SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2007 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-22842
FIRST BANCSHARES, INC.
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(Name of small business issuer as specified in its charter)
Missouri 43-1654695
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
142 E. First Street
Mountain Grove, Missouri 65711
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (417) 926-5151
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per share The Nasdaq Stock Market LLC
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(Title of Class) (Name of each exchange on which
registered)
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act [ ]
Check whether the issuer (1) 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
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [x]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act) Yes No x
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The issuer's revenues for the fiscal year ended June 30, 2007 were $16.0
million.
As of September 24, 2007, registrant had outstanding 1,550,815 shares of
common stock. The registrant's common stock is listed on the Nasdaq Global
Market of The Nasdaq Stock Market LLC under the symbol "FBSI." The aggregate
market value of the common stock held by nonaffiliates of the registrant,
based on the closing sales price of the registrant's common stock as quoted on
The Nasdaq Stock Market LLC on December 31, 2006, was $23.7 million. For
purposes of this calculation, officers and directors of the registrant and the
Employee Stock Ownership Plan are considered affiliates of the registrant.
The exclusion of the value of the shares owned by these individuals shall not
be deemed an admission by the issuer that such person is an affiliates of the
issuer.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year
Ended June 30, 2007. (Parts I and II)
2. Portions of the Proxy Statement for the 2007 Annual Meeting of
Stockholders. (Part III)
Transitional Small Business Disclosure Format (check one) Yes No X
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that may relate to First
Bancshares, Inc ("Company" or "First Bancshares") expected future financial
results, strategic plans or objectives. These statements are based on
management's beliefs, assumptions, current expectations, estimates and
projections about the financial services industry, the economy, and about the
Company and the First Home Savings Bank ("Savings Bank" or "First Home").
Words such as anticipates, believes, estimates, expects, forecasts, intends,
is likely, plans, projects, variations of such words and similar expressions
are intended to identify such forward-looking statements. These
forward-looking statements are intended to be covered by the safe-harbor
provisions of the Private Securities Litigation Reform Act of 1995. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions that are difficult to predict with regard to
timing, extent, likelihood and degree of occurrence. Actual results and
outcomes may materially differ from what may be expressed or forecasted in the
forward-looking statements. The Company undertakes no obligation to update,
amend, or clarify forward looking statements, whether as a result of new
information, future events (whether anticipated or unanticipated), or
otherwise.
Future factors that could cause actual results to differ materially from the
results anticipated or projected include, but are not limited to, the
following: the credit risks of lending activities, including changes in the
level and direction of loan delinquencies, other loans of concern, loan
write-offs and changes in estimates of the adequacy of the allowance for loan
losses; competitive pressures among depository institutions; interest rate
movements and their impact on customer behavior and net interest margin; the
impact of repricing and competitor pricing initiatives on loan and deposit
products; the ability to adapt successfully to technological changes to meet
customers' needs and development in the marketplace; our ability to access
cost-effective funding; changes in financial markets; changes in economic
conditions in general and particularly as related to our market areas; new
legislation or regulatory changes, including but not limited to changes in
federal and/or state tax laws or interpretations thereof by taxing
authorities; the outcome of litigation; limitations on our future business
activities resulting from the Memorandum of Understanding between the Savings
Bank and the Office of Thrift Supervision entered into on December 1, 2006;
changes in accounting principles, policies or guidelines; the economic impact
of any terrorist actions on our loan originations and loan repayments; and
other risks detailed from time to time in our filings with the Securities and
Exchange Commission.
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PART I
Item 1. Description of Business
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General
First Bancshares a Missouri corporation, was incorporated on September
30, 1993 for the purpose of becoming the holding company for First Home upon
the Savings Bank's conversion from a state-chartered mutual to a
state-chartered stock savings and loan association ("Conversion"). The
Conversion was completed on December 22, 1993. At June 30, 2007, the Company
had consolidated total assets of $241.3 million, total deposits of $190.1
million and stockholders' equity of $26.5 million. The Company is not engaged
in any significant activity other than holding the stock of First Home.
Accordingly, the information set forth in this report, including consolidated
financial statements and related data, relates primarily to operations of the
Savings Bank. The Company's common shares trade on The Nasdaq Stock Market LLC
under the symbol "FBSI."
The Savings Bank is a Missouri-chartered, federally insured stock savings
and loan association organized in 1911. The Savings Bank conducts its
business from its home office in Mountain Grove and ten full service branch
facilities in Marshfield, Ava, Gainesville, Sparta, Theodosia, Crane, Galena,
Kissee Mills, Rockaway Beach and Springfield, Missouri. The full service
branch in Springfield, Missouri opened in July 2006. In addition, in March
2007 the Savings Bank opened a loan origination office in Springfield,
Missouri for the purpose of originating primarily loans on single-family
residences for sale into the secondary market. The deposits of the Savings
Bank are insured up to applicable limits by the Federal Deposit Insurance
Corporation ("FDIC"). As a Missouri-chartered savings and loan association,
First Home derives its authority from, and is governed by, the provisions of
the Missouri Savings and Loan Law ("Missouri Law") and regulations of the
Missouri Division of Finance ("Division") and the Office of Thrift Supervision
("OTS"). See "-Regulation and Supervision" below.
The Savings Bank provides its customers with a full array of community
banking services. The Savings Bank is primarily engaged in the business of
attracting deposits from the general public and using such deposits, together
with other funding sources, to invest in residential mortgage loans,
commercial real estate loans, land loans, second mortgage loans, consumer
loans and, to a lesser extent, commercial business loans, for its loan
portfolio. As noted above, the Savings Bank also originates residential
mortgage loans for sale into the secondary market. Excess funds are typically
invested in securities and other assets. At June 30, 2007, the Savings Bank's
net loans were $159.0 million, or 65.9% of consolidated total assets,
including $86.5 million, or 53.6% of total loans, for residential mortgage,
$40.3 million or 25.0% of total loans for commercial real estate, $9.1 million
or 5.6% of total loans for land loans, $4.8 million, or 3.0% of total loans,
for second mortgage loans and $20.7 million of consumer and commercial
business loans, or 12.8% of total loans. Of loans maturing after June 30,
2008, adjustable rate mortgage ("ARM") loans account for approximately 70.35%
of loans secured by real estate and 62.30% of the total loan portfolio. See
"-- Lending Activities" below.
Corporate Developments and Overview
During the quarter ended December 31, 2006, the Savings Bank entered into
a memorandum of understanding ("MOU") with the Office of Thrift Supervision
(the "OTS"). The MOU resulted from issues noted during the examination of the
Savings Bank conducted by the OTS, the report on which was dated in July 2006,
and included deficiencies in 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 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. During July
2007, the OTS performed an on-site review of the progress made on the
resolving the issues discussed in the MOU. The Company believes that, except
for the development of the three-year business plan, for which an extension to
October 31, 2007 was granted by the OTS, the Savings Bank has satisfactorily
addressed all of the issues raised by the MOU. For a discussion of some of the
risks faced by the Company relating to the MOU, see " Risk Factors" below.
During the first half of fiscal 2007, there were several changes in
composition of senior management of both the Company and the Savings Bank. In
November 2006, Ronald J. Walters was named Chief Financial Officer of both the
Company and the Savings Bank, replacing the former Chief Financial Officer who
departed in September 2006. In December 2006, James W. Duncan resigned as
President and Chief Executive Officer of both the Company and the Savings
Bank. Daniel P. Katzfey, Executive Vice President and Chief Lending Officer,
was named Interim President and CEO. On January 19, 2007, Mr. Katzfey became
President and Chief Executive Officer of both the Company and the Savings
Bank. The Boards of Directors of the Company and the Savings Bank were
expanded in connection with the addition of D. Mitch Ashlock and the
appointment of an advisory director. During the quarter ended March 31, 2007,
Mr. Duncan resigned as a director of both the Company and the Savings Bank,
and Mr. Katzfey was appointed to both boards.
As the result of the senior management changes and the MOU, and other
changes in products, operations and procedures, the Savings Bank needed to
fill several positions, including Chief Lending Officer, credit analyst and
controller. In March 2007, Dale W. Keenan was named Executive Vice President
and Senior Loan Officer of the Savings Bank, and John K. Francka was named
Senior Vice President-Chief Credit Officer of the Savings Bank. Both Messrs.
Keenan and Francka have extensive experience in lending and management. In
addition, Jeffrey Palmer was named Controller of the Savings Bank.
During the quarter ended March 31, 2007, the Savings Bank obtained
permission from the State of Missouri to open a loan production office in
Springfield, Missouri. This office, which was established primarily to
originate single family mortgage loans for sale to the secondary market,
complements the full-service branch office opened in Springfield in July 2006.
The Savings Bank has added two originators, two loan processors and an
individual whose responsibility is packaging the loans for delivery to and
tracking receipt of funding from the companies on whose behalf the loans were
made. All loan production office personnel have extensive experience in the
origination of single-family mortgage loans for sale in the secondary market.
Since the loans involved are originated on behalf of other parties, the
servicing rights belong to the other parties as well, unless the terms of the
sale provide for the retention of servicing rights by the Savings Bank. In
its loan sale activity to date, the Savings Bank has not retained servicing
rights.
The Savings Bank has continued to seek opportunities to reduce its non-
interest expense and improve customer service through the utilization of
technology. At the beginning of fiscal year 2007, the Savings Bank went from
manual posting of all customer transactions to branch capture with electronic
settlement with the Federal Reserve. This eliminated courier expenses to route
checks and other items from the branches to the Mountain Grove office, and to
the Federal Reserve. In addition, the Savings Bank also utilized imaging
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features of branch capture, along with auto-mail technology, to internally
generate customer statements. Third party processing costs and related courier
expenses were eliminated, postage expense decreased, and statement delivery
time to customers decreased from approximately three weeks to three days.
During the quarter ended March 31, 2007, the Savings Bank began to extend
this technology to business customers with high volumes of check deposits,
allowing for remote image capture with equipment located at the customer
facilities. In addition, remote image capture provides a powerful marketing
tool when calling on prospective customers.
Risk Factors
As is the case with all investments in stock, an investment in our common
stock is subject to risks inherent in our business. Before making an
investment decision, you should carefully consider the risks and uncertainties
described below together with all of the other information included or
incorporated by reference in this report. Additional risks and uncertainties
that we are not aware of or focused on or that we currently deem immaterial
may also exist and could materially and adversely affect the Company's
business, financial condition and results of operations. This report is
qualified in its entirety by these risk factors.
If any of the circumstances described in the following risk factors
actually occur, our business, financial condition and results of operations
could be materially and adversely affected. If this were to happen, the value
of our common stock could decline significantly, and you could lose all or
part of your investment.
We are subject to the restrictions and conditions of a Memorandum of
Understanding with, and other commitments we have made to, the Office of
Thrift Supervision. Failure to comply with the Memorandum of Understanding
could result in additional enforcement action against us, including the
imposition of monetary penalties.
As discussed above under "Corporate Developments and Overview," we
entered into a Memorandum of Understanding with the Office of Thrift
Supervision on December 1, 2006, which requires us to, among other things,
take certain actions with respect to deficiencies in lending policies and
procedures and recent operating losses, and to revise both our three-year
business plan and budget to enhance profitability. While we believe we are
currently in compliance with the terms of the Memorandum of Understanding, if
we fail to comply with these terms, the Office of Thrift Supervision could
take additional enforcement action against us, including the imposition of
monetary penalties or the issuance of a cease and desist order requiring
further corrective action. We have incurred significant additional regulatory
compliance expense in connection with the Memorandum of Understanding, and
although we do not expect it, it is possible regulatory compliance expenses
related to the Memorandum of Understanding and our other commitments could
have a material adverse impact on us in the future. As required by the
Memorandum of Understanding, we are currently developing a revised three-year
business plan and budget which we must submit to the Office of Thrift
Supervision by October 31, 2007 for its approval. It is possible that the
Office of Thrift Supervision will not approve our proposed business plan and
budget, or require modifications that limit our business activities and growth
potential. In addition, the Office of Thrift Supervision must approve any
material deviation from our approved business plan, which could further limit
our ability to make changes to our business activities.
We have had losses and low earnings in recent years.
Our net income has decreased in recent years. Net income was $272,000,
$1.3 million, $2.3 million and $2.2 million for the fiscal years ended June
30, 2007, 2005, 2004 and 2003, respectively. We had a net loss of $173,000 for
the fiscal year ended June 30, 2006. Our return on average assets was 0.09%,
0.51%, 0.87% and 0.85 for the fiscal years ended June 30, 2007, 2005, 2004 and
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2003 and our return on average equity was 0.77%, 4.60%, 8.49% and 8.68% for
the same years. Our returns on average assets and average equity were
negative for the fiscal year ended June 30, 2006, as we incurred a net loss
for that year. We face significant challenges that will hinder our ability to
improve our earnings significantly. These challenges include the fact that we
currently operate under a Memorandum of Understanding with the Office of
Thrift Supervision (discussed above) and have a significant amount of problem
loans (discussed below), and we have a low interest rate spread. Our interest
rate spread, which is the difference between the average yield earned on our
interest-earning assets and the average rate paid on our interest rate spread,
declined from 3.31% for the year ended June 30, 2005 to 2.96% for the year
ended June 30, 2006 to 2.71% for the year ended June 30, 2007. While we have
identified various strategic initiatives we will pursue in our efforts to
overcome these challenges and improve earnings, our strategic initiatives
might not succeed in increasing our net income.
We have had a significant amount of problem loans and losses related to
these loans.
Since 1999, we have focused our efforts on increasing our commercial
business loan and commercial real estate loan portfolios. However, as a
result, we recognized substantial losses in the fiscal years ended June 30,
2006 and 2005. Our ratio of non-performing assets to total assets increased
from .59% at June 30, 2006 to 1.47% at June 30, 2007, and our total
non-accruing loans increased from $841,000 at June 30, 2006 to $2.9 million at
June 30, 2007. These increases are due in large part to five loans involving
two borrowers. In one case, there are four loans totaling over $1.6 million
where the borrower has filed for protection under the bankruptcy laws. While
reorganization was the stated goal in bankruptcy, the situation evolved to the
point where liquidation is the most probable outcome. The other loan, with a
balance of $512,000 has already proceeded to liquidation. The allowance for
loan losses was increased to cover the anticipated shortfall between the loan
balances and the Small Business Administration guarantees and anticipated
proceeds from liquidation of both the real estate and other collateral.
At June 30, 2007 classified assets were $4.3 million, a decrease from
$8.3 million at June 30, 2006. Notwithstanding this decrease, we identified
an additional $4.8 million of loans at June 30, 2007 on our internal watch
list including $2.9 million, $805,000, $1.03 million and $73,000 of commercial
real estate, commercial business, one-to-four family and consumer loans,
respectively. We identified these loans as higher risk loans and any further
deterioration in their financial condition could increase our classified
assets.
We are highly dependent on key individuals, there has been significant
turnover in our management team in the past five years and we are being led by
a new management.
We are highly dependent on the continued services of a limited number of
our executive officers and key management personnel. The loss of services of
any of these individuals could have a material adverse impact on our
operations because other officers may not have the experience and expertise to
readily replace these individuals.
During the past five years we have had four different Presidents and
Chief Executive Officers. Our current President and Chief Executive Officer
has only served in that position since December 2006 having joined the Savings
Bank in September 2006. Our Chief Financial Officer has only been with the
Savings Bank since November 2006 and most of the other key members of senior
management have been with the Savings Bank for less than a year.
While we believe we have in place qualified individuals to replace the
individuals who have left the Savings Bank, the new individuals will need to
develop a cohesive and unified management team. Changes in key personnel and
their responsibilities may be disruptive to our business and could have a
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material adverse effect on our business, financial condition and
profitability.
We recently suspended our regular cash dividend and might not be able to
resume the payment of dividends.
On March 1, 2007, in response to our recent operating performance, our
board of directors decided to suspend our regular cash. We do not know if or
when we will resume dividend payments. Whether we pay dividends in the future
will depend on a number of factors, including capital requirements, our
financial condition and results of operations, including our ability to
generate sufficient earnings to warrant the payment of dividends, tax
considerations, statutory and regulatory limitations and general economic
conditions. In addition, our ability to pay dividends may depend, in part, on
our receipt of dividends from the Savings Bank because the Company has minimal
income sources beyond the earnings from the Savings Bank.
Our loan portfolio includes loans with a higher risk of loss.
We originate residential mortgage loans (including second mortgage
loans), construction loans, commercial mortgage and land loans, commercial
business loans and consumer loans primarily within our market area.
Generally, the types of loans other than residential mortgage loans have a
higher risk of loss than residential mortgage loans. We had $75.0 million or
47.16% of our total loan portfolio outstanding in these higher risk loans at
June 30, 2007. We have had a significant increase in these types of loans
since 1999, when we began to diversify the loan portfolio in order to mitigate
other types of risk, such as interest-rate risk. While diversification into
construction, commercial real estate and land, commercial business, and
consumer loans may have reduced interest-rate risk due to the typically
shorter terms and, in most cases, adjustable nature of their interest rates,
they do expose a lender to greater credit risk than loans secured by
residential real estate. The collateral securing these loans may not be sold
as easily as residential real estate. These loans also have greater credit
risk than residential real estate for the following reasons and as discussed
in detail under A-- Lending Activities:
* Commercial Real Estate and Land Loans. Commercial real estate and
land loans typically involve higher principal amounts than other
types of loans. Repayment is dependent upon income being generated
in amounts sufficient to cover borrowers' operating expenses, as
well as, debt service. Loans on land under development or held for
future use also pose additional risk because of a lack of income
produced by the property and the potential illiquid nature of the
security. The repayment of loans secured by farm properties is
dependent upon the success of farming operations, which is
contingent on many factors outside the control of either the
borrowers or us. These factors include adverse weather conditions,
fluctuating market prices of both final product and production
costs, factors affecting the physical condition of livestock and
government regulations.
* Commercial Business Loans. Repayment of these loans is dependent
upon the successful operation of the borrower's businesses.
* Consumer Loans. Consumer loans (such as vehicle loans, mobile home
loans and personal lines of credit) are collateralized, if at all,
with assets that may not provide an adequate source of payment of
the loan due to depreciation, damage, or loss.
* Construction Loans. Construction lending involves the inherent
difficulties of estimating the cost of the project and estimating a
property's value at completion of the project. If the estimate of
construction cost proves to be inaccurate, we may need to advance
funds beyond the original loan amount in order to complete the
project. If the estimate of value upon completion proves to be
inaccurate, we may be confronted at, or prior to, the maturity of
the
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loan with a project the value of which is insufficient to assure
full repayment.
A downturn in the local economy or a decline in real estate values could
hurt our profits.
Nearly all of our loans are secured by collateral or dependent for
repayment on businesses located in our primary market area, consisting of
Wright, Webster, Douglas, Christian, Ozark, Stone, Taney and Greene Counties
in the State of Missouri. As a result, a downturn in the local economy could
cause significant increases in non-performing loans, which would adversely
affect our profits. Additionally, a decrease in asset quality could require
additions to our allowance for loan losses through increased provisions for
loan losses, which would negatively affect our profits. A decline in real
estate values could cause some of our mortgage loans to become inadequately
collateralized, which would expose us to a greater risk of loss.
Changes in interest rates may reduce our net interest income.
Like other financial institutions, our operating results are largely
dependent on our net interest income. Net interest income is the difference
between interest earned on loans and investments and interest expense incurred
on deposits and other borrowings. Our net interest income is impacted by
changes in market rates of interest, changes in the shape of the yield curve,
the interest rate sensitivity of our assets and liabilities, prepayments on
our loans and investments and limits on increases in the rates of interest
charged on our loans.
Our interest earning assets and interest bearing liabilities may react in
different degrees to changes in market interest rates. Interest rates on some
types of assets and liabilities may fluctuate prior to changes in broader
market interest rates, while rates on other types may lag behind. The result
of these changes to rates may result in differing spreads on interest earning
assets and interest bearing liabilities. While we take measures intended to
manage the risks from changes in market interest rates, we cannot control or
accurately predict changes in market rates of interest nor be sure our
protective measures are adequate.
There is strong competition in financial services including the market
areas we serve.
We compete in our market areas with numerous commercial banks, savings
institutions, mortgage brokerage firms, credit unions, finance companies,
mutual funds, insurance companies, and brokerage and investment banking firms
operating locally and throughout the county. Some of these competitors have
substantially greater resources and lending limits than we have, have greater
name recognition and market presence that benefit them in attracting business,
and offer certain services that we do not or cannot provide profitably. In
addition, larger competitors may be able to price loans and deposits more
aggressively than we do. Our profitability depends upon the Company's
continued ability to successfully compete in its market areas. The greater
resources and deposit and loan products offered by some of our competitors may
limit the Company's ability to attract funds or increase its interest-earning
assets. For additional information see "-- Competition.
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While management believes that our allowance for loan losses is
sufficient to cover realized losses, our earnings could be adversely impacted
should additional reserves be required.
We make various assumptions and judgments about the collectibility of our
loan portfolio, including the creditworthiness of our borrowers and the value
of the real estate and other assets serving as collateral for the repayment of
many of our loans. In determining the amount of the allowance for loan losses,
we review our loans, our loss experience and our delinquency experience, and
evaluate economic conditions, nationally and in our market areas. If our
assumptions prove to have been incorrect, the allowance for loan losses may
not be sufficient to cover losses inherent in the loan portfolio, resulting in
the need for additions to our allowance. Material additions to the allowance
would materially decrease our net income. Our allowance for loan losses was
1.67% of total loans and 76.08% of non-performing assets at June 30, 2007,
however, at June 30, 2007 our allowance was only 58.91% of total classified
loans.
In addition, the bank regulators periodically review it, and the
regulators may require us to increase our provision for loan losses or
recognize further loan charge-offs. An increase in our allowance for loan
losses or loan charge-offs as required by regulatory authorities could a
material adverse effect on our financial condition and results of operations.
We are subject to extensive government regulation and supervision.
We are subject to extensive federal and state regulation and supervision,
and, as discussed above, we currently operate under a memorandum of
understanding with the Office of Thrift Supervision which places restrictions
on our business activities. Banking regulations are primarily intended to
protect depositors' funds, federal deposit insurance funds and the banking
system as a whole, not shareholders. These regulations affect our lending
practices, capital structure, investment practices, dividend policy and
growth, among other things. Congress and federal regulatory agencies
continually review banking laws, regulations and policies for possible
changes. Changes to statutes, regulations or regulatory policies, including
changes in interpretation or implementation of statutes, regulations or
policies, could affect the Company in substantial and unpredictable ways. Such
changes could subject us to additional costs, limit the types of financial
services and products we may offer and/or increase the ability of non-banks to
offer competing financial services and products, among other things. Failure
to comply with laws, regulations or policies could result in sanctions by
regulatory agencies, civil money penalties and/or reputation damage, which
could have a material adverse effect on our business, financial condition and
results of operations.
If we fail to maintain an effective system of disclosure controls and
procedures and internal control over financial reporting, we may not be able
to accurately report our financial results or prevent fraud, and, as a result,
investors and depositors could lose confidence in our financial reporting,
which could adversely affect our business, the trading price of our stock and
our ability to attract additional deposits.
In connection with the enactment of the Sarbanes-Oxley Act of 2002 and
the implementation of the rules and regulations promulgated by the SEC, the
Company must maintain disclosure controls and procedures and internal control
over financial reporting. If the Company fails to identify and correct any
significant deficiencies in the design or operating effectiveness of its
disclosure controls and procedures or internal control over financial
reporting or fails to prevent fraud, current and potential shareholders, and
depositors could lose confidence in our internal controls and financial
reporting, which could adversely affect our business, financial condition and
results of operations, the trading price of our stock and our ability to
attract additional deposits.
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We determined that at June 30, 2006 our disclosure procedures and
controls were not effective in regard to the identification of other than
temporary impairment of two equity securities. More specifically, at June 30,
2006 we did not properly identify or record certain the other than temporary
impairment of two equity securities. While we took remedial action at June
30, 2006 that we believe corrected this deficiency, no assurance can be made
that similar or other deficiencies do not currently exist or will not exist in
the future.
Market Area
The Savings Bank is headquartered in the town of Mountain Grove, in
Wright County, Missouri. Wright County has a population of approximately
17,000 and its economy is highly diversified, with an emphasis on the beef and
dairy industries. Except for the branch office open in July of 2006 in
Springfield, Missouri, the Savings Bank's market area is predominantly rural
in nature. Its deposit taking and lending activities primarily encompass
Wright, Webster, Douglas, Christian, Ozark, Stone, Taney and, since July 2006,
Greene counties in Missouri. Significant companies in the rural areas include
Hutchens Steel, Bore Flex, Inc., Copeland Corporation, Dairy Farmers of
America and WoodPro Cabinetry. The Springfield market has a great many
significant companies, including, Kraft Foods, Willow Brook Foods, Bass Pro
Shops, O'Reilly Automotive, Positronic Industries, Lauren Cook Company and
Paul Mueller Company. In addition, Missouri State University, St. John's
Hospital and Cox Health Systems are major employers and contributors to the
economic well-being of the Springfield, Missouri area. The Savings Bank also
transacts a significant amount of business in Texas County, Missouri. The
Savings Bank's market area, especially Ozark County because of its proximity
to Norfolk and Bull Shoals lakes, has experienced a rather slow but steady
growth from retirees. The Springfield market has shown robust growth and
development over the past several years. Economic conditions in the Savings
Bank's market areas, with the exception of a recent slight downturn in the
housing market, have been relatively stable.
Selected Consolidated Financial Information
This information is incorporated by reference to pages 3 and 4 of the
2007 Annual Report to Stockholders ("Annual Report") attached hereto as
Exhibit 13.
Average Balances, Yields Earned and Rates Paid
This information is incorporated by reference to page 15 of the Annual
Report attached hereto as Exhibit 13.
Yields Earned and Rates Paid
This information is incorporated by reference to page 16 of the Annual
Report attached hereto as Exhibit 13.
Rate/Volume Analysis
This information is incorporated by reference to page 17 of the Annual
Report attached hereto as Exhibit 13.
Lending Activities
General. Historically, the principal lending activity of the Savings
Bank has been the origination of conventional mortgage loans for the purpose
of purchasing, constructing or refinancing one-to-four family owner occupied
homes within its primary market area. While the Savings Bank continues to
actively seek originations of such loans, most of the fixed-rates loans of
this type are currently originated for sale in the secondary market. In an
attempt to diversify its lending portfolio, the Savings Bank also originates
commercial real estate loans, land loans, consumer loans, such as mobile home
loans, automobile loans and loans secured by savings accounts, and, to a
lesser extent, commercial business loans. The ratios of residential and
commercial
8
real estate loans to total loans has shifted gradually in recent years as a
result of both this diversification and the minimal number of fixed-rate
one-to-four family loans originated for the portfolio. Additionally, the
Savings Bank used the Small Business Administration's ("SBA") guaranteed
programs between September 2000 and December 2005. As of June 30, 2007, 38
commercial business and commercial real estate loans with an aggregate balance
of $7.3 million have SBA guarantees. The Savings Bank was not involved in SBA
lending during the fiscal year ended June 30, 2007.
In addition to loans within the Savings Bank's primary market area, the
Savings Bank also has originated ten one-to-four family loans, ten commercial
real estate loans and five loans of other types in Arkansas, California,
Oregon, Illinois, Nebraska, Tennessee and six other states. The 25 loans had
an aggregate balance of $5.3 million at June 30, 2007. These loans were
performing according to their scheduled repayment terms at June 30, 2007.
At June 30, 2007, the Savings Bank's net loans receivable totaled $159.0
million representing 65.9% of consolidated total assets. Historically, the
Savings Bank has primarily originated ARM loan products. At June 30, 2007,
ARM loans with a maturity date after June 30, 2008 accounted for $99 million
or 62.30% of the total loan portfolio and 70.35% of loans secured by real
estate. The Savings Bank focuses on serving the needs of its local community
and strongly believes in a lending philosophy that emphasizes individual
customer service and flexibility in meeting the needs of its customers. During
the four years ended June 30, 2006, the Savings Bank experienced a significant
decline in the amount of its one-to-four family loan portfolio. During the
year ended June 30, 2007, the Savings Bank experienced growth in its
one-to-four family loan portfolio, despite the fact that, since March 2007,
most of these loans with fixed interest rates have been originated for other
investors. Our loan officers have been directed to take a more pro-active
approach in the generation of new business. While the origination of loans for
others does not increase the Savings Bank's loan portfolio, it does provide
the Savings Bank with the opportunity to generate fee income. In addition,
the Savings Bank historically has retained some fixed-rate mortgage loans in
its portfolio. The retained loans generally have a higher interest rate than
those loans originated for other investors. Generally, fixed rate loans that
are retained in the Savings Bank's portfolio will be small loans ($50,000 or
less) where the value of the acreage is too great for the residence to qualify
under the secondary market standard. Both of these are common occurrences in
the Savings Bank's primary trade market in rural Missouri.
Loan Portfolio Analysis. The following table sets forth the composition
of the Savings Bank's loan portfolio by type of loan as of the dates
indicated. Construction loans are included in residential and commercial real
estate loans depending on the type of security. At June 30, 2007, the Savings
Bank had $11.0 million, or 6.89% of total loans, in interim construction loans
in its portfolio of which $6.6 million were for residential construction,
$233,000 were for multi-family construction and $4.2 million were for
non-residential construction, as described below. At June 30, 2006, the
Savings Bank had $5.1 million, or 3.42% of total loans, in interim
construction loans in its portfolio. Because of the amount of its construction
loans, and the fact that most of these loans are made with the intent to
convert to permanent financing, the Savings Bank does not separately account
for these types of loans.
9
At June 30,
--------------------------------------------------------------------------------------------
2007 2006 2005 2004 2003
---------------- ---------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
{Dollars in thousands}
Type of Loan:
Residential $ 86,530 53.57% $ 82,519 55.59% $ 89,220 54.36% $ 95,339 56.21% $103,751 57.64%
Commercial
real estate
(1) 40,331 24.97 37,097 24.99 41,492 25.28 40,196 23.70 41,158 22.87
Land 9,095 5.63 7,949 5.36 9,450 5.76 9,019 5.32 9,892 5.50
Second
Mortgage
loans 4,828 2.99 3,659 2.47 4,161 2.54 3,882 2.29 4,679 2.60
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total
mortgage
loans 140,784 87.16 131,224 88.41 144,323 87.94 148,436 87.52 159,480 88.61
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Consumer Loans:
Automobile
loans 4,078 2.52 3,467 2.34 4,910 2.99 5,314 3.13 5,972 3.32
Savings
account
loans 1,504 0.93 1,709 1.15 1,709 1.04 1,900 1.12 1,813 1.01
Mobile home
loans 3,589 2.22 2,438 1.64 2,139 1.30 1,970 1.16 1,742 0.97
Other consumer 2,860 1.77 1,060 0.71 979 0.60 1,629 0.96 1,805 1.00
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total other
loans 12,031 7.45 8,674 5.84 9,737 5.93 10,813 6.38 11,332 6.30
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial
business 8,700 5.39 8,532 5.75 10,057 6.13 10,350 6.10 9,172 5.10
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans 161,515 100.00% 148,430 100.00% 164,117 100.00% 169,599 100.00% 179,984 100.00%
====== ====== ====== ====== ======
Add:
Unamortized
deferred
loan costs,
net of
origination
fees 171 184 201 224 240
Less:
Undisbursed
loans in
process 1 4,153 3,324 2,324 2,373
Allowance for
possible
loan losses 2,692 2,474 2,851 1,240 1,144
-------- -------- -------- -------- --------
Total loans
receivable,
net $158,993 $141,987 $158,143 $166,259 $176,707
======== ======== ======== ======== ========
------------
(1) Includes multi-family residential loans
10
One-to-Four Family Residential Loans. The Savings Bank originates
residential mortgage loans to enable borrowers to purchase existing homes, to
construct new one-to-four family homes or refinance existing debt on their
homes. Management believes that the origination of one-to-four family
residential mortgage loans has contributed positively to interest income. The
increases in delinquencies and losses over the three years ended June 30, 2006
were primarily the result of lending activities other than one-to-four family
residential mortgage lending. At June 30, 2007, $86.5 million, or 53.6% of the
Savings Bank's gross loan portfolio, consisted of residential mortgage loans
(almost all of which are non-indexed ARMs, with the principal amortizing over
loan terms ranging from 10 to 30 years). Since 1973 until fiscal 2006, the
Savings Bank had originated almost exclusively ARM loan products. Initially,
ARM loans were indexed to the Savings Bank's cost of funds. In 1979, the
Savings Bank discontinued the use of the indexed ARM loans and changed to its
current policy of non-indexed ARMs, which generally allows, but does not
require, the Savings Bank to adjust the interest rate once a year, up or down,
not to exceed 1% per year. Loans of this nature originated after 1988
generally were limited to a 6% maximum increase over the life of the loan.
During the current year, the Savings Bank began offering fixed rate
one-to-four family residential mortgage lending in an effort to compete with
products offered by other lenders. Most of these loans are originated for
sale in the secondary market.
The Savings Bank's lending policies generally limit the maximum
loan-to-value ratio on one-to four family residential mortgage loans for
portfolio to 100% of the lesser of the appraised value or purchase price of
the underlying residential property. Loans exceeding 80% loan to value have a
higher interest rate and loans exceeding 90% loan to value have private
mortgage insurance, which reduces the loan-to-value ratio to 78%. Reducing
the loan to value ratio of these loans limits the Savings Bank's exposure and
allows these loans to qualify for sale in the secondary market. The Savings
Bank requires title insurance, fire and casualty coverage and a flood zone
determination on all residential mortgage loans originated or purchased. All
of the Savings Bank's real estate loans contain "due on sale" clauses. In
prior years, the Savings Bank's personnel prepared all property evaluations at
no expense to the borrower unless the property is outside its normal lending
territory or the loan exceeds $250,000, in which event, independent appraisers
are utilized. During fiscal 2006, the Savings Bank changed its practice and
now obtains independent appraisals on all residential mortgage loans, as well
as, all non-residential mortgage loans.
At June 30, 2007, the Savings Bank had $6.6 million in residential
construction loans in its portfolio with maximum loan to value ratios of 85%
based upon the estimated value upon completion. Typically, the Savings Bank
limits its construction lending to individuals who are building their primary
residences. Generally, loan proceeds are disbursed as construction
progresses, based on invoices presented and inspections made. Construction
financing generally is considered to involve a higher degree of risk, and
possibly loss, than long-term financing on improved, occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the estimated cost of construction and the accuracy of the initial estimate of
the property's value at completion of construction or development. During the
construction phase, a number of factors could result in delays and cost
overruns. The Savings Bank has sought to minimize this risk by primarily
limiting construction lending to qualified borrowers in the Savings Bank's
market area. At June 30, 2007, speculative construction loans amounted to
$2.1 million, or 1.31% of the total loan portfolio and custom construction
loans amounted to $4.5 million, or 2.85% of the total loan portfolio. The
majority of these loans are converted into permanent residential real estate
loans. During construction, these loans typically require monthly
interest-only payments. Once construction is completed, these loans convert
to monthly principal and interest based on amortization schedules for
conventional residential or commercial buildings.
Second Mortgage Loans. The Savings Bank offers fixed and adjustable rate
second mortgage loans that are usually made on the security of the borrower's
11
residence. Loans normally do not exceed 80% of the appraised value of the
residence, less the outstanding principal of the first mortgage, and have
terms of up to 10 years requiring monthly payments of principal and interest.
At June 30, 2007, second mortgage loans amounted to $4.8 million, or 3.0% of
total loans of the Savings Bank.
During the year ended June 30, 2007, the Savings Bank began offering Home
Equity Lines of Credit. Home Equity Lines of Credit have terms of up to ten
years and carry an interest rate of prime with a monthly adjustment for those
loans that, combined with the first mortgage, result in a loan-to-value ratio
of no more than 90%, or a rate of prime plus 1.0% with a monthly adjustment
for those loans that, combined with the first mortgage, result in a
loan-to-value ratio of greater than 90%. These loans are included with either
residential loans, if they have a first lien position, or second mortgages in
the various schedules that are part of this report. As June 30, 2007, home
equity lines of credit totaled $1.2 million, of which $212,000 was included in
the residential loan totals and $1.0 million was included with the second
mortgage total.
Land and Commercial Real Estate Loans. The Savings Bank had loans
outstanding secured by land and commercial real estate of $49.4 million, or
30.6% of the Savings Bank's gross loan portfolio, at June 30, 2007. The
commercial real estate loans originated by the Savings Bank amounted to $40.3
million, or 25.0% of the total loan portfolio, and are primarily located in
the Savings Bank's market area. The average size of these loans is $168,000.
These loans typically are made with a fixed rate for one to five years and
then adjust at least annually, thereafter, based on prime rate or the Constant
Maturity Treasury Index ("CMT"). The Savings Bank's commercial real estate
portfolio consists of loans on a variety of property types with no large
concentrations by property type. The Savings Bank's largest commercial real
estate loan at June 30, 2007 was a $2.4 million loan. The loan is for a term
of three years and is collateralized by an office building and parking lots
located in Springfield, Missouri. At June 30, 2007, the loan was performing
according to its repayment terms.
Of primary concern in commercial real estate lending is the feasibility
and cash flow potential of the property along with the borrower's
creditworthiness and the value of the underlying collateral. Loans secured by
income properties are generally larger and involve greater risks than
residential mortgage loans because payments on loans secured by income
properties are often dependent on successful operation or management of the
properties. As a result, repayment of such loans may be subject, to a greater
extent than residential real estate loans, to supply and demand in the market
in the type of property securing the loan and therefore, may be subject to
adverse conditions in the real estate market or the economy. If the cash flow
from the project is reduced, the borrowers' ability to repay the loan may be
impaired. Commercial real estate loans also tend to have shorter maturities
than residential mortgage loans and may not be fully amortizing, meaning that
they may have a significant principal balance or "balloon" payment due on
maturity. In addition, commercial real estate properties, particularly
industrial properties, are generally subject to relatively greater
environmental risks than non-commercial properties and to the corresponding
burdens and costs of compliance with environmental laws and regulations.
Also, there may be costs and delays involved in enforcing rights of a property
owner against tenants in default under the terms of leases with respect to
commercial properties. For example, tenants may seek the protection of the
bankruptcy laws, which could result in termination of lease contracts,
reducing cash flow.
At June 30, 2007, the Savings Bank had three loans secured by
multi-family residential real estate, totaling approximately $471,000, or .29%
of the Savings Bank's gross loan portfolio. At June 30, 2007, all of these
loans were performing in accordance with their repayment terms. Multi-family
real estate loans are generally originated at 80% of the appraised value of
the property or selling price, whichever is less, and carry interest rates
that are fixed for 1-5 years and then adjust annually based on the CMT with
the principal amortized over 15 to 30 years. Loans secured by multi-family
real estate are
12
generally larger and involve a greater degree of risk than one-to-four family
residential loans. In addition, multi-family real estate loans carry risks
similar to those associated with commercial real estate lending.
Land loans amounted to $9.1 million, or 5.6% of the gross loan portfolio
at June 30, 2007 and are secured primarily by property located in the Savings
Bank's primary market area. The Savings Bank's land loans generally are
secured by farm land used in beef or dairy operations. Loans secured by farm
properties are of particular concern since repayment is dependent upon the
successful operation of the farming operations, which is greatly contingent on
various factors outside the control of either the borrower or the Savings
Bank. These factors include adverse weather conditions, fluctuating market
prices of both final product and production costs, factors affecting the
physical condition of livestock and government regulations.
Consumer. The Savings Bank's consumer loans consist of automobile loans,
recreational vehicles, mobile home loans, savings account loans, and various
other consumer loans. At June 30, 2007, the Savings Bank's consumer loans
totaled $12.0 million, or 7.44% of the Savings Bank's total loan portfolio.
Subject to market conditions, management expects to continue to market and
originate consumer loans as part of its strategy to provide a wide range of
personal financial services to its depository customer base and as a means to
enhance the interest rate sensitivity of the Savings Bank's interest-earning
assets and its interest rate spread.
At June 30, 2007, the Savings Bank's loan portfolio secured by
automobiles amounted to $4.1 million, or 2.5% of total loans. These loans are
originated directly with the borrower with a maximum term of 60 months. The
Savings Bank may lend up to 100% of the purchase price of a new automobile or
up to the National Automobile Dealers Association published loan value for a
used vehicle. The Savings Bank requires all borrowers to maintain automobile
insurance, including collision, fire and theft insurance, with the Savings
Bank listed as loss payee.
Loans secured by mobile homes at June 30, 2007 were $3.6 million, or 2.2%
of total loans. These loans are generally considered to involve relatively
higher credit risk as compared with conventional one-to-four family
residential mortgage loans because of the typically lower income level and net
worth of the borrower, and the greater likelihood of damage, loss or
depreciation of the mobile home. The age, size and overall condition of the
mobile home are additional factors in the mobile home loan underwriting
consideration process.
The Savings Bank's procedures for underwriting consumer loans include an
assessment of the applicant's payment history on other debts and ability to
meet existing obligations and payments on the proposed loan. Although the
borrower's creditworthiness is a primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, to
the proposed loan amount.
Consumer loans are considered a greater risk than residential mortgage
loans, particularly in the case of consumer loans which are unsecured or
secured by rapidly depreciating assets such as automobiles, mobile homes,
boats and recreational vehicles. Repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment of the
outstanding loan balance. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
Consumer loans may also give rise to claims and defenses by a borrower against
an assignee of such loans such as the Savings Bank, and a borrower may be able
to assert against the assignee claims and defenses that it has against the
seller of the underlying collateral. The largest balance of consumer loans
are loans for automobiles,
13
boats , recreational vehicles, mobile homes and small unsecured loans. At
June 30, 2007, none of the Savings Bank's consumer loan portfolio was 90 days
or more past due. However, two loans totaling approximately $6,000 were on
non-accrual status at June 30, 2007.
Commercial Business Loans. Commercial business loans consist of loans to
businesses with no real estate as security, such as business equipment loans,
farm equipment loans and cattle loans. As of June 30, 2007, these loans
totaled $8.7 million, or 5.39% of the Savings Bank's total loan portfolio. The
Savings Bank has, during the past several years, had a number of commercial
business loans that become problem loans. See "-- Non-Performing Assets and
Delinquencies" and "-- Reserve for Loan Losses" for data on loans originated
by the Savings Bank.
At June 30, 2007, the average size of a loan in the commercial business
category was $37,000. These loans are typically structured with maturities of
five years or less and have variable interest rates based on the prime rate.
The largest commercial loan at June 30, 2007 was a line of credit loan to an
area family-owned automobile dealership. At June 30, 2007 the balance of this
loan was $377,000 and it was classified as a watch credit ( see "Asset
Classification")at that date because, while the all payments had been made
according to terms, other borrower obligations under the loan agreement had
not been met.
Commercial business loans may involve greater risk than real estate
lending. Because payments on commercial business loans are often dependent
on successful operation of the business involved, repayment of such loans may
be subject to adverse conditions in the economy and other negative
circumstances affecting the business. In recognition of this risk, the
Savings Bank attempts to make loans secured by adequate collateral to provide
the majority of repayment of the principal balance in the event that business
operations are not successful. However, collateral for these types of loans
may quickly decline in market value through normal usage and changes in
technology, and may fluctuate in value based on the success of the business.
In addition, the Savings Bank limits this type of lending to its market area
and to borrowers with which it has prior experience or who are otherwise well
known to the Savings Bank. The Savings Bank generally requires personal
guarantees for commercial business loans.
Non-performing commercial business loans increased significantly between
June 30, 2006 and June 30, 2007. This is reflective of the underwriting and
credit analysis weaknesses that existed at the time the loans were originated.
During fiscal 2007, as required by the Savings Bank's MOU with the OTS,
substantial improvements were made in the underwriting, credit analysis,
monitoring and follow-up on commercial business loans. No assurance can be
given, however, that non-performing business loans will not increase in future
periods, whether originated before or after these procedural improvements.
Loan Maturity and Repricing
The following table sets forth scheduled contractual amortization of
loans at June 30, 2007 and the dollar amount of such loans at that date which
are scheduled to mature after one year and have fixed or adjustable interest
rates. Demand loans, loans having no stated schedule of repayments and no
stated maturity are reported as due in one year or less.
14
After
After Three
One Year Years
Through Through After
Within Three Five Five
One Year Years Years Years Total
-------- ------- ------ -------- --------
(Dollars in thousands)
Mortgage Loans
Residential Mortgage $ 9,812 $ 1,734 $1,280 $ 73,704 $ 86,530
Commercial Real Estate 4,189 6,863 902 28,377 40,331
Land 1,145 219 394 7,337 9,095
Second Mortgage 1,125 339 221 3,143 4,828
------- ------- ------ -------- --------
Total Mortgage Loans 16,271 9,155 2,797 112,561 140,784
------- ------- ------ -------- --------
Consumer Loans
Automobile 354 1,854 1,709 161 4,078
Savings Account 1,332 133 25 14 1,504
Mobile Home 114 96 133 3,246 3,589
Other 765 1,947 108 40 2,860
------- ------- ------ -------- --------
Total Consumer Loans 2,565 4,030 1,975 3,461 12,031
------- ------- ------ -------- --------
Commercial Business Loans 4,031 768 1,631 2,270 8,700
------- ------- ------ -------- --------
Total Loans $22,867 $13,953 $6,403 $118,292 $161,515
======= ======= ====== ======== ========
Amount due after 1 year
-------------------------------------
Fixed Rate Adjustable Rate Total
---------- --------------- -----
(Dollars in thousands)
Mortgage Loans
Residential Mortgage 17,216 59,502 76,718
Commercial Real Estate 7,615 28,527 36,142
Land 228 7,722 7,950
Second Mortgage 406 3,297 3,703
------ ------- -------
Total Mortgage Loans 25,465 99,048 124,513
------ ------- -------
Consumer Loans
Automobile 3,724 - 3,724
Savings Account 143 29 172
Mobile Home 366 3,109 3,475
Other 107 1,988 2,095
------ ------- -------
Total Consumer Loans 4,340 5,126 9,466
------ ------- -------
Commercial Business Loans 3,117 1,552 4,669
------ ------- -------
Total Loans 32,922 105,726 138,648
====== ======= =======
Loan Solicitation and Processing. The Savings Bank's main source of
loans is from contact and relationships with real estate agents, referrals
from customers, and to a lesser extent walk-in applicants. Once a loan
application is received, a credit report, along with verification of income,
is obtained. An appraisal of the proposed collateral is then ordered. Real
estate appraisals are completed by independent appraisers on all one-to four
family loans originated after March 2006 and on all other real estate secured
loans. The application is then reviewed by the loan officer and action is
taken or loan write-up is presented to the Savings Bank's loan committee if
the amount is greater than the loan officer's lending authority.
Commercial and commercial real estate loans are also primarily obtained
through referrals or loan officer contacts. While loan officers are delegated
reasonable commitment authority based on their qualification, credit decisions
on significant commercial loans and commercial real estate loans are made by
the loan committee, which is made up of senior loan officers and members of
the Board of Directors.
Consumer loans are originated through referrals and existing deposit and
loan customers of the Savings Bank. Consumer loan applications below set
limits may be processed at branch locations or by loan documentation personnel
at the main office.
15
Loan Originations, Purchases and Sales. During the fiscal year ended
June 30, 2007 the Savings Bank opened a loan origination office in
Springfield, Missouri. This office primarily originates fixed-rate,
single-family loans for sale in the secondary market, as well as, to a lesser
extent, [fixed and adjustable rate] single family loans for the Savings Bank's
portfolio.
The following table shows total mortgage loans originated sold and repaid
during the periods indicated. No loans were purchased during the periods
indicated.
Year Ended June 30,
--------------------
2007 2006
-------- --------
(In thousands)
Total gross loans at beginning of year $148,430 $164,117
Loans originated:
Secondary market loans 8,900 -
One-to-four family loans 32,176 27,839
Multi-family residential and commercial
real estate 24,052 7,715
Land 2,275 2,612
-------- --------
Total mortgage loans originated 67,403 38,166
-------- --------
Other loans:
Automobile loans 4,005 2,686
Deposit account loans 1,085 1,399
Mobile home loans 203 1,038
Other consumer loans 2,640 815
-------- --------
Total other loans originated 7,933 5,938
-------- --------
Commercial business loans 6,316 3,743
-------- --------
Loans sold:
Secondary market loans 7,097 -
-------- --------
7,097 -
-------- --------
Loans principal repayments 60,564 61,008
-------- --------
Other decreases:
Loans charged-off 373 2,203
Loans transferred to real estate owned 533 323
-------- --------
906 2,526
-------- --------
Total gross loans at end of year $161,515 $148,430
======== ========
-----------
Loan Commitments. The Savings Bank issues commitments for one-to-four
family residential loans that are honored for up to 60 days from approval. If
the commitment expires, it is generally renewed upon request without penalty
or expense to the borrower at the current market rate. The Savings Bank had
outstanding net loan commitments of $5.1 million at June 30, 2007. See Note
13 of the Notes to the Consolidated Financial Statements contained in the
Annual Report to Shareholders filed as Exhibit 13 to this report.
Non-Performing Assets and Delinquencies. The Savings Bank generally
institutes collection procedures when a monthly payment is two to four weeks
delinquent. A first notice is generally mailed to the borrower, or a phone
call is made. If necessary, a second notice follows at the end of the next
two week period. In most cases, delinquencies are cured promptly. However, if
the Savings Bank is unable to make contact with the borrower to obtain full
payment, or, full payment is not possible, and the Savings Bank cannot work
out a repayment schedule, a notice to commence foreclosure may be mailed to
the borrower. The Savings Bank makes every reasonable effort, however, to
work with delinquent borrowers. Understanding that borrowers sometimes cannot
make payments because of illness, loss of employment, etc., the Savings Bank
will attempt to work with delinquent borrowers who are communicating and
cooperating with the Savings Bank.
The Savings Bank generally follows the same collection procedures for
non-mortgage loans.
16
The Savings Bank implemented several new procedures between March 31,
2006 and June 30, 2006 in identifying watch list credits. All loans greater
than $50,000 that are 30 days or more past due or loans that have had events
occur that raise questions as to the ability of the loan to perform in the
future, are added to the watch list. On a quarterly basis, the account
officer must complete a write-up on the credit giving an update and outlining
the status of the credit and what is expected to remove the credit from the
watch list. During fiscal 2007, the procedures for identifying and monitoring
watch list credits were developed further, and a more aggressive approach to
dealing with such credits was implemented, such as earlier contact with past
due borrowers and consistent follow-up on problem loans. Classified assets
decreased significantly at June 30, 2007, compared to classified assets at
June 30, 2006.
The Board of Directors is informed on a monthly basis as to the status of
all mortgage and non-mortgage loans that are delinquent, as well as the status
on all loans currently in foreclosure or real estate owned by the Savings Bank
through foreclosure.
The table below sets forth the amounts and categories of non-performing
assets in the Savings Bank's loan portfolio at the dates indicated. Loans are
placed on non-accrual status when it is determined that the payment of
interest or principal is doubtful of collection, or when interest or principal
is past-due 90 days or more. Any accrued but uncollected interest previously
recorded on such loans is reversed in the current period and interest income
is subsequently recognized upon collection. The Savings Bank would have
recorded interest income on non-accrual loans of $232,000 and $117,000 during
the years ended June 30, 2007 and 2006, respectively, if such loans had been
performing during such periods.
Non-accrual loans increased from $841,000 at June 30, 2006 to $2.9
million at June 30, 2007. The increase in non-accrual loans was due in large
part to five loans involving two borrowers. In one case, there are four loans
totaling over $1.6 million where the borrower has filed for protection under
the bankruptcy laws. While reorganization was the stated goal in bankruptcy,
the situation evolved to the point where liquidation is the most probable
outcome. The other loan, with a balance of $512,000 has proceeded to
liquidation as well. The allowance for loan losses was increased by $630,000
during the year to cover the anticipated shortfall between the loan balances
and the Small Business Administration guarantees and anticipated proceeds from
liquidation of both the real estate and other collateral.
The Savings Bank considers all non-accrual loans and loans past due 90
days or more to be impaired. Subsequent to June 30, 2007, none of these loans
has, as yet, undergone foreclosure proceedings. These loans are closely
monitored and any necessary additional action will be taken as warranted.
One-to-four family loans which are 60 or more days but less than 90 days
past due increased during the fiscal year 2007 to $119,000 at June 30, 2007
from $54,000 at June 30, 2006.
17
The following table sets forth information with respect to the Savings
Bank's non-performing assets at the dates indicated.
At June 30,
-----------------------------------------------
2007 2006 2005 2004 2003
------ ------ ------ ------ ------
(Dollars in thousands)
Loans accounted for on a
non-accrual basis
Real estate:
Residential $ 245 $ 322 $ 221 $ 158 $ -
Commercial 2,171 306 1,112 386 176
Commercial business 467 65 1,502 1,224 -
Consumer 6 148 19 44 -
------ ------ ------ ------ ------
Total $2,889 $ 841 $2,854 $1,812 $ 176
====== ====== ====== ====== ======
Accruing loans which are
contractually past due
90 days or more:
Real estate:
Residential $ 278 $ - $ 63 $ 555 $ 640
Commercial 81 - 30 142 893
Commercial business - - - - 27
Consumer - 3 55 13 214
------ ------ ------ ------ ------
Total $ 359 $ 3 $ 148 $ 710 $1,774
====== ====== ====== ====== ======
Total of non-accrual and
90 days past due loans $3,248 $ 844 $3,002 $2,522 $1,950
Real estate owned 291 497 340 174 282
Other non-performing assets:
Impaired loans not past due - - 2,004 - 1,368
Slow home loans (60 to 90
days past due) - - 450 430 1,173
------ ------ ------ ------ ------
Total non-performing
assets $3,539 $1,341 $5,796 $3,126 $4,773
====== ====== ====== ====== ======
Total loans delinquent 90
days or more to net loans 0.23% 0.59% 1.90% 1.52% 1.10%
Total loans delinquent 90
days or more to total
consolidated assets 0.15% 0.37% 1.23% 0.95% 0.73%
Total non-performing assets
to total consolidated assets 1.47% 0.59% 2.39% 1.18% 1.78%
As of June 30, 2007, the Savings Bank had loans with an aggregate
outstanding balance of $4.3 million with respect to which known information
concerning possible credit problems with the borrowers or the cash flows of
the properties securing the respective loans has caused management to be
concerned about the ability of the borrowers to comply with present loan
repayment terms, which may result in the future inclusion of such loans in the
non-accrual loan category. These loans are reflected in the Savings Bank's
classified assets, discussed below. In addition, the Savings Bank has
identified an additional $4.8 million of loans on its internal watch list
(discussed below) to review quarterly for any deterioration in their capacity
to perform as agreed. The $4.8 million of watch list credits includes $3.0
million, $805,000, $989,000 and $96,000 of commercial real estate, commercial
business, one-to-four family and consumer loans, respectively.
Asset Classification. OTS regulations require that each insured savings
institution review and classify its assets on a regular basis. In addition,
in connection with examinations of insured institutions, OTS examiners have
authority to identify problem assets and, if appropriate, require them to be
classified. There are three classifications for problem assets: substandard,
doubtful and loss. An asset is classified substandard when it is inadequately
protected by the current net worth and paying capacity of the borrower or by
the collateral pledged, if any. Assets so classified must have one or more
defined weaknesses and are characterized by the distinct possibility that the
insured institution will sustain some loss if the deficiencies are not
18
corrected. The Savings Bank's policy is to classify as substandard, for
example, any loan, irrespective of payment record or collateral value, when a
bankruptcy filing occurs, the pay record becomes erratic (e.g., the borrower
misses several monthly payments, but makes double payments in the future), or
a loan becomes contractually delinquent by three monthly payments. Doubtful
assets have the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in full on
the basis of currently existing facts, conditions and values questionable, and
there is a high possibility of loss. An asset classified loss is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted. If an asset or portion thereof is classified
loss, the insured institution must either establish specific allowances for
loan losses for the full amount of the portion of the asset classified as loss
or charge-off such amount. All or a portion of general loan loss allowances
established to cover possible losses related to assets classified substandard
or doubtful may be included in determining an institution's regulatory
capital, while specific valuation allowances for loan losses generally do not
qualify as regulatory capital.
At June 30, 2007 and 2006 the aggregate amounts of the Savings Bank's
classified assets as determined by the Savings Bank, and of the Savings Bank's
general and specific loss allowances and charge-offs, were as follows:
At June 30,
--------------------
2007 2006
------ ------
(In thousands)
Loss $ - $ -
Doubtful 101 686
Substandard assets 4,176 5,898
------ ------
Sub total 4,277 6,584
Special mention - 1,681
------ ------
Total classified assets 4,277 8,265
Total watch list credits 4,843 -
------ ------
Total loans of concern $9,120 $8,265
====== ======
General loss allowances $1,795 $2,348
Specific loss allowances 897 126
------ ------
Total loss allowances $2,692 $2,474
====== ======
Net charge-offs $ 208 $1,897
====== ======
The $1.7 million decrease in substandard assets to $4.2 million at June
30, 2007 from $5.9 million at June 30, 2006, was the result of significant
improvement in the process and procedures utilized to follow-up on problem
credits, earlier recognition of potential problems with credits and a more
aggressive approach in dealing with those problems.
At June 30, 2007, the Savings Bank's largest substandard loans to one
borrower consisted of four loans to an individual and related interests with
a collective outstanding balance of $1.6 million. At June 30, 2007, these
loans were all past due at least seven months. The loans are collateralized
by first deeds of trust on real estate and a security interest in equipment
and inventory. The borrower and the related interests have all filed for
protection under the bankruptcy laws and it appears that the collateral will
be liquidated. Two of the loans totaling almost $1.4 million have a 75%
guarantee through the SBA, and loss reserves have been established for the
Savings Bank's portion of the anticipated shortfall from liquidation.
The Savings Bank no longer uses a "special mention" category in its
internal loan classification process. Instead, a category titled 'watch' is
used by the Savings Bank to monitor loans which are not typical in their
repayment terms, collateral, or a situation with the borrower that may create
repayment difficulties in the future. Loans are designated as watch when the
ability to meet current payment schedules is questionable, even though
interest and principle are still being paid as agreed.
19
Real Estate Owned
Real estate owned includes real estate acquired in the settlement of
loans, which is recorded at the lower of the remaining loan balance or
estimated fair value less the estimated costs to sell the asset. Any write
down at the time of foreclosure is charged against the allowance for loan
losses. Subsequently, net expenses related to holding the property and
declines in the market value are charged against income. At June 30, 2007,
real estate owned consisted of six properties with a net book value of
$292,000 and other repossessed assets with a net book value of $1,000 on the
books. At June 30, 2006, five properties were held as real estate owned with
a total value of $497,000.
Allowance for Loan Losses
Management recognizes that loan losses may occur over the life of a loan
and that the allowance for loan losses must be maintained at a level necessary
to absorb specific losses on impaired loans and probable losses inherent in
the loan portfolio.
Management believes that the accounting estimate related to the allowance
for loan losses is a critical accounting estimate because it is highly
susceptible to change from period to period. This may require management to
make assumptions about losses on loans; and the impact of a sudden large loss
could deplete the allowance and potentially require increased provisions to
replenish the allowance, which would negatively affect earnings.
The allowance for loan losses is evaluated on a monthly basis by
management and is based on management's periodic review of the collectibility
of the loans in light of historical experience, the nature and volume of the
loan portfolio, adverse situations that may affect the borrower's ability to
repay, estimated value of any underlying collateral and prevailing economic
conditions, such as unemployment rates, bankruptcies and vacancy rates of
business and residential properties. This evaluation is inherently subjective
as it requires estimates that are susceptible to significant revision as more
information becomes available.
The allowance consists of specific and general components. The specific
component relates to loans that are classified as either doubtful, substandard
or special mention. For such loans that are also classified as impaired, an
allowance is established when the discounted cash flows (or collateral value
or observable market price) of the impaired loan is lower than the carrying
value of that loan. The general component covers non-classified loans and is
based on historical loss experience adjusted for qualitative factors.
The allowance is increased by the provision for loan losses, which is
charged against current period operating results and decreased by the amount
of actual loan charge-offs, net of recoveries.
The Savings Bank had an allowance for loan losses at June 30, 2007 and
2006 of $2.7 million and $2.5 million, respectively. The Savings Bank began
experiencing an increase in problem loans during fiscal year 2005. This
increase required a significant increase in the allowance for loan losses. At
June 30, 2005 the allowance for loan losses was $2.9 million, or 1.7%, of
gross loans compared to $2.5 million, or 1.7%, of gross loans at June 30,
2006. The allowance for loan losses was $2.7 million, or 1.7%, of gross loans
at June 30, 2007.
Management believes that the allowance for loan losses was adequate at
June 30, 2007 to absorb the known and inherent risks of loss in the loan
portfolio at that date. While management believes the estimates and
assumptions used in its 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
20
provisions that may be required will not adversely impact our financial
condition and results of operations. In addition, the determination of the
amount of the Savings 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 provision based upon their judgment of
information available to them at the time of their examination. Any material
increase in the allowance may adversely affect the Savings Bank's financial
condition and earnings.
The following table sets forth an analysis of the Savings Bank's
allowance for loan losses for the periods indicated.
At June 30,
----------------------------------------------
2007 2006 2005 2004 2003
------ ------ ------ ------ ------
(Dollars in thousands)
Allowance at beginning of
period $2,474 $2,851 $1,240 $1,144 $ 884
------ ------ ------ ------ ------
Provision for loan losses 426 1,520 2,333 340 427
------ ------ ------ ------ ------
Recoveries:
Residential real estate 24 5 1 9 7
Commercial real estate 8 - 9 - -
Consumer 37 48 62 79 53
Commercial business 96 50 15 14 -
------ ------ ------ ------ ------
Total recoveries 165 103 87 102 60
------ ------ ------ ------ ------
Charge-offs:
Residential real estate 169 26 110 41 44
Commercial real estate 94 99 77 127 18
Consumer 32 223 415 147 165
Commercial business 78 1,663 207 31 -
------ ------ ------ ------ ------
Total charge-offs 373 2,000 809 346 227
------ ------ ------ ------ ------
Net charge-offs 208 1,897 722 244 167
------ ------ ------ ------ ------
Allowance at end of
period $2,692 $2,474 $2,851 $1,240 $1,144
====== ====== ====== ====== ======
Ratio of allowance to total
loans outstanding at the
end of the period 1.59% 1.67% 0.46% 0.73% 0.63%
Ratio of net charge offs to
average loans outstanding
during the period 0.14% 1.29% 0.10% 0.14% 0.09%
The following table sets forth the breakdown of the allowance for loan
losses by loan category as of the dates indicated. Management believes that
the allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses
in any other categories.
21
Allowance for Loan Losses by Category
At June 30,
-------------------------------------------------------------------------------------
2007 2006 2005
--------------------------- -------------------------- --------------------------
Percent Percent Percent
Percent Of Gross Percent Of Gross Percent Of Gross
Of Out- Loans in Of Out- Loans in Of Out- Loans in
Standing Category Standing Category Standing Category
Loans in To Gross Loans in To Gross Loans in To Gross
Amount Category Loans Amount Category Loans Amount Category Loans
------ -------- -------- ------ -------- -------- ------ -------- --------
(Dollars in thousands)
Real estate --
mortgage:
Residential $ 164 0.19% 53.58% $ 222 0.27% 55.59% $ 217 0.24% 54.36%
Commercial 1,567 3.89 24.97 726 1.96 24.99 759 1.83 25.28
Land 119 1.31 5.63 25 0.31 5.36 26 0.28 5.76
Second mortgage
loans 60 1.24 2.99 31 0.86 2.47 32 0.76 2.54
Consumer 239 1.99 7.44 82 0.95 5.84 177 1.82 5.93
Commercial business 543 6.24 5.39 1,388 16.27 5.75 1,640 16.30 6.13
------ ------ ------ ------ ------ ------
Total allowance
for loan
losses $2,692 1.59% 100.00% $2,474 1.67% 100.00% $2,851 1.74% 100.00%
====== ====== ====== ====== ====== ======
At June 30,
--------------------------------------------------------
2004 2003
--------------------------- --------------------------
Percent Percent
Percent Of Gross Percent Of Gross
Of Out- Loans in Of Out- Loans in
Standing Category Standing Category
Loans in To Gross Loans in To Gross
Amount Category Loans Amount Category Loans
------ -------- -------- ------ -------- --------
(Dollars in thousands)
Real estate --
mortgage:
Residential $ 283 0.30% 56.21% $ 287 0.28% 57.64%
Commercial 337 0.84 23.70 302 0.73 22.87
Land 31 0.34 5.32 26 0.26 5.50
Second mortgage
loans 20 0.52 2.29 33 0.71 2.60
Consumer 240 2.22 6.38 182 1.61 6.30
Commercial business 329 3.18 6.10 314 3.43 5.09
------ ------ ------ ------
Total allowance
for loan
losses $1,240 0.73% 100.00% $1,144 0.64% 100.00%
====== ====== ====== ======
22
Securities Activity
Savings and loan associations have authority to invest in various types
of liquid assets, including United States Treasury obligations, securities of
various Federal agencies and of state and municipal governments, deposits at
the FHLB-Des Moines, certificates of deposit of federally insured
institutions, certain bankers' acceptances and federal funds. Subject to
various restrictions, savings institutions may also invest a portion of their
assets in commercial paper, corporate debt securities and mutual funds, the
assets of which conform to the investments that federally chartered savings
institutions are otherwise authorized to make directly. Savings institutions
are also required to maintain minimum levels of liquid assets which vary from
time to time. See "REGULATION OF FIRST HOME -- Federal Home Loan Bank
System." The Savings Bank may decide to increase its liquidity above the
required levels depending upon the availability of funds and comparative
yields on securities in relation to return on loans.
Routine short-term investment decisions, which are reported monthly to
the Board of Directors, are made by the President and Chief Executive Officer
and Chief Financial Officer, who act within policies established by the Board.
Those securities include federally insured certificates of deposit, FHLB time
obligations, bankers acceptances, treasury obligations, U.S. Government agency
obligations, mortgage-backed securities, bank qualifying municipal tax exempt
bonds, and corporate bonds. Securities not within the parameters of the
policies require prior Board approval. Securities are purchased for
investment purposes. The goals of the Savings Bank's investment policy are to
select securities based on safety first, flexibility second and
diversification third. In addition, as a result of the concern with interest
rate risk exposure, there has been a focus on short-term investments. At June
30, 2007, the Company's and the Savings Bank's securities portfolio totaled
$43.7 million (of which $31.3 million were available for sale) and consisted
primarily of federal agency obligations securities, federal agency
mortgage-backed securities, common stocks, and municipal bonds. For further
information concerning the Savings Bank's securities portfolio, see Note 2 of
the Notes to the Consolidated Financial Statements included in the Annual
Report.
Securities Analysis
The following table sets forth the Company's and the Savings Bank's
securities portfolio at carrying value at the dates indicated. Securities that
are held-to-maturity are shown at amortized cost, and securities that are
available-for-sale are shown at the current market value.
At June 30,
----------------------------------------------------
2007 2006 2005
---------------- ---------------- ----------------
Book Percent Book Percent Book Percent
Value Of Value Of Value Of
(1) Portfolio (1) Portfolio (1) Portfolio
----- --------- ----- --------- ----- ---------
(Dollars in thousands)
Debt securities:
United States Government
and Federal agencies
Obligations $13,460 30.79% $23,564 56.50% $26,426 58.72%
Obligations of state and
political subdivisions 3,510 8.03 3,782 9.07 3,431 7.62
Federal agency mortgage-
backed securities 24,856 56.85 10,451 25.06 10,792 23.98
------- ------ ------- ------ ------- ------
Total debt securities 41,826 95.67 37,797 90.63 40,649 90.32
------- ------ ------- ------ ------- ------
Equity securities:
FHLB stock 1,614 3.69 1,612 3.87 1,904 4.23
Other 281 0.64 2,297 5.51 2,454 5.45
------- ------ ------- ------ ------- ------
Total equity
securities 1,895 4.33 3,909 9.37 4,358 9.68
------- ------ ------- ------ ------- ------
Total investment
securities $43,721 100.00% $41,706 100.00% $45,007 100.00%
======= ====== ======= ====== ======= ======
23
-------------
(1) The market value of the Company's and the Savings Bank's investment
securities portfolio amounted to $43.5 million, $41.3 million, and $44.9
million at June 30, 2007, 2006 and 2005, respectively. At June 30, 2007,
the market value of the principal component of the Company's and the
Savings Bank investment securities portfolio which were federal agencies
mortgage-backed securities was $24.7 million.
The following table sets forth the maturities and weighted average yields
of the debt securities in the Company's and the Savings Bank's investment
securities portfolio at June 30, 2007.
After One Year After Five Years
One Year or Less Through Five Years Through Ten Years After Ten Years
---------------- ------------------ ----------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ------ ------ -----
(Dollars in thousands)
United States
Government
and Federal
Agencies
obligations $5,799 4.28% $5,724 4.78% $ 937 4.91% $ 1,000 5.00%
Obligations of
state and
political
subdivisions 350 3.52 2,132 3.81 1,028 4.53 - -
Mortgage-backed
securities - - 4,387 5.36 5,843 5.14 14,626 5.32
------ ------- ------ -------
Total loans $6,149 $12,243 $7,808 $15,626
====== ======= ====== =======
At June 30, 2007, the Savings Bank held no security which had an
aggregate book value in excess of 10% of the Company's stockholders' equity.
To supplement lending activities in periods of deposit growth and/or
declining loan demand, the Savings Bank has invested in residential mortgage-
backed securities. Although such securities are held for investment, they can
serve as collateral for borrowings and, through repayments, as a source of
liquidity. For information regarding the carrying and market values of the
Savings Bank's mortgage-backed securities portfolio, see Note 2 of the Notes
to Consolidated Financial Statements included in the Annual Report. The
Savings Bank has invested in federal agency securities issued by FHLMC, FNMA
and Government National Mortgage Association ("GNMA"). As of June 30, 2007,
3.6% of the outstanding balance of the mortgage-backed securities had
adjustable rates of interest that adjust within the next two years. As of
June 30, 2007, the Savings Bank's portfolio included $24.9 million of
mortgage-backed securities purchased as investments to supplement the Savings
Bank's mortgage lending activities.
The FHLMC, FNMA and GNMA certificates are modified pass-through mortgage-
backed securities that represent undivided interests in underlying pools of
fixed-rate, or certain types of adjustable-rate, one-to-four family
residential mortgages issued by these government-sponsored entities. As a
result, the interest rate risk characteristics of the underlying pool of
mortgages, such as fixed- or adjustable-rate, as well as prepayment risk, are
passed on to the certificate holder. FHLMC and FNMA provide the certificate
holder a guarantee of timely payments of interest and ultimate collection of
principal, whether or not they have been collected. GNMA's guarantee to the
holder of timely payments of principal and interest is backed by the full
faith and credit of the U.S. government. Mortgage-backed securities generally
yield less than the loans that underlie such securities, because of the cost
of payment guarantees or credit enhancements that reduce credit risk. In
addition, mortgage-backed securities are more liquid than individual mortgage
loans and may be used to collateralize obligations of the Savings Bank.
24
The Savings Bank has incorporated into its investment policy the
regulatory requirements set forth in the OTS Thrift Bulletin 52, which
addresses the selection of securities dealers, securities policies, unsuitable
investment practices and mortgage derivative products. At June 30, 2007, the
Savings Bank owned no mortgage derivative products.
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major source of the
Savings Bank's funds for lending and other investment purposes. Loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are significantly influenced by general interest
rates and money market conditions. Borrowings may be used on a short-term
basis to compensate for reductions in the availability of funds from other
sources. They may also be used on a longer term basis for general business
purposes.
Deposit Accounts. Deposits are attracted from within the Savings Bank's
primary market area through the offering of a broad selection of deposit
instruments, including negotiable order of withdrawal ("NOW") accounts, money
market accounts, regular savings accounts, certificates of deposit and
retirement savings plans. Deposit account terms vary according to the minimum
balance required, the time periods the funds must remain on deposit and the
interest rate, among other factors. In determining the terms of its deposit
accounts, the Savings Bank considers the rates offered by its competition,
profitability to the Savings Bank, matching deposit and loan products and its
customer preferences and concerns. The Savings Bank generally reviews its
deposit mix and pricing at least weekly, and adjusts it as necessitated by
liquidity needs, the interest rate sensitivity gap position (which is the
extent to which interest earning assets repricing during a specified time
period exceed interest bearing liabilities repricing during the same time
period, or vice versa) and competition.
On an overall basis, the Savings Bank experienced deposit growth during
the year ended June 30,2007. This was due to the introduction of a money
market savings account late in calendar 2006, which attracted approximately
$36.3 million in funds by June 30, 2007, of which approximately 50% came from
existing accounts and approximately 50% was new money. However, the growth in
the new product was substantially offset by decreases in regular savings
accounts, interest-bearing checking accounts and certificates of deposit
during the year. During the fiscal year ended June 30, 2007, with the
exception of the money market saving product, the rates paid by the Savings
Bank were at about the mid-point of the range of rates offered by competitors
in each type and maturity of account. Prior to September 2006, the rates on
the Savings Bank's deposit accounts were tended to be at the lower end of the
range of rates paid by area financial institutions in each type and maturity
of account.
25
The following table sets forth information concerning the Savings Bank's
time deposits and other interest-bearing deposits at June 30, 2007.
Weighted
Average Percentage
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
-------- ---- --------------------- -------- ------- ----------
(Dollars in
thousands)
0.00% None Non-interest bearing $ 100 12,716 6.69%
1.07% None NOW accounts 100 31,808 16.72
2.30% None Super Saver accounts 1,000 13,375 7.04
1.50% None Savings accounts 25 12,609 6.63
5.04% None Money Market Savings 10,000 36,286 19.09
Certificates of deposit
-----------------------
3.67% 3 months Fixed term, fixed rate 500 595 0.31
4.90% 6 months Fixed term, fixed rate 500 12,391 6.52
5.22% 9 months Fixed term, fixed rate 500 2,601 1.37
4.87% 12 months Fixed term, fixed rate 500 14,995 7.89
4.12% 15 months Fixed term, fixed rate 500 593 0.31
4.60% 18 months Fixed term, fixed rate 500 924 0.49
4.48% 24 months Fixed term, fixed rate 500 2,757 1.45
3.78% 30 months Fixed term, fixed rate 500 772 0.41
3.99% 36 months Fixed term, fixed rate 500 1,079 0.57
3.95% 48 months Fixed term, fixed rate 500 572 .030
4.00% 60 months Fixed term, fixed rate 500 2,450 1.29
3.90% 72 months Fixed term, fixed rate 500 10 0.01
5.22% 120 months Fixed term, fixed rate 500 21 0.01
Various Various Fixed term, adjustable rate 500 20,987 11.04
Various Various Jumbo certificates 100,000 22,549 11.86
------- ------
190,090 100.00%
======= ======
26
The following table indicates the amount of the Savings Bank's jumbo
certificates of deposit by time remaining until maturity as of June 30, 2007.
Jumbo certificates of deposit require minimum deposits of $100,000 and rates
paid on such accounts are negotiable.
Jumbo
Certificates
Maturity Period Of Deposit
------------------------------ ------------
(In thousands)
Three months or less $ 5,220
After three through six months 4,922
After six through twelve months 6,822
After twelve months 5,585
-------
Total $22,549
=======
Time Deposits by Rates
The following table sets forth the time deposits in the Savings Bank
classified by rates as of the dates indicated.
At June 30,
------------------
2007 2006
------ ------
(In thousands)
0.00 - 1.49% $ - $ 18
1.50 - 2.49% 90 1,217
2.50 - 3.49% 1,891 9,610
3.50 - 4.49% 6,236 37,985
4.50 - 5.00% 58,156 42,106
5.01 5.49% 16,430 39
5.50 - 6.49% 493 236
6.50 - 7.49% - -
Over 7.49% - -
------- -------
Total $83,296 $91,211
======= =======
The following table sets forth the amount and maturities of time deposits
at June 30, 2007.
Amount Due
--------------------------------------------
More More More
than than than Percent
One Year 2 Years 3 Years of Total
One Year thru thru thru After 4 Certificate
Or less 2 Years 3 Years 4 Years Years Total Accounts
-------- -------- ------- ------- ------- ----- -----------
(In thousands)
0.00 - 1.49% - - - - - - -%
1.50 - 2.49% 90 - - - - 90 0.11
2.50 - 3.49% 1,028 699 164 - - 1,891 2.27
3.50 - 4.49% 4,739 753 656 54 34 6,236 7.49
4.50 - 5.00% 36,469 12,519 5,207 3,781 180 58,156 69.82
5.01 5.49% 15,168 815 100 214 133 16,430 19.72
5.50 - 6.49% 298 119 76 - - 493 0.59
6.50 - 7.49% - - - - - - -
Over 7.49% - - - - - - -
------- ------- ------ ------ ---- ------- ------
Total $57,792 $14,905 $6,203 $4,049 $347 $83,296 100,00%
======= ======= ====== ====== ==== ======= ======
27
Deposit Flow
The following table sets forth the balances of savings deposits in the
various types of savings accounts offered by the Savings Bank at the dates
indicated.
At June 30,
----------------------------------------------------
2007 2006
------------------------- ------------------------
Percent Percent
Of Increase Of Increase
Amount Total (Decrease) Amount Total (Decrease)
------ ------- -------- ------ ------- --------
(Dollars in thousands)
Non-interest bearing $ 12,716 6.69% $ (29) $ 12,745 7.11% $ 929
NOW checking 31,808 16.73 (3,071) 34,879 19.47 (3,359)
Regular savings
accounts 12,609 6.63 (10,811) 23,420 13.08 (6,454)
Super Saver accounts 13,375 7.04 (3,511) 16,886 9.43 (698)
Money Market
savings accounts 36,286 19.08 36,286
Fixed-rate
certificates
which mature (1):
Within 1 year 50,270 26.45 (916) 51,186 28.57 2,825
After 1 year, but
Within 2 years 3,763 1.98 (1,757) 5,520 3.08 1,158
After 2 years, but
Within 5 years 2,310 1.22 (984) 3,294 1.84 (1,857)
Adjustable-rate
certificates 26,953 14.18 (4,258) 31,211 17.42 (546)
-------- ------ ------ -------- ------ -------
Total certificates 83,296 43.83 (7,915) 91,211 50.91 1,580
-------- ------ ------ -------- ------ -------
Total $190,090 100.00% 10,949 $179,141 100.00% $(8,002)
======== ====== ====== ======== ====== =======
------------
(1) At June 30, 2007 and 2006, jumbo certificates of deposit amounted to
$22.5 million and $24.2 million, respectively, and IRAs amounted to
$23.0 million and $24.7 million at those dates, respectively.
The following table sets forth the savings activities of the Savings Bank
for the periods indicated.
Years Ended June 30,
----------------------
2007 2006
-------- --------
(In thousands)
Beginning balance $179,141 $187,143
-------- --------
Net increase (decrease)
before interest credited 5,000 (12,245)
Interest credited 5,949 4,243
-------- --------
Net increase/(decrease) in
savings deposits 10,949 (8,002)
-------- --------
Ending balance $190,090 $179,141
======== ========
In the unlikely event the Savings Bank is liquidated, depositors will be
entitled to full payment of their deposit accounts prior to any payment being
made to the Company, as sole stockholder of the Savings Bank. Substantially
all of the Savings Bank's depositors are residents of the State of Missouri.
Retail Repurchase Agreements. In December 2006, the Savings Bank began to
offer retail repurchase agreements. This was done to provide an additional
product for its existing customer base and to attract new customers who would
find the product beneficial. Customers with large balances in checking
accounts benefit by having those balances which exceed a predetermined level
"swept" out of the checking account and into a retail repurchase account. The
repurchase account earns interest at a floating market rate and is uninsured.
However, the balance is collateralized by designated investment securities of
the Savings Bank. At June 30, 2007, the balances of retail repurchase
agreements totaled $2.1 million.
28
Borrowings. Savings deposits are the primary source of funds for the
Savings Bank's lending and investment activities and for its general business
purposes. The Savings Bank also relies on advances from the FHLB-Des Moines
to supply funds and to act as a source of liquidity, if needed. The FHLB-Des
Moines has served as the Savings Bank's primary borrowing source. Advances
from the FHLB-Des Moines are typically secured by the Savings Bank's first
mortgage loans. These advances require monthly payments of interest only with
principal due at maturity and have fixed rates. These advances were obtained
in response to the Savings Bank's previous strong loan demand and limited
deposit growth experienced during fiscal years 2001 and 2000. At June 30,
2007, the Savings Bank had $22.0 million in advances from the FHLB-Des Moines.
The following tables set forth certain information concerning the Savings
Bank's borrowings at the dates and for the periods indicated.
At June 30,
-------------------------
2007 2006 2005
---- ---- ----
Weighted average rate paid on
FHLB advances 5.75% 5.74% 5.50%
Years Ended June 30,
-------------------------
2007 2006 2005
---- ---- ----
(Dollars in thousands)
Maximum amounts of FHLB advances
outstanding at any month end $25,000 $28,394 $29,121
Approximate average FHLB advances
Outstanding 24,077 27,653 29,111
Approximate average effective rate
paid on FHLB advances 5.76% 5.59 5.59%
The FHLB-Des Moines functions as a central reserve bank providing credit
for savings and loan associations and other member financial institutions. As
a member, the Savings Bank is required to own capital stock in the FHLB-Des
Moines and is authorized to apply for advances on the security of such stock
and certain of its mortgage loans and other assets (principally securities
which are obligations of, or guaranteed by, the United States) provided
certain standards related to creditworthiness have been met. Advances are
made pursuant to several different programs. Each credit program has its own
interest rate and range of maturities. Depending on the program, limitations
on the amount of advances are based either on a fixed percentage of an
institution's retained earnings or on the FHLB's assessment of the
institution's creditworthiness. The FHLB-Des Moines determines specific lines
of credit for each member institution. Because of their prepayment penalties,
it is not currently economical to prepay any of these advances prior to
maturity.
Subsidiary Activities
Fybar Service Corporation ("Fybar") is a Missouri corporation
wholly-owned by the Savings Bank. Until May 2007, Fybar owned five rental
properties. In May, the properties were transferred to the Company. The
transfer of the real estate was done to comply with one of the requirements of
the MOU, specifically that Fybar either divest itself of its real estate
holdings or apply for an exception from the FDIC. See "-Corporate
Developments and Overview." Management believes that the transfer to the
Company was the best and most expeditious way to meet the MOU requirement. The
transfer was done at the net book value on Fybar's books. The Company took
title to the properties, assumed the mortgage obligation to the Savings Bank,
paid a portion of the difference between the net book value of the real estate
and the balance of the mortgage in cash and executed a note payable to Fybar
for the remainder of the difference.
Fybar serves as Trustee on all the Savings Bank's deeds of trust, is a
registered agent and receives limited income from credit life and accident and
health policies written in conjunction with the Savings Bank's loans.
29
At June 30, 2007, the Savings Bank had an investment in Fybar of
$576,000.
First Home Investments, Inc. is a wholly-owned subsidiary of the Savings
Bank that offered fixed and variable annuities as well as mutual funds to its
customers and members of the general public. First Home Investments, Inc.
also processed stock and bond trades and provided credit life, disability and
health insurance services to the Savings Bank's customers as well as group and
individual coverages. In August 2007, First Home Investments ceased
operations, and the Savings Bank decided to enter into an agreement with an
outside party to provide investments services to its customer base.
REGULATION OF FIRST HOME
As a Missouri-chartered and federally insured savings and loan
association, First Home is subject to extensive regulation. Lending
activities and other investments must comply with various statutory and
regulatory capital requirements. The Savings Bank is regularly examined by
its state and federal regulators and files periodic reports concerning the
Savings Bank's activities and financial condition. The Savings Bank's
relationship with its depositors and borrowers is also regulated to a great
extent by federal and state laws, especially in such matters as the ownership
of savings accounts and the form and content of the Savings Bank's mortgage
documents.
Missouri Savings and Loan Law
General. As a Missouri-chartered savings and loan association, First
Home derives its authority from, and is governed by, the provisions of the
Missouri Savings and Loan Law ("Missouri Law") and regulations of the Missouri
Division of Finance ("Division"). The Director of the Missouri Division of
Finance ("Director") proposes regulations which must then be approved,
amended, modified or disapproved by the State Savings and Loan Commission
("Commission"). Missouri Law and the resulting regulations are administered
by the Director.
Investments and Accounts. Missouri Law and regulations impose
restrictions on the types of investments and loans that may be made by a
Missouri-chartered institution, generally bringing these restrictions into
parity with the regulation of federally chartered institutions. The manner of
establishing accounts and evidencing the same is prescribed, as are the
obligations of the institution with respect to withdrawals from accounts and
redemption of accounts. The Director may also impose or grant the same
restrictions, duties and powers concerning deposits as are applicable to
federal institutions under federal rules and regulations.
Branch Offices. Under Missouri Law, no institution may establish a
branch office or agency without the prior written approval of the Director.
The Director reviews the proposed location, the functions to be performed at
the office, the estimated volume of business, the estimated annual expense of
the office and the mode of payments. Decisions of the Director may be
appealed to the Commission. The relocation or closing of any office is
subject to additional regulation and in certain circumstances may require
prior approval.
Merger or Consolidation. Missouri Law permits the merger or
consolidation of savings institutions, subject to the approval by the
Director, when the Director finds that such merger or consolidation is
equitable to the members or account holders of the institutions and will not
impair the usefulness and success of other properly conducted institutions in
the community. Mergers or consolidations of mutual institutions must also be
approved by a majority of the members of each institution. Stock institutions
must obtain shareholder approval pursuant to the Missouri statutes relating to
general and business corporations.
Holding Companies. Missouri Law requires a savings and loan holding
company and its subsidiaries to register with the Director within 60 days of
becoming a savings and loan holding company. Following registration it is
subject to examination by the Division and thereafter must file certain
reports
30
with the Director. A savings and loan holding company may acquire control of
an institution of another savings and loan holding company upon application
and prior written approval of the Director. The Director, in reviewing the
application, must determine if such acquisition is consistent with the
interests of maintaining a sound financial system and that the acquisition
does not afford a basis for supervisory objection.
Examination. Periodic reports to the Division must be made by each
Missouri-chartered institution. The Division conducts and supervises the
examination of state-chartered institutions.
Supervision. The Director has general supervisory authority over
Missouri-chartered institutions and upon the Director's finding that an
institution is violating the provisions of its articles of incorporation, its
bylaws or any law of the state, or is conducting business in an unsafe or
injurious manner, the Director may order the institution to discontinue such
violation or practice, and to conform with all the requirements of law. The
Director may demand and take possession of the institution, if the institution
fails to comply with the Director's order, if the Director determines that
the institution is insolvent, in an unsafe condition or conducting business in
an unsafe manner, or if the institution refuses to submit to examination or
inspection by the Division.
Federal Regulation of Savings Banks
Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the
Treasury. Among other functions, the OTS issues and enforces regulations
affecting federally-insured savings associations and regularly examines these
institutions.
The OTS has extensive authority over the operations of all insured
savings associations. As part of this authority, First Home is required to
file periodic reports with the OTS District Director and is subject to
periodic examinations by the OTS and the FDIC. The OTS and FDIC have
extensive discretion in their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in these policies, whether by the OTS, the FDIC or
Congress, could have a material adverse impact on the Company.
The OTS has established a schedule for the assessment of fees upon all
savings associations to fund the operations of the OTS. A schedule of fees
has also been established for the various types of applications and filings
made by savings associations with the OTS. The general assessment, to be paid
on a semi-annual basis, is determined based upon the savings association's
total assets, including consolidated subsidiaries, as reported in the
association's latest quarterly thrift financial report. For the first half of
2007, the Savings Bank's assessment under the semi-annual assessment procedure
was $49,727. Based on the current assessment rates published by the OTS and
First Home's total assets of approximately $239.9 million at March 31, 2007,
First Home will be required to pay a semi-annual assessment of $51,831 for the
second half of calendar year 2007.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings, internal controls and
audit systems, interest rate risk exposure and compensation and other employee
benefits. Any institution that fails to comply with these standards must
submit a compliance plan. In this regard, the Savings Bank entered into a
memorandum of understanding with the OTS in December 2006. See "-Corporate
Developments and Overview."
Federal Deposit Insurance Reform Act of 2005. The Federal Deposit
Insurance Reform Act of 2005 ("Reform Act") was signed into law on February 8,
2006 and amended current laws regarding the federal deposit insurance system.
31
Pursuant to the Reform Act, the FDIC merged the Bank Insurance Fund and the
Savings Association Insurance Fund into one deposit insurance fund, the DIF,
on March 31, 2006. The new legislation also abolished the prior minimum 1.25%
reserve ratio and the mandatory assessments when the ratio falls below 1.25%.
Under the Reform Act, the FDIC, at the beginning of each year, has the
flexibility to adjust the DIF's reserve ratio between 1.15% and 1.50%
depending upon a variety of factors, including projected losses, economic
considerations and assessment rates.
Pursuant to the Reform Act, effective April 1, 2006, deposit insurance
coverage limits were increased from $100,000 to $250,000 for certain types of
Individual Retirement Accounts, 401(k) plans and other retirement savings
accounts, including Keogh accounts and "457 plan" accounts, among others. The
current $100,000 limit continues to apply to individual accounts and municipal
deposits; however, the Reform Act authorizes the FDIC to review all levels of
insurance coverage every five years beginning in 2011, and index such
insurance coverage to inflation. Additionally, under the Reform Act,
undercapitalized financial institutions are restricted from accepting employee
benefit plan deposits. Certain one-time deposit premium assessment credits
are also authorized under the Reform Act, and regulations related to the
allotment of such credits have recently been issued by the FDIC. To date,
however, the credit program has not been finalized and the credits will not be
rebated but instead may be applied against premiums at any time, subject to
limited exceptions.
Insurance of Accounts and Regulation by the FDIC. The Savings Bank is a
member of the Deposit Insurance Fund (the "DIF"), which is administered by the
FDIC. The FDIC insures deposits up to the applicable limits and this
insurance is backed by the full faith and credit of the United States
government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-
insured institutions. It also may prohibit any FDIC-insured institution from
engaging in any activity the FDIC determines by regulation or order to pose a
serious risk to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings institutions, after giving the OTS an
opportunity to take such action, and may terminate the deposit insurance if it
determines that the institution has engaged in unsafe or unsound practices or
is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified
as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of
Tier 1 or core capital to risk-weighted assets ("Tier 1 risk-based capital")
of at least 6% and a risk-based capital ratio of at least 10%) and considered
healthy pay the lowest premiums while institutions that are less than
adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of less
than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern pay the highest premiums. Risk classification
of all insured institutions is made by the FDIC for each semi-annual
assessment period. The Reform Act authorizes the FDIC to revise its current
risk-based system, subject to public notice and comment, although no deadline
was given by Congress for the creation or implementation of such regulations.
DIF-insured institutions are required to pay a Financing Corporation
(FICO) assessment, in order to fund the interest on bonds issued to resolve
thrift failures in the 1980s. For the quarter ended June 30, 2006, the FICO
assessment was equal to 1.28 basis points for each $100 in domestic deposits.
These assessments, which may be revised based upon the level of DIF deposits,
will continue until the bonds mature in the years 2017 through 2019.
32
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs,
is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to: supervise the FHLBs; ensure that the
FHLBs carry out their housing finance mission; ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets; and
ensure that the FHLBs operate in a safe and sound manner.
First Home, as a member of the FHLB-Des Moines, is required to acquire
and hold shares of capital stock in the FHLB-Des Moines equal to the greater
of (i) 1.0% of the aggregate outstanding principal amount of residential
mortgage loans, home purchase contracts and similar obligations at the
beginning of each year, or (ii) 1/20 of its advances (borrowings) from the
FHLB-Des Moines. First Home complied with this requirement with an investment
in FHLB-Des Moines stock of $1.6 million at June 30, 2007.
Among other benefits, the FHLB provides a central credit facility
primarily for member institutions. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It
makes advances to members in accordance with policies and procedures
established by the FHFB and the Board of Directors of the FHLB-Des Moines. At
June 30, 2007, the Savings Bank had $22.0 million of advances from the
FHLB-Des Moines.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community
investment and low- and moderate-income housing projects. These contributions
have adversely affected the level of FHLB dividends paid in the past and could
do so in the future. These contributions also could have an adverse effect on
the value of FHLB stock in the future.
Prompt Corrective Action. The OTS is required to take certain
supervisory actions against undercapitalized savings associations, the
severity of which depends upon the institution's degree of under-
capitalization. Generally, an institution that has a ratio of total capital
to risk-weighted assets of less than 8%, a ratio of Tier I (core) capital to
risk-weighted assets of less than 4%, or a ratio of core capital to total
assets of less than 4% (3% or less for institutions with the highest
examination rating) is considered to be "undercapitalized." An institution
that has a total risk-based capital ratio less than 6%, a Tier I capital ratio
of less than 3% or a leverage ratio that is less than 3% is considered to be
"significantly undercapitalized" and an institution that has a tangible
capital to assets ratio equal to or less than 1.5% is deemed to be "critically
undercapitalized."
At June 30, 2007, First Home was a "well capitalized" institution under
the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The federal banking regulatory
agencies have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). The
Guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the OTS determines that the
Savings Bank fails to meet any standard prescribed by the Guidelines, ot may
require the Savings Bank to submit an acceptable plan to achieve compliance
with the standard. Management is aware of no conditions relating to these
safety and soundness standards which would require submission of a plan of
compliance.
Qualified Thrift Lender Test. All savings associations, including First
Home, are required to meet a qualified thrift lender test to avoid certain
restrictions on their operations. This test requires a savings association to
have at least 65% of its portfolio asset, as defined by regulation, in
33
qualified thrift investments on a monthly average for nine out of every 12
months on a rolling basis. As an alternative, the savings association may
maintain 60% of its assets in those assets specified in Section 7701(a)(19) of
the Code. Under either test, such assets primarily consist of residential
housing related loans and investments. At June 30, 2007, First Home met the
test and its qualified thrift lender percentage was 66.74%.
Any savings association that fails to meet the qualified thrift lender
test must convert to a national bank charter. Recent legislation has expanded
the extent to which education loans, credit card loans and small business
loans may be considered "qualified thrift investments." As of June 30, 2007,
the Savings Bank met the qualified thrift lender test.
Capital Requirements. The OTS's capital regulations require federal
savings institutions to meet three minimum capital standards: a 1.5% tangible
capital to total assets ratio, a 4% leverage ratio (3% for institutions
receiving the highest rating on the CAMELS examination rating system) and an
8% risk-based capital ratio. In addition, the prompt corrective action
standards discussed below also establish, in effect, a minimum 2% tangible
capital standard, a 4% leverage ratio (3% for institutions receiving the
highest rating on the CAMELS system) and, together with the risk-based capital
standard itself, a 4% Tier I risk-based capital standard. The OTS regulations
also require that, in meeting the tangible, leverage and risk-based capital
standards, institutions must generally deduct investments in and loans to
subsidiaries engaged in activities as principal that are not permissible for a
national bank.
The risk-based capital standard requires federal savings institutions to
maintain Tier I (core) and total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, recourse obligations, residual
interests and direct credit substitutes, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the OTS capital regulation based on the
risks believed inherent in the type of asset. Core (Tier I) capital is defined
as common stockholders' equity (including retained earnings), certain
non-cumulative perpetual preferred stock and related surplus and minority
interests in equity accounts of consolidated subsidiaries, less intangibles
other than certain mortgage servicing rights and credit card relationships.
The components of supplementary capital currently include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock, the allowance for loan and
lease losses limited to a maximum of 1.25% of risk-weighted assets and up to
45% of unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
The OTS also has authority to establish individual minimum capital
requirements in appropriate cases upon a determination that an institution's
capital level is or may become inadequate in light of the particular
circumstances. At June 30, 2007, the Bank met each of these capital
requirements.
34
The following table presents the Savings Bank's capital levels as of June
30, 2007.
At June 30, 2007
----------------------
Percent of
Amount Assets
------ ----------
(Dollars in thousands)
Tangible capital $24,199 10.1%
Minimum required tangible capital 3,591 1.5
------- ----
Excess $20,608 8.6%
======= ====
Core capital $24,199 10.1%
Minimum required core capital 9,576 4.0
------- ----
Excess $14,623 6.1%
======= ====
Risk-based capital $26,078 17.1%
Minimum risk-based capital requirement 12,179 8.0
------- ----
Excess $13,899 9.1%
======= ====
Limitations on Capital Distributions. OTS regulations impose various
restrictions on savings institutions with respect to their ability to make
distributions of capital, which include dividends, stock redemptions or
repurchases, cash-out mergers and other transactions charged to the capital
account.
Generally, savings institutions, such as the Savings Bank, that before
and after the proposed distribution are well-capitalized, may make capital
distributions during any calendar year equal to up to 100% of net income for
the year-to-date plus retained net income for the two preceding years.
However, an institution deemed to be in need of more than normal supervision
by the OTS may have its dividend authority restricted by the OTS. The Savings
Bank may pay dividends in accordance with this general authority.
Savings institutions proposing to make any capital distribution need not
submit written notice to the OTS prior to such distribution unless they are a
subsidiary of a holding company or would not remain well-capitalized following
the distribution. Savings institutions that do not, or would not meet their
current minimum capital requirements following a proposed capital distribution
or propose to exceed these net income limitations, must obtain OTS approval
prior to making such distribution. The OTS may object to the distribution
during that 30-day period based on safety and soundness concerns.
Loans to One Borrower. Federal law provides that savings institutions
are generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of the Savings Bank's unimpaired capital and
surplus, plus an additional 10% of unimpaired capital and surplus, if such
loan is secured by specified readily-marketable collateral. The OTS by
regulation has amended the loans to one borrower rule to permit savings
associations meeting certain requirements, including capital requirements, to
extend loans to one borrower in additional amounts under circumstances limited
essentially to loans to develop or complete residential housing units. At
June 30, 2007, the Savings Bank's largest loan outstanding to any one
borrower, including related entities, was $2.9 million, of which $1.2 million
was unfunded. This amount is a single loan secured by a subdivision
development in Springfield, Missouri. This loan was performing in accordance
with its repayment terms at that date.
Activities of Savings Associations and Their Subsidiaries. When a
savings association establishes or acquires a subsidiary or elects to conduct
any new activity through a subsidiary that the associations controls, the
savings association shall notify the FDIC and the OTS 30 days in advance and
provide the information each agency may, by regulation, require. Savings
associations also must conduct the activities of subsidiaries in accordance
with existing regulations and orders.
35
The OTS may determine that the continuation by a savings association of
its ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The
FDIC also may determine by regulation or order that any specific activity
poses a serious threat to the SAIF. If so, it may require that no SAIF member
engage in that activity directly.
Accounting and Regulatory Standards. An OTS policy statement applicable
to all savings associations clarifies and re-emphasizes that the investment
activities of a savings association must be in compliance with approved and
documented investment policies and strategies, and must be accounted for in
accordance with generally accepted accounting principles (GAAP). Under the
policy statement, management must support its classification of an accounting
for loans and securities (i.e., whether held for investment, sale or trading)
with appropriate documentation. First Home is in compliance with these
amended rules.
The OTS has adopted an amendment to its accounting regulations, which may
be made more stringent than generally accepted accounting principles by the
OTS, to require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial
reports must incorporate any other accounting regulations or orders prescribed
by the OTS.
Investment Portfolio Policy. OTS supervisory policy requires that
securities owned by thrift institutions must be classified and reported in
accordance with GAAP which establishes three classifications of investment
securities: held-to-maturity, trading and available-for-sale. Trading
securities are acquired principally for the purpose of near term sales. Such
securities are reported at fair value and unrealized gains and losses are
included in income.
Securities which are designated as held-to-maturity are designated as
such because the investor has the ability to hold these securities to
maturity. Such securities are reported at amortized cost.
All other securities are designated as available-for-sale, a designation
which provides the investor with certain flexibility in managing its
investment portfolio. Such securities are reported at fair value; net
unrealized gains and losses are excluded from income and reported net of
applicable income taxes as a separate component of stockholders' equity. The
Savings Bank has adopted a reporting policy that complies with these OTS
requirements.
Transactions with Affiliates. The Savings Bank's authority to engage in
transactions with "affiliates" is limited by OTS regulations and by Sections
23A and 23B of the Federal Reserve Act as implemented by the Federal Reserve
Board's Regulation W. The term "affiliates" for these purposes generally means
any company that controls or is under common control with an institution. The
Company and its non-savings institution subsidiaries would be affiliates of
the Savings Bank. In general, transactions with affiliates must be on terms
that are as favorable to the institution as comparable transactions with
non-affiliates. In addition, certain types of transactions are restricted to
an aggregate percentage of the institution's capital. Collateral in specified
amounts must usually be provided by affiliates in order to receive loans from
an institution. In addition, savings institutions are prohibited from lending
to any affiliate that is engaged in activities that are not permissible for
bank holding companies and no savings institution may purchase the securities
of any affiliate other than a subsidiary.
The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") generally prohibits
a company from making loans to its executive officers and directors. However,
that act contains a specific exception for loans by a depository institution
to its executive officers and directors in compliance with federal
36
banking laws. Under such laws, the Savings Bank's authority to extend credit
to executive officers, directors and 10% stockholders ("insiders"), as well as
entities such person's control is limited. The law restricts both the
individual and aggregate amount of loans the Savings Bank may make to insiders
based, in part, on the Savings Bank's capital position and requires certain
Board approval procedures to be followed. Such loans must be made on terms
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. There is an exception for
loans made pursuant to a benefit or compensation program that is widely
available to all employees of the institution and does not give preference to
insiders over other employees. There are additional restrictions applicable
to loans to executive officers.
Privacy Standards. The Gramm-Leach-Bliley Financial Services
Modernization Act of 1999 ("GLBA"), which was enacted in 1999, modernized the
financial services industry by establishing a comprehensive framework to
permit affiliations among commercial banks, insurance companies, securities
firms and other financial service providers. The Savings Bank is subject to
OTS regulations implementing the privacy protection provisions of the GLBA.
These regulations require the Savings Bank to disclose its privacy policy,
including identifying with whom it shares "non-public personal information,"
to customers at the time of establishing the customer relationship and
annually thereafter.
Anti-Money Laundering and Customer Identification. Congress enacted the
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (the "USA Patriot Act") on
October 26, 2001 in response to the terrorist events of September 11, 2001.
The USA Patriot Act gives the federal government new powers to address
terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing, and broadened anti-money
laundering requirements. In 2006, Congress re-enacted certain expiring
provisions of the USA Patriot Act.
REGULATION OF FIRST BANCSHARES
General
First Bancshares is a unitary savings and loan holding company subject to
regulatory oversight of the OTS. Accordingly, the Company is registered with
the OTS and subject to OTS regulations, examinations, supervision and
reporting requirements. The Company is required to file certain reports with,
and otherwise comply with the regulations of, the OTS and the Securities and
Exchange Commission. As a subsidiary of a savings and loan holding company,
the Savings Bank is subject to certain restrictions in its dealings with the
Company and with other companies affiliated with the Company and also is
subject to regulatory requirements and provisions as federal institutions.
Mergers and Acquisitions. The Company must obtain approval from the OTS
before acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company or acquiring such an
institution or holding company by merger, consolidation or purchase of its
assets. In evaluating an application for the Company to acquire control of a
savings institution, the OTS would consider the financial and managerial
resources and future prospects of the Company and the target institution, the
effect of the acquisition on the risk to the insurance funds, the convenience
and the needs of the community and competitive factors.
Activities Restrictions. As a unitary savings and loan holding company,
the Company generally is not subject to activity restrictions. The Company and
its non-savings institution subsidiaries are subject to statutory and
regulatory restrictions on their business activities specified by federal
regulations, which include performing services and holding properties used by
a savings institution subsidiary, activities authorized for savings and loan
holding companies as of March 5, 1987, and non-banking activities permissible
for bank holding companies pursuant to the Bank Holding Company Act of 1956 or
authorized for financial holding companies pursuant to the GLBA.
37
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 was signed
into law by President Bush on July 30, 2002 in response to public concerns
regarding corporate accountability in connection with recent accounting
scandals. The stated goals of the Sarbanes-Oxley Act are to increase
corporate responsibility, to provide for enhanced penalties for accounting and
auditing improprieties at publicly traded companies and to protect investors
by improving the accuracy and reliability of corporate disclosures pursuant to
the securities laws. The Sarbanes-Oxley Act generally applies to all
companies that file or are required to file periodic reports with the SEC,
under the Securities Exchange Act of 1934, including the Company.
The Sarbanes-Oxley Act includes very specific additional disclosure
requirements and new corporate governance rules, requires the SEC and
securities exchanges to adopt extensive additional disclosure, corporate
governance and other related rules and mandates further studies of certain
issues by the SEC and the Comptroller General. The Sarbanes-Oxley Act
represents significant federal involvement in matters traditionally left to
state regulatory systems, such as the regulation of the accounting profession,
and to state corporate law, such as the relationship between a board of
directors and management and between a board of directors and its committees.
Qualified Thrift Lender Test
If the Savings Bank fails the qualified thrift lender test, within one
year the Company must register as a bank holding company, and will become
subject to, the significant activity restrictions applicable to bank holding
companies. See "Regulation of First Home -- Qualified Thrift Lender Test" for
information regarding the Savings Bank's qualified thrift lender test.
TAXATION
Federal Taxation
General. The Company and the Savings Bank report their income on a
fiscal year basis using the accrual method of accounting and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Savings Bank's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as
a summary and does not purport to be a comprehensive description of the tax
rules applicable to the Savings Bank or the Company.
Bad Debt Reserve. Historically, savings institutions such as the Savings
Bank which met certain definitional tests primarily related to their assets
and the nature of their business ("qualifying thrift") were permitted to
establish a reserve for bad debts and to make annual additions thereto, which
may have been deducted in arriving at their taxable income. The Savings
Bank's deductions with respect to "qualifying real property loans," which are
generally loans secured by certain interest in real property, were computed
using an amount based on the Savings Bank's actual loss experience, or a
percentage equal to 8% of the Savings Bank's taxable income, computed with
certain modifications and reduced by the amount of any permitted additions to
the non-qualifying reserve. Due to the Savings Bank's loss experience, the
Savings Bank generally recognized a bad debt deduction equal to 8% of taxable
income.
In August 1996, the provisions repealing the current thrift bad debt
rules were passed by Congress as part of "The Small Business Job Protection
Act of 1996." The rules eliminate the 8% of taxable income method for
deducting additions to the tax bad debt reserves for all thrifts for tax years
beginning after December 31, 1995. These rules also require that all
institutions recapture all or a portion of their bad debt reserves added since
the base year (last taxable year beginning before January 1, 1988). For
taxable years beginning after December 31, 1995, the Savings Bank's bad debt
deduction will be determined under the experience method using a formula based
on actual bad debt experience over a period of years or, if the Savings Bank
is a "large" association (assets in excess of $500 million) on the basis of
net charge-offs
38
during the taxable year. The unrecaptured base year reserves will not be
subject to recapture as long as the institution continues to carry on the
business of banking. In addition, the balance of the pre-1988 bad debt
reserves continue to be subject to provisions of present law referred to below
that require recapture in the case of certain excess distributions to
shareholders.
Distributions. To the extent that the Savings Bank makes "nondividend
distributions" to the Company that are considered as made: (i) from the
reserve for losses on qualifying real property loans, to the extent the
reserve for such losses exceeds the amount that would have been allowed under
the experience method; or (ii) from the supplemental reserve for losses on
loans ("Excess Distributions"), then an amount based on the amount distributed
will be included in the Savings Bank's taxable income. Nondividend
distributions include distributions in excess of the Savings Bank's current
and accumulated earnings and profits, distributions in redemption of stock,
and distributions in partial or complete liquidation. However, dividends paid
out of the Savings Bank's current or accumulated earnings and profits, as
calculated for federal income tax purposes, will not be considered to result
in a distribution from the Savings Bank's bad debt reserve. Thus, any
dividends to the Company that would reduce amounts appropriated to the Savings
Bank's bad debt reserve and deducted for federal income tax purposes would
create a tax liability for the Savings Bank. The amount of additional taxable
income attributable to an Excess Distribution is an amount that, when reduced
by the tax attributable to the income, is equal to the amount of the
distribution. Thus, if, the Savings Bank makes a "nondividend distribution,"
then approximately one and one-half times the amount so used would be
includable in gross income for federal income tax purposes, assuming a 35%
corporate income tax rate (exclusive of state and local taxes).See
"REGULATION" for limits on the payment of dividends by the Savings Bank. The
Savings Bank does not intend to pay dividends that would result in a recapture
of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. AMTI is
increased by an amount equal to 75% of the amount by which the Savings Bank's
adjusted current earnings exceed its AMTI (determined without regard to this
preference and prior to reduction for net operating losses).
Dividends-Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Savings Bank as a member
of the same affiliated group of corporations. The corporate
dividends-received deduction is generally 70% in the case of dividends
received from unaffiliated corporations with which the Company and the Savings
Bank will not file a consolidated tax return, except that if the Company or
the Savings Bank owns more than 20% of the stock of a corporation distributing
a dividend, then 80% of any dividends received may be deducted.
Other Federal Tax Matters. Other changes in the federal tax system could
also affect the business of the Savings Bank. These changes include
limitations on the deduction for personal interest paid or accrued by
individual taxpayers, limitations on the deductibility of losses attributable
to investment in certain passive activities and limitations on the
deductibility of contributions to individual retirement accounts. The Savings
Bank does not believe these changes will have a material effect on its
operations.
There have not been any IRS audits of the Company's and Savings Bank's
consolidated Federal income tax returns during the past five years.
Missouri Taxation
Missouri-based thrift institutions, such as the Savings Bank, are subject
to a special financial institutions tax, based on net income without regard to
39
net operating loss carryforwards, at the rate of 7% of net income. This tax
is in lieu of certain other state taxes on thrift institutions, on their
property, capital or income, except taxes on tangible personal property owned
by the Savings Bank and held for lease or rental to others and on real estate,
contributions paid pursuant to the Unemployment Compensation Law of Missouri,
social security taxes, sales taxes and use taxes. In addition, First Home is
entitled to credit against this tax all taxes paid to the State of Missouri or
any political subdivision except taxes on tangible personal property owned by
the Savings Bank and held for lease or rental to others and on real estate,
contributions paid pursuant to the Unemployment Compensation Law of Missouri,
social security taxes, sales and use taxes, and taxes imposed by the Missouri
Financial Institutions Tax Law. Missouri thrift institutions are not subject
to the regular state corporate income tax.
There have not been any audits of the Savings Bank's state income tax
returns during the past five years.
For additional information regarding taxation, see Note _ of the Notes to
the Consolidated Financial Statements included in the Annual Report.
Competition
The Savings Bank has been, and continues to be, a community-oriented
savings institution offering a variety of financial resources to meet the
needs of Wright, Webster, Douglas, Ozark, Christian, Stone, Taney and Green
counties, Missouri. The Savings Bank also transacts a significant amount of
business in Texas county, Missouri. The Savings Bank's deposit gathering and
lending activities are concentrated in these market areas. At June 30, 2007,
the Savings Bank's offices were located in Mountain Grove, Marshfield, Ava,
Gainesville, Sparta, Theodosia, Crane, Galena, Kissee Mills, Rockaway Beach,
and Springfield, Missouri. In addition, a loan production office was opened
in Springfield, Missouri in March 2007.
The Savings Bank is the only thrift institution located in Wright County,
Missouri. The Savings Bank faces strong competition in the attraction of
savings deposits and in the origination of loans. Its most direct competition
for savings deposits and loans has historically come from other thrift
institutions and from commercial banks, small loan companies and credit unions
located in its primary market area, some with a state-wide or regional
presence. The Savings Bank also competes with securities firms, money market
funds and mutual funds in raising deposits. Many of these institutions are
substantially larger and have greater financial resources than the Savings
Bank.
The competitive factors among financial institutions can be classified
into two categories; competitive rates and competitive services. Interest
rates are widely advertised and thus competitive, especially in the area of
time deposits. From a service standpoint, financial institutions compete
against each other in types and quality of services. The Savings Bank is
generally competitive with other financial institutions in its area with
respect to interest rates paid on time and savings deposits, fees charged on
deposit accounts, and interest rates charged on loans. With respect to
services, the Savings Bank offers a customer service-oriented atmosphere which
management believes is tailored to its customers' needs.
The Savings Bank also believes it benefits from its community orientation
as well as its relatively high core deposit base.
40
Executive Officers
The following table sets forth certain information with respect to the
executive officers of the Company and the Savings Bank.
Name Age(1) Position
---- ------ --------
Daniel P. Katzfey (2) 45 President and Chief Executive Officer
of the Company and the Savings Bank
James W. Duncan (3) 50 President and Chief Executive Officer
Of the Company and the Savings Bank
Ronald J. Walters (4) 57 Senior Vice President, Treasurer and
Chief Financial Officer of the
Company and the Savings Bank
Dale W. Keenan (5) 44 Executive Vice President and Senior
Lender of the Savings Bank
Adrian C. Rushing (6) 38 Chief Operating Officer of the Savings
Bank
--------------
(1) As of June 30, 2007.
(2) Mr. Katzfey was named Interim President and Chief Executive Officer of
the Company and the Savings Bank by the Board on December 22, 2006
following the resignation of James W. Duncan from those positions. Mr.
Katzfey was named President and Chief Executive Officer of the Company
and the Savings Bank by the Board on January 22, 2007. He originally
joined both the Company and the Savings Bank as Chief Lending Officer on
October 3, 2006.
(3) Mr. Duncan resigned as president and Chief Executive Officer of the
Company and the Savings Bank on December 22, 2006 and as a director of
the Company and the Savings Bank on January 26, 2007.
(4) Mr. Walters was named Senior Vice President, Treasurer and Chief
Financial Officer of both the Company and the Savings Bank on November
20, 2006. He replaced the previous Chief Financial Officer who stepped
down from those positions on September 18, 2006.
(5) Mr. Keenan was named Executive Vice President and Senior Lender of the
Savings Bank on March 11, 2007.
(6) Mr. Rushing was named Senior Vice President of the Savings Bank on June
21, 2006, the date on which he joined the Savings Bank.
The principal occupation of each executive officer of the Company is set
forth below. All executive officers reside in the Savings Bank's primary
trade area in Missouri, unless otherwise stated. There are no family
relationships among or between the executive officers, unless otherwise
stated.
Daniel P. Katzfey joined the Company and the Bank on October 3, 2006 as
Executive Vice President and Chief Lending Officer, was named interim
President and Chief Executive Officer on December 22, 2006 and was appointed
President and Chief Executive Officer on January 22, 2007. Previously, Mr.
Katzfey was Executive Vice President, Commercial Lender for Village Bank,
Springfield, Missouri from 2004 to 2006. Mr. Katzfey has over twenty-two years
experience in financial services.
James W. Duncan joined the Company and Savings Bank as President and
Chief Executive Officer effective December 16, 2005. Previously, Mr. Duncan
was the Executive Vice President and Chairman of the Loan Department at
Southern Missouri Bank and Trust Company in Poplar Bluff, Missouri from 1999-
2005. Effective December 22, 2006, Mr. Duncan resigned as President and Chief
Executive Officer of both the Company and the Savings Bank.
Ronald J. Walters joined the Company and the Savings Bank on November 20,
2006 as Senior Vice President, Treasurer and Chief Financial Officer. Mr.
Walters, a CPA, was previously Senior Vice President, Secretary, Treasurer and
Chief Financial Officer of Meta Financial Group and MetaBank in Storm Lake,
41
Iowa from 2003 to 2006. He has over thirty years experience in financial
services.
Dale W. Keenan joined the Savings Bank on March 11, 2007 as Executive
Vice President and Senior Lender. Mr. Keenan was previously a Senior Vice
President and Senior Lender for Heritage Bank of the Ozarks in Lebanon,
Missouri from 2003 to 2007. Mr. Keenan has over twenty-four years of
experience in financial services.
Adrian Rushing joined the Savings Bank on June 21, 2006 as Senior Vice
President and Chief Operating Officer. Mr. Rushing was previously Senior Vice
President, Chief Operations Officer with Southern Missouri Bank and Trust,
Poplar Bluff, Missouri from 1998 to 2006. Mr. Rushing has over sixteen years
experience in financial services.
Personnel
As of June 30, 2007, the Savings Bank had 103 full-time employees and 22
part-time employees. The Savings Bank believes that employees play a vital`
role in the success of a service company and that the Savings Bank's
relationship with its employees is good. The employees are not represented by
a collective bargaining unit.
Item 2. Description of Property
The following table sets forth information regarding the Savings Bank's
offices as of June 30, 2007.
Net
Book
Value Land Building
Year as of Owned/ Owned/ Square
Location County Opened 6/30/07 Leased Leased Footage
--------------------- ------ ------ ------- ------ -------- -------
(Dollars
Main Office in thousands)
-----------
142 East First Street Wright 1911 $1,085 Owned Owned 15,476
Mountain Grove, MO 65711
Branch Offices
--------------
1201 N. Jefferson Street Douglas 1978 263 Owned Owned 3,867
Ava, MO 65608
103 South Clay Street Webster 1974 232 Owned Owned 3,792
Marshfield, MO 65706
203 Elm Street Ozark 1992 485 Owned Owned 3,321
Gainesville, MO 65655
7164 Highway 14 East Christian 1995 203 Owned Owned 3,000
Sparta, MO 65753
Business Highway 160 Ozark 1997 20 Leased Leased 1,824
Theodosia, MO 65761
123 Main Street Stone 1998 217 Owned Owned 5,000
Crane, MO 65633
(table continued on the following page)
42
Net
Book
Value Land Building
Year as of Owned/ Owned/ Square
Location County Opened 6/30/07 Leased Leased Footage
--------------------- ------ ------ ------- ------ -------- -------
(Dollars
in thousands)
112 East 5th Street Stone 1998 51 Owned Owned 1,100
Galena, MO 65656
20377 US Highway 160 Taney 2000 783 Owned Owned 3,386
Forsyth, MO 65653 (1)
2536 State Highway 176 Taney 2000 415 Owned Owned 2,500
Rockaway Beach, MO 65740
2655 South Campbell Greene 2006 81 Leased Leased 2,963
Springfield, MO 65807
Drive-in Facilities
-------------------
207 West 3rd Street Wright 1986 115 Owned Owned 2,268
Mountain Grove, MO 65711
223 West Washington Webster 1993 208 Owned Owned 1,000
Marshfield, MO 65706
Loan Production Office
----------------------
4039 South Fremont Greene 2006 - Leased Leased 2,450
Springfield, MO 65804
------------
(1) This office is located in Kissee Mills, Missouri, but has a mailing
address in Forsyth, Missouri.
Item 3. Legal Proceedings
--------------------------
From time to time, the Company and the Savings Bank may be involved in
various legal proceedings that are incidental to their business. In the
opinion of management, neither the Company nor the Savings Bank is a party to
any current legal proceedings that are expected to be material to the
financial condition or results of operations of the Company or the Savings
Bank, either individually or in the aggregate.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
None.
PART II
Item 5. Market for Common Equity, Related Stockholder Matters and Small
------------------------------------------------------------------------
Business Issuer Purchases of Equity Securities
----------------------------------------------
The information contained in the section captioned "Common Stock
Information" in the Annual Report to Stockholders attached to this Form 10-KSB
as Exhibit 13 is incorporated herein by reference. In addition, the "Equity
Compensation Plan Information" contained in Part III, Item 11 of this Form
10-KSB is incorporated herein by reference.
43
Share Repurchase Activity
The Company completed ten separate stock repurchase programs between
March 9, 1994 and May 28, 2004. On May 28, 2004, an 11th repurchase program of
164,336 shares was initiated. While this program was in effect, a total of
95,618 shares were repurchased at a total cost of $1.9 million. The 11th
repurchase program was terminated by the Board on April 27, 2007. As of June
30, 2007, 1,344,221 shares had been repurchased under repurchase programs at a
cost of $19.1 million or an average cost per share of $14.22.
The table below sets forth information regarding the Company's
repurchases of its common stock during the fourth quarter of fiscal 2007.
Maximum
Total Number Number of
of Shares Shares that
Purchased as May Yet Be
Total Number Average Part of Purchased
of Shares Price Paid Publicly Under the
Period Purchased per Share Announced Plan Plan
------------------------------------------------------------------------------
April 1 - 30, 2007 500 $16.06 95,618 -
May 1 - 31, 2007 - -
June 1 - 30, 2007 - -
----- ------ ------ -----
Total 500 $16.06 95,618 -
----- ------ ------ -----
Item 6. Management's Discussion and Analysis or Plan of Operation
------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the Annual Report is incorporated herein by reference.
Item 7. Financial Statements
-----------------------------
Independent Auditors Reports *
(a) Consolidated Statements of Financial Condition as of June 30, 2007
and 2006*
(b) Consolidated Statements of Income for the Years Ended June 30, 2007
and 2006*
(c) Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 2007 and 2006*
(d) Consolidated Statements of Cash Flows for the Years Ended June 30,
2007 and 2006*
(e) Notes to Consolidated Financial Statements*
* Contained in the Annual Report to Stockholders attached to this Form
10-KSB as Exhibit 13, which is incorporated herein by reference. All
schedules have been omitted as the required information is either
inapplicable or contained in the Consolidated Financial Statements or
related Notes contained in the Annual Report to Stockholders.
Item 8. Changes in and Disagreements with Accountants on Accounting and
------------------------------------------------------------------------
Financial Disclosure
--------------------
The information required by this item was previously reported by the
Registrant in its Current Report on Form 8-K filed with the Securities and
Exchange Commission on May 2, 2006.
Item 8A. Controls and Procedures
---------------------------------
(a) Evaluation of Disclosure Controls and Procedures: An
------------------------------------------------
evaluation of the Company's disclosure controls and procedures (as defined in
Section 12(a)-15(e) of the Securities Exchange Act of 1934 (the "Act")) was
carried out as of June 30, 2007 under the supervision and with the
44
participation of the Company's Chief Executive Officer, Chief Financial
Officer and several other members of the Company's senior management. The
Company's Chief Executive Officer and Chief Financial Officer concluded that
as of June 30, 2007 the Company's disclosure controls and procedures were
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 Control Over Financial Reporting: During the
-----------------------------------------------------
quarter ended June 30, 2007, no change occurred in the Company's 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,
the Company's internal control over financial reporting.
The Company does not expect that its 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.
Item 8B. Other Information
---------------------------
Not applicable.
45
PART III
Item 9. Directors, Executive Officers, Promoters, Control Persons and
----------------------------------------------------------------------
Corporate Governance; Compliance with Section 16(a) of the Exchange Act
-----------------------------------------------------------------------
For information required by this item concerning Directors of the
Company, see the section captioned "Proposal I -- Election of Directors"
included in the Company's Proxy Statement, a copy of which will be filed with
the SEC no later than 120 days after the Company's fiscal year end and is
incorporated herein by reference.
For information concerning Executive Officers of the Company, see the
section captioned "-- Executive Officers" in Part I of this Form 10-KSB, which
is incorporated herein by this reference.
Compliance with Section 16(a) of the Exchange Act
The information required by this item will be contained in the section
captioned "Compliance with Section 16(a) of the Exchange Act" is included in
the Company's Proxy Statement and is incorporated herein by reference.
Audit Committee and Audit Committee Financial Expert
----------------------------------------------------
The Audit Committee consists of Directors Moody and Hixon. The Board of
Directors has determined Director Hixon qualifies as an "audit committee
financial expert," as defined by the SEC. Mr. Hixon is independent, as
independence for audit committee members as defined under the listing
standards of the NASDAQ Stock Market.
Code of Ethics
--------------
First Bancshares, Inc. has adopted a Code of Ethics that applies to First
Bancshares' directors, executive officers and all other employees, which was
included as Exhibit 14 to the Form 10-KSB for the year ended June 30, 2006. A
copy of First Bancshares' Code of Ethics is available to any person without
charge, upon written request made to the Corporate Secretary at PO Box 777,
Mountain Grove, Missouri 65711.
Item 10. Executive Compensation
--------------------------------
The information contained under the section captioned "Directors'
Compensation" and "Executive Compensation" included in the Proxy Statement, a
copy of which will be filed with the SEC no later than 120 days after the
Company's fiscal year end, are incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management and
----------------------------------------------------------------------------
Related Stockholder Matters
---------------------------
Equity Compensation Plan Information. The following table summarizes
share and exercise price information about the Company's equity compensation
plans as of June 30, 2007.
46
(c)
Number of
Securities
(a) (b) Remaining
Available for
Number of Future Issuance
Securities to Weighted- Under Equity
Be Issued Upon Average Plans
Exercise of Exercise Price Compensation
Outstanding of Outstanding (Excluding
Options, Options, Securities
Warrants and Warrants and Reflected in
Plan Category Rights Rights Column (a))
--------------- ------------ ------------- ---------------
Equity Compensation
Plans approved by
security holders:
Option Plan 64,500 $16.76 35,500
Restricted stock plan - - 50,000
Equity Compensation Plans
not approved by security
holders: - - -
------ ------ ------
Total 64,500 $16.76 85,500
====== ====== ======
(a) Security Ownership of Certain Beneficial Owners and Management.
The information contained in the section captioned "Voting
Securities and Security Ownership of Certain Beneficial Owners and
Management" is included in the Proxy Statement, a copy of which
will be filed with the SEC no later than 120 days after the
Company's fiscal year end, is incorporated herein by reference.
(b) Security Ownership of Management
The information contained in the sections captioned "Voting
Securities and Security Ownership of Certain Beneficial Owners and
Management" and "Proposal I - Election of Directors" is included in
the Company's Proxy Statement and are incorporated herein by
reference.
(c) Changes in Control
The Company is not aware of any arrangements, including any pledge
by any person of securities of the Company, the operation of which
may at a subsequent date result in a change in control of the
Company.
Item 12. Certain Relationships and Related Transactions, and Director
----------------------------------------------------------------------
Independence
------------
The information contained in the section captioned " Transactions with
Management" and "Meetings And Committees Of The Board Of Directors And
Corporate Governance Matters-Director Independence" is included in the
Company's Proxy Statement, a copy of which will be filed with the SEC no later
than 120 days after the Company's fiscal year end, is incorporated herein by
reference.
47
Item 13. Exhibits
------------------
(a) 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 (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)10.4First Bancshares, Inc. 2004
Management Recognition Plan (4)
10.5 First Bancshares, Inc. 2004 Stock Option Plan (4)
10.6 Form of Incentive Stock Option Agreement (5)
10.7 Form of Non-Qualified Stock Option Agreement (5)
10.8 First Bancshares, Inc. 2004 Management Recognition
Plan (4)
10.9 Severance Agreement between First Bancshares, Inc. and
First Home Savings Bank and Charles W. Schumacher (6)
10.10 Employment Agreement with James W. Duncan (7)
10.11 Employment Agreement with Daniel P. Katzfey (8)
13. 2007 Annual Report to Stockholders (Except for the
portions of the 2007 Stockholder Report that are expressly
incorporated by reference in this Annual Report on Form
10-KSB, the 2007 Stockholder Report of the Company shall
not be deemed filed as a part hereof.)
14. Code of Ethics (9)
16. Letter on change in certifying accountant (10)
21. Subsidiaries of the Registrant
23. Auditors' Consent
31.1 Rule 13a-14(a) Certification (Chief Executive Officer)
31.2 Rule 13a-14(a) Certification (Chief Financial Officer)
32.1 Section 1350 Certification (Chief Executive Officer)
32.2 Section 1350 Certification (Chief Financial Officer)
------------------
(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 Form 10-KSB for the fiscal
year ended June 30, 2001. An updated Employment Agreement with Mr.
Schumacher was entered into in November 2004 and terminated in June
2005.
(4) Incorporated by reference to the Company's 2004 Annual Meeting Proxy
Statement dated September 15, 2004.
(5) Filed as an exhibit to the Current Report on Form 8-K dated February 22,
2006 and incorporated herein by reference.
(6) Filed as an exhibit to the Current Report on Form 8-K dated October 31,
2005.
(7) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended December 31, 2005.
(8) Filed as an exhibit to the Current Report on Form 8-K dated July 20,
2007.
(9) Filed as an exhibit to the Company's Form 10-KSB for the fiscal year
ended June 30, 2006.
(10) Filed as an exhibit to the Company's Current Report on Form 8-K filed on
May 2, 2006 and incorporated herein by reference.
48
Item 14. Principal Accountant Fees and Services.
The information required by this item is included in the Company's Proxy
Statement, a copy of which will be filed with the Securities and Exchange
Commission no later than 120 days after the Company's fiscal year end and is
incorporated herein by reference.
49
SIGNATURES
In accordance with Section 13 or 15(d) 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: September 28, 2007 By: /s/Daniel P. Katzfey
--------------------
Daniel P. Katzfey
President and Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/Daniel P. Katzfey September 28, 2007
--------------------------------
Daniel P. Katzfey
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/Ronald J. Walters September 28, 2007
--------------------------------
Ronald J. Walters
Senior Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/Thomas M. Sutherland September 28, 2007
--------------------------------
Thomas M. Sutherland
Chairman of the Board
By: /s/Harold F. Glass September 28, 2007
--------------------------------
Harold F. Glass
Director
By: /s/John G. Moody September 28, 2007
--------------------------------
John G. Moody
Director
By: /s/D. Mitch Ashlock September 28, 2007
--------------------------------
D. Mitch Ashlock
Director
By: /s/Billy E. Hixon September 28, 2007
--------------------------------
Billy E. Hixon
Director
EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT DESCRIPTION
-------------- -------------------
13 2007 Stockholder Report. Except for the portions of
the 2007 Stockholder Report that are expressly
incorporated by reference in this Annual Report on
Form 10-KSB, the 2007 Stockholder Report of the
Company shall not be deemed filed as a part hereof.
21 Subsidiaries of the Registrant
23 Consent of Auditors
31.1 Rule 13a - 14(a) Certification (Chief Executive
Officer)
31.2 Rule 13a - 14(a) Certification (Chief Financial
Officer)
32.1 Rule 1350 Certification (Chief Executive Officer)
32.2 Rule 1350 Certification (Chief Financial Officer)
Exhibit 13
Annual Report to Stockholders
First Bancshares, Inc.
2007 Annual Report
First Home Savings Bank
A wholly owned subsidiary of First Bancshares, Inc.
www.fhsb.com
TABLE OF CONTENTS
Page
----
Letter to Shareholders............................................. 1
Business of the Company............................................ 3
Selected Consolidated Financial Information........................ 4
Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 6
McGladrey & Pullen, LLP Independent Auditors' report............... 23
Consolidated Financial Statements.................................. 24
Notes to Consolidated Financial Statements......................... 29
Common Stock Information........................................... 57
Directors and Executive Officers................................... 58
Corporate Information.............................................. 59
Dear Fellow Shareholder:
It is with great pride that we present to you the First Bancshares Annual
Report for the fiscal year ended June 30, 2007. This past year has been one of
transition and tremendous challenge for our employees and senior management,
and the result was a profitable one. We believe we have taken the steps
necessary for continued future growth and profitability. We would like to
take this opportunity to outline five factors which contributed to the
improvements in our performance; they are: 1) additions to the management and
the Board of Directors, 2) improvements in our lending operations and asset
quality, 3) enhancements and increases in earnings, and controlling expenses
and spending, 4) focus on resolving regulatory issues, and 5) product
development and market growth.
Our efforts resulted in an improvement in our results of operations for the
year ended June 30, 2007. To summarize, the Company had a net profit for the
year ended June 30, 2007 of $272,000, or $0.18 per diluted share, compared to
a net loss of $173,000, or $0.11 per diluted share, for the year ended June
30, 2006.
The first area of improvement was the addition and replacement of the entire
senior management team including the President and Chief Executive Officer,
the Chief Operating Officer, Chief Financial Officer, Senior Lender, Chief
Credit Officer, and the Compliance Officer. The new executive management team
has over 135 years of combined commercial banking and savings and loan
experience. We enhanced our positions in human resources, information
technology, and bookkeeping as well as by adding a branch coordinator and a
Controller. We instituted an internal loan review to enhance our
underwriting. We recognize the importance of depth of knowledge and
experience and we will continue to work on augmenting our banking team. In
addition, we added one new board member and an advisory board member, both
with extensive banking backgrounds, and we have formed board committees, to
provide improved oversight.
Another goal was to improve our lending operations and asset quality,
decrease our classified assets and to improve our lending policy and
procedures. We resolved numerous loan delinquencies and obtained proper
evaluations of collateral and also corrected a number of loan documentation
errors. As a result of our efforts, the number of delinquent loans in the
portfolio has decreased. This is not to suggest that we do not have additional
problem loans in the portfolio, but that we believe we have improved our
underwriting and oversight. We have established better policies and training
for all lending staff. Internal loan reviews by our Chief Credit Officer, our
Compliance Officer and our loan processing and administration staff have
significantly improved our underwriting. We are analyzing the types of
investments we need and are utilizing models to test profitability under
various interest rate scenarios.
Another area that needed attention was the reduction of expenses and
enhancement of revenue, especially in the branch network. We have begun
increasing revenue by reviewing, among other things, interest income and non
interest income. While interest expense was increasing, non-interest income
was declining. Based on our new strategy this is reversing. By creating and
adopting budgets and a proper business plan, we have established goals and
targets to increase earnings. We have adjusted our loan and deposit rates to
be competitive while with the goal of improving the margin for the Bank. We
have developed strategies in pricing our products and services to bring our
fee income in line with fee income of our peer group banks. We have set goals
and levels of achievement for all
1
department managers, and we will measure them in the future based on our
branch profitability. Our expansion into the Springfield, Missouri market has
helped increase our interest rate spread by allowing for higher loan rates and
increased loan originations. We initiated a secondary market residential
lending department in Springfield in March 2007. This has been successful as
a result of our ability to attract experienced mortgage staff. The secondary
market residential mortgage division has realized a profit since its inception
and has been a much needed source of non-interest income.
Resolving regulatory issues has been an important focus of senior management.
In particular, we have been working diligently to resolve the regulatory
issues that resulted in a Memorandum of Understanding ("MOU") that was imposed
on the Bank in December 2006 by the Office of Thrift Supervision ("OTS"). Our
senior management made this a top priority and, by May 2007, we had completed
the process of addressing the issues raised by the MOU, with the exception of
the development of a three year business plan. The business plan is due to
the OTS at the end of October 2007, and is on schedule for timely completion.
We look forward to the next exam, and our goal is to have the MOU lifted by or
soon after the end of calendar 2007.
A very important goal and key to our success is product development and
becoming a market leader. For the past 12 months our success was enhanced by
the introduction and installation of basic bank products that gave us an
advantage over competition. We were the first in many of our market areas to
offer "E" checking, enhanced Free checking, a higher rate money market
savings account, enhanced debit card programs, merchant capture and cash
management for our growing number of business accounts.
We initially opened our facility in Springfield in May of 2006 as a loan
production office, with three employees. It has been expanded to a full
service banking facility with over 10 employees. Our loans and deposits have
grown tremendously, and we have shown that by employing talented people in a
new market, the Bank can achieve profitability in one year. In the first
year of operation, the Springfield branch has surpassed some of our branches
in smaller markets in total deposits, and it has also surpassed many of our
branches in loan growth. We are very proud of our Springfield office and,
while no specific plans have as yet been developed, we look forward to
additional branches in Springfield in the future. We will continue to look at
new markets to expand our customer base and improve net income and earnings
per share.
Fiscal 2007 was a far better year than the fiscal 2006, and we look forward to
an even better 2008. Thanks for your continued support and understanding as
we try to bring stability and growth to your Company.
Sincerely,
Daniel P Katzfey
President and Chief Executive Officer
First Bancshares, Inc.
President and Chief Executive Officer
First Home Savings Bank
2
Business of the Company
First Bancshares, Inc. ("Company"), a Missouri corporation, was incorporated
on September 30, 1993 for the purpose of becoming the holding company for
First Home Savings Bank ("First Home" or the "Savings Bank") upon the
conversion of First Home from a Missouri mutual to a Missouri stock savings
and loan association. That conversion was completed on December 22, 1993. At
June 30, 2007, the Company had total consolidated assets of $241.3 million and
consolidated stockholders' equity of $26.5 million.
The Company is not engaged in any significant business activity other than
holding the stock of First Home. Accordingly, the information set forth in
this report, including the consolidated financial statements and related data,
applies primarily to First Home. The Company has been involved in the
ownership of real estate, held for the purpose of generating rental revenue.
During fiscal 2007, other similar real estate that had been held by First
Home's subsidiary, Fybar Service Corporation, was transferred to the Company.
This was done as a result of the memorandum of understanding entered into in
December 2006 by First Home and the Office of Thrift Supervision (the "OTS")
following the OTS' most recent examination of the Savings Bank.. The Company
has begun the process of divesting its real estate holdings.
First Home is a Missouri-chartered, federally-insured stock savings bank
organized in 1911. The Savings Bank is regulated by the Missouri Division of
Finance and the Office of Thrift Supervision ("OTS"). Its deposits are
insured up to applicable limits by the Federal Deposit Insurance Corporation.
First Home also is a member of the Federal Home Loan Bank ("FHLB") System.
First Home conducts its business from its home office in Mountain Grove and
ten full service branch facilities in Marshfield, Ava, Gainesville, Sparta,
Theodosia, Crane, Galena, Kissee Mills, Rockaway Beach, and Springfield,
Missouri. The Springfield, Missouri office was opened in July 2006. In
addition to the branch offices, during fiscal 2007, the First Home opened a
loan origination office in Springfield, Missouri. First Home provides its
customers with a full array of community banking services and is primarily
engaged in the business of attracting deposits from, and making loans to, the
general public, including individuals and small to medium size businesses.
First Home emphasizes the origination of one-to-four family residential
mortgage loans along with multi-family residential, consumer, commercial and
home equity loans. First Home also invests in mortgage-backed, United States
Government and agency securities and other assets.
At June 30, 2007, First Home's total gross loans were $161.5 million, or 66.9%
of total consolidated assets, including residential mortgage loans of $86.5
million, or 53.6% of total gross loans and other mortgage loans of $54.3
million, or 33.6% of total gross loans. Of the mortgage loans, over 72.6% are
adjustable-rate loans.
3
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth certain information concerning the consolidated
financial position and operating results of the Company as of and for the
dates indicated. The Company is primarily in the business of directing,
planning and coordinating the business activities of First Home. The
consolidated data is derived in part from, and should be read in conjunction
with, the Consolidated Financial Statements of the Company and its
subsidiaries presented herein.
At June 30,
-----------------------------------------------
2007 2006 2005 2004 2003
--------- -------- --------- --------- --------
(In thousands)
FINANCIAL CONDITION DATA:
Total assets $ 241,331 $ 228,395 $ 244,007 $ 264,978 $268,542
Loans receivable, net 158,993 141,987 158,143 166,259 176,707
Cash, interest-bearing
deposits and securities 65,498 69,007 68,600 81,971 75,349
Customer deposits 190,090 179,141 187,143 207,247 211,664
Retail repurchase agreements 2,103 - - - -
Borrowed funds 22,000 22,000 28,394 29,121 29,352
Stockholders' equity 26,468 26,291 26,817 27,276 26,404
Years Ended June 30,
-----------------------------------------------
2007 2006 2005 2004 2003
--------- -------- --------- --------- --------
(In thousands, except per share information)
OPERATING DATA:
Interest income $ 13,724 $ 12,913 $ 13,265 $ 13,735 $ 15,486
Interest expense 7,354 5,987 5,091 5,727 7,098
--------- --------- --------- --------- --------
Net interest income 6,370 6,926 8,174 8,008 8,388
Provision for loan losses 426 1,520 2,333 340 427
--------- --------- --------- --------- --------
Net interest income after
provision for loan losses 5,944 5,406 5,841 7,668 7,961
Impairment of and gains/
(losses) on securities 177 (421) (4) 178 27
Non-interest income, excluding
gains/(losses) on securities 2,127 1,902 2,911 2,310 1,877
Non-interest expense 8,094 7,151 7,415 6,744 6,357
--------- --------- --------- --------- --------
Income (loss) before taxes 154 (264) 1,333 3,412 3,508
Income tax expense (benefit) (118) (91) 16 1,065 1,264
--------- --------- --------- --------- --------
Net income (loss) $ 272 $ (173)$ 1,317 $ 2,347 $ 2,244
========= ========= ========= ========= ========
Basic earnings (loss) per
share $ 0.18 $ (0.11)$ 0.83 $ 1.42 $ 1.37
========= ========= ========= ========= ========
Diluted earnings (loss) per
share $ 0.18 $ (0.11)$ 0.83 $ 1.42 $ 1.35
========= ========= ========= ========= ========
Dividends per share $ 0.08 $ 0.16 $ 0.16 $ 0.16 $ 0.16
========= ========= ========= ========= ========
4
At or For the Years Ended June 30,
---------------------------------------------
2007 2006 2005 2004 2003
-------- ------- -------- -------- -------
KEY OPERATING RATIOS:
Return on average assets 0.09 % NA % 0.51 % 0.87 % 0.85 %
Return on average equity 0.77 NA 4.60 8.49 8.68
Average equity to average
assets 11.32 11.52 11.10 10.22 9.77
Interest rate spread for period 2.71 2.96 3.31 3.04 3.13
Net interest margin for period 3.01 3.21 3.48 3.22 3.37
Non-interest expense to average
assets 3.46 2.99 2.88 2.49 2.41
Average interest-earning assets
to interest-bearing liabilities 108.66 108.98 108.01 107.16 108.50
Allowance for loan losses to
total loans at end of period 1.59 1.67 1.74 0.73 0.63
Net charge-offs to average loans
outstanding during the period 0.14 1.29 0.44 0.14 0.09
Ratio of non-performing assets to
total assets 1.47 0.59 2.21 1.02 1.34
Ratio of loan loss allowance to
non-performing assets 79.08 184.52 52.93 45.98 41.66
Dividend payout ratio 44.44 NA 19.28 11.27 11.68
June 30,
---------------------------------------------
OTHER DATA: 2007 2006 2005 2004 2003
-------- ------- -------- -------- -------
Number of:
Loans outstanding 3,450 3,644 4,263 4,771 5,296
Deposit accounts 23,983 24,724 25,021 25,419 25,565
Full service offices 11 10 10 10 10
5
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this
section should be read in conjunction with the Consolidated Financial
Statements, the accompanying Notes to Consolidated Financial Statements and
the other sections contained in this report.
Management's Discussion and Analysis ("MD&A") and other portions of this
report contain certain "forward-looking statements" that may relate to the
Company's expected future financial results, strategic plans or objectives.
These statements are based on management's beliefs, assumptions, current
expectations, estimates and projections about the financial services industry,
the economy, and about the Company and the Savings Bank. Words such as
anticipates, believes, estimates, expects, forecasts, intends, is likely,
plans, projects, variations of such words and similar expressions are intended
to identify such forward-looking statements. These forward-looking statements
are intended to be covered by the safe-harbor provisions of the Private
Securities Litigation Reform Act of 1995. These statements are not guarantees
of future performance and involve certain risks, uncertainties and assumptions
that are difficult to predict with regard to timing, extent, likelihood and
degree of occurrence. Actual results and outcomes may materially differ from
what may be expressed or forecasted in the forward-looking statements. The
Company undertakes no obligation to update, amend, or clarify forward looking
statements, whether as a result of new information, future events (whether
anticipated or unanticipated), or otherwise.
Future factors that could cause actual results to differ materially from the
results anticipated or projected include, but are not limited to, the
following: the credit risks of lending activities, including changes in the
level and direction of loan delinquencies, other loans of concern, loan
write-offs and changes in estimates of the adequacy of the allowance for loan
losses; competitive pressures among depository institutions; interest rate
movements and their impact on customer behavior and net interest margin; the
impact of repricing and competitor pricing initiatives on loan and deposit
products; the ability to adapt successfully to technological changes to meet
customers' needs and development in the marketplace; our ability to access
cost-effective funding; changes in financial markets; changes in economic
conditions in general and particularly as related to our market areas; new
legislation or regulatory changes, including but not limited to changes in
federal and/or state tax laws or interpretations thereof by taxing
authorities; the outcome of litigation; limitations on our future business
activities resulting from the Memorandum of Understanding between the Savings
Bank and the Office of Thrift Supervision entered into on December 1, 2006;
changes in accounting principles, policies or guidelines; the economic impact
of any terrorist actions on our loan originations and loan repayments; and
other risks detailed from time to time in our filings with the Securities and
Exchange Commission.
Corporate Developments and Overview
During the quarter ended December 31, 2006, the Savings Bank entered into a
memorandum of understanding ("MOU") with the Office of Thrift Supervision (the
"OTS"). The MOU resulted from issues noted during the examination of the 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 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
6
exceptions and loan policy exceptions; (3) preparing and submitting to the
Bank's Board of Directors an accurate and complete loan-to-one borrower
report; (4) preparing and updating, where appropriate, a workout plan for each
classified asset over $250,000; (5) adopting a revised loan loss allowance
policy; (6) amending the 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,
except for the development of the three-year business plan, for which an
extension to October 31, 2007 was granted by the OTS, 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 the
resolving the issues discussed in the MOU. The Savings Bank will not receive a
formal report from the OTS on the results of this review.
During the first half of fiscal 2007, there were several changes in
composition of senior management of both the Company and the Savings Bank. In
November 2006, Ronald J. Walters was named Chief Financial Officer of both the
Company and the Savings Bank, replacing the former Chief Financial Officer who
departed in September 2006. In December 2006, James W. Duncan resigned as
President and Chief Executive Officer of both the Company and the Savings
Bank. Daniel P. Katzfey, Executive Vice President and Chief Lending Officer,
was named Interim President and CEO. On January 19, 2007, Mr. Katzfey became
President and Chief Executive Officer of both the Company and the Savings
Bank. The Boards of Directors of the Company and the Savings Bank were
expanded in connection with the addition of a sixth person and the appointment
of an advisory director. During the quarter ended March 31, 2007, Mr. Duncan
resigned as a director of both the Company and the Bank, and Mr. Katzfey was
appointed to both boards.
As the result of the senior management changes and the MOU, , and other
changes in products, operations and procedures, the Savings Bank needed to
fill several positions, including Chief Lending Officer, credit analyst and
controller. In March 2007, Mr. Dale W. Keenan was named Executive Vice
President and Senior Loan Officer of the Savings Bank, and John K. Francka was
named Senior Vice President-Chief Credit Officer of the Savings Bank. Both
Messrs. Keenan and Francka have extensive experience in lending and
management. In addition, Jeffrey Palmer was named Controller of the Savings
Bank.
During the quarter ended March 31, 2007, the Savings Bank obtained permission
from the State of Missouri to open a loan production office in Springfield,
Missouri. This office, which was established primarily to originate single
family mortgage loans for sale to the secondary market, complements the
full-service branch office opened in Springfield in July 2006. The Savings
Bank has added two originators, two loan processors and an individual whose
responsibility is packaging the loans for delivery to and tracking receipt of
funding from the companies on whose behalf the loans were made. All loan
production office personnel have extensive experience in the origination of
single-family mortgage loans for sale in the secondary market. Since the loans
involved are originated on behalf of other parties, the servicing rights
belong to the other parties as well, unless the terms of the sale provide for
the retention of servicing rights by the Savings Bank. In its loan sale
activity to date, the Savings Bank has not retained servicing rights.
The Savings Bank has continued to seek opportunities to reduce its
non-interest expense and improve customer service through the utilization of
technology. At the beginning of fiscal year 2007, the Savings Bank went from
manual posting of all customer transactions to branch capture with electronic
settlement with the Federal Reserve. This eliminated courier expenses to route
7
checks and other items from the branches to the Mountain Grove office, and to
the Federal Reserve. In addition, the Bank also utilized imaging features of
branch capture, along with auto-mail technology, to bring customer statement
processing in-house. Third party processing costs and related courier expenses
were eliminated, postage expense decreased, and statement delivery time to
customers decreased from approximately three weeks to three days.
During the quarter ended March 31, 2007, the Savings Bank began to extend this
technology to business customers with high volumes of check deposits, allowing
for remote image capture with equipment located at the customer facilities. In
addition, remote image capture provides a powerful marketing tool when calling
on prospective customers.
Operating Strategy
The primary goals of management are to reduce and manage risk, improve
profitability and promote the growth of the Company. Operating results depend
primarily on net interest income, which is the difference between the income
earned on interest-earning assets, consisting of loans and securities, and the
cost of interest-bearing liabilities, consisting of deposits and borrowings.
Net income is also affected by, among other things, provisions for loan losses
and operating expenses. Operating results are also significantly affected by
general economic and competitive conditions, primarily changes in market
interest rates, governmental legislation and policies concerning monetary and
fiscal affairs and housing, as well as, by other financial institutions and
the actions of the regulatory authorities. Management's strategy is to
strengthen First Home's presence in, and expand the boundaries of, its primary
market area.
Management has implemented various general strategies with the intent of
improving profitability while maintaining, and as necessary, improving safety
and soundness. Primary among those strategies are, to the extent that market
conditions allow, increasing the volume of originated one-to-four family
loans, actively seeking high quality commercial real estate loans, continuing
improvement in, and maintaining, asset quality, and managing interest-rate
risk. Since the start-up of the loan origination office in Springfield,
Missouri in March, 2007, most of the fixed-rate, single-family mortgages
originated by the Company have been sold to third parties, while adjustable
rate loans are retained in portfolio. This is consistent with First Home's
historical general practice of primarily being an adjustable rate lender. It
is anticipated, subject to market conditions, that no changes will be made in
these strategies.
Lending. Historically, First Home predominantly originated one-to-four family
residential loans. One-to-four family residential loans were 55% of the
mortgage loans originated during fiscal year 2007, compared with 73% of the
mortgage loans originated during fiscal 2006. At June 30, 2007, residential
mortgage loans as a percent of the Savings Bank's total gross loan portfolio
were approximately 54% compared to approximately 55% at June 30, 2006. First
Home has gradually increased its commercial real estate loan originations
within its traditional lending territory over the past six years from 20% of
loan originations for the year ended June 30, 2001 to approximately 27% of
loan originations for the year ended June 30, 2006 to almost 41% of loan
originations for the year ended June 30, 2007. It is anticipated that this
trend will continue for the foreseeable future as the Savings Bank enters new
markets and develops new products.
Asset Quality. Asset quality remains a significant concern of management and
the Company's Board of Directors. The Savings Bank's asset quality is
monitored and measured using various benchmarks. The two key items are
non-performing loans and classified loans. Non-performing loans consist of
non-accrual loans, loans past due over 90 days and impaired loans not past due
or past due less than 60 days. Classified loans are loans internally
identified as having greater credit risk and requiring additional monitoring.
Past due loans (i.e. loans 30-89 days delinquent) at June 30, 2007 were 3.44%
of the total loan portfolio and included 1.72% of total residential loans,
8
5.77% of total commercial real estate loans, 15.11% of total commercial
business loans and 2.22% of total consumer loans.
The table below shows the risk classification of the Savings Bank's loan
portfolio at the dates indicated. Non-performing loans increased by $2.4
million to $3.2 million at June 30, 2007 from $844,000 at June 30, 2006. The
increase in non-performing loans was due in large part to five non-accrual
loans involving two borrowers. In one case, there are four loans totaling over
$1.6 million where the borrower has filed for protection under the bankruptcy
laws. While reorganization was the stated goal in bankruptcy, the situation
evolved to the point where liquidation is the most probable outcome. The other
loan, with a balance of $512,000 has proceeded to liquidation as well.
Classified loans decreased by $4.0 million, or 48%, to $4.3 million at June
30, 2007 compared to $8.3 million at June 30, 2006. This decrease is the
result of efforts by management to encourage borrowers to take the steps
necessary to resolve issues with their loans before the issues become
insurmountable. Stricter internal policies relating to the identification and
monitoring of problem loans have been beneficial in reducing classified loans.
In addition to the classified loans, the Savings Bank has identified an
additional $4.8 million of credits at June 30, 2007 on its internal watch list
including $3.0 million, $805,000, $989,000 and $96,000 of commercial real
estate, commercial business, one-to-four family and consumer loans,
respectively. Management has identified these loans as high risk credits and
any deterioration in their financial condition could increase the classified
loan totals
Asset quality: (in thousands)
At or for the
Year Ended June 30,
----------------------
2007 2006
------- --------
Non-performing assets:
----------------------
Past due over 90 days $ 359 $ 3
Non-accrual loans 2,889 841
Other - -
------- --------
Total non-performing loans 3,248 844
Real estate owned 291 497
------- --------
Total non-performing assets $ 3,539 $ 1,341
======= ========
Classified loans:
-----------------
Loss $ - $ -
Doubtful 101 686
Substandard 4,176 5,898
------- --------
Sub total 4,277 6,584
Special mention - 1,681
------- --------
Total classified assets 4,277 8,265
Total watch list credits 4,843 -
------- --------
Total loans of concern $ 9,120 $ 8,265
======= ========
Net charge-offs $ 208 $ 1,897
====== =======
Provision for loan losses $ 426 $ 1,520
====== =======
The Savings Bank's provision for loan losses for the year ended June 30,
2007 decreased $1.1 million to $426,000 from $1.5 million for the year ended
June 30, 2006. This was a return to a more typical provision following
significantly higher provisions in both fiscal 2006 and 2005.
Managing Interest-Rate Risk. First Home has relied primarily on adjustable
interest rate loans and short-term fixed-rate loans to manage the inherent
risks of interest rate changes. During
9
fiscal 2006, in order to compete in the current interest rate environment,
First Home began offering long-term fixed rate mortgages to borrowers with
good credit quality. With the aim of mitigating risk on these long-term fixed
rate products, management monitors the number, outstanding balance and other
amounts related to these loans to determine when changes should be made to the
terms of the loans offered. While a small number of fixed-rate loans are
retained in portfolio, most fixed rate loans originated since the opening of
the loan origination office have been originated for sale in the secondary
market. Management also utilizes FHLB advances with terms that correspond with
the terms of the loan products.
Critical Accounting Policies. The Company uses estimates and assumptions in
its financial statements in accordance with generally accepted accounting
principles. Material or critical estimates that are susceptible to
significant change include the determination of the allowance for loan losses
and the associated provision for loan losses, as well as the estimation of
fair value for a number of the Company's assets.
Allowance for Loan Losses. Management recognizes that loan losses
may occur over the life of a loan and that the allowance for loan losses must
be maintained at a level necessary to absorb specific losses on impaired loans
and probable losses inherent in the loan portfolio. Management of the Savings
Bank assesses the allowance for loan losses on a monthly basis, through the
analysis of several different factors including delinquency, charge-off rates
and the changing risk profile of the Company's loan portfolio, as well as
local economic conditions such as unemployment rates, bankruptcies and vacancy
rates of business and residential properties.
Management believes that the accounting estimate related to the allowance for
loan losses is a critical accounting estimate because it is highly susceptible
to change from period to period. This may require management to make
assumptions about losses on loans; and the impact of a sudden large loss could
require increased provisions, which would negatively affect earnings.
The allowance for loan losses is evaluated on a regular basis by management
and is based on management's periodic review of the collectibility of the
loans in light of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to repay,
the estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information becomes
available.
The allowance consists of specific and general components. The specific
component relates to loans that are classified as doubtful, substandard or
special mention. For such loans that are also classified as impaired, an
allowance is established when the discounted cash flows (or collateral value
or observable market price) of the impaired loan is lower than the carrying
value of that loan. The general component covers non-classified loans and is
based on historical loss experience adjusted for qualitative factors.
The allowance is increased by the provision for loan losses, which is charged
against current period operating results and decreased by the amount of actual
loan charge-offs, net of recoveries.
Estimation of Fair Value. The estimation of fair value is significant to
a number of the Company's assets, including securities and real estate owned.
These are all recorded at either fair value or at the lower of cost or fair
value. Declines in fair value of held-to-maturity and available-for-sale
securities below their cost that are deemed to be other-than-temporary are
reflected in earnings as realized losses. In estimating other-than-temporary
impairment losses, management considers (1) the length of time and the extent
to which the fair value has been less than cost, (2) the financial condition
and near-term prospects of the issuer, and (3) the intent and ability of the
Company to retain its investment in the issuer for a period of time sufficient
to allow for any anticipated recovery in fair value. Furthermore, accounting
principles generally accepted in the
10
United States require disclosure of the fair value of financial instruments as
a part of the notes to the consolidated financial statements. Fair values are
volatile and may be influenced by a number of factors, including market
interest rates, prepayment speeds, discount rates and the shape of yield
curves.
Comparison of Financial Condition at June 30, 2007 and June 30, 2006
General. The most significant change in the Company's financial condition
during the year ended June 30, 2007 was an increase in net loans receivable of
$17.0 million. This increase was funded primarily by an increase of $10.9
million in deposits and $2.1 million in customer funds invested in retail
repurchase agreements, which the Savings Bank began to offer in December 2006.
Total Assets. Total assets increased $12.9 million, or 5.7%, to $241.3
million at June 30, 2007 from $228.4 million at June 30, 2006. The increase
was primarily attributable to a $17.0 million increase in loans receivable
which was partially offset by a decrease of $3.5 million in cash, certificates
of deposit and securities.
Cash and Cash Equivalents. Cash and cash equivalents was $21.0 million at
June 30, 2007 compared to $23.5 million at June 30, 2006, a decrease of $2.4
million, or 10.4%. The decrease was the result of using available cash to
fund loan growth, which exceeded the growth of deposits and the funds provided
by the introduction of retail repurchase agreements. Additionally, during the
year the Savings Bank re-evaluated and reduced the level of cash on hand in
the main office and the branch offices.
Certificates of Deposit. Certificates of deposit purchased as investments
decreased $3.1 million to $747,000 at June 30, 2007 from $3.8 million at June
30, 2006. As certificates of deposit purchased matured during the year ended
June 30, 2007, the proceeds were used to fund loans and purchase
mortgage-backed securities.
Securities. Securities increased $2.0 million to $42.1 million at June 30,
2007 from $40.1 million at June 30, 2006. Proceeds from the sales,
maturities, calls and prepayments on securities were reinvested, along with
other excess funds, primarily in mortgage-backed securities. The
available-for-sale portfolio increased by $10.4 million, or 50.0%, to $31.3
million at June 30, 2007 from $20.9 million at June 30, 2006. The held to
maturity portfolio decreased by $8.4 million, or 43.9%, to $10.8 million at
June 30, 2007 from $19.2 million at June 30, 2006. This change was the result
of a decision to allow the held to maturity portfolio to run off through
maturities while new purchases were categorized as available-for-sale,
providing the greatest level of flexibility in the investment portfolio.
Loans Receivable. Net loans receivable increased from $142.0 million at June
30, 2006 to $159.0 million at June 30, 2007. The $17.0 million, or 12.0%,
increase was the result of loan originations exceeding paydowns and payoffs on
loans. Real estate loan originations increased by $16.1 million, or 42.2%, to
$54.3 million for the year ended June 30, 2007 compared to $38.2 million for
the year ended June 30, 2006. Commercial real estate, multi-family and land
loan originations increased by $13.9 million, while one-to-four family loan
originations increased by $2.2 million. Fiscal 2007 saw the reversal of the
declines in the Savings Bank's outstanding loan total that had taken place
over the previous five years.
Non-accrual Loans. Non-accrual loans increased from $841,000 at June 30, 2006
to $2.9 million at June 30, 2007. The increase in non-accrual loans between
June 30, 2006 and June 30, 2007 was due in large part to five loans involving
two borrowers. In one case, four loans totaling over $1.6 million were put on
non-accrual when the borrower filed for protection under the bankruptcy laws.
While reorganization was the stated goal in bankruptcy, the situation evolved
to
11
the point where liquidation is the most probable outcome. The other loan, with
a balance of $512,000 has proceeded to liquidation as well. The allowance for
loan losses was increased to cover the anticipated shortfall between the loan
balances and the Small Business Administration guarantees and anticipated
proceeds from liquidation of both the real estate and other collateral.
Non-performing Assets. Non-performing assets increased $2.2 million from $1.3
million at June 30, 2006 to $3.5 million at June 30, 2007. At June 30, 2007,
the ratio of non-performing assets to total assets was 1.47% compared to 0.59%
at June 30, 2006. The Savings Bank's non-performing loans consist of
non-accrual loans and past due loans over 90 days. Non-performing assets also
include real estate owned and other repossessed assets.
The Savings Bank has identified an additional $4.8 million of credits at June
30, 2007 on its internal watch list including $3.0 million, $805,000, $989,000
and $96,000 of commercial real estate, commercial business, one-to-four family
and consumer loans, respectively. Management has identified these loans as
high risk credits and any deterioration in their financial condition could
increase the classified loan totals.
Deposits. Deposits increased $10.9 million, or 6.1%, to $190.1 million at
June 30, 2007 from $179.2 million at June 30, 2006. The single most important
factor in the increase in deposits was the introduction in December 2006 of a
money market savings product. The money market savings account had $36.3
million in balances at June 30, 2007, while regular savings decreased $10.8
million, checking and money market accounts, decreased $13.9 million and
certificates of deposit decreased $7.9 million. The rates paid by the Savings
Bank on deposits, with the exception of special offerings and specifically
designed accounts, usually fall in the middle of the range of rates offered by
the Savings Bank's competitors.
Retail Repurchase Agreements and Borrowings. In December 2006, the Savings
Bank began to offer retail repurchase agreements. This was done to provide an
additional product for its existing customer base and to attract new customers
who would find the product beneficial. Customers with large balances in
checking accounts benefit by having those balances which exceed a
predetermined level "swept" out of the checking account and into a retail
repurchase account. The repurchase account earns interest at a floating market
rate and is uninsured. However, the balance is collateralized by designated
investment securities of the Savings Bank. At June 30, 2007, the balances of
retail repurchase agreements totaled $2.1 million. Advances from the Federal
Home Loan Bank of Des Moines were $22.0 million at both June 30, 2007 and June
30, 2006. During the year the Savings Bank borrowed an additional $3.0 million
from the Federal Home Loan Bank of Des Moines and a $3.0 million callable
advance was called. There was no other borrowed money during the year ended
June 30, 2007.
Stockholders' Equity. Stockholders' equity was $26.5 million at June 30, 2007
compared to $26.3 million at June 30, 2006. The $178,000 increase was the
result of net income of $272,000 and an increase in paid-in-capital of
$84,000, which resulted from the implementation of FASB 123R in regard to
stock based compensation. These increases were partially offset by the payment
of dividends of $124,000, or $0.08 per share, the repurchase of the Company's
common shares totaling $27,000, and a $27,000 addition to net unrealized
losses on securities. At June 30, 2007, there were 1,550,815 shares of stock
outstanding compared to 1,552,480 shares outstanding at June 30, 2006. The
decrease in the Company's outstanding shares is the result of the Company's
stock repurchases. The book value per share increased to $17.07 at June 30,
2007 from $16.93 at June 30, 2006.
Comparison of Operating Results for the Years Ended June 30, 2007 and June 30,
2006
Net Income. Net income increased $445,000 from a net loss of $173,000 for the
fiscal year ended June 30, 2006 to net income of $272,000 for the fiscal year
ended June 30, 2007. The
12
increase was primarily attributable to an $823,000 increase in non-interest
income and a $1.1 million decrease in provision for loan losses. These items
were partially offset by a decrease of $556,000 in net interest income and an
increase in non-interest expense of $943,000.
Net Interest Income. Net interest income decreased $556,000, or 8.0%, to $6.4
million for the fiscal year ended June 30, 2007 from $6.9 million for the
fiscal year ended June 30, 2006. Total interest expense increased $1.4
million, while total interest income increased by $812,000.
Interest Income. Interest income increased $812,000, or 6.3%, to $13.7
million for the fiscal year ended June 30, 2007, from $12.9 million for the
fiscal year ended June 30, 2006. Interest income on loans receivable
increased by $532,000, or 5.1%, to $10.9 million for the fiscal year ended
June 30, 2007 from $10.4 million for the fiscal year ended June 30, 2006.
During the year ended June 30, 2007, the average balance of net loans
outstanding increased $4.6 million, or 3.1%, to $152.2 million from $147.5
million for the fiscal year ended June 30, 2006. In addition, the yield on net
loans outstanding increased to 7.19% in fiscal 2007 from 7.06% in fiscal 2006,
due to origination of loans at higher market rates.. Total originations of
loans were $81.7 million, while repayments on loans were $60.6 million.
Interest income from securities increased $133,000, or 7.4% to $1.9 million
for the year ended June 30, 2007 from $1.8 million for the year ended June 30,
2006. The increase was the result of an increase in the yield on securities
to 4.46% for fiscal 2007 from 3.70% for fiscal 2006, which was partially
offset by a decrease of $5.2 million, or 10.8%, in the average balance of
securities to $43.2 million in fiscal 2007 from $48.5 million in fiscal 2006.
Interest income from other interest-earning assets (primarily overnight funds)
increased $147,000, or 20.7%, to $853,000 for the fiscal year ended June 30,
2007 from $706,000 for the fiscal year ended June 30, 2006. The increase is
attributable to an increase in the yield on other interest-earning assets from
3.57% for the year ended June 30, 2006 to 5.33% for the year ended June 30,
2007, which was partially offset by a decrease in the average balance of other
interest-earning assets from $19.8 million in fiscal 2006 to $16.0 million
during fiscal 2007.
Interest Expense. Interest expense for the fiscal year ended June 30, 2007
increased $1.4 million, or 22.8%, to $7.4 million from $6.0 million for the
fiscal year ended June 30, 2006. Expense on interest-bearing customer
deposits increased by $1.5 million, or 34.2%, to $5.9 million for fiscal 2007
from $4.4 million for fiscal 2006. This increase was the result of an increase
in the average rate paid on deposits to 3.50% for the fiscal year ended June
30, 2007 from 2.60% for the fiscal year ended June 30, 2006. The increase in
the average cost of deposits was the result of increased short-term interest
rates during fiscal 2007, maturities of lower costing time deposits and the
money market savings product, which the Savings Bank began to offer in
December 2006.
The Savings Bank added retail repurchase agreements to its product mix during
fiscal 2007 which resulted in interest expense of $21,000 for the year.
Interest expense on other interest-bearing liabilities decreased $170,000, or
10.9%, to $1.4 million for the fiscal year ended June 30, 2007 from $1.6
million for the fiscal year ended June 30, 2006. The decrease was the result
of a decrease of $3.8 million in the average balance of other interest bearing
liabilities from $27.8 million for fiscal 2006 to $24.1 million for fiscal
2007, which was partially offset by an increase in the average cost of these
liabilities from 5.59% in fiscal 2006 to 5.76% in fiscal 2007.
Provision for Loan Losses. The provision for loan losses decreased $1.1
million, or 72.0%, to $426,000 for the fiscal year ended June 30, 2007 from
$1.5 million for the fiscal year ended June 30, 2006. As the result of
increasing problem loans beginning in fiscal 2005, the Savings Bank was
required to significantly increase the allowance for loan losses. The
allowance for loan losses was $2.5 million, or 1.67%, of gross loans at June
30, 2006 compared to $2.7 million, or 1.59%,
13
of gross loans at June 30, 2007. Loan charge-offs, net of recoveries, of
First Home originated loans was $208,000 for the fiscal year ended June 30,
2007 compared to $1.9 million for the fiscal year ended June 30, 2006. The
decrease in net loan losses was the result of many of the loans identified as
problems in fiscal 2005 having been charged off during fiscal year 2006.
Most of the increase in non-accrual loans during the year ended June 30, 2007
was in loans with SBA guarantees.
Non-interest Income. Non-interest income increased $823,000, or 55.6%, to
$2.3 million for the fiscal year ended June 30, 2007 compared to $1.5 million
for the fiscal year ended June 30, 2006. During fiscal 2007 the Company
recorded profit on the sale of securities available-for-sale of $177,000 and
gains on the sale of property and equipment and real estate owned of $58,000
compared to losses of $161,000 and $380,000 in these categories, respectively,
in fiscal 2006. Additionally, there was a provision for an
other-than-temporary impairment of available-for-sale securities of $260,000
recorded in fiscal 2006 which did not recur in fiscal 2007. The Savings Bank
opened a loan origination office in March 2007 and, as a result of its
operations, recorded gain on the sale of loans of $139,000 in fiscal 2007.
The Company does not expect income from loan sale activities to increase
significantly in the near term, and such income may decrease, due to the
currently unfavorable conditions in the secondary market for mortgage loans.
These increases were offset by write downs of $271,000 in the carrying value
of real estate held for investment. These write downs were based on updated
real estate appraisals. The new appraisals were required in order to begin to
market the properties. Additionally, there were decreases of $71,000, $3,000
and $8,000 in service charges and other fee income, income from bank owned
life insurance and other non-interest income, respectively.
Non-interest Expense. Non-interest expense increased $943,000, or 13.2%, to
$8.1 million for the fiscal year ended June 30, 2007 from $7.2 million for the
fiscal year ended June 30, 2006.
Compensation and employee benefits increased $314,000, or 7.9%, to $4.3
million for the fiscal year ended June 30, 2007 from $4.0 million for the
fiscal year ended June 30, 2006. Compensation increased by $530,000 due to
staffing the new branch and the loan production office, and additional
staffing at senior level positions. During the fiscal year ended June 30,
2007, the Company began to account for stock based compensation under FASB
123R, which requires expense to be recorded through the income statement. This
resulted in an increase of $85,000 in compensation and benefits. These
increases were partially offset by reductions of $211,000 and $180,000 in
defined benefit pension plan expense and group health insurance costs,
respectively. The decrease in defined benefit pension plan expense was the
result of freezing the plan in March 2006, which reduced the annual
contribution to administrative costs and significantly lowered funding
requirements. The decrease in health insurance costs was the result of
requiring employees to pay for a portion of the monthly cost of their
coverage. In addition to these decrease, the amount of compensation deferred
under FASB 91 as part of the cost of loan origination increased due to the
increase in loan volume in fiscal 2007 compared to fiscal 2006
Occupancy and equipment expense for the fiscal year ended June 30, 2007
increased $422,000, or 38.2%, to $1.5 million from $1.1 million during the
fiscal year ended June 30, 2006. The increase was partially attributable to
the opening of a new branch office in July 2006 and a loan production office
in March 2007. Both facilities are located in Springfield, Missouri and both
are leased. In addition, the Savings Bank has addressed some maintenance
issues at the main office and the other branches. Upgrades and additions in
computer hardware and software also resulted in increased costs, either
directly or through increases in depreciation expense.
Professional fees increased $285,000, or 106.3%, from $268,000 in fiscal 2006
to $554,000 in fiscal 2007. This resulted from the use of an outside
accounting firm to handle monthly closing of books, reporting and other tasks
during a two month period when the Company was without a CFO and incurred
higher legal and auditing costs.
14
Customer account processing fees (check processing expenses incurred by the
Savings Bank) of $289,000 in fiscal 2006 were eliminated with the installation
of the check imaging system at the end of June 2006. In addition, there was a
savings of $58,000 in courier expenses which were also eliminated by check
imaging.
Deposit insurance premiums decreased $2,000 as a result of lower balances in
customer deposits at the calculation dates for these semi-annual assessments.
Most of the deposit growth occurred in the second half of fiscal 2007. Deposit
insurance costs during fiscal 2008 are anticipated to increase by
approximately five times over fiscal 2007, without considering deposit growth.
This is the result of increased assessments by the FDIC.
Other non-interest expense increased $212,000, or 14.4%, including increases
of $106,000, $71,000, $35,000 and $29,000 in office supplies, computer data
lines, printing costs and employee education, respectively. These items
related to additional facilities, changes in procedures and upgrades in
computer technology.
Income Taxes. Income tax benefit for the fiscal year ended June 30, 2007
increased $26,000 to a benefit of $117,000 from a benefit of $91,000 for
fiscal 2006.
Net Interest Margin. Net interest margin for the fiscal year ended June 30,
2007 was 3.01% compared to 3.21% for the fiscal year ended June 30, 2006. The
decrease was the result of the cost on interest-bearing liabilities increasing
more rapidly than the yield on interest-earning assets. While the ratio of
interest-earning assets to interest-bearing liabilities remained almost
unchanged during fiscal 2007 compared to fiscal 2006, the interest rate spread
between interest-earning assets and interest-bearing liabilities decreased
0.25% from 2.96% to 2.71%.
Average Balances, Interest and Average Yields/Costs
The earnings of the Savings Bank depend largely on the spread between the
yield on interest-earning assets (primarily loans and securities) and the cost
of interest-bearing liabilities (primarily deposit accounts and FHLB
advances), as well as the relative size of the Savings Bank's interest-earning
assets and interest-bearing liability portfolios.
The following table sets forth, for the periods indicated, information
regarding average balances of assets and liabilities as well as the total
dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities, resultant yields,
interest rate spread, net interest margin, and ratio of average
interest-earning assets to average interest-bearing liabilities.
15
Years Ended June 30,
---------------------------------------------------------
2007 2006
---------------------------- ----------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance(2) Dividends Cost Balance(2) Dividends Cost
---------- --------- ---- ---------- --------- ----
(Dollars in thousands)
Interest-earning
assets:
Loans(1) $152,182 $10,945 7.19% $147,536 $10,413 7.06%
Securities 43,229 1,927 4.46 48,463 1,793 3.70
Other 15,999 853 5.33 19,762 706 3.57
-------- ------ -------- ------
Total interest-
earning assets 211,410 13,725 6.49 215,761 12,912 5.98
Non-interest earning
assets
Office properties
and equipment, net 8,075 5,779
Real estate, net 325 2,766
Other non-interest
earning assets 14,332 14,576
-------- --------
Total assets $234,142 $238,882
======== ========
Interest-bearing liabilities:
Savings and Money
Market savings
accounts $ 33,392 1,193 3.57 $ 16,828 231 1.37
Checking and Super
Saver accounts 51,041 753 1.48 62,558 856 1.37
Certificates of
deposit 85,471 4,000 4.68 90,756 3,343 3.68
-------- ------ -------- ------
Total deposits 169,904 5,946 3.50 170,142 4,430 2.60
Retail repurchase
agreements 575 21 3.65 - -
Advances from
Federal Home
Loan Bank 24,077 1,387 5.76 27,849 1,556 5.59
-------- ------ -------- ------
Total interest-
bearing
liabilities 194,556 7,354 3.78 197,991 5,986 3.02
Non-interest bearing
liabilities:
Other liabilities 13,074 13,363
-------- --------
Total
liabilities 207,630 211,354
Stockholders' equity 26,512 27,528
-------- --------
Total liabilities
and stock-
holders'
equity $234,142 $238,882
======== ========
Net interest income $ 6,371 $ 6,926
======= =======
Interest rate spread 2.71% 2.96%
Net interest margin 3.01% 3.21%
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 109% 109%
(1) Average balances include non-accrual loans and loans 90 days or more past
due. The corresponding interest up to the date of non-accrual status has
been included in the "Interest and Dividends" column.
(2) Average balances for a period have been calculated using the average
monthly balances for the respective year.
16
Yields Earned and Rates Paid
The following table sets forth (on a consolidated basis) for the periods and
at the date indicated, the weighted average yields earned on the Company's and
First Home's assets, the weighted average interest rates paid on First Home's
liabilities, together with the net yield on interest-earning assets.
At June 30, Years Ended June 30
----------- -----------------------
2007 2007 2006
----------- ---------- ---------
Weighted average yield
on loan portfolio 7.45 % 7.19 % 7.06 %
Weighted average yield
on securities 4.66 4.72 3.70
Weighted average yield on other
interest-earning assets 4.85 4.61 3.57
Weighted average yield
on all interest-earning assets 6.71 6.49 5.98
Weighted average rate
paid on total deposits 3.79 3.50 2.60
Weighted average rate paid on retail
repurchase agreements 4.25 3.65 -
Weighted average rate paid on other
interest-bearing liabilities 5.75 5.76 5.59
Weighted average rate paid on
All interest-bearing liabilities 4.01 3.78 3.02
Interest rate spread (spread
between weighted average
rate on all interest-earning assets
and all interest-bearing liabilities) 2.70 2.71 2.96
Net interest margin (net interest
income (expense) as a percentage
of average interest-earning assets) N/A 3.01 3.21
Rate/Volume Analysis
The following table presents certain information regarding changes in interest
income and interest expense of the Company and Savings Bank for the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided with respect to (i) effects on interest
income and interest expense attributable to changes in volume (changes in
volume multiplied by prior rate); (ii) effects on interest income and interest
expense attributable to changes in rate (changes in rate multiplied by prior
volume); (iii) the net changes (the sum of the previous columns). The
effects on interest income and interest expense attributable to changes in
both rate and volume are allocated to the change in volume variance and the
change in the rate variance on a pro rated basis.
17
Years Ended June 30, Years Ended June 30,
2007 Compared to 2006 2006 Compared to 2005
Increase/(Decrease) Increase/(Decrease)
Due to Due to
------------------------ ------------------------
Volume Rate Net Volume Rate Net
------ ------ ------ ------ ------ -------
(In thousands)
Interest-earning
assets:
Loans (1) $ 333 $ 200 $ 533 $(1,116) $ 216 $ (900)
Securities (194) 441 247 84 203 287
Other (134) 166 32 (69) 329 260
------ ------ ------ ------ ------ -------
Total net change in
income on interest-
earnings assets 5 807 812 (1,101) 748 (353)
------ ------ ------ ------ ------ -------
Interest-bearing
liabilities:
Interest-bearing
deposits (7) 1,523 1,516 (288) 1,263 975
Retail repurchase
agreements 21 - 21 - - -
Other interest-bearing
liabilities (199) 30 (169) (79) (1) (80)
------ ------ ------ ------ ------ -------
Total net change in
expense on interest-
bearing liabilities (185) 1,553 1,368 (367) 1,262 895
------ ------ ------ ------ ------ -------
Net change in net
interest income $ 190 $ (746) $ (556) $ (734) $ (514) $(1,248)
====== ====== ====== ====== ====== =======
(1) Includes interest on loans 90 days or more past due not on non-accrual
status.
Liquidity and Capital Resources
First Home's primary sources of funds are proceeds from principal and interest
payments on loans and securities, customer deposits, customer retail
repurchase agreements and FHLB advances. While maturities and scheduled
amortization of loans and securities are a relatively predictable source of
funds, deposit flows and mortgage prepayments are greatly influenced by
general interest rates, economic conditions and competition.
The primary investing activity of First Home is the origination of mortgage
loans. Mortgage loans originated by First Home increased by $16.1 million to
$54.3 million for the year ended June 30, 2007 from $38.2 million for the year
ended June 30, 2006. Other investing activities include the purchase of
securities, which totaled $19.2 million and $15.3 million for the years ended
June 30, 2007 and 2006, respectively. These activities were funded primarily
by principal repayments on loans, securities, and deposit growth.
OTS regulations require First Home to maintain an adequate level of liquidity
to ensure the availability of sufficient funds to support loan growth and
deposit withdrawals, to satisfy financial commitments and to take advantage of
investment opportunities. First Home's sources of funds include customer
deposits, customer retail repurchase agreements, principal and interest
payments from loans and securities, and FHLB advances. During fiscal years
2007 and 2006, First Home used its sources of funds primarily to purchase
securities, fund loan commitments and to pay maturing savings certificates and
deposit withdrawals. At June 30, 2007, First Home had approved loan
commitments totaling $5.1 million and undisbursed loans in process totaling
$1,000.
18
Liquid funds necessary for the normal daily operations of First Home are
maintained in checking accounts, a daily time account with the FHLB - Des
Moines and a repurchase agreement account at a regional bank. It is the
Savings Bank's current policy to maintain adequate collected balances in
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 checking accounts and transferred,
when appropriate, to the daily time account, used to purchase investments or
reduce FHLB advances to enhance net interest income.
At June 30, 2007, certificates of deposit amounted to $83.3 million, or 43.8%,
of First Home's total deposits, including $57.8 million which are scheduled to
mature by June 30, 2008. Historically, First Home has been able to retain a
significant amount of its deposits as they mature. Management of First Home
believes it has adequate resources to fund all loan commitments with savings
deposits and FHLB advances and that it can adjust the offering rates of
savings certificates to retain deposits in changing interest rate
environments.
Capital
OTS regulations require First Home to maintain specific amounts of capital.
As of June 30, 2007, First Home was in compliance with all current regulatory
capital requirements with tangible, core and risk-based capital ratios of
10.1%, 10.1% and 17.1%, respectively. These ratios exceed the 1.5%, 4.0% and
8.0% tangible, core and risk-based capital ratios required by OTS regulations.
In addition, the OTS amended its capital regulations that require savings
institutions to maintain specified amounts of regulatory capital based on the
estimated effects of changes in market rates and that could further increase
the amount of regulatory capital required to be maintained by the Savings
Bank.
Consistent with our goal to operate a sound and profitable financial
organization, we actively seek to maintain a "well capitalized" institution in
accordance with regulatory standards. Total equity capital was $26.5 million
at June 30, 2007, or 10.97%, of total assets on that date. As of June 30,
2007, we exceeded all regulatory capital requirements. Our regulatory capital
ratios at June 30, 2007 were as follows: Tier 1 (core) capital 10.11%; Tier 1
risk-based capital 15.90%; and total risk-based capital 17.13%. The
regulatory capital requirements to be considered well capitalized are 5%, 6%
and 10%, respectively.
Off-Balance Sheet Arrangements
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business in order to meet the financing needs of our
customers. These financial instruments generally include commitments to
originate mortgage, commercial and consumer loans, and involve to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the balance sheet. The Company's maximum exposure to credit
loss in the event of nonperformance by the borrower is represented by the
contractual amount of those instruments. Since some commitments may expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company uses the same credit policies
in making commitments as it does for on-balance sheet instruments. Collateral
is not required to support commitments.
Undisbursed balances of loans closed include funds not disbursed but committed
for construction projects. Unused lines of credit include funds not
disbursed, but committed to, home equity, commercial and consumer lines of
credit.
Commercial letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Those guarantees
are primarily used to support
19
public and private borrowing arrangements. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. Collateral held varies as specified
above and is required in instances where we deem it necessary.
The following is a summary of commitments and contingent liabilities with
off-balance sheet risks as of June 30, 2007:
Commitments to originate loans
(In thousands)
Fixed rate $ 5,098
Adjustable rate -
Undisbursed balance of loans closed 1
Unused lines of credit 2,514
Commercial stanby letters of credit 713
----------
Total $ 8,326
==========
Accounting Policies
Various elements of the Company's accounting policies, by their nature, are
inherently subject to estimation techniques, valuation assumptions and other
subjective assessments. In particular, management has identified several
accounting policies that, as a result of the judgments, estimates and
assumptions inherent in those policies, are critical to an understanding of
the financial statements of the Company. These policies relate to the
methodology for the determination of the provision and allowance for loan
losses and the valuation of real estate held for sale. These policies and the
judgments, estimates and assumptions are described in greater detail in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations section and in the section entitled "New accounting standards"
contained in Note 1 of the Notes to Consolidated Financial Statements.
Management believes that the judgments, estimates and assumptions used in the
preparation of the financial statements are appropriate based on the factual
circumstances at the time. However, because of the sensitivity of the
financial statements to these critical accounting policies, the use of other
judgments, estimates and assumptions could result in material differences in
the results of operations or financial condition.
Effect of Inflation and Changing Prices
The Consolidated Financial Statements and related financial data presented
herein have been prepared in accordance with accounting principles generally
accepted in the United States of America, which require the measurement of
financial position and operating results in terms of historical dollars,
without considering the changes in relative purchasing power of money over
time due to inflation. The primary impact of inflation on operations of First
Home is reflected in increased operating costs. Unlike most industrial
companies, virtually all the assets and liabilities of a financial institution
are monetary in nature. As a result, interest rates generally have a more
significant impact on a financial institution's performance than do general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services. During
the current interest rate environment, management believes that the liquidity
and the maturity structure of First Home's assets and liabilities are critical
to the maintenance of acceptable profitability.
Quantitative and Qualitative Disclosures About Market Risk
20
Interest Rate Sensitivity of Net Portfolio Value. The following table sets
forth the change in the Savings Bank's net portfolio value at June 30, 2007,
based on Office of Thrift Supervision ("OTS") models, and to a lesser extent,
internal assumptions that would occur upon an immediate change in interest
rates with no effect given to any steps that management might take to
counteract that change. Net portfolio value is the present value of expected
cash flows from assets, liabilities and off-balance sheet contracts. The
calculation is intended to illustrate the change in net portfolio value that
will occur upon an immediate change in interest rates of at least 200 basis
points with no effect given to any steps that management might take to counter
the effect of that interest rate movement.
Net Portfolio as % of
Net Portfolio Value Portfolio Value of Assets
-------------------------- --------------------------
Basis Point ("bp") Dollar Dollar Percent Net Portfolio
Change in Rates Amount Change(1) Change Value Ratio(2) Change(3)
------------------ ------- --------- ------- --------------- ----------
(Dollars in thousands)
300 bp $ 34,436 $ (4,224) (11) % 14.05 % (135) bp
200 35,788 (2,872) (7) 14.49 (91)
100 36,961 (1,699) (4) 14.87 (53)
- 38,660 - - 15.40 -
(100) 39,454 790 1 15.61 21
(200) 38,688 28 2 15.29 11
(1) Represents the increase (decrease) of the estimated net portfolio value at
the indicated change in interest rates compared to the net portfolio value
assuming no change in interest rates.
(2) Calculated as the estimated net portfolio value divided by the portfolio
value of total assets.
(3) Calculated as the increase (decrease) of the net portfolio value ratio
assuming the indicated change in interest rates over the estimated net
portfolio value ratio assuming no change in interest rates.
The above table illustrates, for example, that at June 30, 2007 an
instantaneous 200 basis point increase in market interest rates would decrease
the Savings Bank's net portfolio value by approximately $2.9 million, or 7%,
and an instantaneous 200 basis point decrease in market interest rates would
increase the Savings Bank's net portfolio value by $28,000, or 2%.
The following summarizes key exposure measures for the dates indicated. They
measure the change in net portfolio value ratio for a 200 basis point adverse
change in interest rates.
June 30, March 31, June 30,
2007 2007 2006
--------- ---------- ----------
Pre-shock net portfolio
Value ratio 15.40% 14.72% 14.63%
Post-shock net portfolio
Value ratio 14.49% 13.94% 13.87%
Decline in net portfolio
Value ratio 91 bp 78 bp 76 bp
The calculated risk exposure measures indicate the Savings Bank's interest
rate risk at June 30, 2007 has increased from the previous year end, in that
the "shock" increase in market rates would have a relatively small negative
effect on net portfolio value.
The OTS uses certain assumptions in assessing the interest rate risk of thrift
institutions. These assumptions relate to interest rates, loan prepayment
rates, deposit decay rates, and the market
21
values of certain assets under differing interest rate scenarios, among
others. As with any method of measuring interest rate risk, certain
shortcomings are inherent in the method of analysis presented in the foregoing
table. For example, although certain assets and liabilities may have similar
maturities or period to repricing, they may react in different degrees to
changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market interest rates. Additionally, certain assets, such as adjustable rate
mortgage loans, have features that restrict changes in interest rates on a
short-term basis and over the life of the asset. Further, in the event of a
change in interest rates, expected rates of prepayments on loans and early
withdrawals from certificates of deposit could deviate significantly from
those assumed in calculating the table.
22
Report of Independent Registered Public Accounting Firm
To the Board of Directors
First Bancshares, Inc.
Mountain Grove, Missouri
We have audited the accompanying consolidated statements of financial
condition of First Bancshares, Inc. and subsidiaries as of June 30, 2007 and
2006 and the related consolidated statements of income, stockholders' equity
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statements presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Bancshares, Inc. and subsidiaries as of June 30, 2007 and 2006 and the results
of their operations and their cash flows for the years then ended in
conformity with U.S. generally accepted accounting principles.
As described in Note 1 to the consolidated financial statements, the Company
adopted Financial Accounting Standards Board Statement No. 123(R), effective
July 1, 2006.
/s/McGladrey & Pullen, LLP
Kansas City, Missouri
September 28, 2007
23
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
June 30, 2007 and 2006
2007 2006
------------ ------------
ASSETS
------
Cash and cash equivalents $ 21,030,321 $ 23,473,645
Certificates of deposit purchased 746,632 3,826,847
Securities available-for-sale 31,321,225 20,883,868
Securities held to maturity 10,786,182 19,209,895
Federal Home Loan Bank stock, at cost 1,613,800 1,611,800
Loans receivable, net 158,992,921 141,986,975
Accrued interest receivable 1,259,460 1,177,502
Prepaid expenses 360,375 292,024
Property and equipment, net 7,506,862 8,028,309
Real estate owned and other repossessed assets 293,337 496,721
Intangible assets, net 285,584 335,699
Deferred tax asset, net 817,373 718,472
Income taxes recoverable 86,380 316,756
Bank-owned life insurance 5,919,973 5,705,493
Other assets 310,334 330,597
------------ ------------
Total assets $241,330,759 $228,394,603
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits $190,090,359 $179,141,140
Retail repurchase agreements 2,103,105 -
Advances from Federal Home Loan Bank 22,000,000 22,000,000
Accrued expenses 669,202 962,894
------------ ------------
Total liabilities 214,862,666 202,104,034
------------ ------------
Commitments and contingencies (Note 13)
Preferred stock, $.01 par value; 2,000,000
shares authorized, none issued - -
Common stock, $.01 par value; 8,000,000 shares
authorized, issued 2,895,036 in 2007 and in 2006,
outstanding 1,550,815 in 2007 and 1,552,480 in 2006 28,950 28,950
Paid-in capital 17,936,224 17,851,736
Retained earnings - substantially restricted 27,850,962 27,703,268
Treasury stock, at cost - 1,344,221 shares in
2007 and 1,342,556 shares in 2006 (19,112,627) (19,085,173)
Accumulated other comprehensive loss (235,416) (208,212)
------------ ------------
Total stockholders' equity 26,468,093 26,290,569
------------ ------------
Total liabilities and stockholders' equity $241,330,759 $228,394,603
============ ============
See notes to the consolidated financial statements
24
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Years Ended June 30, 2007 and 2006
2007 2006
------------ ------------
Interest Income:
Loans receivable $ 10,944,655 $ 10,412,821
Securities 1,926,562 1,793,140
Other interest-earning assets 853,090 706,582
------------ ------------
Total interest income 13,724,307 12,912,543
------------ ------------
Interest Expense:
Deposits 5,946,278 4,430,111
Retail repurchase agreements 21,223 -
Advances from Federal Home Loan Bank 1,386,582 1,556,494
------------ ------------
Total interest expense 7,354,083 5,986,605
------------ ------------
Net interest income 6,370,224 6,925,938
Provision for loan losses 426,000 1,520,083
------------ ------------
Net interest income after
Provision for loan losses 5,944,224 5,405,855
------------ ------------
Non-interest Income:
Service charges and other fee income 1,802,231 1,873,041
Gain on the sale of loans 139,161 -
Gain (loss) on sale of securities 177,000 (161,299)
Gain (loss) on sale of property and equipment
and real estate owned 57,913 (380,040)
Write-down on real estate held for investment (271,009) -
Provision for impairment of securities
available-for-sale - (260,260)
Income from bank-owned life insurance 214,480 217,113
Other 184,190 192,665
------------ ------------
Total non-interest income 2,303,966 1,481,220
------------ ------------
Non-interest Expense:
Compensation and employee benefits 4,307,930 3,993,840
Occupancy and equipment 1,527,115 1,104,746
Professional fees 553,852 268,458
Customer deposit account processing fees - 289,184
Deposit insurance premiums 22,290 24,185
Other 1,682,550 1,470,725
------------ ------------
Total non-interest expense 8,093,737 7,151,138
------------ ------------
Income (loss) before income taxes 154,453 (264,063)
Income taxes (benefit) (117,407) (91,236)
------------ ------------
Net income (loss) $ 271,860 $ (172,827)
============ ============
Basic earnings (loss) per share $ 0.18 $ (0.11)
============ ============
Diluted earnings (loss) per share $ 0.18 $ (0.11)
============ ============
See notes to the consolidated financial statements
25
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-------------------------------------
Years Ended June 30, 2007 and 2006
Common
Stock Other Total
------------------ Paid-in Retained Treasury Comprehensive Stockholders'
Shares Amount Capital Earnings Stock Income (Loss) Equity
--------- -------- ----------- --------- -------- ------------ ------------
Balances at June 30,
2005 1,552,010 $28,930 $17,829,014 $28,124,572 $(19,059,171) $ (106,016) $26,817,329
Comprehensive income:
Net loss - - - (172,827) - - (172,827)
Other comprehensive
income, net of tax:
Change in unrealized
gain(loss) on
securities available-
for-sale, net of deferred
income taxes of $(215,490) - - - - - (367,778) (367,778)
Less: reclassification
adjustment, net of
deferred income taxes
of $155,977 - - - - - 255,582 255,582
-----------
Total Comprehensive
Income (Loss) (275,023)
-----------
Proceeds from exercise of
stock options 2,000 20 16,480 - - - 15,480
Tax Benefit from stock
options exercised - - 7,242 - - - 7,242
Cash dividends ($.16 per
share) - - - (248,477) - - (248,477)
Purchase of treasury
stock at cost (1,530) - - - (26,002) - (26,002)
--------- ------- ----------- ----------- ------------ ---------- -----------
Balances at June 30,
2006 1,552,480 28,950 17,851,736 27,703,268 (19,085,173) (208,212) 26,290,569
-----------
Comprehensive income:
Net income - - - 271,860 - - 271,860
Other comprehensive
income, net of tax:
Change in unrealized
gain(loss) on
securities available-
for-sale, net of deferred
income taxes of $(14,014) - - - - - (204,204) (204,204)
Add: reclassification
adjustment - - - - - 177,000 177,000
-----------
Total Comprehensive
Income (244,656)
-----------
Adjustment for stock option
costs - - 84,488 - - - 84,488
Cash dividends ($.08 per
share) - - - (124,166) - - (124,166)
Purchase of treasury stock
at cost (1,665) - - - (27,454) - (27,454)
--------- ------- ----------- ----------- ------------ ---------- -----------
Balances at June 30,
2007 1,550,815 $28,950 $17,936,224 $27,850,962 $(19,112,627) $ (235,416) $26,468,093
========= ======= =========== =========== ============ ========== ===========
See notes to the consolidated financial statements
26
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Years Ended June 30, 2007 and 2006
2007 2006
------------ ----------
Cash flows from operating activities:
Net income (loss) $ 271,860 $ (172,827)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 757,492 648,371
Amortization 50,115 70,411
Net premiums and (discounts) on securities (105,339) 48,836
Stock based compensation 84,488 -
(Gain) loss on sale of securities (177,000) 161,299
Provision for impairment of securities - 260,260
Provision for loan losses 426,000 1,520,083
Provision for loss on real estate owned 7,000 -
Write down on real estate held for investment 271,009 -
Deferred income taxes (98,579) 59,826
(Gain) loss on sale of property and equipment
and real estate owned (66,618) 380,040
Increase in cash surrender value on bank-owned
life insurance (214,480) (217,113)
Net change in operating accounts:
Accrued interest receivable, prepaid expenses
and other assets (130,048) 201,303
Deferred loan costs 13,744 17,480
Income taxes recoverable 230,376 -
Accrued expenses (293,691) (355,003)
------------ ----------
Net cash provided by operating activities 1,026,329 2,622,966
------------ ----------
Cash flows from investing activities:
Purchase of securities available-for-sale (18,902,694)(13,281,210)
Purchase of securities held-to-maturity (345,000) (2,000,000)
Proceeds from sale of securities
available-for-sale 1,986,000 6,845,018
Proceeds from maturities of securities
available-for-sale 6,513,834 3,920,093
Proceeds from maturities of securities
held-to-maturity 8,961,543 6,894,219
Purchase of Federal Home Loan Bank stock (85,600) -
Proceeds from redemption of Federal Home Loan
Bank stock 83,600 292,500
Net change in certificates of deposit 3,080,215 (851,719)
Net change in loans receivable (17,951,445) 14,299,031
Purchases of property and equipment (624,727) (1,515,728)
Proceeds from sale of property and equipment 92,636 228,088
Proceeds from payments on note receivable - 3,253
Net proceeds from sale of real estate owned 821,281 431,244
------------ ----------
Net cash provided by (used in) investing
activities (16,370,357) 15,567,789
------------ ----------
27
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
---------------------------------------
Years Ended June 30, 2007 and 2006
2007 2006
------------ -----------
Cash flows from financing activities:
Net change in deposits $ 10,949,219 $(8,001,566)
Net change in retail repurchase agreements 2,103,105 -
Payments on borrowed funds (3,000,000) (7,074,036)
Proceeds from borrowed funds 3,000,000 -
Proceeds from issuance of common stock - 15,500
Cash dividends paid (124,166) (248,477)
Purchase of treasury stock (27,454) (26,002)
------------ ------------
Net cash provided by (used in) financing
activities 12,900,704 (15,334,581)
------------ ------------
Net increase (decrease) in cash and cash
equivalents (2,443,324) 2,856,174
Cash and cash equivalents -
beginning of period 23,473,645 20,617,471
------------ ------------
Cash and cash equivalents -
end of period $ 21,030,321 $ 23,473,645
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and
other borrowings $ 7,342,359 $ 5,867,445
Income taxes 18,585 137,109
Supplemental schedule of non-cash investing and
financing activities:
Loans transferred to real estate owned $ 533,243 $ 322,666
Land transferred to other real estate owned - 285,000
See notes to consolidated financial statements
28
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2007 and 2006
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Nature of business - First Bancshares, Inc., a Missouri corporation
("Company"), was organized on September 30, 1993 for the purpose
of becoming a unitary savings and loan holding company for First
Home Savings Bank ("Savings Bank"). The Savings Bank is primarily
engaged in providing a full range of banking and mortgage services
to individual and corporate customers in southern Missouri. The
Company and Savings Bank are also subject to the regulation of
certain federal and state agencies and undergo periodic
examinations by those regulatory authorities.
Principles of consolidation - The accompanying consolidated financial
statements include the accounts of the Company, and its
wholly-owned subsidiaries, the Savings Bank and SCMG, Inc.
(formerly South Central Missouri Title, Inc.) and the wholly-owned
subsidiaries of the Savings Bank, Fybar Service Corporation and
First Home Investments. In consolidation, all significant
intercompany balances and transactions have been eliminated.
Estimates - In preparing the consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America, management is required to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as
of the date of the balance sheet and reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near term
relate to the determination of the fair value of financial
instruments and the allowance for loan losses.
Segment reporting - An operating segment is defined as a component of a
business for which separate financial information is available that
is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and evaluate performance. The
Company has one operating segment, community banking.
Consolidated statements of cash flows - For purposes of the consolidated
statements of cash flows, cash consists of cash on hand and
deposits with other financial institutions. Cash equivalents
include highly-liquid instruments with an original maturity of
three months or less.
29
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2007 and 2006
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-----------------------------------------------------
Securities - Securities which are designated as held-to-maturity are
designated as such because the Company has the ability and intent
to hold these securities to maturity. Such securities are reported
at amortized cost.
All other securities are designated as available-for-sale, a
designation which provides the company with certain flexibility in
managing its investment portfolio. Such securities are reported at
fair value; net unrealized gains and losses are excluded from
income and reported net of applicable income taxes as a separate
component of stockholders' equity.
Interest income on securities is recognized on the interest method
according to the terms of the security. Gains or losses on sales of
securities are recognized in operations at the time of sale and are
determined by the difference between the net sales proceeds and the
cost of the securities using the specific identification method,
adjusted for any unamortized premiums or discounts. Premiums or
discounts are amortized or accreted to income using the interest
method over the period to maturity.
Declines in fair value of individual securities below their
amortized cost that are determined to be other than temporary
result in write-downs of the individual securities to their fair
value with the resulting write-downs included in current earnings
as realized losses. In estimating other-than-temporary impairment
losses, management considers independent price quotations,
projected target prices of investment analysis within the short
term, the financial condition of the issuer, the length of time and
the extent to which the fair value has been less than cost, and the
intent and ability of the Company to retain its investment in the
issues for a period of time sufficient to allow for any anticipated
recovery in fair value.
Federal Home Loan Bank stock - The Savings Bank, as a member of the
Federal Home Loan Bank ("FHLB") system, is required to maintain an
investment in capital stock of the FHLB of Des Moines. No ready
market exists for this stock and it has no quoted market value.
The stock is subject to repurchase by the FHLB at par and is
reported at cost.
Loans receivable - Loans receivable are stated at their principal amount
outstanding, net of deferred loan origination and certain direct
costs. Loan origination and certain direct loan origination costs
are deferred and recognized in interest income over the contractual
lives of the related loans using the interest method. When a loan
is paid-off, the unamortized balance of these deferred fees and
costs is recognized in income.
30
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2007 and 2006
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-----------------------------------------------------
Interest income on loans is recognized on an accrual basis.
The accrual of interest on impaired loans is discontinued when it
is determined that the payment of interest or principal is doubtful
of collection, or when interest or principal is past due 90 days or
more. The interest on these loans is accounted
for on the cash-basis method, until qualifying for return to
accrual. Any accrued but uncollected interest previously recorded
on such loans is generally reversed in the current period and
interest income is subsequently recognized upon collection. Loans
are returned to accrual status when all the principal and interest
amounts contractually due are brought current and future payments
are reasonably assured.
Allowance for loan losses - The allowance for loan losses is established
as losses are estimated to have occurred through a provision for
loan losses charged to earnings. Loan losses are charged against
the allowance when management believes the uncollectibility of a
loan balance is confirmed. Subsequent recoveries, if any, are
credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based on management's periodic review of the
collectibility of the loans in light of historical experience, the
nature and volume of the loan portfolio, adverse situations that
may affect the borrower's ability to repay, estimated value of any
underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that
are susceptible to significant revision as more information becomes
available.
The allowance consists of specific and general components. The
specific component relates to loans that are classified as
doubtful, substandard or special mention. For such loans that are
also classified as impaired, an allowance is established when the
discounted cash flows (or collateral value or observable market
price) of the impaired loan is lower than the carrying value of
that loan. The general component covers non-classified loans and
is based on historical loss experience adjusted for qualitative
factors.
A loan is considered impaired when, based on current information
and events, it is probable that the Savings Bank will be unable to
collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Factors
considered by management in determining impairment include payment
status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's
prior payment record, and the amount of the shortfall in relation
to the principal and interest
31
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2007 and 2006
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-----------------------------------------------------
owed. Impairment is measured on a loan-by-loan basis for
commercial and real estate loans by either the present value of
expected future cash flows discounted at the loan's effective
interest rate, the loan's obtainable market price, or the fair
value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Savings Bank does not
separately identify individual consumer loans for impairment
disclosures.
Property and equipment and related depreciation - Property and equipment
has been stated at cost. Property and equipment depreciation has
been principally computed by applying the following methods and
estimated lives:
Category Estimated Life Method
-------------- -------------- ------
Automobiles 5 Years Straight-line
Office furniture, fixtures
and equipment 3-10 Years Straight-line
Buildings 15-40 Years Straight-line
Investment real estate 15-40 Years Straight-line
Intangible assets - The intangible asset relates to customer
relationships that were acquired in connection with the acquisition
of two branches. The premium paid by the Savings Bank for the
branches is being amortized on a straight-line basis over 15 years.
Bank-owned life insurance - Bank-owned life insurance is carried at its
cash surrender value. Changes in cash surrender value are recorded
in non-interest income.
Income taxes - Deferred taxes are determined using the liability (or
balance sheet) method whereby deferred tax assets are recognized
for deductible temporary differences and operating loss and tax
credit carry-forwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities
and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the
date of enactment.
Real estate owned - Includes real estate acquired in the settlement of
loans, which, is recorded at the lower of the remaining loan
balance or estimated fair value less the estimated costs to sell
the asset. Any write down at the time of foreclosure is charged
against the allowance for loan losses. Subsequently, net expenses
related to holding the property and declines in the market value
are charged against income.
32
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2007 and 2006
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-----------------------------------------------------
Earnings per share - Basic earnings per share and is computed by dividing
net income available to common stockholders by the weighted average
number of common 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 would be issued from
the exercise of stock options has been reduced by the number of
shares that could have been purchased from the proceeds at the
average market price of the Company's stock.
Comprehensive income - Accounting principles generally require that
recognized revenue, expenses, gains and losses be included in net
income. Although certain changes in assets and liabilities, such
as unrealized gains and losses on available-for-sale securities,
are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income.
Employee stock options - During the years ended June 30, 2007 and 2006
the Company had stock-based employee compensation plans, which are
described more fully in Note 10, Employee Benefit Plans.
Beginning with fiscal 2007, the Company was required to account for
stock options using Statement of Financial Accounting Standards
("SFAS") SFAS No. 123(R), "Share-Based Payment", which was issued
in December 2004, by the Financial Accounting Standards Board
("FASB"). This Statement revised SFAS Statement No. 123,
"Accounting for Stock-Based Compensation," amended SFAS No. 95,
"Statement of Cash Flows," and superseded APB Opinion No. 25. SFAS
No. 123(R). It requires that all stock-based compensation now be
measured at fair value and recognized as expense in the income
statement. This Statement also clarifies and expands guidance on
measuring fair value of stock compensation, requires estimation of
forfeitures when determining expense, and requires that excess tax
benefits be shown as financing cash inflows versus a reduction of
taxes paid in the statement of cash flows.
During fiscal 2006, the Company accounted for the plans under the
recognition and measurement provisions of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations.
Pro forma information regarding net income was required by SFAS No.
123, and the amount was determined as if the Company had accounted
for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the
date of grant using a fair value option pricing model.
The effect of applying the fair value method required by SFAS No.
123(R) to the Company's stock option awards resulted in net income
and earnings per share
33
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2007 and 2006
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-----------------------------------------------------
which are not materially different from amounts reported in the
consolidated statements of income, therefore a table reconciling
net income and earnings per share as reported and on a pro forma
basis has not been presented.
Revenue recognition - Deposit account transaction fees and other
ancillary non-interest income related to the Savings Bank's deposit
and lending activities are recognized as services are performed.
Transfers of financial assets - Transfers of financial assets area
accounted for as sales only when control over the assets has been
surrendered. Control over transferred assets is deemed to be
surrendered when: (1) the assets have been isolated from the
Company, (2) the transferee obtains the right to pledge or exchange
the assets it received, and no condition both constrains the
transferee from taking advantage of its right to pledge or exchange
and provides more than a modest benefit to the transferor, and (3)
the Company does not maintain effective control over the
transferred assets through an agreement to repurchase them before
their maturity or the ability to unilaterally cause the holder to
return specific assets.
Impairment of long-lived assets - Long-lived assets, including property
and equipment, real estate held for investment and intangible
assets, are reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be
recoverable. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets.
New accounting standards - In June 2006, the FASB issued FASB
Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in
Income Taxes." This interpretation applies to all tax positions
accounted for in accordance with SFAS No. 109, "Accounting for
Income Taxes." FIN 48 clarifies the application of SFAS No. 109 by
defining the criteria that an individual tax position must meet in
order for the position to be recognized within the financial
statements and provides guidance on measurement, derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition for tax positions. This
interpretation is effective for fiscal years beginning after
December 15, 2006, with earlier adoption permitted. Management has
implemented FIN 48, and knows of no uncertain tax position that
would require additional tax accruals for tax liabilities.
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements." This Statement defines fair value, establishes a
framework for measuring fair value, and expands disclosures about
fair value measurements. It clarifies that fair value is the price
that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants in
the market in which the reporting entity transacts. This Statement
does not require any new fair value measurements, but rather, it
provides enhanced guidance to other pronouncements that require or
permit assets or liabilities to be measured at fair value. This
Statement is effective for fiscal years beginning after November
34
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2007 and 2006
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-----------------------------------------------------
15, 2007, with earlier adoption permitted. The Company does not
expect that the adoption of this Statement will have a material
impact on its financial position, results of operation or cash
flows.
In February 2007, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities - Including an amendment of FASB
Statement No. 115, which provides all entities, including
not-for-profit organizations, with an option to report selected
financial assets and liabilities at fair value. The objective of
the Statement is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in earnings
caused by measuring related assets and liabilities differently
without having to apply the complex provisions of hedge accounting.
Certain specified items are eligible for the irrevocable fair value
measurement option as established by Statement No. 159. Statement
No. 159 is effective as of the beginning of an entity's first
fiscal year beginning after November 15, 2007. Early adoption is
permitted as of the beginning of a fiscal year that begins on or
before November 15, 2007 provided the entity also elects to apply
the provisions of Statement No. 157, Fair Value Measurements. The
Company is currently evaluating the impact that the adoption of
this Statement will have on its financial position, results of
operation or cash flows.
Reclassifications - Certain accounts in the prior-year consolidated
financial statements have been reclassified for comparative
purposes to conform to the presentation in the current-year
consolidated financial statements, with no effect on stockholders'
equity or net income.
(2) SECURITIES
----------
A summary of the securities available-for-sale at June 30, 2007 is as
follows:
Gross Unrealized Estimated
Amortized ------------------- Fair
Cost Gains Losses Value
------------ ------- --------- ------------
United States Government and
Federal agency obligations $ 6,751,838 $ - $ (42,045) $ 6,709,793
Obligations of states and
political subdivisions 1,180,000 - (3,502) 1,176,498
Mutual funds 23,464 - - 23,464
Federal agency mortgage-
backed securities 23,464,614 1,551 (312,695) 23,153,470
Common and preferred stocks 258,000 - - 258,000
------------ ------- --------- ------------
Total $ 31,677,916 $ 1,551 $(358,242) $ 31,321,225
============ ======= ========= ============
35
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2007 and 2006
(2) SECURITIES (CONTINUED)
----------------------
A summary of securities held to maturity at June 30, 2007 is as follows:
Gross Unrealized Estimated
Amortized ------------------- Fair
Cost Gains Losses Value
------------ ------- --------- ------------
United States Government and
Federal agency obligations $ 6,750,000 $ 1,250 $ (56,247) $ 6,695,003
Obligations of states and
political subdivisions 2,333,655 5,775 (15,449) 2,323,981
Federal agency mortgage-
backed securities 1,702,527 321 (107,173) 1,595,675
------------ ------- ---------- ------------
Total $ 10,786,182 $ 7,346 $(178,869) $ 10,614,659
============ ======= ========== ============
The amortized cost and estimated market value of debt securities at June
30, 2007, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
Available for Sale
-----------------------------
Amortized Estimated
Cost Fair Value
------------ --------------
Due in one year or less $ 4,310,195 $ 4,298,701
Due after one year through five years 3,066,643 3,040,484
Due after five years through ten years 555,000 547,106
------------ --------------
Subtotal 7,931,83 7,886,291
Mutual funds 23,464 23,464
Federal agency mortgage-backed securities 23,464,614 23,153,470
Common and preferred stocks 258,000 258,000
------------ --------------
Total $ 31,677,916 $ 31,321,225
============ ==============
Held to Maturity
-----------------------------
Amortized Estimated
Cost Fair Value
------------ --------------
Due in one year or less $ 1,850,032 $ 1,844,337
Due after one year through five years 4,814,705 4,800,325
Due after five years through ten years 1,418,918 1,407,762
Due after ten years 1,000,000 966,560
------------ --------------
Subtotal 9,083,655 9,018,984
Federal agency mortgage-backed securities 1,702,527 1,595,675
------------ --------------
Total $ 10,786,182 $ 10,614,659
============ ==============
36
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2007 and 2006
(2) SECURITIES (CONTINUED)
---------------------
A summary of the securities available-for-sale at June 30, 2006 is as
follows:
Gross Unrealized Estimated
Amortized ------------------- Fair
Cost Gains Losses Value
------------ ------- --------- ------------
United States Government and
Federal agency obligations $ 8,931,356 $ - $(117,635) $ 8,813,721
Obligations of states and
political subdivisions 1,325,000 - (6,574) 1,318,426
Mutual funds 26,236 - - 26,236
Federal agency mortgage
back securities 8,663,462 1,309 (210,286) 8,454,485
Common and preferred stocks 2,267,000 4,000 - 2,271,000
------------ ------- --------- ------------
Total $ 21,213,054 $ 5,309 $(334,495) $ 20,883,868
============ ======= ========= ============
A summary of securities held to maturity at June 30, 2006 is as follows:
Gross Unrealized Estimated
Amortized ------------------- Fair
Cost Gains Losses Value
------------ ------- --------- ------------
United States Government and
Federal agency obligations $ 14,750,000 $ - $(231,352) $ 14,518,648
Obligations of states and
political subdivisions 2,463,702 4,964 (22,212) 2,446,454
Federal agency mortgage
back securities 1,996,193 617 (152,100) 1,844,710
------------ ------- --------- ------------
Total $ 19,209,895 $ 5,581 $(405,664) $ 18,809,812
============ ======= ========= ============
The following tables present the fair value and gross unrealized losses
of the Company's securities with unrealized losses that are not deemed to
be other-than-temporarily impaired, aggregated by category and length of
time that individual securities have been in a continuous unrealized loss
position, at June 30, 2007 and 2006.
37
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2007 and 2006
(2) SECURITIES (CONTINUED)
---------------------
Available-for-sale as of June 30, 2007
---------------------------------------------------------------------------------------------------------
Less Than 12 Months 12 Months or More Total
------------------------- ---------------------------- -----------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value (Losses) Value (Losses) Value Losses
----------- ---------- ----------- ------------ ----------- ----------
United States
Government and
Federal agency
obligations $ 1,676,465 $ (11,610) $ 5,033,328 $ (30,435) $ 6,709,793 $ (42,045)
Obligations of
states and
political
subdivisions 1,107,819 (2,181) 68,679 (1,321) 1,176,498 (3,502)
Federal agency
mortgage-backed
securities 16,886,532 (201,088) 5,266,010 (111,607) 22,152,542 (312,695)
----------- --------- ----------- --------- ----------- ---------
Total temporarily
impaired securities $19,670,816 $(214,879) $10,368,017 $(143,363) $30,038,833 $(358,242)
=========== ========= =========== ========= =========== =========
Held to Maturity as of June 30, 2007
---------------------------------------------------------------------------------------------------------
Less Than 12 Months 12 Months or More Total
------------------------- ---------------------------- -----------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value (Losses) Value (Losses) Value Losses
----------- ---------- ----------- ------------ ----------- ----------
United States
Government and
Federal agency
obligations $ - $ - $ 4,943,753 $ (56,247) $ 4,943,753 $ (56,247)
Obligations of states
and political
subdivisions 511,813 (3,218) 971,687 (12,231) 1,483,500 (15,449)
Federal agency
mortgage-backed
securities - - 1,563,976 (107,173) 1,563,976 (107,173)
----------- --------- ----------- ---------- ----------- ---------
Total temporarily
impaired securities $ 511,813 $ (3,218) $ 7,479,416 $ (175,651) $ 7,991,229 $(178,869)
=========== ========= =========== ========== =========== =========
38
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2007 and 2006
(2) SECURITIES (CONTINUED)
----------------------
Available-for-sale as of June 30, 2006
---------------------------------------------------------------------------------------------------------
Less Than 12 Months 12 Months or More Total
------------------------- ---------------------------- -----------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value (Losses) Value (Losses) Value Losses
----------- ---------- ----------- ------------ ----------- ----------
United States
Government and
Federal agency
obligations $ 6,862,156 $ (69,923) $ 1,951,565 $ (47,712) $ 8,813,721 $ (117,635)
Obligations of states
and political
subdivisions 1,189,867 (5,133) 128,559 (1,441) 1,318,426 (6,574)
Federal agency
mortgage-backed
securities 6,083,340 (135,652) 1,383,049 (74,634) 7,466,389 (210,286)
----------- --------- ----------- --------- ----------- ---------
Total temporarily
impaired securities $14,135,363 $(210,708) $ 3,463,173 $(123,787) $17,598,536 $(334,495)
=========== ========= =========== ========= =========== =========
Held to Maturity as of June 30, 2006
---------------------------------------------------------------------------------------------------------
Less Than 12 Months 12 Months or More Total
------------------------- ---------------------------- -----------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value (Losses) Value (Losses) Value Losses
----------- ---------- ----------- ------------ ----------- ----------
United States
Government and
Federal agency
obligations $ - $ - $ 4,943,753 $ (56,247) $ 4,943,753 $ (56,247)
obligations $ 2,429,690 $ (70,310) $12,088,958 $ (161,042) $14,518,648 $(231,352)
Obligations of states
and political
subdivisions 1,304,336 (15,725) 387,750 (6,487) 1,692,086 (22,212)
Federal agency
mortgage-backed
securities 286,241 (9,366) 1,524,847 (142,734) 1,811,088 (152,100)
----------- --------- ----------- ---------- ----------- ---------
Total temporarily
impaired securities $ 4,020,267 $ (95,401) $14,001,555 $ (310,263) $18,021,822 $(405,664)
=========== ========= =========== ========== =========== =========
The unrealized losses are related to changes in interest rates and not from
the deterioration in the creditworthiness of the issuer and, as such, are
considered by the Company to be temporary. In addition, the Company has
the ability and intent to hold these investments for a period of time
sufficient to allow for an anticipated recovery.
39
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2007 and 2006
(2) SECURITIES (CONTINUED)
---------------------
The following table presents proceeds from sales of securities and the
gross realized securities gains and losses.
June 30,
------------------------
2007 2006
----------- -----------
Proceeds from sales $ 1,986,000 $ 6,845,018
=========== ===========
Realized gains $ 177,000 $ -
Realized (losses) - (161,299)
----------- -----------
Net realized (losses) $ 177,000 $ (161,299)
=========== ===========
The book value of securities pledged as collateral to secure public
deposits was $259,853 at June 30, 2006. There were no securities pledged
as collateral on public funds as of June 30, 2007. The book value of
securities pledged on retail repurchase agreements at June 30, 2007 was
$2,496,000.
(3) LOANS RECEIVABLE
----------------
Loans receivable at June 30 consist of the following:
2007 2006
Residential real estate $ 86,530,040 $ 82,519,285
Commercial real estate 40,331,248 37,096,966
Land 9,094,838 7,949,085
Loans to depositors, secured by savings
accounts 1,503,530 1,708,700
Consumer and automobile loans 10,387,221 6,755,244
Second mortgage loans 4,828,083 3,658,886
Commercial business loans 8,700,087 8,532,078
Overdrafts 140,268 210,298
------------ ------------
Total gross loans 161,515,315 148,430,542
Allowance for loan losses (2,692,594) (2,474,439)
Loans in process (984) (4,152,747)
Unamortized deferred loan costs, net of
origination fees 171,184 183,619
------------ ------------
Net loans receivable $158,992,921 $141,986,975
============ ============
40
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2007 and 2006
(3) LOANS RECEIVABLE (CONTINUED)
----------------------------
Activity in the allowance for loan losses is summarized as follows for
the years ended June 30:
2007 2006
----------- -----------
Balance at beginning of year $ 2,474,439 $ 2,850,704
Provision charged to income 426,000 1,520,083
Charge-offs (372,428) (1,999,592)
Recoveries 164,583 103,244
----------- -----------
Balance at end of year $ 2,692,594 $ 2,474,439
=========== ===========
The Savings Bank primarily grants loans to customers throughout southern
Missouri. The loans are typically secured by real estate or personal
property.
Loans receivable at June 30, 2007 and 2006 that are past 90 days due or
non-accrual consist of the following:
2007 2006
----------- -----------
Past due 90 days or more and still
accruing interest $ 358,965 $ 2,913
Non-accrual 2,889,180 841,367
----------- -----------
$ 3,248,145 $ 844,280
=========== ===========
The following is a summary of information pertaining to impaired loans:
June 30,
------------------------
2007 2006
----------- -----------
Total impaired loans $ 3,248,145 $ 844 280
=========== ===========
Total impaired loans without reserve $ 609,116 $ 40,509
=========== ===========
Total impaired loans with reserve $ 2,639,029 $ 803,771
=========== ===========
Valuation allowance related to impaired
loans $ 896,760 $ 126,252
=========== ===========
Years Ended June 30,
------------------------
2007 2006
----------- -----------
Average investment in
impaired loans $ 1,715,588 $ 2,496,402
=========== ===========
Interest income recognized
on impaired loans $ 105,502 $ 140,270
=========== ===========
Interest income recognized on
a cash basis on impaired loans $ 105,502 $ 136,599
=========== ===========
41
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2007 and 2006
(4) PROPERTY AND EQUIPMENT
----------------------
Property and equipment at June 30 consists of the following:
2007
------------------------------------
Accum.
Category Cost Deprec. Net
------------------ ----------- ---------- -----------
Land $ 635,204 $ - $ 635,204
Buildings 5,582,042 2,059,723 3,522,319
Office furniture,
fixtures and
equipment 3,923,448 2,481,701 1,441,747
Automobiles 100,076 32,295 67,781
Investment real
estate 2,544,420 704,609 1,839,811
----------- ---------- -----------
Total $12,785,190 $5,278,328 $ 7,506,862
=========== ========== ===========
2006
------------------------------------
Accum.
Category Cost Deprec. Net
------------------ ----------- ---------- -----------
Land $ 635,204 $ - $ 635,204
Buildings 5,490,973 1,886,564 3,604,409
Office furniture,
fixtures and
equipment 3,470,018 2,004,932 1,465,086
Automobiles 160,557 100,848 59,709
Investment real
estate 2,896,736 632,835 2,263,901
----------- ---------- -----------
Total $12,653,488 $4,625,179 $ 8,028,309
=========== ========== ===========
Depreciation charges to operations for the years ended June 30, 2007 and
2006 were $757,492 and $648,371, respectively.
The Savings Bank's offices in Theodosia and Springfield, as well as the
Loan Origination Office in Springfield, are leased. The lease on the
Theodosia office is renewable on an annual basis. The lease on the
Springfield office was assumed and it has eight years remaining on the
initial term. The monthly rent under this lease is subject to annual
adjustments based on the annual change in a base index. The lease on the
Loan Production Office has an initial term of two years. Minimum future
lease payments for leased facilities for the next five years are as
follows:
2008 $ 128,233
2009 100,091
2010 86,820
2011 86,820
2012 86,820
Thereafter 260,460
------------
$ 749,244
============
Rent expense for the years ended June 30, 2007 and 2006 was $139,613 and
$17,941, respectively.
42
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2007 and 2006
(5) INTANGIBLE ASSET
----------------
A summary of the intangible asset at June 30 is as follows:
2007 2006
----------- -----------
Premium on branch acquisition $ 1,020,216 $ 1,020,216
Accumulated amortization (734,632) (684,517)
----------- -----------
Net premium on branch acquisition $ 285,584 $ 335,699
=========== ===========
Amortization expense relating to this premium was $50,115 in 2007 and
2006.
Estimated future amortization expense is as follows for the years
ending June 30:
2008 $ 50,115
2009 50,115
2010 50,115
2011 50,115
2012 50,115
Thereafter 35,009
-------------
$ 285,584
=============
(6) DEPOSITS
--------
A summary of deposit accounts at June 30 is as follows:
2007 2006
------------ ------------
Non-interest-bearing checking $ 12,715,947 $ 12,745,481
Interest-bearing checking 31,807,750 34,879,468
Super Saver money market 12,609,062 23,420,108
Savings 13,375,164 16,885,789
Money Market savings accounts 36,286,508 -
Certificates of Deposit 83,295,928 91,210,294
------------ ------------
Total $190,090,359 $179,141,140
============ ============
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100,000 was $22,549,073 and $24,246,422 at June 30, 2007
and 2006, respectively.
At June 30, 2007, scheduled maturities of certificates of deposit are as
follows:
Fiscal 2008 $ 57,791,799
2009 14,904,856
2010 6,203,765
2011 4,048,893
2012 346,615
-------------
$ 83,295,928
=============
43
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2007 and 2006
(7) RETAIL REPURCHASE AGREEMENTS
----------------------------
In December 2006, the Savings Bank began to offer retail repurchase
agreements as an additional item in its product mix. Retail repurchase
agreements allow customers to have excess checking account balances
"swept" from the checking accounts into a non-insured interest bearing
account. The customers' investment in these non-insured accounts is
collateralized by securities of the Savings Bank pledged at FHLB for that
purpose.
(8) ADVANCES FROM FEDERAL HOME LOAN BANK
------------------------------------
The advances listed below were obtained from the FHLB of Des Moines. The
advances are secured by FHLB stock and qualifying one-to-four family
mortgage loans. Advances from the FHLB at June 30 are summarized as
follows:
Weighted Weighted
Average Average
2007 Rate 2006 Rate
------------ ---- ----------- ----
Term Advances:
Long-term; fixed-rate;
callable quarterly $19,000,000 5.88% $22,000,000 5.74%
Long-term; fixed-rate;
non-callable 3,000,000 4.94 -
------------ -----------
Total $22,000,000 5.75% $22,000,000 5.74%
============ ===========
As of June 30, 2007 the fixed-rate term advances shown above were subject
to a prepayment fee equal to 100 percent of the present value of the
monthly lost cash flow to the FHLB based upon the difference between the
contract rate on the advance and the rate on an alternative qualifying
investment of the same remaining maturity. Advances may be prepaid
without a prepayment fee if the rate on an advance being prepaid is equal
to or below the current rate for an alternative qualifying investment of
the same remaining maturity.
Maturities of FHLB advances are as follows: Aggregate
Annual
Year Ended June 30 Maturities
-------------------- ------------
2008 $ -
2009 -
2010 19,000,000
2011 -
2012 -
2013 3,000,000
------------
$ 22,000,000
============
At June 30, 2007, the Savings Bank had irrevocable letters of credit
issued on its behalf from the FHLB totaling $4,505,000, as collateral for
public entity deposits in excess of federal insurance of accounts limits.
The letters of credit expire July 2007 through June 2008.
44
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2007 and 2006
(9) INCOME TAXES
------------
The provision for income taxes (benefit) for the years ended June
30 is as follows:
2007 2006
----------- -----------
Current $ (17,982) $ (151,062)
Deferred (99,425) 59,826
----------- -----------
Total $ (117,407) $ (91,236)
=========== ===========
The provision for income taxes (benefit) differs from that computed at
the statutory corporate rate, 34%, for the years ended June 30 as
follows:
2007 2006
----------- -----------
Tax at statutory rate $ 52,514 $ (89,780)
Increase (decrease) in taxes resulting
from: State taxes, net of federal benefit (5,433) (4,166)
Tax-exempt income (43,420) (40,462)
Bank-owned life insurance (72,923) (73,818)
Dividends received deduction (18,921) (33,097)
Change in valuation allowance (21,910) 96,296
Net effect of other book/tax differences (7,314) 53,791
----------- -----------
Provision for income taxes $ (117,407) $ (91,236)
=========== ===========
The components of deferred tax assets and liabilities as of June 30, 2007
and 2006 consisted of:
2007 2006
----------- -----------
Deferred tax assets:
Reserve for loan losses $ 990,297 $ 915,542
Investment impairment - 96,296
Health insurance plan reserves not
currently deductible - 2,699
Book amortization in excess of tax
amortization 27,742 52,461
Compensated employee absences 28,375 50,357
State net operating loss carry-forwards 51,644 40,018
Capital loss carry-forwards 22,742 -
Net unrealized loss on available for sale
securities 121,275 121,798
Other 45,046 -
----------- -----------
1,297,121 1,279,171
Valuation allowance (74,386) (96,296)
----------- -----------
Total net deferred tax assets $ 1,222,735 $ 1,182,875
=========== ===========
Deferred tax liabilities:
Premises and equipment $ (198,259) $ (262,053)
FHLB stock dividends (60,936) (60,936)
Prepaid expenses (82,829) (70,298)
Unamortized deferred loan costs,
net of fees (63,338) (71,116)
----------- -----------
Total gross deferred tax liabilities $ (405,362) $ (464,403)
----------- -----------
Total net deferred tax assets $ 817,373 $ 718,472
=========== ===========
45
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2007 and 2006
(9) INCOME TAXES (CONTINUED)
-----------------------
In accordance with SFAS No. 109, a deferred tax liability has not been
recognized for tax basis bad debt reserves of approximately $2,190,825 of
the Savings Bank that arose in tax years that began prior to December 31,
1987. At June 30, 2007 the amount of the deferred tax liability that had
not been recognized was approximately $811,000. This deferred tax
liability could be recognized if, in the future, there is a change in
federal tax law, the Savings Bank fails to meet the definition of a
"qualified savings institution," as defined by the Internal Revenue Code,
certain distributions are made with respect to the stock of the Savings
Bank, or the bad debt reserves are used for any purpose other than
absorbing bad debts.
During the years ended June 30, 2007 and 2006, the Company recorded a
valuation allowance of $74,386 and $96,296, respectively, on the
deferred tax assets to reduce the total to an amount that management
believes will ultimately be realized. Realization of deferred tax assets
is dependent upon sufficient future taxable income during the period that
deductible temporary differences and carry forwards are expected to be
available to reduce taxable income. The 2006 valuation allowance related
to the $260,000 write down on securities available-for-sale due to a
determination that the impairment was other than temporary. During the
year ended June 30, 2007, the Company sold the preferred stock that was
determined to be impaired and recovered $177,000 of the write down.
(10) EMPLOYEE BENEFIT PLANS
----------------------
The Savings Bank had participated in a multiple-employer defined benefit
pension plan covering substantially all employees. In fiscal 2006, the
Savings Bank opted to freeze the plan. Participants in the plan became
entitled to their vested benefits at the date it was frozen. The Savings
Bank limited its future obligations to the funding amount required by the
annual actuarial evaluation of the plan and administrative costs. No
participants will be added to the plan. Pension expense for the years
ended June 30, 2007 and 2006 was approximately $147,000 and $404,000,
respectively. This plan is not subject to the requirements of FAS 158.
The First Home Savings Bank Employee Stock Ownership and 401(k) Plan
covers all employees that are age 21 and have completed six months of
service. As of April 1, 2006, the Company began making contributions on
a matching basis of up to 3% on employee deferrals. Expense for the ESOP
and 401(k) plan for the years ended June 30, 2007 and 2006 was $40,986
and $8,113, respectively.
Effective July 1, 2006, the Company adopted SFAS No. 123(R), 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.123(R), compensation expense for stock-based awards is recorded over
the vesting period at the fair value of the award at the time of 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. Prior years' results have not been restated. 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 forfeitures on its stock-based compensation, since
actual historical forfeiture rates on its stock-based incentive awards
have been negligible.
46
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2007 and 2006
(10) EMPLOYEE BENEFIT PLANS (CONTINUED)
---------------------------------
The Company's 2004 Stock Option and Incentive Plan has authorized the
grant of options to certain officers, employees and directors for up to
100,000 shares of the Company's common stock. All options granted have
10 year terms and vest and become exercisable ratably over five years
following the date of grant. The plan was approved by shareholders in
October 2004.
The Company's 2004 Management Recognition Plan has authorized 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. 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.
The plan was approved by shareholders in October 2004.
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 corresponding with the
expected life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant. The dividend rate is equal to the dividend
rate in effect on the date of grant. The Company used the following
assumptions for grants in fiscal 2007, respectively: dividend rates of
.00% to .99%, price volatility of 18.36% to 20.29%, risk-free interest
rates of 4.58% to 5.02%, and an expected life of 7.5 to 10 years.
A summary of the Company's stock option activity, and related information
for the years ended June 30 follows:
2007 2006
-------------------- -------------------
Weighted Weighted
Average Average
Options Price Options Price
---------- -------- --------- --------
Outstanding at
beginning of year 48,000 $ 17.46 2,000 $ 7.75
Granted 47,500 16.72 48,000 17.46
Exercised - - (2,000) 7.75
Forfeited (31,000) 17.78 - -
---------- -------
Outstanding at
end of year 64,500 16.76 48,000 17.46
========== =======
Exercisable at end
of year 3,400 $ 17.50 5,000 $ 17.79
========== =======
47
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2007 and 2006
(10) EMPLOYEE BENEFIT PLANS (CONTINUED)
---------------------------------
The following table summarizes information about stock options
outstanding at June 30, 2007:
Number Number Remaining
Exercise Outstanding at Exercisable at Contractual
Price June 30 June 30 Life (Months)
-------- ------- ------- -------------
$17.50 2,000 400 104
17.00 32,500 - 117
16.78 15,000 3,000 108
16.10 15,000 - 112
A summary of the Company's non-vested options as of June 30, 2007, and
changes during the year ended June 30, 2007, is presented below:
Weighted-
Average
Grant-Date
Nonvested Options Options Fair Value
---------------- ------ ----------
Nonvested at July 1, 2006 43,000 $ 6.25
Granted 47,500 5.92
Vested (8,400) 6.28
Forfeited (21,000) 6.22
------
Nonvested at June 30, 2007 61,100 6.02
======
As of June 30, 2007, there was $183,000 of total unrecognized
compensation cost related to non-vested share-based compensation
arrangements granted under the Plan. That cost is expected to be
recognized over a weighted-average period of approximately 1.7 years.
The aggregate intrinsic value of options on Company stock is summarized
in the following table.
Intrinsic
Options Value
------ --------
Non-exercisable options 61,100 $(13,610)
Exercisable options 3,400 (840)
Options exercised - -
------- --------
Total 64,500 $(14,450)
======= ========
(11) EARNINGS PER SHARE
------------------
The following information shows the amounts used in computing earnings
per share and the effect on income and the weighted average number of
shares of dilutive potential common stock. The amounts in the income
columns represent the numerator and the amounts in the shares columns
represent the denominator. There was no dilutive effect since the
exercise price of all shares eligible to be exercised at June 30, 2007
exceeded the market price of the shares.
48
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2007 and 2006
(11) EARNINGS PER SHARE (CONTINUED)
-----------------------------
Years Ended June 30,
----------------------------------------------------------
2007 2006
--------------------------- ----------------------------
Per Per
Share Share
Income Shares Amt Income Shares Amt
-------- --------- ----- -------- --------- -------
Basic EPS:
Income available
to common
stockholders $271,860 1,547,966 $0.18 $(172,827) 1,553,010 $(0.11)
Effect of dilutive ===== ======
securities - - - -
-------- --------- --------- ---------
Diluted EPS:
Income available
to stockholders
plus stock
options $271,860 1,547,966 $0.18 $(172,827) 1,553,010 $(0.11)
======== ========== ===== ========= ========= ======
At June 30, 2007 and 2006, there were no shares determined to be dilutive
due to the market price of the Company's common shares.
(12) RELATED PARTY TRANSACTIONS
--------------------------
Certain employees, officers and directors are engaged in transactions
with the Savings Bank in the ordinary course of business. It is the
Savings Bank's policy that all related party transactions are conducted
at "arm's length" and all loans and commitments included in such
transactions are made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other customers. A summary of the changes in
outstanding loans to officers and directors for the year ended June 30 is
as follows:
2007
--------
Beginning balances $587,480
Originations and advances 508,624
Principal repayments (567,352)
--------
Ending balances $528,752
========
The Company had two directors that perform legal services, primarily on
behalf of the Savings Bank. One of these directors resigned from the
Board prior to the end of calendar 2005, but receives a monthly retainer
until the end of calendar 2007. The services provided by the current
director relate primarily to foreclosures and bankruptcies. During the
years ended June 30, 2007 and 2006, the Savings Bank paid $64,592 and
$56,713, respectively, for legal services performed by these directors.
(13) COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Savings Bank has various
outstanding commitments that are not reflected in the accompanying
consolidated financial statements. The principal commitments of the
Savings Bank are as follows:
Letters of Credit - Outstanding standby letters of credit were
approximately $713,000 and $1,607,000 at June 30, 2007 and 2006,
respectively.
49
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2007 and 2006
(13) COMMITMENTS AND CONTINGENCIES (CONTINUED)
----------------------------------------
Loan Commitments - The Savings Bank had outstanding firm commitments to
originate loans in the amount of $5,098,000 at June 30, 2007 and loans in
the amount of $1,859,000 at June 30, 2006.
Lines of Credit - The unused portion of lines of credit was approximately
$2,514,000 and $3,668,000 at June 30, 2007 and 2006, respectively.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the
Company upon extension of credit, is based on management's credit
evaluation of the party. Collateral held varies, but may include
accounts receivable, crops, livestock, inventory, property and equipment,
residential and commercial real estate as well as income-producing
commercial properties.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing and
similar transactions. Most guarantees have one year terms.
None of the guarantees extend longer than one year. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Collateral held
varies as specified above and is required in instances which the Company
deems necessary. All of the standby letters of credit outstanding at
June 30, 2007 were collateralized. No amounts were recorded as
liabilities at June 30, 2007 or 2006 for the Company's potential
obligations under these guarantees.
In the normal course of business, the Company is involved in various
legal proceedings. In the opinion of management, any liability resulting
from such proceedings would not have a material adverse effect on the
Company's consolidated financial statements.
(14) CONCENTRATION OF CREDIT RISK
----------------------------
The Savings Bank maintains its primary bank accounts with institutions in
Missouri and Iowa. On June 30, 2007, the individual balances of these
accounts exceeded standard insurance limits established by the Federal
Deposit Insurance Corporation. The Savings Bank has not experienced any
losses in such accounts.
50
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2007 and 2006
(15) REGULATORY CAPITAL REQUIREMENTS
-------------------------------
The Savings Bank is subject to various regulatory capital requirements
administered by its primary federal regulator, the Office of Thrift
Supervision ("OTS"). Failure to meet the minimum regulatory capital
requirements can initiate certain mandatory, and possible additional
discretionary actions by regulators that if undertaken, could have a
direct material affect on the Savings Bank and the consolidated financial
statements. Under the regulatory capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Savings Bank must
meet specific capital guidelines involving quantitative measures of the
Savings Bank's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Savings Bank's
capital amounts and classification under the prompt corrective action
guidelines are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Savings Bank to maintain minimum amounts and ratios
(set forth in the table below) of total risk-based capital and Tier 1
capital to risk-weighted assets (as defined in the regulations), Tier 1
capital to adjusted total assets (as defined), and tangible capital to
adjusted total assets (as defined).
Management believes, as of June 30, 2007, that the Savings Bank meets all
capital adequacy requirements to which it is subject.
As of June 30, 2007, the most recent notification from the OTS, the
Savings Bank was categorized as well-capitalized under the regulatory
framework for prompt corrective action. To be categorized as
well-capitalized, the Savings Bank must maintain minimum total
risk-based, Tier 1 risk-based, and core capital leverage ratios as
set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's
category.
The Savings Bank's actual capital amounts and ratios are also presented
in the table.
Minimum
to Be Well-
Minimum Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------- ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ------- -------- -------
(Dollars in thousands)
As of June 30, 2007:
Total Risk-Based Capital
(to Risk-Weighted
Assets) $ 26,078 17.13% $12,179 8.0% $15,224 10.0%
Core Capital
(to Adjusted
Tangible Assets) 24,199 10.11% 9,576 4.0% 11,970 5.0%
Tangible Capital
(to Adjusted
Tangible Assets) 24,199 10.11% 3,591 1.5% N/A
Tier 1 Capital
(to Risk-Weighted
Assets) 24,199 15.90% 9,576 4.0% 9,135 6.0%
51
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2007 and 2006
(15) REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
------------------------------------------
As of June 30, 2006:
Total Risk-Based Capital
(to Risk-Weighted
Assets) $ 24,428 17.46% $11,190 8.0% $13,98 10.0%
Core Capital
(to Adjusted
Tangible Assets) 22,706 10.06% 9,026 4.0% 11,283 5.0%
Tangible Capital
(to Adjusted
Tangible Assets) 22,706 10.06% 3,385 1.5% N/A
Tier 1 Capital
(to Risk-Weighted
Assets) 22,706 16.23% 9,026 4.0% 8,392 6.0%
(16) COMMON STOCK
------------
As provided in the Company's Articles of Incorporation record holders of
Common Stock who beneficially own, either directly or indirectly, in
excess of 10% of the Company's outstanding shares are not entitled to any
vote with respect to the shares they hold in excess of the 10% limit.
(17) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------------------------
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Cash and cash equivalents and certificates of deposit - For these
short-term instruments, the carrying amount approximates fair
value.
Available-for-sale and held-to-maturity securities - Fair values for
securities equal quoted market prices, if available. If quoted
market prices are not available, fair values are estimated based on
quoted market prices of similar securities.
Loans receivable - The fair value of loans is estimated by discounting
the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and
for the same remaining maturities. Loans with similar
characteristics are aggregated for purposes of the calculations.
Investment in FHLB stock - Fair value of the Savings Bank's investment in
FHLB stock approximates the carrying value as no ready market
exists for this investment and the stock could only be sold back to
the FHLB at par.
Accrued interest - The carrying amounts of accrued interest approximate
their fair value.
Deposits - The fair value of demand deposits, savings accounts and
interest-bearing demand deposits is the amount payable on demand at
the reporting date (i.e., their carrying amount). The fair value
of fixed-maturity time deposits is estimated using a discounted
cash flow calculation that applies the rates currently offered for
deposits of similar remaining maturities.
52
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2007 and 2006
(17) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
----------------------------------------------------------------
Retail repurchase agreements - The fair value of retail repurchase
agreements is the amount payable at the reporting date.
FHLB advances - Rates currently available to the Savings Bank for
advances with similar terms and remaining maturities are used to
estimate fair value of existing advances by discounting the future
cash flows.
Commitments to extend credit, letters of credit and lines of credit - The
fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms
of the agreements and the present credit worthiness of the
counterparties. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and the
committed rates. The fair value of letters of credit and lines of credit
is based on fees currently charged for similar agreements or on the
estimated cost to terminate or otherwise settle the obligations with the
counterparties at the reporting date and are insignificant.
The following table presents estimated fair values of the Company's
financial instruments. The fair values of certain of these instruments
were calculated by discounting expected cash flows, which involves
uncertainties and significant judgments by management. Fair value is the
estimated amount at which financial assets or liabilities could be
exchanged in a current transaction between willing parties, other than in
a forced or liquidation sale. Because no market exists for certain of
these financial instruments and because management does not intend to
sell these financial instruments, the Company does not know whether the
fair values shown below represent values at which the respective
financial instruments could be sold individually or in the aggregate.
June 30, 2007
-------------------------------------
Approximate
Carrying Approximate
Amount Fair Value
--------------- ---------------
Financial assets:
Cash and cash equivalents $ 21,030,000 $ 21,030,000
Certificates of deposit 747,000 747,000
Available-for-sale securities 31,321,000 31,321,000
Held-to-maturity securities 10,786,000 10,615,000
Investment in FHLB stock 1,614,000 1,614,000
Loans, net of allowance for
loan losses 158,993,000 158,303,000
Accrued interest receivable 1,259,000 1,259,000
Financial liabilities:
Deposits 190,090,000 189,994,000
Retail repurchase agreements 2,103,000 2,103,000
FHLB advances 22,000,000 22,138,000
Accrued interest payable 358,000 358,000
53
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2007 and 2006
(17) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
----------------------------------------------------------------
June 30, 2006
-------------------------------------
Approximate
Carrying Approximate
Amount Fair Value
------------------ -----------------
Financial assets:
Cash and cash equivalents $ 23,474,000 $ 23,474,000
Certificates of deposit 3,827,000 3,827,000
Available-for-sale securities 20,884,000 20,884,000
Held-to-maturity securities 19,210,000 18,810,000
Investment in FHLB stock 1,612,000 1,612,000
Loans, net of allowance for loan losses 141,987,000 141,790,000
Accrued interest receivable 1,178,000 1,178,000
Financial liabilities:
Deposits 179,141,000 179,022,000
FHLB advances 22,000,000 22,379,000
Accrued interest payable 358,000 358,000
(18) PARENT COMPANY ONLY FINANCIAL INFORMATION
-----------------------------------------
The following condensed statements of financial condition and condensed
statements of income and cash flows for First Bancshares, Inc. are as
follows:
Condensed Statements of Financial Condition
ASSETS 2007 2006
------ ----------- -----------
Cash and cash equivalents $ 156,673 $ 332,320
Certificates of deposit 10,000 10,000
Securities available-for-sale 48,000 452,000
Investment in subsidiaries 24,974,967 24,332,525
Property and equipment, net 1,839,812 1,086,207
Due from subsidiary 3,017 44,741
Deferred tax asset, net 106,098 19,835
Other assets 94,593 31,735
----------- -----------
Total assets $27,433,160 $26,309,363
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Notes payable, subsidiaries $ 947,765 $ -
Accrued expenses 17,302 18,794
----------- -----------
Total Liabilities 965,067 18,794
Stockholders' equity 26,468,093 26,290,569
----------- -----------
Total liabilities and
stockholders' equity $27,433,160 $26,309,363
=========== ===========
54
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2007 and 2006
(18) PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
----------------------------------------------------
Condensed Statements of Income
2007 2006
----------- ----------
Income:
Equity in earnings of subsidiaries $ 582,218 $ (49,802)
Interest and dividend income 23,249 25,626
Gain/(loss) on sale of property and
Equipment (298,887) (123,161)
Other 40,080 21,539
----------- ----------
Total income (loss) 346,660 (125,798)
----------- ----------
Expenses:
Professional fees 158,243 101,396
Printing and office supplies 6,826 10,842
Interest 6,747 19,580
Other 71,458 72,423
Income tax benefit (168,474) (157,212)
----------- ----------
Total expenses 74,800 47,029
----------- ----------
Net income (loss) $ 271,860 $ (172,827)
=========== ==========
Condensed Statements of Cash Flows
2007 2006
----------- ----------
Cash flows from operating activities:
Net income (loss) $ 271,860 $ (172,827)
Adjustments to reconcile net income
(loss) to net cash provided from
operating activities:
Equity in earnings of subsidiaries (582,218) 49,802
Depreciation expense 36,333 49,292
Loss on sale or write down of property
and equipment 298,887 123,161
Net change in operating accounts:
Deferred tax asset, net (86,263) (52,092)
Other assets and liabilities (21,565) (30,503)
----------- ----------
Net cash (used in) operating activities (82,966) (33,167)
----------- ----------
Cash flows from investing activities:
Dividends from subsidiary - 1,000,000
Proceeds from call of security available-
for- sale 200,000
Purchase of property and equipment (1,138,826) (73,371)
Proceeds from sales of property and
Equipment 50,000 224,488
----------- ----------
Net cash used in (provided by)
from investing activities (888,826) 1,151,117
----------- ----------
55
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2007 and 2006
(18) PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
----------------------------------------------------
Condensed Statements of Cash Flows (Continued)
2007 2006
---------- ----------
Cash flows from financing activities:
Proceeds from notes payable 948,915 -
Payments on notes payable (1,150) (625,000)
Proceeds from issuance of common stock - 15,500
Cash dividends paid (124,166) (248,477)
Purchase of treasury stock (27,454) (26,002)
---------- ----------
Net cash provided by (used in) financing
activities 796,145 (883,979)
---------- ----------
Net increase (decrease) in cash and cash
equivalents (175,647) 233,971
---------- ----------
Cash and cash equivalents-beginning of
period 332,320 98,349
---------- ----------
Cash and cash equivalents-end of period $ 156,673 $ 332,320
========== ==========
56
COMMON STOCK INFORMATION
The common stock of First Bancshares, Inc. is traded on The Nasdaq Stock
Market LLC under the symbol "FBSI". As of September 24, 2007, there were 489
stockholders and 1,550,815 shares of common stock outstanding. This does not
reflect the number of persons or entities who hold stock in nominee or "street
name."
On August 23 and December 1, 2006, the Company declared a $.04 common stock
dividend payable on September 29 and December 29, 2006 to stockholders of
record on September 15 and December 12, 2006, respectively. At its February
2007 meeting, the Board of Directors decided to suspend dividend payments
until the Company's earnings improved. Dividend payments by the Company are
dependent on its cash flows, which include reimbursement from its subsidiaries
for the income tax savings created by its stand alone operating loss, the
operation of real estate owned by the Company and dividends received by the
Company from the Savings Bank. Under Federal regulations, the dollar amount
of dividends a savings and loan association may pay is dependent upon the
association's capital position and recent net income. Generally, if an
association satisfies its regulatory capital requirements, it may make
dividend payments up to the limits prescribed in the OTS regulations.
However, institutions that have converted to stock form of ownership may not
declare or pay a dividend on, or repurchase any of, its common stock if the
effect thereof would cause the regulatory capital of the institution to be
reduced below the amount required for the liquidation account which was
established in accordance with the OTS regulations and the Savings Bank's Plan
of Conversion. In addition, under Missouri law, the Company is generally
prohibited from declaring and paying dividends at a time when the Company's
net assets are less than its stated capital or when the payment of dividends
would reduce the Company's net assets below its stated capital. During the
fiscal year ended June 30, 2007, no dividend payments were paid by the Savings
Bank to the Company.
The following table sets forth market price and dividend information for the
Company's common stock.
Fiscal 2007 High Low Dividend
----------- ---- -- --------
First Quarter $17.15 $16.00 $.04
Second Quarter $17.85 $16.00 $.04
Third Quarter $17.50 $16.41 N/A
Fourth Quarter $17.00 $15.10 N/A
Fiscal 2006 High Low Dividend
----------- ---- -- --------
First Quarter $20.23 $15.95 $.04
Second Quarter $19.39 $15.95 $.04
Third Quarter $18.73 $16.60 $.04
Fourth Quarter $18.18 $16.46 $.04
57
DIRECTORS AND EXECUTIVE OFFICERS
FIRST BANCSHARES, INC. FIRST HOME SAVINGS BANK
DIRECTORS: DIRECTORS:
---------- ----------
Thomas M. Sutherland, Chairman Thomas M. Sutherland, Chairman
One of the owners and operators One of the owners and operators
of Sutherlands of Sutherlands
Home Improvement Centers group Home Improvement Centers group
of stores of stores
D. Mitch Ashlock D. Mitch Ashlock
Director, President and Director, President and
Chief Executive Officer Chief Executive Officer
First Federal Savings Bank of First Federal Savings Bank of
Olathe Olathe
Harold F. Glass Harold F. Glass
Partner Partner
Millington, Glass & Love, Millington, Glass & Love,
Attorneys at Law Attorneys at Law
Billy E. Hixon Billy E. Hixon
Retired partner from regional Retired partner from regional
CPA firm of BKD, LLP CPA firm of BKD, LLP
Daniel P. Katzfey Daniel P. Katzfey
President and Chief Executive President and Chief Executive
Officer Officer
First Bancshares, Inc.
First Home Savings Bank
John G. Moody John G. Moody
Judge of the 44th Judge of the 44th
Missouri Judicial Circuit Missouri Judicial Circuit
ADVISORY DIRECTOR: ADVISORY DIRECTOR:
------------------ ------------------
Robert J. Breidenthal Robert J. Breidenthal
Director Director
Security Bank of Kansas City Security Bank of Kansas City
OFFICERS: OFFICERS:
Daniel P. Katzfey Daniel P. Katzfey
President and Chief Executive President and Chief Executive
Officer Officer
Ronald J. Walters, CPA Ronald J. Walters, CPA
Senior Vice President, Treasurer Senior Vice President, Treasurer
and Chief Financial Officer and Chief Financial Officer
Shannon Peterson Dale W. Keenan
Secretary Executive Vice President and
Senior Lending Officer
Adrian Rushing
Senior Vice President and
Chief Operating Officer
Shannon Peterson
Secretary
58
CORPORATE INFORMATION
CORPORATE HEADQUARTERS TRANSFER AGENT
142 East First Street Registrar and Transfer Company
P.O. Box 777 10 Commerce Drive
Mountain Grove, Missouri 65711 Cranford, New Jersey 07016
(800) 866-1340
INDEPENDENT AUDITORS
McGladrey & Pullen, LLP COMMON STOCK
Kansas City, Missouri
Traded on The Nasdaq Stock Market LLC
GENERAL COUNSEL Nasdaq Symbol: FBSI
Harold F. Glass
Springfield, Missouri
SPECIAL COUNSEL
Breyer & Associates PC
McLean, Virginia
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ANNUAL MEETING
The date and location of the Annual Meeting of Stockholders has not as yet
been determined. The date and location will be announced at a later date.
------------------------------------------------------------------------------
FORM 10-KSB
A COPY OF THE FORM 10-KSB AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
WILL BE FURNISHED WITHOUT CHARGE TO STOCKHOLDERS AS OF THE RECORD DATE FOR
VOTING AT THE ANNUAL MEETING OF STOCKHOLDERS UPON WRITTEN REQUEST TO THE
SECRETARY, FIRST BANCSHARES, INC., P.O. BOX 777, MOUNTAIN GROVE, MISSOURI
65711.
THE COMPANY'S FORMS 10-KSB, 10-QSB AND OTHER DISCLOSURE DOCUMENTS FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION CAN BE OBTAINED FROM THE SEC HOME PAGE
ON THE WORLD WIDE WEB AT http://www.sec.gov.
59
Exhibit 21
Subsidiaries of the Registrant
Parent
------
First Bancshares, Inc.
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
---------------- ------------ ----------------------
First Home Savings Bank 100% Missouri
SCMG, Inc. 100% Missouri
(formerly South Central
Missouri Title, Inc.)
Fybar Service Corporation (b) 100% Missouri
First Home Investments, Inc. (b) 100% Missouri
---------------
(a) The operation of the Company's wholly owned subsidiaries are included in
the Company's Consolidated Financial Statements contained in the Annual
Report attached hereto as Exhibit 13.
(b) Wholly owned subsidiary of First Home Savings Bank.
Exhibit 23
Consent of Auditors
McGladrey & Pullen, LLP
Certified Public Accountants
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement (No.
33-87234) on Form S-8 of First Bancshares, Inc. of our report dated September
28, 2007 relating to our audit of the consolidated financial statements, which
appear in the Annual Report to Shareholders, which is incorporated in this
Annual Report on Form 10-KSB of First Bancshares, Inc. for the year ended June
30, 2007.
/s/McGladrey & Pullen, LLP
MCGLADREY & PULLEN, LLP
Kansas City, Missouri
September 28, 2007
Exhibit 31.1
Rule 13a - 14(a) Certification
(Chief Executive Officer)
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Daniel P. Katzfey, certify that:
1. I have reviewed this Annual Report on Form 10-KSB 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
small business issuer 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 small business issuer'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: September 28, 2007 /s/Daniel P. Katfey
--------------------------------
Daniel P. Katfey
President and Chief Executive Officer
Exhibit 31.2
Rule 13a - 14(a) Certification
(Chief Financial Officer)
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Ronald J. Walters, certify that:
1. I have reviewed this Annual Report on Form 10-KSB 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
small business issuer 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 small business issuer'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: September 28, 2007 /s/Ronald J. Walters
------------------------------
Ronald J. Walters
Senior Vice President, Treasurer
and Chief Financial Officer
Exhibit 32.1
Section 1350 Certifications
CERTIFICATION OF CHIEF EXECUTIVE 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 Annual Report on Form
10-KSB for the fiscal year ended June 30, 2007, 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 as of the dates and for the periods presented in the
financial statements included in the report.
Date: September 28, 2007 /s/Daniel P. Katzfey
--------------------------------
Daniel P. Katzfey
President and Chief Executive Officer
Exhibit 32.2
Section 1350 Certifications
CERTIFICATION OF 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 Annual Report on Form
10-KSB for the fiscal year ended June 30, 2007, 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 as of the dates and for the periods presented in the
financial statements included in the report.
Date: September 28, 2007 /s/Ronald J. Walters
-----------------------------
Ronald J. Walters
Senior Vice President, Treasurer
and Chief Financial Officer