UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2008
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE EXCHANGE ACT
For the transition period from __________ to __________
---------- ----------
Commission File Number: 0-22842
FIRST BANCSHARES, INC.
(Exact name of small business issuer as specified in its charter)
Missouri 43-1654695
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
142 East First Street, Mountain Grove, Missouri 65711
(Address of principal executive offices)
(417) 926-5151
(Issuer's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No___
----- ------
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of "large accelerated filer", "accelerated filer"
and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer ( ) Accelerated filer ( )
Non-accelerated filer ( ) Smaller reporting company (X)
Indicate by check mark whether the registrant is a shell company (as
defined in Exchange Act Rule 12b-2). Yes No X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: Common Stock, $.01 par
value per share, 1,550,815 shares outstanding at February 17, 2009.
1
FIRST BANCSHARES, INC.
AND SUBSIDIARIES
FORM 10-Q
INDEX
Page No.
--------
Part I. Financial Information
-----------------------------
Item 1. Financial Statements:
Consolidated Statements of Financial Condition
at December 31, 2008 and June 30, 2008 (Unaudited) 3
Consolidated Statements of Income for the Three and Six
Months Ended December 31, 2008 and 2007 (Unaudited) 4
Consolidated Statements of Comprehensive Income for the
Three and Six Months Ended December 31, 2008 and 2007
(Unaudited) 5
Consolidated Statements of Cash Flows for the
Six Months Ended December 31, 2008 and 2007
(Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 21
Item 4. Controls and Procedures 22
Part II. Other Information
---------------------------
Item 1. Legal Proceedings 24
Item 1a. Risk Factors 24
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits 24
Signatures 26
Exhibit Index 27
Certifications 28
2
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
December 31, June 30,
2008 2008
----------- --------
ASSETS
------
Cash and cash equivalents........................ $ 17,537,889 $ 17,010,093
Certificates of deposit purchased................ 477,659 566,800
Securities available-for-sale.................... 48,395,079 40,830,284
Securities held to maturity...................... 3,117,881 4,174,886
Federal Home Loan Bank stock, at cost............ 1,580,800 1,613,200
Loans receivable, net............................ 148,058,866 167,034,726
Loans held for sale.............................. 799,519 755,357
Accrued interest receivable...................... 1,146,381 1,135,894
Prepaid expenses................................. 268,416 243,368
Property and equipment, net...................... 6,829,050 6,913,125
Real estate owned and other repossessed assets... 1,892,436 1,205,737
Intangible assets, net........................... 210,412 235,470
Deferred tax asset, net.......................... 2,144,543 795,688
Income taxes recoverable......................... - 57,653
Bank-owned life insurance........................ 6,233,054 6,121,360
Other assets..................................... 463,610 538,121
------------ ------------
Total assets.................................. $239,155,595 $249,231,762
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits......................................... $178,835,329 $194,593,283
Retail repurchase agreements..................... 4,786,610 4,647,587
Advances from Federal Home Loan Bank............. 29,000,000 22,000,000
Accrued expenses................................. 1,451,709 891,320
------------ ------------
Total liabilities............................. 214,073,648 222,132,190
------------ ------------
Preferred stock, $.01 par value; 2,000,000
shares authorized, none issued.................. - -
Common stock, $.01 par value; 8,000,000 shares
authorized, 2,895,036 issued at December 31,
2008 and June 30, 2008, 1,550,815 shares
outstanding at December 31, 2008 and June
30, 2008........................................ 28,950 28,950
Paid-in capital.................................. 18,039,782 18,019,852
Retained earnings - substantially restricted..... 25,298,971 28,214,183
Treasury stock - at cost; 1,344,221 shares....... (19,112,627) (19,112,627)
Accumulated other comprehensive income (loss).... 826,871 (50,786)
Total stockholders' equity.................... 25,081,947 27,099,572
------------ ------------
Total liabilities and stockholders' equity.... $239,155,595 $249,231,762
============ ============
See notes to consolidated financial statements
3
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
2008 2007 2008 2007
----------- ---------- ----------- ----------
Interest Income:
Loans receivable...... $ 2,510,358 $ 3,018,324 $ 5,241,433 $ 5,972,535
Securities............ 686,231 613,642 1,303,631 1,198,715
Other interest-earning
assets............... 18,349 175,666 86,994 381,202
----------- ---------- ----------- ----------
Total interest
income.............. 3,214,938 3,807,632 6,632,058 7,552,452
----------- ---------- ----------- ----------
Interest Expense:
Deposits.............. 1,054,923 1,660,803 2,212,515 3,393,109
Retail repurchase
agreements........... 18,668 11,891 45,149 28,671
Borrowed funds........ 323,240 323,240 646,479 646,497
----------- ---------- ----------- ----------
Total interest
expense............. 1,396,831 1,995,934 2,904,143 4,068,277
----------- ---------- ----------- ----------
Net interest
income............. 1,818,107 1,811,698 3,727,915 3,484,175
Provision for loan
losses................ 4,230,100 145,000 4,379,297 152,500
----------- ---------- ----------- ----------
Net interest income
(loss) after provision
for loan losses....... (2,411,993) 1,666,698 (651,382) 3,331,675
----------- ---------- ----------- ----------
Non-interest Income:
Service charges and
other fee income..... 498,623 527,454 1,053,397 1,028,403
Gain on sale of
loans................ 84,937 111,683 190,278 264,612
Gain (loss) on sale of
property and equipment
and real estate
owned................ (13,814) (24,709) (15,334) 12,084
Income from bank-owned
life insurance....... 58,328 40,462 111,694 93,422
Other................. 45,555 25,782 90,950 66,865
----------- ---------- ----------- ----------
Total non-interest
income 673,629 680,672 1,430,985 1,465,386
----------- ---------- ----------- ----------
Non-interest Expense:
Compensation and
employee benefits.... 1,107,486 1,043,837 2,236,114 2,180,518
Occupancy and
equipment............ 397,253 411,466 877,060 805,053
Professional fees..... 146,586 184,569 260,836 331,517
Deposit insurance
premiums............. 27,599 27,251 54,319 54,314
Other................. 549,602 480,016 957,394 907,619
----------- ---------- ----------- ----------
Total non-interest
expense............ 2,228,526 2,147,139 4,385,723 4,279,021
----------- ---------- ----------- ----------
Income (loss) before
taxes.............. (3,966,890) 200,231 (3,606,120) 518,040
Income taxes
(benefit)............. (962,026) 113,512 (845,995) 205,949
----------- ---------- ----------- ----------
Net income (loss)... $(3,004,864) $ 86,719 $(2,760,125) $ 312,091
=========== ========== =========== ==========
Earnings (loss) per
share - basic...... $ (1.94) $ 0.05 $ (1.78) $ 0.20
=========== ========== =========== ==========
Earnings (loss) per
share - diluted.... (1.94) 0.05 (1.78) 0.20
=========== ========== =========== ==========
Dividends per
share.............. 0.00 0.00 0.10 0.00
=========== ========== =========== ==========
See notes to consolidated financial statements
4
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
2008 2007 2008 2007
----------- ---------- ----------- ----------
Net Income (loss)...... $(3,004,864) $ 86,719 $(2,760,125) $312,091
Other comprehensive
income, net of tax:
Change in unrealized
gain on securities
available-for-sale,
net of deferred
income taxes........ 776,604 251,879 877,657 424,628
----------- -------- ----------- --------
Comprehensive income
(loss)................ $(2,228,260) $338,598 $(1,882,468) $736,719
=========== ======== =========== ========
See notes to consolidated financial statements
5
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended
December 31,
2008 2007
------------ -----------
Cash flows from operating activities:
Net income (loss).............................. $ (2,760,126) $ 312,091
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation.................................. 330,844 437,036
Amortization.................................. 25,058 25,057
Premiums and discounts on securities.......... (67,240) (79,094)
Stock based compensation...................... 19,930 47,350
Provision for loan losses..................... 4,379,297 152,500
Provision for losses on real estate owned..... 8,000 20,500
Gain on the sale of loans..................... (190,278) (264,612)
Proceeds from sales of loans originated for
sale......................................... 7,589,369 11,334,488
Loans originated for sale..................... (7,263,752) (9,820,118)
Deferred income taxes......................... (1,375,018) (46,122)
(Gain) loss on sale of property and
equipment and real estate owned.............. 7,970 (31,986)
Loss on the sale of other repossessed assets.. - 1,502
Income from bank-owned life insurance......... (111,694) (93,423)
Net change in operating accounts:
Accrued interest receivable and other
assets...................................... (140,525) (108,599)
Deferred loan costs.......................... 44,574 (35,781)
Income taxes recoverable..................... 411,127 167,559
Accrued expenses and accounts payable........ (219,049) 300,069
------------ -----------
Net cash provided by operating activities.. 688,487 2,318,417
------------ -----------
Cash flows from investing activities:
Purchase of securities available-for-sale...... (11,843,470) (9,602,566)
Proceeds from maturities of securities
available-for-sale............................ 5,676,740 5,856,507
Proceeds from maturities of securities held
to maturity................................... 1,055,965 3,757,146
Purchase of Federal Home Loan Bank stock....... (261,500) -
Proceeds from redemption of Federal Home Loan
Bank stock.................................... 293,900 600
Net change in certificates of deposit
purchased..................................... 89,141 90,089
Net change in loans receivable................. 13,679,407 (2,494,777)
Purchases of property and equipment............ (273,643) (153,280)
Net proceeds from the sale of property and
equipment..................................... 27,897 287,112
Net proceeds from sale of real estate owned
and repossessed assets........................ 168,890 128,732
------------ -----------
Net cash used (provided) by investing
activities................................ 8,613,327 (2,130,437)
------------ -----------
Cash flows from financing activities:
Net change in deposits......................... (15,757,954) 1,900,474
Net change in retail repurchase agreements..... 139,023 (966,956)
Proceeds from borrowed funds................... 7,000,000 -
Cash dividends paid............................ (155,087) -
------------ -----------
Net cash provided (used) by financing
activities................................ (8,774,018) 933,518
------------ -----------
Net increase in cash and cash equivalents....... 527,796 1,121,498
Cash and cash equivalents - beginning of
period......................................... 17,010,093 21,030,321
------------ -----------
Cash and cash equivalents - end of period....... $ 17,537,889 $22,151,819
============ ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowed funds........ $ 2,878,742 $ 4,216,381
============ ===========
Income taxes................................... - -
============ ===========
Supplemental schedule of non-cash investing and
financing activities:
Loans transferred to real estate acquired in
settlement of loans............................ $ 872,583 $ 512,728
============ ===========
See notes to consolidated financial statements
6
FIRST BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed for interim reporting by First Bancshares,
Inc. (the "Company") and its consolidated subsidiaries, First Home Savings
Bank (the "Bank") and SCMG, Inc. are consistent with the accounting policies
followed for annual financial reporting. All adjustments that, in the opinion
of management, are necessary for a fair presentation of the results for the
periods reported have been included in the accompanying unaudited consolidated
financial statements, and all such adjustments are of a normal recurring
nature. The accompanying consolidated statement of financial condition as of
June 30, 2008, which has been derived from audited financial statements, and
the unaudited interim financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to those rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information not misleading. It is suggested that these
consolidated financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's latest
shareholders' Annual Report on Form 10-K for the year ended June 30, 2008 .
The results for these interim periods may not be indicative of results for the
entire year or for any other period.
2. ACCOUNTING DEVELOPMENTS
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements."
This Statement defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. It clarifies
that fair value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants
in the market in which the reporting entity transacts. This Statement does
not require any new fair value measurements, but rather, it provides enhanced
guidance to other pronouncements that require or permit assets or liabilities
to be measured at fair value. This Statement is effective for fiscal years
beginning after November 15, 2007, with earlier adoption permitted. However,
in February 2008, FASB decided that an entity need not apply this standard to
non-financial assets and liabilities that are recognized or disclosed at fair
value in the financial statements on a non-recurring basis until the
subsequent year. The adoption of this standard on July 1, 2008 is limited to
financial assets and liabilities, and any non-financial assets and liabilities
recognized or disclosed at fair value on a recurring basis. See Note 6 of the
Notes to Consolidated Financial Statements.
In February 2007, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement No. 115, which provides
all entities, including not-for-profit organizations, with an option to report
selected financial assets and liabilities at fair value. The objective of the
Statement is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in earnings caused by measuring related
assets and liabilities differently without having to apply the complex
provisions of hedge accounting. Certain specified items are eligible for the
irrevocable fair value measurement option as established by Statement No. 159.
Statement No. 159 is effective as of the beginning of an entity's first fiscal
year beginning after November 15, 2007. The Company did not elect any fair
value options as of July 1, 2008.
3. EARNINGS PER SHARE
Basic earnings per share is based on net income or loss divided by the
weighted average number of shares outstanding during the period. Diluted
earnings per share includes the effect of the issuance of shares
7
eligible to be issued pursuant to stock option agreements.
The table below presents the numerators and denominators used in the basic
earnings per common share computations for the three and six month periods
ended December 31, 2008 and 2007.
Three Months Ended Six Months Ended
December 31, December 31,
----------- -----------
2008 2007 2008 2007
------ ------ ------ ------
Basic earnings per common
share:
Numerator:
Net income (loss)........ $(3,004,864) $ 86,719 $(2,760,125) $ 312,091
=========== ========== =========== ==========
Denominator:
Weighted average common
shares outstanding...... 1,550,815 1,550,815 1,550,815 1,550,815
=========== ========== =========== ==========
Basic earnings (loss) per
common share.............. $ (1.94) $ 0.05 $ (1.78) $ 0.20
=========== ========== =========== ==========
Diluted earnings per common
share:
Numerator:
Net income (loss)........ $(3,004,864) $ 86,719 $(2,760,125) $ 312,091
=========== ========== =========== ==========
Denominator:
Weighted average common
shares outstanding...... 1,550,815 1,550,860 1,550,815 1,550,835
=========== ========== =========== ==========
Basic earnings (loss) per
common share.............. $ (1.94) $ 0.05 $ (1.78) $ 0.20
=========== ========== =========== ==========
4. COMMITMENTS
At December 31, 2008 and June 30, 2008, the Company had outstanding
commitments to originate loans and fund unused lines of credit totaling
$653,000 and $793,000, respectively. It is expected that outstanding loan
commitments will be funded with existing liquid assets.
5. STOCK OPTION PLAN
Effective July 1, 2006, the Company adopted SFAS No. 123R, Share-based
Payments, using the modified prospective transition method. Prior to that date
the Company accounted for stock option awards under APB Opinion No. 25,
Accounting for Stock Issued to Employees. In accordance with SFAS No. 123R,
compensation expense for stock-based awards is recorded over the vesting
period at the fair values of the award at the time of the grant. The recording
of such compensation began on July 1, 2006 for shares not yet vested as of
that date and for all new grants subsequent to that date. The exercise price
of options granted under the Company's incentive plans is equal to the fair
market value of the underlying stock at the grant date. The Company assumes
no projected forfeiture rates on its stock-based compensation.
The Company uses historical data to estimate the expected term of the options
granted, volatilities, and other factors. Expected volatilities are based on
the historical volatility of the Company's common stock over a period of time.
The risk-free rate for periods within the contractual life of the option is
based on the U.S. Treasury yield curve in effect at the time of grant. The
dividend rate is equal to the dividend rate in effect on the date of grant.
There were no grants made during either the fiscal year ended June 30, 2008 or
the six months ended December 31, 2008.
A summary of option activity under the 2004 Stock Option Plan ("Plan") as of
December 31, 2008, and changes during the six months ended December 31, 2008,
is presented below:
8
Weighted-
Weighted- Average
Average Remaining
Exercise Contractual
Options Shares Price Term
------- ------ ----- ----
( in months)
Outstanding at beginning of period...... 60,500 $ 16.73 100
Granted................................. - -
Exercised............................... - -
Forfeited or expired.................... (37,875) 16.24
------ -------
Outstanding at end of period............ 22,625 $ 16.76 97
====== =======
Exercisable at end of period............ 7,425 $ 16.72
====== =======
A summary of the Company's non-vested shares as of December 31, 2008, and
changes during the six months ended December 31, 2008, is presented below:
Weighted-
Average
Grant Date
Non-vested Options Options Fair Value
------------------ ------- ----------
Outstanding at beginning of period...... 45,075 $ 5.99
Granted................................. - -
Exercised............................... - -
Vested.................................. - -
Forfeited or expired.................... (29,875) 5.91
------ ------
Outstanding at end of period............ 15,200 $ 6.16
====== ======
As of December 31, 2008, there was $23,000 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 13 months.
6. FAIR VALUE MEASUREMENTS
Effective July 1, 2008, the Company adopted the provisions of SFAS No. 157,
"Fair Value Measurements," for financial assets and financial liabilities. In
accordance with Financial Accounting Standards Board Staff Position (FSP) No.
157-2, "Effective Date of FASB Statement No. 157," the Company will delay
application of SFAS 157 for non-financial assets and non-financial
liabilities, until July 1, 2009. SFAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements.
SFAS 157 defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants. A fair value measurement assumes that the transaction to sell
the asset or transfer the liability occurs in the principal market for the
asset or liability or, in the absence of a principal market, the most
advantageous market for the asset or liability. The price in the principal (or
most advantageous) market used to measure the fair value of the asset or
liability shall not be adjusted for transaction costs. An orderly transaction
is a transaction that assumes exposure to the market for a period prior to the
measurement date to allow for marketing activities that are usual and
customary for transactions involving such assets and liabilities; it is not a
forced transaction. Market participants are buyers and sellers in the
principal market that are (i) independent, (ii) knowledgeable, (iii) able to
transact and (iv) willing to transact.
9
SFAS 157 requires the use of valuation techniques that are consistent with the
market approach, the income approach and/or the cost approach. The market
approach uses prices and other relevant information generated by market
transactions involving identical or comparable assets and liabilities. The
income approach uses valuation techniques to convert future amounts, such as
cash flows or earnings, to a single present amount on a discounted basis. The
cost approach is based on the amount that currently would be required to
replace the service capacity of an asset (replacement cost). Valuation
techniques should be consistently applied. Inputs to valuation techniques
refer to the assumptions that market participants would use in pricing the
asset or liability. Inputs may be observable, meaning those that reflect the
assumptions market participants would use in pricing the asset or liability
developed based on market data obtained from independent sources, or
unobservable, meaning those that reflect the reporting entity's own
assumptions about the assumptions market participants would use in pricing the
asset or liability developed based on the best information available in the
circumstances. In that regard, SFAS 157 establishes a fair value hierarchy for
valuation inputs that gives the highest priority to quoted prices in active
markets for identical assets or liabilities and the lowest priority to
unobservable inputs. The fair value hierarchy is as follows:
Level 1 Inputs - Unadjusted quoted prices in active markets for identical
assets or liabilities that the reporting entity has the ability to access at
the measurement date.
Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly or indirectly. These
might include quoted prices for similar assets or liabilities in active
markets, quoted prices for identical or similar assets or liabilities in
markets that are not active, inputs other than quoted prices that are
observable for the asset or liability (such as interest rates, volatilities,
prepayment speeds, credit risks, etc.) or inputs that are derived principally
from or corroborated by market data by correlation or other means.
Level 3 Inputs - Unobservable inputs for determining the fair values of assets
or liabilities that reflect an entity's own assumptions about the assumptions
that market participants would use in pricing the assets or liabilities.
A description of the valuation methodologies used for instruments measured at
fair value, as well as the general classification of such instruments pursuant
to the valuation hierarchy, is set forth below. These valuation methodologies
were applied to all of the Company's financial assets and financial
liabilities carried at fair value effective July 1, 2008.
In general, fair value is based upon quoted market prices, where available. If
such quoted market prices are not available, fair value is based upon
internally developed models that primarily use, as inputs, observable
market-based parameters. Valuation adjustments may be made to ensure that
financial instruments are recorded at fair value. These adjustments may
include amounts to reflect counterparty credit quality, the Company's
creditworthiness, among other things, as well as unobservable parameters. Any
such valuation adjustments are applied consistently over time. The Company's
valuation methodologies may produce a fair value calculation that may not be
indicative of net realizable value or reflective of future fair values. While
management believes the Company's valuation methodologies are appropriate and
consistent with other market participants, the use of different methodologies
or assumptions to determine the fair value of certain financial instruments
could result in a different estimate of fair value at the reporting date.
Securities Available for Sale. Securities classified as available for sale are
reported at fair value utilizing Level 1 and Level 2 inputs. For equity
securities, unadjusted quoted prices in active markets for identical assets
are utilized to determine fair value at the measurement date. For all other
securities, the Company obtains fair value measurements from an independent
pricing service. The fair value measurements consider observable data that may
include dealer quotes, market spreads, cash flows, the U.S. Treasury
10
yield curve, live trading levels, trade execution data, market consensus
prepayment speeds, credit information and the bond's terms and conditions,
among other things.
Impaired Loans. The Company does not record impaired loans at fair value on a
recurring basis. However, periodically, a loan is considered impaired and is
reported at the fair value of the underlying collateral, less estimated costs
to sell, if repayment is expected solely from the collateral. Impaired loans
measured at fair value typically consist of loans on non-accrual status, and
loans with a portion of the allowance for loan losses allocated specifically
to the loan. Collateral values are estimated using Level 2 inputs, including
recent appraisals and Level 3 inputs based on customized discounting criteria.
Due to the significance of the Level 3 inputs, impaired loans fair values have
been classified as Level 3.
The following table summarizes financial assets and financial liabilities
measured at fair value on a recurring basis as of December 31, 2008,
segregated by the level of the valuation inputs within the fair value
hierarchy utilized to measure fair value:
Level 1 Level 2 Level 3 Total
Inputs Inputs Inputs Fair Value
----------------------------------------
(dollars in thousands)
Securities-available-for-sale..... $ - $48,395 $ - $48,395
Certain financial assets and financial liabilities are measured at fair value
on a nonrecurring basis; that is, the instruments are not measured at fair
value on an ongoing basis but are subject to fair value adjustments in certain
circumstances (for example, when there is evidence of impairment). Financial
assets and financial liabilities, excluding impaired loans, measured at fair
value on a non-recurring basis were not significant at December 31, 2008.
The following table summarizes financial assets and financial liabilities
measured at fair value on a non-recurring basis as of December 31, 2008,
segregated by the level of the valuation inputs within the fair value
hierarchy utilized to measure fair value:
Level 1 Level 2 Level 3 Total
Inputs Inputs Inputs Fair Value
----------------------------------------
(dollars in thousands)
Impaired Loans.................... $ - $ - $7,330 $7,330
Non-financial assets and non-financial liabilities measured at fair value on a
recurring basis include reporting units measured at fair value in the first
step of a goodwill impairment test. Non-financial assets measured at fair
value on a non-recurring basis include non-financial assets and non-financial
liabilities measured at fair value in the second step of a goodwill impairment
test, as well as intangible assets and other non-financial long-lived assets
measured at fair value for impairment assessment. As stated above, SFAS 157
will be applicable to these fair value measurements beginning July 1, 2009.
7. RECLASSIFICATIONS
Certain amounts in the prior period financial statements have been
reclassified, with no effect on net income or loss or stockholders' equity, to
be consistent with the current period classification.
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
First Bancshares, Inc. (the "Company") is a unitary savings and loan holding
company whose primary assets are First Home Savings Bank and SCMG, Inc. The
Company was incorporated on September 30, 1993, for the purpose of acquiring
all of the capital stock of First Home Savings Bank in connection with the
Bank's conversion from a state-charted mutual to a state-chartered stock form
of ownership. The transaction was completed on December 22, 1993.
On December 31, 2008, the Company had total assets of $239.2 million, net
loans receivable of $148.1 million, total deposits of $178.8 million and
stockholders' equity of $25.1 million. The Company's common shares trade on
The Nasdaq Global Market of The NASDAQ Stock Market LLC under the symbol
"FBSI."
The following discussion focuses on the consolidated financial condition of
the Company and its subsidiaries, at December 31, 2008, compared to June 30,
2008, and the consolidated results of operations for the three-month and
six-month periods ended December 31, 2008, compared to the three-month and
six-month periods ended December 31, 2007, respectively. This discussion
should be read in conjunction with the Company's consolidated financial
statements, and notes thereto, for the year ended June 30, 2008.
Recent Developments and Corporate Overview
Recent events in the U.S. and global financial markets, including the
deterioration of the worldwide credit markets, have created significant
challenges for financial institutions such as First Home Savings Bank.
Dramatic declines in the housing market during the past year, marked by
falling home prices and increasing levels of mortgage foreclosures, have
resulted in significant write-downs of asset values by many financial
institutions, including government-sponsored entities and major commercial and
investment banks. In addition, many lenders and institutional investors have
reduced, and in some cases, ceased to provide funding to borrowers, including
other financial institutions, as a result of concern about the stability of
the financial markets and the strength of counterparties.
In response to the crises affecting the U.S. banking system and financial
markets and attempt to bolster the distressed economy and improve consumer
confidence in the financial system, on October 3, 2008, the U.S. Congress
passed, and the President signed into law, the Emergency Economic
Stabilization Act of 2008 (the "Stabilization Act"). The Stabilization Act
authorizes the Secretary of the U.S. Treasury and the Federal Deposit
Insurance Corporation (the "FDIC") to implement various temporary emergency
programs designed to strengthen the capital positions of financial
institutions and stimulate the availability of credit within the U.S.
financial system. Pursuant to the Stabilization Act, the U.S. Treasury will
have the authority to, among other things, purchase up to $700 billion of
mortgages, mortgage-backed securities and certain other financial instruments
from financial institutions for the purpose of stabilizing and providing
liquidity to the U.S. financial markets.
On October 14, 2008, the U.S. Treasury announced that it will purchase equity
stakes in eligible financial institutions that wish to participate. This
program, known as the Capital Purchase Program, allocates $250 billion from
the $700 billion authorized by the Stabilization Act to the U.S. Treasury for
the purchase of senior preferred shares from qualifying financial
institutions. Eligible institutions will be able to sell equity interests to
the U.S. Treasury in amounts equal to between 1% and 3% of the institution's
risk-weighted assets. In conjunction with the purchase of preferred stock,
the U.S. Treasury will receive warrants to purchase common stock from the
participating institutions with an aggregate market price equal to 15% of the
preferred investment. Participating financial institutions will be required
to adopt the U.S. Treasury's standards for executive compensation and
corporate governance for the period during which the U.S. Treasury holds
equity issued under the Capital Purchase Program. Many financial institutions
have already announced that they will participate in the Capital Purchase
Program. We have not applied to participate in the Capital Purchase Program.
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Also on October 14, 2008, using the systemic risk exception to the FDIC
Improvement Act of 1991, the U.S. Treasury authorized the FDIC to provide a
100% guarantee of newly-issued senior unsecured debt and deposits in
non-interest bearing accounts at FDIC insured institutions. Initially, all
eligible financial institutions will automatically be covered under this
program, known as the Temporary Liquidity Guarantee Program, without incurring
any fees for a period of 30 days. Coverage under the Temporary Liquidity
Guarantee Program after the initial 30-day period is available to insured
financial institutions at a cost of 75 basis points per annum for senior
unsecured debt and 10 basis points per annum for non-interest bearing
deposits. After the initial 30-day period, institutions will continue to be
covered under the Temporary Liquidity Guarantee Program unless they inform the
FDIC that they have decided to opt out of the program. We have determined
that we will participate in the insurance program covering the non-interest
bearing deposits. Neither the Company nor the Bank has unsecured senior debt.
Under the Troubled Asset Auction Program, another initiative based on the
authority granted by the Stabilization Act, the U.S. Treasury, through a
newly-created Office of Financial Stability, will purchase certain troubled
mortgage-related assets from financial institutions in a reverse-auction
format. Troubled assets eligible for purchase by the Office of Financial
Stability include residential and commercial mortgages originated on or before
March 14, 2008, securities or obligations that are based on such mortgages,
and any other financial instrument that the Secretary of the U.S. Treasury
determines, after consultation with the Chairman of the Board of Governors of
the Federal Reserve System, is necessary to promote financial market
stability. The U.S. Treasury has not issued any definitive guidance regarding
this program and we have not determined whether or not we will participate.
Under the Stabilization Act, the U.S. Treasury is also required to establish a
program that will guarantee principal of, and interest on, troubled assets
originated or issued prior to March 14, 2008, including mortgage-backed
securities. The program may take any form and may vary by asset class, but it
must be voluntary and self-funding. The U.S. Treasury has the authority to
set premiums to reflect the credit risk characteristics of the insured assets.
The U.S. Treasury has solicited requests for comments on how the program
should be structured but no program has been implemented to date. The
Stabilization Act also temporarily increases the amount of insurance coverage
of deposit accounts held at FDIC-insured depository institutions, including
First Home Savings Bank, from $100,000 to $250,000. The increased coverage is
effective during the period from October 3, 2008 until December 31, 2009.
It is not clear at this time what impact the Stabilization Act, the Capital
Purchase Program, the Temporary Liquidity Guarantee Program, the Troubled
Asset Auction Program, other liquidity and funding initiatives of the Federal
Reserve and other agencies that have been previously announced, and any
additional programs that may be initiated in the future will have on our
future financial condition and results of operations.
On February 10, 2009, the Treasury Department announced a Financial Stability
Plan to address the credit crisis. The purpose of the Plan is to stabilize
the financial system and restore confidence in the markets and encompasses the
following six key elements: a Financial Stability Trust, (ii) a
Public-Private Investment Fund, (iii) Consumer & Business Lending Initiative,
(iv) Increased Transparency, Accountability, Monitoring and Conditions, (v)
Housing Support and Foreclosure Prevention, and (vi) Small Business and
Community Lending Initiative. The details of the Plan are still being
established and it is uncertain how the Plan will effect the Company's
operations going forward.
The preceding is a summary of recently enacted laws and regulations that could
materially impact our results of operations or financial condition. This
discussion is qualified in its entirety by reference to such laws and
regulations and should be read in conjunction with "Regulation of First Home"
discussion contained in our 2008 Annual Report on Form 10-K.
The Bank continues to operate under a Memorandum of Understanding (the "MOU")
with the Office of Thrift Supervision (the "OTS"). The MOU was entered into
during the December 31, 2006 quarter. The MOU resulted from issues noted
during the examination of the Bank conducted by the OTS, the report on which
was dated in
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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 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 Bank's subsidiary, FYBAR Service Corporation, to hold real estate for
investment or approve a plan for divestiture of such investment by June 30,
2007; (9) implementing corrective actions with respect to the previously
conducted independent information technology audit; and (10) preparing,
adopting and submitting to the OTS a comprehensive three year business plan
and budget. The Company believes that the Bank has satisfactorily addressed
all of the issues raised by the MOU. During July 2007, the OTS performed an
on-site review of the progress made on resolving the issues discussed in the
MOU. The Bank did not receive a formal report from the OTS on the results of
this review.
Since the end of fiscal 2008, the Company and the Bank have had changes in
senior management. On September 23, 2008, as was noted in the Company's Annual
Report to the SEC on Form 10-K, filed on September 26, 2008, Adrian C.
Rushing, the Bank's Chief Operating Officer, resigned his position to pursue
another opportunity. The Bank reviewed the position description for the Chief
Operating Officer, and decided to reassign several functions and
responsibilities to other officers. The position of Operations Manager was
created to manage the remaining functions and responsibilities. The position
was filled from within the Bank in November 2008.
On October 28, 2008, Daniel P. Katzfey, President and Chief Executive Officer
of both the Company and the Bank, and a director of both the Company and the
Bank, resigned his positions.
The Company appointed Thomas M. Sutherland, Chairman of the Company's and
Bank's Boards of Directors, to serve as the Interim Chief Executive Officer of
the Company and the Bank. Mr. Sutherland has served as Chairman of the Board
of the Company's and Bank's Boards of Directors since 2005. In addition, the
Company appointed Lannie E. Crawford, a Senior Vice President of the Bank, to
serve as Interim President of the Company and the Bank. Mr. Crawford joined
the Bank in November 2007 and has more than 30 years of experience with
financial institutions. The interim appointments of Mr. Sutherland as Chief
Executive Officer of the Company and the Bank, and of Mr. Crawford as
President of the Company and the Bank, were made permanent at the
organizational meeting of the board of the Company and a special board meeting
of the Bank on November 6, 2008.
R.J. Breidenthal had been selected to fill the vacancy created on the Boards
of Directors of Company and the Bank by Mr. Katzfey's resignation. Mr.
Breidenthal has served as an advisory director of the Company and the Bank
since December 2006. Mr. Breidenthal serves on the Bank's Loan Committee. Mr.
Breidenthal is the first cousin of Thomas M. Sutherland, the Chairman of the
Board and Chief Executive Officer of the Company and the Bank.
During the months of November and December 2008, in light of a continually
worsening economy and the departure of several loan officers, the Bank
conducted an in depth review and analysis of its loan portfolio primarily
focusing on commercial real estate loans, multi-family real estate loans,
development loans and commercial business loans. As a result of this review,
the Bank added 65 loans with principal balances totaling $12.6 million to
either the classified asset list or the internal watch list. Additionally, 33
loans which had appeared on either the classified asset list or the internal
watch list at the end of November were downgraded. During the quarter ended
December 31, 2008, based on the loan analysis and in light of the economic
conditions, the Bank recorded a provision for loan losses of $4.4 million.
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At its December 19, 2008 meeting, the Board of Directors, following extensive
discussions over several months, determined that it was in the best interest
of both the Bank and the Company to cash out the Bank Owned Life Insurance
(BOLI) owned by the Bank. This decision resulted in an additional tax
provision of $562,000. However, the benefits from the transaction in the form
of additional liquidity provided by the proceeds, the elimination of a
non-cash flowing asset and a reduction in the Company's exposure to the
increased risk that has been a significant factor in the marketplace over the
last several months, more than offset the cost.
Financial Condition
As of December 31, 2008, First Bancshares, Inc. had assets of $239.2 million,
compared to $249.2 million at June 30. 2008. The decrease in total assets of
$10.0 million, or 4.0%, was the result of a decrease of $18.9 million in loans
receivable, net. This decrease was partially offset by increases in
investments, real estate owned, cash and cash equivalents and deferred tax
assets, which totaled $6.5 million, $687,000, $528,000, and $1.3 million,
respectively. Deposits decreased $15.8 million and Federal Home Loan Bank of
Des Moines advances increased by $7.0 million. At December 31, 2008, there was
a total of $800,000 in loans originated for sale which were not yet funded by
the purchasers. The decrease in deposits was partially offset by an increase
of $139,000 in retail repurchase agreements.
Loans receivable, net totaled $148.1 million at December 31, 2008, a decrease
of $19.0 million, or 11.4%, from $167.0 million at June 30. 2008. The
decrease in loans is, in part, the result of decreased originations because of
the current uncertainty in the economy, both local and national, brought about
by problems in the sub-prime mortgage market. These problems have affected
many sectors of the economy and have created concerns for individuals and
businesses. Housing sales, both new and existing, consumer confidence and
other indicators of economic health in our market area have decreased over the
last few months. The decrease in loans, net is also due in part to the large
increase in the allowance for loan losses during the six months ended December
31, 2008.
The Company's deposits decreased by $15.8 million, or 8.1%, from $194.6
million as of June 30, 2008 to $178.8 million as of December 31, 2008. The
decrease is the result of a number of factors, including depositors seeking
higher yields available through non-bank entities and, in some cases, the need
to use savings for living expenses due to loss of employment. The balance of
the Company's retail repurchase agreements, first introduced during fiscal
2007, increased by $139,000, or 3.0%, from $4.6 million at June 30, 2008 to
$4.8 million at December 31, 2008.
As of December 31, 2008 the Company's stockholders' equity totaled $25.1
million, compared to $27.1 million as of June 30, 2008. The decrease of $2.0
million was due to the net loss of $2.8 million during the first six months of
the fiscal year which was partially offset by a positive change in the
mark-to-market adjustment, net of taxes, of $878,000 on the Company's
available for sale securities portfolio. In addition, there was a $20,000
increase resulting from the accounting treatment of stock based compensation.
There was a dividend of $0.10 per share on common stock, which totaled
$155,000, paid during the period. The Company's previously announced stock
repurchase program expired on December 31, 2008. No shares of common stock
were purchased under the program.
Non-performing Assets and Allowance for Loan Losses
Generally, when a loan becomes delinquent 90 days or more, or when the
collection of principal or interest becomes doubtful, the Company will place
the loan on non-accrual status and, as a result of this action, previously
accrued interest income on the loan is reversed against current income. The
loan will remain on non-accrual status until the loan has been brought current
or until other circumstances occur that provide adequate assurance of full
repayment of interest and principal.
Non-performing assets increased from $3.9 million, or 1.6% of total assets, at
June 30, 2008 to $8.1 million, or 3.4% of total assets at December 31, 2008.
The Bank's non-performing assets consist of non-accrual loans, past due loans
over 90 days, impaired loans not past due or past due less than 60 days, real
estate owned and other
15
repossessed assets. The increase in non-performing assets consisted of an
increase of $3.7 million in non-accrual loans and an increase of $687,000 in
real estate owned and other repossessed assets. These increases were
partially offset by a decrease of $527,000 in loans 90 days or more delinquent
and still accruing interest, The increase in non-accrual loans consisted of
increases of $925,000 in non-accrual residential mortgages, $2.9 million in
non-accrual land loans, $95,000 in non-accrual second mortgages, $827,000 in
non-accrual commercial business loans and $42,000 in non-accrual consumer
loans. These increases were partially offset by a decrease of $1.2 million in
non-accrual commercial real estate loans. There were three loans totaling
$360,000 past due 90 days or more and still accruing interest at June 30,
2008. All three became non-accrual loans during the six months ended December
31, 2008. At December 31, 2008, loans 90 days past due and still accruing
consisted of one residential mortgage loan of $160,000 and one commercial
business loan of $50,000. Almost all of the loans that were moved to
non-accrual or became 90 days or more delinquent and still accruing as of
December 31, 2008, were loans that had been on the Company's list of watch
credits at June 30, 2008, September 30, 2008 or both. The increase in
non-performing assets is a result of two factors. First was the current
economic crisis which has had an adverse impact on individuals and businesses
in the Company's primary market areas. Secondly, there were issues with the
Bank's underwriting of some of the loans that were originated prior to May
2008. Since May 2008 the Bank has required that all loan originations,
renewals and modifications to be approved by the Board Loan Committee. As
discussed below, management believes the allowance for loan losses as of
December 31, 2008, was adequate to absorb the known and inherent risks of loss
in the loan portfolio at that date.
As of June 30, 2008, there were twelve foreclosed properties held for sale
totaling $1.2 million. During the six months ended December 31, 2008 five
properties with a book value of $178,000 were sold resulting in a net loss of
$9,000. In addition, during the six month period there was an $8,000 provision
for loss on real estate owned. Ten properties totaling $814,000 were
foreclosed and added to real estate owned. Real estate owned also increased as
the result of $59,000 in costs needed to complete construction on one
property. At December 31, 2008, there were seventeen foreclosed properties
held for sale totaling $1.9 million.
Classified assets. Federal regulations provide for the classification of
loans and other assets as "substandard", "doubtful" or "loss", based on the
level of weakness determined to be inherent in the collection of the principal
and interest. When loans are classified as either substandard or doubtful,
the Company may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances
which have been established to recognize the inherent risk associated with
lending activities, but which, unlike specific allowances, have not been
allocated to particular problem loans. When assets are classified as loss, the
Company is required either to establish a specific allowance for loan losses
equal to 100% of that portion of the loan so classified, or to charge-off such
amount. The Company's determination as to the classification of its loans and
the amount of its allowances for loan losses are subject to review by its
regulatory authorities, which may require the establishment of additional
general or specific allowances for loan losses.
On the basis of management's review of its loans and other assets, at December
31, 2008, the Company had classified $9.4 million of its assets as
substandard, $1.4 million as doubtful and $1.5 million as loss. This compares
to classifications at June 30, 2008 of $5.1 million substandard, $718,000
doubtful and none as loss. The increase in classified loans to $12.3 million
at December 31, 2008 from $5.8 million at June 30, 2008 was the result of an
in depth review and analysis of the Bank's loan portfolio brought about by a
continually worsening economy, a change in management and the departure of
several loan officers. The review focused primarily on commercial real estate
loans, multi-family real estate loans, development loans and commercial
business loans. As a result of this review, the Bank added 65 loans with
principal balances totaling $12.6 million to either the classified asset list
or the internal watch list. Additionally, 33 loans which had appeared on
either the classified asset list or the internal watch list at November 30,
2008 were downgraded. During the quarter ended December 31, 2008, the Bank
recorded a provision for loan losses of $4.2 million. The $4.2 million
provision for loan losses included $3.2 million on 19 loans totaling $5.3
million made to six individuals or related parties. The largest provision was
for $1.4 million on a $2.8 million subdivision development loan, brought about
by cost overruns, diminishing collateral value and the weakening economic
climate. The second largest provision was $667,000 on seven loans totaling
$842,000 collateralized primarily by business assets and, to a lesser degree,
by real estate, to related entities. The business is not generating sufficient
cash flow to service its debt and the value of the business
16
assets has significantly deteriorated. The next largest provision was $371,000
on three loans totaling $520,000 collateralized primarily by business assets
of a company involved in the building trades. The business, and the value of
the collateral, has deteriorated in the current economic climate, resulting in
insufficient cash flows to meet debt service. In addition, classified assets
at December 31, 2008 and June 30, 2008 included real estate owned and other
repossessed assets of $1.9 million and $1.2 million, respectively. In addition
to the classified loans, the Bank has identified an additional $11.2 million
of credits at December 31, 2008 on its internal watch list compared to $4.8
million at June 30, 2008. Management has identified these loans as high risk
credits and any deterioration in their financial condition could increase the
classified loan totals. The increase in the internal watch list is primarily
the result of the current state of the economy which had a negative impact on
cash flows for both individuals and businesses. This, along with stricter
internal policies, which have been in place during the last year, relating to
the identification and monitoring of problem loans, has resulted in an
increase in the number and the total dollar amount of loans identified as
problem loans. During the six months ended December 31, 2008, thirty-four
loans totaling $4.3 million were removed from the watch list as a result the
resolution of the reasons they were on the watch list.
Allowance for loan losses. The Company establishes its provision for loan
losses, and evaluates the adequacy of its allowance for loan losses based upon
a systematic methodology consisting of a number of factors including, among
others, historic loss experience, the overall level of classified assets and
non-performing loans, the composition of its loan portfolio and the general
economic environment within which the Bank and its borrowers operate.
At December 31, 2008, the Company has established an allowance for loan losses
of $6.5 million compared to $2.8 million at June 30, 2008. The allowance
represents approximately 105.3% and 103.9% of the total non-performing loans
at December 31, 2008 and June 30, 2008, respectively.
The allowance for loan losses reflects management's best estimate of probable
losses inherent in the portfolio based on currently available information.
The Company believes that the allowance for loan losses as of December 31,
2008 was adequate to absorb the known and inherent risks of loss in the loan
portfolio at that date. While the Company believes the estimates and
assumptions used in the determination of the adequacy of the allowance are
reasonable, there can be no assurance that such estimates and assumptions will
not be proven incorrect in the future, or that the actual amount of future
provisions will not exceed the amount of past provisions or that any increased
provisions that may be required will not adversely impact the Company's
financial condition and results of operations. Future additions to the
allowance may become necessary based upon changing economic conditions,
increased loan balances or changes in the underlying collateral of the loan
portfolio. In addition, the determination of the amount of the Bank's
allowance for loan losses is subject to review by bank regulators as part of
the examination process, which may result in the establishment of additional
reserves based upon their judgment of information available to them at the
time of their examination.
Critical Accounting Policies
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. The financial
information contained within these statements is, to a significant extent,
financial information that is based on approximate measures of the financial
effects of transactions and events that have already occurred. Based on its
consideration of accounting policies that involve the most complex and
subjective decisions and assessments, management has identified its most
critical accounting policy to be the policy related to the allowance for loan
losses.
The Company's allowance for loan loss methodology incorporates a variety of
risk considerations, both quantitative and qualitative, in establishing an
allowance for loan loss that management believes is appropriate at each
reporting date. Quantitative factors include the Company's historical loss
experience, delinquency and charge-off trends, collateral values, changes in
non-performing loans, and other factors. Quantitative factors also incorporate
known information about individual loans, including borrowers' sensitivity to
interest rate movements. Qualitative factors include the general economic
environment in the Company's markets, including
17
economic conditions throughout the Midwest and, in particular, the state of
certain industries. Size and complexity of individual credits in relation to
loan structure, existing loan policies, and pace of portfolio growth are other
qualitative factors that are considered in the methodology. As the Company
adds new products and increases the complexity of its loan portfolio it will
enhance its methodology accordingly. Management may have reported a
materially different amount for the provision for loan losses in the statement
of operations to change the allowance for loan losses if its assessment of the
above factors were different. This discussion and analysis should be read in
conjunction with the Company's financial statements and the accompanying notes
presented elsewhere herein, as well as the portion of this Management's
Discussion and Analysis section entitled "Non-performing Assets and Allowance
for Loan Losses." Although management believes the levels of the allowance as
of both December 31, 2008 and June 30, 2008 were adequate to absorb probable
losses inherent in the loan portfolio, a decline in local economic conditions,
or other factors, could result in increasing losses.
Results of Operations for the Three Months Ended December 31, 2008 Compared to
the Three Months Ended December 31, 2007
General. For the three months ended December 31, 2008, the Company reported a
net loss of $3.0 million, or $(1.94) per diluted share, compared to net income
of $87,000, or $0.05 per diluted share, for the same period in 2007. The
decrease in net income for the 2008 period included a substantial increase in
the provision for loan losses, an increase in non-interest expense and
decreases in interest income and non-interest income. These items were
partially offset by decreases in interest expense and in the income tax
expense.
Net interest income. The Company's net interest income for both the three
months ended December 31, 2008 and the three months ended December 31, 2007
was $1.8 million, with net interest income for the 2008 period being $6,000
higher. The increase reflects a $599,000 decrease in interest expense
partially offset by a $593,000 decrease in interest income.
Interest income. Interest income for the three months ended December 31, 2008
decreased $593,000, or 15.6%, to $3.2 million compared to $3.8 million for the
same period in 2007. Interest income from loans decreased $508,000 to $2.5
million from $3.0 million in 2007. This was attributable to a decrease in the
yield on loans to 6.45% during the three months ended December 31, 2008 from
7.58% during the comparable period in 2007, and by a decrease in average
outstanding loans to $154.4 million during the 2008 period from $158.1 million
during the comparable 2007 period. The decrease in yield was the result of the
dramatic downward trend in interest rates between periods.
Interest income from investment securities and other interest-earning assets
for the three months ended December 31, 2008 decreased $84,000 to $705,000
from $789,000 for the same period in 2007. The decrease was the result of a
decrease in the average balance of these assets of $800,000 to $64.7 million
for the quarter ended December 31, 2008 from $65.5 million for the same period
in 2007, and to a decrease in the yield on these assets to 4.32% for the 2008
period from 4.78% for the 2007 period.
Interest expense. Interest expense for the three months ended December 31,
2008 decreased $599,000 or 30.0%, to $1.4 million from $2.0 million for the
same period in 2007. Interest expense on deposits decreased $606,000 to $1.1
million in the three months ended December 31, 2008 from $1.7 million in the
same period in 2007. The decrease resulted from a decrease in average
interest-bearing deposit balances of $10.3 million to $171.0 million in the
2008 period from $181.3 million in the 2007 period. The decrease was also
attributable to a decrease in the average cost of deposits to 2.45% in the
2008 period from 3.63% in the 2007 period. Interest expense on other
interest-bearing liabilities increased $7,000 to $342,000 in the three months
ended December 31, 2008 from $335,000 in the comparable period in 2007. The
increase in interest expense on other interest-bearing liabilities was due to
an increase in the average outstanding balances of other interest-bearing
liabilities to $28.4 million during the 2008 period from $23.6 million during
the 2007 period which was partially offset by a decrease in the average cost
of other interest-bearing liabilities to 4.77% during the 2008 quarter from
5.34% during the 2007 quarter.
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Net interest margin. Net interest margin increased to 3.29% for the three
months ended December 31, 2008 from 3.22% for the three months ended December
31, 2007.
Provision for loan loss. During the quarter ended December 31, 2008, the
provision for loan losses was $4.2 million, compared to $145,000 for the
quarter ended December 31. 2007. For a discussion of this change, see
"Non-performing Assets and Allowance for Loan Losses" herein.
Non-interest income. For the three months ended December 31, 2008,
non-interest income totaled $674,000, compared to $681,000 for the three
months ended December 31, 2007. The $7,000 decrease between the two periods
resulted primarily from decreases in service charges and other fee income and
profit on the sale of loans, which were $29,000 and $27,000, respectively.
These decreases were partially offset by increases of $11,000, $18,000 and
$20,000 in gain on the sale of property and equipment and real estate owned,
income from bank-owned life insurance and other non-interest income,
respectively.
Non-interest expense. Non-interest expense totaled $2.2 million for both the
three months ended December 31, 2008 compared to $2.1 million for the three
months ended December 31, 2007, an increase of $81,000. This was the result
of increases of $64,000 and $70,000 in compensation and benefits and other
non-interest expense, respectively. These increases were partially offset by
decreases of $14,000 in occupancy and equipment and $38,000 in professional
fees. The increase in compensation and benefits was the result of increases in
directors' fees and health insurance costs, as well as, normal increases in
salary and payroll taxes. The decrease in professional fees was due to the
timing of the internal audit work performed during the prior year period
compared to the current year.
Income tax expense. During the quarter ended December 31, 2008, an income tax
benefit of $962,000 was recorded, compared to income tax expense of $114,000
for the quarter ended December 31, 2007. The pre-tax loss of $4.0 million
during the 2008 quarter was reduced as a result of the decision to cash in the
Bank's BOLI. Cashing in the BOLI required recording a tax provision of
approximately $562,000. No tax provision was previously recorded on income
from the BOLI. It did not become a taxable event until it was decided to cash
in the policies.
Results of Operations for the Six Months Ended December 31, 2008 Compared to
the Six Months Ended December 31, 2007
General. For the six months ended December 31, 2008, the Company reported a
net loss of $2.8 million, or $(1.78) per diluted share, compared to net income
of $312,000, or $0.20 per diluted share, for the same period in 2007. The
decrease in net income for the 2008 period included a decrease in non-interest
income, an increase in non-interest expense and a substantial increase in the
provision for loan losses, which were partially offset by an increase in net
interest income and a decrease in and income taxes.
Net interest income. The Company's net interest income for the six months
ended December 31, 2008 increased by $244,000 to $3.7 million, compared to
$3.5 million for the same period in 2007. The increase reflects a $1.2
million decrease in interest expense which was partially offset by a $920,000
decrease in interest income.
Interest income. Interest income for the six months ended December 31, 2008
decreased $920,000, or 12.2%, to $6.6 million compared to $7.6 million for the
same period in 2007. Interest income from loans decreased $731,000 to $5.2
million from $6.0 million in 2007. This was attributable to a decrease in the
yield on loans to 6.57% during the 2008 period from 7.51% during the
comparable 2007 period, which was partially offset by a small increase in
average loan balances to $158.2 million in the 2008 period from $157.8 million
during the 2007 period.
Interest income from investment securities and other interest-earning assets
for the six months ended December 31, 2008 decreased $188,000 to $1.4 million
from $1.6 million for the same period in 2007. The decrease was the result of
a decrease in the average balance of these assets of $188,000 to $64.0 million
for the six months ended
19
December 31, 2008 from $64.9 million for the same period in 2007 and a
decrease in the yield on these assets to 4.25% for the 2008 period from 4.83%
for the 2007 period.
Interest expense. Interest expense for the six months ended December 31, 2008
decreased $1.2 million, or 28.6%, to $2.9 million from $4.1 million for the
same period in 2007. Interest expense on deposits decreased $1.2 million to
$2.2 million in the six months ended December 31, 2008 from $3.4 million in
the same period in 2007. The decrease resulted from a decrease in average
interest-bearing deposit balances of $5.7 million to $174.8 million in the
2008 period from $180.5 million in the 2007 period and to a decrease in the
average cost of deposits to 2.51% in the 2008 period from 3.73% in the 2007
period. Interest expense on other interest-bearing liabilities increased
$16,000 to $691,000 in the six months ended December 31, 2008 from $675,000 in
the comparable period in 2007. The increase in interest expense on other
interest-bearing liabilities was due to an increase in the average outstanding
balances of other interest-bearing liabilities to $27.5 million during the
2008 period from $23.8 million during the 2007 period, which was partially
offset by a decrease in the average cost on other interest-bearing liabilities
to 4.98% during the 2008 period from 5.63% during the 2007 period.
Net interest margin. Net interest margin increased to 3.33% for the six months
ended December 31, 2008 from 3.10% for the six months ended December 31, 2007.
Provision for loan loss. During the six months ended December 31, 2008, the
provision for loan losses was $4.4 million, compared to $153,000 for the six
months ended December 31. 2007. For a discussion of this change, see
"Non-performing Assets and Allowance for Loan Losses" herein.
Non-interest income. For the six months ended December 31, 2008, non-interest
income totaled $1.4 million, compared to $1.5 million for the six months ended
December 31, 2007. The $34,000 decrease between the two periods resulted
primarily from decreases of $74,000 and $27,000 in profit on the sale of loans
and gain on the sale of property and equipment and real estate owned,
respectively. These decreases were partially offset by an increase in service
charges and fee income of $25,000, income from Bank Owned Life Insurance of
$18,000 and other non-interest income of $24,000.
Non-interest expense. Non-interest expense totaled $4.4 million for the six
months ended December 31, 2008, compared to $4.3 million for the six months
ended December 31, 2007, increasing by $107,000. This was the result of
increases of $56,000, $72,000 and $50,000 in compensation and benefits,
occupancy and equipment, and other non-interest expense, respectively. These
increases were partially offset by a decrease of $71,000 in professional fees.
The increase in compensation and benefits was the result of increases in
directors' fees and health insurance costs, as well as, normal increases in
salary and payroll taxes. The increase in occupancy and equipment expense is
primarily the result of an ongoing effort to upgrade the appearance and
functionality of the Company's home office and branch offices. While a
significant portion of costs related to these efforts has been capital in
nature, a lesser portion has been for repairs and maintenance, and has been
expensed. Most of these expense were incurred in the first three months of the
six month period. The decrease in professional fees was due to the timing of
the internal audit work performed during the prior year period compared to the
current year.
Income tax expense. During the six months ended December 31, 2008, an income
tax benefit of $846,000 was recorded, compared to income tax expense of
$206,000 for the quarter ended December 31, 2007. The tax benefit on the
pre-tax loss of over $3.6 million during the six months ended December 31,2008
was reduced as a result of the decision to cash in the Bank's BOLI. Cashing in
the BOLI required recording a tax provision of approximately $562,000. No tax
provision was previously recorded on income from the BOLI. It did not become a
taxable event until it was decided to cash in the policies.
20
Item 3. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, borrowings, principal and
interest payments on loans, investments, and mortgage-backed securities, and
funds provided by other operating activities. While scheduled payments on
loans, mortgage-backed securities, and short-term investments are relatively
predictable sources of funds, deposit flows and early loan repayments are
greatly influenced by general interest rates, economic conditions, and
competition.
The Company uses its capital resources principally to meet ongoing commitments
to fund maturing certificates of deposits and loan commitments, to maintain
liquidity, and to meet operating expenses. At December 31, 2008, the Company
had commitments to originate loans and fund unused lines of credit totaling
$653,000. The Company believes that loan repayment and other sources of funds
will be adequate to meet its foreseeable short-and long-term liquidity needs.
Regulations require First Home Savings Bank to maintain minimum amounts and
ratios of total risk-based capital and Tier 1 capital to risk-weighted assets,
and a leverage ratio consisting of Tier 1 capital to average assets. The
following table sets forth First Home Savings Bank's actual capital and
required capital amounts and ratios at December 31, 2008 which, at that date,
exceeded the minimum capital adequacy requirements.
Minimum
Requirement To Be
Minimum Well Capitalized
Requirement For Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
------ -------- ----------
At December 31, 2008 Amount Ratio Amount Ratio Amount Ratio
--------------------- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Tangible Capital
(to adjusted total
assets)............ $21,707 9.23% $3,526 1.50% - -
Tier 1 (Core) Capital
(to adjusted total
assets)............ 21,707 9.23 9,403 4.00 $11,752 5.00%
Total Risk Based
Capital (to risk
weighted assets)... 23,579 15.56 12,121 8.00 15,152 10.00
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
established five regulatory capital categories and authorized the banking
regulators to take prompt corrective action with respect to institutions in an
undercapitalized category. At December 31, 2008, First Home Savings Bank
exceeded minimum requirements for the well-capitalized category.
Forward Looking Statements
The Company, and its wholly-owned subsidiaries, First Home Saving Bank and
SCMG, Inc., may from time to time make written or oral "forward-looking
statements," including statements contained in its filings with the Securities
and Exchange Commission, in its reports to shareholders, and in other
communications by the Company, which are made in good faith by the Company
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995.
These forward-looking statements include statements with respect to the
Company's beliefs, expectations, estimates and intentions that are subject to
significant risks and uncertainties, and are subject to change based on
various factors, some of which are beyond the Company's control. Such
statements may address: future operating results; customer growth and
retention; loan and other product demand; earnings growth and expectations;
new products and services; credit quality and adequacy of reserves;
technology; and our employees. The following factors, among others, could
cause the Company's financial performance to differ materially from the
expectations, estimates, and intentions expressed in such forward-looking
statements: the strength of the
21
United States economy in general and the strength of the local economies in
which the Company conducts operations; the effects of, and changes in, trade,
monetary, and fiscal policies and laws, including interest rate policies of
the Federal Reserve Board; inflation, interest rate, market, and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users; the impact of changes in financial services' laws and
regulations; technological changes; acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing its
"litigation", improving its loan underwriting and related lending policies and
procedures, collecting assets of borrowers in default, successfully resolving
the MOU and managing the risks involved in the foregoing.
The foregoing list of factors is not exclusive. Additional discussions of
factors affecting the Company's business and prospects are contained in the
Company's periodic filings with the SEC. The Company expressly disclaims any
intent or obligation to update any forward-looking statement, whether written
or oral, that may be made from time to time by or on behalf of the Company.
Item 4. Controls and Procedures
Any control system, no matter how well designed and operated, can provide only
reasonable (not absolute) assurance that its objectives will be met.
Furthermore, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been detected.
Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures, as such term is defined
in Rules 13a 15(e) and 15d 15(e) of the Securities Exchange Act of 1934
(Exchange Act) as of the end of the period covered by the report.
Based upon that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that as of December 31 2008 the Company's
disclosure controls and procedures were effective to provide reasonable
assurance that (i) the information required to be disclosed by the Company in
this Report was recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and (ii) information required
to be disclosed by the Company in the reports that its files or submits
under the Exchange Act is accumulated and communicated to its management,
including its principal executive and principal financial officers, or
persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure.
Internal Control Over Financial Reporting
During the quarter ended December 31, 2008, there have been no changes in our
internal control over financial reporting (as defined in Rule 13a-15(f) of the
Act) that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
The Company does not expect that its disclosure controls and procedures and
internal control over financial reporting will prevent all error and all
fraud. A control procedure, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control procedure are met. Because of the inherent limitations in all control
procedures, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur 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
22
time, controls may become inadequate because of changes in conditions, or the
degree of compliance with the policies or procedures may deteriorate.
The Company intends to continually review and evaluate the design and
effectiveness of its disclosure controls and procedures and to improve its
controls and procedures over time and to correct any deficiencies that it may
discover in the future. The goal is to ensure that senior management has
timely access to all material financial and non-financial information
concerning the Company's business. While the Company believes the present
design of its disclosure controls and procedures is effective to achieve its
goal, future events affecting its business may cause the Company to modify its
disclosure controls and procedures.
23
FIRST BANCSHARES, INC.
AND SUBSIDIARIES
PART II - OTHER INFORMATION
FORM 10-Q
Item 1. Legal Proceedings
-----------------
There are no material pending legal proceedings to which the Company or its
subsidiaries is a party other than ordinary routine litigation incidental to
their respective businesses.
Item 1a. Risk Factors
------------
There are no material changes from risk factors as previously disclosed in our
June 30, 2008 annual report on Form 10K.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
----------------------------------------------------------
(a) Recent sales of unregistered securities - None.
(b) Use of proceeds - None.
(c) Stock repurchases - None
Item 3. Defaults Upon Senior Securities - None
--------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company's Annual Meeting of Stockholders for the year ended June 30, 2008
was held on November 6, 2008 at the Days Inn located at 300 East 19th Street,
Mountain Grove, Missouri. The results of the vote on items presented at the
meeting are as follows:
The stockholders elected the following nominees to the Board of Directors for
a three-year term ending in 2011 by the following vote:
Number of
Number of Votes
Votes For Percentage Withheld Percentage
--------- ---------- -------- ----------
Thomas M. Sutherland....... 1,104,198 97.1% 32,551 2.9%
D. Mitch Ashlock........... 1,111,359 97.8% 25,390 2.2%
The following directors, whose terms did not expire in 2008, and were not up
for re-election at the Annual Meeting of Stockholders, continue to serve as
directors: Billy E. Hixon, Harold F. Glass, John G. Moody, and Robert J.
Breidenthal.
Item 5. Other Information - None
------------------------
Item 6. Exhibits
--------
(a) Exhibits:
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
24
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
------------------------------
25
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
FIRST BANCSHARES, INC.
Date: February 17, 2009 By: /s/ Thomas M. Sutherland
------------------------
Thomas M. Sutherland,
Chief Executive Officer
Date: February 17, 2009 By: /s/ Ronald J. Walters
------------------------
Ronald J. Walters, Senior Vice President,
Treasurer and Chief Financial Officer
26
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
27