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, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-22842
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FIRST BANCSHARES, INC.
--------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Missouri 43-1654695
----------------- -------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
142 E. First Street
Mountain Grove, Missouri 65711
------------------------- --------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area
code: (417) 926-5151
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
---------------------------------------
(Title of Class)
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 disclosure of delinquent filers
pursuant to Item 405 of Regulation S-B is not contained herein, and
will not be contained, to the best of the Registrant's knowledge, in
definitive proxy or other information statements incorporated by
reference in Part III of this Form 10-KSB or any amendments to this
Form 10-KSB. /_X_ /
The registrant's revenues for the fiscal year ended June 30, 1997
were $12,092,000.
As of September 26, 1997, there were outstanding 1,100,054 shares
of the Registrant's Common Stock. The Registrant's voting stock is
traded over-the-counter and is listed on the Nasdaq Stock Market
("Nasdaq/NMS") under the symbol "FBSI." The aggregate market value
of the voting stock held by nonaffiliates of the Registrant, based
on the closing sales price of the Registrant's common stock as quoted
on the Nasdaq/NMS on September 26, 1997, was $19,469,017. For
purposes of this calculation, officers and directors of the
Registrant, the Employee Stock Ownership Plan and the Management
Recognition Plan are considered affiliates of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year
Ended June 30, 1997. (Parts I and II)
2. Portions of Proxy Statement for the 1997 Annual Meeting of
Stockholders. (Part III)
Transitional Small Business Disclosure Format (check one)
Yes No X
---- -----
</page>
PART I
Item 1. Business
General
First Bancshares, Inc. ("First Bancshares" or the "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 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, 1997, the Company had
consolidated total assets of $164.0 million, total customer deposits
of $117.7 million and stockholders' equity of $22.2 million. First
Bancshares has not engaged in any significant activity other than
holding the stock of First Home. Accordingly, the information set
forth in this report, including financial statements and related
data, relates primarily to the Savings Bank and its subsidiaries.
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 five full service branch facilities in Marshfield, Ava,
Gainesville, Sparta and Theodosia, Missouri. The deposits of the
Savings Bank are insured up to applicable limits by the Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC").
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 one- to four-family residential mortgage loans and, to a lesser
extent, multi-family residential, consumer, and commercial mortgage
loans, including home equity loans, for its loan portfolio, as well
as for mortgage-backed and U.S. Government and agency securities and
other assets. At June 30, 1997, the Savings Bank's net loans were
$134.1 million, or 81.8% of consolidated total assets, including
$105.7 million, or 76.82% of total loans secured by one- to four-
family properties, $22.0 million, or 15.98% of total loans secured
by other real estate and $7.8 million of consumer loans, or 5.63% of
total loans. As discussed in following areas, ARM loans account for
approximately 93% of the total loan portfolio.
In early September 1997, First Home Savings Bank received
notification it was the successful bidder for a branch bank with
locations in two small southwest Missouri towns. The acquisition is
contingent upon negotiation of a final contract with the seller and
regulatory approval. Closing of the transaction, assuming all
contingencies can be met, is expected to occur in early
1998. Branch deposits to be acquired, which are subject to change
by the closing of the transaction, totaled approximately $20.0
million at June 30, 1997.
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 industry. The Savings Bank's market
area is predominantly rural in nature and its deposit taking and
lending activities primarily encompass Wright, Webster, Douglas,
Christian and Ozark counties. Companies in the area include
Hutchens Steel, Paramont Cap, Arlee Home Fashions, Copeland
Corporation, and Rawlings. The Savings Bank also transacts a
significant amount of business in Texas, Greene and Taney counties,
Missouri. The area, especially Ozark County due to its proximity to
the Norfolk and Bull Shoals lakes, has experienced a rather slow but
steady growth from retirees. Economic conditions in the Savings
Bank's market area have been stable.
The Savings Bank has also established a limited lending presence
in and around Kimberling City in Taney and Stone counties, Missouri.
That area has enjoyed significant growth due to its proximity to the
resort area of Branson and Table Rock Lake. Most of the Savings
Bank's lending in this area has been limited to owner occupied
single-family homes.
1
</page>
Selected Consolidated Financial Information
This information is incorporated by reference from pages 4 and
5 of the 1997 Annual Report to Stockholders ("Annual Report")
attached hereto as Exhibit 13.
Yields Earned and Rates Paid
The earnings of the Savings Bank depend largely on the spread
between the yield on interest-earning assets (primarily loans and
investments) 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. Average balances for a period
have been calculated using the average monthly balances for the period.
2
</page>
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- -----------------------------
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/
Balance(2) Dividends Cost Balance(2) Dividends Cost Balance(2) Dividends Cost
--------- --------- ------ --------- --------- ---- --------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans(1)............................ $126,587 $10,420 8.23% $111,335 $ 8,946 8.03% $ 93,384 $ 7,027 7.52%
Mortgage-backed securities.......... 2,374 161 6.76 3,035 201 6.62 3,221 243 7.54
Investment securities............... 16,834 1,029 6.11 3,275 803 6.05 17,738 1,049 5.91
Daily interest-bearing deposits..... 1,723 85 4.93 3,223 163 5.06 1,704 66 3.87
Federal funds sold - - - 3 - - 180 5 2.77
-------- ------ -------- ------- --------- -------
Total interest-earning assets.... 147,518 11,695 7.93 130,871 10,113 7.73 116,227 8,390 7.22
Non-interest earning assets:
Office properties and equipment, net 2,349 2,003 1,736
Real estate, net.................... 1,159 876 441
Other non-interest-earning assets... 3,511 2,614 2,515
--------- -------- --------
Total assets...................... $154,537 $136,364 $120,919
======== ======== ========
Interest-bearing liabilities:
Passbook accounts................... $ 5,621 170 3.02 $ 5,182 164 3.17 $ 5,044 160 3.17
NOW and Super Saver accounts........ 28,140 881 3.13 26,353 858 3.25 25,820 866 3.35
Certificates of deposit............. 75,223 4,326 5.75 68,475 4,021 5.87 62,520 3,428 5.48
-------- ----- -------- ------ ------- -----
Total deposits.................... 108,984 5,377 4.93 100,010 5,043 5.04 93,384 4,454 4.77
Other interest-bearing liabilities.. 19,011 1,116 5.87 10,404 618 5.94 2,059 100 4.86
-------- ------ -------- ------ ------- -----
Total interest-bearing liabilities 127,995 6,493 5.07 110,414 5,661 5.13 95,443 4,554 4.77
Non-interest-bearing liabilities:
Other liabilities................... 3,902 2,362 1,319
--------- -------- --------
Total liabilities................. 131,897 112,776 96,762
Stockholders' equity................. 22,640 23,588 24,157
--------- -------- --------
Total liabilities and
stockholders' equity.............$154,537 $136,364 $120,919
======== ========= ========
Net interest income................... $5,202 $4,452 $3,836
====== ====== ======
Interest rate spread.................. 2.86% 2.60% 2.45%
Net interest margin................... 3.53% 3.40% 3.30%
Ratio of average interest-earning
assets to average interest-
bearing liabilities.................. 115% 119% 122%
__________________
(1) Average balances include nonaccrual loans and loans 90 days or more past due. The corresponding interest up to the date of
nonaccrual 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
</TABLE>
3
</page>
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.
<TABLE>
<CAPTION>
At June 30, Years Ended June 30,
1997 1997 1996 1995
---------- ----- ----- -----
<S> <C> <C> <C> <C>
Weighted average yield on loan portfolio.............. 8.29% 8.23% 8.03% 7.52%
Weighted average yield on mortgage-backed
securities.......................................... 6.92 6.76 6.62 7.54
Weighted average yield on investment securities....... 6.20 6.11 6.05 5.91
Weighted average yield on interest-bearing deposits... 6.28 4.93 5.06 3.87
Weighted average yield on federal funds sold.......... -- -- -- 2.77
Weighted average yield on all interest-
earning assets...................................... 8.02 7.93 7.73 7.22
Weighted average rate paid on total deposits.......... 4.83 4.93 5.04 4.77
Weighted average rate paid on FHLB advance............ 5.84 5.87 5.94 4.86
Weighted average rate paid on all interest
-bearing liabilities................................. 5.00 5.07 5.13 4.77
Interest rate spread (spread between weighted
average rate on all interest-earning assets
and all interest-bearing liabilities)................ 3.02 2.86 2.60 2.45
Net interest margin (net interest income
(expense) as a percentage of average
interest-earning assets)............................ N/A 3.53 3.40 3.30
</TABLE>
4
</page>
Rate/Volume Analysis
The following table sets forth the effects of changing rates and
volumes on net interest income of the Company and Savings Bank.
Information is provided with respect to (i) effects on interest
income attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) effects on interest income
attributable to changes in rate (changes in rate multiplied by prior
volume); (iii) changes in rate/volume (change in rate multiplied by
change in volume); and (iv) the net changes (the sum of the previous
columns).
<TABLE>
<CAPTION>
Years Ended June 30, Years Ended June 30,
1997 Compared to 1996 1996 Compared to 1995
Increase (Decrease) Increase (Decrease)
Due to Due to
---------------------------------- -------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------- ------ ------ ----- ------- ---- -------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans(1).......................... $1,225 $ 223 $ 26 $1,474 $1,350 $ 476 $ 93 $1,919
Mortgage-backed securities........ (44) 4 -- (40) (14) (30) 2 (42)
Investment securities............. 215 8 3 226 (264) 25 (7) (246)
Daily interest-bearing deposits... (76) (4) 2 (78) 59 20 18 97
Federal funds sold................ -- -- -- -- (5) (5) 5 (5)
--------- ------ ----- ------- ------- ----- ----- -------
Total net change in income on
interest-earning assets........... 1,320 231 31 1,582 1,126 486 111 1,723
------- ------ ----- ------- ------- ------ ----- -------
Interest-bearing liabilities:
Interest-bearing deposits......... 452 (110) (8) 334 317 253 19 589
FHLB advances..................... 511 (7) (6) 498 406 22 90 518
Other borrowings.................. -- -- -- -- -- -- -- --
------- ----- ---- ----- ------ ----- ----- -----
Total net change in expense on
interest- bearing liabilities..... 963 (117) (14) 832 723 275 109 1,107
------ ------ ----- ------ ------ ------ ------ ------
Net change in net interest income.. $ 357 $ 348 $ 45 $ 750 $ 403 $ 211 $ 2 $ 616
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
(1) Includes interest on loans 90 days or more past due.
5
</page>
Interest Rate Sensitivity of Net Portfolio Value
The table below measures interest rate risk by estimating the change
in market value of the Savings Bank's assets, liabilities, and off-
balance sheet contracts in response to an instantaneous change in
the general level of interest rates. The procedure for measuring
interest rate risk was developed by the Office of Thrift Supervision
("OTS") to replace the "gap" analysis (the difference between
interest-earning assets and interest-bearing liabilities that mature
or reprice within a specific time period) used previously by the OTS.
The model first estimates the level of the Savings Bank's market
value of portfolio equity ("MVPE") (market value of assets, less
market value of liabilities, plus or minus the market value of any
off-balance sheet items) under the current rate environment. In
general, market values are estimated by discounting the estimated
cash flows of each instrument by appropriate discount rates. The
model then recalculates the Savings Bank's MVPE under different
interest rate scenarios. The change in MVPE under the different
interest rate scenarios provides a measure of the Savings Bank's
exposure to interest rate risk. The data presented below is as of
June 30, 1997.
<TABLE>
<CAPTION>
-400 -300 -200 -100 +100 +200 +300 +400
Basis Basis Basis Basis No Basis Basis Basis Basis
Points Points Points Points Change Points Points Points Points
------- ------- ------- -------- ------- ------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Mortgage loans and
securities............. $132,608 $131,264 $130,130 $129,169 $128,155 $126,669 $124,432 $121,612 $118,514
Non-mortgage loans...... 9,953 9,927 9,901 9,876 9,851 9,827 9,803 9,779 9,756
Cash, deposits and
securities............. 23,100 22,849 22,602 22,360 22,123 21,890 21,660 21,435 21,214
Premises and
equipment.............. 3,262 3,262 3,262 3,262 3,262 3,262 3,262 3,262 3,262
Other assets............ 1,548 1,786 2,320 3,081 3,916 4,708 5,459 6,174 6,853
TOTAL................... $170,471 $169,088 $168,215 $167,748 $167,307 $166,356 $164,616 $162,262 $159,599
========= ========= ========= ======== ======== ======== ======== ========= =========
LIABILITIES
Deposits................ $120,214 $119,578 $118,951 $118,341 $117,744 $117,161 $116,589 $116,030 $115,484
Borrowings.............. 25,595 25,238 24,891 24,552 24,222 23,900 23,587 23,281 22,982
Other liabilities....... 291 290 290 289 289 289 288 288 288
-------- -------- -------- -------- -------- -------- -------- -------- --------
TOTAL................... $146,100 $145,106 $144,132 $143,182 $142,255 $141,350 $140,464 $139,599 $138,754
======== ======== ======== ======== ======== ======== ======== ======== ========
MARKET VALUE OF
PORTFOLIO EQUITY ..$ 24,371 $ 23,982 $ 24,083 $ 24,566 $ 25,052 $ 25,006 $ 24,152 $ 22,663 $ 20,845
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
6
</page>
Lending Activities
General. The principal lending activity of the Savings Bank is
the origination of conventional mortgage loans for the purpose of
purchasing, constructing or refinancing single-family owner occupied
homes within its primary market area. In an attempt to diversify its
lending portfolio, however, the Savings Bank also originates real
estate loans, consumer loans, mobile home loans, home improvement
loans, commercial loans, business loans, student loans, and loans
secured by savings accounts. In addition to loans within the
Savings Bank's primary market area, the Savings Bank also has
originated 19 single-family loans, one condominium loan and four
land loans in Kansas, Texas, Tennessee, Arkansas, California and
Colorado. The aggregate balance of these 24 loans at June 30, 1997
was $1.1 million and all were performing according to their terms at
that date.
At June 30, 1997, the Savings Bank's net loans receivable
totaled approximately $134.1 million representing approximately
81.77% of consolidated total assets. Since 1973, the Savings Bank
has primarily originated ARM loan products. At June 30, 1997, ARM
loans accounted for $127.6 million or 92.73% of the total loan
portfolio. The Savings Bank focuses on serving the needs of its
local community and strongly believes in a lending philosophy that
stresses individual customer service and flexibility in meeting the
needs of its customers.
7
</page>
Loan Portfolio Analysis. The following table sets forth the
composition of the Savings Bank's loan portfolio by type of loan
and type of security as of the dates indicated. Construction loans
are included in the residential and commercial loan types. The
Savings Bank does not account for construction loans separate from
residential and commercial loans.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ----------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
--------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loan:
- ------------
Residential................. $105,700 76.82% $ 95,534 77.44% $ 82,891 79.12% $ 70,320 80.17% $ 61,721 80.76%
Commercial.................. 10,876 7.90 9,159 7.42 7,074 6.75 5,497 6.27 4,363 5.71
Land........................ 6,828 4.97 5,781 4.69 4,272 4.08 3,464 3.95 2,774 3.63
Second mortgage loans....... 4,278 3.11 3,727 3.02 2,731 2.60 1,812 2.07 1,736 2.27
-------- ----- -------- ----- -------- ------ --------- ------ -------- -----
Total mortgage loans...... 127,682 92.80 114,201 92.57 96,968 92.55 81,093 92.46 70,594 92.37
-------- ----- -------- ----- -------- ------ --------- ----- -------- -----
Other Loans:
Automobile loans............ 4,334 3.15 4,184 3.39 3,084 2.95 2,685 3.06 2,245 2.94
Savings account loans....... 1,301 0.94 1,282 1.04 1,145 1.09 941 1.08 718 0.94
Mobile home loans........... 743 0.54 745 0.60 622 0.59 583 0.66 533 0.69
Other consumer.............. 1,373 1.00 916 0.75 811 0.78 947 1.08 976 1.28
Commercial business......... 2,162 1.57 2,035 1.65 2,142 2.04 1,460 1.66 1,360 1.78
-------- ----- -------- ------ ------- ------ -------- ------ -------- ------
Total other loans......... 9,913 7.20 9,162 7.43 7,804 7.45 6,616 7.54 5,832 7.63
-------- ----- -------- ------ ------- ------ -------- ------- -------- ------
Total loans............... 137,595 100.00% 123,363 100.00% 104,772 100.00% 87,709 100.00% 76,426 100.00%
-------- ======= -------- ======= ------- ======= ------- ======= -------- ======
Add:
Unamortized deferred loan costs,
net of origination fees.... 107 70 46 21 --
Less:
Undisbursed loans in process 3,117 4,133 2,945 1,474 2,878
Unamortized loan origination fees,
net of direct costs........ -- -- -- -- --
Allowance for possible loan
losses.................... 481 520 442 479 470
-------- -------- ------- ------- -------
Total loans receivable, net.. $134,104 $118,780 $101,431 $85,777 $73,078
======== ======== ======== ======= =======
</TABLE>
8
</page>
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------- ---------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- ------- ------- ------- -------- -------
(Dollars in thousands)
Type of Security:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate
Second mortgage loans...... $ 3,805 2.77% $ 3,356 2.72% $ 2,355 2.25% $ 1,812 2.07% $ 1,736 2.27%
One-to-four family......... 105,700 76.82 95,534 77.44 82,891 79.12 70,320 80.17 60,380 79.00
Multi-family............... 1,119 0.81 1,190 0.97 1,391 1.33 1,267 1.45 1,341 1.76
Commercial or industrial real
estate................... 10,123 7.36 8,283 6.71 5,977 5.70 4,230 4.82 4,363 5.71
Land......................... 6,935 5.04 5,838 4.73 4,354 4.15 3,464 3.95 2,774 3.63
Commercial or industrial assets 2,162 1.57 2,035 1.65 2,142 2.04 1,460 1.66 1,360 1.78
Automobile................... 4,334 3.15 4,184 3.39 3,084 2.95 2,685 3.06 2,245 2.94
Savings accounts............. 1,301 0.94 1,282 1.04 1,145 1.09 941 1.08 718 0.94
Mobile homes................. 743 0.54 745 0.60 622 0.59 583 0.66 533 0.69
Other........................ 1,373 1.00 916 0.75 811 0.78 947 1.08 976 1.28
-------- ----- ------- ----- ------ ----- ------ ----- ------- -----
Total..................... 137,595 100.00% 123,363 100.00% 104,772 100.00% 87,709 100.00% 76,426 100.00%
======= ======= ======= ======= =======
Add:
Unamortized deferred loan costs,
net of origination fees..... 107 70 46 21 --
Less:
Undisbursed loans in process 1,185 1,535 841 20 1,421
Due to borrowers on construction
loans..................... 1,932 2,598 2,104 1,454 1,457
Allowance for possible loan losses 481 520 442 479 470
-------- -------- -------- ------- --------
Total loans receivable, net. $134,104 $118,780 $101,431 $85,777 $73,078
======== ======== ======== ======= =======
</TABLE>
9
</page>
One- to Four-Family Residential Loans. The primary lending
activity of the Savings Bank has been the origination of mortgage
loans to enable borrowers to purchase existing homes, to construct
new single-family homes or refinance existing debt on their homes.
Management believes that this policy of focusing on single-family
residential mortgage loans has been successful in contributing to
interest income while keeping delinquencies and losses at a minimum.
At June 30, 1997, approximately $105.7 million, or 76.82% of the
Savings Bank's gross loan portfolio, consisted of loans secured by
one- to four-family residential real estate.
The Savings Bank presently originates ARM loans secured by one-
to four-family properties with loan terms of 10 to 30 years. Since
1973, the Savings Bank has originated almost exclusively ARM loan
products. Initially, ARM loans were indexed to the Savings Bank's
cost of money. 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 are limited to a 6% maximum increase over the life of
the loan.
The Savings Bank does not charge points on ARM loans. In
addition, the Savings Bank does not charge appraisal fees. It
quotes an interest rate, or base rate, with no points and gives
the borrower the option, if desired, to pay a 1% fee, but obtain the
loan at 1% below the Savings Bank's base rate for the first year of
the loan. Construction borrowers can pay a 2% fee and receive a 2%
reduction in the initial interest rate for the first year of the
loan. The Savings Bank funds most of its loan commitments in a
relatively short period of time. If a commitment expires, the
Savings Bank will generally renew the commitment upon request.
The Savings Bank underwrites ARMs based on an assumed 1% per
year interest rate increase. The Savings Bank's policy to adjust
the interest rate once a year within 1% is a self-imposed limit by
the Savings Bank. The Savings Bank's experience has been that most
of its borrowers can manage an increased payment resulting from a 1%
increase; however, an increase of over 1% may put a strain on the
borrowers' ability to repay. As a result, the potential for a
substantial increase in interest payments on the Savings Bank's ARM
loans is lessened as is the likelihood of delinquencies and defaults.
The Savings Bank's lending policies generally limit the maximum
loan-to-value ratio on adjustable rate residential mortgage loans to
85% of the lesser of the appraised value or purchase price of the
underlying residential property. The Savings Bank requires title
insurance or an abstract extension and attorney's opinion, fire and
casualty coverage and a flood zone determination on all mortgage
loans originated or purchased. All of the Savings Bank's real
estate loans contain "due on sale" clauses. The Savings Bank
personnel prepare all property evaluations at no expense to the
borrower unless the property is outside its normal lending territory,
in which event, independent appraisers are utilized. At June 30,
1997, the maximum loan-to-value ratio on loans to local borrowers
was generally 85%.
At June 30, 1997, the Savings Bank had $5.9 million in interim
construction loans in its portfolio with maximum loan to value
ratios of 80% to 85%. Most of these loans are residential
construction loans for single- or multi-family dwelling units. All
of these loans automatically convert into permanent residential real
estate loans.
Multi-Family Residential Loans. At June 30, 1997, approximately
$1.1 million, or .81% of the Savings Bank's gross loan portfolio
consisted of nine loans secured by multi-family residential real
estate. 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 adjustable rate mortgages with the
principal amortized over 10 to 30 years. Loans secured by
multi-family real estate are 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.
See " -- Consumer and Commercial Business Loans."
At June 30, 1997, the Savings Bank's largest multi-family
residential loan was a $228,000 loan secured by five separate
properties with a total of 12 rental units in Harrison, Arkansas
and a 400 acre farm in Douglas County, Missouri. At June 30, 1997,
10
</page>
the Savings Bank had no multi-family residential loans that the
Savings Bank originated that were delinquent 60 days or more. See
"-- Non-Performing Assets and Delinquencies."
Land and Commercial Real Estate Loans. The Savings Bank had
land and commercial real estate loans outstanding of $17.7 million
at June 30, 1997. The commercial real estate loans originated by
the Savings Bank are primarily secured by commercial buildings.
Land loans on property located primarily in the Savings Bank's
primary market area amounted to $6.8 million or 4.97% of the total
loan portfolio at June 30, 1997. The Savings Bank's land loans
generally are secured by farm land and involve the risks associated
with general agricultural conditions.
The Savings Bank does not actively solicit or originate
commercial real estate loans. At June 30, 1997, the Savings Bank's
largest commercial real estate loan was a $445,000 loan secured by an
automobile dealership building located in its market area which was
performing according to its terms. Of primary concern in commercial
real estate lending is the borrower's creditworthiness and the
feasibility and cash flow potential of the property. 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.
Consumer and Commercial Business Loans. The Savings Bank's
consumer loans consist of car loans, appliance dealer loans, mobile
home loans, savings account loans, and various other consumer loans.
At June 30, 1997, the Savings Bank's consumer loans totaled
approximately $7.8 million, or 5.63% of the Savings Bank's total
loans. 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.
In May 1994, the Savings Bank purchased a pool of car loans
totaling $250,000 through a private placement. Principal and interest
payments are made on the loans monthly and paid to the Savings Bank.
At June 30, 1997, the balance of these loans, after write-offs of
$25,000, totaled $41,000. Based on information from the loan
servicer concerning delinquencies, repossessions and individual
balances written-off, the Savings Bank has established a reserve of
$21,000 at June 30, 1997 for the remaining loans.
The Savings Bank also purchases consumer loans from two local
appliance dealers. Such loans are made by the appliance dealers to
the dealer's customers. At June 30, 1997, such loans amounted to
$161,000. Reserves for losses maintained by the dealers at June 30,
1997 totaled $26,000. These loans are originated by the dealers and
are assigned, with recourse, to the Savings Bank. Payments are made
directly to the dealers by the borrower and any losses are borne by
the dealer rather than the Savings Bank. The Savings Bank obtains
and reviews regularly updated financial statements of the appliance
dealers and monitors the individual loans purchased.
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.
11
</page>
Consumer loans entail greater risk than do 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. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation.
The remaining deficiency often does not warrant further substantial
collection efforts against the borrower beyond obtaining a
deficiency judgment. 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. Such loans may also give rise to claims
and defenses by a consumer loan borrower against an assignee of such
loans such as the Savings Bank, and a borrower may be able to assert
against such assignee claims and defenses that it has against the
seller of the underlying collateral. Historically, the Savings Bank
has had a low level of delinquencies on its consumer loans. See
"-- Non-Performing Assets and Delinquencies." At June 30, 1997, only
$122,000 of the Savings Bank's consumer loan portfolio was 90 days or
more past due.
Other loans consist of commercial loans with no real estate as
security, business equipment loans, farm equipment loans and cattle
loans. As of June 30, 1997, 1996 and 1995, these loans totaled $2.2
million, $2.0 million and $2.1 million, respectively. Not only did
the dollar amount of other loans remain stable, the ratio of other
loans as a percent of total loans likewise remained relatively
constant during the three years ended June 30, 1997 at 1.57%, 1.65%
and 2.04%, respectively. These ratios are an indication that the
Savings Bank does not particularly emphasize loans of this type, but
may make such loans for well qualified customers. There have been no
losses from the "other loans" category in the past three fiscal years.
Second Mortgage Loans. The Savings Bank offers adjustable rate
second mortgage loans that are usually made on the security of the
borrower's residence. Loans normally do not exceed 80% to 85% of
the appraised value of the residence, less the outstanding principal
of the first mortgage, and have terms of up to 20 to 25 years
requiring monthly payments of principal and interest. At June 30,
1997, second mortgage loans amounted to $4.3 million, or 3.11% of
total loans of the Savings Bank.
12
</page>
Loan Maturity and Repricing
The following table sets forth certain information at June 30,
1997 regarding the dollar amount of loans maturing in the Savings
Bank's portfolio based on their contractual terms to maturity, but
does not include scheduled payments or potential prepayments. Demand
loans, loans having no stated schedule of repayments and no stated
maturity, are reported as due in one year or less. Mortgage loans
which have adjustable rates are shown as maturing at their next
repricing date. Loan balances do not include undisbursed loan
proceeds, unearned discounts, unearned income and allowance for loan
losses.
<TABLE>
<CAPTION>
After One Year After 3 Years After 5 Years
Within One Year Through 3 Years Through 5 Years Through 10 Years Beyond 10 Years Total
--------------- --------------- --------------- ---------------- --------------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgage......... $109,435 $ 45 $ 25 $ -- $ -- $109,505
Commercial real estate....... 11,242 -- -- -- -- 11,242
Land......................... 6,935 -- -- -- -- 6,935
Mobile home.................. 741 2 -- -- -- 743
Automobile................... 4,263 71 -- -- -- 4,334
Savings account loans........ 1,190 106 5 -- -- 1,301
Other consumer............... 1,177 196 -- -- -- 1,373
Commercial business.......... 2,113 49 -- -- -- 2,162
-------- ----- ------ ------- ------- ---------
Total loans............. $137,096 $ 469 $ 30 $ -- $ -- $137,595
======== ======= ====== ======== ======== ========
</TABLE>
The following table sets forth the dollar amount of all loans
due one year after June 30, 1997, all of which have fixed interest
rates.
<TABLE>
<CAPTION>
Fixed
Rates
-------
(In thousands)
<S> <C>
Real estate mortgage......... $ 70
Commercial real estate....... --
Land......................... --
Mobile home.................. 2
Automobile................... 71
Savings account loans........ 111
Other consumer............... 196
Commercial business.......... 49
------
Total $ 499
======
</TABLE>
13
</page>
The following table sets forth scheduled contractual
amortization of loans and mortgage-backed securities at June 30,
1997 and the dollar amount of such loans and mortgage-backed
securities at the date which are scheduled to mature after one
year which 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.
<TABLE>
<CAPTION>
At June 30, 1997
-----------------------------------------------------
Commercial Mortgage-
Mortgage Consumer Business Total Backed
Loans Loans Loans Loans Securities
-------- -------- ---------- ------ ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Amounts due:
Within one year........... $ 971 $2,886 $ 221 $ 4,078 $ --
After one year
through three years...... 4,852 2,378 1,362 8,592 --
After three years
through five years....... 1,987 1,669 214 3,870 --
After five years.......... 119,872 818 365 121,055 828
-------- ------ ------ -------- -----
Total................. $127,682 $7,751 $2,162 $137,595 $828
======== ====== ====== ======== ====
Interest rate terms
on amounts due after
one year:
Fixed................... $ 70 $ 380 $ 49 $ 499 $191
Adjustable.............. 126,641 4,485 1,892 133,018 637
------- ------ ------ -------- ----
Total................ $126,711 $4,865 $1,941 $133,517 $828
======== ====== ====== ======== ====
</TABLE>
Mortgage Loan Solicitation and Processing. The Savings Bank's
main source of loans is from referrals from current or prior
borrowers, limited walk-ins and contact and relationships with real
estate agents. Once a mortgage loan application is received, a
credit and property analysis is completed including obtaining a
credit report from local reporting agencies, verification of income
and deposits through mail or direct contact, asset and liability
verification as required and an evaluation of the property offered
as collateral. Real estate evaluations are completed by board
approved staff personnel. The application is then submitted for
underwriting by designated staff members and forwarded to a loan
officer for review and action along with the underwriter's
recommendations. Decisions are generally made within a week. Loans
in excess of $100,000 are approved by the Board of Directors and
loans less than that amount are approved by authorized officers or
a loan officer of the Savings Bank.
Loan Originations, Purchases and Sales. Loans are originated
to meet or exceed the applicable underwriting requirements of the
Savings Bank. The Savings Bank has never sold loans in the
secondary market.
The Savings Bank has occasionally purchased loans from
other financial institutions or three local appliance dealers,
as discussed above. See "-- Consumer and Commercial Business
Loans." The Savings Bank did not purchase any whole mortgage
loans during 1997.
14
</page>
The following table shows total mortgage loans originated, purchased,
sold and repaid during the periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------
1997 1996 1995
-------- -------- -------
(In thousands)
<S> <C> <C> <C>
Total mortgage loans at beginning of period......... $114,201 $ 96,968 $ 81,093
Loans originated:
One-to-four family residential..................... 33,414 32,452 25,817
Multi-family residential and commercial real estate 4,539 4,254 3,052
Land............................................... 2,622 3,528 1,646
-------- -------- --------
Total loans originated........................... 40,575 40,234 30,515
Loans purchased:
Single-family residential.......................... -- 358 --
Participation loans................................ -- -- 117
------- ------ -------
Total loans purchased............................ -- 358 117
Loans sold. ................................... -- -- --
Mortgage loan principal repayments.................. 26,870 23,359 14,711
-------- -------- --------
Other-loans charged off or
transferred to other real estate(1)................ 224 -- 46
-------- -------- -------
Total other activity............................. 224 -- 46
-------- -------- -------
Total gross mortgage loans at end of period......... $127,682 $114,201 $96,968
======== ======== =======
Total mortgage-backed certificates at beginning of
period............................................. $ 2,831 $ 3,134 $ 3,420
Mortgage-backed purchased........................... -- -- --
Mortgage-backed sold................................ (2,000) -- --
Principal repayments................................ (128) (265) (229)
Amortization of premiums............................ -- (3) (4)
Adjustment to market value.......................... 125 (35) (53)
-------- -------- -------
Total mortgage-backed at end of period.............. $ 828 $ 2,831 $ 3,134
======== ======== ========
</TABLE>
- -------------
(1) Loans transferred to other real estate amounted to $114,000,
$0 and $43,000 in 1997, 1996 and 1995, respectively. Loans charged
off amounted to $110,000, $0 and $3,000 in 1997, 1996 and 1995,
respectively.
15
</page>
Loan Commitments. The Savings Bank issues commitments for
adjustable rate one- to four-family residential mortgage loans that
are honored for up to a maximum of 30 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
approximately $567,000 at June 30, 1997. See Note 14 of the Notes
to the Consolidated Financial Statements.
Loan Origination and Other Fees. The Savings Bank does not
charge points on ARM mortgage loans. Instead, it quotes an interest
rate, or base rate, with no points and gives the borrower the option,
if desired, to pay a 1% fee, but obtain the loan at 1% below the
Savings Bank's base rate at the time the loan is issued. Subsequent
increases in the loan's interest rate are based upon the reduced rate
rather than the base rate. Construction borrowers can pay a 2% fee
and receive a 2% reduction in the initial rate. Current accounting
standards require fees received (net of certain loan origination
costs) for originating loans to be deferred and amortized into
interest income over the contractual life of the loan. Net
deferred fees associated with loans that are sold are recognized as
income at the time of sale. The Savings Bank had $107,000 net
deferred loan costs at June 30, 1997.
Non-Performing Assets and Delinquencies. When a mortgage loan
borrower fails to make a required payment by the end of the month in
which the payment is due, the Savings Bank generally institutes
collection procedures. The first notice is generally mailed to the
borrower, or a phone call made, within 10 days of the end of the
month, and 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, if that is not
possible, 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 institutes the same collection procedures
for non-mortgage loans.
The Board of Directors is informed on a monthly basis as to
the status of all mortgage and non-mortgage loans that are
delinquent 60 days or more, as well as the status on all loans
currently in foreclosure or 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 only
when the Savings Bank determines there is little, if any,
likelihood they will be repaid. The loans are fully reserved at
that time, through appropriate loss reserves and are kept on the
books as long as some principal is being repaid. The Savings Bank
has no reserves for uncollected interest and does not accrue interest
on the non-accrual loans. The Savings Bank would have recorded
interest income of $4,300, $4,300 and $4,100 on non-accrual loans
during the years ended June 30, 1997, 1996 and 1995, respectively,
if such loans had been performing during such periods. The Savings
Bank did not recognize interest income on loans after being placed
on a non-accrual basis during the years ended June 30, 1997, 1996
and 1995.
16
</page>
The following table sets forth information with respect to the
Savings Bank's non-performing assets at the dates indicated. At the
dates shown, the Savings Bank had no restructured loans within the
meaning of SFAS 15.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on
a nonaccrual basis:
Real estate:
Residential.................... $ -- $ -- $ -- $ -- $ 3
Commercial..................... -- -- -- -- --
Commercial business............. 48 121 40 40 11
Consumer........................ 9 9 11 12 44
------ ------ ------ ------ ----
Total....................... $ 57 $ 130 $ 51 $ 52 $ 58
====== ====== ====== ====== ====
Accruing loans which are contractually
past due 90 days or more:
Real estate:
Residential.................... $..461 $ 548 $ 295 $ 355 $ 292
Commercial..................... 152 4 106 26 17
Commercial business............. 12 29 44 23 87
Consumer........................ 122 108 93 161 86
------ ------ ------ ------ ----
Total...................... $ 747 $ 689 $ 538 $ 565 $ 482
====== ====== ====== ====== =====
Total of nonaccrual and
90 days past due loans......... $ 804 $ 819 $ 589 $ 617 $ 540
Real estate owned................. 114 -- 48 47 --
Other non-performing assets....... -- -- -- -- --
Slow home loans (60 to 90 days
delinquent)...................... 602 446 349 309 198
------ ------ ------ ----- ----
Total non-performing assets.... $1,520 $1,265 $ 986 $ 973 $ 738
====== ======= ====== ====== =====
Total loans delinquent 90 days
or more to net loans............ 0.56% 0.58% 0.53% 0.66% 0.65%
Total loans delinquent 90 days
or more to total consolidated
assets.......................... 0.46 0.48 0.42 0.48 0.57
Total non-performing assets
to total consolidated
assets.............................0.93......0.88.....0.77.....0.82.....0.78
</TABLE>
17
</page>
Asset Classification. The OTS has adopted various regulations
regarding problem assets of savings institutions. The regulations
require that each insured 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. Substandard assets 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 corrected. 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, 1997 and 1996 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:
<TABLE>
<CAPTION>
At June 30,
----------------------
1997 1996
------- ---------
(In thousands)
<S> <C> <C>
Loss........................... $ 82 $ 74
Doubtful....................... 75 49
Substandard assets............. 1,726 2,197
------- -------
Total classified assets...... $1,883 $2,320
====== ======
General loss allowances........ $ 209 $ 182
Specific loss allowances....... 273 338
------ ------
Total allowances $ 482 $ 520
====== ======
Charge-offs.................... $ 114 $ 1
====== ======
</TABLE>
The Savings Bank does not use a special mention category in
its loan classification process. Loans classified as substandard,
therefore, include all loans for which any perceived weakness occurs
even if no possibility has arisen that a loss will occur if the
weakness is not 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, a divorce
petition is filed, the pay record becomes erratic (i.e., miss one
monthly payment, but make a double payment the next month), a
borrower moves from the area, a major illness occurs, or a loan
becomes contractually delinquent by two monthly payments.
The Savings Bank's further policy is not to remove a loan
from a substandard classification, again, irrespective of pay
record or collateral value, until those perceived weaknesses are
cured. Because of this stringent classification policy, the June
30, 1997 substandard classification totals included $700,000 of
loans that were current in their payment obligations. As of
June 30, 1996, loans classified substandard included $900,000 of
current loans.
The following is a discussion of the Savings Bank's major
substandard loans at June 30, 1997:
The Savings Bank had two borrowers with major substandard loans
at June 30, 1997. One borrower obtained a loan in December of 1992
to purchase a turkey farm in southern Missouri. The balance of the
loan was $145,000 at June 30, 1997. The loan was 4 months delinquent
at June 30, 1997 due to the loss of a turkey crop. The borrower is
18
</page>
making additional payments to attempt to bring the loan current.
The second borrower obtained a residential construction loan in
March of 1996. At June 30, 1997, the balance of the loan was
$124,000. The loan is classified due to the fact the borrower
exceeded his initial loan amount and had to borrow additional
proceeds to complete the construction of the house. To date, all
principal and interest payments made by the borrower have been made
timely.
Real Estate Owned. Real estate acquired by the Savings Bank as
a result of foreclosure or by deed in lieu of foreclosure is
classified as real estate owned until it is sold. When property
is acquired, the unpaid principal balance of the related loan
plus foreclosure costs are compared to the property's appraised
value. The property is then directly written down to the lower of
cost or fair value. Subsequently, the property is carried at the
lower of cost or net realizable value with any adjustments made
through the establishment of a specific reserve. At June 30,
1997, there were two pieces of property held as real estate owned.
In July 1997, both properties were sold generating a combined $7,000
profit. At June 30, 1996, no property was held as real estate owned.
Reserve for Loan Losses
The Savings Bank's loan personnel, at least monthly, evaluate
the need to establish reserves for losses on loans based on
estimated losses on specific loans when a finding is made that a
decline in value has occurred. Such evaluation includes a review of
all loans for which full collectibility may not be reasonably assured
and considers, among other matters, the estimated market value of
the underlying collateral of problem loans, prior loss experience,
economic conditions and overall portfolio quality. These provisions
for losses are charged against earnings in the year they are
established. The Savings Bank had reserves for loan losses at
June 30, 1997, 1996 and 1995 of approximately $482,000, $520,000
and $442,000, respectively. Management believes that loan loss
reserves were adequate at June 30, 1997. However, if the underlying
facts and circumstances of the loan portfolio change in the future,
the adequacy of the allowance for loan losses will be addressed and,
if need be, adjusted accordingly.
While the Savings Bank believes it has established its existing
allowance for loan losses in accordance with GAAP, there can be no
assurance that regulators, in reviewing the Savings Bank's loan
portfolio, will not request the Savings Bank to significantly
increase its allowance for loan losses. Any material increase in
reserves may adversely affect the Savings Bank's financial condition
and earnings.
19
</page>
The following table sets forth an analysis of the Savings Bank's gross reserve
for possible loan losses for the periods indicated. Where specific loan loss
reserves have been established, any difference between the loss reserve and the
amount of loss realized has been charged or credited to current income.
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------------------
1997 1996 1995 1994 1993
------ ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period........... $520 $442 $479 $470 $443
Provision for loan losses.................. 71 79 (27) 23 41
Recoveries:
Residential real estate................... -- -- -- -- --
Commercial real estate.................... -- -- -- -- --
Consumer.................................. 5 -- 2 8 3
Commercial business....................... -- -- -- -- --
---- ----- ---- ----- ----
Total recoveries........................ 5 -- 2 8 3
---- ----- ---- ----- ----
Charge offs:
Residential real estate................... 8 -- 3 3 --
Commercial real estate.................... -- -- -- -- --
Consumer.................................. 31 1 9 8 9
Commercial business....................... 75 -- -- 11 8
----- ---- ---- ---- ----
Total charge offs....................... 114 1 12 22 17
----- ---- ---- ---- ----
Net charge offs......................... 109 1 10 14 14
----- ---- ---- ---- ----
Allowance at end of period............. $482 $520 $442 $479 $470
==== ==== ==== ==== ====
Ratio of allowance to total loans
outstanding at the end of the period...... 0.35% 0.42% 0.42% 0.54% 0.61%
Ratio of net charge offs to average loans
outstanding during the period............. 0.09% -- 0.01% 0.02% 0.02%
20
</page>
Allowance for Loan Losses by Category
</TABLE>
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------------------------------------
1997 1996 1995 1994
----------------------- ----------------------- --------------------- -----------------------
% % % %
% of Gross % of Gross % of Gross % of Gross
of Out- Loans in of Out- Loans in of Out- Loans in of Out- Loans in
standing Category standing Category standing Category standing Category
Loans in to Gross Loans in to Gross Loans in to Gross Loans in to Gross
Amount Category Loans Amount Category Loans Amount Category Loans Amount Category Loans
------ -------- ----- ------ -------- ----- ------- -------- ----- ------ -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate -- mortgage:
Residential........... $ 174 0.16% 76.82% $179 0.19% 77.44% $186 0.22% 79.12% $201 0.29% 79.86%
Commercial............ 60 0.55 7.90 61 0.67 7.42 58 0.82 6.75 53 0.96 6.24
Land.................. 15 0.22 4.97 9 0.16 4.69 7 0.16 4.08 5 0.14 3.93
Second mortgage loans. 9 0.21 3.11 8 0.21 3.02 4 0.15 2.60 3 0.17 2.06
Consumer................ 156 2.01 5.63 159 2.23 5.78 146 2.58 5.41 172 3.12 6.25
Commercial business..... 68 3.15 1.57 104 5.11 1.65 41 1.91 2.04 45 3.08 1.66
------ ------- ----- ------- ----- ------ ----- ------
Total allowance for
loan losses $ 482 0.35% 100.00% $520 0.42% 100.00% $442 0.42% 100.00% $479 0.54% 100.00%
====== ======= ===== ====== ===== ======= ===== =======
</TABLE>
<TABLE>
<CAPTION>
At June 30,
1993
------------------------
%
% of Gross
of Out- Loans in
standing Category
Loans in To Gross
Amount Category Loans
------ -------- -------
<S> <C> <C> <C>
Real estate--mortgage:
Residential...... $ 199 0.32% 80.21%
Commercial....... 49 1.12 5.67
Land 4 0.14 3.60
Second mortgage loans 3 0.17 2.26
Consumer 171 3.42 6.49
Commercial business 44 3.24 1.77
----- ------
Total allowance for
loan losses $ 470 0.61% 100.00%
====== =======
</TABLE>
21
</page>
Investment Activities
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 investments
in relation to return on loans.
The Savings Bank is required under federal regulations to
maintain a minimum amount of liquid assets and is also permitted
to make certain other securities investments. See "REGULATION OF
FIRST HOME" herein and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and
Capital Resources" in the Annual Report. The balance of the Savings
Bank's investments in short-term securities in excess of regulatory
requirements reflects management's response to the significant
percentage of deposits with short maturities. At June 30, 1997,
the Savings Bank's regulatory liquidity was 15.8% which is
significantly in excess of the required 5%. It is the intention of
management to hold securities with short maturities in the Savings
Bank's investment portfolio in order to enable the Savings Bank to
match more closely the interest-rate sensitivities of its assets and
liabilities.
At June 30, 1997, the Savings Bank's investment portfolio
included a domestic corporate bond of Sears, Roebuck & Company.
At June 30, 1997, this bond had a maturity date of August 1997 and an
interest rate of 9.25%. Management of the Savings Bank presently
does not have any plans to purchase additional corporate bonds.
The Savings Bank purchased one pool of car loans through a
private placement in fiscal 1992 totaling $250,000. Principal and
interest payments are made on the loans monthly and paid to the
Savings Bank. The loans have a five year stated maturity.
In October 1993, the Savings Bank was advised by the trustee that an
audit of these loans disclosed evidence of possible fraudulent
activity in connection with the borrowers' payments. On July 10,
1995, the pool of loans was downgraded from B to CCC. Monthly
principal and interest payments are currently being received.
Based on information it received, the Savings Bank wrote down this
investment by $66,000 to its estimated net realizable value because,
in the opinion of management, the decline in market value was
considered to be other than temporary. At June 30, 1997, the
estimated net realizable value of this investment was $44,000.
Routine short-term investment decisions are made by the
President and Chief Executive Officer, who acts within policies
established by the Board of Directors, and are reported monthly to
the Board. Those investments include federally insured certificates
of deposit, FHLB term time obligations, bankers acceptances, treasury
obligations and U.S. Government agencies. All other investments
including, but not limited to, mortgage-backed securities, bank
qualifying municipal tax exempt bonds, corporate bonds or other
longer term obligations require prior Board approval. Securities
are purchased for investment purposes and are to be held until
maturity. The goals of the Savings Bank's investment policy are to
select investments 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, 1997, the Company's and the Savings Bank's
securities investment portfolio totaled $17.0 million and consisted
primarily of federal agency obligations securities, mutual funds,
corporate bonds, and municipal bonds. For further information
concerning the Savings Bank's investment and mortgage-backed
securities portfolio, see Notes 2, 3 and 4 of the Notes to the
Consolidated Financial Statements.
22
</page>
Investment Securities Analysis
The following table sets forth the Company's and the Savings
Bank's investment securities portfolio at carrying value at the
dates indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------
1997 1996 1995
----------------- ----------------- -------------------
Book Percent of Book Percent of Book Percent of
Value(1) Portfolio Value(1) Portfolio Value(1) Portfolio
------- --------- -------- --------- ------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Debt securities:
Domestic corporate bonds.........$ 150 0.88% $ 155 1.23% $ 159 1.24%
U.S. government treasury and
obligations of U.S.
government agencies............ 13,127 76.78 8,009 63.56 8,699 67.82
Auto and student loan pools...... 112 0.65 158 1.25 251 1.95
State and political subdivision.. 1,492 8.73 2,075 16.47 1,779 13.87
-------- ------ ------- ------- ------- ------
Total debt securities.......... 14,881 87.04 10,397 82.51 10,888 84.88
-------- ----- ------ ----- ------ -----
Equity securities:
Federal Home Loan Bank
stock.......................... 1,264 7.39 890 7.06 784 6.11
Other............................ 951 5.57 1,314 10.43 1,155 9.01
------- ----- ------- ------ ------- ----
Total equity securities........ 2,215 12.96 2,204 17.49 1,939 15.12
------- ------ ------- ------ ------- -----
Total investment securities $17,096 100.00% $12,601 100.00% $12,827 100.00%
======= ======= ======= ======= ======= =======
</TABLE>
(1) The market value of the Company's and the Savings Bank's
investment securities portfolio amounted to $17.12 million,
$12.62 million and $12.84 million at June 30, 1997, 1996 and
1995, respectively. At June 30, 1997, the market value of the
principal components of the Company's and the Savings Bank's
investment securities portfolio which were obligations of U.S.
Government securities was $13.13 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, 1997.
<TABLE>
<CAPTION>
Less Than One to Five to Over Ten
One Year Five Years Ten Years Years
-------------- -------------- -------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield
------- ----- ------- ----- ------- ----- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic corporate bonds.......... $ 150 9.25% $ -- --% $ -- --% $ -- --%
U.S. government treasury and
obligations of U.S.
government agencies............. 6,331 6.02 6,796 6.29 -- -- -- --
Auto and student loan pools....... 44 7.00 68 19.13 -- -- -- --
State and political subdivisions.. 485 5.32 947 5.58 60 5.66 -- --
------ ----- ----- -----
Total.......................... $7,010 6.05 $7,811 6.32 $60 5.66 $ -- --
----- ----- ----- ------
</TABLE>
23
</page>
At June 30, 1997, the Savings Bank held the following
security which had an aggregate book value in excess of 10% of the
Company's stockholders' equity:
Carrying Value Fair Value
--------------- ----------
Federal Farm Credit Bank bond $4,998 $5,025
Mortgage-Backed Securities. To supplement lending activities
in previous periods of deposit growth and/or declining loan demand,
the Savings Bank has invested in residential mortgage-backed
securities. Because of strong local loan demand, however, no
mortgage-backed securities have been purchased in the past five
years. 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 4 of the Notes to Consolidated Financial
Statements. The Savings Bank has invested in federal agency
securities issued by Federal Home Loan Mortgage Corporation
("FHLMC"), Federal National Mortgage Association ("FNMA") and
Government National Mortgage Association ("GNMA"). As of
June 30, 1997, 78% of the outstanding balance of the mortgage-
backed securities had adjustable rates of interest.
As of June 30, 1997, the Savings Bank's portfolio included
$800,000 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, single-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 a 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.
The Savings Bank has incorporated into its investment
policy the regulatory requirements set forth in the OTS TB 52,
which deals with the selection of securities dealers, securities
policies, unsuitable investment practices and 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
weekly, and adjusts it as necessitated by liquidity needs, the gap
position and competition. Management believes deposits have remained
relatively stable to increasing slightly, net of interest credited,
despite withdrawals as depositors sought increased yields on
alternative investments in the marketplace.
24
</page>
The following table sets forth information concerning the
Savings Bank's time deposits and other interest-bearing deposits
at June 30, 1997.
<TABLE>
<CAPTION>
Weighted
Average Percentage
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
- -------- -------- ------------- --------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
0.00% None Non-interest bearing $ -- $ 3,271 2.78%
2.18% None NOW accounts 25 7,972 6.78
3.78% None Super Saver accounts 1 14,878 12.64
2.74% None Super NOW accounts 300 6,432 5.47
3.00% None Savings accounts -- 5,588 4.75
Certificates of Deposit
-----------------------
5.00% 3 months Fixed term, fixed rate 500 1,799 1.53
5.10% 6 months Fixed term, fixed rate 500 13,915 11.82
5.45% 12 months Fixed term, fixed rate 500 16,030 13.62
5.60% 18 months Fixed term, fixed rate 500 2,535 2.15
5.75% 24 months Fixed term, fixed rate 500 5,287 4.49
5.85% 30 months Fixed term, fixed rate 500 1,939 1.65
5.90% 36 months Fixed term, fixed rate 500 2,819 2.40
6.00% 48 months Fixed term, fixed rate 500 1,132 0.96
6.10% 60 months Fixed term, fixed rate 500 7,167 6.09
8.00% 96 months Fixed term, fixed rate 500 29 0.02
various various Fixed term, adjust rate 500 12,921 10.98
various various Jumbo certificates 100,000 13,971 11.87
-------- -------
TOTAL $117,685 100.00%
</TABLE>
The following table indicates the amount of the Savings Bank's
jumbo certificates of deposit by time remaining until maturity as of
June 30, 1997. Jumbo certificates of deposit require minimum
deposits of $100,000 and rates paid on such accounts are negotiable.
<TABLE>
<CAPTION>
Jumbo
Certificates
Maturity Period of Deposits
- --------------- -------------
(In thousands)
<S> <C>
Three months or less $3,081
Three through six months 2,032
Six through twelve months 4,336
Over twelve months 4,522
-------
Total $13,971
=======
</TABLE>
25
</page>
Time Deposits by Rates
The following table sets forth the time deposits in the Savings
Bank classified by rates as of the dates indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------
1997 1996 1995
--------- ------------ ----------
(In thousands)
<S> <C> <C> <C>
3.00 - 4.49%.......... $ -- $ 240 $ 2,093
4.50 - 5.49%.......... 27,382 34,324 16,041
5.50 - 6.49%............41,547 25,510 36,862
6.50 - 7.49%.......... 10,377 10,261 11,321
Over 7.49%.......... 238 739 1,507
------- -------- -------
Total................. $79,544 $71,074 $67,824
======= ======= =======
</TABLE>
The following table sets forth the amount and maturities of time
deposits at June 30, 1997.
<TABLE>
<CAPTION>
Amount Due
--------------------------------------------------
Percent
of Total
Less Than 1-2 2-3 3-4 After Certificate
One Year Years Years Years 4 Years Total Accounts
--------- ------- -------- -------- -------- -------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
4.50 - 5.49%............. $25,049 $ 1,698 $ 510 $ 125 $ -- $27,382 34.42%
5.50 - 6.49%............. 24,967 9,464 3,281 3,105 730 41,547 52.23
6.50 - 7.49%............. 1,108 4,767 3,580 15 907 10,377 13.05
Over 7.49%............... -- 29 209 -- -- 238 0.30
------- -------- -------- ------- ------ ------- ------
Total.................... $51,124 $15,958 $7,580 $3,245 $1,637 $79,544 100.00%
======= ======= ====== ====== ======= ======= =======
</TABLE>
26
</page>
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.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ----------------------------- -----------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
-------- ------- --------- --------- ------ --------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing............... $ 3,271 2.78% $ 781 $ 2,490 2.35% $ 1,764 $ 726 0.74%
NOW checking....................... 7,972 6.78 2,575 5,397 5.09 4,388 1,009 1.03
Regular savings accounts........... 5,588 4.75 (193) 5,781 5.46 877 4,904 4.98
Super Saver accounts............... 14,878 12.64 702 14,176 13.38 (160) 14,336 14.57
Super NOW accounts................. 6,432 5.47 (610) 7,042 6.65 (2,548) 9,590 9.75
Fixed-rate certificates which
mature (1):
Within 1 year.................... 46,054 39.13 3,122 42,932 40.52 4,070 38,862 39.50
After 1 year, but within 2 years. 10,348 8.79 4,387 5,961 5.62 (238) 6,199 6.30
After 2 years, but within 5 years 8,417 7.15 (78) 8,495 8.02 (1,143) 9,638 9.79
Thereafter....................... 47 0.04 47 -- -- (12) 12 0.01
Adjustable rate certificates...... 14,678 12.47 992 13,686 12.91 573 13,113 13.33
-------- ------ ------ -------- ----- -------- -------- -------
Total certificates................. 79,544 67.58 8,470 71,074 67.07 3,250 67,824 68.93
-------- ------ ------ -------- ----- -------- -------- ------
Total......................... $117,685 100.00% $11,725 $105,960 100.00% $7,571 $98,389 100.00%
======== ======= ======== ======== ======= ======== ======== =======
</TABLE>
________________
(1) At June 30, 1997, 1996 and 1995, jumbo certificates of deposit
amounted to $14.0 million, $11.8 million and $10.3 million,
respectively, and IRAs equaled $14.1 million, $12.6 million and $11.8
million at those dates, respectively.
27
</page>
The following table sets forth the savings activities of the
Savings Bank for the periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------
1997 1996 1995
--------- -------- --------
(In thousands)
<S> <C> <C> <C>
Beginning balance............ $105,960 $ 98,389 $ 85,904
-------- -------- --------
Net increase before
interest credited........... 7,415 3,590 8,948
Interest credited............ 4,310 3,981 3,537
-------- -------- --------
Net increase in
savings deposits............ 11,725 7,571 12,485
-------- -------- --------
Ending balance............... $117,685 $105,960 $98,389
======== ======== =======
</TABLE>
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 stockholders of the Savings Bank.
Substantially all of the Savings Bank's depositors are residents of
the State of Missouri.
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 may rely upon advances
from the FHLB-Des Moines to supplement its supply of lendable funds
and to meet deposit withdrawal requirements. 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
recent strong loan demand and limited deposit growth. The Savings
Bank also has available a $5.0 million open line of credit with the
FHLB. At June 30, 1997, no funds were drawn.
The following tables set forth certain information concerning
the Savings Bank's borrowings at the dates and for the periods
indicated.
<TABLE>
<CAPTION>
At June 30,
-----------------
1997 1996
----- ------
<S> <C> <C>
Weighted average rate paid on
FHLB advances........................ 5.84% 5.80%
Years Ended June 30,
--------------------
1997 1996
-------- ------
(Dollars in thousands)
Maximum amounts of FHLB advances
outstanding at any month end........... $23,500 $13,500
Approximate average FHLB advances
outstanding............................ 18,956 10,349
Approximate weighted average rate paid
on FHLB advances....................... 5.87% 5.94%
</TABLE>
28
</page>
The FHLB-Des Moines functions as a central reserve bank
providing credit for savings and loan associations and certain
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.
Subsidiary Activities
Fybar Service Corporation ("Fybar") is a Missouri corporation
wholly owned by the Savings Bank. Fybar owns three rental
properties. One is an office building in Mountain Grove, Missouri
called "The Shannon Centre" which is adjacent to the Savings Bank's
drive-in and is currently approximately 90% occupied. The second
property is in Ava, Missouri and consists of an older home which
has been remodeled into apartments and a duplex. That rental
property is 100% occupied. The third is a duplex in Ozark, Missouri
which is 100% occupied.
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 and operates Lawson & Lawson Insurance Agency.
Fybar acquired Lawson & Lawson in December 1991. Lawson &
Lawson is a general insurance agency with its business transacted off
site in a building currently rented from Fybar. In August 1997,
the assets relating to Lawson & Lawson were sold for $90,000,
generating a $51,000 pre-tax profit. At June 30, 1997, the Savings
Bank had an investment in Fybar of $289,000.
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
29
</page>
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 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
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. When these examinations are conducted by the OTS or the
FDIC, the examiners may require the Savings Bank to provide for
higher general or specific loan loss reserves. Financial
institutions in various regions of the United States have been
called upon by examiners to write down assets and to establish
increased levels of reserves, primarily as a result of perceived
weaknesses in real estate values and a more restrictive regulatory
climate.
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
computed upon the savings association's total assets, including
consolidated subsidiaries, as reported in the association's latest
quarterly thrift financial report. Savings associations that
(unlike the Savings Bank) are classified as "troubled" (i.e.,
having a supervisory rating of "4" or "5" or subject to a
conservatorship) are required to pay a 50% premium over the
standard assessment. For the first half of 1997, the Savings
Bank's assessment under the semi-annual assessment procedure was
$23,000. Based on the current assessment rates published by the
OTS and First Home's total assets of approximately $162.3 million
at June 30, 1997, First Home will be required to pay a semi-annual
assessment of approximately $24,000 for the second half of calendar
year 1997.
In addition, the investment and lending authority of the Savings
Bank is prescribed by federal laws and regulations, and the Savings
Bank is prohibited from engaging in any activities not permitted by
such laws and regulations. These laws and regulations generally are
applicable to all federally chartered savings associations and many
also apply to state-chartered savings associations.
30
</page>
Among other things, OTS regulations provide that no savings
association may invest in corporate debt securities not rated in
one of the four highest rating categories by a nationally recognized
rating organization. In addition, the HOLA provides that loans
secured by nonresidential real property may not exceed 400% of
regulatory capital, subject to increase by the OTS on a case-by-case
basis.
First Home is subject to limitations on the aggregate amount of
loans that it can make to any one borrower, including related
entities. Applicable regulations generally do not permit loans-to-
one borrower to exceed 15% of unimpaired capital and surplus,
provided that loans in an amount equal to an additional 10% of
unimpaired capital and surplus also may be made to a borrower if
the loans are fully secured by readily marketable securities. The
OTS by regulation has amended the loans-to-one borrower rule to
permit savings associations meeting certain requirements, including
fully phased-in 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, 1997, First Home was in compliance with
applicable loans-to-one borrower limitations.
Potential Operational Restrictions Associated with Regulatory Oversight
The Savings Bank is subject to extensive regulation, supervision
and examination by the OTS, as its chartering authority and primary
federal regulator, and by the FDIC, which insures its deposits up to
applicable limits. The Savings Bank is a member for the FHLB System
and is subject to certain limited regulations promulgated by the
Board of Governors of the Federal Reserve System ("Federal Reserve").
As the holding company of the Savings Bank, the Company also is
subject to regulation and oversight by the OTS. Such regulation and
supervision govern the activities in which an institution can engage
and is intended primarily for the protection of the insurance fund
and depositors. Regulatory authorities have been granted extensive
discretion in connection with their supervisory and enforcement
activities which are intended to strengthen the financial condition
of the banking industry, including the imposition of restrictions on
the operation of an institution, the classification of assets by the
institution and the adequacy of an institution's allowance for loan
losses. Any change in such regulation and oversight, whether by the
OTS, the FDIC or Congress, could have a material impact on the
Company, the Savings Bank and their respective operations.
Legislation proposing a comprehensive reform of the banking and
thrift industries has recently been discussed in the United States
Congress. Under such legislation, (I) the BIF and SAIF would be
merged, at which time thrifts and banks would pay the same deposit
insurance premiums, (ii) federal savings associations would be
required to convert to a national bank or state-chartered bank or
thrift, (iii) all savings and loan holding companies would become
bank holding companies and (iv) the OTS would be merged with the
Office of the Comptroller of the Currency. It is uncertain when or
if such legislation may be passed and, if passed, in what form such
legislation may be passed.
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. The OTS
generally possesses the supervisory and regulatory duties and
responsibilities formerly vested in the Federal Home Loan Bank Board.
Among other functions, the OTS issues and enforces regulations
affecting federally-insured savings associations and regularly
examines these institutions.
Federal Deposit Insurance Corporation
The FDIC is an independent federal agency established originally
to insure the deposits, up to prescribed statutory limits, of
federally insured banks and to preserve the safety and soundness of
the banking industry. The FDIC maintains two separate insurance
funds: the BIF and the SAIF. As insurer of deposits, the FDIC has
examination, supervisory and enforcement authority over all savings
associations.
31
</page>
The Savings Bank's accounts are insured by the FDIC under the
SAIF to the maximum extent permitted by law. The Savings Bank
currently pays deposit insurance premiums to the FDIC based on a
risk-based assessment system established by the FDIC for all SAIF-
member institutions. Under applicable regulations, institutions are
assigned to one of three capital groups that are based solely on the
level of an institution's capital -- "well capitalized," "adequately
capitalized," or "undercapitalized"-- which are defined in the same
manner as the regulations establishing the prompt corrective action
system under the FDIA, as discussed below. The Savings Bank's
assessments expensed for the year ended June 30, 1997, totaled
$142,000 and $640,000 in a special assessment.
Pursuant to the Deposit Insurance Funds Act ("DIF Act"), which
was enacted on September 30, 1996, the FDIC imposed a special
assessment on each depository institution with SAIF-assessable
deposits which resulted in the SAIF achieving its designated
reserve ratio. In connection therewith, the FDIC reduced the
assessment schedule for SAIF members, effective January 1, 1997, to
a range of 0% to 0.27%, with most institutions, including the
Savings Bank, paying 0%. This assessment schedule is the same as
that for the BIF, which reached its designated reserve ratio in 1995.
In addition, since January 1, 1997, SAIF members are charged an
assessment of 0.065% of SAIF-assessable deposits for the purpose of
paying interest on the obligations issued by the Financing
Corporation ("FICO") in the 1980s to help fund the thrift industry
cleanup. BIF-assessable deposits will be charged an assessment to
help pay interest on the FICO bonds at a rate of approximately .013%
until the earlier of December 31, 1999 or the date upon which the
last savings association ceases to exist, after which time the
assessment will be the same for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF
into the Deposit Insurance Fund on January 1, 1999, but only if no
insured depository institution is a savings association on that date.
The DIF Act contemplates the development of a common charter for all
federally chartered depository institutions and the abolition of
separate charters for national banks and federal savings
associations. It is not known what form the common charter may take
and what effect, if any, the adoption of a new charter would have on
the operation of the Savings Bank.
The FDIC may terminate the deposit insurance of any insured
depository institution if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound
practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, order
or any condition imposed by an agreement with the FDIC. It also
may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the
institution has no tangible capital. If insurance of accounts is
terminated, the accounts at the institution at the time of
termination, less subsequent withdrawals, shall continue to be
insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances that
could result in termination of the deposit insurance of the Savings
Bank.
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 $1.3 million at June 30, 1997.
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
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Directors of the FHLB-Des Moines. At June 30, 1997, the Savings
Bank had $23.5 million of advances from the FHLB-Des Moines.
Under OTS regulations, a member thrift institution is required
to maintain an average daily balance of liquid assets (cash, certain
time deposits and savings accounts, bankers' acceptances, and
specified U.S. government, state or federal agency obligations and
certain other investments) equal to a monthly average of not less
than a specified percentage of its net withdrawable accounts plus
short-term borrowings. This liquidity requirement, which is
currently 5.0% may be changed from time to time by the OTS
depending upon economic conditions and the deposit flows of
member associations. Existing OTS regulations also require each
member institution to maintain an average daily balance of
short-term liquid assets at a specified percentage (currently 1.0%)
of the total of its net withdrawable savings accounts and borrowings
payable in one year or less. Monetary penalties may be imposed for
failure to meet liquidity requirements. The short- and long-term
liquidity ratios of First Home at June 30, 1997 were 14.7% and 15.8%,
respectively.
Prompt Corrective Action
Each federal banking agency is required to implement a system
of prompt corrective action for institutions which it regulates.
The federal banking agencies have promulgated substantially similar
regulations to implement this system of prompt corrective action.
Under the regulations, an institution shall be deemed to be (i)
"well capitalized" if it has a total risk-based capital ratio of
10.0% or more, has a Tier I risk-based capital ratio of 6.0% or
more, has a leverage capital ratio of 5.0% or more and is not
subject to specified requirements to meet and maintain as specific
capital level for any capital measure: (ii) "adequately capitalized"
if it has a total risk-based capital ratio of 8.0% or more, a Tier I
risk-based capital ratio of 4.0% or more and a leverage capital
ratio of 4.0% or more (3.0% under certain circumstances) and does
not meet the definition of "well capitalized," (iii)
"undercapitalized" if it has a total risk-based capital ratio that
is less than 8.0%, a Tier I risk-based capital ratio that is less
than 4.0% or a leverage capital ratio that is less than 4.0% (3.0%
under certain circumstances), (iv) "significantly undercapitalized"
if it has a total risk-based capital ratio that is less than 6.0%, a
Tier I risk-based capital ratio that is less than 3.0% or a Tier I
leverage capital ratio that is less than 3.0% and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total
assets that is equal to or less than 2.0%
A federal banking agency may, after notice and an opportunity
for a hearing, reclassify a well capitalized institution as
adequately capitalized an may require an adequately capitalized
institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category if the
institution is in an unsafe or unsound condition or engaging in an
unsafe or unsound practice. (The FDIC may not, however, reclassify
a significantly undercapitalized institution as critically
undercapitalized.)
An institution generally must file a written capital
restoration plan which meets specified requirement, as well as a
performance guaranty by each company that controls the institution,
with the appropriate federal banking agency within 45 days of the
date that the institution receives notice or is deemed to have notice
that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to the
provisions of Section 38 of the FDIA, which sets forth various
mandatory and discretionary restrictions on its operations.
At June 30, 1997, First Home was a "well capitalized"
institution under the prompt corrective action regulations of the
OTS.
Standards for Safety and Soundness. Federal law requires the
federal banking regulatory agencies to prescribe, by regulation or
guideline, standards for all insured depository institutions and
depository institution holding companies 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; and (vi) compensation, fees and
benefits. The federal banking agencies have adopted final
regulations and Interagency Guidelines Prescribing Standards for
Safety and Soundness ("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. Any institution which
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fails to comply with these standards must submit a compliance plan.
A failure to submit a compliance plan or to comply with an approved
compliance plan will result in further enforcement action against the
institution. Savings and loan holding companies are also required to
ensure that transactions and relationship with their subsidiary
savings associations do not have a detrimental effect on the safe
and sound operation of the association.
Qualified Thrift Lender Test
All savings associations are required to meet a QTL test to
avoid certain restrictions on their operations. A savings
institution that fails to become or remain a QTL shall either
become a national bank or be subject to the following restrictions
on its operations: (1) the association may not make any new
investment or engaging in activities that would not be permissible
for national banks; (2) the association may not establish any new
branch office where a national bank located in the savings
institution's home state would not be able to establish a branch
office; (3) the association hall not be eligible to obtain new
advances from any FHLB; and (4) the payment of dividends by the
association shall be subject to the rules regarding the statutory
and regulatory dividend restrictions applicable to national banks.
Also, beginning three years after the date on which the savings
institution ceases to be a qualified thrift lender, the savings
institution would be prohibited from retaining any investment or
engaging in any activity not permissible for a national bank and
would be required to repay any outstanding advances to any FHLB.
In addition, within one year of the date on which a savings
association controlled by a company ceases to be a QTL, the company
must register as a bank holding company and becomes subject to the
rules applicable to such companies. A savings institution may
requalify as a qualified thrift lender if it thereafter complies
with the QTL test.
Currently, the QTL test requires that 65% of an institution's
"portfolio assets" (as defined) consist of certain housing and
consumer-related assets on a monthly average basis in nine out of
every 12 months. Assets that qualify without limit for inclusion as
part of the 65% requirement are loans made to purchase, refinance,
construct, improve or repair domestic residential housing and
manufactured housing; home equity loans; mortgage-backed securities
(where the mortgages are secured by domestic residential housing or
manufactured housing);FHLB stock; and direct or indirect obligations
of the FDIC; and loans for educational purposes, loans to small
businesses and loans made through credit cards. In addition, the
following assets, among others, may be included in meeting the test
subject to an overall limit of 20% of the savings institution's
portfolio assets: 50% of residential mortgage loans originated and
sold within 90 days of origination; 100% of consumer loans; and stock
issued by the FHLMC or the FNMA. Portfolio assets consist of total
assets minus the sum of (i) goodwill and other intangible assets,
(ii) property used by the savings institution to conduct its
business, and (iii) liquid assets up to 20% of the institutions
total assets. At June 30, 1997, the qualified thrift investments
of First Home were approximately 80.27% of its portfolio assets.
Capital Requirements
Under OTS regulations a savings association must satisfy three
minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the
standards in order to comply with the capital requirements.
OTS capital regulations establish a 3% core capital ratio
(defined as the ratio of core capital to adjusted total assets).
Core capital is defined to include common stockholders' equity,
noncumulative perpetual preferred stock and any related surplus, and
minority interests in equity accounts of consolidated subsidiaries,
less (i) any intangible assets, except for certain qualifying
intangible assets; (ii) certain mortgage servicing rights; and
(iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged
solely in activities not impermissible for a national bank, engaged
in activities impermissible for a national bank but only as an agent
for its customers, or engaged solely in mortgage-banking activities.
In calculating adjusted total assets, adjustments are made to total
assets to give effect to the exclusion of certain assets from capital
and to appropriately account for the investments in and assets of
both includable and nonincludable subsidiaries. Institutions that
fail to meet the core capital requirement would be required to file
with the OTS a capital plan that details the steps they will take to
reach compliance. In addition, the OTS prompt corrective action
regulation provides that a savings institution that has a core
capital leverage ratio of less than 4% (3% for institutions
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receiving the highest CAMEL examination rating) will be deemed
to be "undercapitalized" and may be subject to certain restrictions.
See "-- Prompt Corrective Action."
Savings associations also must maintain "tangible capital" not
less than 1.5% of the Savings Bank's adjusted total assets. "Tangible
capital" is defined, generally, as core capital minus any "intangible
assets."
Each savings institution must maintain total capital equal to
at least 8% of risk-weighted assets. Total capital consists of the
sum of core and supplementary capital, provided that supplementary
capital cannot exceed core capital, as previously defined.
Supplementary capital includes (i) permanent capital instruments
such as cumulative perpetual preferred stock, perpetual
subordinated debt, and mandatory convertible subordinated debt,
(ii) maturing capital instruments such as subordinated debt,
intermediate-term preferred stock and mandatory redeemable
preferred stock, subject to an amortization schedule, and
(iii) general valuation loan and lease loss allowances up to 1.25%
of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet
asset held by a savings institution to one of four risk categories
based on the amount of credit risk associated with that particular
class of assets. Assets not included for purposes of calculating
capital are not included in calculating risk-weighted assets. The
categories range from 0% for cash and securities that are backed by
the full faith and credit of the U.S. government to 100% for
repossessed assets or assets more than 90 days past due. Qualifying
residential mortgage loans (including multi-family mortgage loans)
are assigned a 50% risk weight. Consumer, commercial, home equity
and residential construction loans are assigned a 100% risk weight,
as are nonqualifying residential mortgage loans and that portion of
land loans and nonresidential construction loans which do not exceed
an 80% loan-to-value ratio. The book value of assets in each
category is multiplied by the weighing factor (from 0% to 100%
assigned to that category. These products are then totaled to arrive
at total risk-weighted assets. Off-balance sheet items are included
in risk-weighted assets by converting them to an approximate balance
sheet "credit equivalent amount" based on a conversion schedule.
These credit equivalent amounts are then assigned to risk categories
in the same manner as balance sheet assets and included risk-weighted
assets.
The OTS has incorporated an interest rate risk component into
its regulatory capital rule. Under the rule, savings associations
with an "above normal" interest rate risk exposure would be subject
to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's interest
rate risk is measured by the decline in the net portfolio value of
its assets (i.e., the difference between incoming and outgoing
discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point
increase or decrease in market interest rates divided by the
estimated economic value of the association's assets, as calculated
in accordance with guidelines set forth by the OTS. A savings
association whose measured interest rate risk exposure exceeds 2%
must deduct an interest rate risk component in calculating its total
capital under the risk-based capital rule. The interest rate risk
component is an amount equal to one-half of the difference between
the institution's measured interest rate risk and 2%, multiplied by
the economic value of the associations assets. That dollar amount
is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule,
there is a two quarter lag between the reporting date of an
institution's financial data and the effective date for the new
capital requirement based on that data. A savings association with
assets of less than $300 million and risk-based capital ratios in
excess of 12% is not subject to the interest rate risk component,
unless the OTS determines otherwise. The rule also provides that
the Director of the OTS may waive or defer an association's
interest rate risk component on a case-by-case basis. Under
certain circumstances, a savings association may request an
adjustment to its interest rate risk component if it believes that
the OTS-calculated interest rate risk component overstates its
interest rate risk exposure. In addition, certain "well-capitalized"
institutions may obtain authorization to use their own interest rate
risk model to calculate their interest rate risk component in lieu of
the OTS-calculated amount. The OTS has recently postponed the date
that the component will first be deducted from an institution's
total capital until an appeals process is developed for the
measurement of an institution's interest rate risk.
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The following table presents the Savings Bank's capital levels
as of June 30, 1997.
<TABLE>
<CAPTION>
At June 30, 1997
-------------------
Percent of
Amount Assets
-------- ---------
(Dollars in thousands)
<S> <C> <C>
Tangible capital............. $18,927 11.7%
Minimum required
tangible capital............ 2,424 1.5
------- ------
Excess....................... $16,503 10.2%
======= ======
Core capital................. $18,927 11.7%
Minimum required core
capital..................... 4,849 3.0%
------- -----
Excess....................... $14,078 8.7%
======= =====
Risk-based capital........... $19,101 18.2%
Minimum risk-based
capital requirement......... 8,380 8.0
------- -----
Excess....................... $10,721 10.2%
======= =====
</TABLE>
Dividend Limitations
OTS regulations impose uniform limitations on the ability of
all savings associations to engage in various distributions of
capital such as dividends, stock repurchases and cash-out mergers.
In addition, OTS regulations require the Savings Bank to give the
OTS 30 days' advance notice of any proposed declaration of dividends
to the Company, and the OTS has the authority under its supervisory
powers to prohibit the payment of dividends to the Company. In
addition, the Savings Bank may not declare or pay a cash dividend
on its capital stock if the effect thereof would be to reduce the
regulatory capital of the Savings Bank below the amount required
for the liquidation account established in connection with the
mutual to stock conversion. The regulation utilizes a three-tiered
approach which permits various levels of distributions based
primarily upon a savings association's capital level.
A Tier 1 savings association generally has capital in excess of
its fully phased-in capital requirement (both before and after the
proposed capital distribution). A Tier 1 savings association may
make (without application but upon prior notice to, and no objection
made by, the OTS) capital distributions during a calendar year up to
100% of its net income to date during the calendar year plus one-
half its surplus capital ratio (i.e., the amount of capital in excess
of its fully phased-in requirement) at the beginning of the calendar
year or the amount authorized for a Tier 2 association. Capital
distributions in excess of such amount require advance approval from
the OTS. A Tier 2 savings association has capital equal to or in
excess of its minimum capital requirement but below its fully
phased-in capital requirement (both before and after the proposed
capital distribution). Such an association may make (without
application) capital distributions up to an amount equal to 75% of
its net income during the previous four quarters depending on how
close the association is to meeting its fully phased-in capital
requirement. Capital distributions exceeding this amount require
prior OTS approval. A Tier 3 savings association may not make any
capital distributions without prior approval from the OTS.
At June 30, 1997, the Savings Bank met the criteria to be
designated a Tier 1 association and, consequently, could at its
option (after prior notice to, and no objection made by, the OTS)
distribute up to 100% of its net income during the calendar year
plus 50% of its surplus capital ratio at the beginning of the
calendar year less any distributions previously paid during the year.
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Investment Rules
Under the HOLA, 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 readily-marketable collateral, which is defined
to include certain financial instruments and bullion. 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, 1997, the largest
loans by the Savings Bank outstanding to any one borrower, including
related entities, was $942,000 which were secured primarily by
single-family rental properties in and around Mountain Grove,
Missouri. These loans were performing in accordance with their terms
at that date.
Activities of Savings Banks and Their Subsidiaries
When a savings association establishes or acquires a subsidiary
or elects to conduct any new activity through a subsidiary that the
association 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.
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 account principles. 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
consistent with the institution's intent to trade, available-for-sale
or held-to-maturity. 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
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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
Savings associations must comply with Sections 23A and 23B of
the Federal Reserve Act ("Sections 23A and 23B") relative to
transactions with affiliates in the same manner and to the same
extent as if the savings association were a Federal Reserve member
bank. Generally, Sections 23A and 23B: (i) limit the extent to
which the insured association or its subsidiaries may engage in
certain covered transactions with an affiliate to an amount equal
to 10% of such institution's capital and surplus and place an
aggregate limit on all such transactions with affiliates to an
amount equal to 20% of such capital and surplus, and (ii) require
that all such transactions be on terms substantially the same, or
at least as favorable to the institution or subsidiary, as those
provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a
guaranty and similar other types of transactions.
Three additional rules apply to savings associations: (i) a
savings association may not make any loan or other extension of
credit to an affiliate unless that affiliate is engaged only in
activities permissible for bank holding companies; (ii) a savings
association may not purchase or invest in securities issued by an
affiliate (other than securities of a subsidiary); and (iii) the OTS
may, for reasons of safety and soundness, impose more stringent
restrictions on savings associations but may not exempt transactions
from or otherwise abridge Section 23A or 23B. Exemptions from
Section 23A or 23B may be granted only by the Federal Reserve Board,
as is currently the case with respect to all FDIC-insured banks.
The Savings Bank has not been significantly affected by the rules
regarding transactions with affiliates.
REGULATION OF FIRST BANCSHARES
First Bancshares is a unitary savings and loan holding company
within the meaning of the Home Owners' Loan Act of 1933, as amended
("HOLA"). As such, 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 are subject to
regulatory requirements and provisions as federal institutions.
Holding Company Acquisitions
The HOLA and OTS regulations issued thereunder generally
prohibit a savings and loan holding company, without prior OTS
approval, from acquiring more than 5% of the voting stock of any
other savings association or savings and loan holding company or
controlling the assets thereof. They also prohibit, among other
things, any director or officer of a savings and loan holding
company, or any individual who owns or controls more than 25% of
the voting shares of such holding company, from acquiring control
of any savings association not a subsidiary of such savings and
loan holding company, unless the acquisition is approved by the OTS.
Holding Company Activities
As a unitary savings and loan holding company, the Company
generally is not subject to activity restrictions. If the Company
acquires control of another savings association as a separate
subsidiary, it would become a multiple savings and loan holding
company, and the activities of the Company and any of its
subsidiaries (other than the Savings Bank or any other SAIF-insured
savings association) would become subject to such restrictions
unless such other associations each qualify as a qualified thrift
lender ("QTL") and were acquired in a supervisory acquisition.
If the Savings Bank fails the QTL test, the Company must obtain
the approval of the OTS prior to continuing after such failure,
directly or through its other subsidiaries, any business activity
other than those approved for multiple savings and loan holding
companies or their subsidiaries. In addition, within one year of
such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The
activities authorized for a bank holding company are more limited
than are the activities authorized for a unitary or multiple savings
and loan holding company. See "-- Qualified Thrift Lender Test."
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The Company must obtain approval from the OTS before acquiring
control of more than 5% of the voting shares of any other SAIF-
insured association. Such acquisitions generally are prohibited if
they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However,
such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings
association.
Affiliate Restrictions
The affiliate restrictions contained in Sections 23A and 23B of
the Federal Reserve Act apply to all federally insured savings
associations and any such "affiliate." A savings and loan holding
company, its subsidiaries and any other company under common control
are considered affiliates of the subsidiary savings association
under the HOLA. Generally, Sections 23A and 23B: (i) limit the
extent to which the insured association or its subsidiaries may
engage in certain covered transactions with an affiliate to an amount
equal to 10% of such institution's capital and surplus, and contain
an aggregate limit on all such transactions with all affiliates to
20% of such capital and surplus, and (ii) require that all such
transactions be on terms substantially the same, or at least as
favorable to the institution or subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes the making
of loans, purchase of assets, issuance of a guarantee and similar
other types of transactions. Also, a savings association may not
make any loan to an affiliate unless the affiliate is engaged only
in activities permissible for bank holding companies. Only the
Federal Reserve may grant exemptions from the restrictions of
Sections 23A and 23B. The OTS, however, may impose more stringent
restrictions on savings associations for reasons of safety and
soundness.
Qualified Thrift Lender Test
The HOLA requires any savings and loan holding company that
controls a savings association that fails the QTL test, as explained
under "REGULATION OF FIRST HOME -- Qualified Thrift Lender Test,"
must, within one year after the date on which the association ceases
to be a QTL, register as and be deemed a bank holding company subject
to all applicable laws and regulations.
TAXATION
Federal Taxation
General. The Corporation and the Savings Bank report their
income on a fiscal year basis using the accrual method of accounting
and will be 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 Corporation.
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
made 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 new 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). The
Savings Bank has previously recorded a deferred tax liability equal
to the bad debt recapture and as such the new rules will have no
effect on the net income or federal income tax expense. 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
39
</page>
or, if the Savings Bank is a "large" association (assets in excess
of $500 million) on the basis of net charge-offs during the taxable
year. The new rules allow an institution to suspend bad debt reserve
recapture for the 1996 and 1997 tax years if the institution's
lending activity for those years is equal to or greater than the
institutions average mortgage lending activity for the six taxable
years preceding 1996 adjusted for inflation. For this purpose, only
home purchase or home improvement loans are included and the
institution can elect to have the tax years with the highest and
lowest lending activity removed from the average calculation. If an
institution is permitted to postpone the reserve recapture, it must
begin its six year recapture no later than the 1998 tax 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 Corporation 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 Corporations 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. In addition, only 90% of
the AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the
Savings Bank's adjusted current earnings exceeds its AMTI
(determined without regard to this preference and prior to reduction
for net operating losses). For taxable years beginning after
December 31, 1986, and before January 1, 1996, an environmental tax
of .12% of the excess of AMTI (with certain modification) over $2.0
million was imposed on corporations, including the Savings Bank,
whether or not an Alternative Minimum Tax ("AMT") was paid.
Dividends-Received Deduction and Other Matters. The Corporation
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 Corporation and the Savings Bank will not file a consolidated tax
return, except that if the Corporation 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 Matter. Other recent 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 Savings Bank's Federal
income tax returns during the past five years.
40
</page>
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 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 Notes 1
and 11 of the Notes to the Consolidated Financial Statements.
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 and Christian counties, Missouri. The Savings Bank also
transacts a significant amount of business in Texas, Greene and
Taney counties, Missouri. The Savings Bank's deposit gathering
and lending activities are concentrated in these market areas.
The Savings Bank's offices are located in Mountain Grove,
Marshfield, Ava, Gainesville, Sparta and Theodosia, Missouri.
The Savings Bank is the only thrift 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 located in its primary market area, some with a state-wide or
regional presence. Additionally, the Savings Bank faces significant
competition from the FHA and Farm Credit System and other financial
entities in lending. The Savings Bank also competes with securities
firms, credit unions, money market funds and mutual funds in raising
deposits.
Management considers the Savings Bank's reputation for financial
strength and customer service as its major competitive advantage in
attracting and retaining customers in its market area. The Savings
Bank also believes it benefits from its community orientation as
well as its relatively high core deposit base.
Personnel
As of June 30, 1997, the Savings Bank had 58 full-time employees
and five 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.
41
</page>
Item 2. Properties
The following table sets forth information regarding the Savings Bank's
offices as of June 30, 1997.
<TABLE>
<CAPTION>
Land Building
Year Net Owned/ Owned/ Square
Location County Opened Book Value Leased Leased Footage
- --------------------- -------- ------ ---------- ------ ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Main Office
- -----------
142 East First Street Wright 1911 $602 Owned Owned 9,800
Mountain Grove, Missouri 65711
Branch Offices
- --------------
1208 N. Jefferson Street Douglas 1978 251 Owned Owned 2,800
Ava, Missouri 65608
103 South Clay Street Webster 1974 238 Owned Owned 2,600
Marshfield, Missouri 65706
Highway 5 and Highway 160 Ozark 1992 776 Owned Owned 3,600
Gainesville, Missouri 65655
7164 Highway 14 East Christian 1995 346 Owned Owned 3,000
Sparta, Missouri 65753
Business Highway 160 Ozark 1997 94 Leased Leased 1,200
Theodosia, Missouri 65761
Drive-in Facilities
- --------------------
Route 60 and Oakland Wright 1986 190 Owned Owned 1,200
Mountain Grove, Missouri 65711
223 West Washington Webster 1993 212 Owned Owned 1,100
Marshfield, Missouri 65706
</TABLE>
42
</page>
Item 3. Legal Proceedings
In the opinion of management, the Savings Bank is not a party
to any pending claims or lawsuits that are expected to have a
material effect on the Savings Bank's financial condition or
operations. Periodically, there have been various claims and
lawsuits involving the Savings Bank mainly as a defendant, such as
claims to enforce liens, condemnation proceedings on properties in
which the Savings Bank holds security interests, claims involving
the making and servicing of real property loans and other issues
incident to the Savings Bank's business. Aside from such pending
claims and lawsuits which are incident to the conduct of the Savings
Bank's ordinary business, the Savings Bank is not a party to any
material pending legal proceedings that would have a material effect
on the financial condition or operations of the Savings Bank.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year ended June 30, 1997.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
The information contained in the section captioned "Common
Stock Information" in the Annual Report is incorporated herein by
reference.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results 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 Report*
(a) Consolidated Statements of Financial Condition as of
June 30, 1997 and 1996*
(b) Consolidated Statements of Income For the Years Ended
June 30, 1997, 1996 and 1995*
(c) Consolidated Statements of Stockholders' Equity For the
Years Ended June 30, 1997, 1996 and 1995*
(d) Consolidated Statements of Cash Flows For the Years
Ended June 30, 1997, 1996 and 1995*
(e) Notes to Consolidated Financial Statements*
* Contained in the Annual Report to Stockholders filed as an
exhibit hereto and 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
No disagreement with the Company's independent accountants on
accounting and financial disclosure has occurred during the past
24 months.
43
</page>
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
The information contained under the section captioned "Proposal
I -- Election of Directors" in the Proxy Statement is incorporated
herein by reference.
The following table sets forth certain information with respect
to the executive officers of the Company, each of whom holds the same
positions with the Company and each of whom holds the same positions
with the Savings Bank.
Name Age(1) Position
- -------- ------ --------
Stephen H. Romines 55 President and Chief Executive Officer
Peter M. Medlen 41 Executive Vice President
Susan J. Uchtman 34 Chief Financial Officer
_________________
(1) As of June 30, 1997.
The principal occupation of each executive officer of the
Company is set forth below. All of the officers listed above have
held positions with or been employed by the Company for five years
unless otherwise stated. All executive officers reside in Mountain
Grove, Missouri, unless otherwise stated. There are no family
relationships among or between the executive officers, unless
otherwise stated.
Stephen H. Romines joined the Savings Bank in 1973 and has
served as Chairman of the Board, President and Chief Executive
Officer the Savings Bank since 1978. Mr. Romines is the brother-
in-law of Mr. Medlen, Executive Vice President of First Home.
Peter M. Medlen has been employed by First Home since 1985
and currently serves as Executive Vice President. Mr. Medlen also
serves as President of the Savings Bank's wholly owned subsidiary,
Fybar Service Corp. Mr. Medlen is a past President of the Mountain
Grove Jaycees and past Treasurer of the Mountain Grove Central
Business District. He is a past Board member of the HI-FI-MO, a
Missouri not-for-profit elderly housing association. Mr. Medlen is
married to Mr. Stephen H. Romines' sister.
Susan J. Uchtman has been employed by First Home since June of
1994. Mrs. Uchtman, a CPA, was previously employed by Kirkpatrick
Phillips & Miller, CPAs, P.C., the Company's independent auditors,
from September 1985 through May 1994.
The information contained under the section captioned
"Compliance with Section 16(a) of the Exchange Act" in the
Proxy Statement is incorporated herein by reference.
Item 10. Executive Compensation
The information contained under the section captioned "Proposal
I -- Election of Directors" in the Proxy Statement is incorporated
herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
44
</page>
Information required by this item is incorporated herein
by reference to the section captioned "Voting Securities
and Security Ownership of Certain Beneficial Owners and
Management" of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein
by reference to the sections captioned "Voting Securities
and Security Ownership of Certain Beneficial Owners and
Management" and "Proposal I - Election of Directors" of the
Proxy Statement.
(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
The information required by this item is incorporated herein
by reference to the section captioned "Proposal I -- Election of
Directors -- Certain Transactions."
PART IV
Item 13. Exhibits, List Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation of First Bancshares,
Inc.*
3.2 Bylaws of First Bancshares, Inc.*
10.1 Employment Agreement with Stephen H. Romines
(incorporated by reference to the Form 10KSB
filing for the fiscal year ended June 30, 1995)
10.2 First Home Savings Bank 1994 Employee Stock
Ownership Plan*
10.3 First Bancshares, Inc. 1993 Stock Option Plan**
10.4 First Home Savings Bank Management Recognition and
Development Plan**
13. Annual Report to Stockholders
21. Subsidiaries of the Registrant
23. Auditors' Consent
27. Financial Data Schedule
(b) Report on Form 8-K
No Forms 8-K were filed during the quarter ended
June 30, 1997
45
</page>
____________________________
* Incorporated by reference to the Corporation's Registration
Statement on Form S-1 File No. 33-69886.
** Incorporated by reference to the Corporation's 1994 Annual
Meeting Proxy Statement dated September 14, 1994.
46
</page>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIRST BANCSHARES, INC.
Date: September 30, 1997 By: /s/ Stephen H. Romines
--------------------------
Stephen H. Romines
Chairman of the Board,
President and Chief
Executive Officer (Duly
Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of
1934, 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/ Stephen H. Romines September 30, 1997
-------------------------------
Stephen H. Romines
Chairman of the Board, President, Chief
Executive Officer (Principal Executive Officer)
By:/s/ Susan J. Uchtman September 30, 1997
-------------------------------
Susan J. Uchtman
Chief Financial Officer
By: 1997
---------------------------------
Harold F. Glass
Director
By:/s/ Almeta Hardebeck September 30, 1997
----------------------------------
Almeta Hardebeck
Director
By:/s/ John G. Moody September 30, 1997
-----------------------
John G. Moody
Director
By: , 1997
------------------------- --------- ---
Dr. James F. Moore
Director
</page>
Exhibit 13
Annual Report to Stockholders
</page>
(LOGO of FIRST BANCSHARES, INC.)
FIRST BANCSHARES, INC.
1997 ANNUAL REPORT
</page>
TABLE OF CONTENTS
Page
----
Letter to Stockholders................................1
Business of the Corporation 3
Selected Consolidated Financial Information 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Independent Auditors' Report 13
Consolidated Financial Statements 14
Notes to Consolidated Financial Statements 19
Common Stock Information 44
Directors and Officers 45
Corporate Information 46
</page>
Dear Stockholder:
{Column graph of Earning per share: 1994-$0.68, 1995-$0.77,
1996-$0.92 and 1997-$1.24}
First Bancshares, Inc. concluded another strong performance for
the fiscal year ended June 30, 1997. Net income, earnings per share,
book value, deposits, loans and assets all enjoyed solid and
substantial growth. Perhaps most important was the 34% growth in
earnings per share from $.92 per share for fiscal 1996 to $1.24
for fiscal 1997.
{Column graph of book value per share: 1994-$16.50, 1995-$17.49,
1996-$18.70 and 1997-$20.30}
Stock repurchase programs in effect during fiscal 1997 resulted
in a net reduction of 177,132 outstanding shares. Stockholders'
equity decreased, as a result, from $23.7 million at June 30, 1996
to $22.2 million at June 30, 1997. Book value per share, however,
increased during the same period from $18.70 $20.34.
{Column graph of total assets: 1994-$118,460,000, 1995-$128,193,000,
1996-$143,671,000 and 1997-$163,973,000.}
The combination of strong loan growth, solid deposit growth and
annual operating results produced a $20.3 million, or 14%, growth in
total assets. Net loans increased by $15.4 million (13%) while
deposits increased by $11.7 million (11%). A $10.0 million increase
in Federal Home Loan Bank advances was utilized to complete funding
loan growth and add to our portfolio of investment securities.
First Bancshares, Inc. paid its fourteenth quarterly dividend of
$.05 per share on June 30, 1997 and has announced its fifteenth
quarterly dividend to be paid on September 30, 1997. Three stock
repurchase programs were completed during the fiscal year. A seventh
repurchase program of 109,466 shares began in June 1997. As of
September 9, 1997, 3,815 shares had been repurchased for $76,000.
{Column graph of number of deposit accounts: 1994-9,301,
1995-10,203, 1996-13,264 and 1997-15,447}
On August 31, 1997, Lawson & Lawson Insurance Agency, a general
insurance agency, wholly-owned by Fybar Service Corporation was sold.
Fybar is a wholly-owned subsidiary of First Home Savings Bank. The
sale is expected to generate approximately $51,000 of pre-tax profits.
With assets more than doubling since our current computer system
was acquired, current plans are to purchase and install new computer
hardware and software in late 1997 or early 1998. Our computer
hardware was last upgraded in 1989 when assets totaled $78 million.
Our most recent computer software upgrade was in 1991 when assets
</page>
totaled $87 million. Approximately $200,000 is budgeted for the
computer upgrade.
The new Gainesville facility was completed in late 1996 and
the old modular facility was sold shortly thereafter. The
Gainesville area continues to provide a significant contribution to
growth as loans and deposits totaled $14.1 million and $10.8 million,
respectively, at June 30, 1997.
Our growth in Ozark County was further enhanced by opening a new
branch in Theodosia (approximately fifteen miles west of Gainesville,
the county seat) in February 1997. At June 30, 1997, after four
months of operation, Theodosia had generated deposit growth of $1.2
million and loan growth totaling $150,000.
The United State Postal Service recently announced that the
City of Gainesville will be eligible for a new post office in the
very near future. We intend to bid aggressively for a contract to
renovate the commercial space immediately to the right of our
Gainesville building, shown at the top of the inside front cover,
for that new post office facility.
Just within the past week, First Home Savings Bank received
notification it was the successful bidder for a branch bank with
locations in two small southwest Missouri towns. The acquisition is
contingent upon negotiation of a final contract with the seller and
regulatory approval. Closing of the transaction, assuming all
contingencies can be met, will probably occur in late 1997 or early
1998. Branch deposits to be acquired, which are subject to change by
the closing of the transaction, totaled approximately $20.0 million at
June 30, 1997.
With the acquisition of these two new locations, building a new
post office and completely revamping our computer system, we expect
fiscal 1998 to be a very busy and productive year!
Sincerely,
/s/ Stephen H. Romines
Stephen H. Romines
President
September 15, 1997
</page>
Business of the Corporation
First Bancshares, Inc. (the "Holding Company" or the "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, 1997, the Company had total consolidated assets of
$164.0 million and consolidated stockholders' equity of $22.2 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 the report, including financial statements
and related data, applies primarily to First Home and its subsidiary.
First Home is a Missouri-chartered, federally-insured stock
savings bank organized in 1911. The Savings Bank is regulated by
the Missouri Division on Finance and the Office of Thrift Supervision
("OTS") and its deposits are insured up to applicable limits by the
Savings Association Insurance Fund ("SAIF") of the Federal Deposit
Insurance Corporation. First Home is also a member of the Federal
Home Loan Bank ("FHLB") System.
First Home conducts its business from its home office in
Mountain Grove and five full service branch facilities in Marshfield,
Ava, Gainesville, Sparta and Theodosia, Missouri. First Home
provides its customers with a full array of community banking
services. It is primarily engaged in the business of attracting
deposits from, and making loans to, the general public. It
emphasizes one-to-four family residential mortgage loans and, to a
lesser extent, multi-family residential, consumer, commercial and
home equity loans. First Home also invests in mortgage-backed, U. S.
Government and agency securities and other assets.
At June 30, 1997, First Home's total gross loans were $137.6
million, or 83.9% of total consolidated assets, including $105.7
million, or 76.8% of total gross loans secured by one-to-four family
properties and $22.0 million, or 16.0% of total gross loans secured
by other real estate. Of the loans secured by real estate, over 95.0%
are adjustable-rate loans.
3
</page>
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. Since the Company had not commenced
operations prior to the mutual to stock conversion of the Savings
Bank on December 22, 1993, the financial information presented for
1993 is for the Savings Bank only. The consolidated data is derived
in part from, and should be read in conjunction with, the
Consolidated Financial Statements of the Company and its subsidiary
presented herein.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------
1997 1996 1995 1994 1993
--------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
FINANCIAL CONDITION DATA:
Total assets $163,973 $143,671 $128,193 $118,460 $94,890
Loans receivable, net 134,104 118,780 101,431 85,777 73,078
Mortgage-backed certificates 828 2,831 3,134 3,420 4,159
Cash, interest-bearing deposits
and investment securities 24,408 18,236 20,483 24,523 13,785
Federal funds sold - - - 2,000 1,400
Customer deposits 117,685 105,960 98,389 85,904 80,068
Borrowed funds 23,555 13,555 5,055 8,055 3,055
Stockholders' equity 22,207 23,729 24,492 24,313 11,421
<CAPTION>
Year Ended June 30,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
OPERATING DATA:
Interest income $ 11,695 $ 10,113 $ 8,390 $ 7,017 $ 6,837
Interest expense 6,493 5,661 4,554 3,554 3,659
-------- ------- ------ ------- ------
Net interest income 5,202 4,452 3,836 3,463 3,178
Provision (credit) for loan losses 71 80 (27) 23 41
-------- ------- ------ ------- -------
Net interest income after provision
(credit) for loan losses 5,131 4,372 3,863 3,440 3,137
Gains (losses) on investments and
mortgage-backed securities 187 (6) (19) (2) -
Noninterest income, excluding gains
(losses) on securities 527 465 317 259 335
Noninterest expense 3,648 3,045 2,514 2,216 1,974
------- ------- ------- ------- ------
Income before taxes 2,197 1,786 1,647 1,481 1,498
Income taxes 784 631 613 431 551
------ ------ ------ ------- ------
Net income $ 1,413 $ 1,155 $ 1,034 $ 1,050 $ 947
======== ======== ======== ======== =======
Primary earnings per share $ 1.24 $ 0.92 $ 0.77 $ 0.68 *
======== ======== ======== ======== =======
*Operating as a mutual.
4
</page>
<CAPTION>
At or For the Year Ended June 30,
----------------------------------------------------
1997 1996 1995 1994 1993
KEY OPERATING RATIOS: -------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <c.
Return on average assets 0.91% 0.85% 0.85% 0.97% 1.03%
Return on average equity 6.24 4.90 4.28 5.51 8.63
Average equity to average assets 14.65 17.31 19.98 17.66 11.96
Interest rate spread for period 2.85 2.60 2.45 2.74 3.31
Net interest margin for period 3.53 3.40 3.30 3.36 3.65
Non-interest expense to average assets 2.36 2.23 2.08 2.06 2.15
Average interest-earning assets to
interest-bearing liabilities 115.00 119.00 122.00 118.00 108.00
Allowance for loan losses to total
loans at end of period 0.35 0.42 0.42 0.54 0.61
Net charge-offs to average outstanding
loans during the period 0.09 0.01 0.01 0.02 0.02
Ratio of non-performing assets to
total assets 0.93 0.88 0.77 0.82 0.78
Ratio of loan loss reserves to
non-performing assets 31.68 41.02 46.55 49.23 63.69
Dividend payout ratio 16.13 21.05 25.32 14.49 *
<CAPTION>
At June 30,
-------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- -------- -------
OTHER DATA:
Number of:
Loans outstanding 4,999 4,712 4,387 4,358 4,210
Deposit accounts 15,447 13,264 10,203 10,028 9,601
Full service offices 6 5 4 4 4
* Operating as a mutual
5
</page>
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.
Operating Strategy
The primary goals of management are to minimize risk, improve
profitability and promote growth. Operating results depend primarily
on net interest income, which is the difference between the income
earned on its interest-earning assets, such as loans and investments,
and the cost of its 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 financial institutions and
the attendant actions of the regulatory authorities. Management's
strategy is to strengthen First Home's presence in, and expand the
boundries of, its primary market area.
Management has implemented various general strategies designed
to continue profitability while maintaining safety and soundness.
Primary among those strategies are emphasizing one-to-four family
lending, maintaining asset quality and managing interest-rate risk.
It is anticipated, subject to market conditions, that no changes will
be made in these strategies.
Emphasizing One-to-Four Family Lending. Historically, First
Home has been predominantly a one-to-four family residential lender.
Single family residential loans constituted 79% of mortgage loans
originated during fiscal 1997, 78% of 1996 mortgage loan originations
and 70% of 1995 mortgage loan originations. First Home has worked to
achieve a reputation within its local lending territory for prompt,
efficient and courteous service during both the loan origination and
servicing processes.
Maintaining Asset Quality. First Home strongly emphasizes
maintaining asset quality through sound underwriting, constant
monitoring and effective collection techniques. At June 30, 1997,
First Home's ratio of non-performing assets to total assets was .93%.
That same ratio at June 30, 1996 was .88%. Actual loan losses, net
of recoveries, of loans originated were $12,000 for the year ended
June 30, 1997. Additional charge-offs were $25,000 for purchased
auto loans and $73,000 for an overdraft of a commercial checking
account. Actual loan losses, net of recoveries, for the year ended
June 30, 1996 were $1,000 and $11,000 for the year ended June 30, 1995.
Managing Interest-Rate Risk. First Home relies primarily on
adjustable interest rate loans to minimize the inherent risks of
interest rate changes. All long-term mortgage loans originated
since 1973 have had adjustable rates rather than fixed rates.
Further, with few exceptions, the majority of other loans including,
but not limited to, car loans, commercial loans, cattle loans and
personal loans that have maturities exceeding two years also have
adjustable rates rather than fixed rates. All loans originated by
First Home have been retained in its portfolio. No loans have been
sold in the secondary mortgage market. To further minimize interest
rate risk, First Home maintains a short-term investment portfolio.
6
</page>
Fiscal Year Ended June 30, 1997 Compared to June 30, 1996
Net Income. Net income increased $258,000, or 22.3%, to
$1,413,000 for the fiscal year ended June 30, 1997 from $1,155,000
for the fiscal year ended June 30, 1996. An increase in interest
income of $1,582,000 combined with an increase in noninterest income
of $255,000 and a decrease in provision for loan losses of $9,000
were offset by increases in interest expense of $832,000, noninterest
expense of $602,000 and income taxes of $153,000.
Net Interest Income. Net interest income was $5,202,000 for
the year ended June 30, 1997, an increase of $750,000, or 16.8%,
from $4,452,000 for the year ended June 30, 1996. An increase in
interest income of $1,582,000 was reduced by an increase in interest
expense of $832,000.
Interest Income. Total interest income of $11,695,000 for the
year ended June 30, 1997 increased $1,582,000, or 15.6%, from
$10,113,000 for the year ended June 30, 1996. An increase in net
loans receivable of $15,324,000 resulted in an increase in interest
income from loans of $1,474,000. Interest income from investment
securities increased $226,000 attributable to the purchase of
additional securities. Income from mortgage-backed and related
securities decreased $40,000 due to the sale of one security and
principal repayments of the remaining balances. A lower average
outstanding balance in other interest-earnings assets caused a
$78,000 decrease in the related income account.
Interest Expense. Interest expense increased $832,000, or
14.7%, from $5,661,000 for the year ended June 30, 1996 to $6,493,000
for the year ended June 30, 1997. An increase in the average balance
of customer deposits partially offset by a decrease in the average
deposit rates paid during the period created a $333,000 increase in
interest expense on customer deposits. Additional FHLB advances
accounted for a $499,000 increase in interest expense on borrowed funds.
Provision (Credit) for Loan Losses. Provision for loan losses
of $71,000 for the year ended June 30, 1997 was a decrease of $9,000
from $80,000 for the year ended June 30, 1996. Actual loan
charge-offs, net of recoveries, of First Home originated loans were
$12,000 for the year ended June 30, 1997 compared to $1,000 for the
year ended June 30, 1996. Additional net charge-offs were $25,000
for purchased auto loans and $73,000 for an overdraft of a commercial
checking account. Included in the $80,000 of loan loss reserves at
June 30, 1996 were $74,000 to increase specific reserves for the
losses on purchased auto loans and the commercial checking account
anticipated in fiscal 1997.
Noninterest Income. Noninterest income was $714,000 for the
year ended June 30, 1997 compared to $459,000 for the year ended
June 30, 1996. Significantly contributing to the $255,000, or 55.6%,
increase were net gains on investments and mortgage-backed securities
of $187,000 for the year ended June 30, 1997 described under "--Gain
(Loss) on Investments and Mortgage-backed Securities."
The increase in noninterest income also included a $119,000, or
44%, increase in service charges and other fee income from customer
deposit accounts. That increase was attributable to the checking
account program begun in July 1995 which has created a continued
increase in customer deposit accounts. Loan origination and
commitment fee income increased $5,000 from $3,000 for the year
ended June 30, 1996 to $8,000 for the year ended June 30, 1997.
Offsetting the increases described above was a loss of $25,000
on the sale of property and equipment for the year ended June 30,
1997, a decrease of $45,000 from the $20,000 gain recognized during
the year ended June 30, 1996. With completion and occupancy of the
new Gainesville facility, the original modular building was no longer
needed and was sold in April of 1997 for a loss of $23,000. Income
from real estate operations decreased by $8,000 from $94,000 for the
year ended June 30, 1996 to $86,000 for the year ended June 30, 1997.
7
</page>
Insurance commissions for the year ended June 30, 1997 were $65,000,
also an $8,000 decrease from $73,000 for the year ended June 30, 1996.
The insurance agency was sold in August, 1997, generating a pre-tax
profit of $51,000. Other noninterest income decreased $1,000.
Noninterest Expense. Noninterest expense was $3,647,000 for the
year ended June 30, 1997, an increase of 602,000, or 19.8%, from
$3,045,000 for the year ended June 30, 1996. Deposit insurance
premiums increased $554,000 due to a $640,000 one-time assessment
to recapitalize the SAIF. The legislation mandating the assessment,
however, also provided for reductions in future premiums. These
reductions lowered the premiums for the following quarters to
partially offset the assessment expense.
Compensation and employee benefit expense increased $128,000,
or 7.5%. The increase was attributable to salaries and related
payroll taxes for additional staff for the Theodosia branch, opened
in early 1997, and annual payroll increases for existing personnel.
Occupany and equipment expense increased $27,000, or 7.4%, due to
the opening of the Theodosia branch and additional depreciation
expense for the new Gainesville building.
Other noninterest expense increased $23,000, or 4.7%. The
majority of the increase was caused by to the increase in customer
checking accounts. Increases included: postage - $26,000 (52.0%),
debit card expense - $7,000, customer and public relations - $9,000
and losses on checking accounts of $8,000. Those increases were
somewhat offset by a $7,000 (63.6%) decrease in the cost of
checking account supplies. OTS and state regulatory assessments
increased $12,000 (28.6%). Decreases in insurance expense of
$6,000 (11.3%) and other operating expense of $13,000 (54.2%) were
also recorded.
Advertising and promotional expense decreased $131,000, or 64%.
As described in the comparison for June 30, 1996 to June 30, 1995,
advertising expenses for the year ended June 30, 1996 included
non-recurring start-up expenses for the checking account program.
Gain (Loss) on Investments and Mortgage-backed Securities. As
noted in "--Noninterest Income," there was a $187,000 net gain on
securities for the year ended June 30, 1997. This was an increase
of $193,000 from the $6,000 loss reported for the year ended June 30,
1996. Common and preferred stock were sold during the year ended
June 30, 1997 for $832,000 resulting in a pretax gain of $223,000.
The gain was somewhat offset by a $20,000 loss on the sale of a
collaterized mortgage obligation and $16,000 in write-downs on a
pool of auto loans purchased.
Income Taxes. Income tax expense increased $153,000, or 24.2%,
from $631,000 for the year ended June 30, 1996 to $784,000 for the
year ended June 30, 1997. The increase was attributable to the
$411,000 increase in income before taxes.
Net Interest Margin. Net interest margin increased to 3.53%
for the year ended June 30, 1997 compared to 3.40% for the year
ended June 30, 1996. An increase in the yield on loans, primarily
adjustable-rate loans, combined with decreases in the cost of
customer deposits and borrowings were responsible for the overall
increase in the margin.
Fiscal Year Ended June 30, 1996 Compared to June 30, 1995
Net Income. Net income for the fiscal year ended June 30, 1996
was $1,155,000, an increase of $121,000, or 11.7%, from $1,034,000
for the fiscal year ended June 30, 1995. Increases in interest
income of $1,723,000 and noninterest income of $160,000 were offset
by increases in total interest expense of $1,106,000, provision for
loan losses of $106,000, noninterest expense of $531,000 and income
taxes of $18,000.
Net Interest Income. Net interest income increased by $616,000,
or 16.1%, to $4,452,000 for the year ended June 30, 1996 compared to
$3,836,000 for the year ended June 30, 1995. An increase of
$1,723,000 in total interest income was reduced by a $1,106,000
increase in total interest expense.
8
</page>
Interest Income. Total interest income was $10,113,000 for the
year ended June 30, 1996 compared to $8,390,000 for the year ended
June 30, 1995, an increase of $1,723,000, or 20.5%. Interest income
from loans receivable increased by $1,919,000 primarily attributable
to a $17,349,000 increase in net loans receivable from $101,431,000
at June 30, 1995 to $118,780,000 at June 30, 1996. The increase was
also partly attributable to interest rate increases on existing loans
pursuant to their adjustable rate features. Income from investment
securities decreased $246,000. The decrease was primarily
attributable to a declining balance in investment securities as
proceeds from maturities and sales were used to fund loan demand.
Income from mortgage-backed and related securities decreased by
$42,000 due to lower outstanding balances as these securities have
been repaid. The $93,000 increase in income from other interest-
earning assets was primarily attributable to proceeds from FHLB
advances and proceeds from maturing investments being placed in
interest-bearing accounts until needed to fund loan demand.
Interest Expense. Interest expense for the year ended
June 30, 1996 was $5,661,000, an increase of $1,106,000, or 24.3%,
from $4,555,000 for the year ended June 30, 1995. Interest expense
on customer deposits increased by $590,000 due to an increase in
average deposit rates paid during the year ended June 30, 1996 and an
increase in customer deposits from $98,389,000 at June 30, 1995 to
$105,960,000 at June 30, 1996. Interest expense on borrowed funds
increased by $518,000 due to the additional advances from the FHLB
for the year ended June 30, 1996.
Provision (Credit) for Loan Losses. Provision for loan losses
of $80,000 for the year ended June 30, 1996 was an increase of
$107,000 from a credit of $27,000 for the year ended June 30, 1995.
Actual loan charge-offs, net of recoveries, decreased to $1,000 for
the year ended June 30, 1996 compared to $11,000 for the year ended
June 30, 1995. While loan losses were lower for the year ended June
30, 1996, there was an increase in net loans receivable noted above
and also in nonperforming assets to $1,266,000 at June 30, 1996 from
$986,000 of June 30, 1995.
Noninterest Income. Noninterest income increased $160,000, or
53.5%, to $459,000 for the year ended June 30, 1996 compared to
$299,000 for the year ended June 30, 1995. Income from service
charges and other fee income increased $103,000 due primarily to an
increase in customer deposit accounts. That increase, in turn, was
largely attributable to the checking account program started in July
1995. The year ended June 30, 1996 also included a $20,000 gain on
the sale of property and equipment. Income from real estate
operations increased $34,000 during the year ended June 30, 1996 due
to a decrease in vacancies and the full year's rents from two
four-plexes in Gainesville, Missouri which were completed in July
1995.
Noninterest Expense. Noninterest expense of $3,045,000 for the
year ended June 30, 1996 increased $531,000, or 21.1%, from
$2,514,000 for the year ended June 30, 1995. Compensation and
employee benefits increased $160,000, or 10.4%. Of this increase,
$50,000 was attributable to the fair market value recording of the
expense for the Employee Stock Ownership Plan ("ESOP"). This
treatment is required by American Institute of Certified Public
Accountant's Statement of Position 93-6, "Employer's Accounting for
Employee Stock Ownership Plans". The Statement requires the
recording of shares released from the ESOP to be recorded at the
average fair market value for the period. The calculated amount is
recorded as expense and an increase in paid-in capital for the fair
market value over cost and to unearned compensation for the
remainder. The expense reduces net income which in turn reduces
retained earnings and stockholders' equity, while the paid-in capital
and unearned compensation amounts increase stockholders equity.
Compensation expense for salaries and related payroll taxes increased
by $110,000 due to the staffing of the Sparta branch and normal
annual salary increases. Group health insurance expense increased by
$38,000. Occupancy and equipment expenses increased $90,000
primarily due to the opening of the Sparta branch. Deposit
insurance premiums increased $24,000 as customer deposits increased.
Professional fees decreased $43,000 due to more of the required
public company reporting being prepared internally.
Other noninterest expense increased $301,000. The marketing
expense for the implementation of the checking account program was
$165,000; however, of that total, $120,000 was non-recurring
start-up expense. Miscellaneous other expenses due to the increase
in the number of checking accounts totaled $39,000. Other cost
increases included a $24,000 increase for office supplies, $10,000
for advertising, $8,000 for telephone, and $8,000 for postage.
9
</page>
Gain (Loss) on Investments. There was a gain of $27,000 for
the year ended June 30, 1996 attributable to the liquidation of
four mutual funds, two U.S. Federal agency obligations and preferred
stock by the Company to generate additional cash flow. An
unrealized loss of $33,000 was recognized during the year ended
June 30, 1996 due to the write-down of a pool of auto loans to net
realizable value. The unrealized loss on this investment for the
year ended June 30, 1995 was $17,000.
Income Taxes. Income tax expense of $631,000 for the year ended
June 30, 1996 increased $18,000, or 2.9%, from $613,000 for the year
ended June 30, 1995. The increase was attributable to the increase
in income before taxes for the year ended June 30, 1996.
Net Interest Margin. Net interest margin increased slightly to
3.40% for the year ended June 30, 1996 from 3.30% for the year ended
June 30, 1995. The percentage increase in net interest income was
slightly more than the percentage increase in average interest-
earning assets. Interest rates on adjustable-rate loans, which can
only be adjusted annually, outpaced increases on the rates paid on
deposits and FHLB advances.
Financial Condition
General. During the year ended June 30, 1997, as in previous
years, First Home continued its strategy of expanding its loan
portfolio within its primary markets and increasing deposit market
share. Loan demand continued strong throughout fiscal year 1997
with net loans receivable showing an increase of $15.3 million and
deposits an increase of $11.7 million.
Total Assets. Total assets were $164.0 million at June 30,
1997, an increase of $20.3 million, or 14.1%, from $143.7 million at
June 30, 1996. The increase was attributable to the $15.3 million
increase in loans combined with a $6.2 million increase in cash,
investments and mortgage-backed securities. These two increases
were partially offset by a $2.0 million decrease in mortgage-backed
certificates.
Cash and Cash Equivalents. Cash and cash equivalents increased
by $2.5 million from $3.3 million at June 30, 1996 to $5.8 million at
June 30, 1997.
Certificates of Deposit. Certificates of deposit purchased as
investments were $1.5 million at June 30, 1997 compared to $2.3
million at June 30, 1996, resulting in a decrease of $800,000.
Investment Securities. Investment securities increased $4.1
million from $11.7 million at June 30, 1996 to $15.8 million at
June 30, 1997. The increase was attributable to the purchase of
additional securities slightly offset by maturities and sales.
The purchases were funded from FHLB advances combined with the
proceeds from the maturities and sales.
Mortgage-backed Securities. The sale of collaterized mortgage
obligation backed by Government National Mortgage Association
securities was the primary cause for the reduction in mortgage-backed
securities of $2.0 million from $2.8 million at June 30, 1996 to
$800,000 at June 30, 1997.
Loans Receivable. Net loans receivable were $134.1 million at
June 30, 1997 compared to $118.7 million at June 30, 1996. The net
loan increase of $15.4 million, primarily in one-to-four family
residential real estate loans, was funded from a $11.7 million
increase in customer deposits, proceeds from maturing investments
and certificates of deposit and the remainder of advances from the
FHLB.
10
</page>
Non-accrual Loans. Non-accrual loans decreased to $57,000 at
June 30, 1997 compared to $130,000 at June 30, 1996. The decrease
was attributable to the partial charge-off of an unsecured loan
created by an overdraft on a commercial checking account.
Non-performing Assets. Non-performing assets were $1.5 million
at June 30, 1997, an increase of $254,000, or 20.1%, from $1.3
million at June 30, 1996. Non-performing assets at June 30, 1997
were comprised of 116 loans and two parcels of other real estate
owned. At least one monthly payment was received during the quarter
on 101 of those loans which had ending balances of $1,175,000.
Deposits and Borrowings. Deposits increased from $106.0 million
at June 30, 1996 to $117.7 million at June 30, 1997. This was an
increase of $11.7 million, or 11.0%. FHLB advances were $23.5
million at June 30, 1997 compared to $13.5 million at June 30, 1996.
The additional $10.0 million was used to fund loan growth and
purchase investment securities.
Stockholders' Equity. Stockholders' equity of $22.2 million at
June 30, 1997 decreased $1.5 million from $23.7 million at June 30,
1996. Net income was more than offset by stock repurchases and the
payment of dividends.
Liquidity and Capital Resources. First Home's primary sources
of funds are deposits, proceeds from principal and interest payments
on loans, mortgage-backed securities, investment securities and net
operating income. Funds are also obtained from FHLB advances. While
maturities and scheduled amortization of loans and mortgage-backed
securities are a 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. First Home originated mortgage loans of $40.6
million, $40.2 million and $30.5 million for the years ended June 30,
1997, 1996 and 1995, respectively. Other investing activities
include the purchase of investment securities, which totaled
$6.6 million, $6.4 million and $1.3 million for the years ended
June 30, 1997, 1996 and 1995. These activities were funded
primarily by deposit growth, principal repayments on loans,
mortgage-backed securities, other investment securities, and
advances.
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 deposits and principal and
interest payments from loans and mortgage-backed securities and
investments, and FHLB advances. During fiscal years 1997, 1996 and
1995, First Home used its sources of funds primarily to fund loan
commitments and to pay maturing savings certificates and deposit
withdrawals. At June 30, 1997, First Home had approved loan
commitments totaling $567,000 and undisbursed loans in process
totaling $3.1 million.
Liquid funds necessary for the normal daily operations of First
Home are maintained in three working checking accounts, a daily time
account with the FHLB - Des Moines and in Federal funds. It is the
Savings Bank's current policy to maintain adequate collected balances
in those three checking accounts to meet daily operating expenses,
customer withdrawals, and fund loan demand. Funds received from
daily operating activities are deposited, on a daily basis, in one
of the working checking accounts and transferred, when appropriate
to daily time or Federal funds to enhance interest income.
At June 30, 1997, certificates of deposit amounted to $79.5
million, or 67.6%, of First Home's total deposits, including $51.1
million which were scheduled to mature by June 30, 1998.
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 by
savings deposits and FHLB advances and that it can adjust the
offering rates of savings certificates to retain deposits in changing
interest rate environments.
11
</page>
Currently, the OTS requires a savings institution to maintain
an average daily balance of liquid assets (cash and eligible
investments) equal to at least 5% of the average daily balance
of its net withdrawable deposits and short-term borrowings. In
addition, short-term liquid assets currently must constitute 1% of
the sum of net withdrawable deposit accounts plus short-term
borrowings. First Home's liquidity ratios were 15.8%, 10.7% and
11.2% at June 30, 1997, 1996 and 1995, respectively. First Home's
short-term liquidity ratios at June 30, 1997, 1996 and 1995 were
14.7%, 4.6% and 5.7%, respectively. First Home consistently
maintains liquidity levels in excess of regulatory requirements,
and believes this is an appropriate strategy for proper asset and
liability management.
OTS regulations require First Home to maintain specific amounts
of capital. As of June 30, 1997, First Home was in compliance with
all the regulatory capital requirements which were effective as of
such date, with tangible, core and risk-based capital ratios of
11.7%, 11.7% and 18.2%, respectively. These ratios exceed the
1.5%, 3.0% and 8.0% required by OTS regulations. In addition, the
OTS amended its capital regulations which require savings
institutions to maintain specified amounts of regulatory capital
based on the estimated effects of changes in market rates and which
could further increase the amount of regulatory capital required to
be maintained by the Savings Bank. See Note 15 of the Notes to
Consolidated Financial Statements.
Impact of New Accounting Standards. See Note 1 of the Notes to
the Consolidated Financial Statements.
Effect of Inflation and Changing Prices. The Consolidated
Financial Statements and related financial data presented herein
have been prepared in accordance with generally accepted accounting
principles, 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.
12
</page>
{LOGO OF KIRKPATRICK, PHILLIPS & MILLER, CPAs, A PROFESSIONAL \
CORPORATION}
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Stockholders
First Bancshares, Inc. and Subsidiary
Mountain Grove, Missouri
We have audited the accompanying consolidated statements of financial
condition of First Bancshares, Inc. and Subsidiary as of June 30,
1997 and 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in
the period ended June 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based
on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
these audits 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
statement 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 Subsidiary as of June 30,
1997 and 1996, and the results of operations and its cash flows
for each of the three years in the period ended June 30, 1997, in
conformity with generally accepted accounting principles.
/s/ Kirkpatrick, Phillips & Miller
KIRKPATRICK, PHILLIPS & MILLER, CPAs, P.C.
Springfield, Missouri
August 6, 1997
</page>
</TABLE>
<TABLE>
<CAPTION>
FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- - - - - - - - - - - - - - - - - - - - - - - -
June 30, 1997 and 1996
1997 1996
------------- -------------
ASSETS
- ------
<S> <C> <C>
Cash and cash equivalents, including interest-bearing accounts
of $1,895,311 in 1997 and $526,578 in 1996 $ 5,808,930 $ 3,316,282
Certificates of deposit 1,504,000 2,319,000
Investment securities available-for-sale, at fair value (Notes 1 and 2) 14,227,286 9,478,015
Investment securities held-to-maturity (estimated fair value of
$1,625,760 in 1997 and $2,249,438 in 1996) (Notes 1 and 2) 1,604,665 2,233,375
Investment in Federal Home Loan Bank stock, at cost (Note 3) 1,263,800 889,800
Mortgage-backed certificates available-for-sale,
at fair value (Notes 1 and 4) 827,547 2,831,153
Loans receivable held-for-investment, net (Notes 1 and 5) 134,103,537 118,779,992
Accrued interest receivable (Note 6) 665,112 468,962
Prepaid expenses 117,511 106,725
Commissions and other receivables 4,400 4,400
Property and equipment, less accumulated depreciation
and valuation reserves (Notes 1 and 7) 3,693,891 3,194,113
Intangible assets, less accumulated amortization (Notes 1 and 8) 31,354 42,513
Real estate owned 113,776 -
Other assets 7,165 6,574
------------- -------------
Total assets $ 163,972,974 $ 143,670,904
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------
Customer deposits (Note 9) $ 117,684,732 $ 105,960,227
Advances from Federal Home Loan Bank (Note 10) 23,500,000 13,500,000
Other borrowed funds 55,000 55,000
Income taxes payable - current (Note 11) 5,023 92,169
Deferred income taxes, net (Notes 1 and 11) 272,718 138,771
Accrued expenses 248,857 195,622
------------- -------------
Total liabilities 141,766,330 119,941,789
============= =============
Commitments and contingencies (Note 14) - -
Preferred stock, $.01 par value; 2,000,000 shares authorized,
none issued - -
Common stock, $.01 par value; 8,000,000 shares authorized,
issued 1,558,530 in 1997 and 1,553,040 in 1996, outstanding
1,091,554 in 1997 and 1,268,686 in 1996 (Note 16) 15,585 15,530
Paid-in capital 15,250,480 15,059,638
Retained earnings - substantially restricted (Notes 15 and 16) 15,211,828 14,010,896
Treasury stock, at cost - 466,976 shares in 1997 and
284,354 shares in 1996 (7,429,669) (4,123,081)
Unearned compensation (Note 12) (977,466) (1,209,046)
Unrealized gain/(loss) on securities available-for-sale,
net of applicable deferred income taxes 135,886 (24,822)
------------ -------------
Total stockholders' equity 22,206,644 23,729,115
------------ -------------
Total liabilities and stockholders' equity $ 163,972,974 $ 143,670,904
============= =============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
14
</page>
<TABLE>
<CAPTION>
FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
- - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 1997, 1996 and 1995
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Interest Income:
Loans receivable $ 10,420,259 $ 8,945,961 $ 7,027,255
Investment securities 1,028,922 802,995 1,049,168
Mortgage-backed and related securities 160,580 200,611 242,692
Other interest-earning assets 84,980 163,631 71,383
------------ ------------ -----------
Total interest income 11,694,741 10,113,198 8,390,498
------------ ------------ -----------
Interest Expense:
Customer deposits (Note 9) 5,376,936 5,043,681 4,454,116
Borrowed funds (Note 10) 1,115,838 617,749 100,452
----------- ----------- -----------
Total interest expense 6,492,774 5,661,430 4,554,568
----------- ----------- -----------
Net interest income 5,201,967 4,451,768 3,835,930
Provision (credit) for loan losses 71,361 79,500 (26,660)
----------- ---------- -----------
Net interest income after
provision for loan losses 5,130,606 4,372,268 3,862,590
----------- ----------- -----------
Noninterest Income:
Service charges and other fee income 389,217 270,470 166,508
Gain/(loss) on investment securities and
mortgage-backed securities 187,438 (6,330) (18,505)
Gain/(loss) on sale of property and equipment (24,988) 20,243 7,000
Loan origination and commitment fees (Note 1) 7,737 3,184 4,028
Income from real estate operations 86,157 93,678 60,118
Insurance commissions 65,144 73,457 76,379
Other 3,536 4,099 3,150
----------- ----------- ----------
Total noninterest income 714,241 458,801 298,678
----------- ----------- ----------
Noninterest Expense:
Compensation and employee benefits (Note 12) 1,823,972 1,695,707 1,535,863
Occupancy and equipment 392,336 365,150 274,724
Deposit insurance premiums 782,542 228,870 205,489
Advertising and promotional 73,235 204,469 30,953
Professional fees 58,102 56,606 99,775
Other 517,278 494,591 367,008
----------- ----------- ----------
Total noninterest expense 3,647,465 3,045,393 2,513,812
----------- ----------- -----------
Income before taxes 2,197,382 1,785,676 1,647,456
Income Taxes (Note 11) 783,979 631,039 613,204
----------- ----------- -----------
Net income $ 1,413,403 $ 1,154,637 $ 1,034,252
=========== =========== ===========
Primary earnings per share (Note 1) $ 1.24 $ .92 $ .77
=========== =========== ===========
Fully diluted earnings per share (Note 1) $ 1.23 $ .92 $ .77
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
15
</page>
<TABLE>
FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- - - - - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 1997, 1996 and 1995
<CAPTION>
Common Unrealized Total
Stock Paid-in Retained Treasury Unearned Gain/(Loss) on Stockholders'
Shares Amount Capital Earnings Stock Compensation Securities Equity
--------- -------- ----------- ------------ ----------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994 1,473,792 $ 15,513 $14,857,610 $ 12,316,426 $ (910,450) $ (1,742,436) $(223,959) $24,312,704
Net income - - - 1,034,252 - - - 1,034,252
Proceeds from exercise of
stock option 100 1 999 - - - - 1,000
Cash dividends ($.20 per share) - - - (256,593) - - - (256,593)
Purchase of treasury stock
at cost (73,714) - - - (997,518) - - (997,518)
Vesting of MRP stock - - - - - 81,640 - 81,640
Release of ESOP shares - - 63,159 - - 200,060 - 263,219
Net change in unrealized
loss on securities
available-for-sale,
net of applicable
deferred income taxes - - - - - - 52,891 2,891
--------- ------ ---------- ---------- ---------- ---------- --------- ----------
Balance at June 30, 1995 1,400,178 15,514 14,921,768 13,094,085 (1,907,968) (1,460,736) (171,068) 24,491,595
Net income - - - 1,154,637 - - - 1,154,637
Proceeds from exercise of
stock options 1,648 16 16,464 - - - - 16,480
Cash dividends ($.20 per share) - - - (237,826) - - - (237,826)
Purchase of treasury stock
at cost (133,140) - - - (2,215,113) - - (2,215,113)
Vesting of MRP stock - - - - - 55,390 - 55,390
Release of ESOP shares - - 121,406 - - 196,300 - 317,706
Net change in unrealized
loss on securities
available-for-sale,
net of applicable
deferred income taxes - - - - - - 146,246 146,246
--------- ------ ---------- ---------- ---------- ----------- -------- ----------
Balance at June 30, 1996 1,268,686 15,530 15,059,638 14,010,896 (4,123,081) (1,209,046) (24,822) 23,729,115
Net income - - - 1,413,403 - - - 1,413,403
Proceeds from exercise of
stock options 5,490 55 54,845 - - - - 54,900
Cash dividends ($.20 per share) - - - (212,471) - - - (212,471)
Purchase of treasury stock
at cost (182,622) - - - (3,306,588) - - (3,306,588)
Vesting of MRP stock - - - - - 55,640 - 55,640
Release of ESOP shares - - 135,997 - - 175,940 - 311,937
Net change in unrealized
gain (loss) on securities
available-for-sale,
net of applicable
deferred income taxes - - - - - - 160,708 160,708
--------- -------- ----------- ----------- ------------ ------------ --------- -----------
Balance June 30, 1997 1,091,554 $ 15,585 $15,250,480 $15,211,828 $(7,429,669) $ (977,466) $ 135,886 $22,206,644
======== ======= ========= ========= ========= ========= ======= =========
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
16
</page>
<TABLE>
FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - - - - - - - - - - - - - - - - - -
Years Ended June 30, 1997, 1996 and 1995
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,413,403 $ 1,154,637 $ 1,034,252
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 178,489 161,513 134,946
Amortization 11,159 15,765 16,083
Premiums and discounts on mortgage-backed
securities and investment securities (1,353) 5,842 8,839
Loss (credit) on loans, net of recoveries 71,361 79,500 (26,660)
Unrealized loss on investment securities 16,000 33,000 17,000
(Gain)/ loss on sale of investment securities
and mortgage-backed securities (203,438) (26,670) 1,505
(Gain)/ loss on sale of equipment 24,988 (20,243) (7,000)
Income reinvested on investment securities
and Federal Home Loan Bank stock - (31,391) (62,453)
Vesting of MRP shares 55,658 55,431 78,856
Release of ESOP shares 311,937 317,706 263,219
Net change in operating accounts:
Accrued interest receivable and other assets (207,527) (35,816) (107,248)
Deferred loan costs (37,034) (23,912) (25,366)
Accrued expenses 53,235 32,185 (18,802)
Deferred income taxes 39,759 16,064 116,087
Income taxes payable - current (87,146) 43,425 45,329
------------ ------------ ------------
Net cash from operating activities 1,639,491 1,777,036 1,468,587
------------ ------------ ------------
Cash flows from investing activities:
Purchase of investment securities
available-for-sale (6,224,000) (5,736,100) (1,009,300)
Purchase of investment securities held-to-maturity (374,000) (685,000) (265,000)
Proceeds from maturities of investment securities
available-for-sale 1,000,000 5,016,695 806,902
Proceeds from maturities of investment securities
held-to-maturity 610,542 445,872 265,510
Proceeds from sale of investment securities
available-for-sale 832,277 1,464,308 502,352
Net change in certificates of deposit 815,000 1,803,000 2,482,000
Net change in federal funds sold - - 2,000,000
Net change in loans receivable (15,471,648) (17,433,330) (15,645,278)
Proceeds from principal payments and maturities
of mortgage-backed certificates 127,895 265,265 228,624
Proceeds from sales of mortgage-backed
certificates 1,980,000 - -
Purchases of property and equipment (710,755) (832,818) (548,446)
Proceeds from sale of property and equipment 7,500 32,800 7,000
Net proceeds from sale of real estate owned - 29,112 43,073
Purchase of other assets - - (3,000)
------------ ------------ ------------
Net cash used in investing activities (17,407,189) (15,630,196) (11,135,563)
------------ ------------ ------------
17
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
- - - - - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 1997, 1996 and 1995
1997 1996 1995
------------- ------------- ------------
Cash flows from financing activities:
Net change in demand deposits, savings accounts,
and certificates of deposit $ 11,724,505 $ 7,571,221 $ 12,485,184
Payments on borrowed funds (3,500,000) - (8,000,000)
Proceeds from borrowed funds 13,500,000 8,500,000 5,000,000
Proceeds from sale of common stock 54,900 16,480 1,000
Cash dividends paid (212,471) (237,826) (256,593)
Purchase of treasury stock (3,306,588) (2,215,113) (997,518)
------------- ------------- ------------
Net cash from financing activities 18,260,346 13,634,762 8,232,073
------------ ------------- ------------
Net increase (decrease) in cash and cash equivalents 2,492,648 (218,398) (1,434,903)
Cash and cash equivalents -
beginning of period 3,316,282 3,534,680 4,969,583
------------ ----------- -----------
Cash and cash equivalents -
end of period $ 5,808,930 $ 3,316,282 $ 3,534,680
============ ============ =============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and
other borrowings $ 6,462,776 $ 5,658,063 $ 4,540,132
Income taxes 831,149 567,602 455,457
Supplemental schedule of non-cash investing and
financing activities:
Loans and other real estate
charged off to reserve $ 109,863 $ 1,117 $ 12,487
Loans transferred to real estate
acquired in settlement of loans 113,776 29,112 43,073
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
18
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 1997, 1996 and 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First Bancshares, Inc., a Missouri corporation, was organized
on September 30, 1993 for the purpose of becoming a unitary
savings and loan holding company for First Home 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. It also
provides insurance brokerage activities through a
subsidiary corporation. The Savings Bank is subject
to competition from other financial institutions. The
Company and Savings Bank are also subject to the regulation
of certain federal agencies and undergo periodic
examinations by those regulatory authorities.
On December 16, 1993, the members of the Savings Bank
adopted a plan of conversion pursuant to which the Savings
Bank converted from a state-chartered mutual savings and
loan association to a state-chartered stock savings and
loan association wholly owned by the Holding Company. On
December 22, 1993, the Holding Company completed its
Subscription and Community Offering and acquired the
capital stock of the Savings Bank with a portion of the
proceeds.
To assist the reader in evaluating the financial statements
of First Bancshares, Inc. and Subsidiary, the significant
accounting policies are summarized below.
Use of estimates - Management uses estimates and assumptions
in preparing these financial statements in accordance with
generally accepted accounting principles. Those estimates
and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and
liabilities, and the reported revenues and expenses.
Actual results could vary from the estimates that were used
Material estimates that are particularly susceptible to
significant change relate to the determination of the
allowance for loan losses and the valuation of real
estate acquired in connection with foreclosures or in
satisfaction of loans.
While management uses available information to recognize
losses on loans and foreclosed real estate, future
additions to the allowances may be necessary based on
changes in local economic conditions. In addition,
regulatory agencies, as an integral part of their
examination process, periodically review the Savings
Bank's allowances for loan losses and foreclosed real
estate. Such agencies may require the Savings Bank to
recognize additions to the allowances based on their
judgments about information available to them at the time
of their examination.
Principles of consolidation - The accompanying consolidated
financial statements include the accounts of First
Bancshares, Inc. and its wholly-owned subsidiary, the
Savings Bank, and Fybar Service Corporation, a wholly-
owned subsidiary of the Savings Bank. In consolidation,
all significant intercompany balances and transactions
have been eliminated.
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 which are unrestricted as to withdrawal or
use. Cash equivalents include highly-liquid instruments
with an original maturity of three months or less.
19
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 1997, 1996 and 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Investment securities and mortgage-backed certificates - During
the year ended June 30, 1994, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities," which established 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. 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.
In adopting SFAS No. 115, the Company modified its
accounting policies and designated its securities in
accordance with the three classifications. The Company's
adoption of SFAS No. 115 resulted in the reclassification
of certain securities from the held-to-maturity portfolio
to the available-for-sale portfolio. The net unrealized
losses have been reported as a separate component of
stockholders' equity. At June 30, 1997 and 1996, the
Company had no securities designated as trading securities.
Loans receivable - Loans receivable are stated at their
principal amount outstanding, net of deferred loan
origination and commitment fees and certain direct costs,
which are recognized over the contractual life of the loan
as an adjustment of the loan's yield. Interest income on
loans is recognized on an accrual basis.
Non-performing loans are placed on a nonaccrual 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, except when the loan
is well secured and in the process of collection. 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.
Cash collections subsequently received are applied against
outstanding principal until the loan is considered fully
collectible, after which cash collections are recognized
as interest income.
The Company reports the change in present value of the
expected future cash flows related to impaired loans as
an increase or decrease in bad debt expense.
20
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 1997, 1996 and 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Property and equipment and related depreciation - Property and
equipment has been stated at cost except as discussed in
Note (7). Depreciation has been principally computed by
applying the following methods and estimated lives:
Category Estimated Life Method
--------------------- -------------- ----------
Automobiles 5 Years Straight-line and
declining-balance
Office furniture, fixtures Straight-line and
and equipment 3-10 Years declining-balance
Buildings 15-40 Years Straight-line and
declining-balance
Investment real estate 15-40 Years Straight-line
Maintenance and repairs are charged to expense.
Improvements which extend the lives of the respective
assets are capitalized. When property or equipment is
sold or otherwise disposed of, the cost and related
accumulated depreciation are removed from the respective
accounts and the resulting gain or loss is reflected in
income.
Intangible assets - Intangible assets have been recorded by the
Savings Bank in connection with the acquisition of the
assets of Lawson and Lawson Insurance Agency, Inc., which
is discussed further in Note (8). Goodwill, which
represents the excess of the purchase price over the
estimated fair market value of net assets and other
intangibles acquired, is being amortized on a straight-
line basis over ten years. The cost of covenants not to
compete are being amortized over five years on a straight-
line basis. The cost of renewal lists acquired are being
amortized over their estimated remaining economic lives,
ten years, using the straight-line method. Organization
costs are being amortized on a straight-line basis over
five years.
Income taxes - The Company files a consolidated federal income
tax return with its wholly-owned subsidiary. The income
tax effect of timing differences in reporting transactions
for financial reporting and income tax purposes is
reflected in the financial statements as deferred income
taxes.
During the year ended June 30, 1993, the Company adopted
SFAS No. 109, "Accounting for Income Taxes". Under SFAS
No. 109, income taxes are accounted for under the asset
and liability method. Under this method, deferred income
taxes are recognized for temporary differences by applying
enacted statutory rates applicable to future years to
differences between the financial statement carrying
amounts and the tax basis of existing assets and
liabilities. The effect on deferred taxes of a change in
tax rates is recognized in income in the period that
includes the enactment date. The net effect of the
Company's adoption of SFAS No. 109 was not material to
its financial condition or results of operations.
Allowance for loan losses - The Savings Bank maintains an
allowance for loan losses to absorb possible future
losses that may be realized on its loan portfolio. In
conjunction with a review of the loan portfolio, the
allowance for loan losses is evaluated and adjusted at
least quarterly. In evaluating the allowance for loan
losses, management considers various factors including
historical loss experience, the level and trend of
delinquent and classified loans, current and anticipated
economic and real
21
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 1997, 1996 and 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
estate conditions, and the composition of the loan
portfolio. Losses incurred upon initial acquisition of
real estate owned through foreclosure are charged to the
allowance for loan losses.
Special reserves are established for any impaired loan for
which the recorded investment in the loan exceeds the
measured value of the loan. The values of loans subject
to impairment valuation are determined based on the present
value of expected future cash flows, the market price of
the loans, or the fair values of the underlying collateral
if the loan is collateral dependent.
Real estate owned - Real estate acquired in the settlement of
loans, including in-substance foreclosures, is recorded at
the lower of the remaining 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. Gains on sales are
determined on the specific identification method and are
credited to income when the property is sold.
Loan origination fees and costs - During the year ended
June 30, 1994, the Savings Bank adopted SFAS No. 91,
"Accounting for Nonrefundable Fees and Costs Associated
with Originating or Acquiring Loans and Initial Direct
Costs of Leases." Under SFAS No. 91, loan origination
fees 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 or sold, the unamortized
balance of these deferred fees and costs is recognized in
income. The Savings Bank adopted SFAS No. 91
prospectively from July 1, 1993. The net effect of the
Savings Bank's adoption of SFAS No. 91 was not material to
its financial condition or results of operations.
Real estate held for investment - Real estate properties
held for investment are carried at the lower of cost,
including cost of improvements incurred subsequent to
acquisition, or net realizable value. Costs relating to
the development and improvement of property are
capitalized, whereas costs relating to the holding of the
property are expensed.
Advertising costs - The Company expenses non-direct response
advertising costs as they are incurred.
Earnings per share - Primary earnings per share amounts are
computed based on the weighted average number of shares
actually outstanding plus the shares that would be
outstanding assuming the exercise of dilutive stock
options, which are considered to be common stock
equivalents. 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. The number of shares used in the computations
were 1,141,175 in 1997, 1,260,434 in 1996 and 1,340,202
in 1995.
22
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 1997, 1996 and 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
For purposes of the fully diluted computation for 1997 and
1995, 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 market price of the Company's stock on June 30, 1997
and June 30, 1995 because that price was higher than the
average market price for the year. A similar computation
was not made for 1996 because the average market price for
the year was higher than the price at June 30, 1996. The
number of shares used in the computations of fully diluted
earnings per share were 1,150,071 in 1997, 1,260,434 in
1996 and 1,349,835 in 1995.
Employee Stock Ownership Plan ("ESOP") shares not
committed to be released are not considered outstanding
for purposes of calculating primary and fully diluted
earnings per share due to the Company's adoption of
Statement of Position 93-6, "Employer's Accounting for
Employee Stock Ownership Plans" (See Note (12)).
New accounting standards - In June 1996, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 125,
"Accounting for the Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities" which clarifies
and provides consistent guidance for distinguishing
transfer of financial assets that are sales from transfers
that are borrowings. The standard is based on a financial
components approach that focuses on control. Under that
approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls
and liabilities it has incurred, and derecognizes
liabilities when extinguished. SFAS No. 127, "Deferral
of the Effective Date of Certain Provisions of SFAS
No. 125" defers the December 31, 1996 effective date of
application of certain portions of SFAS No. 125 until
January 1, 1998. The Company adopted the provisions of
SFAS No. 125 on January 1, 1997. The adoption did not
have a material impact on the Company's financial
condition or results of operations.
SFAS No. 128, "Earnings Per Share," was issued in February
1997 and establishes standards for computing and presenting
earnings per share ("EPS"). It applies to entities with
publicly-held common stock or potential common stock. The
Statement replaces the presentation of primary EPS with a
presentation of basic EPS and requires the dual
presentation of basic and diluted EPS on the face of the
income statement. SFAS No. 128 is effective for the
financial statements for the periods ending after December
15, 1997 and requires restatement of all prior period EPS
data presented. The impact of its adoption is not
expected to be material to the Company.
SFAS No. 129, "Disclosure of Information About Capital
Structure," establishes standards for disclosing information
about an entity's capital structure and applies to all
entities. SFAS No. 129 continues the previous requirements
to disclose certain information about an entity's capital
structure found in Accounting Principles Board ("APB")
Opinions No. 10 , "Omnibus Opinion - 1996," and No. 15,
"Earnings Per Share," and SFAS No. 47, "Disclosure of
Long-Term Obligations," for entities that were subject
to those standards. SFAS No. 129 is effective for financial
statements for periods ending after December 15, 1997.
SFAS No. 129 contains no change in disclosure requirements
for entities that were previously subject to the
requirements of APB Opinions Nos. 10 and 15 and SFAS No.
47. The adoption of the provisions of SFAS No. 129 is
not expected to have a material impact on the Company.
23
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 1997, 1996 and 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
In July 1997, FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and
presenting of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose
financial statements. It requires that all items that are
required to be recognized under accounting standards as
components of comprehensive income be reported in a financial
statement that is presented with the same prominence as other
financial statements. SFAS No. 130 requires that companies
(i) classify items of other comprehensive income by their
nature in a financial statement and (ii) display the
accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the
equity section of the statement of financial condition.
SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements
for earlier periods provided for comprehensive purposes is
required.
In June 1997, FASB issued SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information," which
established standards for disclosure about operating segments
in annual financial statements and selected information in
interim financial reports. It also establishes standards for
related disclosures about products and services, geographic
areas, and major customers. SFAS No. 131 supersedes SFAS
No. 14, "Financial Reporting for Segments of a Business
Enterprise". SFAS No. 131 becomes effective for the Company's
fiscal year ending June 30, 1999, and requires that comparative
information from earlier years be restated to conform to its
requirements. The adoption of the provisions of SFAS No. 131
is not expected to have a material impact on the Company.
Reclassifications - Certain accounts in the prior-years'
consolidated financial statements have been reclassified
for comparative purposes to conform with the presentation in
the current-year consolidated financial statements.
24
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 1997, 1996 and 1995
(2) INVESTMENT SECURITIES
As discussed in Note (1), effective June 30, 1994, the Company
adopted SFAS No. 115 and designated certain securities as
available-for-sale.
A summary of the investment securities available-for-sale at
June 30, 1997 is as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Gross Unrealized Fair
Cost Gains Losses Value
------------ ---------- ---------- --------------
<S> <C> <C> <C> <C>
United States Government and
Federal Agencies obligations $ 13,041,337 $ 105,037 $ (18,875) $ 13,127,499
Domestic corporate obligations 150,075 - (75) 150,000
Mutual funds 34,548 2,512 - 37,060
Common and preferred stocks 790,569 131,123 (8,965) 912,727
------------- ---------- ----------- -------------
Total $ 14,016,529 $ 238,672 $ (27,915) $ 14,227,286
============ ========== =========== =============
</TABLE>
The amortized cost and estimated market value of debt securities
available-for-sale at June 30, 1997 are summarized below by
contractual terms to maturity. 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.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
------------- -------------
<S> <C> <C>
Due in one year or les $ 6,397,975 $ 6,480,749
Due after one year through five years 6,793,437 6,796,750
Due after five years through ten years - -
Due after ten years - -
------------ ------------
Total $ 13,191,412 $ 13,277,499
============ ============
</TABLE>
Proceeds from the sales of common and preferred stock held as
available-for-sale during the year ended June 30, 1997 were
$832,277. A gain of $223,438 was recognized on these sales.
A summary of investment securities held-to-maturity at
June 30, 1997 is as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Gross Unrealized Fair
Cost Gains Losses Value
------------ --------- ---------- -----------
<S> <C> <C> <C> <C>
Obligations of states and
political subdivisions $ 1,492,441 $ 21,095 $ - $ 1,513,536
Auto and student loan pools 112,224 - - 112,224
----------- --------- ---------- -----------
Total $ 1,604,665 $ 21,095 $ - $ 1,625,760
============ ========= ========== ===========
</TABLE>
25
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 1997, 1996 and 1995
(2) INVESTMENT SECURITIES - (CONTINUED)
Auto and student loan pools consist of an investment in a pool
of auto loans and a pool of student loans and are stated at net
realizable value in 1997, 1996 and 1995. The auto loan pool
was written down to its estimated net realizable value because,
in the opinion of management, the decline in market value of
that security is considered to be other than temporary. The
amount of the losses, $16,000, $33,000 and $17,000 for 1997,
1996 and 1995, respectively, have been charged to operations.
The amortized cost and estimated market value of investment
securities held-to-maturity at June 30, 1997, 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.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
------------ ------------
<S> <C> <C>
Due in one year or less $ 529,585 $ 534,802
Due after one year through five years 1,015,080 1,029,515
Due after five years through ten years 60,000 61,443
----------- -----------
Total $ 1,604,665 $ 1,625,760
=========== ===========
</TABLE>
A summary of the investment securities available-for-sale at June 30, 1996
is as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Gross Unrealized Fair
Cost Gains Losses Value
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
United States Government and
Federal Agencies obligations $ 8,045,888 $ 9,906 $ (47,077) $ 8,008,717
Domestic corporate obligations 150,522 4,064 - 154,586
Mutual funds 34,548 - - 34,548
Common and preferred stocks 1,166,842 137,500 (24,178) 1,280,164
----------- ---------- ----------- ------------
Total $ 9,397,800 $ 151,470 $ (71,255) $ 9,478,015
=========== ========== =========== ===========
</TABLE>
Proceeds from the sales of four mutual funds, two U.S. Federal agency
obligations and preferred stock held as available-for-sale during the year
ended June 30, 1996 were $1,464,308. A gain of $26,670 was recognized on these
sales. Proceeds from the sales of four mutual funds held as available-for-
sale during the year ended June 30, 1995 were $502,352. A loss of $1,505 was
recognized on these sales.
26
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 1997, 1996 and 1995
(2) INVESTMENT SECURITIES - (CONTINUED)
A summary of investment securities held-to-maturity at June 30,
1996 is as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Gross Unrealized Fair
Cost Gains Losses Value
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Obligations of states and
political subdivisions $ 2,074,609 $ 17,965 $ (1,902) $ 2,090,672
Auto and student loan pools 158,766 - - 158,766
----------- --------- ---------- -----------
Total $ 2,233,375 $ 17,965 $ (1,902) $ 2,249,438
=========== ========= ========== ===========
</TABLE>
The book value of securities pledged as collateral, to secure
public deposits was $1,469,354 at June 30, 1997 and $690,343 at
June 30, 1996. The approximate fair value of pledged securities
was $1,477,332 at June 30, 1997 and $692,482 at June 30, 1996.
(3) INVESTMENT IN FEDERAL HOME LOAN BANK STOCK
Investment in stock of the Federal Home Loan Bank is required
by law of every Federally-insured savings institution. No
ready market exists for this stock and it has no quoted market
value. However, redemption of this stock has been at par value.
The Savings Bank, as a member of the Federal Home Loan Bank of
Des Moines, is required to acquire and hold shares of capital
stock in the Federal Home Loan Bank of Des Moines in an amount
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 Federal Home
Loan Bank of Des Moines. The Savings Bank is in compliance with
this requirement with an investment in Federal Home Loan Bank of
Des Moines stock of $1,263,800 at June 30, 1997.
(4) MORTGAGE-BACKED SECURITIES
The amortized cost and estimated market values of mortgage-
backed securities available-for-sale as of June 30, 1997 are
summarized below:
<TABLE>
<CAPTION>
Estimated
Amortized Gross Unrealized Fair
Cost Gains Losses Value
---------- --------- --------- -----------
<S> <C> <C> <C> <C>
FHLMC certificates $ 333,791 $ 3,336 $ - $ 337,127
FNMA certificates 394,350 - (1,185) 393,165
GNMA certificates 92,954 4,301 - 97,255
---------- ---------- --------- ----------
Total $ 821,095 $ 7,637 $ (1,185) $ 827,547
========== ========= ========= ==========
</TABLE>
27
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 1997, 1996 and 1995
(4) MORTGAGE-BACKED SECURITIES - (CONTINUED)
Proceeds from the sale of a collateralized mortgage obligation
during the year ended June 30, 1997 was $1,980,000. A loss of
$20,000 was recognized on this sale.
The amortized cost and estimated market values of mortgage-
backed securities available-for-sale as of June 30, 1996 are
summarized below:
<TABLE>
<CAPTION>
Estimated
Amortized Gross Unrealized Fair
Cost Gains Losses Value
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
FHLMC certificates $ 393,267 $ 3,026 $ (705) $ 395,588
FNMA certificates 445,669 - (2,908) 442,761
GNMA certificates 110,053 2,751 - 112,804
Collateralized mortgage
obligations 2,000,000 - (120,000) 1,880,000
---------- --------- ---------- -----------
Total $ 2,948,989 $ 5,777 $ (123,613) $ 2,831,153
=========== ========= =========== ============
</TABLE>
(5) LOANS RECEIVABLE
Loans receivable at June 30 consist of the following:
<TABLE>
<CAPTION>
1997 1996
------------- --------------
<S> <C> <C>
First mortgage loans $ 123,403,476 $ 110,473,413
Loans to depositors, secured by
savings accounts 1,300,921 1,282,446
Consumer and automobile loans 6,450,166 5,844,380
Second mortgage loans 4,278,560 3,726,771
Other loans 2,161,552 2,035,412
----------- -------------
Total gross loans 137,594,675 123,362,422
Reserve for loan losses (481,543) (520,045)
Loans in process (3,117,023) (4,132,779)
Unamortized deferred loan costs, net
of origination fees 107,428 70,394
------------ ------------
Net loans receivable $ 134,103,537 $ 118,779,992
============= =============
</TABLE>
Activity in the allowance for loan losses is summarized as
follows for the years ended June 30:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <c. <C>
Balance at beginning of year $ 520,045 $ 441,662
Provision charged to income 71,361 79,500
Charge-offs (114,148) (1,477)
Recoveries 4,285 360
---------- ---------
Balance at end of year $ 481,543 $ 520,045
========= =========
</TABLE>
The Savings Bank primarily grants first mortgage loans to
customers throughout southern Missouri. The loans are
typically secured by real estate or personal property.
28
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 1997, 1996 and 1995
(5) LOANS RECEIVABLE - (CONTINUED)
As of June 30, 1997, the total recorded investment in impaired
loans was $97,438 as recognized in conformity with FASB
Statement No. 114, as amended by FASB Statement No. 118. This
amount was subject to allowances for credit losses of $77,328.
During 1997, the average recorded investment in impaired loans
was $166,862. Interest income recognized in 1997 during the
period in which the underlying loans were considered impaired
was $3,440.
(6) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at June 30 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Investment securities $ 210,558 $ 109,436
Mortgage-backed securities 8,799 17,952
Loans receivable 445,755 341,574
---------- ----------
Total $ 665,112 $ 468,962
========== ==========
</TABLE>
(7) PROPERTY AND EQUIPMENT
Property and equipment at June 30 consists of the following:
<TABLE>
<CAPTION>
1997
------------------------------------------------------
Accum. Valuation
Category Cost Deprec. Reserve Net
---------------------------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Land $ 285,759 $ - $ - $ 285,759
Buildings 2,704,560 755,364 - 1,949,196
Office furniture,
fixtures and equipment 1,353,759 894,827 - 458,932
Automobiles 85,491 41,055 - 44,436
Investment real estate 1,382,206 155,491 271,147 955,568
----------- ---------- --------- -----------
Total $ 5,811,775 $ 1,846,737 $ 271,147 $ 3,693,891
=========== =========== ========= ===========
</TABLE>
<TABLE>
<CAPTION> 1996
------------------------------------------------------
Accum. Valuation
Category Cost Deprec. Reserve Net
------------------------ ----------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Land $ 259,145 $ - $ - $ 259,145
Buildings 2,532,713 688,305 - 1,844,408
Office furniture,
fixtures and equipment 1,106,434 841,936 - 264,498
Automobiles 89,834 29,011 - 60,823
Investment real estate 1,171,840 135,454 271,147 765,239
----------- ---------- --------- ------------
Total $ 5,159,966 $1,694,706 $ 271,147 $ 3,194,113
=========== ========== ========= ============
</TABLE>
29
</page>
(7) PROPERTY AND EQUIMENT - (CONTINUED)
Depreciation charges to operations for the years ended June 30,
1997, 1996 and 1995 were $178,489, $161,513, and $134,946,
respectively. The depreciation policies followed by the
Company are described in Note (1).
A valuation reserve has been established for certain investment
real estate to adjust the property to its net realizable value
at June 30, 1997 and 1996.
(8) INTANGIBLE ASSETS
The subsidiary of the Savings Bank, Fybar Service Corporation,
acquired the assets of the Lawson & Lawson Insurance Agency,
Inc. during October, 1991. This transaction was recorded using
the purchase method of accounting. The results of operations of
this agency have been included in the statements of income from
the date of acquisition. The purchase price of $185,000
exceeded the net assets of Lawson & Lawson at the date of
acquisition by $155,000. The excess was assigned to customer
renewal lists, covenants not to compete and goodwill.
Organization costs totaling $4,936 were incurred and
capitalized in connection with this transaction. During the
year ended June 30, 1995, $32,628 of the unamortized balance
of the amount allocated to customer renewal lists was written
off. The adjustment was due to the loss of customers when one
of the insurance carriers used by Lawson & Lawson transferred
its account to another insurance agency. The allocation of
intangible assets described above and related accumulated
amortization at June 30 is as follows:
<TABLE>
<CAPTION>
1997
-------------------------------
Accum.
Category Cost Amort. Net
----------------------- --------- --------- --------
<S> <C> <C> <C>
Organization costs $ 4,936 $ 4,936 $ -
Customer renewal lists 110,000 80,854 29,146
Covenants not to compete 40,000 40,000 -
Goodwill 5,000 2,792 2,208
--------- --------- ---------
Total $ 159,936 $ 128,582 $ 31,354
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------- Accum.
Category Cost Amort. Net
----------------------- ----------- --------- ---------
<S> <C> <C> <C>
Organization costs $ 4,936 $ 4,490 $ 446
Customer renewal lists 110,000 74,254 35,746
Covenants not to compete 40,000 36,396 3,604
Goodwill 5,000 2,283 2,717
---------- --------- ---------
Total $ 159,936 $ 117,423 $ 42,513
========== ========= =========
</TABLE>
The intangible assets are being amortized as described in Note
(1). Amortization expense charged to operations amounted to
$11,159 for 1997, $15,764 for 1996, and $16,083 for 1995.
30
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 1997, 1996 and 1995
(9) CUSTOMER DEPOSITS
A summary of deposit accounts at June 30 is as follows:
<TABLE>
<CAPTION>
Weighted
Average Rate 1997 1996
at 6/30/97 Amount % Amount %
------------ ------------ ------ -------------- ------
<S> <C> <C> <C> <C> <C>
Noninterest-bearing checking - $ 3,270,891 2.8% $ 2,489,984 2.3%
Interest-bearing checking 2.47% 14,403,732 12.2 12,439,258 11.7
Super Saver money market 3.78% 14,877,924 12.7 14,175,731 13.4
Savings 3.04% 5,587,995 4.7 5,781,593 5.5
------------ ---- ------------ -----
38,140,542 32.4 34,886,566 32.9
------------ ---- ------------ -----
Certificates of Deposit:
3.0% to 4.49% - $ - - % $ 239,453 0.2%
4.5% to 5.49% 5.24% 27,382,204 23.3 34,324,389 32.4
5.5% to 6.49% 5.87% 41,546,814 35.3 25,510,263 24.1
6.5% to 7.49% 6.82% 10,376,619 8.8 10,261,086 9.7
7.5% and over 7.71% 238,553 0.2 738,470 0.7
------------ ----- ------------- -----
79,544,190 67.6 71,073,661 67.1
------------ ----- ------------- -----
Total 4.83% $ 117,684,732 100.0% $ 105,960,227 100.0%
============= ====== ============= ======
</TABLE>
The aggregate amount of jumbo certificates of deposit with a
minimum denomination of $100,000 was $13,970,628 and $11,774,506
at June 30, 1997 and 1996, respectively.
At June 30, 1997, scheduled maturities of certificates of
deposit are as follows:
<TABLE>
<CAPTION>
During Years Ending June 30,
-----------------------------------------------------------------------------
1998 1999 2000 2001 2002 After
------------ ----------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
4.5% to 5.49% $ 25,048,530 $ 1,698,184 $ 510,116 $ 125,374 $ - $ -
5.5% to 6.49% 24,966,869 9,463,992 3,280,555 3,105,024 730,374 -
6.5% to 7.49% 1,108,183 4,766,894 3,579,534 15,000 860,008 47,000
7.5% and over - 29,040 209,513 - - -
------------ ----------- ----------- ----------- --------- ---------
Total $ 51,123,582 $15,958,110 $ 7,579,718 $ 3,245,398 $1,590,382 $ 47,000
============ =========== =========== =========== ========== ========
</TABLE>
Interest expense on deposits is as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------
1997 1996 1995
----------- ------------ -----------
<S> <C> <C> <C>
Checking $ 332,607 $ 299,355 $ 273,542
Super Saver money market 548,141 558,737 592,563
Savings 170,383 164,254 159,730
Certificates of Deposit 4,325,805 4,021,335 3,428,281
----------- ----------- -----------
Total $ 5,376,936 $ 5,043,681 $ 4,454,116
=========== =========== ===========
</TABLE>
31
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 1997, 1996 and 1995
(10) ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWED FUNDS
The advances listed below were obtained from the Federal Home
Loan Bank of Des Moines and secured by Federal Home Loan Bank
stock, loans, investment securities and deposit accounts.
Interest is payable monthly. Advances from the Federal Home
Loan Bank at June 30 are summarized as follows:
<TABLE>
caption>
1997 1996
------------ ------------
<S> <C> <C>
Three year, 5.98% fixed; matures June 1998 $ 5,000,000 $ 5,000,000
One year, 5.79% fixed; matured October 1996 - 3,500,000
Two year; 5.51% fixed; matures December 1997 3,000,000 3,000,000
Five year; 5.78% fixed; matures December 2000 2,000,000 2,000,000
One year; 5.92% fixed; matures September 1997 4,500,000 -
One year; 5.46% fixed; matures November 1997 2,000,000 -
Two year; 5.74% fixed; matures November 1998 2,000,000 -
Three year; 5.85% fixed; matures November 1999 2,000,000 -
One year; 5.86% fixed; matures June 1998 1,500,000 -
Two year; 6.19% fixed; matures June 1999 1,500,000 -
------------ ------------
Total $ 23,500,000 $ 13,500,000
============ ============
</TABLE>
The fixed rate advances shown above shall be subject to a
prepayment fee equal to 100 percent of the present value of the
monthly lost cash flow to the Federal Home Loan Bank 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.
As of June 30, 1997, the Savings Bank had an open line of
credit with the Federal Home Loan Bank of Des Moines. There
was no balance outstanding at June 30, 1997. The line of
credit has a limit of $5,000,000 and expires on September
15, 1997. The interest rate is adjustable as indexed to the
Federal Home Loan Bank daily investment return. At June 30,
1997, any outstanding advances on the line would have been at
6.19%.
32
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 1997, 1996 and 1995
(10) ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWED FUNDS -
(CONTINUED)
Maturities of Federal Home Loan Bank advances and other borrowed
funds are as follows:
<TABLE>
<CAPTION>
Aggregate
Annual
Year Ended June 30 Maturities
------------------ -------------
<S> <C>
1998 $ 16,055,000
1999 3,500,000
2000 2,000,000
2001 2,000,000
2002 -
Later Years -
------------
$ 23,555,000
=============
</TABLE>
Interest expense on borrowed funds for the years ended June 30
is summarized below:
<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
Advances from Federal Home Loan
Bank $ 1,111,990 $ 613,899 $ 96,602
Other borrowings 3,848 3,850 3,850
----------- --------- ---------
Total $ 1,115,838 $ 617,749 $ 100,452
============ ========= =========
</TABLE>
(11) INCOME TAXES
The provision for income tax expense for the years ended June
30 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Current $ 744,220 $ 614,992 $ 497,117
Deferred 39,759 16,047 116,087
---------- ---------- ----------
Total $ 783,979 $ 631,039 $ 613,204
========== ========== ==========
</TABLE>
The provision for income taxes differs from that computed at
the statutory corporate rate, 34% for the years ended June 30,
1997, 1996 and 1995, as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Tax at statutory rate $ 747,110 $ 607,130 $ 560,135
Increase (decrease) in taxes
resulting from:
State taxes, net of
federal benefit 56,179 51,207 52,189
Tax-exempt income (32,586) (37,380) (33,309)
Net effect of other
book/tax differences 13,276 10,082 34,189
----------- ---------- ---------
Provision for income taxes $ 783,979 $ 631,039 $ 613,204
========= ========= =========
</TABLE>
33
</page>
(11) INCOME TAXES - (CONTINUED)
Deferred income tax expense results from timing differences in
the recognition of income and expense for tax and financial
reporting purposes. The sources of the differences and the
related tax effects for the years ended June 30 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Difference in depreciation methods
used for tax purposes and
financial statements $ 48,496 $ 2,066 $ 16,189
Effect of health insurance plan
reserves not currently deductible 5,431 (9,210) 810
Use of different methods for computing
loan loss reserves for tax purposes
and financial statements 14,246 (7,384) 58,282
Use of different methods for computing
net deferred loan costs/fees for tax
purposes and financial statements 17,932 21,968 38,832
Other book/tax differences (46,346) 8,607 1,974
---------- -------- --------
Increase in deferred income taxes $ 39,759 $ 16,047 $ 116,087
========= ========= =========
</TABLE>
The components of deferred tax assets and liabilities as of June
30, 1997 and 1996 consisted of:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Reserve for loan losses $ 178,171 $ 192,417
Valuation reserve on investment real estate 92,190 92,190
Unrealized losses on securities available-for-sale 10,720 66,306
Health insurance plan reserves not
currently deductible 7,065 12,496
Book amortization in excess of tax amortization 5,855 8,124
Nontemporary decline in security held-to-maturity 20,720 18,500
Unearned compensation 9,163 10,807
--------- ---------
Total gross deferred tax benefits $ 323,884 $ 400,840
--------- ---------
Deferred tax liabilities:
Tax depreciation in excess of book depreciation $ 210,948 $ 162,476
Federal Home Loan Bank stock dividends 68,709 68,709
Bad debt reserves for tax purposes in excess of
base year bad debt reserve 147,078 147,078
Unrealized gains on securities available-for-sale 91,134 57,984
Unamortized deferred loan costs, net of fees 78,733 60,800
Other - 42,564
--------- ---------
Total gross deferred tax liabilities $ 596,602 $ 539,611
--------- ---------
Net deferred tax liabilities $(272,718) $(138,771)
========== =========
</TABLE>
34
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 1997, 1996 and 1995
(11) INCOME TAXES - (CONTINUED)
Under the Internal Revenue Code, the Savings Bank, in
determining taxable income, was allowed a special bad debt
deduction based on a percentage of taxable income of 8% for 1995
or on specified experience formulas. In accordance with SFAS No.
109, a deferred tax liability has not been recognized for tax
basis bad debt reserves of approximately $2,145,621 of the
Savings Bank that arose in tax years that began prior to
December 31, 1987. At June 30, 1997 the amount of the deferred
tax liability that had not been recognized was approximately
$793,880. 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. In August 1996, the above
percentage of taxable income special bad debt deduction was
repealed. All thrifts are required to recapture and pay tax
on all or a portion of their bad debt reserves added since the
last taxable year beginning before January 1, 1988 (the "base
year"). Institutions are required to recapture the excess of
their bad debt reserves over the balance of the bad debt
reserves outstanding at the end of the base year ratably over a
six year period beginning with the first taxable year after
December 31, 1995. Institutions can postpone the payment of
these taxes for two years if they meet a residential loan
requirement. This requirement is, generally, the
institution's mortgage lending activity equaling or exceeding
its average mortgage lending activity for the six taxable years
preceding 1996, adjusted for inflation. As a result of the SFAS
No. 109 recording described above, there will be no impact on
the provision for federal income tax resulting from the
recapture of the excess reserves. As the tax on the recapture
is paid, the deferred tax liability will be reduced.
(12) EMPLOYEE BENEFIT PLANS
The Savings Bank participates in a multiple-employer defined
benefit pension plan covering substantially all employees.
Separate actuarial valuations are not available for each
participating employer, nor are plan assets segregated. Pension
expense for the years ended June 30, 1997, 1996 and 1995 was
approximately $3,681, $3,638, and $5,128, respectively. Plan
assets exceeded the present value of accumulated plan benefits
at June 30, 1997, the latest actuarial valuation date.
As a part of the conversion discussed in Note (1), the Company
established an internally-leveraged ESOP that covers all
employees that are age 21 or older and have completed one year
of service with the Savings Bank. The Savings Bank makes annual
contributions to the ESOP equal to the ESOP's debt service in
addition to dividends received by the ESOP. All dividends
received by the ESOP are used to pay debt service. The ESOP
shares initially were pledged as collateral for its debt to
the Company. As the debt is repaid, shares are released from
collateral and allocated to active participants, in proportion
to their compensation relative to total compensation of active
participants. The ESOP borrowed $1,520,870 from the Company and
used the funds to purchase 152,087 shares of the common stock of
the Company issued in the conversion. The loan will be repaid
principally from the Savings Bank's discretionary contributions
to the ESOP over a period of ten years. As of June 30, 1997
the loan had an outstanding balance of $892,981 and an interest
rate of 6%.
During 1995, the Company began accounting for its ESOP in
accordance with Statement of Position 93-6, "Employer's
Accounting for Employee Stock Ownership Plans". Accordingly,
the debt of the ESOP is eliminated in consolidation and the
shares pledged as collateral are reported as unearned ESOP
shares as a reduction of stockholders' equity in the
consolidated balance sheets. As shares are committed to
be released
35
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 1997, 1996 and 1995
(12) EMPLOYEE BENEFIT PLANS - (CONTINUED)
from collateral, the Company reports compensation expense equal
to the current market price of the shares, and the shares become
outstanding for earnings per share computations. Dividends on
allocated ESOP shares are recorded as a reduction of retained
earnings; dividends on unallocated ESOP shares are recorded as
a reduction of debt and accrued interest. Benefits generally
become 20% vested after each year of credited service beyond
two years. Vesting is accelerated upon retirement, death, or
disability of the participant. Forfeitures are returned to the
Savings Bank or reallocated to other participants to reduce
future funding costs. Benefits may be payable upon retirement,
death, disability or separation from service. Since the
Savings Bank's annual contributions are discretionary, benefits
payable under the ESOP cannot be estimated. The Savings Bank
recorded $302,763 of ESOP compensation expense in 1997, $312,118
in 1996 and $261,278 in 1995.
A summary of ESOP shares at June 30, 1997 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Allocated shares 45,869
Shares committed for release 17,594
Unreleased shares 85,098
----------
Total 148,561
----------
Fair value of unreleased shares $1,723,235
==========
</TABLE>
The Savings Bank has adopted a Management Recognition Plan
("MRP") for the benefit of the directors, officers and employees
of the Savings Bank. The MRP provides directors, officers and
employees of the Company with a proprietary interest in the
Company in a manner designed to encourage such persons to
remain with the Savings Bank. The MRP is managed by trustees
comprised of the directors of the Company. The trustees acquired
30,417 shares of the common stock of the Company issued in the
conversion, all of which have been awarded as of June 30, 1994.
These shares represent unearned compensation and have been
accounted for as a reduction of stockholders' equity. Such
awards vest at the rate of 20% at the end of each twelve months.
Vesting is accelerated upon retirement. The Savings Bank
recorded $55,658 of compensation expense under the MRP in 1997,
$55,431 in 1996 and $78,856 in 1995.
In conjunction with the conversion, 152,087 shares of common
stock were reserved under the 1994 Stock Option and Incentive
Plan (Stock Option Plan) for the benefit of certain officers,
employees and directors. The Stock Option Plan is administered
by a committee of the Board of Directors. Management intends
that options granted under the Stock Option Plan constitute both
incentive and non-incentive stock options. Options granted to
non-employee directors will constitute non-incentive stock
options. With respect to incentive stock options, the option
exercise price may be no less than the fair market value of the
Company's common stock on the date of grant. All options expire
no later than ten years from the date of grant. The option
grants vest at a rate of 20% at the end of each 12 months.
During 1995, 1,000 incentive stock options were granted at an
exercise price of $15.50 and 100 options were exercised at
$10.00. During 1996, 1,648 options were exercised at $10.00.
During 1997, 5,490 options were exercised at $10.00. Options
to purchase 72,364 were exercisable at a weighted-average
exercise price of $10.35 at June 30, 1997.
36
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 1997, 1996 and 1995
(12) EMPLOYEE BENEFIT PLANS - (CONTINUED)
The number and exercise price of options outstanding at June 30
are as follows:
<TABLE>
<CAPTION>
Exerercise Price 1997 1996
---------------- ------- --------
<S> <C> <C>
$10.00 114,432 119,922
$10.75 10,000 10,000
$15.50 1,000 1,000
</TABLE>
Stock options outstanding at June 30, 1997 had a weighted-
average remaining contractual life of 6.5 years.
Effective, July 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation". As permitted by
the standard, the Company has elected to contine following the
guidance of Accounting Principles Board Opinion No. 25 (APB No. 25),
"Accounting for Stock Issued to Employees". Under APB No. 25,
no compensation expense is recognized because the exercisable
price of the Company's stock options equals or exceeds the
market price of the stock on the date of grant. The effect of
applying the fair value method required by SFAS No. 123 to the
Company's stock option awards results in net income and
earnings per share that are not materially different from
amounts reported in the consolidated statements of income.
(13) 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 employees, officers and directors for
the years ended June 30 is as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Beginning balance $ 1,171,828 $ 952,333
Originations and advances 283,677 439,152
Principal repayments (237,852) (219,657)
------------ ------------
Ending balance $ 1,217,653 $ 1,171,828
=========== ===========
</TABLE>
(14) 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. Since some of
the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future
cash requirements. The principal commitments of the Savings
Bank are as follows:
Letters of Credit - Outstanding standby letters of credit were
approximately $137,820 and $45,050 at June 30, 1997 and 1996,
respectively.
Loan Commitments - The Savings Bank had outstanding firm
commitments to originate real estate loans in the amount of
$567,100 and $1,799,954 at June 30, 1997 and 1996, respectively.
37
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 1997, 1996 and 1995
(14) COMMITMENTS AND CONTINGENCIES - (CONTINUED)
Lines of Credit - The unused portion of lines of credit on
commercial loans were approximately $2,348,464 and $754,795
at June 30, 1997 and 1996, respectively.
Loans in Process - The Savings Bank has recorded loans in
process representing the undisbursed portion of loans in the
amount of $3,117,023 and $4,132,779 at June 30, 1997 and 1996,
respectively. These amounts were recorded as loans receivable,
with a corresponding reduction for such loans in process as
reflected in Note (5).
At June 30, 1997, the Savings Bank had an Irrevocable Standby
Letter of Credit issued on its behalf from the Federal Home
Loan Bank of Des Moines in the amount of $275,000, expiring
May 27, 1998.
(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 judgements 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,
1997, that the Savings Bank meets all capital adequacy
requirements to which it is subject.
As of June 30, 1997, the most recent notification from the OTS,
the Savings Bank was categorized as well-capitalized under the
framework for prompt corrective action. To be catorgorized 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.
38
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 1997, 1996 and 1995
(15) REGULATORY CAPITAL REQUIREMENTS - (CONTINUED)
The Savings Bank's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
To Be Well-
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ---------- ------ --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1997:
Total Risk-Based Capital
(to Risk-Weighted Assets) $ 19,101 18.2% > $ 8,380 > 8.0% > $ 10,475 > 10.0%
Core Capital
(to Adjusted Tangible Assets) 18,927 11.7% > 4,849 > 3.0% > 8,081 > 5.0%
Tangible Capital
(to Tangible Assets) 18,927 11.7% > 2,424 > 1.5% N/A
Tier 1 Capital
(to Risk-Weighted Assets) 18,927 18.1% N/A > 6,285 > 6.0%
As of June 30, 1996:
Total Risk-Based Capital
(to Risk-Weighted Assets) $ 18,950 20.4% > 7,424 > 8.0% > $ 9,281 > 10.0%
Core Capital
(to Adjusted Tangible Assets) 18,803 13.4% > 4,210 > 3.0% > 7,017 > 5.0%
Tangible Capital
(to Tangible Assets) 18,803 13.4% > 2,105 > 1.5% N/A
Tier 1 Capital
(to Risk-Weighted Assets) 18,803 20.3% N/A > 5,568 > 6.0%
</TABLE>
(16) ADVERTISING COSTS
The Company incurred $73,235, $204,469, and $30,953 in
non-direct response advertising costs during the years ended
1997, 1996 and 1995, respectively. The Company incurred no
direct response advertising costs during these years.
(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 investment 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.
39
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 1997, 1996 and 1995
(17) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONTINUED)
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. The carrying
value of accrued interest receivable approximates its fair
value.
Investment in Federal Home Loan Bank stock - Fair value of the
Savings Bank's investment in Federal Home Loan Bank stock
approximates the carrying value as no ready market exists
for this investment and the stock could only be sold back
to the Federal Home Loan Bank.
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. The carrying amount of accrued
interest payable approximates its fair value.
Federal Home Loan Bank 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. The carrying amount of accrued
interest payable approximates its fair value.
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.
The following table presents estimated fair values of the
Company's financial instruments. The fair values of certain
of these instruments were calculated by discounted expected
cash flows, which involves significant judgments by management
and uncertainties. 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.
40
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 1997, 1996 and 1995
(17) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONTINUED)
<TABLE>
<CAPTION>
June 30, 1997
--------------------------
Carrying Fair
Amount Value
------------ -----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 5,808,930 $ 5,808,930
Certificates of deposit 1,504,000 1,504,000
Available-for-sale securities 14,227,286 14,227,286
Held-to-maturity securities 1,604,665 1,625,760
Investment in Federal Home Loan Bank stock 1,263,800 1,263,800
Available-for-sale mortgage-backed securities 827,547 827,547
Loans, net of allowance for loan losses 134,103,537 136,711,000
Accrued interest receivable 665,112 665,112
Financial liabilities:
Deposits 117,684,732 117,674,000
Federal Home Loan Bank advances 23,500,000 23,274,000
Other borrowings 55,000 55,000
Unrecognized financial instruments (net of contract amount)
Commitments to extend credit - -
Letters of credit - -
Unused lines of credit - -
June 30, 1996
---------------------------
Carrying Fair
Amount Value
------------- -------------
Financial assets:
Cash and cash equivalents $ 3,316,282 $ 3,316,282
Certificates of deposit 2,319,000 2,319,000
Available-for-sale securities 9,478,015 9,478,015
Held-to-maturity securities 2,233,375 2,249,438
Investment in Federal Home Loan Bank stock 889,800 889,800
Available-for-sale mortgage-backed securities 2,831,153 2,831,153
Loans, net of allowance for loan losses 118,779,992 120,385,000
Accrued interest receivable 468,962 468,962
Financial liabilities:
Deposits 105,960,227 106,093,000
Federal Home Loan Bank advances 13,500,000 13,323,000
Other borrowings 55,000 55,000
Unrecognized financial instruments (net of contract amount)
Commitments to extend credit - -
Letters of credit - -
Unused lines of credit - -
</TABLE>
41
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 1997, 1996 and 1995
(18) PARENT COMPANY ONLY FINANCIAL INFORMATION
The following condensed statement of financial condition and
condensed statements of operations and cash flows for First
Bancshares, Inc. should be read in conjunction with the
consolidated financial statements and notes thereto.
<TABLE>
<CAPTION>
Condensed Statements of Financial Condition
ASSETS June 30, 1997 June 30, 1996
------- -------------- -------------
<S> <C> <C>
Cash $ 70,352 $ 316,530
Certificates of deposit 10,000 120,000
Investment securities available-for-sale, at fair value 1,191,977 2,063,913
Investment securities held-to-maturity - 60,000
Investment in subsidiary 19,586,265 19,294,954
Loan to ESOP 892,981 1,074,865
Property and equipment, less accumulated
depreciation 545,113 812,036
Other assets 53,154 55,182
------------ ------------
Total assets $ 22,349,842 $ 23,797,480
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Due to subsidiary $ 89,215 $ 11,199
Accrued expenses 11,115 18,235
Deferred income taxes, net 42,868 38,931
Stockholders' equity 22,206,644 23,729,115
------------ ------------
Total liabilities and stockholders' equity $ 22,349,842 $ 23,797,480
============ ============
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Income
Year Ended Year Ended Year Ended
June 30, 1997 June 30, 1996 June 30, 1995
------------- ------------- -------------
<S> <C> <C> <C>
Income
Equity in earnings of subsidiary $ 1,245,031 $ 1,016,319 $ 851,484
Interest income 135,556 227,920 344,447
Gain on sale of investments 205,938 26,670 -
Other 27,698 30,778 14,803
----------- ----------- -----------
Total income 1,614,223 1,301,687 1,210,734
----------- ----------- -----------
Expenses
Professional fees 12,427 18,480 52,168
Printing and office supplies 9,201 9,262 5,948
Interest 22,191 - 1,534
Other 64,102 58,532 28,786
Income tax 92,899 60,776 88,046
----------- ----------- -----------
Total expenses 200,820 147,050 176,482
----------- ----------- -----------
Net income $ 1,413,403 $ 1,154,637 $ 1,034,252
=========== =========== ===========
</TABLE>
42
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 1997, 1996 and 1995
(18) PARENT COMPANY ONLY FINANCIAL INFORMATION - (CONTINUED)
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
Year Ended Year Ended Year Ended
June 30, 1997 June 30, 1996 June 30, 1995
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,413,403 $ 1,154,637 $ 1,034,252
Adjustments to reconcile net income to net
cash provided from operating activities:
Equity in earnings of subsidiary (1,245,031) (1,016,319) (851,484)
Depreciation expense 10,196 10,228 300
Income reinvested on investment securities - (15,592) (31,106)
Gain on sale of investments (205,938) (26,670) -
Net change in operating accounts:
Deferred income taxes, net 2,165 302 1,861
Other assets 2,028 (11,637) (2,944)
Liabilities 20,896 (15,765) 5,814
------------ ----------- -----------
Net cash from (used in) operating activities (2,281) 79,184 156,693
------------ ----------- -----------
Cash flows from investing activities:
Dividends from subsidiary 1,500,000 - 1,500,000
Principal payment on ESOP loan 161,258 159,059 151,419
Purchase of investment securities (250,000) (150,000) (949,935)
Proceeds from maturities of investments 560,000 157,336 -
Proceeds from sales of investments 832,277 1,464,308 -
Purchase of property and equipment (397,507) (541,923) (280,641)
Proceeds from sales of property and
equipment 654,234 - -
Purchase of other assets - - (3,000)
Net change in certificates of deposit 110,000 1,107,000 1,033,000
--------- --------- ---------
Net cash from investing activities 3,170,262 2,195,780 1,450,843
--------- --------- ---------
Cash flows from financing activities:
Proceeds from borrowed funds 50,000 - -
Net proceeds from issuance of common stock 54,900 16,480 1,000
Cash dividends paid (212,471) (237,826) (256,593)
Purchase of treasury stock (3,306,588) (2,215,113) (997,518)
----------- ----------- -----------
Net cash used in financing activities (3,414,159) (2,436,459) (1,253,111)
----------- ----------- -----------
Net increase (decrease) in cash (246,178) (161,495) 354,425
Cash at beginning of period 316,530 478,025 123,600
---------- ---------- ----------
Cash at end of period $ 70,352 $ 316,530 $ 478,025
=========== =========== ===========
</TABLE>
43
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 1997, 1996 and 1995
COMMON STOCK INFORMATION
The common stock of First Bancshares, Inc. is traded on The
Nasdaq Stock Market under the symbol "FBSI". As of September 5,
1997, there were 796 stockholders and 1,099,254 shares of common
stock outstanding (including unreleased ESOP shares of 85,098).
This does not reflect the number of persons or entities who hold
stock in nominee or "street name."
On August 28, 1996, November 27, 1996, February 28, 1997 and
May 29, 1997, the Company declared a $.05 common stock dividend
payable September 30, and December 31, 1996 and March 31, and
June 30, 1997 to stockholders of record on September 16, and
December 16, 1996 and March 14, and June 16, 1997, respectively.
Dividend payments by the Company are dependent primarily on 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.
The following table sets forth market price and dividend information
for the Company's common stock.
<TABLE>
<CAPTION>
Fiscal 1996 High Low Dividend
- ------------ --------- -------- --------
<S> <C> <C> <C>
First Quarter $17.00 $14.50 $.05
Second Quarter $17.00 $15.75 $.05
Third Quarter $16.75 $16.00 $.05
Fourth Quarter $16.8125 $15.25 $.05
Fiscal 1997
- ------------
First Quarter $16.75 $15.25 $.05
Second Quarter $17.25 $15.00 $.05
Third Quarter $21.25 $16.50 $.05
Fourth Quarter $21.00 $19.00 $.05
</TABLE>
44
</page>
<TABLE>
<CAPTION>
DIRECTORS AND OFFICERS
FIRST BANCSHARES, INC. FIRST HOME SAVINGS BANK
<S> <C>
DIRECTORS: DIRECTORS:
Stephen H. Romines Stephen H. Romines
Chairman of the Board Chairman of the Board
Harold F. Glass Harold F. Glass
Harold F. Glass, Attorney at Law Harold F. Glass, Attorney at Law
John G. Moody John G. Moody
Judge of the 44th Judge of the 44th
Missouri Judicial Circuit Missouri Judicial Circuit
Dr. James F. Moore Dr. James F. Moore
Director of State Fruit Experiment Station of Director of State Fruit Experiment Station of
Southwest Missouri State University Southwest Missouri State University
Almeta Hardebeck Charles R. Cunningham
Loan Officer at the Sparta Branch Retired Manager of the Marshfield Branch
First Home Savings Bank First Home Savings Bank
OFFICERS: OFFICERS:
Stephen H. Romines Stephen H. Romines
President and Chief Executive Officer President and Chief Executive Officer
Peter M. Medlen Peter M. Medlen
Vice-President Executive Vice-President
Susan J. Uchtman, CPA Susan J. Uchtman, CPA
Chief Financial Officer Chief Financial Officer
Gina Gunnels Colleen B. Stofer
Secretary and Treasurer Secretary
Diana Lewis
Treasurer
</TABLE>
45
</page>
CORPORATE INFORMATION
CORPORATE HEADQUARTERS TRANSFER AGENT
142 East First Street Registrar and Transfer Co.
Mountain Grove, Missouri 10 Commerce Drive
Cranford, New Jersey
07016
INDEPENDENT AUDITORS (800) 866-1340
Kirkpatrick, Phillips & Miller, CPAs, P.C. COMMON STOCK
Springfield, Missouri
Traded on The Nasdaq Stock Market
GENERAL COUNSEL Nasdaq Symbol: FBSI
Harold F. Glass
Springfield, Missouri
SPECIAL COUNSEL
Breyer & Aguggia
Washington, D.C.
ANNUAL MEETING
The Annual Meeting of Stockholders will be held Wednesday,
October 15, 1997, at 2:00 p.m., Central Time, at the Days Inn
Conference Room, 300 East 19th Street, Mountain Grove, Missouri.
____________________________________________________________________
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., 142
EAST FIRST STREET, MOUNTAIN GROVE, MISSOURI 65711.
THE CORPORATION'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.
46
</page>
Exhibit 21
Subsidiaries of the Registrant
</page>
Exhibit 21
Subsidiaries of the Registrant
<TABLE>
<CAPTION>
Parent
- -------
First Bancshares, Inc.
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
<S> <C> <C>
First Home Savings Bank 100% Missouri
Fybar Service Corporation (b) 100% Missouri
</TABLE>
- ----------------------
(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.
</page>
Exhibit 23
Consent of Auditors
(On CPA firm letterhead)
CONSENT OF INDEPENDENT AUDITORS
We have issued our report dated August 6, 1997, accompanying the
Consolidated Financial Statement incorporated by reference in the
Annual Report of First Bancshares, Inc. on Form 10-KSB for the year
ending June 30, 1997. We hereby consent to the incorporation by
reference of said reports in the Registration Statement of First
Bancshares, Inc. on Form S-8 (File No. 33-87234, effective December
9, 1994).
/s/Kirkpatrick, Phillips & Miller
KIRKPATRICK, PHILLIPS & MILLER, CPAs , P.C.
Springfield, Missouri
September 25, 1997
</page>
??
100
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