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, 2000 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-22842
----------
FIRST BANCSHARES, INC.
--------------------------------------------------------------
(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, 2000
were $14,526,000.
As of September 25, 2000, there were outstanding 1,884,852 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 25, 2000, was $13,187,000. 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, 2000. (Parts I and II)
2. Portions of Proxy Statement for the 2000 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, 2000, the Company had
consolidated total assets of $199.1 million, total customer deposits
of $155.7 million and stockholders' equity of $24.5 million. While
the Company owns a title insurance agency through a subsidiary and
some rental real estate, it is not engaged in any significant
activity other than holding the stock of First Home. Accordingly,
the information set forth in this report, including consolidated
financial statements and related data, relates primarily to the
Savings Bank.
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 nine full service branch facilities in Marshfield, Ava,
Gainesville, Sparta, Theodosia, Crane, Galena, Kissee Mills and
Rockaway Beach, 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, 2000, the Savings Bank's net loans were
$174.9 million, or 87.8% of consolidated total assets, including
$118.9 million, or 66.44% of total loans secured by one-to-four
family properties, $42.7 million, or 23.85% of total loans secured
by other real estate and $11.8 million of consumer loans, or 6.59% of
total loans. As discussed in following areas, ARM loans account for
approximately 99% of loans secured by real estate and 89% of the total
loan portfolio.
In March 1998, the Savings Bank purchased two bank branch
offices from NationsBank. The branches are located in Crane and
Galena, Missouri. As part of the agreement, the Savings Bank assumed
customer deposits of $17.4 million and other liabilities of $60,000
in exchange for loans of $4.8 million, premises and
equipment of $300,000, cash of $11.3 million and other assets
of $70,000. The Savings Bank paid a premium of $1.0 million
for the loans purchased and the customer deposits assumed. The
acquisition was recorded using the purchase method of accounting.
The premium paid for the branches is being amortized on a straight-
line basis over 15 years. Results of operations of the branches
acquired are included in the accompanying financial statements since
the dates of acquisition.
1
<PAGE>
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, Ozark, Stone and Taney 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 and Greene 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.
Selected Consolidated Financial Information
This information is incorporated by reference to pages 4 and
5 of the 2000 Annual Report to Stockholders ("Annual Report")
attached hereto as Exhibit 13.
2
<PAGE>
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.
3
</page>
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------------------------------------------------------
2000 1999 1998
--------------------------- --------------------------- -----------------------------
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)............................ $162,647 $13,115 8.06% $150,968 $12,185 8.07% $142,405 $11,626 8.16%
Mortgage-backed securities.......... 497 34 6.84 633 44 6.95 751 51 6.79
Investment securities............... 7,497 442 5.90 6,216 423 6.81 11,872 873 7.35
Daily interest-bearing deposits..... 6,310 259 4.10 9,360 332 3.55 5,898 213 3.61
Federal funds sold.................. 280 15 5.36 229 10 4.37 172 8 4.65
-------- ------ -------- ------- --------- -------
Total interest-earning assets.... 177,231 13,865 7.82 167,406 12,994 7.76 161,098 12,771 7.93
Non-interest earning assets:
Office properties and equipment, net 3,708 3,488 3,016
Real estate, net.................... 1,656 1,007 939
Other non-interest-earning assets... 4,962 4,381 5,230
--------- -------- --------
Total assets...................... $187,557 $176,282 $170,283
======== ======== ========
Interest-bearing liabilities:
Passbook accounts................... $ 10,399 317 3.05 $ 9,102 277 3.04 $ 6,435 195 3.03
NOW and Super Saver accounts........ 46,027 1,394 3.03 43,075 1,301 3.02 34,462 1,003 2.91
Certificates of deposit............. 93,664 5,125 5.47 88,786 4,851 5.46 84,219 4,810 5.71
-------- ----- -------- ------ ------- -----
Total deposits.................... 150,090 6,836 4.55 140,963 6,429 4.56 125,116 6,008 4.80
Other interest-bearing liabilities.. 6,485 421 6.49 4,452 270 6.07 16,398 997 6.08
-------- ------ -------- ------ ------- -----
Total interest-bearing liabilities 156,575 7,257 4.64 145,415 6,699 4.61 141,514 7,005 4.95
Non-interest-bearing liabilities:
Other liabilities................... 6,584 6,502 5,211
--------- -------- --------
Total liabilities................. 163,159 151,917 146,725
Stockholders' equity................. 24,398 24,365 23,558
--------- -------- --------
Total liabilities and
stockholders' equity.............$187,557 $176,282 $170,283
======== ========= ========
Net interest income................... $6,608 $6,295 $5,766
====== ====== ======
Interest rate spread.................. 3.18% 3.15% 2.98%
Net interest margin................... 3.73% 3.76% 3.58%
Ratio of average interest-earning
assets to average interest-
bearing liabilities.................. 113% 115% 114%
__________________
(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>
4
</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,
2000 2000 1999 1998
---------- ----- ----- -----
<S> <C> <C> <C> <C>
Weighted average yield on loan portfolio.............. 8.22 8.06% 8.07% 8.16%
Weighted average yield on mortgage-backed
securities.......................................... 6.93 6.84 6.95 6.79
Weighted average yield on investment securities....... 5.99 5.90 6.81 7.35
Weighted average yield on interest-bearing deposits... 6.18 4.10 3.55 3.61
Weighted average yield on federal funds sold.......... 6.87 5.36 4.37 4.65
Weighted average yield on all interest-
earning assets...................................... 8.08 7.82 7.76 7.93
Weighted average rate paid on total deposits.......... 4.87 4.55 4.56 4.80
Weighted average rate paid on FHLB advance............ 7.00 6.49 6.07 6.08
Weighted average rate paid on all interest
-bearing liabilities................................. 5.10 4.64 4.61 4.95
Interest rate spread (spread between weighted
average rate on all interest-earning assets
and all interest-bearing liabilities)................ 2.98 3.18 3.15 2.98
Net interest margin (net interest income
(expense) as a percentage of average
interest-earning assets)............................ N/A 3.73 3.76 3.58
</TABLE>
5
</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,
2000 Compared to 1999 1999 Compared to 1998
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).......................... $ 944 $ (14) $ -- $ 930 $ 698 $(129) $(10) $ 559
Mortgage-backed securities........ (9) (1) -- (10) (8) 1 -- (7)
Investment securities............. 87 (57) (11) 19 (416) (64) 30 (450)
Daily interest-bearing deposits... (108) 52 (17) (73) 125 (4) (2) 119
Federal funds sold................ 2 2 1 5 3 (1) -- 2
--------- ------ ----- ------- ------- ----- ----- -------
Total net change in income on
interest-earning assets........... 916 (18) (27) 871 402 (197) 18 223
------- ------ ----- ------- ------- ------ ----- -------
Interest-bearing liabilities:
Interest-bearing deposits......... 416 (14) 5 407 760 (300) (39) 421
FHLB advances..................... 123 19 9 151 (726) (2) 1 (727)
------- ----- ---- ----- ------ ----- ----- -----
Total net change in expense on
interest- bearing liabilities..... 539 5 14 558 34 (302) (38) (306)
------ ------ ----- ------ ------ ------ ------ ------
Net change in net interest income.. $ 377 $ (23) $ (41) $ 313 $ 368 $ 105 $ 56 $ 529
====== ======= ======= ====== ====== ====== ====== ======
</TABLE>
(1) Includes interest on loans 90 days or more past due.
6
</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, 2000.
7
<PAGE>
<TABLE>
<CAPTION>
-300 -200 -100 +100 +200 +300
Basis Basis Basis No Basis Basis Basis
Points Points Points Change Points Points Points
------- ------- -------- ------- ------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Mortgage loans and
securities............. $163,776 $161,912 $160,401 $158,952 $157,062 $154,665 $151,832
Non-mortgage loans...... 17,871 17,773 17,678 17,585 17,495 17,406 17,320
Cash, deposits and
securities............. 14,616 14,528 14,439 14,311 14,172 14,035 13,902
Premises and
equipment.............. 4,644 4,644 4,644 4,644 4,644 4,644 4,644
Other assets............ 2,181 3,297 4,686 6,049 7,326 8,526 9,675
--------- -------- --------- --------- -------- -------- ---------
TOTAL................... $203,088 $202,154 $201,848 $201,541 $200,699 $199,276 $197,373
========= ========= ========= ======== ======== ======== ========
LIABILITIES
Deposits................ $157,475 $156,787 $156,114 $155,453 $154,811 $154,184 $153,574
Borrowings.............. 18,714 18,523 18,343 18,173 18,012 17,859 17,714
Other liabilities....... 929 929 929 929 929 929 929
-------- -------- -------- -------- -------- -------- --------
TOTAL................... $177,118 $176,239 $175,386 $174,555 $173,752 $172,972 $172,217
======== ======== ======== ======== ======== ======== ========
MARKET VALUE OF
PORTFOLIO EQUITY.........$ 25,970 $ 25,915 $ 26,462 $ 26,986 $ 26,947 $ 26,304 $ 25,156
======== ======== ======== ======== ======== ======== ========
</TABLE>
8
</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 one-to-four family owner occupied
homes within its primary market area. In an attempt to diversify its
lending portfolio, however, the Savings Bank also originates
nonresidential 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 26 one-to-four family home loans, one condominium loan, two
land loans and one commercial real estate loan in Texas, Arkansas, and
Colorado. The aggregate balance of these 29 loans at June 30, 2000
was $1.1 million. These loans were performing according to the
scheduled terms at June 30, 2000.
At June 30, 2000 the Savings Bank's net loans receivable
totaled approximately $174.9 million representing approximately
85.95% of consolidated total assets. Since 1973, the Savings Bank
has primarily originated ARM loan products. At June 30, 2000, ARM
loans accounted for $159.8 million or 89.27% of the total loan
portfolio and 98.87% of loans secured by real estate. The Savings
Bank focuses on serving the needs of its local community and strongly
believes in a lending philosophy that stresses individual customer
service and flexibility in meeting the needs of its customers.
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.
9
<PAGE>
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------- ----------------- ----------------- ----------------- -----------------
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................. $118,929 66.44% $113,075 72.14% $112,404 74.74% $105,700 76.82% $ 95,534 77.44%
Commercial.................. 28,575 15.96 15,850 10.11 11,615 7.72 10,876 7.90 9,159 7.42
Land........................ 9,029 5.05 8,407 5.36 8,727 5.80 6,828 4.97 5,781 4.69
Second mortgage loans....... 5,082 2.84 4,991 3.19 4,910 3.27 4,278 3.11 3,727 3.02
-------- ----- -------- ----- -------- ------ --------- ------ -------- -----
Total mortgage loans...... 161,615 90.29 142,323 90.80 137,656 91.53 127,682 92.80 114,201 92.57
-------- ----- -------- ----- -------- ------ --------- ----- -------- -----
Other Loans:
Automobile loans............ 6,517 3.64 5,270 3.36 5,724 3.81 4,334 3.15 4,184 3.39
Savings account loans....... 1,646 0.92 1,944 1.24 1,662 1.10 1,301 0.94 1,282 1.04
Mobile home loans........... 1,319 0.74 1,346 0.86 1,135 0.75 743 0.54 745 0.60
Other consumer.............. 2,317 1.29 1,552 0.99 1,847 1.23 1,373 1.00 916 0.75
Commercial business......... 5,582 3.12 4,314 2.75 2,372 1.58 2,162 1.57 2,035 1.65
-------- ----- -------- ------ ------- ------ -------- ------ -------- ------
Total other loans......... 17,381 9.71 14,426 9.20 12,740 8.47 9,913 7.20 9,162 7.43
-------- ----- -------- ------ ------- ------ -------- ------- -------- ------
Total loans............... 178,996 100.00% 156,749 100.00% 150,396 100.00% 137,595 100.00% 123,363 100.00%
-------- ======= -------- ======= ------- ======= ------- ======= -------- ======
Add:
Unamortized deferred loan costs,
net of origination fees.... 267 217 167 107 70
Less:
Undisbursed loans in process 3,797 2,810 3,629 3,117 4,133
Allowance for possible loan
losses.................... 597 540 528 481 520
-------- -------- ------- ------- -------
Total loans receivable, net.. $174,869 $153,616 $146,406 $134,104 $118,780
======== ======== ======== ======= =======
</TABLE>
10
</page>
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------- ---------------- ---------------- ---------------- ----------------
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...... $ 3,366 1.88% $ 3,746 2.39% $ 3,884 2.58% $ 3,805 2.77% $ 3,356 2.72%
One-to-four family......... 118,929 66.44 113,075 72.14 112,404 74.74 105,700 76.82 95,534 77.44
Multi-family............... 1,774 0.99 1,535 0.98 1,085 0.72 1,119 0.81 1,190 0.97
Commercial or industrial real
estate................... 28,381 15.86 15,437 9.85 11,422 7.60 10,123 7.36 8,283 6.71
Land......................... 9,165 5.12 8,530 5.44 8,861 5.89 6,935 5.04 5,838 4.73
Commercial or industrial
assets................... 5,582 3.12 4,314 2.75 2,372 1.58 2,162 1.57 2,035 1.65
Automobile................... 6,517 3.64 5,270 3.36 5,724 3.81 4,334 3.15 4,184 3.39
Savings accounts............. 1,646 0.92 1,944 1.24 1,662 1.10 1,301 0.94 1,282 1.04
Mobile homes................. 1,319 0.74 1,346 0.86 1,135 0.75 743 0.54 745 0.60
Other........................ 2,317 1.29 1,552 0.99 1,847 1.23 1,373 1.00 916 0.75
-------- ----- ------- ----- ------ ----- ------ ----- ------- -----
Total..................... 178,996 100.00% 156,749 100.00% 150,396 100.00% 137,595 100.00% 123,363 100.00%
======= ======= ======= ======= =======
Add:
Unamortized deferred loan costs,
net of origination fees....... 267 217 167 107 70
Less:
Undisbursed loans in process.. 652 932 1,514 1,185 1,535
Due to borrowers on construction
loans...................... 3,145 1,878 2,115 1,932 2,598
Allowance for possible loan
losses..................... 597 540 528 481 520
-------- -------- -------- ------- --------
Total loans receivable, net. $174,869 $153,616 $146,406 $134,104 $118,780
======== ======== ======== ======= =======
</TABLE>
11
</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 one-to-four 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, 2000, approximately $118.9 million, or 66.44% 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
or the loan exceeds $250,000, in which event, independent appraisers
are utilized. At June 30, 2000 the maximum loan-to-value ratio on
loans to local borrowers was generally 85%.
12
<PAGE>
At June 30, 2000, the Savings Bank had $5.1 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, 2000, approximately
$1.8 million, or .99% of the Savings Bank's gross loan portfolio
consisted of 12 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, 2000, the Savings Bank's largest multi-family
residential loan was a $510,000 loan secured by a 24-unit apartment complex
in Taney County, Missouri and a $105,000 note receivable. At June 30, 2000,
only one of the twelve loans was not performing according to its scheduled
terms. See "-- Non-Performing Assets and Delinquencies."
Land and Commercial Real Estate Loans. The Savings Bank had
land and commercial real estate loans, the majority of which are
ARM products, outstanding of $37.5 million at June 30, 2000. The
commercial real estate loans originated by the Savings Bank amounted
to $28.4 million and are primarily secured by commercial buildings.
Land loans on property located primarily in the Savings Bank's
primary market area amounted to $9.2 million or 5.12% of the total
loan portfolio at June 30, 2000. The Savings Bank's land loans
generally are secured by farm land used in beef or dairy operations
and involve the risks associated with general agricultural conditions
relative to those areas of agriculture.
At June 30, 2000, the Savings Bank's largest commercial real
estate loan was a $595,000 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.
13
</page>
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, 2000, the Savings Bank's consumer loans totaled
approximately $11.8 million, or 6.59% 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.
The Savings Bank also purchases consumer loans from two local
appliance dealers. The loans are made by the appliance dealers to
the dealers' customers. At June 30, 2000, the loans amounted to
$158,000. Reserves for losses maintained by the dealers at June 30,
2000 totaled $23,000. 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.
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
14
</page>
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, 2000, only
$266,000 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, 2000, 1999 and 1998, these loans totaled $5.6
million, $4.3 million and $2.4 million, respectively. The ratio of
other loans as a percent of total loans increased during
the three years ended June 30, 2000 to 3.12%, 2.75%
and 1.58%, 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 First Home originated loans in 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,
2000, second mortgage loans amounted to $3.4 million, or 1.88% of
total loans of the Savings Bank.
15
</page>
Loan Maturity and Repricing
The following table sets forth certain information at June 30,
2000 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......... $121,331 $ 374 $ 9 $ 89 $ 492 $122,295
Commercial real estate....... 30,043 -- -- 100 12 30,155
Land......................... 9,085 36 44 -- -- 9,165
Mobile home.................. 1,297 11 11 -- -- 1,319
Automobile................... 6,436 69 12 -- -- 6,517
Savings account loans........ 1,553 65 -- -- 28 1,646
Other consumer............... 2,235 82 -- -- -- 2,317
Commercial business.......... 5,509 64 -- 9 5,582
-------- ----- ------ ------- ------- ---------
Total loans............. $177,489 $ 701 $ 76 $ 189 $ 541 $178,996
======== ======= ====== ======== ======== ========
</TABLE>
The following table sets forth the dollar amount of all loans
due one year after June 30, 2000, all of which have fixed interest
rates.
<TABLE>
<CAPTION>
Fixed
Rates
-------
(In thousands)
<S> <C>
Real estate mortgage......... $ 793
Commercial real estate....... 112
Land......................... 80
Mobile home.................. 22
Automobile................... 72
Savings account loans........ 91
Other consumer............... 80
Commercial business.......... 72
------
Total $1,322
======
</TABLE>
16
</page>
The following table sets forth scheduled contractual
amortization of loans and mortgage-backed securities at June 30,
2000 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, 2000
-----------------------------------------------------
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........... $ 11,979 $4,376 $3,272 $ 19,627 $ --
After one year
through three years...... 1,406 3,586 818 5,810 --
After three years
through five years....... 3,056 2,676 926 6,658 13
After five years.......... 145,174 1,161 566 146,901 444
-------- ------ ------ -------- -----
Total................. $161,615 $11,799 $5,582 $178,996 $457
======== ====== ====== ======== ====
Interest rate terms
on amounts due after
one year:
Fixed................... $ 985 $ 265 $ 72 $ 1,322 $ 89
Adjustable.............. 148,651 7,158 2,238 158,047 368
------- ------ ------ -------- ----
Total................ $149,636 $7,423 $2,310 $159,369 $457
======== ====== ====== ======== ====
</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 $250,000 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.
17
<PAGE>
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 mortgage
loans during 2000.
18
</page>
The following table shows total mortgage loans originated, purchased,
sold and repaid during the periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------
2000 1999 1998
-------- -------- -------
(In thousands)
<S> <C> <C> <C>
Total mortgage loans at beginning of period......... $142,323 $137,656 $127,682
Loans originated: -------- -------- --------
One-to-four family residential..................... 38,075 37,155 34,141
Multi-family residential and commercial real estate 13,104 6,832 3,977
Land............................................... 5,093 3,194 3,769
-------- -------- --------
Total loans originated........................... 56,272 47,181 41,887
Loans purchased:
One-to-four family residential..................... -- 49 2,115
Multi-family residential and commercial real estate -- -- 590
Land............................................... -- 29 71
Participation loans................................ -- -- --
------- ------ -------
Total loans purchased............................ -- 78 2,776
Loans sold.......................................... -- -- --
Mortgage loan principal repayments.................. 36,818 42,467 34,643
-------- -------- --------
Other-loans charged off or
transferred to other real estate(1)................ 162 125 46
-------- -------- -------
Total other activity............................. 162 125 46
-------- -------- -------
Total gross mortgage loans at end of period......... $161,615 $142,323 $137,656
======== ======== =======
Total mortgage-backed certificates at beginning of
period............................................. $ 550 $ 703 $ 828
Mortgage-backed purchased........................... -- -- --
Mortgage-backed sold................................ -- -- --
Principal repayments................................ (100) (143) (123)
Amortization of premiums............................ -- -- --
Adjustment to market value.......................... (1) (10) (2)
-------- -------- -------
Total mortgage-backed at end of period.............. $ 449 $ 550 $ 703
======== ======== ========
</TABLE>
-------------
(1) Loans transferred to other real estate amounted to $142,000,
$99,000 and $41,000 in 2000, 1999 and 1998, respectively. Mortgage
loans charged off amounted to $20,000, $26,000 and $5,000 in 2000,
1999 and 1998, respectively.
19
</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 $500,000 at June 30, 2000. See Note 15 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 $267,000 net
deferred loan costs at June 30, 2000.
Non-Performing Assets and Delinquencies. The Savings Bank
generally institutes collection procedures when a monthly payment
is two to four weeks delinquent. A first notice is generally mailed
to the borrower, or a phone call made. If necessary, a second notice
follows at the end of the next two week period. In most cases,
delinquencies are cured promptly; however, if the Savings Bank is
unable to make contact with the borrower to obtain full payment, or,
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
20
<PAGE>
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 annually on non-accrual loans
during the years ended June 30, 2000, 1999 and 1998, 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, 2000, 1999
and 1998.
Accruing loans contractually past due 90 days or more have
increased over the past year. The vast majority of the remaining
past due loans are well secured, and the borrowers are making
payments and working with Savings Bank personnel to bring their loans
current.
21
</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,
------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on
a nonaccrual basis:
Real estate:
Residential.................... $ -- $ -- $ -- $ -- $ --
Commercial..................... -- -- -- -- --
Commercial business............. 40 40 48 48 121
Consumer........................ 9 15 9 9 9
------ ------ ------ ------ ----
Total....................... $ 49 $ 55 $ 57 $ 57 $130
====== ====== ====== ====== ====
Accruing loans which are contractually
past due 90 days or more:
Real estate:
Residential.................... $1,536 $ 718 $1,321 $ 461 $ 548
Commercial..................... 737 315 306 152 4
Commercial business............. 83 99 201 12 29
Consumer........................ 333 227 255 122 108
------ ------ ------ ------ ----
Total...................... $2,689 $1,359 $2,083 $ 747 $ 689
====== ====== ====== ====== =====
Total of nonaccrual and
90 days past due loans......... $2,738 $1,414 $2,140 $ 804 $ 819
Real estate owned................. -- -- -- 114 --
Other non-performing assets....... -- -- -- -- --
Slow home loans (60 to 90 days
delinquent)...................... 750 537 700 602 446
------ ------ ------ ----- ----
Total non-performing assets.... $3,488 $1,951 $2,840 $1,520 $1,265
====== ======= ====== ====== =====
Total loans delinquent 90 days
or more to net loans............ 1.57% 0.92% 1.46% 0.56% 0.58%
Total loans delinquent 90 days
or more to total consolidated
assets.......................... 1.38 0.79 1.24 0.46 0.48
Total non-performing assets
to total consolidated
assets.......................... 1.75 1.09 1.65 0.93 0.88
</TABLE>
22
</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, 2000 and 1999 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,
----------------------
2000 1999
------- ---------
(In thousands)
<S> <C> <C>
Loss........................... $ 76 $ 94
Doubtful....................... 149 59
Substandard assets............. 2,047 1,864
------- -------
Total classified assets...... $2,272 $2,017
====== ======
General loss allowances........ $ 307 $ 267
Specific loss allowances....... 290 273
------ ------
Total allowances $ 597 $ 540
====== ======
Charge-offs.................... $ 37 $ 72
====== ======
</TABLE>
23
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, 2000 substandard classification totals included $436,000 of
loans that were current in their payment obligations.
The following is a discussion of the Savings Bank's largest
substandard loan at June 30, 2000: Because of health reasons, a
loan with a current balance due, principal and interest, of
approximately $206,000 is past due and classified substandard. The
loan is secured by the borrower's home with a $160,000 appraisal,
a rental house with an evaluation of $40,000 and an assigned $49,600
(as of June 30) annuity. The borrowers plan to sell their home and
move into the rental house to significantly reduce debt and improve
cash flow. This has taken more time than they anticipated.
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, 2000
and 1999, 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, historical loss experience, the
level and trend of delinquent and classified loans, current and
anticipated economic; and real estate conditions and the composition
of the loan portfolio. 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, 2000, 1999 and 1998 of
approximately $597,000, $540,000 and $528,000, respectively.
24
</page>
Management believes that loan loss reserves were adequate at
June 30, 2000. 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.
25
</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,
---------------------------------------------
2000 1999 1998 1997 1996
------ ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period........... $540 $528 $482 $520 $442
Provision for loan losses.................. 89 84 66 71 79
Recoveries:
Residential real estate................... -- -- 12 -- --
Commercial real estate.................... -- -- -- -- --
Consumer.................................. 5 -- -- 5 --
Commercial business....................... -- -- -- -- --
---- ----- ---- ----- ----
Total recoveries........................ 5 -- 12 5 --
---- ----- ---- ----- ----
Charge offs:
Residential real estate................... 20 14 5 8 --
Commercial real estate.................... -- 12 -- -- --
Consumer.................................. 17 46 27 31 1
Commercial business....................... -- -- -- 75 --
----- ---- ---- ---- ----
Total charge offs....................... 37 72 32 114 1
----- ---- ---- ---- ----
Net charge offs......................... 32 72 20 109 1
----- ---- ---- ---- ----
Allowance at end of period............. $597 $540 $528 $482 $520
==== ==== ==== ==== ====
Ratio of allowance to total loans
outstanding at the end of the period...... 0.33% 0.34% 0.35% 0.35% 0.42%
Ratio of net charge offs to average loans
outstanding during the period............. 0.02% 0.05% 0.01% 0.09% --
26
</page>
Allowance for Loan Losses by Category
</TABLE>
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------------------------------------
2000 1999 1998 1997
----------------------- ----------------------- --------------------- -----------------------
% % % %
% 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........... $ 195 0.16% 66.44% $198 0.18% 72.14% $195 0.17% 74.74% $174 0.16% 76.82%
Commercial............ 112 0.39 15.96 70 0.44 10.11 69 0.59 7.72 60 0.55 7.90
Land.................. 17 0.18 5.05 16 0.19 5.36 20 0.23 5.80 15 0.22 4.97
Second mortgage loans. 14 0.27 2.84 13 0.26 3.19 12 0.24 3.27 9 0.21 3.11
Consumer................ 170 1.45 6.59 163 1.61 6.45 161 1.55 6.89 156 2.01 5.63
Commercial business..... 89 1.59 3.12 80 1.85 2.75 71 2.99 1.58 68 3.15 1.57
------ ------- ----- ------- ----- ------ ----- ------
Total allowance for
loan losses....... $ 597 0.33% 100.00% $540 0.34% 100.00% $528 0.35% 100.00% $482 0.35% 100.00%
====== ======= ===== ====== ===== ======= ===== =======
</TABLE>
<TABLE>
<CAPTION>
At June 30,
1996
------------------------
%
% of Gross
of Out- Loans in
standing Category
Loans in To Gross
Amount Category Loans
------ -------- -------
<S> <C> <C> <C>
Real estate--mortgage:
Residential...... $ 179 0.19% 77.44%
Commercial....... 61 0.67 7.42
Land............. 9 0.16 4.69
Second mortgage loans 8 0.21 3.02
Consumer........... 159 2.23 5.78
Commercial business 104 5.11 1.65
----- ------
Total allowance for
loan losses $ 520 0.42% 100.00%
====== =======
</TABLE>
27
</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, 2000
the Savings Bank's regulatory liquidity was 7.1% which is
significantly in excess of the required 4%. 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.
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
28
<PAGE>
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, 2000, the Company's and the Savings Bank's
securities investment portfolio totaled $6.6 million and consisted
primarily of federal agency obligations securities, mutual funds,
and municipal bonds. For further information
concerning the Savings Bank's investment and mortgage-backed
securities portfolio, see Notes 3, 4 and 5 of the Notes to the
Consolidated Financial Statements.
29
</page>
Investment Securities Analysis
The following table sets forth the Company's and the Savings
Bank's investment securities portfolio at carrying value at the
dates indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------
2000 1999 1998
----------------- ----------------- -------------------
Book Percent of Book Percent of Book Percent of
Value(1) Portfolio Value(1) Portfolio Value(1) Portfolio
------- --------- -------- --------- ------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Debt securities:
Domestic corporate bonds.........$ -- --% $ -- --% $ -- --%
U.S. government treasury and
obligations of U.S.
government agencies............ 2,653 39.91 2,172 37.33 1,699 34.87
Auto and student loan pools...... 23 0.34 34 0.58 63 1.30
State and political subdivision.. 1,634 24.58 1,510 25.96 1,050 21.55
-------- ------ ------- ------- ------- ------
Total debt securities.......... 4,310 64.83 3,716 63.87 2,812 57.72
-------- ----- ------ ----- ------ -----
Equity securities:
Federal Home Loan Bank
stock.......................... 1,072 16.13 1,058 18.18 1,058 21.71
Other............................ 1,266 19.04 1,044 17.95 1,002 20.57
------- ----- ------- ------ ------- ----
Total equity securities........ 2,338 35.17 2,102 36.13 2,060 42.28
------- ------ ------- ------ ------- -----
Total investment securities $ 6,648 100.00% $ 5,818 100.00% $ 4,872 100.00%
======= ======= ======= ======= ======= =======
</TABLE>
-------------------------
(1) The market value of the Company's and the Savings Bank's
investment securities portfolio amounted to $6.62 million,
$5.81 million and $4.89 million at June 30, 2000, 1999 and
1998, respectively. At June 30, 2000, 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 $2.65 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, 2000.
<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>
U.S. government treasury and
obligations of U.S.
government agencies............. $ -- -- $,653 6.17% $ -- -- $ -- --
Auto and student loan pools....... -- -- 23 6.84 -- -- -- --
State and political subdivisions.. 263 5.07 1,079 4.77 292 5.13 -- --
------ ----- ----- -------
Total.......................... $ 263 5.07 $3,755 5.77 $292 5.13 $ -- --
------ ------ ----- -------
</TABLE>
30
</page>
At June 30, 2000, the Savings Bank held no security which
had an aggregate book value in excess of 10% of the
Company's stockholders' equity.
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 six
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 5 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, 2000, 79% of the outstanding balance of the mortgage-
backed securities had adjustable rates of interest.
As of June 30, 2000, the Savings Bank's portfolio included
$449,000 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 as prepayment risk, are passed
on to the certificate holder. FHLMC and FNMA provide the certificate
holder a guarantee of timely payments of interest and ultimate
collection of principal, whether or not they have been collected.
GNMA's guarantee to the holder of timely payments of principal and
interest is backed by the full faith and credit of the U.S.
government. Mortgage-backed securities generally yield less than
the loans that underlie such securities, because of the cost of
payment guarantees or credit enhancements that reduce credit risk.
In addition, mortgage-backed securities are more liquid than
individual mortgage loans and may be used to collateralize
obligations of the Savings Bank.
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.
31
<PAGE>
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 should remain
relatively stable to decreasing slightly, net of interest credited,
attributable to withdrawals as depositors seek increased yields on
alternative investments in the marketplace.
32
</page>
The following table sets forth information concerning the
Savings Bank's time deposits and other interest-bearing deposits
at June 30, 2000.
<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 $ -- $ 5,742 3.69%
2.21% None NOW accounts 25 20,047 12.88
3.78% None Super Saver accounts 1 18,575 11.93
2.80% None Super NOW accounts 300 5,069 3.26
3.00% None Savings accounts -- 10,354 6.65
Certificates of Deposit
-----------------------
5.64% 3 months Fixed term, fixed rate 500 3,133 2.01
5.87% 6 months Fixed term, fixed rate 500 15,525 9.97
5.72% 12 months Fixed term, fixed rate 500 23,589 15.15
5.58% 18 months Fixed term, fixed rate 500 3,016 1.94
5.47% 24 months Fixed term, fixed rate 500 5,477 3.52
5.57% 30 months Fixed term, fixed rate 500 1,439 0.92
5.75% 36 months Fixed term, fixed rate 500 2,552 1.64
5.82% 48 months Fixed term, fixed rate 500 838 0.54
5.98% 60 months Fixed term, fixed rate 500 6,483 4.17
6.24% 72 months Fixed term, fixed rate 500 74 0.05
5.22% 120 months Fixed term, fixed rate 500 21 0.01
various various Fixed term, adjust rate 500 13,009 8.36
various various Jumbo certificates 100,000 20,718 13.31
-------- -------
TOTAL $155,661 100.00%
======== =======
</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, 2000. 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 $5,681
Three through six months 3,256
Six through twelve months 4,955
Over twelve months 6,826
-------
Total $20,718
=======
</TABLE>
33
</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,
------------------------------------
2000 1999 1998
--------- ------------ ----------
(In thousands)
<S> <C> <C> <C>
2.00 - 4.49%.......... $ 463 $ 4,002 $ 785
4.50 - 5.49%.......... 19,461 61,689 41,051
5.50 - 6.49%.......... 70,093 19,146 36,970
6.50 - 7.49%.......... 5,857 4,705 9,896
Over 7.49%.......... -- 210 263
------- -------- -------
Total................. $95,874 $89,752 $88,965
======= ======= =======
</TABLE>
The following table sets forth the amount and maturities of time
deposits at June 30, 2000.
<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>
2.00 - 4.49% $ 463 $ -- $ -- $ -- $ -- $ 463 0.48%
4.50 - 5.49%............. 16,615 1,291 595 920 40 19,461 20.30
5.50 - 6.49%............. 47,052 10,447 5,622 4,332 2,640 70,093 73.11
6.50 - 7.49%............. 2,873 1,350 468 340 826 5,857 6.11
Over 7.49%............... -- -- -- -- -- -- --
------- -------- -------- ------- ------ ------- ------
Total.................... $67,003 $13,088 $6,685 $5,592 $3,506 $95,874 100.00%
======= ======= ====== ====== ======= ======= =======
</TABLE>
34
</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,
-----------------------------------------------------------------------------------
2000 1999 1998
---------------------------- ----------------------------- -----------------
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................. $ 5,742 3.69% $ 596 $ 5,146 3.40% $ 683 $ 4,463 3.17%
NOW checking......................... 20,047 12.88 2,042 18,005 11.91 2,870 15,135 10.73
Regular savings accounts............. 10,354 6.65 147 10,207 6.75 2,094 8,113 5.75
Super Saver accounts................. 18,575 11.93 (2,846) 21,421 14.17 3,871 17,550 12.44
Super NOW accounts................... 5,069 3.26 (1,610) 6,679 4.42 (154) 6,833 4.85
Fixed-rate certificates which
mature (1):
Within 1 year...................... 62,487 40.14 761 61,726 40.82 3,806 57,920 41.06
After 1 year, but within 2 years... 7,890 5.07 524 7,366 4.87 (3,595) 10,961 7.77
After 2 years, but within 5 years.. 9,864 6.34 3,638 6,226 4.12 (159) 6,385 4.53
Thereafter......................... 26 0.02 (7) 33 0.02 6 27 0.01
Adjustable rate certificates........ 15,607 10.02 1,206 14,401 9.52 729 13,672 9.69
-------- ------ ------ -------- ----- -------- -------- -------
Total certificates................... 95,874 61.59 6,122 89,752 59.35 787 88,965 63.06
-------- ------ ------ -------- ----- -------- -------- ------
Total........................... $155,661 100.00% $ 4,451 $151,210 100.00% $10,151 $141,059 100.00%
======== ======= ======== ======== ======= ======== ======== =======
</TABLE>
________________
(1) At June 30, 2000, 1999 and 1998, jumbo certificates of deposit
amounted to $20.7 million, $18.1 million and $14.6 million,
respectively, and IRAs equaled $16.6 million, $15.6 million and $15.8
million at those dates, respectively.
35
</page>
The following table sets forth the savings activities of the
Savings Bank for the periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------
2000 1999 1998
--------- -------- --------
(In thousands)
<S> <C> <C> <C>
Beginning balance............ $151,210 $141,059 $117,685
-------- -------- --------
Net increase (decrease) before
interest credited........... (1,266) 5,274 19,089
Interest credited............ 5,717 4,877 4,285
-------- -------- --------
Net increase in
savings deposits............ 4,451 10,151 23,374
-------- -------- --------
Ending balance............... $155,661 $151,210 $141,059
======== ======== =======
</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 also relies on 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.
The short-term advances require interest payable at maturity. Two
long-term advances requires monthly payment of principal and interest.
These advances were obtained in response to the Savings Bank's
recent strong loan demand and limited deposit growth.
36
<PAGE>
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,
-----------------
2000 1999
----- ------
<S> <C> <C>
Weighted average rate paid on
FHLB advances........................ 7.00% 5.85%
Years Ended June 30,
--------------------
2000 1999
-------- ------
(Dollars in thousands)
Maximum amounts of FHLB advances
outstanding at any month end........... $17,900 $ 5,700
Approximate average FHLB advances
outstanding............................ 6,485 4,452
Approximate weighted average rate paid
on FHLB advances....................... 6.49% 6.07%
</TABLE>
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 five 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 100% occupied. The second
property is is a duplex in Ozark, Missouri which is 100% occupied.
The third is a single family residence in Gainesville, Missouri
which is currently occupied. The fourth property is a commercial
building in Mountain Grove, Missouri and is fully occupied. The fifth
is a single family residence in Mountain Grove, Missouri and is
also currently occupied. Two properties mentioned in the 1999 Form
10-KSB have been sold. These were the apartments and a duplex located
in Ava, Missouri and a modular home near Mansfield, Missouri.
37
<PAGE>
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.
At June 30, 2000, the Savings Bank had an investment in Fybar of
$401,000.
South Central Missouri Title, Inc., is a Missouri corporation
wholly owned by First Bancshares, Inc. South Central is a licensed
agent for the purpose of selling title insurance and also providing
real estate closing services. It is currently operating profitably
with offices in three counties.
REGULATION OF FIRST HOME
As a Missouri-chartered and federally insured savings and
loan association, First Home is subject to extensive regulation.
Lending activities and other investments must comply with various
statutory and regulatory capital requirements. The Savings Bank is
regularly examined by its state and federal regulators and files
periodic reports concerning the Savings Bank's activities and
financial condition. The Savings Bank's relationship with its
depositors and borrowers is also regulated to a great extent by
federal and state laws, especially in such matters as the ownership
of savings accounts and the form and content of the Savings Bank's
mortgage documents.
Missouri Savings and Loan Law
General. As a Missouri-chartered savings and loan association,
First Home derives its authority from, and is governed by, the
provisions of the Missouri Savings and Loan Law ("Missouri Law") and
regulations of the Missouri Division of Finance ("Division"). The
Director of the Missouri Division of Finance ("Director") proposes
regulations which must then be approved, amended, modified or
disapproved by the State Savings and Loan Commission ("Commission").
Missouri Law and the resulting regulations are administered by the
Director.
Investments and Accounts. Missouri Law and regulations impose
restrictions on the types of investments and loans that may be made
by a Missouri-chartered institution, generally bringing these
restrictions into parity with the regulation of federally chartered
institutions. The manner of establishing accounts and evidencing the
same is prescribed, as are the obligations of the institution with
respect to withdrawals from accounts and redemption of accounts. The
Director may also impose or grant the same restrictions, duties and
powers concerning deposits as are applicable to federal institutions
under federal rules and regulations.
Branch Offices. Under Missouri Law, no institution may
establish a branch office or agency without the prior written
approval of the Director. The Director reviews the proposed
location, the functions to be performed at the office, the estimated
volume of business, the estimated annual expense of the office and
the mode of payments. Decisions of the Director may be appealed to
the Commission. The relocation or closing of any office is subject
to additional regulation and in certain circumstances may require
prior approval.
38
<PAGE>
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
39
<PAGE>
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 2000, 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 $190.0 million
at March 31, 2000, First Home will be required to pay a semi-annual
assessment of approximately $24,000 for the second half of calendar
year 2000.
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.
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, 2000, 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
40
<PAGE>
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.
Office of Thrift Supervision
The OTS is an office in the Department of the Treasury subject
to the general oversight of the Secretary of the Treasury.
Among other functions, the OTS issues and enforces regulations
affecting federally-insured savings associations and regularly
examines these institutions.
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. The Savings Bank's accounts are insured
by the FDIC under the SAIF to the maximum extent permitted by law. As
insurer of deposits, the FDIC has examination, supervisory and
enforcement authority over all savings associations.
Under applicable regulations, the FDIC assigns an institution
to one of three capital categories based on the institution's
financial information, as of the reporting period ending seven
months before the assessment period. The capital categories are:
well-capitalized, adequately capitalized, or undercapitalized.
The FDIC also places an institution in one of three supervisory
subcategories within each capital group. The supervisory subgroup
to which an institution is assigned is based on a supervisory
evaluation provided to the FDIC by the institution's primary federal
regulator and information that the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the
deposit insurance funds. An institution's assessment rate depends
on the capital category and supervisory category to which it is
assigned with the most well-capitalized, healthy institutions
receiving the lowest rates.
Effective January 1, 1997, the premium schedule for BIF and SAIF
insured institutions ranged from 0 to 27 basis points. However,
SAIF insured institutions and BIF insured institutions are required
to pay a Financing Corporation assessment in order to fund the
interest on bonds issued to resolve thrift failures in the 1980s.
This amount is currently equal to about six basis points for each
$100 in domestic deposits for SAIF members while BIF insured
institutions pay an assessment equal to about 1.50 basis points for
each $100 in domestic deposits. These assessments, which may be
revised based upon the level of BIF and SAIF deposits, will continue
until the bonds mature in the year 2015.
41
</page>
The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times
in the past and may raise insurance premiums in the future. If such
action is taken by the FDIC, it could have an adverse effect on the
earnings of First Home.
Under the FDIA, the FDIC may terminate insurance of deposits
upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule,
order or condition imposed by the FDIC or the OTS. Management of
First Home does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
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 $1.1 million at June 30, 2000.
Among other benefits, the FHLB provides a central credit
facility primarily for member institutions. It is funded primarily
from proceeds derived from the sale of consolidated obligations of
the FHLB System. It makes advances to members in accordance with
policies and procedures established by the FHFB and the Board of
Directors of the FHLB-Des Moines. At June 30, 2000, the Savings
Bank had $17.9 million of advances from the FHLB-Des Moines.
Liquidity Requirements
Under OTS regulations, each savings institution is required to
maintain an average daily balance of specified liquid assets equal
to a monthly average of not less than a specified percentage of its
net withdrawable accounts deposit plus short-term borrowings. This
liquidity requirement is currently 4%, but may be changed from time
to time by the OTS to any amount within the range of 4% to 10%.
Monetary penalties may be imposed for failure to meet liquidity
requirements. The Savings Bank has never been subject to monetary
penalties for failure to meet its liquidity requirements.
42
<PAGE>
Prompt Corrective Action
The OTS is required to take certain supervisory actions against
undercapitalized savings associations, the severity of which depends
upon the institution's degree of undercapitalization. Generally, an
institution that has a ratio of total capital to risk-weighted
assets of less than 8%, a ratio of Tier I (core) capital to risk-
weighted assets of less than 4%, or a ratio of core capital to total
assets of less than 4% (3% or less for institutions with the highest
examination rating) is considered to be "undercapitalized." An
institution that has a total risk-based capital ratio less than 6%,
a Tier I capital ratio of less than 3% or a leverage ratio that is
less than 3% is considered to be "significantly undercapitalized" and
an institution that has a tangible capital to assets ratio equal to
or less than 2% is deemed to be "critically undercapitalized."
Subject to a narrow exception, the OTS is required to appoint a
receiver or conservator for a savings institution that is
"critically undercapitalized." OTS regulations also require that a
capital restoration plan be filed with the OTS within 45 days of the
date a savings institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by
any parent holding company in an amount of up to the lesser of 5% of
the institution's assets or the amount which would bring the
institution into compliance with all capital standards. In
addition, numerous mandatory supervisory actions become immediately
applicable to an undercapitalized institution, including, but not
limited to, increased monitoring by regulators and restrictions on
growth, capital distributions and expansion. The OTS also could
take any one of a number of discretionary supervisory actions,
including the issuance of a capital directive and the replacement
of senior executive officers and directors.
At June 30, 2000, First Home was a "well capitalized"
institution under the prompt corrective action regulations of the
OTS.
Standards for Safety and Soundness. The federal banking
regulatory agencies have prescribed, by regulation, standards for
all insured depository institutions relating to: (i) internal
controls, information systems and internal audit systems;
(ii) loan documentation; (iii) credit underwriting; (iv) interest
rate risk exposure; (v) asset growth; (vi) asset quality;
(vii) earnings; and (viii) compensation, fees and benefits
("Guidelines"). The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital
becomes impaired. If the OTS determines that the Savings Bank
fails to meet any standard prescribed by the Guidelines, the agency
may require the Savings Bank to submit to the agency an acceptable
plan to achieve compliance with the standard. Management is aware
of no conditions relating to these safety and soundness standards
which would require submission of a plan of compliance.
43
<PAGE>
Qualified Thrift Lender Test. All savings associations,
including First Home, are required to meet a qualified thrift lender
test to avoid certain restrictions on their operations. This test
requires a savings association to have at least 65% of its portfolio
asset, as defined by regulation, in qualified thrift investments on
a monthly average for nine out of every 12 months on a rolling
basis. As an alternative, the savings association may maintain 60%
of its assets in those assets specified in Section 7701(a)(19) of
the Code. Under either test, such assets primarily consist of
residential housing related loans and investments. At June 30, 2000,
First Home met the test and its qualified thrift lender percentage
was 68.79%.
Any savings association that fails to meet the qualified thrift
lender test must convert to a national bank charter, unless it
requalifies as a qualified thrift lender and thereafter remains a
qualified thrift lender. If an association does not requalify and
converts to a national bank charter, it must remain SAIF-insured
until the FDIC permits it to transfer to the BIF. If such an
association has not yet requalified or converted to a national bank,
its new investments and activities are limited to those permissible
for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In
addition, First Home is immediately ineligible to receive any new
FHLB borrowings and is subject to national bank limits for payment
of dividends. If such association has not requalified or converted
to a national bank within three years after the failure, it must
divest of all investments and cease all activities not permissible
for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment
penalties. If any association that fails the qualified thrift
lender test is controlled by a holding company, then within one year
after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank
holding companies.
Capital Requirements
Federally insured savings associations, such as the Savings
Bank, are required to maintain a minimum level of regulatory
capital. The OTS has established capital standards, including a
tangible capital requirement, a leverage ratio (or core capital)
requirement and a risk-based capital requirement applicable to
such savings associations.
44
</page>
The capital regulations require tangible capital of at least
1.5% of adjusted total assets (as defined by regulation). At
June 30, 2000, the Savings Bank had tangible capital of $20.1
million, or 10.3% of adjusted total assets, which is approximately
$17.2 million above the minimum requirement of 1.5% of adjusted
total assets in effect on that date. At June 30, 2000, the Savings
Bank had $767,000 in intangible assets.
The capital standards also require core capital equal to at
least 3% to 4% of adjusted total assets, depending on an institution's
supervisory rating. Core capital generally consists of tangible
capital. At June 30, 2000, the Savings Bank had core capital equal
to $20.1 million, or 10.3% of adjusted total assets, which is $12.3
million above the minimum leverage ratio requirement of 3% as in
effect on that date.
The OTS risk-based requirement requires savings associations
to have total capital of at least 8% of risk-weighted assets. Total
capital consists of core capital, as defined above, and supplementary
capital. Supplementary capital consists of certain permanent and
maturing capital instruments that do not qualify as core capital and
general valuation loan and lease loss allowances up to a maximum of
1.25% of risk-weighted assets. Supplementary capital may be used to
satisfy the risk-based requirement only to the extent of core capital.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, are multiplied by a risk
weight, ranging from 0% to 100%, based on the risk inherent in the
type of asset. For example, the OTS has assigned a risk weight of
50% for prudently underwritten permanent one-to-four family first
lien mortgage loans not more than 90 days delinquent and having a
loan-to-value ratio of not more than 80% at origination unless
insured to such ratio by an insurer approved by FNMA or FHLMC.
On June 30, 2000, the Savings Bank had total risk-based
capital of a approximately $20.4 million, including $20.1 million
in core capital and $307,000 in qualifying supplementary capital,
and risk-weighted assets of $ 145.3 million, or total capital of
14.0% of risk-weighted assets. This amount was $8.7 million above
the 8% requirement in effect on that date.
45
<PAGE>
The OTS is authorized to impose capital requirements in excess
of these standards on individual associations on a case-by-case
basis. The OTS and the FDIC are authorized and, under certain
circumstances required, to take certain actions against savings
associations that fail to meet their capital requirements. The OTS
is generally required to take action to restrict the activities of
an "undercapitalized association" (generally defined to be one with
less than either a 4% core capital ratio, a 4% Tier 1 risked-based
capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such
plan is approved by the OTS may not increase its assets, acquire
another institution, establish a branch or engage in any new
activities, and generally may not make capital distributions. The
OTS is authorized to impose the additional restrictions that are
applicable to significantly undercapitalized associations.
The OTS is also generally authorized to reclassify an
association into a lower capital category and impose the
restrictions applicable to such category if the institution is
engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
The imposition by the OTS or the FDIC of any of these measures
on the Company or the Savings Bank may have a substantial adverse
effect on their operations and profitability.
The following table presents the Savings Bank's capital levels
as of June 30, 2000.
<TABLE>
<CAPTION>
At June 30, 2000
-------------------
Percent of
Amount Assets
-------- ---------
(Dollars in thousands)
<S> <C> <C>
Tangible capital............. $20,124 10.3%
Minimum required
tangible capital............ 2,935 1.5
------- ------
Excess....................... $17,189 8.8%
======= ======
Core capital................. $20,124 10.3%
Minimum required core
capital..................... 7,826 4.0
------- -----
Excess....................... $12,298 6.3%
======= =====
Risk-based capital........... $20,397 14.0%
Minimum risk-based
capital requirement......... 11,627 8.0
------- -----
Excess....................... $ 8,770 6.0%
======= =====
</TABLE>
46
<PAGE>
Limitations on Capital Distributions
OTS regulations impose various restrictions on savings
institutions with respect to their ability to make distributions of
capital, which include dividends, stock redemptions or repurchases,
cash-out mergers and other transactions charged to the capital
account.
Generally, savings institutions, such as First Home, that
before and after the proposed distribution meet their capital
requirements, may make capital distributions during any calendar
year equal to the greater of 100% of net income for the year-to-
date plus 50% of the amount by which the lesser of the
institution's tangible, core or risk-based capital exceeds its
capital requirement for such capital component, as measured at
the beginning of the calendar year, or 75% of their net income
for the most recent four quarter period. However, an institution
deemed to be in need of more than normal supervision by the OTS
may have its dividend authority restricted by the OTS. First Home
47
<PAGE>
may pay dividends in accordance with this general authority.
Savings institutions proposing to make any capital distribution
need only submit written notice to the OTS 30 days prior to such
distribution. Savings institutions that do not, or would not meet
their current minimum capital requirements following a proposed
capital distribution, however, must obtain OTS approval prior to
making such distribution. The OTS may object to the distribution
during that 30-day period based on safety and soundness concerns.
See "-- Capital Requirements."
The OTS has proposed regulations that would revise the current
capital distribution restrictions. Under the proposal, a savings
institution may make a capital distribution without notice to the
OTS, unless it is a subsidiary of a holding company, provided that
it has a regulatory rating in the two top categories, is not of
supervisory concern, and would remain adequately capitalized, as
defined in the OTS prompt corrective action regulations, following
the proposed distribution. Savings institutions that would remain
adequately capitalized following the proposed distribution but do
not meet the other noted requirements must notify the OTS 30 days
prior to declaring a capital distribution. The OTS stated it will
generally regard as permissible that amount of capital distributions
that do not exceed 50% of the institution's excess regulatory
capital plus net income to date during the calendar year. A
savings institution may not make a capital distribution without
prior approval of the OTS and the FDIC if it is undercapitalized
before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it
would constitute an unsafe or unsound practice. No assurance may
be given as to whether or in what form the regulations may be
adopted.
At June 30, 2000, 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.
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
48
</page>
complete residential housing units. At June 30, 2000, the largest
loans by the Savings Bank outstanding to any one borrower, including
related entities, was $891,000. First Home has a working
relationship with a local closely-held corporation that buys, sells,
develops, rents and manages real estate in our area. At June 30,
2000, there were 13 separate loans secured by 13 different pieces of
real estate, with a combined evaluation of $1.25 million. All loans
are personally endorsed and guaranteed by the corporate owners.
These loans were performing in accordance with their terms
at that date.
Activities of Savings Associations and Their Subsidiaries
When a savings association establishes or acquires a subsidiary
or elects to conduct any new activity through a subsidiary that the
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 accounting 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.
49
<PAGE>
Securities which are designated as held-to-maturity are designated as
such because the investor has the ability to hold these securities to
maturity. Such securities are reported at amortized cost.
All other securities are designated as available-for-sale, a
designation which provides the investor with certain flexibility in
managing its investment portfolio. Such securities are reported at fair
value; net unrealized gains and losses are excluded from income and
reported net of applicable income taxes as a separate component of
stockholders' equity. The Savings Bank has adopted a reporting
policy that complies with these OTS requirements.
Transactions with Affiliates
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.
Acquisitions
The HOLA and OTS regulations issued thereunder generally
prohibit a savings and loan holding company, without prior OTS
50
<PAGE>
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.
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."
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
51
</page>
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
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
52
</page>
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
53
<PAGE>
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.
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 , Christian, Stone and Taney counties, Missouri. The Savings Bank also
transacts a significant amount of business in Texas and Greene
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, Theodosia, Crane, Galena,
Kissee Mills and Rockaway Beach, 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
54
<PAGE>
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 FSA 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, 2000, the Savings Bank had 80 full-time employees
and 14 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.
55
</page>
Item 2. Properties
<TABLE>
The following table sets forth information regarding the Savings Bank's offices as of June 30, 2000.
<CAPTION>
Net Land Building
Year Book Value Owned/ Owned/ Square
Location County Opened as of 6/30/00 Leased Leased Footage
--------------------- -------- ------ ---------- ------ ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Main Office
-----------
142 East First Street Wright 1911 $555 Owned Owned 9,800
Mountain Grove, Missouri 65711
Branch Offices
--------------
1208 N. Jefferson Street Douglas 1978 241 Owned Owned 2,800
Ava, Missouri 65608
103 South Clay Street Webster 1974 413 Owned Owned 4,200
Marshfield, Missouri 65706
Highway 5 and Highway 160 Ozark 1992 717 Owned Owned 3,600
Gainesville, Missouri 65655
7164 Highway 14 East Christian 1995 292 Owned Owned 3,000
Sparta, Missouri 65753
Business Highway 160 Ozark 1997 76 Leased Leased 1,200
Theodosia, Missouri 65761
123 Main Street
Crane, Missouri 65633 Stone 1998 275 Owned Owned 3,800
South Side of Square
Galena, Missouri 65656 Stone 1998 71 Owned Owned 1,600
Drive-in Facilities
--------------------
Route 60 and Oakland Wright 1986 158 Owned Owned 1,200
Mountain Grove, Missouri 65711
223 West Washington Webster 1993 190 Owned Owned 1,100
Marshfield, Missouri 65706
*The Kissee Mills and Rockaway Beach branch offices were opened after June 30, 2000.
</TABLE>
56
</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 adverse 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 adverse
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, 2000.
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.
57
<PAGE>
Item 7. Financial Statements
Independent Auditors Report*
(a) Consolidated Statements of Financial Condition as of
June 30, 2000 and 1999*
(b) Consolidated Statements of Income For the Years Ended
June 30, 2000, 1999 and 1998*
(c) Consolidated Statements of Stockholders' Equity For the
Years Ended June 30, 2000, 1999 and 1998*
(d) Consolidated Statements of Cash Flows For the Years
Ended June 30, 2000, 1999 and 1998*
(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.
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 58 President and Chief Executive Officer
Charles W. Schumacher 48 Senior Vice-President
Peter M. Medlen 44 Executive Vice President
Susan J. Uchtman 37 Chief Financial Officer
_________________
(1) As of June 30, 2000.
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
58
<PAGE>
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 of 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
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.
59
</page>
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, 2000
-------------------
* 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.
60
</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 28, 2000 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 28, 2000
-------------------------------
Stephen H. Romines
Chairman of the Board, President, Chief
Executive Officer (Principal Executive Officer)
By:/s/ Susan J. Uchtman September 28, 2000
-------------------------------
Susan J. Uchtman
Chief Financial Officer
By: 2000
---------------------------------
Harold F. Glass
Director
By:/s/ Almeta Hardebeck September 28, 2000
----------------------------------
Almeta Hardebeck
Director
By:/s/ John G. Moody September 28, 2000
-----------------------
John G. Moody
Director
By: , 2000
------------------------- --------- ---
Dr. James F. Moore
Director
</page>
Exhibit 13
Annual Report to Stockholders
</page>
(LOGO of FIRST BANCSHARES, INC.)
FIRST BANCSHARES, INC.
2000 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.........................15
Consolidated Financial Statements....................16
Notes to Consolidated Financial Statements...........21
Common Stock Information.............................46
Directors and Officers...............................47
Corporate Information................................48
</page>
Dear Stockholder:
{Column graph of Earning per share: 1996-$0.48,
1997-$0.65, 1998-$.90, 1999-$.90 and 2000-$1.06}
One year later, the media attention and hype surrounding Y2K
seems a distant, if not amusing, memory. Not only was our computer
system easily able to make the transition from 1999 to 2000 without
incident, but fiscal year 2000 proved to be a profitable year for
stockholders. With net income rising to $2.0 million, earnings per
share increasing to $1.06 and stockholders' equity increasing
slightly to a healthy $24.5 million, fiscal year 2000 was a very
good year indeed.
{Column graph of book value per share: 1996-$9.35,
1997-$10.17, 1998-$11.01, 1999-$11.75 and 2000-$12.81}
During the fiscal year ended June 30, 2000, First Bancshares,
Inc. repurchased 191,685 shares of stock. That reduction, somewhat
offset by Bank employees exercising options, resulted in a 153,765
decrease in the number of outstanding shares. Since stockholders'
equity only increased slightly, book value per share increased from
$11.75 to $12.81. At August 31, 2000 remaining repurchase
authority, under our eighth repurchase plan, was 30,423 shares.
{Column graph of total assets: 1996-$143,671,000,
1997-$163,973,000, 1998-$172,173,000,1999-$178,721,000 and
2000-$199,086,000}
A $21.3 million increase in net loan growth fueled an increase
of $20.4 million in total assets during the fiscal year. Since net
deposits only increased $4.5 million, we increased Federal Home Loan
Bank advances by $15.7 million to fund the loan growth.
First Bancshares, Inc. paid its 26th quarterly dividend on
June 30, 2000. A $.04 per share dividend, to be paid on
September 30, 2000, has been announced.
While no new branches were added during the fiscal year ended
June 30, 2000, two new branches have been added in the past two
months. With the addition of Kissee Mills, which opened in a
leased modular facility on July 3, 2000, and Rockaway Beach, which
opened in a temporary rented facility August 14, we now have ten
full service facilities. Current plans are to begin building a
new facility, pictured on the back cover, at Kissee Mills later
this year. Rockaway Beach will move into permanent quarters
purchased from Bank of America later this year. As of August 31st,
2000, 233 new deposit accounts, totaling just over $400,000 had been
opened at the two new branches.
</page>
{Column graph of customer deposit accounts: 1996-$105,960,
1997-$117,685, 1998-$141,059, 1999-$151,210 and 2000-155,661,000
and net loans receivable: 1996-$118,780, 1997-$134,104,
1998-$146,406, 1999-$153,616 and 2000-$174,869,000}
As noted in the 1999 annual report, the Gainesville post office
project has been completed. In addition to that project, in late
1999 a rental house and an office building were purchased in
Mountain Grove. Just last month, construction of a small retail
shopping center in Sparta, Missouri was completed. The lead tenant
in the Mountain Grove office building is the Missouri Division of
Family Services and Dollar General is the lead tenant in Sparta.
Collectively, the four rental properties cost almost $1.5 million
and generate $157,000 in gross annual rent.
One disappointment during the fiscal year was our attempt to
implement internet banking. Frankly, the system we began testing
late last fall has not yet produced a level of performance that
meets our standards. In the event satisfactory results are not
obtained within the very near future, we plan to change systems.
While we will always strive to emphasize our traditional friendly
personal service, we do want to make the convenience of internet
banking available for our customers.
On a much more positive note, however, I am pleased to announce
that Charles W. Schumacher joined First Home Savings Bank as Senior
Vice President on September 5, 2000. Charlie, as he likes to be
known, has almost 20 years of banking experience. His most recent
position was Chief Executive Officer and Senior Loan Officer with
Northwood's State Bank in Northwood, Iowa. His presence
significantly strengthens our management team and better positions
First Home for the future.
Our primary goal as we begin fiscal year 2001 is to expand our
core business within the ten branch locations we now have in place.
We will, of course, continue to look for ways to grow our business
and enhance stockholder value.
Sincerely,
/s/ Stephen H. Romines
Stephen H. Romines
President
</page>
Business of the Corporation
First Bancshares, Inc. ("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, 2000, the Company had total consolidated assets of $199.1
million and consolidated stockholders' equity of $24.5 million.
While the Company owns a title insurance agency through a
subsidiary and some rental real estate, it 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 consolidated financial statements and related data, applies
primarily to First Home.
First Home is a Missouri-chartered, federally-insured stock
savings bank organized in 1911. The Savings Bank is regulated by the
Missouri Division of Finance and the Office of Thrift Supervision
("OTS"). Its deposits are insured up to applicable limits by the
Savings Association Insurance Fund ("SAIF") of the Federal Deposit
Insurance Corporation. First Home also is a member of the Federal
Home Loan Bank ("FHLB") System.
First Home conducts its business from its home office in Mountain
Grove and nine full service branch facilities in Marshfield, Ava,
Gainesville, Sparta, Theodosia, Crane, Galena, Kissee Mills, and
Rockaway Beach, Missouri. A map of those locations is shown on the
front cover. 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, 2000, First Home's total gross loans were $179.0
million, or 89.9% of total consolidated assets, including $122.3
million, or 68.3% of total gross loans secured by one-to-four family
properties and $39.3 million, or 22.0% 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. The consolidated data is derived
in part from, and should be read in conjunction with, the
Consolidated Financial Statements of the Company and its subsidiaries
presented herein.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------
2000 1999 1998 1997 1996
--------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
FINANCIAL CONDITION DATA:
Total assets $199,086 $178,721 $172,173 $163,973 $143,671
Loans receivable, net 174,869 153,616 146,406 134,104 118,780
Mortgage-backed certificates 449 550 703 828 2,831
Cash, interest-bearing deposits
and investment securities 15,618 17,749 18,941 24,408 18,236
Federal funds sold 320 245 - - --
Customer deposits 155,661 151,210 141,059 117,685 105,960
Borrowed funds 17,900 2,200 5,700 23,555 13,555
Stockholders' equity 24,477 24,249 24,365 22,207 23,729
<CAPTION>
Years Ended June 30,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
OPERATING DATA:
Interest income $ 13,865 $ 12,994 $12,771 $11,695 $10,113
Interest expense 7,257 6,699 7,005 6,493 5,661
-------- ------- ------ ------- ------
Net interest income 6,608 6,295 5,766 5,202 4,452
Provision for loan losses 89 84 66 71 80
-------- ------- ------ ------- -------
Net interest income after provision
for loan losses 6,519 6,211 5,700 5,131 4,372
Gains (losses) on investments and
mortgage-backed securities - 23 11 187 (6)
Noninterest income, excluding gains
(losses) on securities 1,065 900 755 527 465
Noninterest expense 4,443 4,254 3,729 3,648 3,045
------- ------- ------- ------- ------
Income before taxes 3,141 2,880 2,737 2,197 1,786
Income taxes 1,121 1,062 892 784 631
------ ------ ------ ------- ------
Net income $ 2,020 $ 1,818 $ 1,845 $ 1,413 $ 1,155
======== ======== ======== ======== =======
Basic earnings per share $ 1.06 $ 0.90 $ 0.90 $ 0.65 $ 0.48
======== ======== ======== ======== =======
4
</page>
<CAPTION>
At or For the Years Ended June 30,
----------------------------------------------------
2000 1999 1998 1997 1996
KEY OPERATING RATIOS: -------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <c.
Return on average assets 1.08% 1.03% 1.08% 0.91% 0.85%
Return on average equity 8.28 7.46 7.83 6.24 4.90
Average equity to average assets 13.01 13.82 13.83 14.65 17.31
Interest rate spread for period 3.18 3.15 2.98 2.85 2.60
Net interest margin for period 3.73 3.76 3.58 3.53 3.40
Non-interest expense to average assets 2.37 2.41 2.19 2.36 2.23
Average interest-earning assets to
interest-bearing liabilities 113.00 115.00 114.00 115.00 119.00
Allowance for loan losses to total
loans at end of period 0.33 0.34 0.35 0.35 0.42
Net charge-offs to average outstanding
loans during the period 0.02 0.05 0.02 0.09 0.01
Ratio of non-performing assets to
total assets 1.36 1.06 1.02 0.93 0.88
Ratio of loan loss reserves to
non-performing assets 22.87 28.48 29.93 31.68 41.02
Dividend payout ratio 15.09 15.56 12.22 16.13 21.05
<CAPTION>
At June 30,
-------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- -------- -------
OTHER DATA:
<S>
Number of:
Loans outstanding 6,138 5,676 5,545 4,999 4,712
Deposit account 22,067 21,038 20,127 15,447 13,264
Full service offices 8 8 8 6 5
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.
Management's Discussion and Analysis ("MD&A") and other portions
of this report contain certain "forward-looking statements" concerning
the future operations of the Company. Management desires to take
advantage of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 and is including this statement for the
express purpose of availing the Company of the protections of such safe
harbor with respect to all "forward-looking statements" contained in
our Annual Report. We have used "forward-looking statements" to
describe future plans and strategies, including our expectations of
the Company's future financial results. Management's ability to
predict results or the effect of future plans or strategies is
inherently uncertain. Factors which could affect actual results
include interest rate trends, the general economic climate in the
Company's market area and the country as a whole, the ability of
the Company to control costs and expenses, the ability of the Company
to efficiently incorporate acquisitions into its operations,
competitive products and pricing, loan delinquency rates,
and changes in federal and state regulation. These factors should
be considered in evaluating the "forward-looking statements," and
undue reliance should not be placed on such statements.
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 boundaries
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 58% of mortgage loans originated
during fiscal 2000, 66% of 1999 mortgage loan originations and 69% of
1998 mortgage loan originations. While the percent of loans secured
by single family residences has gradually declined over the past
three years, there has been a corresponding gradual increase in
loans made within our normal lending territory that are secured by
farms and commercial real estate. 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.
6
<PAGE>
Maintaining Asset Quality. First Home strongly emphasizes
maintaining asset quality through sound underwriting, constant
monitoring and effective collection techniques. At June 30, 2000,
First Home's ratio of non-performing assets to total assets was 1.36%.
This ratio was 1.06% at June 30, 1999. Actual loan losses, net of
recoveries, of loans originated by First Home were $32,000 for the year
ended June 30, 2000. During the year ended June 30, 1999, actual loan
losses, net of recoveries, of loans originated by First Home were
$44,000. Actual loan losses, net of recoveries, of loans originated
were $19,400 for the year ended June 30, 1998.
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.
Fiscal Year Ended June 30, 2000 Compared to June 30, 1999
Net Income. Net income for the fiscal year ended June 30, 2000
increased $202,000 to $2,020,000 from $1,818,000 for the fiscal year
ended June 30, 1999. Total interest income increased $871,000
and noninterest income increased $165,000. Those items were offset
by a $558,000 increase in interest expense, a $189,000 increase in
noninterest expense, an increase in income taxes of $59,000, a
$23,000 decrease in gains on investments and a $5,000 increase in
provision for loan losses.
Net Interest Income. Net interest income was $6,608,000 for
the fiscal year ended June 30, 2000, an increase of $313,000, or
5.0%, from $6,295,000 for the fiscal year ended June 30, 1999. An
$871,000 increase in total interest income was reduced by a
$558,000 increase in interest expense.
Interest Income. Total interest income for the year ended
June 30, 2000 increased $871,000, or 6.7%, to $13,865,000 from
$12,994,000 for the fiscal year ended June 30, 1999. Interest
income from loans receivable increased $930,000, or 7.6%. This
increase resulted from a $21,253,000 increase in net loans
receivable slightly offset by a decrease in the annualized yield
from 8.07% for the year ended June 30, 1999 to 8.06% for the year
ended June 30, 2000. The slight decrease in the annualized yield
was attributable to a reduction that occurred in early 1999 in
interest rates charged on existing adjustable rate loans. That
trend was reversed, beginning in early 2000, with higher interest
rates being charged on new and existing adjustable rate loans.
Interest income from investment securities increased $19,000,
or 4.51%, as a higher average balance was maintained in investment
securities and certificates of deposits purchased. The annual
yield on the investments was lower, however, due to lower interest
rates and more investment in tax-exempt securities.
Interest income from other interest-earning assets decreased
$68,000, or 20.0%. The increased loan demand reduced the amount of
funds maintained in the other interest-earning accounts. The
decrease in interest income due to lower volume was partially offset
by a higher interest rate earned on these accounts.
Interest income from mortgage-backed securities decreased
$10,000 as principal repayments were received on these securities
and no new securities were purchased.
Interest Expense. Interest expense for the year ended June 30,
2000, increased $558,000, or 8.3%, to $7,257,000 from $6,699,000 for
the year ended June 30, 1999. Higher average customer deposits
created $419,000 of the increase. This was partially offset by a
decrease in the average rate paid from 4.56% for the year ended
June 30, 1999 to 4.55% for the year ended June 30, 2000. The
$151,000 remainder of the increase in total interest
7
<PAGE>
expense resulted from a higher balance in, and a higher average rate
paid on, FHLB advances. Additional FHLB advances were necessary to
fund loan growth. The rising interest rate environment caused these
funds to be borrowed at rates higher than the previous year.
Provision for Loan Losses. Provision for loan losses for the
year ended June 30, 2000 was $89,000 compared to $84,000 for the
year ended June 30, 1999. The increase of $5,000, or 6.2%, was
attributable to the increase in loans outstanding. Actual loan
charge-offs, net of recoveries, of First Home originated loans were
$32,000 for the year ended June 30, 2000 compared to $44,000 for the
year ended June 30, 1999.
Noninterest Income. Noninterest income increased $142,000, or
15.4% from $923,000 for the fiscal year ended June 30, 1999 to
$1,065,000 for the year ended June 30, 2000. Service charge and
other fee income increased $90,000, or 16.0%, as the number of
checking accounts increased and additional service and activity
charges were paid.
With the completion of the post office at Gainesville and the
purchase of additional investment real estate, rental income from
real estate operations increased $72,000.
In-house printing of checks for First Home customers
contributed $22,000 to noninterest income. Prior to the summer
of 1999, all customer check orders were sent to an outside vendor.
First Home received a small fee for the orders, however, it had to
pay the vendor for checks provided to customers at no charge. The
in-house check printing system enables the Bank to process check
orders more quickly and provide them to customers in a matter of
days. The expenses associated with the check printing system are
discussed below in the "-Noninterest Expense" section.
Gains on investment securities decreased $23,000 from
June 30, 1999, since there were no sales of investment securities
during the fiscal year ended June 30, 2000. Information regarding
the June 30, 1999 gains is provided below under "-Gain on Investment
and Mortgage-backed Securities." Further, since there were no
significant property sales during the year ended June 30, 2000,
gains on the sale of property and equipment decreased to $4,000.
Title insurance commissions earned by South Central Missouri Title,
Inc. remained basically constant during the fiscal year.
Noninterest Expense. For the fiscal year ended June 30, 2000,
noninterest expense was $4,443,000, an increase of $189,000, or 4.5%
from $4,254,000 for the fiscal year ended June 30, 1999.
Increases in other noninterest expense, occupancy and equipment and
compensation and employee benefits were partially offset by the
reduction of FDIC deposit insurance premiums.
Other noninterest expense increased $89,000, or 8.8%. Included
in that increase was $20,000 for additional advertising costs,
postage expense rose $16,000, telephone expense increased $6,000 and
office supplies $9,000. The overall increase in noninterest expense
also included a $34,000 reduction in losses on checking accounts as
a reserve for that amount established at the end of the previous
year was reversed. Charitable contributions increased $11,000
during the year ended June 30, 2000. Several local charities were
able, however, to provide Missouri Neighborhood Assistance Tax
Credits. Those credits allowed a portion of the contributions as a
credit on the Missouri tax return.
The in-house check printing system previously discussed reduced
the expense for checks provided free of charge to customers by
$34,000. This was offset by a $51,000 increase in check printing
costs. The net $17,000 expense increase was more than offset by
the $22,000 increase discussed above in "-Noninterest Income."
Occupancy and equipment expense increased by $85,000, or 14.5%.
The largest increase was in depreciation expense. Computer equipment
replacements and upgrades added $39,000 to depreciation. The
purchase of investment rental real estate increased depreciation by
$15,000 and the completion of existing location remodeling projects
added $10,000.
8
<PAGE>
Maintenance expense for computer equipment and software,
security systems and office equipment increased by $22,000. The
purchase of rental real estate created a $13,000 increase in the
related repairs and maintenance expense. The replacement of several
small office machines in three locations increased furniture and
equipment expense by $8,000. Those increases were partially offset
by an $18,000 decrease in computer expense.
There was a $41,000, or 1.6% increase in the area of
compensation and employee benefits. The primary components were
$68,000 for annual pay rate increases, $61,000 for providing
employees with partial reimbursement for the purchase of home
personal computers and a $42,000 increase in group health insurance
costs to add existing personnel who met the health plan coverage
requirements during the year.
The Employee Stock Ownership Plan ("ESOP") is a significant
component of compensation and employee benefits. The average fair
market value of the Company's common stock decreased during the year
ended June 30, 2000 which in turn reduced the expense for the ESOP
by $87,000. This treatment is required by the 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.
There were also decreases in compensation and employee benefits
of $17,000 relating to the capitalization of estimated loan
personnel costs in accordance with Statement of Financial Accounting
Standards No. 91, "Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct
Costs of Lease." Management Recognition Plan expense decreased
$31,000 as all of the granted shares became fully vested and
distributed during the prior year.
The reduction of FDIC deposit insurance premiums created a
$26,000 decrease even though deposits increased slightly. Legal
fees decreased $9,000, the expense for gifts given to new customers
for opening checking accounts decreased $11,000 and accounting and
auditing fees decreased $13,000.
Gain on Investments and Mortgage-backed Securities. As noted
in "-Noninterest Income," gains on investments and mortgage-backed
securities decreased $23,000 from June 30, 1999, since there were
no sales of investment securities during the year ended June 30,
2000. Common stock was sold during the year ended June 30, 1999 for
$137,000 which resulted in a $37,000 pretax gain. That gain was
offset by $14,000 to complete the write-off of a pool of automobile
loans purchased.
Income Taxes. Income tax expense for the year ended June 30,
2000 was $1,121,000, an increase of $59,000, or 5.56%. This was a
lower percentage increase than the increase in income before taxes
due to the additional tax deduction for the fair market value of
stock options exercised by employees and directors during the fiscal
year.
Net Interest Margin. Net interest margin for the year ended
June 30, 2000 was 3.73%, a slight decrease from 3.76% for the year
ended June 30, 1999. An increase in the average balance of loans
(which have a higher yield than the other earning assets) compared
to total interest earning assets created an overall increase in the
yield on interest earning assets. This increase was more than
offset by an increase in the average balance and related cost of
FHLB borrowings to create the decrease in the net interest margin.
Fiscal Year Ended June 30, 1999 Compared to June 30, 1998
Net Income. Net income for the fiscal year ended June 30, 1999
remained basically constant at $1,818,000 compared to $1,845,000 for
the fiscal year ended June 30, 1998. Total interest income increased
$223,000, noninterest income increased $157,000 and total interest
expense decreased $306,000. These items were more than offset by a
$525,000 increase in noninterest expense, an increase in income taxes
of $170,000 and an increase in provision for loan losses of $18,000.
9
<PAGE>
Net Interest Income. During the fiscal year ended June 30, 1999,
net interest income was $6,295,000, an increase of $529,000, or 9.2%,
from $5,766,000 for the fiscal year ended June 30, 1998. A $223,000
increase in total interest income was enhanced by a $306,000 decrease
in interest expense.
Interest Income. Total interest income increased $223,000, or
1.7%, to $12,994,000 for the fiscal year ended June 30, 1999 from
$12,771,000 for the fiscal year ended June 30, 1998. Interest income
from loans receivable increased $559,000, or 4.8%. This increase was
largely attributable to a $7,210,000 increase in net loans receivable.
Offsetting the increase resulting from the growth in net loans
receivable was a decrease in the annualized yield from 8.16% for the
year ended June 30, 1998 to 8.07% for the year ended June 30, 1999.
This was a result of the continued decrease in interest rates on
existing loans with adjustable rate features.
Interest income from other interest-earning assets increased
$122,000, or 55.6%. A higher balance was maintained in
interest-earning accounts as the FHLB became the correspondent bank in
late 1998. FHLB pays interest on daily funds deposited which allows
interest to be earned sooner than with the previous correspondent bank.
Interest income from investment securities decreased $450,000, or
51.2%, as a result of a lower average balance maintained in investment
securities and certificates of deposits purchased along with lower
interest rates on investments. The majority of government agency
securities purchased in the previous two years contained early
redemption provisions which were exercised by the respective agency.
Interest income from mortgage-backed securities decreased $7,000 as
principal repayments were received on these securities and no new
securities were purchased.
Interest Expense. For the year ended June 30, 1999, interest
expense decreased $306,000, or 4.4%, to $6,699,000 from $7,005,000 for
the year ended June 30, 1998. The increased interest expense related
to higher average customer deposits was more than offset by a lower
average rate paid on those deposits and a $727,000 reduction in
interest expense on FHLB advances. The average interest rate paid on
customer deposits was 4.56% for the year ended June 30, 1999 compared
to 4.7% for the year ended June 30, 1998. FHLB interest expense
decreased as FHLB advances totaling $3.5 million were repaid during
the fiscal year at their respective maturity dates.
Provision for Loan Losses. Provision for loan losses for the year
ended June 30, 1999 was $84,000 compared to $66,000 for the year ended
June 30, 1998. Provision for loan losses were increased by $18,000, or
27.3%, since actual losses and total loans outstanding both increased.
Actual loan charge-offs, net of recoveries, of First Home originated
loans were $44,000 for the year ended June 30, 1999 compared to $19,000
for the year ended June 30, 1998.
Noninterest Income. Noninterest income was $923,000 for the
fiscal year ended June 30, 1999. This was a $157,000, or 20.5%
increase, from $766,000 for the year ended June 30, 1998. Service
charge and other fee income increased $55,000, or 10.8%. As in
previous years, the increase was primarily a result of the checking
account program begun in July 1995, which continues to create an
increase in customer deposit accounts. Also contributing to the
increase was service charges and fees on the deposit accounts acquired
as part of the purchase of the two branches from NationsBank which was
completed in March 1998.
Insurance commissions for the fiscal year ended June 30, 1999 were
$196,000 compared to $81,000 for the fiscal year ended June 30, 1998.
The $115,000 increase was attributable to title insurance commissions
earned by South Central Missouri Title, Inc. which opened in November
1997. In addition to increased business at the Hartville, Missouri
office, branch offices of the title company were opened in Marshfield
and Ava, Missouri. Other increases to noninterest income were
$6,000 from real estate operations and $6,000 from other income.
Gains on the sale of property and equipment decreased $37,000.
The fiscal year ended June 30, 1998 included a $51,000 gain from the
sale of the assets of Lawson & Lawson Insurance Agency. The only
significant gain, totalling $22,000, in fiscal 1999 was from the sale
of real estate held for investment.
10
<PAGE>
Gains on investment securities and mortgage-backed securities
increased by $12,000 from $11,000 for the fiscal year ended June 30,
1998 to $23,000 for the year ended June 30, 1999. Information
regarding this increase is provided under "-Gain on Investment and
Mortgage-backed Securities.
Noninterest Expense. During the fiscal year ended June 30, 1999,
noninterest expense increased $525,000, or 14.1%. The majority of the
increase was in the area of compensation and employee benefits which
increased $289,000, or 12.7%. The primary components of this increase
were $144,000 for salaries and related payroll taxes for staff at the
Crane and Galena branches purchased in March 1998, $64,000 for salaries
and related payroll taxes for South Central Missouri Title, Inc.
personnel and $109,000 for hiring of additional personnel and regular
annual payroll increases for existing personnel.
Group health insurance expense also increased $81,000. The
increase resulted from the addition of the Crane and Galena personnel
in March 1998 and existing personnel meeting the health plan coverage
requirements.
The average fair market value of the Company's common stock
decreased during the year ended June 30, 1999 which in turn reduced the
expense for the Employee Stock Ownership Plan ("ESOP") by $51,000.
This treatment is required by the 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.
There were also decreases in compensation and employee benefits of
$37,000 relating to the capitalization of estimated loan personnel
costs in accordance with Statement of Financial Accounting Standards
No. 91, "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Lease.
Management Recognition Plan expense decreased $21,000 as all of the
granted shares became fully vested and distributed during the year.
Occupancy and equipment expense increased $98,000 from $491,000
for the fiscal year ended June 30, 1998 to $589,000 for the fiscal year
ended June 30, 1999. Addition of the Crane and Galena branches in
March 1998 raised normal occupancy and equipment expenses by $31,000.
Operation of South Central Missouri Title, Inc. for an entire year and
the addition of two additional locations for the title company were
responsible for $15,000 of the increase. A new computer system
installed in January 1998 and an upgrade of the check sorting machine
also caused increases in depreciation and maintenance expenses of
$39,000. Additions of furniture and equipment at existing branches
during the year created a $7,000 increase in depreciation expense. The
Marshfield branch underwent a renovation to provide additional space
which increased expenses by $5,000.
Professional fees increased $47,000 including $30,000 additional
accounting and audit fees incurred in late 1998 and a $17,000 increase
in the accrual for the 1999 audit. The FDIC insurance premiums on
deposit accounts increased $11,000 due to additional accounts and the
addition of the Crane and Galena deposit accounts.
There was a $22,000 decrease in advertising and promotional
expense attributable to the elimination of additional expenses
promoting the purchase of the Crane and Galena branches and a
lower number of gifts given to new customers.
During the year ended June 30, 1999, other noninterest expense
increased $102,000. The majority of the increase was amortization
of the premium paid to NationsBank for the purchase of the loans and
deposits at the Crane and Galena branches. This expense increased
$101,000 which includes $50,000 for an additional write-off to
reflect purchased accounts that were closed by the customers since
the branches were acquired by First Home.
Correspondent bank service charges increased $22,000 as deposit
activity with the correspondent banks increased in connection with new
accounts and the addition of the Crane and Galena branches. During
late 1998, correspondent bank processing was moved to the FHLB. The
service charges are slightly higher at the FHLB; however, interest is
11
<PAGE>
paid on collected balances which more than offsets the service charges.
Related courier service costs also increased by $11,000 due to the
deposits being transported to St. Louis rather than Springfield,
Missouri.
The addition of Crane and Galena also created a total of $20,000
increase in the following expenses: free checks to customers,
insurance, regulatory assessments, dues and employee education.
Commitment of a $10,000 contribution to a local YMCA and
additional contributions for which Missouri Neighborhood Assistance
Tax Credit were issued created a $25,000 increase in charitable
contributions. Postage expense increased $21,000 attributable to a
slight rate increase and the increase in statement mailings due to
new accounts acquired at Crane and Galena. Implementation of
Telebanker, First Home's automated informational telephone banking
system, currently handling 5,000 to 7,000 calls per month, raised
telephone costs by $18,000.
There was a decrease in nonoperating expenses of $31,000 due to
the elimination of the Crane and Galena acquisition costs. A $92,000
decrease in loss on checking accounts included a $34,000 reserve
established in June 1998 for items deposited with the correspondent
bank for which First Home had not received credit. The entry was
reversed in October 1998 when the posting of these items was corrected.
The remainder of the decrease was attributable to extremely
insignificant deposit account losses during the year.
Gain on Investments and Mortgage-backed Securities. As noted in
Noninterest Income," gains on investments and mortgage-backed
securities increased $12,000. Common stock was sold during the year
ended June 30, 1999 for $137,000 which resulted in a $37,000 pretax
gain. The gain was offset by $14,000 to complete the write-off of a
pool of automobile loans purchased. During the year ended June 30,
1998, common and preferred stocks were sold for $232,000 resulting in a
pretax gain of $41,000. The gain was offset by $30,000 in write-downs
on the automobile loan pool.
Income Taxes. Income tax expense increased $170,000. This was a
higher percentage increase than the increase in income before taxes due
to the additional tax deduction for the fair market value of stock
options exercised by employees during early 1998.
Net Interest Margin. Net interest margin was 3.76% for the year
ended June 30, 1999, an increase of .18% from 3.58% for the year ended
June 30, 1998. A decrease in the yield on loans attributable to the
reduction in rates on adjustable-rate loans combined with a decline in
the yield on investment securities created a decrease in the yield on
interest-earning assets. This decrease was more than offset by a
decrease in the cost of customer deposits and borrowings to create the
increase in the net interest margin.
Financial Condition
General. During the year ended June 30, 2000, net loans
receivable increased $21.3 million. The growth was funded primarily
with an increase in FHLB advances of $15.7 million along with $4.5
million in deposit growth. Property and equipment increased $1.2
million while cash decreased $2.7 million.
Total Assets. Total assets increased $20.4 million, or 11.4%
during the year ended June 30, 2000. The $21.3 million increase in
net loans receivable and $1.2 million increase in property and
equipment was somewhat offset by the $2.7 million decrease in cash
and cash equivalents. Investment securities available-for-sale also
increased $700,000.
Cash and Cash Equivalents. Cash and cash equivalents was $8.0
million at June 30, 2000, a $2.7 million decrease from $10.7 million
at June 30, 1999.
Certificates of Deposit. Certificates of deposit purchased as
investments of $1.2 million at June 30, 1999 decreased $200,000 to
$1.0 million at June 30, 2000.
12
<PAGE>
Investment Securities. The purchase of bonds in excess of
regular scheduled maturities of investment securities created a
$800,000 increase from $5.8 million at June 30, 1999 to $6.6 million
at June 30, 2000.
Mortgage-backed Securities. Mortgage-backed securities of
$550,000 at June 30, 1999 decreased $101,000 to $449,000 at June 30,
2000. This decrease was the result of regular principal repayments.
Loans Receivable. Net loans receivable increased $21.3 million,
or 13.9%, during the year from $153.6 million at June 30, 1999 to
$174.9 million at June 30, 2000. The net loan increase was funded
from the increase in customer deposits, reduction in cash and cash
equivalents and, primarily, FHLB advances.
Non-accrual Loans. Non-accrual loans remained basically
constant at $55,000 at June 30, 1999 compared to $49,000 at June 30,
2000.
Nonperforming Assets. Nonperforming assets increased to $2.4
million at June 30, 2000 compared to $1.9 million at June 30, 1999.
At June 30, 2000, nonperforming assets was comprised of 201 loans.
At least one monthly payment was received during the quarter ended
June 30, 2000 on 182 of those loans which had ending balances
totaling $2.3 million.
Customer Deposits and Borrowings. Customer deposits were $155.7
million at June 30, 2000, an increase of $4.5 million, or 2.9%, from
$151.2 million at June 30, 1999. The increase resulted from normal
growth at existing locations. Additional FHLB advances of $15.7
million were needed to fund loan growth during the year. FHLB
advances were $17.9 million at June 30, 2000 compared to $2.2
million at June 30, 1999.
Stockholders' Equity. Stockholders' equity increased slightly
to $24.5 million at June 30, 2000 from $24.2 million at June 30,
1999. The increase was the result of net income of $2.0 million,
$388,000 in unearned compensation adjustments and $190,000 from the
exercise of stock options offset by $2.0 million for the repurchase
of treasury stock and $300,000 for payment of dividends. At June 30,
2000, shares of stock outstanding had been reduced to 1,910,137
from 2,063,902 shares outstanding at June 30, 1999.
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, net
operating income and 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. Mortgage loans originated by First Home have increased
each year at $56.3 million, $47.2 million and $41.9 million for the
years ended June 30, 2000, 1999 and 1998, respectively. Other
investing activities include the purchase of investment securities,
which totaled $1.1 million, $2.8 million and $1.7 million for the years
ended June 30, 2000, 1999 and 1998. These activities were funded
primarily by deposit growth, principal repayments on loans,
mortgage-backed securities, other investment securities, and FHLB
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, principal and interest payments from
loans and mortgage-backed securities and investments, and FHLB
advances. During fiscal years 2000, 1999 and 1998, First Home used its
sources of funds primarily to fund loan commitments and to pay maturing
savings certificates and deposit withdrawals. At June 30, 2000, First
Home had approved loan commitments totaling $500,000 and
undisbursed loans in process totaling $3.8 million.
13
<PAGE>
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, Federal funds or used to reduce FHLB advances to enhance
interest income.
At June 30, 20000, certificates of deposit amounted to $95.9
million, or 61.6%, of First Home's total deposits, including $67.0
million which were scheduled to mature by June 30, 2001. 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.
Currently, the OTS requires a savings institution to maintain an
average daily balance of liquid assets (cash and eligible investments)
equal to at least 4% of the average daily balance of its net
withdrawable deposits and short-term borrowings. First Home's liquidity
ratios were 7.1%, 8.2% and 16.3% at June 30, 2000, 1999 and 1998,
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, 2000, 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 10.3%, 10.3%
and 14.0%, respectively. These ratios exceed the 1.5%, 4.0% and 8.0%,
respectively, capital ratios 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 16 of the Notes to
Consolidated Financial Statements.
Impact of New Accounting Standards. See Note 1 of the Notes to
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.
14
<PAGE>
{LOGO OF KIRKPATRICK, PHILLIPS & MILLER, CPAs, A PROFESSIONAL
CORPORATION}
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Stockholders
First Bancshares, Inc. and Subsidiaries
Mountain Grove, Missouri
We have audited the accompanying consolidated statements of financial
condition of First Bancshares, Inc. and Subsidiaries as of June 30,
2000 and 1999, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in
the period ended June 30, 2000. These consolidated 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 Subsidiaries as of June 30,
2000 and 1999, and the results of operations and its cash flows
for each of the three years in the period ended June 30, 2000, in
conformity with generally accepted accounting principles.
/s/ Kirkpatrick, Phillips & Miller
August 3, 2000
Springfield, Missouri
</page>
</TABLE>
<TABLE>
<CAPTION>
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- - - - - - - - - - - - - - - - - - - - - - - -
June 30, 2000 and 1999
2000 1999
------------- -------------
ASSETS
------
<S> <C> <C>
Cash and cash equivalents, including interest-bearing accounts
of $5,230,883 in 2000 and $8,032,183 in 1999 $ 7,961,552 $ 10,721,664
Certificates of deposit 1,009,000 1,209,000
Federal funds sold 320,000 245,000
Investment securities available-for-sale, at fair value 3,918,241 3,216,799
Investment securities held-to-maturity (estimated fair value of
$1,633,150 in 2000 and $1,529,597 in 1999) 1,657,197 1,543,948
Investment in Federal Home Loan Bank stock, at cost 1,072,200 1,057,600
Mortgage-backed certificates available-for-sale,
at fair value 448,559 550,296
Loans receivable held-for-investment, net 174,868,666 153,615,936
Accrued interest receivable 1,067,411 772,474
Prepaid expenses 130,105 91,414
Commissions and other receivables - 152,605
Property and equipment, less accumulated depreciation
and valuation reserve 5,853,832 4,651,801
Intangible assets, less accumulated amortization 767,256 885,236
Other assets 11,762 7,725
------------- -------------
Total assets $ 199,085,781 $ 178,721,498
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
---------------------------------------
Customer deposits $ 155,661,444 $ 151,209,747
Advances from Federal Home Loan Bank 17,899,616 2,200,000
Other borrowed funds 25,637 -
Income taxes payable - current 59,109 196,103
Deferred income taxes, net 183,703 194,572
Accrued expenses 779,237 672,023
------------- -------------
Total liabilities 174,608,746 154,472,445
------------- -------------
Preferred stock, $.01 par value; 2,000,000 shares authorized,
none issued - -
Common stock, $.01 par value; 8,000,000 shares authorized,
issued 2,756,716 in 2000 and 2,718,796 in 1999, outstanding
1,910,137 in 2000 and 2,063,902 in 1999 27,567 27,188
Paid-in capital 16,635,851 16,244,473
Retained earnings - substantially restricted 20,081,051 18,362,321
Treasury stock, at cost - 846,579 shares in 2000 and
654,894 shares in 1999 (11,891,593) (9,873,113)
Unearned compensation (305,221) (491,031)
Accumulated other comprehensive loss (70,620) (20,785)
------------ -------------
Total stockholders' equity 24,477,035 24,249,053
------------ -------------
Total liabilities and stockholders' equity $ 199,085,781 $ 178,721,498
============= =============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
16
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ -----------
<S> <C> <C> <C>
Interest Income:
Loans receivable $ 13,115,112 $ 12,185,082 $11,626,193
Investment securities 442,209 423,128 873,623
Mortgage-backed and related securities 34,086 43,704 51,100
Other interest-earning assets 273,587 341,946 219,763
------------ ------------ -----------
Total interest income 13,864,994 12,993,860 12,770,679
------------ ------------ -----------
Interest Expense:
Customer deposits 6,835,911 6,429,120 6,008,164
Borrowed funds 421,688 270,131 996,913
----------- ----------- -----------
Total interest expense 7,257,599 6,699,251 7,005,077
----------- ----------- -----------
Net interest income 6,607,395 6,294,609 5,765,602
Provision for loan losses 88,725 83,549 65,955
----------- ---------- -----------
Net interest income after
provision for loan losses 6,518,670 6,211,060 5,699,647
----------- ----------- -----------
Noninterest Income:
Service charges and other fee income 653,769 563,778 508,635
Gain on investment securities and
mortgage-backed securities - 22,766 11,444
Gain on sale of property and equipment 3,916 18,277 55,269
Loan origination and commitment fees 7,574 6,880 6,905
Income from real estate operations 173,334 101,188 95,115
Insurance commissions 193,280 196,594 81,458
Other 32,953 13,554 6,995
----------- ----------- ----------
Total noninterest income 1,064,826 923,037 765,821
----------- ----------- ----------
Noninterest Expense:
Compensation and employee benefits 2,611,595 2,570,546 2,281,341
Occupancy and equipment 674,674 589,454 491,294
Deposit insurance premiums 59,828 85,483 74,777
Other 1,096,791 1,008,201 881,257
----------- ----------- ----------
Total noninterest expense 4,442,888 4,253,684 3,728,669
----------- ----------- -----------
Income before taxes 3,140,608 2,880,413 2,736,799
Income Taxes 1,121,060 1,062,028 891,316
----------- ----------- -----------
Net income $ 2,019,548 $ 1,818,385 $ 1,845,483
=========== =========== ===========
Basic earnings per share $ 1.06 $ .90 $ .90
=========== =========== ===========
Diluted earnings per share $ 1.02 $ .86 $ .85
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
17
</page>
<TABLE>
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- - - - - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2000, 1999 and 1998
<CAPTION> Common Accumulated
Stock Other Total
------------------ Paid-in Retained Treasury Unearned Comprehensive Stockholders'
Shares Amount Capital Earnings Stock Compensation Income (Loss) Equity
--------- -------- ----------- ------------ ----------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 1,091,554 $15,585 $15,250,480 $15,211,828 $(7,429,669) $( 977,466) $ 135,886 $22,206,644
Comprehensive income
Net income - - - 1,845,483 - - - 1,845,483
Other comprehensive income,
net of tax:
Change in unrealized gain
(loss) on securities
available-for-sale, net of
deferred income taxes of
$(20,535) - - - - - - (34,965) (34,965)
Less: reclassification
adjustment, net of deferred
income taxes of $(15,223) - - - - - - (25,921) (25,921)
-------------
Total Comprehensive Income 1,784,597
-------------
Proceeds from exercise of
stock options 32,342 324 265,361 - - - - 265,685
Cash dividends ($.11 per share) - - - (223,153) - - - (223,153)
100% stock dividend 1,102,704 11,027 - (11,027) - - - -
Purchase of treasury stock
at cost (13,000) - - - (234,507) - - (234,507)
Vesting of MRP stock - - - - - 55,250 - 55,250
Release of ESOP shares - - 322,454 - - 187,700 - 510,154
--------- -------- ----------- ----------- ------------ ------------ --------- -----------
Balance June 30, 1998 2,213,600 26,936 15,838,295 16,823,131 (7,664,176) (734,516) 75,000 24,364,670
Comprehensive Income
Net income - - - 1,818,385 - - - 1,818,385
Other comprehensive income,
net of tax:
Change in unrealized gain
(loss) on securities
available-for-sale, net of
deferred income taxes of
$(42,490) - - - - - - (72,347) (72,347)
Less: reclassification
adjustment, net of deferred
income taxes of $(13,765) - - - - - - (23,438) (23,438)
-------------
Total Comprehensive Income 1,722,600
-------------
Proceeds from exercise of
stock options 25,220 252 125,848 - - - - 126,100
Cash dividends ($.14 per share) - - - (279,195) - - - (279,195)
Purchase of treasury stock
at cost (174,918) - - - (2,208,937) - - (2,208,937)
Vesting of MRP stock - - - - - 56,250 - 56,250
Release of ESOP shares - - 280,330 - - 187,235 - 467,565
--------- -------- ----------- ----------- ------------ ------------ --------- -----------
Balance June 30, 1999 2,063,902 27,188 16,244,473 18,362,321 (9,873,113) (491,031) (20,785) 24,249,053
-----------
Comprehensive Income
Net income - - - 2,019,548 - - - 2,019,548
Other comprehensive income,
net of tax:
Change in unrealized gain
(loss) on securities
available-for-sale, net of
deferred income taxes of
$(33,936) - - - - - - (49,835) (49,835)
-------------
Total Comprehensive Income 1,969,713
-------------
Proceeds from exercise of
stock options 37,920 379 189,221 - - - - 189,600
Cash dividends ($.16 per share) - - - (300,818) - - - (300,818)
Purchase of treasury stock
at cost (191,685) - - - (2,018,480) - - (2,018,480)
Release of ESOP shares - - 202,157 - - 185,810 - 387,967
--------- -------- ----------- ----------- ------------ ------------ --------- -----------
Balance at June 30, 2000 1,910,137 $27,567 $16,635,851 $20,081,051 $(11,891,593) $(305,221) $(70,620) $24,477,035
========= ======= =========== =========== ============ ========== ========= ============
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
18
</page>
<TABLE>
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2000, 1999 and 1998
<CAPTION>
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,019,548 $ 1,818,385 $ 1,845,483
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 342,147 278,802 223,681
Amortization 117,980 117,980 18,183
Premiums and discounts on mortgage-backed
securities and investment securities 1,265 (229) (9,690)
Loss on loans, net of recoveries 88,725 83,549 65,955
Unrealized loss on investment securities - 14,437 30,000
Gain on sale of investment securities
and mortgage-backed securities - (37,203) (41,444)
Gain on sale of equipment (9,723) (18,777) (1,813)
Gain on sale of intangible assets - - (49,829)
(Gain) loss on sale of real estate owned 5,807 500 (3,627)
Vesting of MRP shares - 56,250 55,250
Release of ESOP shares 387,967 467,565 510,154
Net change in operating accounts:
Accrued interest receivable and other assets (185,060) (201,800) 51,214
Deferred loan costs (50,082) (49,886) (59,487)
Accrued expenses 107,214 (33,319) 391,485
Deferred income taxes 23,067 (42,891) 29,963
Income taxes payable - current (136,994) 121,417 69,663
------------ ------------ ------------
Net cash from operating activities 2,711,861 2,574,780 3,125,141
------------ ------------ ------------
Cash flows from investing activities:
Purchase of investment securities
available-for-sale (783,999) (1,833,406) (1,644,900)
Purchase of investment securities held-to-maturity (338,000) (984,389) (105,000)
Purchase of Federal Home Loan Bank stock (14,600) - -
Proceeds from maturities of investment securities
available-for-sale 646 1,100,454 12,900,450
Proceeds from maturities of investment securities
held-to-maturity 223,486 540,140 563,759
Proceeds from sale of investment securities
available-for-sale - 137,203 231,948
Proceeds from sale of Federal Home Loan Bank stock - - 206,200
Net change in certificates of deposit 200,000 996,000 (701,000)
Net increase in federal funds sold (75,000) (245,000) -
Net change in loans receivable (21,433,598) (7,342,126) (7,561,466)
Proceeds from principal payments and maturities
of mortgage-backed certificates 99,877 142,031 122,405
Purchases of property and equipment (1,667,081) (728,561) (496,056)
Proceeds from sale of property and equipment 132,626 114,250 11,761
Proceeds from sale of intangible assets - - 80,000
Net proceeds from sale of real estate owned 136,418 98,370 158,461
Net cash received in acquisition of
branches - - 11,274,501
------------ ------------ ------------
Net cash from (used in) investing activities (23,519,225) (8,005,034) 15,041,063
------------ ------------ ------------8
20
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
- - - - - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2000, 1999 and 1998
2000 1999 1998
------------- ------------- ------------
Cash flows from financing activities:
Net change in demand deposits, savings accounts,
and certificates of deposit $ 4,451,697 $ 10,150,999 $ 5,947,762
Payments on borrowed funds (2,015,547) (3,500,000) (18,055,000)
Proceeds from borrowed funds 17,740,800 - 200,000
Proceeds from issuance of common stock 189,600 126,100 252,715
Cash dividends paid (300,818) (279,195) (223,153)
Purchase of treasury stock (2,018,480) (2,208,937) (234,507)
------------- ------------- ------------
Net cash from (used in) financing activities 18,047,252 4,288,967 (12,112,183)
------------ ------------- ------------
Net increase (decrease) in cash and cash equivalents (2,760,112) (1,141,287) 6,054,021
Cash and cash equivalents -
beginning of period 10,721,664 11,862,951 5,808,930
------------ ----------- -----------
Cash and cash equivalents -
end of period $ 7,961,552 $ 10,721,664 $ 11,862,951
============ ============ =============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and
other borrowings $ 7,169,376 $ 6,739,175 $ 6,541,148
Income taxes 1,221,103 905,286 798,195
Supplemental schedule of non-cash investing and
financing activities:
Loans and other real estate
charged off to reserve $ 31,842 $ 71,565 $ 19,414
Loans transferred to real estate
acquired in settlement of loans 142,225 98,870 41,058
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
20
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2000, 1999 and 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business - 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 provided insurance brokerage
activities through a subsidiary corporation until September
1997. The Company and Savings Bank are also subject
to the regulation of certain federal agencies and undergo
periodic examinations by those regulatory authorities. In
November of 1997, South Central Missouri Title, Inc. was
formed as a subsidiary corporation of First Bancshares, Inc.
South Central is a licensed agent to sell title insurance and
also provides real estate sales closing services.
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 subsidiaries, the
Savings Bank and South Central Missouri Title, Inc., 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.
21
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2000, 1999 and 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Investment securities and mortgage-backed certificates -
Securities are classified in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," which
establishes three classifications of investment securities:
held-to-maturity, trading and available-for-sale. Trading
securities are acquired principally for the purpose of near
term sales. Such securities are reported at fair value and
unrealized gains and losses are included in income. At June
30, 2000 and 1999, the Company had no securities designated as
trading securities. 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.
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.
The accrual of interest on impaired loans is discontinued when it
is determined that the payment of interest or principal is
doubtful of collection, or when interest or principal is past
due 90 days or more, 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.
22
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2000, 1999 and 1998
(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 (8). 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 two
branches from NationsBank, which is discussed further in Note
(2). The premium paid by the Savings Bank for the branches is
being amortized on a straight-line basis over fifteen years.
Amortization expense relating to this premium was $117,980,
$117,980 and $17,000 in 2000, 1999 and 1998, respectively.
During the years ended June 30, 2000 and 1999 amortization
expense includes a $50,000 write-down due to the loss of
customers that were acquired from NationsBank.
Intangible assets were also recorded by Fybar Service Corporation
in connection with the acquisition of Lawson and Lawson
Insurance Agency, Inc. during October, 1991. In September,
1997, the intangible assets of Lawson and Lawson were sold.
Amortization expense relating to these intangible assets
amounted to $1,183 in 1998.
Income taxes - The Company files a consolidated federal income tax
return with its wholly-owned subsidiaries. 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.
Income taxes are accounted for under the asset and liability
method in accordance with SFAS No. 109, "Accounting for Income
Taxes." 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.
23
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2000, 1999 and 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
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 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 - Loan origination fees and costs
are recorded in accordance with 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.
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.
24
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2000, 1999 and 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Stock Dividend - On December 30, 1997, the Company's Board of
Directors declared a two-for-one stock split (in the form of a
100% stock dividend) of First Bancshares, Inc. common stock to
stockholders of record on January 16, 1998, payable on January
30, 1998. Common stock was increased and retained earnings
was reduced for the aggregate par value of the shares issued.
The stated par value of each share was not changed from $.01.
All per share amounts and average shares outstanding have been
restated to reflect the aforementioned stock dividend.
Earnings per share - Basic earnings per share excludes dilution
and is computed by dividing net income available to common
stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share
reflects the potential dilution that could occur if
securities or other contracts to issue common stock were
exercised or resulted in the issuance of common stock that
would share in the earnings of the Company. Dilutive
potential common shares are added to weighted average shares
used to compute basic earnings per share. The number of
shares that would be issued from the exercise of stock options
has been reduced by the number of shares that could have been
purchased from the proceeds at the average market price of the
Company's stock.
Comprehensive income - The Company adopted SFAS No. 130,
"Reporting Comprehensive Income," as of July 1, 1998.
Accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net
income. Although certain changes in assets and liabilities,
such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with
net income, are components of comprehensive income. The
adoption of SFAS No. 130 had no effect on the Company's net
income or shareholders' equity.
New accounting standards - In June 1998, FASB issued SFAS
No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair
value. In June 1999, SFAS No. 133 was amended by SFAS No.
137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB
Statement No. 133" which deferred the effective date to the
first quarter of fiscal years beginning after June 15, 2000.
In June 2000, SFAS No. 133 was amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain
Hedging Activities" which adds guidance related to accounting
for derivative instruments and hedging activities. The
adoption of this standard is not expected to have a material
impact on the Company.
25
</page>
FIRST BANCSHARES, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2000, 1999 and 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-----------------------------------------------------
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.
(2) ACQUISITION
In March 1998, the Savings Bank purchased two bank branch
offices from NationsBank. The branches are located at Crane
and Galena, Missouri. As part of the agreement, the Savings
Bank assumed customer deposits of $17,426,254 and other
liabilities of $65,000 in exchange for loans of $4,787,311,
premises and equipment of $341,197, cash of $11,274,501 and
other assets of $68,029. The Savings Bank paid a premium of
$1,020,216 for the loans purchased and customer deposit
accounts assumed. The acquisition was recorded using the
purchase method of accounting. Results of operations of the
branches acquired are included in the accompanying financial
statements since the date of acquisition.
(3) INVESTMENT SECURITIES
As discussed in Note (1), the Company has designated certain
securities as available-for-sale. A summary of the investment
securities available-for-sale at June 30, 2000 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 $ 2,700,000 $ - $ 47,207 $ 2,652,793
Mutual funds 32,998 1,898 - 34,896
Common and preferred stocks 1,277,443 930 47,821 1,230,552
------------- ---------- ----------- -------------
Total $ 4,010,441 $ 2,828 $ 95,028 $ 3,918,241
============ ========== =========== =============
</TABLE>
The amortized cost and estimated market value of debt securities
available-for-sale at June 30, 2000 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 after one year through five years 2,700,000 2,652,793
============ ============
</TABLE>
There were no sales of investment securities available-for-
sale during the year ended June 30, 2000.
26
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2000, 1999 and 1998
(3) INVESTMENT SECURITIES - (CONTINUED)
A summary of investment securities held-to-maturity at
June 30, 2000 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 $ 1,633,796 $ 1,737 $ 25,784 $ 1,609,749
Auto and student loan pools 23,401 - - 23,401
----------- --------- ---------- -----------
Total $ 1,657,197 $ 1,737 $ 25,784 $ 1,633,150
============ ========= ========== ===========
</TABLE>
Auto and student loan pools are stated at net realizable value
in 2000, 1999 and 1998. 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, $14,437 and $30,000 for 1999 and 1998, respectively,
have been charged to operations.
The amortized cost and estimated market value of investment
securities held-to-maturity at June 30, 2000, 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 $ 263,000 $ 262,956
Due after one year through five years 1,102,197 1,087,101
Due after five years through ten years 292,000 283,093
----------- -----------
Total $ 1,657,197 $ 1,633,150
=========== ===========
</TABLE>
A summary of the investment securities available-for-sale at
June 30, 1999 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 $ 2,200,000 $ - $ 27,611 $ 2,172,389
Mutual funds 33,644 3,072 - 36,716
Common and preferred stocks 981,406 26,288 - 1,007,694
----------- ---------- ----------- ------------
Total $ 3,215,050 $ 29,360 $ 27,611 $ 3,216,799
=========== ========== =========== ===========
</TABLE>
Proceeds from the sales of common stock held as available-for-
sale during the year ended June 30, 1999 were $137,203. A
gain of $37,203 was recognized on these sales.
Proceeds from the sales of common and preferred stock held as
available-for-sale during the year ended June 30, 1998 were
$231,948. A gain of $41,444 was recognized on these sales.
27
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2000, 1999 and 1998
(3) INVESTMENT SECURITIES - (CONTINUED)
A summary of investment securities held-to-maturity at June 30,
1999 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 $ 1,510,061 $ 7,839 $ 22,190 $ 1,495,710
Auto and student loan pools 33,887 - - 33,887
----------- --------- ---------- -----------
Total $ 1,543,948 $ 7,839 $ 22,190 $ 1,529,597
=========== ========= ========== ===========
</TABLE>
The book value of securities pledged as collateral, to secure
public deposits was $2,101,358 at June 30, 2000 and $1,340,450 at
June 30, 1999. The approximate fair value of pledged securities
was $2,065,485 at June 30, 2000and $1,327,067 at June 30, 1999.
(4) 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 $1,072,200 at June 30, 2000.
(5) MORTGAGE-BACKED SECURITIES
The amortized cost and estimated market values of mortgage-
backed securities available-for-sale as of June 30, 2000 are
summarized below:
<TABLE>
<CAPTION>
Estimated
Amortized Gross Unrealized Fair
Cost Gains Losses Value
---------- --------- --------- -----------
<S> <C> <C> <C> <C>
FHLMC certificates $ 169,987 $ 647 $ 3,773 $ 166,861
FNMA certificates 226,307 - 6,283 220,024
GNMA certificates 60,487 1,187 - 61,674
---------- ---------- --------- ----------
Total $ 456,781 $ 1,834 $ 10,056 $ 448,559
========== ========= ========= ==========
</TABLE>
28
<PAGE>
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2000, 1999 and 1998
(5) MORTGAGE-BACKED SECURITIES (CONTINUED)
The amortized cost and estimated market values of mortgage-
backed securities available-for-sale as of June 30, 1999 are
summarized below:
<TABLE>
<CAPTION>
Estimated
Amortized Gross Unrealized Fair
Cost Gains Losses Value
---------- --------- --------- -----------
<S> <C> <C> <C> <C>
FHLMC certificates $ 213,495 $ 849 $ 3,421 $ 210,923
FNMA certificates 273,498 - 5,280 268,218
GNMA certificates 69,665 1,490 - 71,155
---------- ---------- --------- ----------
Total $ 556,658 $ 2,339 $ 8,701 $ 550,296
========== ========= ========= ==========
</TABLE>
(6) LOANS RECEIVABLE
Loans receivable at June 30 consist of the following:
<TABLE>
<CAPTION>
2000 1999
------------- --------------
<S> <C> <C>
First mortgage loans $ 156,532,562 $ 137,331,895
Loans to depositors, secured by
savings accounts 1,646,102 1,944,489
Consumer and automobile loans 9,750,918 8,054,123
Second mortgage loans 5,081,954 4,990,937
Other loans 5,984,339 4,427,739
----------- -------------
Total gross loans 178,995,875 156,749,183
Reserve for loan losses (596,951) (540,068)
Loans in process (3,797,139) (2,809,979)
Unamortized deferred loan costs, net
of origination fees 266,881 216,800
------------ ------------
Net loans receivable $ 174,868,666 $ 153,615,936
============= =============
</TABLE>
Activity in the allowance for loan losses is summarized as
follows for the years ended June 30:
<TABLE>
<CAPTION>
2000 1999
---------- ---------
<S> <c. <C>
Balance at beginning of year $ 540,068 $ 528,084
Provision charged to income 88,725 83,549
Charge-offs (36,665) (71,907)
Recoveries 4,823 342
---------- ---------
Balance at end of year $ 596,951 $ 540,068
========= =========
</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.
29
<PAGE>
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2000, 1999 and 1998
(6) LOANS RECEIVABLE (CONTINUED)
----------------------------
As of June 30, 2000 and 1999, the total recorded investment in
impaired loans was $49,446 and $55,110 respectively,as
recognized in conformity with SFAS No. 114, as amended by SFAS
No. 118. This amount was subject to allowances for credit
losses of $49,446 and $55,110, as of June 30, 2000 and 1999,
respectively. During 2000 and 1999, the average recorded
investment in impaired loans was $55,110. There was no
interest income recognized in 2000 and 1999 on
impaired loans.
(7) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at June 30 is summarized as follows:
<TABLE>
<CAPTION>
2000 1999
----------- ----------
<S> <C> <C>
Investment securities $ 74,698 $ 56,860
Mortgage-backed securities 8,799 8,799
Loans receivable 983,914 706,815
---------- ----------
Total $1,067,411 $ 772,474
========== ==========
</TABLE>
(8) PROPERTY AND EQUIPMENT
Property and equipment at June 30 consists of the following:
<TABLE>
<CAPTION>
2000
------------------------------------------------------
Accum. Valuation
Category Cost Deprec. Reserve Net
---------------------------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Land $ 609,683 $ - $ - $ 609,683
Buildings 3,226,687 1,009,626 - 2,217,061
Office furniture,
fixtures and equipment 1,794,798 930,352 - 864,446
Automobiles 163,959 74,292 - 89,667
Investment real estate 2,557,697 213,575 271,147 2,072,975
----------- ---------- --------- -----------
Total $ 8,352,824 $ 2,227,845 $ 271,147 $ 5,853,832
=========== =========== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
1999
------------------------------------------------------
Accum. Valuation
Category Cost Deprec. Reserve Net
------------------------ ----------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Land $ 470,777 $ - $ - $ 470,777
Buildings 3,162,798 915,073 - 2,247,725
Office furniture,
fixtures and equipment 1,920,399 1,113,592 - 806,807
Automobiles 117,047 58,263 - 58,784
Investment real estate 1,538,397 199,542 271,147 1,067,708
----------- ---------- --------- ------------
Total $ 7,209,418 $2,286,470 $ 271,147 $ 4,651,801
=========== ========== ========= ============
</TABLE>
30
<PAGE>
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2000, 1999 and 1998
(8) PROPERTY AND EQUIPMENT (CONTINUED)
----------------------------------
Depreciation charges to operations for the years ended June 30,
2000, 1999 and 1998 were $342,147, $278,802, and $223,681,
respectively. The depreciation policies followed by the
Company are described in Note (1).
A valuation reserve was established in a prior year for certain
investment real estate to adjust the property to its net
realizable value.
(9) CUSTOMER DEPOSITS
A summary of deposit accounts at June 30 is as follows:
<TABLE>
<CAPTION>
2000 1999
-------------------- ----------------------
Amount % Amount %
------------ ------ -------------- ------
<S> <C> <C> <C> <C>
Noninterest-bearing checking $ 5,741,754 3.7% $ 5,145,977 3.4%
Interest-bearing checking 25,115,653 16.1 24,683,993 16.3
Super Saver money market 18,575,407 11.9 21,420,529 14.2
Savings 10,354,220 6.7 10,206,759 6.8
Certificates of Deposit: 95,874,410 61.6 89,752,489 59.3
------------ ----- ------------- -----
Total $ 155,661,444 100.0% $ 151,209,747 100.0%
============= ====== ============= ======
</TABLE>
The aggregate amount of jumbo certificates of deposit with a
minimum denomination of $100,000 was $20,718,114 and $18,102,733
at June 30, 2000 and 1999, respectively.
At June 30, 2000, scheduled maturities of certificates of
deposit are as follows:
<TABLE>
<CAPTION>
<S> <C>
2001 $ 67,002,681
2002 13,087,854
2003 6,685,633
2004 5,591,527
2005 and later 3,506,715
-------------
$ 95,874,410
=============
</TABLE>
(10) ADVANCES FROM FEDERAL HOME LOAN BANK
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:
31
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2000, 1999 and 1998
(10) ADVANCES FROM FEDERAL HOME LOAN BANK (CONTINUED)
-----------------------------------------------
<TABLE>
caption>
2000 1999
------------ ------------
<S> <C> <C>
Three year; 5.85% fixed; matures November 1999 $ - 2,000,000
One month; 6.57% fixed; interest payable at
maturity; matures July 2000 2,500,000 -
Three month; 6.76% fixed; interest payable at
maturity; matures August 2000 1,000,000 -
Three month; 6.74% fixed; interest payable at
maturity; matures September 2000 1,000,000 -
One year; 7.41% adjustable daily; interest paid
daily; matures October 2000 2,900,000 -
One year; 6.08% fixed; interest payable monthly;
matures October 2000 150,000 -
Seven month; 7.01% fixed; interest payable monthly;
matures December 2000 2,000,000 -
Nine month; 6.95% fixed; interest payable monthly;
matures March 2001 4,500,000 -
One year; 7.10% fixed; interest payable monthly
matures May 2001 1,000,000 -
Eighteen month; 6.68% fixed; interest payable
monthly; matures July 2001 300,000 -
Two year; 7.34% fixed; interest payable monthly;
matures May 2002 1,500,000 -
Five year; 5.90% fixed; interest payable monthly;
matures January 2003 200,000 200,000
Fifteen year; 7.20% fixed; $3,731 due monthly
including interest; matures November 2014 400,940 -
Fifteen year; 7.80% fixed; $4,249 due monthly
including interest; matures May 2015 448,676 -
------------ ------------
Total $ 17,899,616 $ 2,200,000
============ ============
</TABLE>
32
<PAGE>
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2000, 1999 and 1998
(10) ADVANCES FROM FEDERAL HOME LOAN BANK (CONTINUED)
------------------------------------------------
The fixed rate advances shown above, excluding advances with
an original maturity of one or three months which are not
prepayable, 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. The adjustable
rate advance is prepayable without penalty.
The adjustable rate advance is a Federal Funds credit line
with the Federal Home Loan Bank of Des Moines. The credit
line has a limit of $26,605,000.
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>
2001 $ 15,083,013
2002 1,835,577
2003 238 340
2004 41,317
2005 44,527
Later years 656,842
------------
$ 17,899,616
=============
</TABLE>
Interest expense on borrowed funds for the years ended June 30
is summarized below:
<TABLE>
<CAPTION>
2000 1999 1998
----------- --------- ---------
<S> <C> <C> <C>
Advances from Federal Home Loan
Bank $ 419,040 $ 270,131 $ 992,959
Other borrowings 2,648 - 3,954
----------- --------- ---------
Total $ 421,688 $ 270,131 $ 996,913
============ ========= =========
</TABLE>
(11) INCOME TAXES
The provision for income tax expense for the years ended June
30 is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Current $1,097,993 $1,104,919 $ 858,842
Deferred 23,067 (42,891) 32,474
---------- ---------- ----------
Total $1,121,060 $1,062,028 $ 891,316
========== ========== ==========
</TABLE>
33
<PAGE>
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2000, 1999 and 1998
(11) INCOME TAXES - (CONTINUED)
The provision for income taxes differs from that computed at
the statutory corporate rate, 34% for the years ended June 30
were as follows:
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Tax at statutory rate $1,067,807 $ 979,340 $ 930,512
Increase (decrease) in taxes
resulting from:
State taxes, net of
federal benefit 81,593 81,897 68,966
Tax-exempt income (25,714) (18,211) (24,665)
Employee benefit plans 21,958 32,404 (85,975)
Net effect of other
book/tax differences (24,584) (13,402) 2,478
----------- ---------- ---------
Provision for income taxes $1,121,060 $1,062,028 $ 891,316
========= ========= =========
</TABLE>
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>
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Difference in depreciation methods
used for tax purposes and
financial statements $ 28,426 $ 27,755 $ 26,281
Effect of health insurance plan
reserves not currently deductible 7,136 (5,737) 6,010
Use of different methods for computing
loan loss reserves for tax purposes
and financial statements (59,498) (26,160) (28,083)
Use of different methods for computing
net deferred loan costs/fees for tax
purposes and financial statements 14,970 12,672 17,741
Other book/tax differences 32,033 (51,421) 10,525
---------- -------- --------
Increase in deferred income taxes $ 23,067 $ (42,891) $ 32,474
========= ========= =========
</TABLE>
34
<PAGE>
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2000, 1999 and 1998
(11) INCOME TAXES (CONTINUED)
-----------------------
The components of deferred tax assets and liabilities as of June
30, 2000 and 1999 consisted of:
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Deferred tax assets:
Reserve for loan losses $ 220,872 $ 199,825
Valuation reserve on investment real estate 92,190 92,190
Unrealized losses on securities available-for-sale 38,881 13,439
Health insurance plan reserves not
currently deductible - 6,792
Book amortization in excess of tax amortization 35,681 17,194
Unearned compensation 4,847 9,020
Other - 33,878
--------- ---------
Total gross deferred tax benefits $ 392,471 $ 372,338
--------- ---------
Deferred tax liabilities:
Tax depreciation in excess of book depreciation $ 293,410 $ 264,984
Federal Home Loan Bank stock dividends 60,936 60,936
Bad debt reserves for tax purposes in excess of
base year bad debt reserve 76,038 114,489
Unrealized gains on securities available-for-sale 1,725 10,219
Installment sale recognition 4,914 7,136
Unamortized deferred loan costs, net of fees 124,116 109,146
Health insurance plan reserves not currently taxable 344 -
Other 14,691 -
--------- ---------
Total gross deferred tax liabilities $ 576,174 $ 566,910
--------- ---------
Net deferred tax liabilities $(183,703) $(194,572)
========== =========
</TABLE>
In accordance with SFAS No. 109, a deferred tax liability has
not been recognized for tax basis bad debt reserves of
approximately $2,190,825 of the Savings Bank that arose in tax
years that began prior to December 31, 1987. At June 30, 2000
the amount of the deferred tax liability that had not been
recognized was approximately $810,605. 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, new legislation was enacted which
provided for the recapture into taxable income of certain
amounts previously deducted as additions to the bad debt
reserves for income tax purposes. The Savings Bank began
changing its method of determining bad debt reserves for tax
purposes during 1996. The amounts to be recaptured for income
tax reporting purposes are considered by the Savings Bank in
the determination of the net deferred tax liability.
35
<PAGE>
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2000, 1999 and 1998
(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, 2000, 1999 and 1998 was
approximately $4,742, $4,220, and $3,800, respectively. Plan
assets exceeded the present value of accumulated plan benefits
at June 30, 2000, the latest actuarial valuation date.
The Company established an internally-leveraged ESOP in December
1993 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 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, 2000 the loan had an
outstanding balance of $318,321 and an interest rate of 6%.
The Company accounts 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 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 $358,159 of ESOP
compensation expense in 2000, $445,117 in 1999 and $496,302 in
1998.
A summary of ESOP shares at June 30, 2000 is as follows:
Allocated shares 178,279
Shares committed for release 37,161
Unreleased shares 57,797
----------
Total 273,237
==========
Fair value of unreleased shares $ 570,736
==========
36
<PAGE>
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2000, 1999 and 1998
(12) EMPLOYEE BENEFIT PLANS (CONTINUED)
----------------------------------
The Savings Bank adopted a Management Recognition Plan ("MRP")
for the benefit of the directors, officers and employees of the
Savings Bank. The MRP provided 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 was managed by trustees comprised of the
directors of the Company. The plan authorized the Company to
grant up to 60,834 shares of the Company stock, all of which
are awarded as of June 30, 1999. These shares represented
unearned compensation and have been accounted for as a reduction
of stockholders' equity. During the year ended June 30, 1999
all of the MRP shares became fully vested. The Savings Bank
recorded compensation expense under the MRP of $31,375 and
$52,250 in 1999 and 1998, respectively.
The Company has reserved 304,174 shares of common stock 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.
A summary of the Company's stock option activity, and related
information for the years ended June 30 follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------------------- ------------------ ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------- ------- -------- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year 168,432 5.06 193,980 5.05 247,320 5.05
Granted - - - - - -
Exercised (37,920) 5.00 (25,220) 5.00 (52,692) 5.04
Forfeited (192) 5.00 (328) 5.00 (648) 5.00
-------- -------- --------
Outstanding - end of year 130,320 5.08 168,432 5.06 193,980 5.06
======== ========= ========
Exercisable at end of year 130,320 5.08 168,032 5.06 140,512 5.05
======== ========= ========
</TABLE>
Exercise prices for options outstanding as of June 30, 2000
ranged from $5.00 to $7.75. The weighted-average remaining
contractual life of those options is 3.5 years.
37
<PAGE>
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2000, 1999 and 1998
(12) EMPLOYEE BENEFIT PLANS (CONTINUED)
----------------------------------
The Company accounts for stock options in accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation". As permitted
by the standard, the Company has elected to continue 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.
All references in this note to the number of shares and per share
amounts have been restated to reflect the 100% stock dividend
during 1998.
(13) EARNINGS PER SHARE
-------------------
The following information shows the amounts used in computing
earnings per share and the effect on income and the weighted
average number of shares of dilutive potential common stock. The
amounts in the income columns represent the numerator and the
amounts in the shares columns represent the denominator.
<TABLE>
<CAPTION>
Years Ended June 30
------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------- ------------------------------ -------------------------------
Per Share Per Share Per Share
Income Shares Amount Income Shares Amount Income Shares Amount
----------- --------- ------- --------- --------- ------ -------------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available
to Common
Stockholders $2,019,548 1,911,324 $1.06 $1,818,385 2,018,005 $.90 $1,845,483 2,039,290 $.90
===== ===== ======
Effect of
dilutive securities - 66,876 - 100,125 - 121,818
---------- --------- ----------- ---------- ----------- ----------
Diluted EPS:
Income available to
stockholders plus
stock options $2,019,548 1,978,200 $1.02 $1,818,385 2,118,130 $.86 $1,845,483 2,161,108 $.85
============= ========= ===== =========== ========= ===== ========== ========= ======
</TABLE>
(14) 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:
38
<PAGE>
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2000, 1999 and 1998
(14) RELATED PARTY TRANSACTIONS (CONTINUED)
--------------------------------------
2000 1999
----------- ------------
Beginning balance $ 1,143,535 $ 1,053,077
Originations and advances 911,394 568,405
Principal repayments (638,887) (477,947)
------------ ------------
Ending balance $ 1,416,042 $ 1,143,535
=========== ===========
(15) 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 $253,951 at June 30, 2000.
Loan Commitments - The Savings Bank had outstanding firm
commitments to originate real estate loans in the amount of
$495,256 at June 30, 2000.
Lines of Credit - The unused portion of lines of credit on
commercial loans were approximately $3,638,689 at June 30, 2000.
Loan in Process - The Savings Bank has recorded loans in process
representing the undisbursed portion of loans in the amount of
$3,638,689 at June 30, 2000. These amounts were recorded as
loans receivable, with a corresponding reduction for such loans
in process as reflected in Note (6).
At June 30, 2000, 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 $300,000, expiring
May 26, 2001.
(16) REGULATORY CAPITAL REQUIREMENTS
The Savings Bank is subject to various regulatory capital
requirements administered by its primary federal regulator, the
Office of Thrift Supervision ("OTS"). Failure to meet the minimum
regulatory capital requirements can initiate certain mandatory,
and possible additional discretionary actions by regulators, that
if undertaken, could have a direct material affect on the Savings
Bank and the consolidated financial statements. Under the
regulatory capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Savings Bank must meet
specific capital guidelines involving quantitative measures of the
Savings Bank's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The
Savings Bank's capital amounts and classification under the prompt
corrective action guidelines are also subject to qualitative
judgments by the regulators about components, risk weightings, and
other factors.
39
<PAGE>
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2000, 1999 and 1998
(16) REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
-------------------------------------------
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, 2000, that the
Savings Bank meets all capital adequacy requirements to which it
is subject.
As of June 30, 2000, the most recent notification from the OTS,
the Savings Bank was categorized as well-capitalized under the
framework for prompt corrective action. To be categorized as
well-capitalized, the Savings Bank must maintain minimum total
risk-based, Tier 1 risk-based, and core capital leverage ratios as
set forth in the table. There are no conditions or events since
that notification that management believes have changed the
institution's category.
The Savings Bank's actual capital amounts and ratios are also
presented in the table.
<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, 2000:
Total Risk-Based Capital
(to Risk-Weighted Assets) $ 20,397 14.0% > $11,627 > 8.0% > $ 14,534 > 10.0%
Core Capital
(to Adjusted Tangible Assets) 20,124 10.3% > 7,826 > 4.0% > 9,783 > 5.0%
Tangible Capital
(to Tangible Assets) 20,124 10.3% > 2,935 > 1.5% N/A
Tier 1 Capital
(to Risk-Weighted Assets) 20,124 13.9% N/A > 8,720 > 6.0%
As of June 30, 1998:
Total Risk-Based Capital
(to Risk-Weighted Assets) $ 19,909 15.7% > 10,124 > 8.0% > $ 12,655 > 10.0%
Core Capital
(to Adjusted Tangible Assets) 19,676 11.2% > 7,041 > 4.0% > 8,801 > 5.0%
Tangible Capital
(to Tangible Assets) 19,676 11.2% > 2,640 > 1.5% N/A
Tier 1 Capital
(to Risk-Weighted Assets) 19,676 15.6% N/A > 7,593 > 6.0%
</TABLE>
40
<PAGE>
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2000, 1999 and 1998
(17) ADVERTISING COSTS
The Company incurred $138,320, $83,634, and $105,688 in
non-direct response advertising costs during the years ended
2000, 1999 and 1998, respectively. The Company incurred no
direct response advertising costs during these years.
(18) 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.
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.
41
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2000, 1999 and 1998
(18) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS -
(CONTINUED)
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.
<TABLE>
<CAPTION>
June 30, 2000
--------------------------
Carrying Fair
Amount Value
------------ -----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 7,961,552 $ 7,961,552
Certificates of deposit 1,009,000 1,009,000
Federal funds sold 320,000 320,000
Available-for-sale securities 3,918,241 3,918,241
Held-to-maturity securities 1,657,197 1,633,150
Investment in Federal Home Loan Bank stock 1,072,200 1,072,200
Available-for-sale mortgage-backed securities 448,559 448,559
Loans, net of allowance for loan losses 174,868,666 175,249,000
Accrued interest receivable 1,067,411 1,067,411
Financial liabilities:
Deposits 155,661,444 154,943,000
Federal Home Loan Bank advances 17,925,253 17,855,000
Accrued interest payable 627,000 627,000
Unrecognized financial instruments (net of contract amount)
Commitments to extend credit - -
Letters of credit - -
Unused lines of credit - -
42
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2000, 1999 and 1998
(18) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONTINUED)
June 30, 1999
---------------------------
Carrying Fair
Amount Value
------------- -------------
Financial assets:
Cash and cash equivalents $ 10,721,664 $ 10,721,664
Certificates of deposit 1,209,000 1,209,000
Federal funds sold 245,000 245,000
Available-for-sale securities 3,216,799 3,216,799
Held-to-maturity securities 1,543,948 1,529,597
Investment in Federal Home Loan Bank stock 1,057,600 1,057,600
Available-for-sale mortgage-backed securities 550,296 550,296
Loans, net of allowance for loan losses 153,615,936 154,498,000
Accrued interest receivable 772,474 772,474
Financial liabilities:
Deposits 151,209,747 150,999,000
Federal Home Loan Bank advances 2,200,000 2,196,000
Accrued interest payable 517,214 517,214
Unrecognized financial instruments (net of contract amount)
Commitments to extend credit - -
Letters of credit - -
Unused lines of credit - -
</TABLE>
(19) PARENT COMPANY ONLY FINANCIAL INFORMATION
The following condensed statements of financial condition and
condensed statements of income and cash flows for First
Bancshares, Inc. should be read in conjunction with the
consolidated financial statements and notes thereto.
43
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2000, 1999 and 1998
(19) PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
-----------------------------------------------------
<TABLE>
<CAPTION>
Condensed Statements of Financial Condition
ASSETS 2000 1999
------- -------------- -------------
<S> <C> <C>
Cash $ 478,309 $ 1,206,584
Certificates of deposit 10,000 85,839
Investment securities available-for-sale, at fair value 487,122 487,694
Investment in subsidiary 22,090,259 21,198,150
Loan to ESOP 318,321 515,409
Property and equipment, less accumulated
depreciation 1,084,408 632,438
Deferred income taxes, net 8,280 -
Other assets 28,735 161,541
------------ ------------
Total assets $ 24,505,434 $ 24,287,655
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Due to subsidiary $ 17,346 $ 12,351
Accrued expenses 11,053 20,379
Deferred income taxes, net - 5,872
Stockholders' equity 24,477,035 24,249,053
------------ ------------
Total liabilities and stockholders' equity $ 24,505,434 $ 24,287,655
============ ============
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Income
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Income
Equity in earnings of subsidiary $ 2,015,220 $ 1,778,557 $ 1,789,186
Interest income 52,804 64,588 96,705
Gain on sale of investments - 37,203 41,444
Gain on sale of property and equipment 13,130 21,735 -
Other 52,630 32,041 26,129
----------- ----------- -----------
Total income 2,133,784 1,934,124 1,953,464
----------- ----------- -----------
Expenses
Professional fees 7,085 16,212 13,501
Printing and office supplies 7,869 12,973 9,936
Interest 4,392 155 978
Other 78,228 73,134 57,269
Income tax 16,662 13,265 26,297
----------- ----------- -----------
Total expenses 114,236 115,739 107,981
----------- ----------- -----------
Net income $ 2,019,548 $ 1,818,385 $ 1,845,483
=========== =========== ===========
</TABLE>
44
</page>
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2000, 1999 and 1998
(19) PARENT COMPANY ONLY FINANCIAL INFORMATION - (CONTINUED)
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,019,548 $ 1,818,385 $ 1,845,483
Adjustments to reconcile net income to net
cash provided from operating activities:
Equity in earnings of subsidiary (2,015,220) (1,778,557) (1,789,186)
Depreciation expense 17,719 12,496 10,318
Gain on sale of investments - (37,203) (41,444)
Gain on sale of property and equipment (13,130) (21,735) -
Net change in operating accounts:
Deferred income taxes, net 16,393 (13,048) 1,742
Other assets 132,806 (119,987) 24,570
Liabilities (4,331) (63,604) 46,003
------------ ----------- -----------
Net cash from (used in) operating activities 153,785 (203,253) 97,486
------------ ----------- -----------
Cash flows from investing activities:
Dividends from subsidiary 1,500,000 1,500,000 1,500,000
Principal payments on ESOP loan 181,895 174,533 165,939
Purchase of investment securities (53,537) (233,406) (248,000)
Proceeds from maturities of investments - 300,000 500,000
Proceeds from sales of investments - 137,203 231,948
Purchase of property and equipment (534,709) (200,769) (1,133)
Proceeds from sales of property and
equipment 78,150 113,500 -
Purchase of South Central Missouri Title, Inc stock - - (5,000)
Net change in certificates of deposit 75,839 124,161 (200,000)
--------- --------- ---------
Net cash from investing activities 1,247,638 1,915,222 1,943,754
--------- --------- ---------
Cash flows from financing activities:
Repayment of borrowed funds - - (50,000)
Net proceeds from issuance of common stock 189,600 126,100 252,715
Cash dividends paid (300,818) (279,195) (223,153)
Purchase of treasury stock (2,018,480) (2,208,937) (234,507)
----------- ----------- -----------
Net cash used in financing activities (2,129,698) (2,362,032) (254,945)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (728,275) (650,063) 1,786,295
Cash and cash equivalents - beginning of period 1,206,584 1,856,647 70,352
---------- ---------- ----------
Cash and cash equivalents - end of period $ 478,309 $ 1,206,584 $ 1,856,647
=========== =========== ===========
</TABLE>
45
</page>
COMMON STOCK INFORMATION
The common stock of First Bancshares, Inc. is traded on The
Nasdaq Stock Market under the symbol "FBSI". As of September 1,
2000, there were 729 stockholders and 1,894,292 shares of common
stock outstanding (including unreleased ESOP shares of 57,797).
This does not reflect the number of persons or entities who hold
stock in nominee or "street name."
On August 31, and November 29, 1999 and February 29, May 31,
and August 28, 3000, the Company declared a $.04 common stock
dividend payable September 30, and December 31, 1999 and March 31,
June 30, and September 30, 2000 to stockholders of record on
September 15, and December 15, 1999, and March 15, June 15 and
September 15, 2000, 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 1999 High Low Dividend
----------- --------- ------- ---------
<S> <C> <C> <C>
First Quarter $13.75 $12.50 $.03
Second Quarter $13.375 $12.50 $ 03
Third Quarter $13.25 $11.75 $.04
Fourth Quarter $12.625 $10.75 $.04
Fiscal 2000
First Quarter $11.50 $10.875 $.04
Second Quarter $11.531 $ 9.00 $.04
Third Quarter $10.50 $ 9.25 $.04
Fourth Quarter $10.00 $ 9.75 $.04
</TABLE>
46
</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
Partner Partner
Millington, Glass & Walters, Attorneys at Law Millington, Glass & Walters, Attorneys 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 Charles W. Schumacher
Vice-President Senior Vice-President
Susan J. Uchtman, CPA Peter M. Medlen
Chief Financial Officer Executive Vice-President
Gina Gunnels Susan J. Uchtman
Secretary and Treasurer Chief Financial Officer
Colleen B. Stofer
Secretary
Diana Blanton
Treasurer
</TABLE>
47
</page>
CORPORATE INFORMATION
CORPORATE HEADQUARTERS TRANSFER AGENT
142 East First Street Registrar and Transfer Co.
P.O. Box 777 10 Commerce Drive
Mountain Grove, Missouri 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 & Associates, P.C.
Washington, D.C.
ANNUAL MEETING
The Annual Meeting of Stockholders will be held Wednesday,
October 18, 2000, 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.,
P.O. BOX 777, 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.
48
</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
South Central Missouri Title, Inc. 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 3, 2000, 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, 2000. 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 26, 2000
</page>
??
143143
