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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
X Annual Report under Section 13 or 15(d) of the Securities Exchange Act
- ----- of 1934
For the fiscal year ended December 31, 1997
OR
Transition Report under Section 13 or 15(d) of the Securities Exchange
- ----- Act of 1934
For the transition period from ________ to ________
Commission file no. 33-94288
THE FIRST BANCSHARES, INC.
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(Name of Small Business Issuer in Its Charter)
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Mississippi 64-0862173
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
6480 U.S. Hwy. 98 West
Hattiesburg, Mississippi 39402
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(Address of Principal Executive Offices) (Zip Code)
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(601) 268-8998
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Issuer's Telephone Number, Including Area Code
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days. Yes X No
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
The issuer's loss for its most recent fiscal year was $261,993. As of
March 15, 1998, 721,848 shares of Common Stock were issued and outstanding.
The aggregate market value of the Common Stock held by non-affiliates
of the Company on March 15, 1998 was $6,072,648. This calculation is based upon
an estimate of the fair market value of the Common Stock by the Company's Board
of Directors of $12 per share. There is not an active trading market for the
Common Stock and it is not possible to identify precisely the market value of
the Common Stock.
Transitional Small Business Disclosure Format.(Check one): Yes No X
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PART I
ITEM 1. BUSINESS.
This Report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
the Securities Exchange Act of 1934. These statements appear in a number of
places in this Report and include all statements regarding the intent, belief or
current expectations of the Company, its directors or its officers with respect
to, among other things: (i) the Company's financing plans; (ii) trends affecting
the Company's financial condition or results of operations; (iii) the Company's
growth strategy and operating strategy; and (iv) the declaration and payment of
dividends. Investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those projected in the
forward-looking statements as a result of various factors discussed herein and
those factors discussed in detail in the Company's filings with the Securities
and Exchange Commission.
GENERAL
The First Bancshares, Inc. (the "Company") was organized on June 23,
1995, to become a bank holding company by acquiring all the capital stock of The
First National Bank of South Mississippi (the "Bank") upon its formation. From
June 23, 1995, through August 2, 1996, the Company's principal activities
related to its organization, the conducting of its initial public stock
offering, and pursuit of approval from the Office of the Comptroller of the
Currency ("OCC") for its application to charter the Bank. The Bank received its
national bank charter and commenced operations on August 5, 1996, and the only
activity of the Company since then has been the ownership and operation of the
Bank.
On February 8, 1996, the Company satisfied the condition for releasing
subscription funds from escrow. Proceeds in the amount of $5,652,380 received
through that date were transferred to the Company. The Company used a portion of
the proceeds to repay the organizers for amounts advanced by them for
organizational, offering, and pre-offering expenses. On August 27, 1996, the
Company completed the initial public offering (the "Offering") of its Common
Stock, par value $1.00 per share (the "Common Stock"), in which it sold 721,848
shares of Common Stock at a price of $10.00 per share for an aggregate of
$7,218,480.
The Bank was organized as a banking association under the laws of the
United States. The Bank is engaged in a general commercial and retail banking
business from its main office in Hattiesburg, Mississippi.
The Company's holding company structure can assist the Bank in
maintaining its required capital ratios because the Company may, subject to
compliance with Federal Reserve debt guidelines, borrow money and contribute the
proceeds to the Bank as primary capital. The holding company structure also
permits greater flexibility in issuing stock for cash, property or services and
in reorganization transactions. Moreover, subject to certain regulatory
limitations, a holding company can purchase shares of its own stock, which the
Bank may not do. A holding company may also engage in certain non-banking
activities which the Board of Governors has deemed to be closely related to
banking. See "Supervision and Regulation." If circumstances should lead the
Company's management to believe that there is a need for these services in the
Bank's marketing area and that such activities
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could be profitably conducted, the management of the Company would have the
flexibility of commencing these activities upon filing notice thereof with the
Board of Governors.
Like many financial institutions, the Company and the Bank rely upon
computers for the daily conduct of their business and for information systems
processing. There is concern among industry experts that on January 1, 2000
computers will be unable to "read" the new year and there may be widespread
computer malfunctions. The Company and the Bank generally rely on software and
hardware developed by independent third parties to provide the information
systems used by the Company and the Bank. The Company is seeking assurances
about the Year 2000 compliance with respect to the third party hardware or
software system it uses, and the Company believes that its internal systems and
software and the network connections it maintains will be adequately programmed
to address the Year 2000 issue. Based on information currently available,
management does not believe that the Company or the Bank will incur significant
costs in connection with the year 2000 issue. Nevertheless, there can be no
assurances that all hardware and software that either the Company or the Bank
uses will be Year 2000 compliant, and the Company cannot predict with any
certainty the costs the Company or the Bank will incur to respond to any Year
2000 issues. Further, the business of many of the Bank's customers may be
negatively affected by the Year 2000 issue, and any financial difficulties
incurred by the Bank's customers in solving Year 2000 issues could negatively
affect such customer's ability to repay any loans which the Bank may have
extended. Therefore, even if the Company and the Bank do not incur significant
direct costs in connection with responding to the year 2000 issue, there can be
no assurance that the failure or delay of the Bank's customers or other third
parties in addressing the Year 2000 issue or the costs involved in such process
will not have a material adverse effect on the Bank's business, financial
condition and results of operations.
MARKETING FOCUS
Most of the banks in the Lamar County area are local branches of large
regional banks. The Company, however, generally does not attempt to compete for
the banking relationships of large corporations, but concentrates its efforts on
small to medium-sized businesses and on individuals.
The Bank advertises using all forms of media to target market segments,
emphasizing the Company's local ownership, community bank nature, and ability to
provide more personalized service than its competition.
BANKING SERVICES
The Bank offers a full range of deposit services that are typically
available in most banks and savings and loan associations, including checking
accounts, NOW accounts, savings accounts and other time deposits of various
types, ranging from daily money market accounts to longer-term certificates of
deposit. The transaction accounts and time certificates are tailored to the
Bank's principal market area at rates competitive to those offered in the Lamar
County area. In addition, the Bank offers certain retirement account services,
such as Individual Retirement Accounts (IRAs). All deposit accounts are insured
by the FDIC up to the maximum amount allowed by law (generally, $100,000 per
depositor subject to aggregation rules). The Bank solicits these accounts from
individuals, businesses, associations and organizations, and governmental
authorities. The Bank offers a Founders' Account to individuals who purchased a
minimum of 500 shares ($5,000) of Common Stock in the initial public offering.
The Founders' Account is a checking account, in the name of the original
purchaser of the
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Common Stock, which has no service charges for the life of the account (subject
to certain exclusions). The Bank offers free checking for depositors who
maintain a minimum monthly balance of $500 or an average monthly balance of
$1,500.
The Bank also offers a full range of short-to-medium term commercial
and personal loans. Commercial loans include both secured and unsecured loans
for working capital (including inventory and receivables), business expansion
(including acquisition of real estate and improvements), and purchase of
equipment and machinery. Consumer loans include secured and unsecured loans for
financing automobiles, home improvements, education and personal investments.
The Bank also makes real estate construction and acquisition loans. The Bank's
lending activities are subject to a variety of lending limits imposed by federal
law. While differing limits apply in certain circumstances based on the type of
loan or the nature of the borrower (including the borrower's relationship to the
Bank), in general the Bank is subject to a loan-to-one-borrower limit of an
amount equal to 15% of the Bank's unimpaired capital and surplus, or 25% of the
unimpaired capital and surplus if the excess over 15% is approved by the board
of directors of the Bank and is fully secured by readily marketable collateral.
The Bank may not make any loans in excess of 5% of the Bank's capital to any
director, officer, employee or 10% shareholder of the Company or the Bank unless
the loan is approved by the Board of Directors of the Bank and is made on terms
not more favorable to such person than would be available to a person not
affiliated with the Bank.
Other bank services include safe deposit boxes, travelers checks,
direct deposit of payroll and social security checks, and automatic drafts for
various accounts. The Bank is associated with a shared network of automated
teller machines that may be used by Bank customers throughout Mississippi and
other regions. The Bank also offers MasterCard and VISA credit card services
through a correspondent bank as an agent for the Bank.
The Bank does not plan to exercise trust powers during its initial
years of operation. The Bank may in the future offer a full-service trust
department, but cannot do so without the prior approval of the OCC.
LENDING ACTIVITIES
General. The Bank emphasizes a range of lending services, including
real estate, commercial, and consumer loans, to individuals and small to
medium-sized businesses and professional concerns that are located in or conduct
a substantial portion of their business in the Bank's market area.
Real Estate Loans. The loans secured generally by first or second
mortgages on real estate are one of the primary components of the Bank's loan
portfolio. These loans consist of commercial real estate loans, construction and
development loans, and residential real estate loans (but excludes home equity
loans, which are classified as consumer loans). Loan terms are generally limited
to five years or less, although payments may be structured on a longer
amortization basis. Interest rates may be fixed or adjustable, and are more
likely to be fixed in the case of shorter term loans. Management attempts to
reduce credit risk in the commercial real estate portfolio by emphasizing loans
on owner-occupied office and retail buildings where the loan-to-value ratio,
established by independent appraisals, generally does not exceed 80%. In
addition, the Bank typically requires personal guarantees of the principal
owners of the property backed with a review by the Bank of the personal
financial statements of the principal owners. The principal economic risk
associated with each category of anticipated
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loans, including real estate loans, is the creditworthiness of the Bank's
borrowers. The risks associated with real estate loans vary with many economic
factors, including employment levels and fluctuations in the value of real
estate. The Bank competes for real estate loans with a number of bank
competitors which are well established in the Lamar County area. Most of these
competitors have substantially greater resources and lending limits than the
Bank. As a result, the Bank may charge lower interest rates to attract
borrowers.
The Bank also plans to originate loans for sale into the secondary
market. The Bank limits interest rate risk and credit risk on these loans by
locking the interest rate for each loan with the secondary investor and
receiving the investor's underwriting approval prior to originating the loan.
Commercial Loans. The Bank makes loans for commercial purposes in
various lines of businesses. Equipment loans are typically made for a term of
five years or less at fixed or variable rates, with the loan fully amortized
over the term and secured by the financed equipment and generally with a
loan-to-value ratio of 80% or less. Working capital loans typically have terms
not exceeding one year and are usually secured by accounts receivable,
inventory, and personal guarantees of the principals of the business. For loans
secured by accounts receivable or inventory, principal is typically repaid as
the assets securing the loan are converted into cash, and in other cases
principal is typically due at maturity. The principal economic risk associated
with each category of anticipated loans, including commercial loans, is the
creditworthiness of the Bank's borrowers. The risks associated with commercial
loans vary with many economic factors, including the economy in the Lamar County
area. The well established banks in the Lamar County area make proportionately
more loans to medium- to large-sized businesses than the Bank. Many of the
Bank's anticipated commercial loans are made to small to medium-sized businesses
who are less able to withstand competitive, economic, and financial conditions
than larger borrowers.
Consumer Loans. The Bank makes a variety of loans to individuals for
personal and household purposes, including secured and unsecured installment and
term loans, home equity loans and lines of credit, and revolving lines of
credit. These loans typically carry balances of less than $25,000 and, in the
case of non-revolving loans, are amortized over a period not exceeding 48 months
or are set up as ninety-day term loans, usually bearing interest at a fixed
rate. The revolving loans typically bear interest at a fixed rate and require
monthly payments of interest and a portion of the principal balance. The
underwriting criteria for home equity loans and of credit are generally the same
as applied by the Bank when making a first mortgage loan, as described above,
and home equity lines of credit typically expire ten years or less after
origination. As with the other categories of loans, the principal economic risk
associated with consumer loans is the creditworthiness of the Bank's borrowers,
and the principal competitors for consumer loans are the established banks in
the Lamar County area.
Loan Approval and Review. The Bank's loan approval policies provide for
various levels of officer lending authority. When the amount of aggregate loans
to a single borrower exceeds that individual officer's lending authority, the
loan request is considered and approved by an officer with a higher lending
limit or the officers' loan committee. The Bank's officers' loan committee has
lending limits, and any loan in excess of this lending limit is approved by the
directors' loan committee.
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OTHER BANKING SERVICES
Other anticipated bank services include cash management services, safe
deposit boxes, travelers checks, direct deposit of payroll and social security
checks, and automatic drafts for various accounts. The Bank is associated with a
shared network of automated teller machines that may be used by the Bank
customers throughout Mississippi and other regions. The Bank also offers
MasterCard and VISA credit card services through a correspondent bank as an
agent for the Bank. The Bank does not plan to exercise trust powers during its
initial years of operation. The Bank may in the future offer a full-service
trust department, but cannot do so without the prior approval of the OCC.
LOCATION AND SERVICE AREA
The Bank engages in a general commercial and retail banking business,
emphasizing the needs of small to medium-sized businesses, professional concerns
and individuals, primarily in Lamar County, Mississippi and the surrounding
area. The Bank has a main office located west of the city of Hattiesburg,
Mississippi, in Lamar County, and a branch office located in the city of Purvis,
Mississippi, also in Lamar County. See "Item 2, Description of Property" below.
The main office primarily serves the area in and around the northern
third of Lamar County which is west of Hattiesburg. The branch office primarily
serves the area in and around Purvis, Mississippi, which is in the east central
part of Lamar County and is the county seat.
Lamar County is located in the southeastern section of the State of
Mississippi. Hattiesburg, one of the largest cities in Mississippi, is located
in Forrest and Lamar Counties. Hattiesburg can be reached via Highways 98 and 49
and Interstate 59. Lamar County, which includes the projected service areas for
both sites of the Bank, had an estimated population in 1990 of 30,424 according
to the 1990 Census of Population and Housing. Major employers located in the
Lamar County area include Forrest General Hospital, the University of Southern
Mississippi, the Methodist Hospital, Camp Shelby, Sunbeam Oster, the Hattiesburg
Public Schools, the Hattiesburg Clinic, the City of Hattiesburg, Marshall Durbin
Poultry, and Murray Envelope. The principal components of the economy of the
Lamar County area are service industries, wholesale and retail trade,
manufacturing, and transportation and public utilities. The Lamar County area
has experienced steady growth over the past ten years, and the Company expects
the Lamar County area, as well as the service industry needed to support it, to
continue to grow.
COMPETITION
The banking business is highly competitive. The Bank competes as a
financial intermediary with other commercial banks, savings and loan
associations, credit unions, and money market mutual funds operating in the
Lamar County area and elsewhere. As of December 1997, there were seven other
commercial banks operating in Lamar County. A number of these competitors are
well established in the Lamar County area. Most of them have substantially
greater resources and lending limits than the Bank and offer certain services,
such as extensive and established branch networks and trust services, that the
Bank either does not yet provide. However, the Company believes that the
community bank focus of the Bank, with its emphasis on service to small
businesses, individuals, and professional concerns, gives it an advantage in
this market.
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EMPLOYEES
The Bank has approximately eighteen full-time employees and five
part-time employees. The Company does not have any employees other than its
officers, none whom receive any remuneration for their services to the Company.
SUPERVISION AND REGULATION
The Company and the Bank are subject to state and federal banking laws
and regulations which impose specific requirements or restrictions on and
provide for general regulatory oversight with respect to virtually all aspects
of operations. These laws and regulations are generally intended to protect
depositors, not shareholders. To the extent that the following summary describes
statutory or regulatory provisions, it is qualified in its entirety by reference
to the particular statutory and regulatory provisions. Any change in applicable
laws or regulations may have a material effect on the business and prospects of
the Company. Beginning with the enactment of the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA") and following with FDICIA, which
was enacted in 1991, numerous additional regulatory requirements have been
placed on the banking industry in the past several years, and additional changes
have been proposed. The operations of the Company and the Bank may be affected
by legislative changes and the policies of various regulatory authorities. The
Company is unable to predict the nature or the extent of the effect on its
business and earnings that fiscal or monetary policies, economic control, or new
federal or state legislation may have in the future.
The Company. Because it owns the outstanding capital stock of the Bank,
the Company is a bank holding company within the meaning of the federal Bank
Holding Company Act of 1956 (the "BHCA") and the Mississippi Banks and Financial
Institutions Act (the "Mississippi Act"). The activities of the Company are also
governed by the Glass-Steagall Act of 1933 (the "Glass-Steagall Act").
The BHCA. Under the BHCA, the Company is subject to periodic
examination by the Federal Reserve and is required to file periodic reports of
its operations and such additional information as the Federal Reserve may
require. The Company's and the Bank's activities are limited to banking,
managing or controlling banks, furnishing services to or performing services for
its subsidiaries, and engaging in other activities that the Federal Reserve
determines to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto.
Investments, Control, and Activities. With certain limited exceptions,
the BHCA requires every bank holding company to obtain the prior approval of the
Federal Reserve before (i) acquiring substantially all the assets of any bank,
(ii) acquiring direct or ownership or control of any voting shares of any bank
if after such acquisition it would own or control more than 5% of the voting
shares of such bank (unless it already owns or controls the majority of such
shares), or (iii) merging or consolidating with another bank holding company.
In addition, and subject to certain exceptions, the BHCA and the Change
in Bank Control Act, together with regulations thereunder, require Federal
Reserve approval (or, depending on the circumstances, no notice of disapproval)
prior to any person or company acquiring "control" of a bank holding company,
such as the Company. Control is conclusively presumed to exist if an individual
or company acquires 25% or more of any class of voting securities of the bank
holding company. Control
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is rebuttably presumed to exist if a person acquires 10% or more but less than
25% of any class of voting securities and either the Company has registered
securities under Section 12 of the Exchange Act (which the Company has done) or
no other person owns a greater percentage of that class of voting securities
immediately after the transaction. The regulations provide a procedure for
challenge of the rebuttable control presumption.
Under the BHCA, a bank holding company is generally prohibited from
engaging in, or acquiring direct or indirect control of more than 5% of the
voting shares of any company engaged in, non-banking activities, unless the
Federal Reserve Board, by order or regulation, has found those activities to be
so closely related to banking or managing or controlling banks as to be a proper
incident thereto. Some of the activities that the Federal Reserve Board has
determined by regulation to be proper incidents to the business of a bank
holding company include making or servicing loans and certain types of leases,
engaging in certain insurance and discount brokerage activities, performing
certain data processing services, acting in certain circumstances as a fiduciary
or investment or financial adviser, owning savings associations, and making
investments in certain corporations or projects designed primarily to promote
community welfare.
The Federal Reserve Board has imposed certain capital requirements on
the Company under the BHCA, including a minimum leverage ratio and a minimum
ratio of "qualifying" capital to risk-weighted assets. These requirements are
described below under "Capital Regulations." Subject to its capital requirements
and certain other restrictions, the Company may borrow money to make a capital
contribution to the Bank, and such loans may be repaid from dividends paid from
the Bank to the Company (although the ability of the Bank to pay dividends is
subject to regulatory restrictions as described below in "The Bank -
Dividends"). The Company is also able to raise capital for contribution to the
Bank by issuing securities without having to receive regulatory approval,
subject to compliance with federal and state securities laws.
Source of Strength; Cross-Guarantee. In accordance with Federal Reserve
Board policy, the Company is expected to act as a source of financial strength
to the Bank and to commit resources to support the Bank in circumstances in
which the Company might not otherwise do so. Under the BHCA, the Federal Reserve
Board may require a bank holding company to terminate any activity or relinquish
control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon
the Federal Reserve Board's determination that such activity or control
constitutes a serious risk to the financial soundness or stability of any
subsidiary depository institution of the bank holding company. Further, federal
bank regulatory authorities have additional discretion to require a bank holding
company to divest itself of any bank or nonbank subsidiary if the agency
determines that divestiture may aid the depository institution's financial
condition.
Glass-Steagall Act. The Company is also restricted in its activities by
the provisions of the Glass-Steagall Act, which prohibit the Company from owning
subsidiaries that are engaged principally in the issue, flotation, underwriting,
public sale, or distribution of securities. The interpretation, scope, and
application of the provisions of the Glass-Steagall Act currently are being
considered and reviewed by regulators and legislators, and the interpretation
and application of those provisions have been challenged in the federal courts.
Mississippi Act. As a bank holding company registered under the
Mississippi Act, the Company is subject to regulation by the Mississippi Banking
Department. Consequently, the Company
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must receive the approval of the Mississippi Banking Department prior to
engaging in the acquisitions of banking or nonbanking institutions or assets.
The Company must also file with the Mississippi Banking Department periodic
reports with respect to its financial condition and operations, management, and
intercompany relationships between the Company and its subsidiaries.
The Bank. The Bank operates as a national banking association
incorporated under the laws of the United States and subject to examination by
the OCC. Deposits in the Bank are insured by the FDIC up to a maximum amount
(generally $100,000 per depositor, subject to aggregation rules). The OCC and
the FDIC regulates or monitors virtually all areas of the Bank's operations,
including security devices and procedures, adequacy of capitalization and loan
loss reserves, loans, investments, borrowings, deposits, mergers, issuances of
securities, payment of dividends, interest rates payable on deposits, interest
rates or fees chargeable on loans, establishment of branches, corporate
reorganizations, maintenance of books and records, and adequacy of staff
training to carry on safe lending and deposit gathering practices. The OCC
requires the Bank to maintain certain capital ratios and imposes limitations on
the Bank's aggregate investment in real estate, bank premises, and furniture and
fixtures. The Bank is required by the OCC to prepare quarterly reports on the
Bank's financial condition and to conduct an annual audit of its financial
affairs in compliance with minimum standards and procedures prescribed by the
OCC.
Under FDICIA, all insured institutions must undergo regular on-site
examinations by their appropriate banking agency. The cost of examinations of
insured depository institutions and any affiliates may be assessed by the
appropriate agency against each institution or affiliate as it deems necessary
or appropriate. Insured institutions are required to submit annual reports to
the FDIC and the appropriate agency (and state supervisor when applicable).
FDICIA also directs the FDIC to develop with other appropriate agencies a method
for insured depository institutions to provide supplemental disclosure of the
estimated fair market value of assets and liabilities, to the extent feasible
and practicable, in any balance sheet, financial statement, report of condition
or any other report of any insured depository institution. FDICIA also requires
the federal banking regulatory agencies to prescribe, by regulation, standards
for all insured depository institutions and depository institution holding
companies relating, among other things, to: (i) internal controls, information
systems, and audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; and (v) asset quality.
National banks and their holding companies which have been chartered or
registered or undergone a change in control within the past two years or which
have been deemed by the OCC or the Federal Reserve Board, respectively, to be
troubled institutions must give the OCC or the Federal Reserve Board,
respectively, thirty days prior notice of the appointment of any senior
executive officer or director. Within the thirty day period, the OCC or the
Federal Reserve Board, as the case may be, may approve or disapprove any such
appointment.
Deposit Insurance. The FDIC establishes rates for the payment of
premiums by federally insured banks and thrifts for deposit insurance. A
separate Bank Insurance Fund ("BIF") and Savings Association Insurance Fund
("SAIF") are maintained for commercial banks and thrifts, respectively, with
insurance premiums from the industry used to offset losses from insurance
payouts when banks and thrifts fail. Since 1993, insured depository institutions
like the Bank have paid for deposit insurance under a risk-based premium system.
Under this system, until mid-1995 depositor institutions paid to BIF or SAIF
from $0.23 to $0.31 per $100 of insured deposits depending on its capital levels
and risk profile, as
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determined by its primary federal regulator on a semi-annual basis. Once the BIF
reached its legally mandated reserve ratio in mid-1995, the FDIC lowered
premiums for well-capitalized banks, eventually to $.00 per $100, with a minimum
semiannual assessment of $1,000. However, in 1996 Congress enacted the Deposit
Insurance Funds Act of 1996, which eliminated this minimum assessment. It also
separated the Financial Corporation (FICO) assessment to service the interest on
its bond obligations. The amount assessed on individual institutions, including
the Bank, by FICO is in addition to the amount paid for deposit insurance
according to the risk-related assessment rate schedule. Increases in deposit
insurance premiums or changes in risk classification will increase the Bank's
cost of funds, and there can be no assurance that such cost can be passed on the
Bank's customers.
Transactions With Affiliates and Insiders. The Bank is subject to the
provisions of Section 23A of the Federal Reserve Act, which place limits on the
amount of loans or extensions of credit to, or investments in, or certain other
transactions with, and on the amount of advances to third parties collateralized
by the securities or obligations of affiliates. The aggregate of all covered
transactions is limited in amount, as to any one affiliate, to 10% of the bank's
capital and surplus and, as to all affiliates combined, to 20% of the bank's
capital and surplus. Furthermore, within the foregoing limitations as to amount,
each covered transaction must meet specified collateral requirements. Compliance
is also required with certain provisions designed to avoid the taking of low
quality assets.
The Bank is also subject to the provisions of Section 23B of the
Federal Reserve Act which, among other things, prohibit an institution from
engaging in certain transactions with certain affiliates unless the transactions
are on terms substantially the same, or at least as favorable to such
institution or its subsidiaries, as those prevailing at the time for comparable
transactions with non-affiliated companies. The Bank is subject to certain
restrictions on extensions of credit to executive officers, directors, certain
principal shareholders, and their related interests. Such extensions of credit
(i) must be made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
third parties and (ii) must not involve more than the normal risk of repayment
or present other unfavorable features.
Dividends. A national bank may not pay dividends from its capital. All
dividends must be paid out of undivided profits then on hand, after deducting
expenses, including reserves for losses and bad debts. In addition, a national
bank is prohibited from declaring a dividend on its shares of common stock until
its surplus equals its stated capital, unless there has been transferred to
surplus no less than one-tenth of the bank's net profits of the preceding two
consecutive half-year periods (in the case of an annual dividend). The approval
of the OCC is required if the total of all dividends declared by a national bank
in any calendar year exceeds the total of its net profits for that year combined
with its retained net profits for the preceding two years, less any required
transfers to surplus. In addition, under FDICIA, the Bank may not pay a dividend
if, after paying the dividend, the Bank would be undercapitalized. See "Capital
Regulations" below.
Branching. National banks are required by the National Bank Act to
adhere to branch office banking laws applicable to state banks in the states in
which they are located. Under current Mississippi law, the Bank may open
branches throughout Mississippi with the prior approval of the OCC. In addition,
with prior regulatory approval, the Bank is able to acquire existing banking
operations in Mississippi. Furthermore, federal legislation has recently been
passed which permits interstate branching. The new law permits out of state
acquisitions by bank holding companies (subject to veto by new state law),
interstate branching by banks if allowed by state law, interstate merging by
9
<PAGE> 11
banks, and de novo branching by national banks if allowed by state law. See
"Recent Legislative Developments."
Community Reinvestment Act. The Community Reinvestment Act requires
that, in connection with examinations of financial institutions within their
respective jurisdictions, the Federal Reserve, the FDIC, OCC, or the Office of
Thrift Supervision shall evaluate the record of the financial institutions in
meeting the credit needs of their local communities, including low and moderate
income neighborhoods, consistent with the safe and sound operation of those
institutions. These factors are also considered in evaluating mergers,
acquisitions, and applications to open a branch or facility.
Other Regulations. Interest and certain other charges collected or
contracted for by the Bank are subject to state usury laws and certain federal
laws concerning interest rates. The Bank's loan operations also subject to
certain federal laws applicable to credit transactions, such as the federal
Truth-In-Lending Act, governing disclosures of credit terms to consumer
borrowers; the Home Mortgage Disclosure of 1975, requiring financial
institutions to provide information to enable the public and public officials to
determine whether a financial institution is fulfilling its obligation to help
meet the housing needs community it serves; the Equal Credit Opportunity Act,
prohibiting discrimination on the basis of creed or other prohibited factors in
extending credit; the Fair Credit Reporting Act of 1978, governing the use and
provision of information to credit reporting agencies; the Fair Debt Collection
Act, concerning the manner in which consumer debts may be collected by
collection agencies; and the rules and regulations of the various federal
agencies charged with the responsibility of implementing such federal laws. The
deposit operations of the Bank also are subject to the Right to Financial
Privacy Act, which imposes a duty to maintain confidentiality of consumer
financial records and prescribes procedures for complying with administrative
subpoenas of financial records, and the Electronic Funds Transfer Act and
Regulation E issued by the Federal Reserve Board to implement that Act, which
governs automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
Capital Regulations. The federal bank regulatory authorities have
adopted risk-based capital guidelines for banks and bank holding companies that
are designed to make regulatory capital requirements more sensitive to
differences in risk profile among banks and bank holding companies, account for
off-balance sheet exposure and minimize disincentives for holding liquid assets.
The resulting capital ratios represent qualifying capital as a percentage of
total risk-weighted assets and off-balance sheet items. The guidelines are
minimums, and the federal regulators have noted that banks and bank holding
companies contemplating significant expansion programs should not allow
expansion to diminish their capital ratios and should maintain ratios well in
excess of the minimums. The current guidelines require all bank holding
companies and federally-regulated banks to maintain a minimum risk-based total
capital ratio equal to 8%, of which at least 4% must be Tier 1 capital. Tier 1
capital includes common shareholders' equity, qualifying perpetual preferred
stock and minority interests in equity accounts of consolidated subsidiaries,
but excludes goodwill and most other intangibles and excludes the allowance for
loan and lease losses. Tier 2 capital includes the excess of any preferred stock
not included in Tier 1 capital, mandatory convertible securities, hybrid capital
instruments, subordinated debt and intermediate term-preferred stock and general
reserves for loan and lease losses up to 1.25% of risk-weighted assets.
Under the guidelines, banks' and bank holding companies' assets are
given risk-weights of 0%, 20%, 50% and 100%. In addition, certain off-balance
sheet items are given credit conversion factors
10
<PAGE> 12
to convert them to asset equivalent amounts to which an appropriate risk-weight
will apply. These computations result in the total risk-weighted assets. Most
loans are assigned to the 100% risk category, except for first mortgage loans
fully secured by residential property and, under certain circumstances,
residential construction loans, both of which carry a 50% rating. Most
investment securities are assigned to the 20% category, except for municipal or
state revenue bonds, which have a 50% rating, and direct obligations of or
obligations guaranteed by the United States Treasury or United States Government
agencies, which have a 0% rating.
The federal bank regulatory authorities have also implemented a
leverage ratio, which is Tier 1 capital as a percentage of average total assets
less intangibles, to be used as a supplement to the risk-based guidelines. The
principal objective of the leverage ratio is to place a constraint on the
maximum degree to which a bank holding company may leverage its equity capital
base. The minimum required leverage ratio for top-rated institutions is 3%, but
most institutions are required to maintain an additional cushion of at least 100
to 200 basis points.
FDICIA established a new capital-based regulatory scheme designed to
promote early intervention for troubled banks and requires the FDIC to choose
the least expensive resolution of bank failures. The new capital-based
regulatory framework contains five categories of compliance with regulatory
capital requirements, including "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." To qualify as a "well capitalized" institution, a bank must
have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of no less
than 6%, and a total risk-based capital ratio of no less than 10%, and the bank
must not be under any order or directive from the appropriate regulatory agency
to meet and maintain a specific capital level. As of December 31, 1997, the
Company and the Bank were qualified as "well capitalized." See "Management's
Discussion and Analysis or Plan of Operation -- Capital."
Under the FDICIA regulations, the applicable agency can treat an
institution as if it were in the next lower category if the agency determines
(after notice and an opportunity for hearing) that the institution is in an
unsafe or unsound condition or is engaging in an unsafe or unsound practice. The
degree of regulatory scrutiny of a financial institution will increase, and the
permissible activities of the institution will decrease, as it moves downward
through the capital categories. Institutions that fall into one of the three
undercapitalized categories may be required to (i) submit a capital restoration
plan; (ii) raise additional capital; (iii) restrict their growth, deposit
interest rates and other activities; (iv) improve their management; (v)
eliminate management fees; or (vi) divest themselves of all or part of their
operations. Bank holding companies controlling financial institutions can be
called upon to boost the institutions' capital and to partially guarantee the
institutions' performance under their capital restoration plans.
Effective January 1, 1997, the OCC amended the risk-based capital
standards to incorporate a measure for market risk to cover all positions
located in a institution's trading account, and foreign exchange and commodity
positions wherever located. The effect of the rule is that it requires any bank
or bank holding company with significant exposure to market risk to measure the
risk and hold capital commensurate with that risk. Since the Bank does not
currently engage, nor has any plans to engage, in trading, foreign exchange or
commodity position activities, the rule does not have an effect on the required
Bank capital levels.
These capital guidelines can affect the Company in several ways. The
Company's capital levels
11
<PAGE> 13
are currently more than adequate. However, rapid growth, poor loan portfolio
performance, or poor earnings performance, or a combination of these factors,
could change the Company's capital position in a relatively short period of
time, making an additional capital infusion necessary. Failure to meet these
capital requirements would mean that a bank would be required to develop and
file a plan with its primary federal banking regulator describing the means and
a schedule for achieving the minimum capital requirements. In addition, such a
bank would generally not receive regulatory approval of any application that
requires the consideration of capital adequacy, such as a branch or merger
application, unless the bank could demonstrate a reasonable plan to meet the
capital requirement within a reasonable period of time.
Enforcement Powers. FIRREA expanded and increased civil and criminal
penalties available for use by the federal regulatory agencies against
depository institutions and certain "institution-affiliated parties" (primarily
including management, employees, and agents of a financial institution,
independent contractors such as attorneys and accountants, and others who
participate in the conduct of the financial institution's affairs). These
practices can include the failure of an institution to timely file required
reports or the filing of false or misleading information or the submission of
inaccurate reports. Civil penalties may be as high as $1,000,000 a day for such
violations. Criminal penalties for some financial institution crimes have been
increased to twenty years. In addition, regulators are provided with greater
flexibility to commence enforcement actions against institutions and
institution-affiliated parties. Possible enforcement actions include the
termination of deposit insurance. Furthermore, FIRREA expanded the appropriate
banking agencies' power to issue cease and desist orders that may, among other
things, require affirmative action to correct any harm resulting from a
violation or practice, including restitution, reimbursement, indemnifications or
guarantees against loss. A financial institution may also be ordered to restrict
its growth, dispose of certain assets, rescind agreements or contracts, or take
other actions as determined by the ordering agency to be appropriate.
Recent Legislative Developments. On September 29, 1994, the federal
government enacted the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the Interstate Banking Act). This Act became effective on September
29, 1995, and permits eligible bank holding companies in any state, with
regulatory approval, to acquire banking organizations in any other state. Since
June 1, 1997, the Interstate Banking Act has allowed banks with different home
states to merge, unless a particular state opts out of the statute. In addition,
beginning June 1, 1997, the Interstate Banking Act has permitted national and
state banks to establish de novo branches in another state if there is a law in
that state which applies equally to all banks and expressly permits all
out-of-state banks to establish de novo branches. From time to time, various
bills are introduced in the United States Congress with respect to the
regulation of financial institutions. Certain of these proposals, if adopted,
could significantly change the regulation of banks and the financial services
industry. The Company cannot predict whether any of these proposals will be
adopted or, if adopted, how these proposals would affect the Company.
Effect of Governmental Monetary Policies. The earnings of the Bank are
affected by domestic economic conditions and the monetary and fiscal policies of
the United States government and its agencies. The Federal Reserve Board's
monetary policies have had, and are likely continue to have, an important impact
on the operating results of commercial banks through its power to implement
national monetary policy in order, among other things, to curb inflation or
combat a recession. The monetary policies of the Federal Reserve Board have
major effects upon the levels of bank loans, investments and deposits through
its open market operations in United States government securities and through
its
12
<PAGE> 14
regulation of the discount rate on borrowings of member banks and the reserve
requirements against member bank deposits. It is not possible to predict the
nature or impact of future changes in monetary and fiscal policies.
ITEM 2. DESCRIPTION OF PROPERTY.
The principal place of business of both the Company and the main office
of the Bank is located at the southwest corner of U.S. Highway 98 and Old
Highway 11, Hattiesburg, Mississippi. The main office sits on a 2.0 plus acre
plot of land on which the Company has built a permanent banking facility of
10,000 square feet. The Bank opened this new facility in late January 1997. The
Bank also operates a branch office facility on Highway 589 in Purvis,
Mississippi. The Company believes that the facilities adequately serves the
Bank's needs for its first several years of operation.
ITEM 3. LEGAL PROCEEDINGS.
Neither the Company nor the Bank is a party to, nor is any of their
property the subject of, any material pending legal proceedings incidental to
the business of the Company or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Company's articles of incorporation authorize it to issue up to
10,000,000 shares of Common Stock, of which 721,848 were sold in the Company's
initial public offering and are outstanding as of March 15, 1998. As of December
31, 1997, the Company had 719 shareholders of record. There is no established
public trading market in the Common Stock, and one is not expected to develop in
the near future.
All outstanding shares of Common Stock of the Company are entitled to
share equally in dividends from funds legally available therefor, when, as and
if declared by the Board of Directors. The Company does not plan to declare any
dividends in the immediate future. See Item 1. Business - Dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
In response to this Item, the information contained on pages 2 through
13 of the Company's Annual Report to Shareholders for the year ended December
31, 1997 is incorporated herein by reference.
13
<PAGE> 15
ITEM 7. FINANCIAL STATEMENTS
In response to this Item, the information contained on pages 14 through
24 of the Company's Annual Report to Shareholders for the year ended December
31, 1997 is incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
In response to this Item, the information contained on page 7 of the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held on
April 28, 1998 is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
In response to this Item, the information contained on pages 5 through
7 of the Company's Proxy Statement for the Annual Meeting of Shareholders to be
held on April 28, 1998 is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
In response to this Item, the information contained on pages 7 through
9 of the Company's Proxy Statement for the Annual Meeting of Shareholders to be
held on April 28, 1998 is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In response to this Item, the information contained on page 9 of the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held on
April 28, 1998 is incorporated herein by reference.
PART IV
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
3.1 Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 of the Registration Statement on Form
S-1, File No. 33-94288.)
3.2 Bylaws of the Company (incorporated by reference to Exhibit
3.2 of the Registration Statement on Form S-1, File No.
33-94288.)
14
<PAGE> 16
4.1 Provisions in the Company's Articles of Incorporation and
Bylaws defining the rights of holders of the Company's common
stock (incorporated by reference to Exhibit 4.1 of the
Registration Statement on Form S-1, File No. 33-94288.)
10.3 Contract for the Purchase and assignment of 16th Section
Leasehold, dated June 26, 1995 by and between the proposed
bank and Department of Public Safety, State of Mississippi
(incorporated by reference to Exhibit 10.4 of the Registration
Statement on Form S-1, File No. 33-94288.)
10.4 Option to purchase dated May 23, 1995, among the Bank, John
Hudson, and La Carroll Hudson (incorporated by reference to
Exhibit 10.4 of the Registration Statement on Form S-1, File
No. 33-94288.)
10.5 Lease agreement dated June 21, 1995, among Joel S. Thomas,
individually, Thomas Enterprises, Inc. and the Company
(incorporated by reference to Exhibit 10.5 of the Registration
Statement on Form S-1, File No. 33-94288.)
10.6 Amended and restated employment agreement dated November 20,
1995, between David E. Johnson and the Company (incorporated
by reference to Exhibit 10.7 of the Company's Form 10-KSB for
the fiscal year ended December 31, 1995, File No. 33-94288.)
1997 Stock Option Plan dated as of March 18, 1997 (incorporated by
reference to Exhibit 10.7 of the Company's Form 10-KSB for the
fiscal year ended December 31, 1996, File No. 33-94288.)
13 Annual Report to Shareholders for the year ended December 31,
1997.
21.1 Subsidiaries of the Company.
27.1 Financial Data Schedule (for SEC use only)
- ------------------
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of
the year ended December 31, 1997.
15
<PAGE> 17
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
THE FIRST BANCSHARES, INC.
Date: 3/18/98 By:/s/David E. Johnson
----------------------- ---------------------------------------
David E. Johnson
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David E. Johnson, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this Registration Statement, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto attorney-in-fact and agent
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/David Waldron Bomboy Director 3/18/98
--------------------------------- ----------------------
David Waldron Bomboy
/s/E. Ricky Gibson Director 3/18/98
--------------------------------- ----------------------
E. Ricky Gibson
/s/John Hudson Director 3/18/98
--------------------------------- ----------------------
John Hudson
/s/David E. Johnson Director, President and Chief 3/18/98
--------------------------------- Executive Officer ----------------------
David E. Johnson
/s/Fred A. McMurry Director 3/18/98
--------------------------------- ----------------------
Fred A. McMurry
/s/Dawn T. Parker Director 3/18/98
--------------------------------- ----------------------
Dawn T. Parker
</TABLE>
16
<PAGE> 18
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Director
--------------------------------- ----------------------
Perry Edward Parker
/s/Ted E. Parker Director 3/18/98
--------------------------------- ----------------------
Ted E. Parker
Director
--------------------------------- ----------------------
Dennis L. Pierce
/s/Charles T. Ruffin Director and Principal Financial and 3/18/98
--------------------------------- Accounting Officer ----------------------
Charles T. Ruffin
Director
--------------------------------- ----------------------
A.L. "Pud" Smith
Director
--------------------------------- ----------------------
Andrew D. Stetelman
</TABLE>
17
<PAGE> 19
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
3.1 Articles of Incorporation of the Company (incorporated by reference to
Exhibit 3.1 of the Registration Statement on Form S-1, File No.
33-94288.)
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 of the
Registration Statement on Form S-1, File No. 33-94288.)
4.1 Provisions in the Company's Articles of Incorporation and
Bylaws defining the rights of holders of the Company's common
stock (incorporated by reference to Exhibit 4.1 of the
Registration Statement on Form S-1, File No. 33-94288.)
10.3 Contract for the Purchase and assignment of 16th Section
Leasehold, dated June 26, 1995 by and between the proposed
bank and Department of Public Safety, State of Mississippi
(incorporated by reference to Exhibit 10.4 of the Registration
Statement on Form S-1, File No. 33-94288.)
10.4 Option to purchase dated May 23, 1995, among the Bank, John
Hudson, and La Carroll Hudson (incorporated by reference to
Exhibit 10.4 of the Registration Statement on Form S-1, File
No.
33-94288.)
10.5 Lease agreement dated June 21, 1995, among Joel S. Thomas,
individually, Thomas Enterprises, Inc. and the Company (incorporated by
reference to Exhibit 10.5 of the Registration Statement on Form S-1,
File No. 33-94288.)
10.6 Amended and restated employment agreement dated November 20, 1995,
between David E. Johnson and the Company (incorporated by reference to
Exhibit 10.7 of the Company's Form 10-KSB for the fiscal year ended
December 31, 1995, File No. 33-94288.)
10.7 1997 Stock Option Plan dated as of March 18, 1997 (incorporated by
reference to Exhibit 10.7 of the Company's Form 10-KSB for the
fiscal year ended December 31, 1996, File No. 33-94288.)
13 Annual Report to Shareholders for the year ended December 31, 1997
21.1 Subsidiaries of the Company.
27.1 Financial Data Schedule (for SEC use only)
- -----------------------
<PAGE> 1
EXHIBIT 13
MANAGEMENT'S DISCUSSION & ANALYSIS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to further explain financial information
outlined in the accompanying two year listing of selected financial data.
Information contained in this data summary depicts selected totals from the
Company's balance sheet and income statement for the past two years. Your
attention is also directed to management's letter to shareholders at the
beginning of this Annual Report. This letter further explains significant
changes that occurred in the Company's operation during the past year.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The First Bancshares, Inc. ("The Company") was organized June 23, 1995 (the
"Inception Date"). From the Inception Date through August 2, 1996, the Company's
principal activities related to its organization, the conducting of its initial
stock offering, and pursuit of approval from the Office of the Comptroller of
the Currency ("OCC") for its application to charter its subsidiary bank, The
First National Bank of South Mississippi ("THE FIRST"). THE FIRST received it's
charter and commenced operations on August 5, 1996. The Company's initial stock
offering was closed on August 27, 1996 after 721,848 shares were sold at $10.00
per share generating capital of $7,218,480.
At the close of business, December 31, 1997, THE FIRST concluded it first full
calendar year of operations. As of year end 1997, the Company's assets totaled
$27,532,060. Of this total, $990,261 was Cash and Due From Banks; $1,850,000 was
Fed Funds Sold; $4,303,586 Securities comprised primarily of U.S. Gov't Agency
and Mortgage Backed; $17,487,426 Loans Net of the Reserve for Loan Losses
($193,565); $2,090,225 Premises and Equipment; $841,861 Interest Receivable; and
$162,266 Other Assets.
Deposits as of year end 1997 totaled $22,539,143. Of this total, $2,479,084 were
non-interest bearing; $4,445,832 were Time Deposits of $100,000 or more; and
$15,614,227 were Other Interest Bearing deposits. Interest payable and Other
Liabilities of $107,973 comprised the remaining liabilities as of yearend.
Shareholder's equity totaled $6,367,704 as of December 31, 1997. Of this amount,
$721,848 was Common Stock at $1 par value; $6,451,456 was representative of
Additional paid-in capital from the initial stock offering; ($817,650) was
representative of accumulated losses from operations to date, of which
($261,992) resulted from 1997 operating losses; and $12,051 was representative
of the unrealized gain on "Available for Sale" securities at year end. The net
loss per common share through year end 1997 was equal to ($.36).
Net interest income, the primary source of earnings for the Company, represents
earnings generated from earning assets less the interest expense of funding
those assets. During 1997, earning assets grew $12,823,327. Changes in net
interest income can be divided into components, the change in average earning
assets (volume component) and the change in the net interest margin (rate
component). Net Interest Margin (NIM) represents the difference between yields
on earning assets and rates paid on interest bearing liabilities. The NIM (tax
adjusted) for 1997 was 4.04%.
2
<PAGE> 2
The Company's Provision for Loan and Lease Losses is utilized to replenish its
Reserve for Loan and Lease Losses on its balance sheet. The reserve is
maintained at a level deemed adequate by the Board of Directors after evaluation
of credit risk and loan performance trends in the loan portfolio. The reserve
amount currently maintained (1.10% of loans net of unearned)is deemed adequate
to cover existing exposure within the company's loan portfolio.
Non-interest income and non-interest expense reflect the impact of costs
associated with beginning operations and growing the deposit base. Non-interest
income includes various service charges, fees, and commissions collected by the
Company; non-interest expense represents ordinary overhead expenses to include
salaries, bonuses, and benefits.
LIQUIDITY, ASSET/LIABILITY MANAGEMENT
Liquidity may be defined as the ability of the Company to meet cash flow
requirements created by decreases in deposits and/or other sources of funds or
increases in loan demand. The Company has maintained an asset/liability
management policy which focuses upon interest rate risk and rate sensitivity.
The primary objective of rate sensitivity management is to maintain interest
income growth while reducing exposure to adverse fluctuations in interest rates.
The Company utilizes an Asset/Liability Management Committee which evaluates and
analyzes the Company's pricing, maturities, growth, and balance sheet mix
strategies in an effort to make informed decisions that will increase income and
limit interest rate risk. The committee utilizes GAP Analysis generated using
Asset Liability Management Software. Utilizing GAP Analysis, the bank desires to
maintain a rate sensitivity position which is essentially neutral, with rate
sensitive assets being equal to rate sensitive liabilities with repricing
opportunities of one year or less. The Company has experienced no problem with
liquidity since commencing operations and anticipates that all liquidity
requirements will be met comfortably in the foreseeable future. The Company's
traditional sources of funds from deposit increases, maturing loans and
investments have allowed it to generate sufficient funds for liquidity needs. It
is pointed out that the Company's Loan to Deposit ratio is 77.58% with a goal of
70% and a maximum of 80%.
CAPITAL
Current regulatory requirements call for a basic leverage ratio of 5% for a bank
to be considered "well capitalized". At December 31, 1997, the Company
maintained a 30.3% leverage ratio which allowed it to significantly exceed the
ratio required for a "well capitalized" institution. The regulatory authorities
have become increasingly interested in evaluating a financial institutions
capital against its assets which have been risk weighted (high risk assets would
require a higher capital allotment, lower risk assets a lower capital
allotment). In this context, a "well capitalized" bank is required to have a
Tier I risk based capital ratio (excludes reserve for loan losses) of 6% and a
total risk based capital ratio (includes reserve for loan losses) of 10%. At the
end of 1997, the Company had a Tier I ratio of 30.7% and total risk based
consolidated capital of 31.7%, once again placing the company well above the
consolidated level required for a "well capitalized" institution. The Company's
capital position
3
<PAGE> 3
exceeds regulatory requirements, even for "well capitalized" institutions.
Management considers current capital levels to be entirely sufficient to support
the needs of the Company and anticipates no events or conditions that would
significantly affect the capital position.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements, and notes thereto, 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 the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the Bank's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Bank are monetary in
nature. As a result, interest rates have a greater impact on the Bank's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
SUPPLEMENTAL STATISTICAL INFORMATION
I. DISTRIBUTION OF ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY; INTEREST AND
INTEREST DIFFERENTIAL
A. AVERAGE BALANCE SHEETS ( IN THOUSANDS ):
<TABLE>
<CAPTION>
ASSETS 1996 1997
CONSOLIDATED CONSOLIDATED
<S> <C> <C>
CASH AND DUE FROM BANKS $3,313 $ 753
FED FUNDS SOLD AND SECURITIES $3,339 $ 6,373
PURCHASED UNDER AGREEMENTS TO RESELL
LOANS, NET OF UNEARNED and RESERVE FOR LOAN LOSSES $1,432 $12,556
DEPOSITS ON LAND $ 52 $ 221
FIXED ASSETS $ 796 $ 1,956
ACCRUED INCOME $ 16 $ 552
OTHER ASSETS $ 188 $ 179
TOTAL ASSETS $9,111 $22,531
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
NON-INTEREST BEARING $1,152 $ 2,030
INTEREST BEARING $2,402 $13,987
TOTAL DEPOSITS $3,554 $16,017
FED FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE $ 0 $ 0
BORROWED FUNDS $ 0 $ 0
OTHER LIABILITIES $ 25 $ 110
TOTAL LIABILITIES $2,740 $16,128
STOCKHOLDERS' EQUITY $6,371 $ 6,403
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $9,111 $22,531
</TABLE>
4
<PAGE> 4
B. ANALYSIS OF NET INTEREST EARNINGS
The table below shows, for the periods indicated, an analysis of net interest
earnings, including the average amount of interest-earning assets and
interest-bearing liabilities outstanding during the period, the interest earned
or paid on such accounts, the average yields/rates paid and the net yield on
interest-earning assets:
($ IN THOUSANDS) USING AVERAGE BALANCES
<TABLE>
<CAPTION>
YIELDS YIELDS
EARNED EARNED
AND AND
RATES RATES
EARNING ASSETS CONSOLIDATED PAID CONSOLIDATED PAID %
1996 1997
<S> <C> <C> <C> <C>
NET LOANS $ 1,432 9.486% $12,692 9.01%
INVESTMENTS FED
FUNDS SOLD AND
SECURITIES PURCHASED
AGREEMENTS TO RESELL $ 3,339 5.597% $ 6,373 5.97%
TOTALS $ 4,771 6.46% $19,065 7.99%
INTEREST-BEARING
LIABILITIES
INTEREST-BEARING
DEPOSITS $ 2,402 5.469% $13,987 5.11%
BORROWED FUNDS
AND FED FUNDS
PURCHASED AND
SECURITIES SOLD
UNDER
AGREEMENT T0
REPURCHASE $ 0 0% $ 0 0%
TOTALS $ 2,402 5.469% $13,987 5.11%
NET AMOUNTS $ 2,369 .991% $ 5,078 2.88%
</TABLE>
Net yield on earning assets:
(1) Interest and yields on tax-exempt obligations are not on a fully taxable
equivalent basis.
(2) For the purpose of these computations, non-accruing loans are included in
the average loan balances outstanding.
5
<PAGE> 5
C. INCREASE (DECREASE) IN INTEREST INCOME AND INTEREST EXPENSE
Since The First National Bank of South Mississippi commenced operations on
August 5, 1996, comparison of the prior year to 1997 information regarding
changes in Interest Income and Interest Expense is a comparison of the five
months of operation in 1996 to twelve full months of operation in 1997 and
should be viewed accordingly.
<TABLE>
<CAPTION>
($ to the nearest Thousand)
INTEREST INCOME 1996 1997 DIFFERENCE
<S> <C> <C>
INTEREST ON BALANCES DUE FROM $50 $73 $23
BANKS
INTEREST INCOME ON U.S. TREAS $223 $280 $57
AND AGENCY SEC.
INTEREST ON OBLIGATIONS OF $0 $0 $0
STATES AND POLITICAL
SUBDIVISIONS
INTEREST ON OTHER SECURITIES $6 $10 $4
INTEREST ON FED FUNDS SOLD $69 $91 $22
INTEREST SECURITIES PURCHASED
UNDER AGREEMENTS
TO RESELL
INTEREST AND FEES ON LOANS $707 $1,144 $437
TOTAL INTEREST INCOME $1,055 $1,599 $544
INTEREST EXPENSE:
INTEREST ON CERTIFICATES OF $44 $86 $42
DEPOSIT OF $100,000 OR MORE
INTEREST ON OTHER DEPOSITS $425 $628 $203
INTEREST ON FED FUNDS PURCHASED $0 $0 $0
AND SECURITIES SOLD UNDER
REPURCHASE
AGREEMENTS
INTEREST ON DEMAND NOTES ISSUED $0 $0 $0
TO THE U.S. TREASURY AND ON
OTHER BORROWED MONEY
TOTAL INTEREST EXPENSE $470 $714 $244
</TABLE>
II. INVESTMENT PORTFOLIO
A. The following tables present the book values of securities as of December
31, 1997. All amounts are stated in Thousands.
6
<PAGE> 6
<TABLE>
<CAPTION>
SECURITY DESCRIPTION CONSOLIDATED CONSOLIDATED
D 1997
1996
<S> <C> <C>
U.S. TREASURY $0 $504
U.S. GOV'T AGENCIES AND MORTGAGE BACKED SECURITIES $4,058 $2,635
STATES AND POLITICAL SUBDIVISIONS $0 $0
OTHER $0 $658
TOTAL BOOK VALUE $4,216 $3,797
</TABLE>
B. The following table sets forth maturities of investment and
mortgage-backed securities (carrying values) at December 31, 1997, and
the weighted average yield of such securities. All dollar values are
stated in Thousands.
<TABLE>
<CAPTION>
1997 0 - 1 YIELD 1 - 5 YIELD 5 - 10 YIELD
SECURITIES YEAR (%) YEARS (%) YEARS (%)
<S> <C> <C> <C> <C> <C> <C>
U.S. TREASURY $0 0% $500 6.252% $0 0%
U.S. GOV'T AGENCIES $0 0% $500 6.063% $0 0%
MORTGAGE BACKED $235 5.965% $0 0% $714 6.38
SECURITIES
STATES AND POLITICAL $0 0% $0 0% $0 0%
SUBDIVISIONS
OTHER $0 0% $0 0% $0 0%
TOTAL $235 5.965% $1,000 6.157% $714 6.38%
GREATER THAN YIELD
10 YRS (%)
MORTGAGE BACKED $2,495 6.681
SECURITIES
EQUITY SECURITIES $158 6.00%
TOTAL $2,653 6.76%
</TABLE>
NOTE: Interest and yields on tax-exempt obligations are not on a
taxable equivalent basis. Average yield on floating rate securities was
determined using the current yield.
7
<PAGE> 7
C. Investment securities in excess of 10% of stockholders' equity.
At December 31, 1997, there were no securities from any issues in
excess of 10% of stockholders' equity.
III. LOAN PORTFOLIO
A. TYPE OF LOANS
The amount of loans outstanding by type at the indicated dates are shown
in the following table. All dollar amounts are expressed in Thousands.
<TABLE>
<CAPTION>
LOAN TYPE DECEMBER 31, DECEMBER 31, 1997
1996
<S> <C> <C>
COMMERCIAL, FINANCIAL AND AGRICULTURE $2,740 $4,341
REAL ESTATE - CONSTRUCTION $36 $7,604
REAL ESTATE - MORTGAGE $1,079 $3,314
INSTALLMENT LOANS TO INDIVIDUALS $470 $2,228
OTHER $2 $0
TOTAL LOANS $4,327 $17,487
LESS: UNEARNED INTEREST $0 $0
TOTAL LOANS NET OF UNEARNED INT. $4,327 $17,487
</TABLE>
B. MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES.
All dollar values are expressed in Thousands as of December 31, 1997.
<TABLE>
<CAPTION>
LOAN TYPE WITHIN 1 1 - 5 YEARS 5-10 10-15 OVER
MATURING OR REPRICING YEAR YEARS YEARS 15
YEARS
<S> <C> <C> <C> <C> <C>
COMMERCIAL, FINANCIAL AND $3,702 $639 $0 $0 $0
AGRICULTURAL
REAL ESTATE - CONSTRUCTION $5,481 2,123 $0 $0 $0
REAL ESTATE - MORTGAGE $1,744 $1,556 $14 $0 $0
INSTALLMENT LOANS TO $1,280 $940 $8 $0 $0
INDIVIDUALS
TOTAL LOANS BY MATURITY OR $12,207 $5,258 $22 $0 $0
EARLIEST REPRICING DATE
LOANS INCLUDED IN TOTALS ABOVE
WITH:
PREDETERMINED INTEREST RATES $0 $0 $0 $0 $0
FLOATING INTEREST RATES $8,973 $0 $0 $0 $0
</TABLE>
C. NON-PERFORMING LOANS
1. As of December 31, 1997 there were no loans classified as
non-performing in nature.
2. There were no loan concentrations in excess of 10% of total
loans at December 31, 1997.
8
<PAGE> 8
3. There were no outstanding foreign loans at December 31, 1997.
4. Loans classified for regulatory purposes or for internal credit
review purposes that have not been disclosed in the above table do
not represent or result from trends or uncertainties that
management expects will materially impact the financial condition
of the company or its subsidiary banks, or their future operating
results, liquidity, or capital resources.
5. As of December 31, 1997, no loans were in non-accruing status
and therefore interest income has not been impacted by such
activity.
6. Management stringently monitors loans that are classified as
non-performing. Non-performing loans include non-accrual loans,
loans past due 90 days or more, and loans renegotiated or
restructured because of a debtor's financial difficulties. Loans
are generally placed on non-accrual status if any of the following
events occur: (1) the classification of a loan as non-accrual
internally or by regulatory examiners; (2) delinquency on principal
for 90 days or more unless management is in the process of
collection; (3) a balance remains after repossession of
collateral; (4) notification of bankruptcy; or (5) management's
judgment that non-accrual is appropriate.
D. OTHER INTEREST-BEARING ASSETS
There were no other interest-bearing non-performing assets at
December 31, 1997.
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. An analysis of the loan loss experience for the period ending
December 31, 1997 is provided in the following table. All balances
are provided in Thousands of dollars.
<TABLE>
<CAPTION>
BEGINNING BALANCE DECEMBER 31, 1996 DECEMBER 31, 1997
<S> <C> <C>
CHARGE-OFFS:
COMMERCIAL, FINANCIAL AND AGRICULTURAL $0 $0
REAL ESTATE $0 $0
INSTALLMENT LOANS AND OTHER $0 $0
TOTAL CHARGE-OFFS $0 $0
RECOVERIES:
COMMERCIAL, FINANCIAL AND AGRICULTURAL $0 $0
</TABLE>
9
<PAGE> 9
<TABLE>
<S> <C> <C>
REAL ESTATE $0 $0
INSTALLMENT LOANS AND OTHER $0 $0
TOTAL RECOVERIES $0 $0
NET CHARGE-OFFS $0 $0
PROVISION FOR LOAN LOSSES BEGINNING $0 $37
BALANCE
PROVISION CHARGED TO OPERATIONS $37 $156
ENDING BALANCE $37 $193
RATIO OF NET CHARGE-OFFS TO AVERAGE $0 0%
LOANS OUTSTANDING
RATIO OF RESERVE FOR LOAN LOSSES TO .86% 1.10%
LOANS OUTSTANDING AT YEAR END
</TABLE>
B. DETERMINATION OF RESERVE FOR LOAN LOSSES
The loan loss reserve is currently based upon the formula
established in the bank charter application with the Office of
the Comptroller of the Currency. The reserve is based upon 1.10%
of net loans for the first year of operation. The bank will
build this loan loss reserve based upon this schedule with
additional reserves as individual loans are classified internally
or by examiners (OLEM 5%, Substandard 10%, Doubtful 15% plus
specific reserve for recognized exposure, and Loss 100%) for
credit, collateral or repayment weaknesses.
C. LOANS AND RISK DESCRIPTIONS
REAL ESTATE LOANS
Approximately $10.9 million or 62% of the loan portfolio
consisted of Real Estate loans at 12/31/97. These loans were
extended after a thorough review of all supporting financial and
collateral information with a loan to value margin of up to 80%.
The Bank believes that these loans represent an acceptable risk.
At 12/31/97 the Bank had $4.3 million or approximately 25% of the
loan portfolio in Commercial/Financial/Industrial loans. These
loans to both businesses and individuals were booked after a
thorough credit analysis of the borrower's repayment ability. The
credit analysis included the review of financial statements, tax
returns, credit bureaus, and supporting collateral. These type
loans represent the core of the bank's loan portfolio and
represent a conservative vehicle for interest income.
D. CONSUMER AND OTHER LOANS
At 12/31/97 approximately 12.7% or $2.2 million of the Bank's
portfolio consisted of consumer loans. These loans represent an
opportunity for the bank to meet the varied
10
<PAGE> 10
needs of its customers. These loans allow the Bank to earn a
stable rate of interest income and are reserved for borrower's
that meet the bank's credit quality standards.
V. DEPOSITS
A. AVERAGE DEPOSITS ( ALL $ TO THE NEAREST THOUSAND )
<TABLE>
<CAPTION>
1996 1996 1997 1997
$ RATE $ RATE
<S> <C> <C> <C> <C>
NON-INTEREST BEARING $250 0% $2,030 0%
DEPOSITS
INTEREST BEARING $1,565 4.75% $6,754 4.60%
DEPOSITS (1)
SAVINGS DEPOSITS $25 2.417% $145 2.07%
TIME DEPOSITS $402 5.661% $6,894 5.80%
TOTAL DEPOSITS $2,248 4.351% $15,459 4.63%
</TABLE>
(1) INCLUDES MONEY MARKET ACCOUNTS
B. OTHER CATEGORIES
None
C. FOREIGN DEPOSITS
None
D. TIME CERTIFICATES OF DEPOSIT OF $100,000 OR MORE AND MATURITIES AT
DECEMBER 31.
<TABLE>
<CAPTION>
TIME CERTIFICATES OF 1996 1997
DEPOSIT OF $100,000 OR
MORE
<S> <C> <C>
3 MONTHS OR LESS $100 $508
3 - 6 MONTHS $0 $1,620
6 - 12 MONTHS $400 $1,018
OVER 12 MONTHS $200 $1,299
</TABLE>
E. FOREIGN OFFICE TIME DEPOSITS OF $100,000 OR MORE
Not Applicable
11
<PAGE> 11
VI. RETURN ON EQUITY AND ASSETS
The following financial ratios are presented for analytical purposes:
<TABLE>
<CAPTION>
RATIO DESCRIPTION DECEMBER 31, 1996 DECEMBER 31, 1997
<S> <C> <C>
RETURN ON ASSETS (NET INCOME DIVIDED (5.42%) (1.16%)
BY AVERAGE TOTAL ASSETS)
RETURN ON EQUITY ( NET INCOME DIVIDED (7.75%) (4.09%)
BY AVERAGE EQUITY)
DIVIDEND PAYOUT RATIO (DIVIDENDS PER 0% 0%
SHARE DIVIDED BY NET INCOME PER
SHARE)
EQUITY TO ASSET RATIO (AVERAGE EQUITY 69.93% 28.42%
DIVIDED BY AVERAGE TOTAL ASSETS)
</TABLE>
VII. SHORT TERM BORROWINGS
As of December 31, 1997 there were no short term borrowings. During 1997
the Company and its subsidiaries had no short term borrowings in excess of
30% of stockholders' equity.
VIII. CAPITAL ADEQUACY DATA
Total capital of the Company as a percentage of total adjusted assets was
as follows:
<TABLE>
<CAPTION>
($ THOUSANDS) ($ THOUSANDS)
DECEMBER 31, 1996 DECEMBER 31, 1997
<S> <C> <C>
TOTAL ASSETS $14,177 $27,534
ALLOWANCE FOR LOAN LOSSES ($37) ($193)
TOTAL ADJUSTED ASSETS $14,214 $27,727
TOTAL STOCKHOLDERS' EQUITY (EXCLUDING $6,618 $6,363
UNREALIZED GAIN/LOSS)
ALLOWANCE FOR LOAN LOSSES $37 $193
OTHER COMPONENTS OF CAPITAL $0 $0
TOTAL PRIMARY CAPITAL $6,655 $6,556
TOTAL SECONDARY CAPITAL $0 $0
TOTAL CAPITAL $6,655 $6,556
RATIO OF TOTAL CAPITAL TO TOTAL ADJUSTED 46.80% 23.65%
ASSETS
</TABLE>
Tier I and total Capital as a percentage of "risk-weighted" assets at
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
<S> <C> <C>
TIER I CAPITAL PERCENTAGE 91.3% 30.7%
TOTAL CAPITAL PERCENTAGE 91.8% 31.7%
</TABLE>
12
<PAGE> 12
The Company's capital ratios exceed the minimum capital requirements at
December 31, 1997 and management expects this to continue.
IX. INTEREST RATE SENSITIVITY ANALYSIS
The following table reflects the year-end position of the Company's
interest-earning assets and interest-bearing liabilities which can either
reprice or mature within the designated time period. The interest rate
sensitivity gaps can vary from day-to-day and are not necessarily a
reflection of the future. In addition, certain assets and liabilities
within the same designated time period may none the less reprice at
different times and at different levels.
<TABLE>
<CAPTION>
($ IN THOUSANDS)
DECEMBER 31, 1997
INTEREST SENSITIVE WITHIN (CUMULATIVE)
WITHIN WITHIN WITHIN 5 YEARS TOTAL INTEREST
3 MONTHS 12 MONTHS 5 YEARS OR MORE EARNING ASSETS
<S> <C> <C> <C> <C> <C>
INTEREST EARNING
ASSETS:
LOANS $ 9,471 $2,736 $5,258 $ 22 $17,487
INVESTMENTS AND $ 0 $1,217 $1,000 $3,209 $ 5,426
MORTGAGE BACKED
SECURITIES
FED FUNDS SOLD AND $ 1,850 $ 0 $ 0 $ 0 $ 1,850
OTHER
TOTALS $11,321 $3,953 $6,258 $3,231 $21,033
INTEREST BEARING
LIABILITIES:
DEPOSITS AND BORROWED $ 5,287 $9,807 $4,742 $ 178 $20,015
FUNDS
SENSITIVITY GAP:
DOLLAR AMOUNT $ 6,034 $ 180 $1,696 $4,749
PERCENT OF TOTAL 28.68% .86% 8.06% 22.58%
INTEREST EARNING ASSETS
</TABLE>
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive"
and by monitoring rate sensitivity differences ("GAP") between assets and
liabilities. An asset or liability is considered to be rate sensitive
within a specific time period if it will mature or be subject to
repricing within that period of time. The interest rate sensitivity gap
is the difference between the amount of interest-earning assets
anticipated, based upon certain assumptions, to mature or reprice within
that time period. a gap is considered to be positive when the amount of
rate sensitive assets maturing or repricing within a period of time
exceeds the amount of rate sensitive liabilities maturing within that same
time frame. During a period of falling interest rates, a negative gap
would tend to result in an increase in net interest income while a
positive gap would tend to adversely affect net interest income. In an
environment of rising interest rates, an institution with a positive gap
would generally be expected, absent the effects of other factors, to
experience a greater increase in the yield of its assets relative to the
costs of its liabilities and thus an increase in the institution's net
interest income would result whereas an institution with a negative gap
could experience the opposite results.
13
<PAGE> 13
At December 31, 1997, total interest-earning assets maturing or repricing
within one year was greater than interest bearing liabilities maturing or
repricing within the same period of time by $180 thousand (cumulative),
representing a positive cumulative gap of .86% of earning assets. The
Company has a positive gap in all time frames, it is expected that this
gap will move toward a more neutral position with the addition of deposits
with fixed maturities of a longer duration than seen at the present time.
This trend should be particularly noticeable in the 2 - 5 year time frame,
since these will be the maturities in which most time deposits will be
marketed and in which any change in interest rates will have the greatest
impact on earnings.
14
<PAGE> 14
THE FIRST BANCSHARES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
AND
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
DECEMBER 31, 1997 AND 1996
15
<PAGE> 15
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
The First Bancshares, Inc.
Hattiesburg, Mississippi
We have audited the accompanying consolidated balance sheets of The First
Bancshares, Inc., and subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the consolidated financial position of The First
Bancshares, Inc., and subsidiary as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
T.E. Lott & Company
Columbus, Mississippi
February 11, 1998
<PAGE> 16
THE FIRST BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
----------- -----------
<S> <C> <C>
Cash and due from banks $ 970,262 $ 1,458,586
Federal funds sold 1,870,000 2,311,386
Securities (Note C) 4,303,587 4,216,027
Loans, net of reserve for loan losses of $193,566
in 1997 and $37,148 in 1996 (Note D) 17,293,861 4,290,272
Premises and equipment (Note E) 2,092,225 1,691,760
Interest receivable 188,365 35,576
Other assets 808,338 173,153
------------ ------------
$ 27,526,638 $ 14,176,760
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 2,479,084 $ 1,566,076
Time, $100,000 or more 2,631,198 400,000
Other interest-bearing 15,948,103 5,540,573
------------ ------------
Total deposits 21,058,385 7,506,649
Interest payable 94,649 26,646
Other liabilities 5,900 22,936
------------ ------------
Total liabilities 21,158,934 7,556,231
------------ ------------
Commitments and contingent liabilities (Note J)
Stockholders' Equity (Note F):
Common stock, par value $1 per share; 10,000,000
shares authorized; issued and outstanding 721,848
at December 31, 1997 and 1996 721,848 721,848
Preferred stock, par value $1 per share, 10,000,000
shares authorized; no shares issued and outstanding -- --
Additional paid-in capital 6,451,456 6,451,456
Accumulated deficit (817,651) (555,658)
Unrealized gain on available-for-sale securities 12,051 2,883
------------ ------------
Total stockholders' equity 6,367,704 6,620,529
------------ ------------
$ 27,526,638 $ 14,176,760
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
17
<PAGE> 17
THE FIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
INTEREST INCOME ---------- ---------
<S> <C> <C>
Interest and fees on loans $ 1,141,101 $ 80,035
Interest and dividends on investment securities - taxable 290,247 60,738
Interest on federal funds sold 91,354 119,003
Interest on deposits in banks -- 6,516
Other, preopening -- 183,083
----------- ---------
1,522,702 449,375
INTEREST EXPENSE
Interest on time deposits of $100,000 or more 68,385 7,433
Interest on other deposits 572,762 66,052
Interest on borrowed funds -- 5,909
----------- ---------
641,147 79,394
----------- ---------
Net interest income 881,555 369,981
Provision for loan losses 156,418 37,148
----------- ---------
Net interest income after provision for loan losses 725,137 332,833
OTHER INCOME
Service charges on deposit accounts 67,543 2,136
Other service charges and fees 24,723 2,190
Other (Note E) 123,858 --
----------- ---------
216,124 4,326
OTHER EXPENSES
Salaries 531,754 172,051
Employee benefits 100,538 34,328
Occupancy expense 77,401 13,166
Furniture and equipment expense 122,739 51,942
Marketing and public relations 43,245 21,182
Other 327,577 176,253
Preopening expenses (Note K) -- 223,985
----------- ---------
1,203,254 692,907
----------- ---------
Net loss $ (261,993) $(355,748)
=========== =========
Net loss per common share (Note B-12) $ (.36) (.58)
=========== =========
Net loss per common share - assuming dilution (Note B-12) $ (.36) $ (.58)
=========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE> 18
THE FIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Unrealized
Gain
On
Additional Available-
Common Paid-in Accumulated For-Sale
Stock Capital Deficit Securities Total
--------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ 10 $ 90 $(199,910) $ -- $ (199,810)
Issuance of common stock,
net of issuance costs 721,848 6,451,456 -- -- 7,173,304
Net loss for 1996 -- -- (355,748) -- (355,748)
Unrealized gain on available-
for-sale securities -- -- -- 2,883 2,883
Redemption of organization
stock (10) (90) -- -- (100)
--------- ----------- --------- ---------- -----------
Balance, December 31, 1996 721,848 6,451,456 (555,658) 2,883 6,620,529
Net loss for 1997 -- -- (261,993) -- (261,993)
Net change in unrealized gain
on available-for-sale
securities, net of tax -- -- -- 9,168 9,168
--------- ----------- --------- ---------- -----------
Balance, December 31, 1997 $ 721,848 $ 6,451,456 $(817,651) $ 12,051 $ 6,367,704
========= =========== ========= ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE> 19
THE FIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIODS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (261,993) $ (355,748)
Adjustments to reconcile net income to net cash:
Depreciation and amortization 157,333 42,210
Provision for loan losses 156,418 37,148
Amortization and accretion (101,992) (13,285)
Increase in interest receivable (152,789) (35,576)
Increase in other assets (672,157) (69,791)
Increase in interest payable 68,003 26,646
(Decrease) increase in other liabilities (17,036) 12,808
------------ ------------
Net cash used in operating activities (824,213) (355,588)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities (6,252,319) (4,949,859)
Proceeds from maturities and calls of available-for-sale
securities 6,782,920 750,000
Purchase of securities to be held-to-maturity (507,001) --
Increase in loans (13,160,007) (4,327,420)
Additions to premises and equipment (520,826) (1,585,625)
------------ ------------
Net cash used in investing activities (13,657,233) (10,112,904)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposits 13,551,736 7,506,649
Decrease in borrowed funds -- (441,950)
Proceeds from issuance of stock, net -- 7,173,204
------------ ------------
Net cash provided by financing activities 13,551,736 14,237,903
------------ ------------
Net increase (decrease) in cash and cash equivalents (929,710) 3,769,411
Cash and cash equivalents at beginning of year 3,769,972 561
------------ ------------
Cash and cash equivalents at end of year $ 2,840,262 $ 3,769,972
============ ============
CASH PAID DURING THE YEAR FOR:
Interest $ 573,144 $ 52,748
Income taxes -- --
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE> 20
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE A - ORGANIZATION
The First Bancshares, Inc. (the Company) was incorporated under the laws of
Mississippi on June 23, 1995 (the "Inception Date"), for the purpose of
becoming a one-bank holding company. From the Inception Date through August 5,
1996, the Company was a development-stage company and its activities during
the period consisted of its organization, the conducting of its initial public
stock offering, pursuit of the approval of the Office of the Comptroller of
the Currency ("OCC") for its application to charter its subsidiary bank, the
First National Bank of South Mississippi (the "Bank"), and the establishing of
systems, hiring and training of personnel, and other matters related to the
opening of the Bank. The Bank began its operations on August 5, 1996.
NOTE B - SUMMARY OF ACCOUNTING POLICIES
1. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
the Bank. All significant intercompany accounts and transactions have been
eliminated.
2. NATURE OF OPERATIONS
The Company as a bank holding company is regulated by the Federal Reserve
Bank.
The Bank operates under a national bank charter and provides full banking
services. It is subject to the regulation of the OCC. The Bank provides
services primarily to Forrest and Lamar Counties of Mississippi.
3. ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
( Continued )
21
<PAGE> 21
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE B - SUMMARY OF ACCOUNTING POLICIES (Continued)
4. SECURITIES
Investments in securities are classified into three categories and are
accounted for as follows:
Available-for-Sale Securities
Securities classified as available-for-sale are those securities that are
intended to be held for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as available-for-sale
would be based on various factors, including movements in interest rates,
liquidity needs, security risk assessments, changes in the mix of assets and
liabilities and other similar factors. These securities are carried at their
estimated fair value, and the net unrealized gain or loss is reported in
stockholders' equity, net of tax, when applicable, until realized.
Gains and losses on the sale of available-for-sale securities are determined
using the adjusted cost of the specific security sold.
Premiums and discounts are recognized in interest income using the interest
method.
Securities to be Held-to-Maturity
Securities classified as held-to-maturity are those securities for which there
is a positive intent and ability to hold to maturity. These securities are
carried at cost adjusted for amortization of premiums and accretion of
discounts, computed by the interest method.
Trading Account Securities
Trading account securities are those securities which are held for the purpose
of selling them at a profit. There were no trading account securities on hand
at December 31, 1997 and 1996.
5. LOANS
Loans are carried at the principal amount outstanding, net of the reserve for
loan losses. Interest income on loans is recognized based on the principal
balance outstanding and the stated rate of the loan.
( Continued )
22
<PAGE> 22
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE B - SUMMARY OF ACCOUNTING POLICIES (Continued)
6. RESERVE FOR LOAN LOSSES
For financial reporting purposes, the provision for loan losses charged to
operations is based upon management's estimations of the amount necessary to
maintain the reserve at an adequate level, considering losses charged to the
loan portfolio, current economic conditions, credit reviews of the loan
portfolio, and other factors warranting consideration. Reserves for any
impaired loans are generally determined based on collateral values. Loans are
charged against the reserve for loan losses when management believes the
collectibility of the principal is unlikely. The reserve is maintained at a
level believed adequate by management to absorb potential loan losses.
7. PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation. The
depreciation policy is to provide for depreciation over the estimated useful
lives of the assets using the straight-line method. Repairs and maintenance
expenditures are charged to operating expenses; major expenditures for
renewals and betterments are capitalized and depreciated over their estimated
useful lives.
8. ORGANIZATION COSTS
Organization costs consisting of incorporation expenses are included in other
assets and are being amortized to expense over a sixty-month period.
9. INCOME TAXES
A deferred tax asset or liability is recognized for the future income tax
effects attributable to the differences in the tax bases of assets or
liabilities and their reported amounts in the financial statements, as well as
operating loss and tax credit carryforwards. The deferred tax asset or
liability is measured using the enacted tax rate expected to apply to taxable
income in the period in which the deferred tax asset or liability is expected
to be realized.
10. STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks and federal funds sold. Generally, federal funds are sold
for a one-day period.
( Continued )
23
<PAGE> 23
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE B - SUMMARY OF ACCOUNTING POLICIES (Continued)
11. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business, the Bank enters into off-balance sheet
financial instruments consisting of commitments to extend credit, credit card
lines and standby letters of credit. Such financial instruments are recorded
in the financial statements when they are exercised.
12. NET LOSS PER SHARE
In February, 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, "Earnings Per Share," which is effective for years ending
after December 15, 1997. Under Statement No. 128, two per share amounts are to
be considered and presented, if applicable. Basic per share data is calculated
based on the weighted-average number of common shares outstanding during the
reporting period. Diluted per share data includes any dilution from potential
common stock outstanding, such as exercise of stock options.
The following table discloses the reconciliation of the numerators and
denominators of the basic and diluted computations:
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
December 31, 1997 December 31, 1996
---------------------------------------------- -------------------------------------------
Net Loss Shares Per Share Net Loss Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Data
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic per share $(261,993) 721,848 $ (.36) $(355,748) 612,435 $ (.58)
======= =======
Effect of dilutive
shares:
Stock options -- 8,865 -- --
--------- ------- --------- -------
Diluted per share $(261,993) 730,713 $ (.36) $(355,748) 612,435 $ (.58)
========= ======= ======= ========= ======= =======
</TABLE>
The diluted per share amounts were computed by applying the treasury stock
method.
24
<PAGE> 24
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE C - SECURITIES
Securities at December 31, 1997 and 1996, consisted of available-for-sale
securities with a carrying amount of $3,796,862 and $4,216,027, respectively,
and securities held-to-maturity with a carrying amount of $506,725 and $-0-,
respectively. The amortized cost, gross unrealized gains, gross unrealized
losses and estimated fair value of these securities at December 31, 1997 and
1996, are as follows:
<TABLE>
<CAPTION>
1997
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
Available-for-sale securities:
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 499,928 $ 3,822 $ -- $ 503,750
Obligations of U. S
Government agencies 500,000 -- 310 499,690
Mortgage-backed securities 2,126,525 9,721 1,181 2,135,065
Equity securities 167,950 -- -- 167,950
Other securities 490,407 -- -- 490,407
---------- ------- ------ ----------
$3,784,810 $13,543 $1,491 $3,796,862
========== ======= ====== ==========
Held-to-maturity securities:
Mortgage-backed securities $ 506,725 $ 877 $ -- $ 507,602
========== ======= ====== ==========
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Available-for-sale securities:
Obligations of U. S.
Government agencies $3,458,269 $ 3,486 $4,448 $3,457,307
Mortgage-backed securities 596,475 3,845 -- 600,320
Equity securities 158,400 -- -- 158,400
---------- ------- ------ ----------
$4,213,144 $ 7,331 $4,448 $4,216,027
========== ======= ====== ==========
</TABLE>
( Continued )
25
<PAGE> 25
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE C - SECURITIES (Continued)
The scheduled maturities of securities at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
Estimated
Amortized
Fair
Cost Value
---------- ---------
<S> <C> <C>
Due in one year or less $ 490,407 490,407
Due after one year through five years 999,928 1,003,440
Mortgage-backed securities and equity securities 2,801,200 2,810,617
---------- ----------
$4,291,535 $4,304,464
========== ==========
</TABLE>
Actual maturities can differ from contractual maturities because the
obligations may be called or prepaid with or without penalties.
Equity securities consist of stock in the Federal Reserve Bank, the
transferability of which is restricted.
No gains and losses were realized on available-for-sale securities in 1997 and
1996.
Securities with a carrying value of $499,310 and $-0- at December 31, 1997 and
1996, respectively, were pledged to secure public deposits and for other
purposes as required or permitted by law.
NOTE D - LOANS
Loans outstanding include the following types at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
(In Thousands)
1997 1996
--------------------------- -------
<S> <C> <C>
Commercial, financial, and agricultural $ 5,187 $ 1,106
Real estate - construction 2,031 36
Real estate - mortgage:
Commercial 4,166 1,508
Residential 3,698 1,205
Consumer 2,392 470
Other 13 2
-------- -------
17,487 4,327
Reserve for loan losses (193) (37)
-------- -------
$ 17,294 $ 4,290
======== =======
</TABLE>
Activity in the reserve for loan losses included a provision for loan losses
charged to operations of $156,418 and $37,148 for the years ended December 31,
1997 and 1996. For the period ended December 31, 1997 and 1996, the Bank had no
loans classified as impaired.
26
<PAGE> 26
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE E - PREMISES AND EQUIPMENT
The detail of premises and equipment at December 31, 1997 and 1996, is as
follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Premises:
Land $ 453,366 $ 452,121
Buildings and improvements 1,380,205 60,863
Equipment 421,225 342,443
Construction in process -- 878,543
----------- -----------
2,254,796 1,733,970
Less accumulated depreciation (162,571) (42,210)
----------- -----------
$ 2,092,225 $ 1,691,760
=========== ===========
</TABLE>
The amounts charged to operating expense for depreciation were $120,361 and
$42,210 in 1997 and 1996, respectively.
Included in other income for the year ended December 31, 1997, is a gain of
$112,177 from the sale of nonbanking real estate.
NOTE F - REGULATORY MATTERS
The Company and its subsidiary bank are subject to regulatory capital
requirements administered by federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to
qualitative judgment by regulators about components, risk weightings, and
other related factors.
To ensure capital adequacy, quantitative measures have been established by
regulators and these require the Company and the Bank to maintain minimum
amounts and ratios (set forth in the table below) of total and Tier I
capital (as defined) to risk-weighted assets (as defined), and of Tier I
capital to adjusted total assets (leverage). Management believes, as of
December 31, 1997, that the Company and the Bank exceed all capital adequacy
requirements.
(Continued)
27
<PAGE> 27
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE F - REGULATORY MATTERS (Continued)
At December 31, 1997, the Bank was categorized by regulators as
well-capitalized under the regulatory framework for prompt corrective
action. A financial institution is considered to be well-capitalized if it
has total risk-based capital of 10% or more, has Tier I risk-based ratio of
6% or more, and has a Tier I leverage capital ratio of 5% or more. There are
no conditions or anticipated events that, in the opinion of management,
would change the categorization.
The actual capital amounts and ratios at December 31, 1997 and 1996, are
presented in the following table. No amount was deducted from capital for
interest-rate risk exposure.
<TABLE>
<CAPTION>
($ In Thousands )
Company
(Consolidated) Bank
------------------- --------------------
Amount Ratio Amount Ratio
------ ----- ------ ------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Total risk-based $6,496 31.7% $5,023 24.5%
Tier I risk-based 6,303 30.7% 4,829 23.6%
Tier I leverage 6,303 30.3% 4,829 23.2%
DECEMBER 31, 1996
Total risk-based $6,655 91.8% $4,842 69.8%
Tier I risk-based 6,618 91.3% 4,805 69.1%
Tier I leverage 6,618 46.6% 4,805 34.5%
</TABLE>
The minimum amounts of capital and ratios as established by banking
regulators at December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
($ In Thousands )
Company
(Consolidated) Bank
------------------- --------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Total risk-based $1,640 8.0% $1,638 8.0%
Tier I risk-based 820 4.0% 819 4.0%
Tier I leverage 839 4.0% 832 4.0%
DECEMBER 31, 1996
Total risk-based $ 580 8.0% $ 556 8.0%
Tier I risk-based 290 4.0% 278 4.0%
Tier I leverage 569 4.0% 557 4.0%
</TABLE>
( Continued )
28
<PAGE> 28
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE F - REGULATORY MATTERS (CONTINUED)
The Company's dividends, if any, will be made from dividends received from the
Bank. The OCC limits dividends of a national bank in any calendar year to the
net profits of that year combined with the retained net profits for the two
preceding years. At December 31, 1997, the Bank had no retained net profits free
of the restrictions.
NOTE G - INCOME TAXES
The Company's accounting and reporting of income taxes is in accordance with
FASB Statement No. 109, "Accounting for Income Taxes." At December 31, 1997 and
1996, the Company had a net operating loss carryforward of approximately
$817,000 and $555,000, respectively, for financial reporting purposes. The
realization of any deferred tax asset by the Company depends upon having
sufficient taxable income in the carryforward periods. Under Statement No. 109,
deferred tax assets are recognized for future deductible amounts resulting from
differences in the financial statements and tax bases of assets, liabilities and
operating loss carryforwards. A valuation allowance is then established to
reduce the deferred tax asset to an amount that it is "more likely than not" to
be realized in the future. The net operating losses during the years ended
December 31, 1997 and 1996, generated deferred tax assets of approximately
$306,000 and $208,000, respectively, each of which have been fully offset by a
valuation allowance of the same amount.
For income tax accounting purposes, the Company had a consolidated net
operating loss of approximately $360,000 at December 31, 1997. The
difference in the loss carryforward for financial and tax reporting purposes
is primarily due to the deferral and amortization of pre-opening expenses
over a sixty-month period for tax reporting. Carryforwards of net operating
losses will expire in the year 2012 if not utilized.
29
<PAGE> 29
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE H - EMPLOYEE BENEFITS
The Company and the Bank have an employment agreement with its President and
Chief Executive Officer. The initial term of the agreement is for three
years with an extension provision for an additional three year term. It
provides for a minimum salary to be reviewed by the Board of Directors
annually and increased at its discretion and allows for participation in any
management incentive programs, long-term equity incentives, and eligibility
for grants of any stock options, restricted stock, and other similar awards.
In the first two years of operations of the Bank, bonuses were determined by
the Board of Directors. Thereafter, the bonuses will be based upon a
percentage of net profits after taxes of the Bank. Initially, the agreement
granted an option to purchase up to 3% of the number of shares sold in the
stock offering at a price per share equal to the initial offering price. The
options vested one-third per year for the first three years of operations of
the Bank and were subject to certain performance criteria as established by
the Board of Directors. The option to purchase had a term of ten years. The
stock option provisions of the agreement were superseded by the stock option
plan adopted in 1997. In addition, the agreement provides for additional
benefits in the event of termination after a change in control.
In 1997, the Company adopted the 1997 Stock Option Plan (the "Plan"). The plan
provides for the granting of options to purchase up to 72,185 shares of Company
common stock by directors and key employees of the Company and its subsidiary.
As of December 31, 1997, all shares had been granted. The options may be
exercised at an option price equal to the fair market value of the stock at the
grant date. The options may be exercised over ten years.
The Company accounts for stock options in accordance with Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees". In accordance with APB 25, no expense has been recorded in the
accompanying consolidated financial statements. If FASB No. 123, "Accounting
for Stock-Based Compensation" had been applied, the net loss from operations
for the years ended December 31, 1997 and 1996, would have been $300,468 and
$367,290, respectively, and the basic net loss per common share would have
been $.42 and $.60, respectively.
The Bank provides a deferred compensation arrangement (401(k) plan) whereby
employees contribute a percentage of their compensation. For employee
contributions of three percent or less, the Bank provides a matching
contribution. Contributions by the Bank totaled $8,646 in 1997 and $2,017 in
1996.
30
<PAGE> 30
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE I - RELATED PARTY TRANSACTIONS
In the normal course of business, the Bank makes loans to its directors and
officers and to companies in which they have a significant ownership
interest. These loans are made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons. Such loans amounted to
approximately $1,565,000 and $655,000 at December 31, 1997 and 1996,
respectively. In the opinion of management, such loans are consistent with
sound banking policies and are within applicable regulatory and lending
limitations.
The Bank contracted with a company in which a director is a principal to
construct a new bank building. Approximately $310,000 in 1997 and $580,000
in 1996 were paid to the company for construction costs. Management of the
Company and of the Bank are of the opinion such transactions are consistent
with sound business practices.
NOTE J - COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS OF CREDIT RISK
In the normal course of business, there are outstanding various commitments and
contingent liabilities, such as guaranties, commitments to extend credit, etc.,
which are not reflected in the accompanying financial statements. The Bank had
outstanding letters of credit of $82,500 and $50,000 at December 31, 1997 and
1996, and had made loan commitments of approximately $1,882,000 and $785,000 at
December 31, 1997 and 1996. The Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit and letters of credit is represented by the contractual amount of
the instrument. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for its lending activities. No significant
losses are anticipated as a result of these transactions.
The primary market area served by the Bank is Forrest and Lamar Counties
within South Mississippi. Management closely monitors its credit
concentrations and attempts to diversify the portfolio within its primary
market area. As of December 31, 1997, management does not consider there to
be any significant credit concentration within the loan portfolio. Although
the Bank's loan portfolio, as well as existing commitments, reflect the
diversity of its primary market area, a substantial portion of a borrower's
ability to repay a loan is dependent upon the economic stability of the
area.
The Bank has Sixteenth Section land leases and contracts for bank premises.
The leases have 40 year terms with annual rentals of $20,240 subject to
reappraisals every 10 years.
31
<PAGE> 31
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE K - PREOPENING EXPENSES
A summary of the components of pre-opening expenses for the year ended
December 31, 1996, is as follows:
<TABLE>
<S> <C>
Salaries and employee benefits $153,736
Professional fees 19,557
Marketing and public relations 9,910
Occupancy costs 22,526
Supplies and postage 7,607
Other 10,649
--------
$223,985
========
</TABLE>
NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB No. 107, "Disclosure about Fair Value of Financial Instruments,"
requires the Company to disclose estimated fair values for its financial
instruments. Fair value estimates, methods, and assumptions are set forth
below. The following information does not purport to represent the aggregate
consolidated fair value of the Company.
Cash and Cash Equivalents - The carrying amount of these financial
instruments (cash and due from banks and federal funds sold) approximate
fair value.
Investment Securities - Fair values are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based
on quoted market prices of comparable instruments.
Loans - For certain categories of loans, such as variable rate loans and
other lines of credit, the carrying amount, adjusted for credit risk, is a
reasonable estimate of fair value as the Company has the ability to reprice
the loan as interest rate changes occur. The fair value of other 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.
( Continued )
32
<PAGE> 32
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Deposits - The fair value of demand deposits, savings accounts, and money
market accounts is the amount payable on demand at the reporting date. The
fair value of fixed-maturity certificates of deposit is estimated by
discounting the future cash flows using rates currently offered for deposits
of similar remaining maturities.
Commitments to Extend Credit - Management is of the opinion the estimated
fair value is not significantly different than the contractual or notational
amounts.
The carrying amount and estimated fair value of the Company's consolidated
financial instruments are as follows:
<TABLE>
<CAPTION>
(In Thousands)
December 31, 1997 December 31, 1996
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 2,840 $ 2,840 $ 3,770 $ 3,770
======== ======== ======== ========
Investment securities $ 4,304 $ 4,304 $ 4,216 $ 4,216
======== ======== ======== ========
Loans $ 17,487 $ 17,466 $ 4,327 $ 4,320
Reserve for loan losses (193) -- (37) --
-------- -------- -------- --------
Net Loans $ 17,294 $ 17,466 $ 4,290 $ 4,320
======== ======== ======== ========
Financial Liabilities:
Deposits:
Noninterest-bearing demand $ 2,479 $ 2,479 $ 1,566 $ 1,566
Interest-bearing demand 6,666 6,666 3,912 3,912
Savings 200 200 71 71
Certificates of deposit 11,713 11,719 1,958 1,960
-------- -------- -------- --------
Total Deposits $ 21,058 $ 21,064 $ 7,507 $ 7,509
======== ======== ======== ========
</TABLE>
Statement No. 107 prohibits adjustments for any value derived from the expected
retention of deposits for a future time period. That value, often referred to as
a core deposit intangible, is neither included in the fair value amounts nor
recorded as an intangible asset in the consolidated balance sheets.
33
<PAGE> 33
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE M - PARENT COMPANY FINANCIAL INFORMATION
The balance sheets, statements of operations, and cash flows for The First
Bancshares, Inc. (parent only) follow:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Assets:
Cash $ -- $ 461
Interest-bearing deposit with subsidiary bank 1,480,758 1,515,077
Investment in subsidiary bank 4,861,510 4,807,805
Fixed assets -- 332,077
Other 32,861 43,518
---------- ----------
$6,375,129 $6,698,938
========== ==========
Liabilities:
Other $ 7,425 $ 78,410
Stockholders' equity 6,367,704 6,620,528
---------- ----------
$6,375,129 $6,698,938
========== ==========
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended
December 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Income:
Interest $ 73,435 $ 242,583
Other 8,134 --
---------- ----------
81,569 242,583
Expenses:
Other 44,034 28,884
---------- ----------
Income before income taxes and equity in
undistributed loss of subsidiary 37,535 213,699
Income taxes 7,188 75,410
---------- ----------
Income before equity in undistributed loss
of subsidiary 30,347 138,289
Equity in undistributed loss of subsidiary (292,340) (494,037)
---------- ----------
Net loss $ (261,993) $ (355,748)
========== ==========
</TABLE>
( Continued )
34
<PAGE> 34
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE N - PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
December 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (261,993) $ (355,748)
Adjustments to reconcile net loss to net cash
and cash equivalents:
Equity in undistributed loss of subsidiary 292,340 494,037
Other, net (60,327) 128,126
---------- ----------
Net cash provided by (used in) operating activities (29,980) 266,415
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in subsidiary -- (5,298,960)
Acquisition of fixed assets (4,800) (183,732)
---------- ----------
Net cash used in investing activities (4,800) (5,482,692)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock, net -- 7,173,204
Payment of note payable -- (441,950)
---------- ----------
Net cash provided by financing activities -- 6,731,254
---------- ----------
Net increase (decrease) in cash and cash equivalents (34,780) 1,514,977
Cash and cash equivalents at beginning of period 1,515,538 561
---------- ----------
Cash and cash equivalents at end of period $1,480,758 $1,515,538
========== ==========
</TABLE>
35
<PAGE> 35
SHAREHOLDER INFORMATION
- ----------------------------------------------------
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at 5:00 p.m., Tuesday,
April 28, 1998:
The First National Bank of South Mississippi
6480 U. S. Highway 98 West
Hattiesburg, Mississippi 39402
All shareholders are invited.
FORM 10K/FINANCIAL INFORMATION
Copies of The First Bancshares, Inc. Annual Report to the Securities &
Exchange Commission, Form 10K, and other information may be obtained
from:
Charles T. Ruffin
The First National Bank of South Mississippi
P. O. Box 15549
Hattiesburg, MS 39404-5549
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, N. J. 07016
1-800-368-5948
INDEPENDENT AUDITOR
T. E. Lott & Company
A Professional Association
Certified Public Accountants
Columbus, Mississippi
STOCK INFORMATION
- ----------------------------------------------------
The First Bancshares, Inc. common stock is not currently listed or traded on any
exchange. There is no established public trading market in the common stock and
one is not expected to develop in the near future. Transactions in the common
stock are negotiated privately and management does not have knowledge of any
transactions involving the Company's stock.
The Company's articles of incorporation authorize it to issue up to 10,000,000
shares of common stock, par value $1.00 per share (the "Common Stock"), of which
721,848 were sold in the Company's initial public offering and are outstanding
as of March 9, 1998. As of December 31, 1997, the Company had 719 shareholders
of record.
36
<PAGE> 36
DIRECTORS
- ----------------------------------------------------
David E. Johnson
President and CEO
The First Bancshares, Inc.
The First National Bank of South Mississippi
David Waldron Bomboy
Orthopedic Surgeon
E. Ricky Gibson
President and Owner, N & H Electronics
John T. Hudson
Past President and Owner, R & R Trucking
Fred A. McMurry
Vice President and General Manager
Havard Pest Control, Inc.
Dawn T. Parker
H P Cattle Company
Chairman of the Board
The First Bancshares, Inc.
The First National Bank of South MS
Perry E. Parker
Currency Options Trader, Deutsche Bank, London
Ted E. Parker
Cattle Farmer
Dennis L. Pierce
Real Estate Developer
A. L. "Pud" Smith
Owner, A. L. Smith Oil Co., Inc.
Andrew D. Stetelman
London and Stetelman Realtors
Charles T. Ruffin
Executive Vice President and Chief Operating Officer,
The First Bancshares, Inc.
The First National Bank of South Mississippi
37
<PAGE> 37
OFFICERS
- ----------------------------------------------------
THE FIRST BANCSHARES, INC.
Dawn T. Parker
Chairman of the Board
David E. Johnson
President and
Chief Executive Officer
Chandra B. Kidd
Corporate Secretary
THE FIRST NATIONAL BANK OF SOUTH MS
Dawn T. Parker
Chairman of the Board
David E. Johnson
President and
Chief Executive Officer
Charles T. Ruffin
Executive Vice President
Chief Operating Officer
Irvinder "Bandy" Singh
Senior Vice President and
Senior Lender
Jessie M. Laird
Assistant Vice President
Branch Manager, Purvis, MS Branch
Canda R. Smith
Assistant Vice President and Mtg Loan Originator
John M. Rogers, II
Assistant Vice President
Operations
Chandra B. Kidd
Assistant Vice President &
Corporate Secretary
38
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
First National Bank of South Mississippi
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 970,262
<INT-BEARING-DEPOSITS> 15,948,103
<FED-FUNDS-SOLD> 1,870,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,796,862
<INVESTMENTS-CARRYING> 506,725
<INVESTMENTS-MARKET> 507,602
<LOANS> 17,487,427
<ALLOWANCE> 193,566
<TOTAL-ASSETS> 27,526,638
<DEPOSITS> 21,058,385
<SHORT-TERM> 0
<LIABILITIES-OTHER> 5,900
<LONG-TERM> 0
0
0
<COMMON> 721,848
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 27,526,638
<INTEREST-LOAN> 1,141,101
<INTEREST-INVEST> 290,247
<INTEREST-OTHER> 91,354
<INTEREST-TOTAL> 1,522,702
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 641,147
<INTEREST-INCOME-NET> 881,555
<LOAN-LOSSES> 156,418
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,203,254
<INCOME-PRETAX> (261,993)
<INCOME-PRE-EXTRAORDINARY> (261,993)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (261,993)
<EPS-PRIMARY> (.36)
<EPS-DILUTED> (.36)
<YIELD-ACTUAL> 5.11
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 37,148
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 193,566
<ALLOWANCE-DOMESTIC> 193,566
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
