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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, 1998
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)
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)
(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
---- ----
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 profit for its most recent fiscal year was $66,772. As of
March 15, 1999, 1,150,691 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, 1999 was $13,497,270. This calculation is based
upon an estimate of the fair market value of the Common Stock by the Company's
Board of Directors of $15 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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DOCUMENTS INCORPORATED BY REFERENCE
Company's 1998 Annual Report and Proxy Statement.
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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 Company was incorporated on June 23, 1995 to serve as a holding
company for The First National Bank of South Mississippi (the Hattiesburg
bank). The Hattiesburg bank began operations on August 5, 1996 from its main
office in the Oak Grove community, which is on the outskirts of Hattiesburg,
Mississippi, and in November 1996 opened a branch office in Purvis,
Mississippi. The Hattiesburg bank opened an additional branch office on Lincoln
Road in Hattiesburg in the fourth quarter of 1998. In June 1998, the Company
entered into a bank development agreement with the organizers of the Laurel
bank, a proposed de novo community bank in Laurel, Mississippi. In connection
with the opening of the Laurel bank, the Company raised approximately $6.4
million in a public offering which commenced in September 1998 and closed on
December 31, 1998. The Company used $5.0 million of the proceeds of the
offering to capitalize the Laurel bank. The Laurel bank began operations on
January 19, 1999.
The Company currently engages in a general commercial and retail
banking business through the Hattiesburg bank and the Laurel bank,
characterized by personalized service and local decision-making, emphasizing
the banking needs of small- to medium-sized businesses, professional concerns,
and individuals.
LOCATION AND SERVICE AREA
The Hattiesburg Bank. The Hattiesburg bank serves the cities of
Hattiesburg and Purvis and the surrounding areas of Lamar and Forrest Counties,
Mississippi. The Hattiesburg bank has a main office located west of the city of
Hattiesburg, Mississippi, in Lamar County. The Hattiesburg bank also has a
branch office located in a modular building on Highway 589 in the city of
Purvis, Mississippi, also in Lamar County, and a third office located at the
intersection of Lincoln Road and South 28th Avenue in Hattiesburg.
The main office primarily serves the area in and around the northern
portion of Lamar County which is west of Hattiesburg. The Purvis 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 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
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Interstate 59. Major employers located in the Lamar and Forrest County areas
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 and
Forrest County areas include service industries, wholesale and retail trade,
manufacturing, and transportation and public utilities.
The Laurel Bank. The Laurel bank serves the city of Laurel and the
surrounding area of Jones County, Mississippi. The Laurel bank's permanent main
office will be located at 1945 Highway 15 North, Laurel, Mississippi. During
the first year of operation, the Laurel bank is operating from a temporary
facility located adjacent to the site of its permanent facility. The Laurel
bank expects to draw 75% of its retail business within a five mile radius of
this location, with the remaining business coming from other areas of Jones
County, as well as portions of Jasper County, Wayne County, Smith County, and
Covington County that are within a 15 mile radius of the Laurel bank.
MARKETING FOCUS
The Hattiesburg bank's primary service area includes portions of Lamar
and Forrest Counties, and the Laurel bank's primary service area includes Jones
County, Mississippi. According to the U.S. Census Bureau, Lamar County is one
of the fastest growing counties in Mississippi with a population of 33,642 in
1995, reflecting a 10.6% increase from the 1990 population of 30,424. The per
capita income in Lamar County was $14,450 in 1993, as compared to $14,858 for
Mississippi as a whole. Similarly, the population of Forrest County grew 6.5%,
from 68,134 to 72,553, between 1990 and 1995, and the population of Jones
County grew 1.6%, from 62,031 to 63,001, during this period. In 1993, the per
capita income was $14,824 in Forrest County and $15,146 in Jones County, as
compared to $14,858 for Mississippi as a whole.
Total nonagricultural employment in Lamar, Forrest, and Jones Counties
grew by 6.7%, 4.1%, and 2.0% respectively from 1995 to 1997. During the same
time, unemployment fell from 3.3% to 2.6% in Lamar County, from 4.4% to 3.4% in
Forrest County, and from 4.0% to 3.6% in Jones County, all of which are lower
than the 5.7% unemployment rate for the State of Mississippi.
Most of the banks in the Pine Belt region are local branches of large
regional banks. Although size gives the larger banks certain advantages in
competing for business from large corporations, including higher lending limits
and the ability to offer services in other areas of Mississippi and elsewhere,
the Company believes that there remains a demand for community banks in the
Pine Belt region that the Company can successfully fulfill. As a result, the
Company 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 Company strives to provide its customers
with the breadth of products comparable to a regional bank, while maintaining
the quick response and personal service of a locally headquartered bank. The
Company's advertising emphasizes the Company's local ownership, community bank
nature, and ability to provide more personalized service than its competition.
BANKING SERVICES
The Company strives to provide its customers with the breadth of
products and services comparable to those offered by large regional banks,
while maintaining the quick response and personal
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service of a locally owned and managed bank. In addition to offering a full
range of deposit services and commercial and personal loans, the Hattiesburg
bank offers products such as mortgage loan originations. The following is a
description of the products and services offered or planned to be offered by
the Hattiesburg and Laurel banks.
- - Deposit Services. The banks offer 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 each bank's
principal market area at rates competitive to those offered by other
banks in the area. In addition, the banks offer certain retirement
account services, such as Individual Retirement Accounts (IRAs). All
deposit accounts are insured by the Federal Deposit Insurance
Corporation (the "FDIC") up to the maximum amount allowed by law. The
banks solicit these accounts from individuals, businesses,
associations and organizations, and governmental authorities.
- - Loan Products. The banks offer a full range of commercial and personal
loans. Commercial loans include both secured and unsecured loans for
working capital (including loans secured by inventory and accounts
receivable), business expansion (including acquisition of real estate
and improvements), and purchase of equipment and machinery. Consumer
loans include equity lines of credit and secured and unsecured loans
for financing automobiles, home improvements, education, and personal
investments. The banks also make real estate construction and
acquisition loans. The banks' 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 banks are subject to a loans-to-one-borrower
limit of an amount equal to 10% of the bank's unimpaired capital and
surplus. The banks may not make any loans to any director, officer,
employee, or 10% shareholder unless the loan is approved by the Board
of Directors of the bank and is made on terms not more favorable to
such a person than would be available to a person not affiliated with
the bank.
- - Mortgage Loan Division. The Hattiesburg bank recently established a
mortgage loan division through which it will broaden the range of
services that it offers to its customers. The mortgage loan division
originates loans to purchase existing or construct new homes and to
refinance existing mortgages. The Hattiesburg bank anticipates
generating additional fee income by selling most of these loans in the
secondary market and cross-selling its other products and services to
its mortgage customers.
- - Other Services. Other 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
Hattiesburg bank is, and the Laurel bank will be, associated with the
Money Belt, Gulfnet, and Plus networks of automated teller machines
that may be used by the Hattiesburg bank's customers throughout
Mississippi and other regions. The banks also offer VISA and
MasterCard credit card services through a correspondent bank.
COMPETITION
Banks generally compete with other financial institutions through the
selection of banking products and services offered, the pricing of services,
the level of service provided, the convenience and availability of services,
and the degree of expertise and the personal manner in which services are
offered. Mississippi law permits statewide branching by banks and savings
institutions, and many
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financial institutions in the state have branch networks. Consequently,
commercial banking in Mississippi is highly competitive. Many large banking
organizations currently operate in the Company's market area, several of which
are controlled by out-of-state ownership. In addition, competition between
commercial banks and thrift institutions (savings institutions and credit
unions) has been intensified significantly by the elimination of many previous
distinctions between the various types of financial institutions and the
expanded powers and increased activity of thrift institutions in areas of
banking which previously had been the sole domain of commercial banks. Recent
legislation, together with other regulatory changes by the primary regulators
of the various financial institutions, has resulted in the almost total
elimination of practical distinctions between a commercial bank and a thrift
institution. Consequently, competition among financial institutions of all
types is largely unlimited with respect to legal ability and authority to
provide most financial services.
The Company faces increased competition from both federally-chartered
and state-chartered financial and thrift institutions, as well as credit
unions, consumer finance companies, insurance companies, and other institutions
in the Company's market area. Some of these competitors are not subject to the
same degree of regulation and restriction imposed upon the Company. Many of
these competitors also have broader geographic markets and substantially
greater resources and lending limits than the Company and offer certain
services such as trust banking that the Company does not currently provide. In
addition, many of these competitors have numerous branch offices located
throughout the extended market areas of the Company that may provide these
competitors with an advantage in geographic convenience that the Company does
not have at present.
Currently there are eight other commercial banks, one savings
institution, and three credit unions operating in the Hattiesburg bank's
primary service area, and seven other commercial banks and two credit unions
operating in the Laurel bank's primary service area.
EMPLOYEES
As of March 15, 1999, the Hattiesburg bank had 26 full-time employees
and three part-time employees, and the Laurel bank had 10 full-time employees.
The Company does not have any employees other than its officers.
SUPERVISION AND REGULATION
The Company and its banks 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 banks 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.
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THE COMPANY
Because it owns the outstanding capital stock of the Hattiesburg and
Laurel banks, 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 banks' 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 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, nonbanking 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
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contribution to the banks, and such loans may be repaid from dividends paid
from the banks to the Company (although the ability of the banks to pay
dividends is subject to regulatory restrictions as described below in "The
Banks - Dividends"). The Company is also able to raise capital for contribution
to the banks 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 banks and to commit resources to support the banks 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 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 BANKS
The Hattiesburg and Laurel banks operate as national banking
associations incorporated under the laws of the United States and subject to
examination by the OCC. Deposits in the banks 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
banks' 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 banks to maintain certain capital
ratios and imposes limitations on the banks' aggregate investment in real
estate, bank premises, and furniture and fixtures. The banks are required by
the OCC to prepare quarterly reports on their financial condition and to
conduct an annual audit of their 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
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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 banks 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 determined by its primary federal
regulator on a semiannual 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 banks, 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 banks' cost of funds, and
there can be no assurance that such cost can be passed on to the banks'
customers.
Transactions With Affiliates and Insiders. The banks are subject to
Section 23A of the Federal Reserve Act, which places limits on the amount of
loans to and certain other transactions with affiliates, as well as 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.
The banks are also subject to Section 23B of the Federal Reserve Act,
which prohibits an institution from engaging in certain transactions with
affiliates unless the transactions are on terms substantially the same, or at
least as favorable to such institution, as those prevailing at the time for
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comparable transactions with nonaffiliated companies. The banks are 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 the bank has transferred to
surplus no less than one-tenth of its 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 banks 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 banks may open
branches throughout Mississippi with the prior approval of the OCC. In
addition, with prior regulatory approval, the banks are 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 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, the 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 banks are subject to state usury laws and certain federal
laws concerning interest rates. The banks' loan operations are 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 Act 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 banks 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
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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 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 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 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, 1998, the
Company and the Hattiesburg bank were qualified as "well capitalized." Upon
opening in January 1999, the Laurel bank also qualified as "well capitalized."
9
<PAGE> 11
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.
These capital guidelines can affect the Company in several ways. If
the Company continues to grow at a rapid pace, a premature "squeeze" on capital
could occur making a capital infusion necessary. The requirements could impact
the Company's ability to pay dividends. The Company's present capital levels
are more than adequate; however, rapid growth, poor loan portfolio performance,
or poor earnings performance could change the Company's capital position in a
relatively short period of time.
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; 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
10
<PAGE> 12
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 banks
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 to 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 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 Hattiesburg Bank. The Hattiesburg bank has a main office located
west of the city of Hattiesburg, Mississippi, in Lamar County. The main office
is located in a 10,000 square foot facility which the Company constructed and
opened in January 1997 on a two acre plot of land at the southwest corner of
U.S. Highway 98 and Old Highway 11. The Hattiesburg bank also has a branch
office located in a modular building on Highway 589 in the city of Purvis,
Mississippi, also in Lamar County, and a third office in a 3,300 square foot
facility located at the intersection of Lincoln Road and South 28th Avenue in
Hattiesburg.
The Laurel Bank. The Laurel bank will serve the city of Laurel and the
surrounding area of Jones County, Mississippi. The Laurel bank's permanent main
office will be located on an eight acre parcel at 1945 Highway 15 North,
Laurel, Mississippi. During the first year of operation, the Laurel bank is
operating from a temporary facility located adjacent to the site of its
permanent facility.
The Company believes that the banks' facilities will adequately serve
their needs.
ITEM 3. LEGAL PROCEEDINGS.
Neither the Company nor either 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.
11
<PAGE> 13
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 were outstanding as of December 31, 1998. In
addition, as of December 31, 1998 the Company had another $6.4 million in
subscription proceeds which it held in escrow pending issuance of stock
certificates for the shares sold in connection with the formation of the Laurel
bank. In January 1999 these funds were released from escrow and added to
shareholders' equity, and the Company issued an additional 428,843 shares of
its common stock. As of March 15, 1999, the Company had 1,150,691 share
outstanding, held by 1,203 shareholders of record.
There is currently no established or liquid market for the Common
Stock. Although the Company intends to make arrangements with one or more
market makers to trade the Common Stock on the OTC Bulletin Board, the Company
does not anticipate that a market for the Common Stock will exist or develop in
the near term following the offering, and there is a risk that no market will
develop for the Common Stock at all. The development of a public trading market
depends on the existence of willing buyers and sellers, the presence of which
is not within the control of the Company or any market maker.
The Company intends to list the Common Stock on The Nasdaq National
Market, the Nasdaq SmallCap Market, the American Stock Exchange, or another
securities exchange as soon as it meets the requirements to do so, but the
Company does not expect to meet these listing requirements for at least two
years. The decisions whether and where to apply for listing have not yet been
made and remain in the discretion of the Company. There is no assurance that
the Company will apply for or be accepted for listing within any particular
period of time, if at all.
There is currently no established public trading market in the Common
Stock, and trading and quotations of the Common Stock have been limited and
sporadic. The Company issued 721,848 shares of its currently issued and
outstanding Common Stock in its initial public offering, which closed on August
27, 1996. The price per share in the initial public offering was $10.00. The
Company issued an additional 428,843 shares of its common stock in its public
offering in connection with the formation of the Laurel bank, which closed on
December 31, 1998. The price per share in this offering was $15.00. The Company
is not aware of all prices at which the Common Stock has been traded since the
initial offering. Based on information available to the Company from a limited
number of sellers and purchasers of Common Stock, the Company is aware of
several transactions between August 27, 1996 and December 31, 1996, all of
which were at $10.00 per share, and the Company believes transactions in the
Common Stock ranged from $10.00 to $12.00 during 1997 and from $12.00 to $17.50
during 1998.
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.
12
<PAGE> 14
(b) Pursuant to Commission Rule 463, the Company is obligated to
report on the use of proceeds from its initial public offering. The information
provided below is given as of December 31, 1998.
(1) The Company's registration statement on Form SB-2
(File No.333-61081) was declared effective by the
Commission on September 16, 1998.
(2) The offering commenced on September 16, 1998.
(3) The offering did not terminate before any securities
were sold.
(4)
(i) The offering terminated on December
31,1998, before the sale of all securities
that the Company had registered.
(ii) The Company's officers and directors sold
shares in the offering, but did not receive
any commissions for their efforts.
(iii) Common Stock was the only class of
securities registered in the offering.
(iv) 533,333 shares ($7,999,995) of Common Stock
was registered, of which 428,843 shares
($6,432,645) were sold.
(v) The Company incurred approximately $61,625
in (deferred) expenses in connection with
the issuance and distribution of the Common
Stock in the offering. All of these
expenses were paid directly or indirectly
to persons or entities other than
directors, officers, persons owning 10% or
more of the Company's securities, or
affiliates of the Company.
(vi) The net proceeds to the Company after
deducting the total expenses described
above were $6,371,020.
(vii) Through December 31, 1998, $6,371,020 of
the net proceeds of the offering were
invested in cash. None of the net proceeds
have been paid directly or indirectly to
directors, officers, persons owning 10% or
more of the Company's securities, and
affiliates of the Company.
(viii) The use of proceeds described above does
not represent a material change from the
use of proceeds disclosed in the prospectus
for the offering.
13
<PAGE> 15
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
In response to this Item, the information contained on pages 4 through
23 of the Company's Annual Report to Shareholders for the year ended December
31, 1998 is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
In response to this Item, the information contained on pages 25
through 28 of the Company's Annual Report to Shareholders for the year ended
December 31, 1998 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 or about page
10 of the Company's Proxy Statement for the Annual Meeting of Shareholders to
be held on May 27, 1999 is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
In response to this Item, the information contained on pages 6 through
7 of the Company's Proxy Statement for the Annual Meeting of Shareholders to be
held on May 27, 1999 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
8 of the Company's Proxy Statement for the Annual Meeting of Shareholders to be
held on May 27, 1999 is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In response to this Item, the information contained on page 10 of the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held on
May 27, 1999 is incorporated herein by reference.
14
<PAGE> 16
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. Amended and Restated Articles of Incorporation (incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement No.
33-94288 on Form S-1).
3.2. Bylaws (incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement No. 33-94288 on Form S-1).
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 to the Company's
Registration Statement No. 33-94288 on Form S-1).
4.2. Form of Certificate of Common Stock (incorporated by reference to
Exhibit 4.2 to the Company's Registration Statement No. 33-94288 on
Form S-1).
5.1. Opinion of Nelson Mullins Riley & Scarborough, L.L.P. Regarding
Legality (incorporated by reference to Exhibit 5.1 to the Company's
Registration Statement No. 333-61081 on Form SB-2).
10.1. Amended and restated employment agreement dated November 20, 1995, by
and 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).
10.2. Employment Agreement dated June 10, 1998 by and between the Company
and The First National Bank of the Pine Belt and William M. Renovich,
Jr. (incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed June 25, 1998).
10.3. Bank Development Agreement dated June 19, 1998 by and among the
Company and the organizers of The First National Bank of the Pine Belt
(incorporated by reference to Exhibit 10.2 to the Company's Current
Report on Form 8-K filed June 25, 1998).
10.4. First Bancshares, Inc. 1997 Stock Option Plan 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).
10.5 Promissory Note dated June 16, 1998 by and between the Company and The
First National Bank of the Pine Belt (incorporated by reference to
Exhibit 10.5 to the Company's Registration Statement No. 333-61081 on
Form SB-2).
10.6 Construction Agreement dated March 18, 1998 between The First National
Bank of South Mississippi and Piercon, Inc. (incorporated by reference
to Exhibit 10.6 to the Company's Registration Statement No.
333-61081 on Form SB-2).
10.6 Option to Purchase Real Estate dated June 29, 1998 between the Pine
Belt Organizers, LLC and Frances B. Wheelis (incorporated by reference
to Exhibit 10.7 to the Company's Registration Statement No. 333-61081
on Form SB-2).
13 The Company's 1998 Annual Report
15
<PAGE> 17
21.1 Subsidiaries of the Company
23.1. Consent of Independent Public Accountants (incorporated by reference
to Exhibit 23.1 to the Company's Registration Statement No. 333-61081
on Form SB-2)
23.2. Consent of Nelson Mullins Riley & Scarborough, L.L.P. (incorporated by
reference to Exhibit 23.2 to the Company's Registration Statement No.
333-61081 on Form SB-2).
24.1. Power of Attorney (incorporated by reference to Exhibit 24.1 to the
Company's Registration Statement No. 333-61081 on Form SB-2).
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, 1998.
16
<PAGE> 18
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: March 30, 1999 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>
- --------------------------------------
David Waldron Bomboy Director
- --------------------------------------
M. Ray (Hoppy) Cole, Jr. Director
/s/ E. Ricky Gibson March 30, 1999
- --------------------------------------
E. Ricky Gibson Director
/s/ David E. Johnson March 30, 1999
- --------------------------------------
David E. Johnson Director, President and Chief
Executive Officer
/s/ Fred A. McMurry March 30, 1999
- --------------------------------------
Fred A. McMurry Director
/s/ Dawn T. Parker March 30, 1999
- --------------------------------------
Dawn T. Parker Director
</TABLE>
17
<PAGE> 19
<TABLE>
<S> <C> <C>
- --------------------------------------
Perry Edward Parker Director
/s/ Ted E. Parker March 30, 1999
- --------------------------------------
Ted E. Parker Director
/s/ Dennis L. Pierce March 30, 1999
- --------------------------------------
Dennis L. Pierce Director
- --------------------------------------
David L. Rice, III Director
/s/ Charles T. Ruffin March 30, 1999
- --------------------------------------
Charles T. Ruffin Director, Principal Financial and
Accounting Officer
- --------------------------------------
J. Douglas Seidenburg Director
Director
- --------------------------------------
A.L. "Pud" Smith
/s/ Andrew D. Stetelman March 30, 1999
- --------------------------------------
Andrew D. Stetelman Director
</TABLE>
18
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3.1. Amended and Restated Articles of Incorporation (incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement No.
33-94288 on Form S-1).
3.2. Bylaws (incorporated by reference to Exhibit 3.2 to the Company's Registration
Statement No. 33-94288 on Form S-1).
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 to the Company's
Registration Statement No. 33-94288 on Form S-1).
4.2. Form of Certificate of Common Stock (incorporated by reference to
Exhibit 4.2 to the Company's Registration Statement No. 33-94288 on
Form S-1).
5.1. Opinion of Nelson Mullins Riley & Scarborough, L.L.P. Regarding
Legality (incorporated by reference to Exhibit 5.1 to the Company's
Registration Statement No. 333-61081 on Form SB-2).
10.5. Amended and restated employment agreement dated November 20, 1995, by
and 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).
10.6. Employment Agreement dated June 10, 1998 by and between the Company
and The First National Bank of the Pine Belt and William M. Renovich,
Jr. (incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed June 25, 1998).
10.7. Bank Development Agreement dated June 19, 1998 by and among the
Company and the organizers of The First National Bank of the Pine Belt
(incorporated by reference to Exhibit 10.2 to the Company's Current
Report on Form 8-K filed June 25, 1998).
10.8. First Bancshares, Inc. 1997 Stock Option Plan 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).
10.7 Promissory Note dated June 16, 1998 by and between the Company and The
First National Bank of the Pine Belt (incorporated by reference to
Exhibit 10.5 to the Company's Registration Statement No. 333-61081 on
Form SB-2).
10.6 Construction Agreement dated March 18, 1998 between The First National
Bank of South Mississippi and Piercon, Inc. (incorporated by reference
to Exhibit 10.6 to the Company's Registration Statement No.
333-61081 on Form SB-2).
10.8 Option to Purchase Real Estate dated June 29, 1998 between the Pine Belt
Organizers, LLC and Frances B. Wheelis (incorporated by reference to
Exhibit 10.7 to the Company's Registration Statement No. 333-61081 on
Form SB-2).
13 The Company's 1998 Annual Report
</TABLE>
19
<PAGE> 21
<TABLE>
<S> <C>
21.1 Subsidiaries of the Company
23.1. Consent of Independent Public Accountants (incorporated by reference
to Exhibit 23.1 to the Company's Registration Statement No. 333-61081
on Form SB-2)
23.2. Consent of Nelson Mullins Riley & Scarborough, L.L.P. (incorporated by
reference to Exhibit 23.2 to the Company's Registration Statement No.
333-61081 on Form SB-2).
24.1. Power of Attorney (incorporated by reference to Exhibit 24.1 to the
Company's Registration Statement No. 333-61081 on Form SB-2).
27.1. Financial Data Schedule (For SEC use only)
</TABLE>
20
<PAGE> 1
EXHIBIT 13
THE FIRST BANCSHARES, INC.
1998 ANNUAL REPORT
<PAGE> 2
CORPORATE PURPOSE
CUSTOMERS
The First Bancshares, Inc. customers are our reason for being. They are the
constant in every decision that we make. We promise to be responsive to our
customers' needs by providing superior financial products and services, which
will be offered in combination with the high level of personal attention our
customers deserve.
SHAREHOLDERS
The First Bancshares, Inc. will strive to maximize the value of our
shareholders' investment and will conduct its business in a manner that will
instill a sense of pride in our company.
EMPLOYEES
The First Bancshares, Inc. will foster a dynamic team environment for our
employees that creates opportunities for personal and professional growth. We
will respect their opinions, believe in their abilities, support them and
recognize their contributions to the success of the company.
COMMUNITY
The First Bancshares, Inc., as locally-owned or managed financial institutions,
will be in touch with the communities that we serve, listening and responding
to their credit and financial service needs.
We will direct the energy and excitement of our team toward being a good friend
and neighbor and toward enhancing the quality of life in our communities.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders.................................................................3
Management's Discussion and Analysis................................................4-23
Report of Independent Auditor.........................................................24
Consolidated Financial Statements..................................................25-28
Notes to Consolidated Financial Statements.........................................29-48
Directors and Officers................................................................49
Shareholder and Stock Information.....................................................50
</TABLE>
<PAGE> 4
TO OUR SHAREHOLDERS AND FRIENDS
Dear Fellow Shareholder:
We are happy to report that your company reported a net profit of
$67,000 in 1998. This was an improvement of $329,000 from the loss of $262,000
in 1997.
Although 1998 was only our second full year of operation, it was an
eventful year for the Company. We opened our Lincoln Road-Hattiesburg branch in
late 1998. We also introduced internet banking in the fall of 1998. Our most
exciting accomplishment was entering into a bank development agreement with a
group of organizers in Laurel, Mississippi, with the end result being a
separately chartered bank being opened in Laurel in January of 1999. We are
happy to have 490 new shareholders, having raised an additional $6,432,645 in
capital at $15.00 per share.
During 1998 total assets increased from $27.5 million to $49.9
million. Loans grew by 85% and deposits by 69%.
Our plans for 1999 are to grow our existing offices in order to reach
a higher degree of profitability in the Hattiesburg bank while trying to
minimize our loss in the first year of operation of the Laurel bank. We do
expect the company to show a consolidated loss in 1999 due to the initial
expenses of the Laurel bank.
We continue to appeal to you, our shareholders, to support your bank
by taking advantage of our banking services.
David E. Johnson
Chairman of the Board
And Chief Executive Officer
3
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was incorporated on June 23, 1995 to serve as a holding
company for The First National Bank of South Mississippi (our Hattiesburg
bank). The Hattiesburg bank began operations on August 5, 1996 from its main
office in the Oak Grove community, which is on the outskirts of Hattiesburg,
Mississippi, and in November 1996 opened a branch office in Purvis,
Mississippi. The Hattiesburg bank opened an additional branch office on Lincoln
Road in Hattiesburg in the fourth quarter of 1998. In June 1998, the Company
entered into a bank development agreement with the organizers of The First
National Bank of the Pine Belt, a proposed de novo community bank in Laurel,
Mississippi (our Laurel bank). In connection with the opening of the Laurel
bank, the Company raised approximately $6.4 million in a public offering which
commenced in September 1998 and closed on December 31, 1998. The Company used
$5.0 million of the proceeds of the offering to capitalize the Laurel bank. The
Laurel bank began operations on January 19, 1999. The Company engages in a
general commercial and retail banking business characterized by personalized
service and local decision-making, emphasizing the banking needs of small- to
medium-sized businesses, professional concerns, and individuals.
The Company's primary source of revenue is interest income and fees,
which it earns by lending and investing the funds which are held on deposit.
Because loans generally earn higher rates of interest than investments, the
Company seeks to employ as much of its deposit funds as possible in the form of
loans to individuals, businesses, and other organizations. To ensure sufficient
liquidity, the Company also maintains a portion of the banks' deposits in cash,
government securities, deposits with other financial institutions, and
overnight loans of excess reserves (known as "Federal Funds sold") to
correspondent banks. The revenue which the Company earns (prior to deducting
its overhead expenses) is essentially a function of the amount of the Company's
loans and deposits, as well as the profit margin ("interest spread") and fee
income which can be generated on these amounts.
The Company has grown from approximately $14.2 million in total
assets, $4.3 million in loans, $7.5 million in deposits, and $6.6 million in
shareholders' equity at December 31, 1996 to approximately $49.9 million in
total assets, $32.1 million in loans, $35.7 million in deposits, and $6.4
million in shareholders' equity at December 31, 1998. In addition, as of
December 31, 1998 the Company had another $6.4 million in subscription proceeds
which it held in escrow pending issuance of stock certificates for the shares
sold in connection with the formation of the Laurel bank. In January 1999 these
funds were released from escrow and added to shareholders' equity. The Company
enjoyed its first quarterly profit in the third quarter of 1997 and has
reported a net profit for the year 1998. Comparisons of the Company's results
for all of the periods presented should be made with an understanding of the
Company's short history. The following discussion should be read in conjunction
with the preceding "Selected Consolidated Financial Data" and the Company's
Financial Statements and the Notes thereto and the other financial data
included elsewhere.
4
<PAGE> 6
The following table demonstrates the Company's growth during each
calendar year from August 5, 1996 (when the Hattiesburg bank opened for
business) through December 31, 1998.
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Earnings:
Net interest income $ 1,617 $ 881 $ 370
Provision for loan losses 170 156 37
Noninterest income 215 216 4
Noninterest expense 1,595 1,203 693
Net income (loss) 67 (262) (356)
Per Share Data:
Basic net income per share $.09 $ (.36) $ (.58)
Diluted net income per share .09 (.36) (.58)
Selected Year End Balances:
Total assets $49,912 $27,527 $14,177
Securities 7,486 4,303 4,216
Loans 32,059 17,294 4,290
Deposits 35,667 21,058 7,506
Shareholders' equity 6,422 6,368 6,621
</TABLE>
RESULTS OF OPERATIONS
NET INCOME
The Company's net income was $67,000, or $.09 per share, for the year ended
December 31, 1998, as compared to a loss of $262,000, or $.36 per share, for
the year ended December 31, 1997, and a loss of $356,000 or $.58 per share, for
the year ended December 31, 1996. The increase in net income from 1997 to 1998
results primarily from a $736,000 increase in net interest income. The
increased net interest income resulted from continued increases in earning
assets, principally loans, and to improvement in yields on the loan portfolio.
Also, rates paid on the various interest-bearing liabilities reflected modest
changes between the periods. These factors, along with a change in the mix of
earning assets during the year 1998 as compared to the year 1997, resulted in
improved net interest income. The increase in net interest income was partially
offset by a $392,000 increase in noninterest expenses which was primarily the
result of anticipated increases in staff during the year 1998 and operating
costs related to the growth of the Hattiesburg bank and the formation of the
Laurel bank.
5
<PAGE> 7
NET INTEREST INCOME
The largest component of net income for the Company is net interest
income, which is the difference between the income earned on assets and
interest paid on deposits and borrowings used to support such assets. Net
interest income is determined by the rates earned on the Company's
interest-earning assets and the rates paid on its interest-bearing liabilities,
the relative amounts of interest-earning assets and interest-bearing
liabilities, and the degree of mismatch and the maturity and repricing
characteristics of its interest-earning assets and interest-bearing
liabilities.
Net interest income was $1,617,000 for the year ended December 31,
1998, as compared to $882,000 for the year ended December 31, 1997. This 83.3%
increase reflected the substantial growth and improving yields of the loan
portfolio between these periods. These factors resulted in improvements in the
net interest spread and net interest margin. At December 31, 1998, the net
interest spread, the difference between the yield on earning assets and the
rates paid on interest-bearing liabilities, was 4.10% as compared to 3.41% at
December 31, 1997. The net interest margin (which is net interest income
divided by average earning assets) increased to 4.89% at December 31, 1998,
from 4.63% at December 31, 1997. Loans comprised 74.9% of the average earning
assets for the year ended December 31, 1998, compared to 66.6% for the year
ended December 31, 1997. Loans typically provide a higher yield than other
types of earning assets, and this factor, along with the improved yields on
loans in 1998 when compared to 1997, contributed to the increases in the net
interest spread and margin.
Average Balances, Income and Expenses, and Rates. The following tables
depict, for the periods indicated, certain information related to the Company's
average balance sheet and its average yields on assets and average costs of
liabilities. Such yields are derived by dividing income or expense by the
average balance of the corresponding assets or liabilities. Average balances
have been derived from daily averages.
6
<PAGE> 8
AVERAGE BALANCES, INCOME AND EXPENSES, AND RATES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997
-------------------------- -------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------- ------- ------ ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning Assets
Loans (1) (2) ................................. $24,359 $2,558 10.50% $12,692 $1,142 9.00%
Securities..................................... 6,873 400 5.81% 4,720 290 6.14%
Federal funds sold............................. 1,765 75 4.25% 1,653 81 5.51%
Other 42 2 4.76% -- --
------- ------ ------ ------
Total earning assets......................... 33,039 3,035 9.19% 19,065 1,523 7.99%
------- ------ ------ ------
Cash and due from banks........................ 866 753
Premises and equipment......................... 2,625 1,956
Other assets................................... 1,140 893
Allowance for loan losses...................... (258) (136)
------- ------
Total assets................................. $37,412 $22,531
======= =======
LIABILITIES
Interest-bearing liabilities................... $27,814 $1,418 5.09% $13,987 $ 641 4.58%
Demand deposits (1)............................ 3,006 2,030
Other liabilities.............................. 204 111
Shareholders' equity........................... 6,388 6,403
------- -------
Total liabilities and shareholders' equity.. $37,412 $22,531
======= =======
Net interest spread............................ 4.10% 3.41%
Net interest income/margin..................... $1,617 4.89% $ 882 4.63%
====== ======
</TABLE>
- --------------------
(1) All loans and deposits were made to borrowers in the United States.
The Company had no nonaccrual loans during the periods presented.
(2) Includes loan fees of $310 and $115, respectively.
7
<PAGE> 9
Analysis of Changes in Net Interest Income. The following table
presents the dollar amount of changes in interest income and interest expense
attributable to changes in volume and to changes in rate. The combined effect
in both volume and rate which cannot be separately identified has been
allocated proportionately to the change due to volume and due to rate.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
-------------------------- --------------------------
1998 VERSUS 1997 1997 VERSUS 1996
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
-------------------------- --------------------------
VOLUME RATE NET VOLUME RATE NET
--------- ---- ------ ------ ---- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Loans..................................... $1,052 $365 $1,417 $1,067 $ (6) $1,061
Securities................................ 132 (22) 110 219 10 229
Federal funds sold and securities 1
purchased under agreements to resell... (22) 6 (16) (35) (34)
Other short-term investments.............. 2 -- 2 (92) (90) (182)
------ ---- ------ ------ ---- ------
Total interest income.................. 1,164 349 1,513 1,159 (85) 1,074
------ ---- ------ ------ ---- ------
INTEREST-BEARING LIABILITIES
Interest-bearing transaction accounts..... 39 (62) (23) 58 2 60
Money market accounts..................... 38 20 58 123 -- 123
Savings deposits.......................... 2 1 3 2 -- 2
Time deposits............................. 546 188 734 398 (21) 377
Borrowed funds............................ 6 -- 6 -- -- --
------ ---- ------ ----- ---- ------
Total interest expense................. 631 147 778 581 (19) 562
------ ---- ------ ------ ---- ------
Net interest income....................... $ 533 $202 $ 735 $ 578 $(66) $ 512
====== ==== ====== ====== ==== ======
</TABLE>
Interest Sensitivity. The Company monitors and manages the pricing and
maturity of its assets and liabilities in order to diminish the potential
adverse impact that changes in interest rates could have on its net interest
income. A monitoring technique employed by the Company is the measurement of
the Company's interest sensitivity "gap," which is the positive or negative
dollar difference between assets and liabilities that are subject to interest
rate repricing within a given period of time. The Company also performs
asset/liability modeling to assess the impact varying interest rates and
balance sheet mix assumptions will have on net interest income. Interest rate
sensitivity can be managed by repricing assets or liabilities, selling
securities available-for-sale, replacing an asset or liability at maturity, or
adjusting the interest rate during the life of an asset or liability. Managing
the amount of assets and liabilities repricing in the same time interval helps
to hedge the risk and minimize the impact on net interest income of rising or
falling interest rates. The Company evaluates interest sensitivity risk and
then formulates guidelines regarding asset generation and repricing, funding
sources and pricing, and off-balance sheet commitments in order to decrease
interest rate sensitivity risk.
8
<PAGE> 10
The following tables illustrate the Company's interest rate
sensitivity and cumulative gap position at December 31, 1997 and December 31,
1998.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------------
AFTER THREE
WITHIN THROUGH WITHIN GREATER THAN
THREE TWELVE ONE ONE YEAR OR
MONTHS MONTHS YEAR NONSENSITIVE TOTAL
--------- ----------- --------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Earnings Assets
Loans................................. $ 6,687 $ 3,636 $ 10,323 $ 7,164 $ 17,487
Securities............................ 1,007 1,776 2,783 1,521 4,304
Funds sold............................ 1,870 -- 1,870 -- 1,870
--------- --------- --------- --------- ---------
Total earning assets................ 9,564 5,412 14,976 8,685 23,661
--------- --------- --------- --------- ---------
LIABILITIES
Interest-bearing liabilities
Interest-bearing deposits
NOW accounts (1)...................... -- 2,370 2,370 -- 2,370
Money market accounts................. 4,296 -- 4,296 -- 4,296
Savings deposits (1) ................. -- 200 200 -- 200
Time deposits......................... 1,464 5,423 6,887 4,826 11,713
--------- --------- --------- --------- ---------
Total interest-bearing deposits.... 5,760 7,993 13,753 4,826 18,579
--------- --------- --------- --------- ---------
Interest-sensitivity gap per period...... $ 3,804 $ (2,581) $ 1,223 $ 3,859 $ 5,082
========= ========= ========= ========= =========
Cumulative gap at December 31, 1997...... $ 3,804 $ 1,223 $ 1,223 $ 5,082 $ 5,082
========= ========= ========= ========= =========
Ratio of cumulative gap to total
earning assets at December 31, 1997... 16.08% 5.17% 5.17% 21.47%
DECEMBER 31, 1998
--------------------------------------------------------------
AFTER THREE
WITHIN THROUGH WITHIN GREATER THAN
THREE TWELVE ONE ONE YEAR OR
MONTHS MONTHS YEAR NONSENSITIVE TOTAL
--------- ----------- --------- ------------ ---------
(DOLLARS IN THOUSANDS)
ASSETS
Earnings Assets
Loans................................. $ 2,829 $ 5,184 $ 8,013 $ 24,393 $ 32,406
Securities............................ 3,930 505 4,435 3,051 7,486
Funds sold............................ 2,963 -- 2,963 -- 2,963
--------- --------- --------- --------- ---------
Total earning assets................ 9,722 5,689 15,411 27,444 42,855
--------- --------- --------- --------- ---------
LIABILITIES
Interest-bearing liabilities
Interest-bearing deposits
NOW accounts (1)...................... -- 3,302 3,302 -- 3,302
Money market accounts................. 6,932 -- 6,932 -- 6,932
Savings deposits (1) ................. -- 417 417 -- 417
Time deposits......................... 4,991 7,395 12,386 9,223 21,609
--------- --------- --------- --------- ---------
Total interest-bearing deposits.... 11,923 11,114 23,037 9,223 32,260
Borrowed funds........................... 1,200 -- 1,200 -- 1,200
--------- --------- --------- --------- ---------
Total interest-bearing liabilities 13,123 11,114 24,237 9,223 33,460
--------- --------- --------- --------- ---------
Interest-sensitivity gap per period...... $ (3,401) $ (5,425) $ (8,826) $ 18,221 $ 9,395
========= ========= ========= ========= =========
Cumulative gap at December 31, 1998...... $ (3,401) $ (8,826) $ (8,826) $ 9,395 $ 9,395
========= ========= ========= ========= =========
Ratio of cumulative gap to total
earning assets at December 31, 1998.. (7.94%) (20.59%) (20.59%) 21.92%
</TABLE>
- ------------------
(1) NOW and savings accounts are subject to immediate withdrawal and
repricing. These deposits do not tend to immediately react to changes
in interest rates and the Company believes these deposits are a stable
and predictable funding source. Therefore, these deposits are included
in the repricing period that management believes most closely matches
the periods in which they are likely to reprice rather than the period
in which the funds can be withdrawn contractually.
9
<PAGE> 11
The Company generally would benefit from increasing market rates of
interest when it has an asset-sensitive gap and generally from decreasing
market rates of interest when it is liability sensitive. The Company currently
is liability sensitive over the three month and one-year time frames. However,
the Company's gap analysis is not a precise indicator of its interest
sensitivity position. The analysis presents only a static view of the timing of
maturities and repricing opportunities, without taking into consideration that
changes in interest rates do not affect all assets and liabilities equally. For
example, rates paid on a substantial portion of core deposits may change
contractually within a relatively short time frame, but those rates are viewed
by management as significantly less interest-sensitive than market-based rates
such as those paid on non-core deposits. Accordingly, management believes a
liability sensitive-position would not be as indicative of the Company's true
interest sensitivity as it would be for an organization which depends to a
greater extent on purchased funds to support earning assets. Net interest
income is also affected by other significant factors, including changes in the
volume and mix of earning assets and interest-bearing liabilities.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Company has developed policies and procedures for evaluating the
overall quality of its credit portfolio and the timely identification of
potential problem loans. Management's judgment as to the adequacy of the
allowance is based upon a number of assumptions about future events which it
believes to be reasonable, but which may not prove to be accurate, particularly
given the Company's short operating history and rapid growth. Thus, there can
be no assurance that charge-offs in future periods will not exceed the
allowance for loan losses or that additional increases in the loan loss
allowance will not be required.
Additions to the allowance for loan losses, which are expended as the
provision for loan losses on the Company's statement of operations, are made
periodically to maintain the allowance at an appropriate level based on
management's analysis of the potential risk in the loan portfolio. Currently,
the allowance for loan losses is evaluated on an overall portfolio basis.
Management intends to begin allocating the allowance to loan categories once
the loan portfolio becomes large and diversified enough to support such an
allocation system. The amount of the provision is a function of the level of
loans outstanding, the level of nonperforming loans, historical loan loss
experience, the amount of loan losses actually charged against the reserve
during a given period, and current and anticipated economic conditions.
At December 31, 1998 the allowance for loan losses amounted to
$347,000, or 1.07% of outstanding loans. At December 31, 1997 and 1996, the
allowance for loan losses amounted to $193,000 and $37,000, respectively. The
allowance represented 1.10% and 0.86% of outstanding loans at December 31, 1997
and 1996, respectively. The Company's provision for loan losses was $169,000
for December 31, 1998, compared to $156,000 and $37,000 for the years ended
December 31, 1997 and 1996, respectively. In each case, the provision was made
based on management's assessment of general loan loss risk and asset quality.
10
<PAGE> 12
The Company discontinues accrual of interest on loans when management
believes, after considering economic and business conditions and collection
efforts, that a borrower's financial condition is such that the collection of
interest is doubtful. Generally, the Company will place a delinquent loan in
nonaccrual status when the loan becomes 90 days or more past due. At the time a
loan is placed in nonaccrual status, all interest which has been accrued on the
loan but remains unpaid is reversed and deducted from earnings as a reduction
of reported interest income. No additional interest is accrued on the loan
balance until the collection of both principal and interest becomes reasonably
certain. The Company had no nonaccrual, restructured, or other nonperforming
loans at December 31, 1998 or at December 31, 1997 or 1996. At December 31,
1998 the Company had loans in the principal amount of $218,000 delinquent by
more than 30 days, and loans of approximately $1,000 that were delinquent by
more than 90 days. At December 31, 1997 and 1996, the Company did not have any
loans that were delinquent by more than 30 days.
A potential problem loan is one in which management has serious doubts
about the borrower's future performance under the terms of the loan contract.
These loans are current as to principal and interest and, accordingly, they are
not included in nonperforming assets categories. The level of potential problem
loans is one factor used in the determination of the adequacy of the allowance
for loan losses. At December 31, 1998 and December 31, 1997, the Company had
$12,000 and $30,000, respectively, in potential problem loans.
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average loans outstanding.................................... $ 24,359 $ 12,692 $ 1,432
======== ======== ========
Loans outstanding at period end.............................. $ 32,406 $ 17,487 $ 4,327
======== ======== ========
Total nonperforming loans.................................... -- -- --
======== ======== ========
Beginning balance of allowance............................... 194 37 --
Loans charged-off............................................ (16) -- --
-------- -------- --------
Total loans charged-off...................................... (16) -- --
-------- -------- --------
Total recoveries............................................. -- -- --
-------- -------- --------
Net loans charged-off........................................ (16) -- --
-------- -------- --------
Provision for loan losses.................................... 169 156 37
-------- -------- --------
Balance at period end........................................ $ 347 $ 194 $ 37
======== ======== ========
Net charge-offs to average loans............................. .06% -- --
Allowance as percent of total loans.......................... 1.07% 1.10% 0.86%
Nonperforming loans as a percentage of total loans........... -- -- --
Allowance as a percentage of nonperforming loans............. -- -- --
</TABLE>
NONINTEREST INCOME AND EXPENSE
Noninterest Income. The Company's primary source of noninterest income
is service charges on deposit accounts. Other sources of noninterest income
include bankcard fees, commissions on check sales, safe deposit box rent, wire
transfer fees, and official check fees.
11
<PAGE> 13
Excluding a gain of $122,000 on nonbanking real estate in 1997,
noninterest income increased by $121,000, or 128.6%, from $94,000 for the year
ended December 31, 1997, to $215,000 for the year ended December 31, 1998.
Reflecting increased activity fees related to deposits and to the growth of
deposits, deposit service charges were $165,000 for 1998 compared to $68,000
for 1997. Other service charges and fees totaled $39,000 for the year ended
December 31, 1998, compared to $25,000 for the year ended December 31, 1997.
Noninterest expense increased from $1.2 million for the year ended
December 31, 1997 to $1.6 million for the year ended December 31, 1998. The
Company experienced increases in most expense categories, which reflects the
continued growth of the Company during the year. The largest increase was in
salary and employee benefits, which increased by $216,000 in 1998 as compared to
1997. This increase included normal merit increases in salaries as well as the
employment of additional employees throughout 1998. Occupancy expense increased
from $77,000 in 1997 to $96,000 in 1998. This increase resulted from costs
related to the opening of a new branch facility in the fourth quarter of 1998.
Equipment expense increased from $122,000 in 1997 to $152,000 in 1998. This
increase is primarily due to an increase in maintenance expense of banking
equipment and to depreciation of newly acquired equipment. Other expenses,
including data processing and supplies, increased primarily as a result of the
growth of the Company in 1998 as compared to 1997 and the resulting increased
lending activities. In light of the intense competition in the financial
services market in recent years, management emphasizes expense management and
will continue to evaluate and monitor growth in discretionary expense categories
in an attempt to control future increases.
The following table sets forth the primary components of noninterest
expense for the periods indicated:
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------ ------ ----
(IN THOUSANDS)
<S> <C> <C> <C>
Salaries and employee benefits.................................... $ 848 $ 632 $206
Occupancy......................................................... 96 77 13
Equipment......................................................... 152 123 52
Marketing and public relations.................................... 39 43 21
Data processing................................................... 44 33 22
Supplies.......................................................... 64 40 29
Telephone......................................................... 27 20 16
Correspondent services............................................ 23 13 1
Deposit and other insurance....................................... 41 34 9
Professional fees................................................. 30 36 19
Postage........................................................... 22 17 5
Other............................................................. 209 135 76
Pre-opening expense............................................... -- -- 224
------ ------ ----
Total........................................................ $1,595 $1,203 $693
====== ====== ====
</TABLE>
12
<PAGE> 14
INCOME TAX EXPENSE
The Company had a cumulative net operating loss carryforward as of
December 31, 1998, 1997, and 1996. At December 31, 1998, the cumulative net
operating loss carryforward available was approximately $265,000. The Company's
ability to realize a deferred tax benefit as a result of net operating losses
will depend upon whether the Company has sufficient taxable income of an
appropriate character in the carryforward periods. The Company recognizes
deferred tax assets for future deductible amounts resulting from differences in
the financial statement and tax bases of assets and liabilities and operating
loss carryforwards. The Company then establishes a valuation allowance to
reduce the deferred tax asset to the level that it is "more likely than not"
that the tax benefit will be realized. The Company has fully offset the
deferred tax assets resulting primarily from the provision for loan losses, the
deferred pre-opening costs, and the operating loss carryforwards by a valuation
allowance in the same amount.
ANALYSIS OF FINANCIAL CONDITION
EARNING ASSETS
Loans. Loans typically provide higher yields than the other types of
earning assets, and thus one of the Company's goals is for loans to be the
largest category of the Company's earning assets. At December 31, 1998, loans
accounted for 76% of earning assets, as compared to 74% and 40% of earning
assets at December 31, 1997 and 1996, respectively. Management attempts to
control and counterbalance the inherent credit and liquidity risks associated
with the higher loan yields without sacrificing asset quality to achieve its
asset mix goals. Loans averaged $24.3 million during 1998, as compared to $12.7
million in 1997, reflecting the substantial growth of the Company during the
period.
13
<PAGE> 15
The following table shows the composition of the Hattiesburg bank's
loan portfolio by category:
COMPOSITION OF LOAN PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural........... $12,378 38.2% $ 5,187 29.7% $ 1,106 25.6%
Real estate:
Mortgage-commercial........ 5,816 17.9 4,166 23.8 1,508 34.9
Mortgage-residential....... 7,119 22.0 3,698 21.1 1,205 27.8
Construction............... 3,166 9.8 2,031 11.6 36 0.8
Consumer and other............ 3,927 12.1 2,405 13.8 472 10.9
------- ------ ------- ----- ------- -----
Total loans.............. $32,406 100.0% $17,487 100.0% $ 4,327 100.0%
===== ===== =====
Allowance for loan losses..... 347 193 37
------- ------- -------
Total net loans.......... $32,059 $17,294 $ 4,290
======= ======= =======
</TABLE>
In the context of this discussion, a "real estate mortgage loan" is
defined as any loan, other than loans for construction purposes, secured by
real estate, regardless of the purpose of the loan. The Company follows the
common practice of financial institutions in the Company's market area of
obtaining a security interest in real estate whenever possible, in addition to
any other available collateral. This collateral is taken to reinforce the
likelihood of the ultimate repayment of the loan and tends to increase the
magnitude of the real estate loan portfolio component. Generally, the Company
limits its loan-to-value ratio to 80%. Due to the short term the loan portfolio
has existed and the fact that in 1999 the Laurel bank will begin to develop its
own loan portfolio, the current portfolio may not be indicative of the ongoing
portfolio mix. Management attempts to maintain a conservative philosophy
regarding its underwriting guidelines and believes it will reduce the risk
elements of its loan portfolio through strategies that diversify the lending
mix.
The repayment of loans in the loan portfolio as they mature is a
source of liquidity for the Company. The following table sets forth the
Company's loans maturing within specified intervals at December 31, 1998 and
1997.
14
<PAGE> 16
LOAN MATURITY SCHEDULE AND SENSITIVITY TO CHANGES IN INTEREST RATES
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------------------------------
OVER ONE YEAR
ONE YEAR THROUGH OVER FIVE
OR LESS FIVE YEARS YEARS TOTAL
------- -------------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial, financial and agricultural.. $ 2,877 $ 9,501 $ -- $ 12,378
Real estate - construction.............. 2,782 384 -- 3,166
All other loans......................... 2,354 12,789 1,719 16,862
-------- -------- -------- ---------
$ 8,013 $ 22,674 $ 1,719 $ 32,406
======== ======== ======== =========
Loans maturing after one year with:
Fixed interest rates.................... $ 9,391
Floating interest rates................. 15,002
---------
$ 24,393
=========
DECEMBER 31, 1997
------------------------------------------------------------
OVER ONE YEAR
ONE YEAR THROUGH OVER FIVE
OR LESS FIVE YEARS YEARS TOTAL
------- -------------- --------- --------
(DOLLARS IN THOUSANDS)
Commercial, financial and agricultural.. $ 4,511 $ 676 $ -- $ 5,187
Real estate - construction.............. 1,524 507 -- 2,031
All other loans......................... 4,288 5,889 92 10,269
-------- -------- -------- ---------
$ 10,323 $ 7,022 $ 92 $ 17,487
======== ======== ======== =========
Loans maturing after one year with:
Fixed interest rates.................... $ 1,625
Floating interest rates................. 5,539
---------
$ 7,164
=========
</TABLE>
The information presented in the above tables are based on the
contractual maturities of the individual loans, including loans which may be
subject to renewal at their contractual maturity. Renewal of such loans is
subject to review and credit approval, as well as modification of terms upon
their maturity.
Investment Securities. The investment securities portfolio is a
significant component of the Company's total earning assets. Total securities
averaged $6.9 million in 1998, as compared to $4.7 million in 1996. This
represents 21.1% and 24.8% of the average earning assets for the years ended
December 31, 1998 and 1997, respectively. At December 31, 1998, investment
securities were $7.5 million and represented 17.5% of earning assets. The
Company attempts to maintain a portfolio of high quality, highly liquid
investments with returns competitive with short term U.S. Treasury or agency
obligations. This objective is particularly important as the Company continues
to grow its loan portfolio. The Company primarily invests in U.S. Treasury
securities, securities of other U.S. Government agencies, and corporate
obligations with maturities up to five years.
15
<PAGE> 17
The following table summarizes the book value of securities for the
dates indicated.
SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Available-for-sale
U.S. Treasury............................. $ 500 $ 504 $ --
U.S. Government agencies.................. 3,286 2,635 4,058
Corporate obligations..................... 3,343 -- --
Other..................................... 235 658 158
------- ------- -------
Total available-for-sale.................. 7,364 3,797 4,216
------- ------- -------
Held-to-maturity
U.S. Government agencies.................. $ 122 $ 507 $ --
------- ------- -------
Total......................................... $ 7,486 $ 4,304 $ 4,216
======= ======= =======
</TABLE>
The following table shows, at carrying value, the scheduled maturities
and average yields of securities held at December 31, 1998.
INVESTMENT SECURITIES MATURITY DISTRIBUTION AND YIELDS (1)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------------------
AFTER ONE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS AFTER TEN YEARS
--------------- ----------------- ---------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Held-to-maturity:
U.S. Government agencies (2) ....... $ -- -- $ -- -- $ -- --
-- ---- ----
Available-for-sale:
U.S. Treasury ....................... 500 6.23% -- -- -- --
U.S. Government agencies (3) ....... -- -- -- -- -- --
Corporate obligations ............... 3,343 -- -- -- -- --
Other ............................... -- 5.57% -- -- $235 6.34%
-- ---- ----
Total investment securities
available-for-sale .............. 3,843 5.39% -- -- 235 6.34%
-- ---- ----
Total investment securities ....... $3,843 5.39% $ -- -- $235 6.34%
====== ======= ====
</TABLE>
(1) Investments with a call feature are shown as of the contractual
maturity date.
(2) Excludes mortgage-backed securities totaling $122,000 with a yield of
4.50%.
(3) Excludes mortgage-backed securities totaling $3.3 million with a
yield of 5.99%.
Short-Term Investments. Short-term investments, which consist of
Federal Funds sold, averaged $1.8 million in 1998 as compared to $1.6 million
in 1997. At December 31, 1998, and December 31, 1997, short-term investments
totaled $3.0 million and $1.8 million, respectively. These funds are a primary
source of the Company's liquidity and are generally invested in an earning
capacity on an overnight basis.
16
<PAGE> 18
DEPOSITS
Deposits. Average interest-bearing deposits increased $13.8 million,
or 98.7%, to $27.8 million in 1998, from $14.0 million in 1997, and average
total deposits increased $13.3 million, or 489.9%, to $16.0 million in 1997
from $2.7 million in 1996. At December 31, 1998, total deposits were $35.7
million, compared to $21.0 million a year earlier, an increase of 180.5%.
The following table sets forth the deposits of the Company by category
for the periods indicated.
DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------
1998 1997 1996
--------------------- -------------------- --------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT DEPOSITS AMOUNT DEPOSITS AMOUNT DEPOSITS
------- ---------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Demand deposit accounts............$ 3,407 9.6% $ 2,479 11.8% $ 1,566 20.9%
NOW accounts....................... 3,302 9.2 2,370 11.3 1,257 16.7
Money market accounts.............. 6,932 19.4 4,296 20.4 2,655 35.4
Savings accounts................... 417 1.2 200 0.9 71 0.9
Time deposits less than $100,000... 13,237 37.1 7,267 34.5 1,256 16.7
Time deposits of $100,000 or over.. 8,372 23.5 4,446 21.1 702 9.4
-------- ----- -------- ---- -------- -----
Total deposits..................$ 35,667 100.0% $ 21,058 100.0% $ 7,507 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
The Company's loan-to-deposit ratio was 90.9% at December 31, 1998, 83.0% at
December 31, 1997, and 57.6% at December 31, 1996. The loan-to-deposit ratio
averaged 79.0% during 1998. Core deposits, which exclude time deposits of
$100,000 or more, provide a relatively stable funding source for the Company's
loan portfolio and other earning assets. The Company's core deposits were $27.3
million at December 31, 1998 and $16.6 million at December 31, 1997. Management
anticipates that a stable base of deposits will be the Company's primary source
of funding to meet both its short-term and long-term liquidity needs in the
future. The Company has purchased brokered deposits from time to time to help
fund loan growth and maintain a lower loan-to-deposit ratio. Brokered deposits
and jumbo certificates of deposit generally carry a higher interest rate than
traditional core deposits. Further, brokered deposit customers typically do not
have loan or other relationships with the Company. The Company has adopted a
policy not to permit brokered deposits to represent more than 10% of all of the
Company's deposits. Certificates of deposit included brokered deposits totaling
less than $500,000 at December 31, 1998.
The maturity distribution of the Company's certificates of deposits of
$100,000 or more at December 31, 1998, and December 31, 1997, is shown in the
following table. The Company did not have any other time deposits of $100,000
or more at either of these dates.
17
<PAGE> 19
MATURITIES OF CERTIFICATES OF DEPOSIT
OF $100,000 OR MORE
<TABLE>
<CAPTION>
AFTER THREE
WITHIN THREE THROUGH AFTER TWELVE
MONTHS TWELVE MONTHS MONTHS TOTAL
------------ ------------- ------------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1997................... $ 508 $ 2,639 $ 1,299 $ 4,446
December 31, 1998................... $ 2,899 $ 2,872 $ 2,601 8,372
</TABLE>
Borrowed funds. Borrowed funds consist primarily of advances from the
Federal Home Loan Bank of Dallas. At December 31, 1998, advances totaled $1.2
million consisting of two advances of $600,000 each. These advances bear
adjustable rates of interest (5.21% and 5.28%, respectively, at December 31,
1998) and mature January 1, 2014. The advances are collateralized by
securities. The Company did not have any short-term borrowings in 1997.
Although the Company may use borrowings as a secondary funding source from time
to time, management expects that core deposits will continue to be the
Company's primary funding source.
CAPITAL
Total shareholders' equity as of December 31, 1998 was $6.4 million,
an increase of $54,000, or approximately .8%, compared with shareholders'
equity of $6.3 million as of December 31, 1997. This increase was primarily
attributable to net income from operations for the year ended December 31, 1998
of $67,000. In addition, as of December 31, 1998 the Company had another $6.4
million in subscription proceeds which it held in escrow pending issuance of
stock certificates for the shares sold in connection with the formation of the
Laurel bank. In January 1999, these funds were released from escrow and added
to shareholders' equity.
The Federal Reserve Board and bank regulatory agencies require bank
holding companies and financial institutions to maintain capital at adequate
levels based on a percentage of assets and off-balance sheet exposures,
adjusted for risk weights ranging from 0% to 100% (the Federal Reserve grants
an exemption from these requirements for bank holding companies with less than
$150 million in consolidated assets, and therefore the Company's capital is
currently measured only at the bank level). Under the risk-based standard,
capital is classified into two tiers. Tier 1 capital consists of common
shareholders' equity, excluding the unrealized gain (loss) on
available-for-sale securities, minus certain intangible assets. Tier 2 capital
consists of the general reserve for loan losses subject to certain limitations.
An institution's qualifying capital base for purposes of its risk-based capital
ratio consists of the sum of its Tier 1 and Tier 2 capital. The regulatory
minimum requirements are 4% for Tier 1 and 8% for total risk based capital.
18
<PAGE> 20
Bank holding companies and banks are also required to maintain capital
at a minimum level based on total assets, which is known as the leverage ratio.
The minimum requirement for the leverage ratio is 3%. All but the highest rated
institutions are required to maintain ratios 100 to 200 basis points above the
minimum. The Company and the Hattiesburg bank exceeded their minimum regulatory
capital ratios as of December 31, 1998 and 1997.
ANALYSIS OF CAPITAL
<TABLE>
<CAPTION>
REGULATORY MINIMUMS
------------------------- THE COMPANY THE HATTIESBURG
ADEQUATELY WELL ------------------ ------------------
CAPITAL RATIOS CAPITALIZED CAPITALIZED DECEMBER 31, DECEMBER 31,
- -------------- ----------- ----------- ------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Leverage.............. 4.0% 5.0% 12.7% 30.3% 10.0% 23.2%
Risk-based capital
Tier 1........... 4.0% 6.0% 15.8% 30.7% 12.5% 23.6%
Total............ 8.0% 10.0% 16.7% 31.7% 13.3% 24.5%
</TABLE>
LIQUIDITY MANAGEMENT
Liquidity management involves monitoring the Company's sources and
uses of funds in order to meet its day-to-day cash flow requirements while
maximizing profits. Liquidity represents the ability of a company to convert
assets into cash or cash equivalents without significant loss and to raise
additional funds by increasing liabilities. Liquidity management is made more
complicated because different balance sheet components are subject to varying
degrees of management control. For example, the timing of maturities of the
investment portfolio is very predictable and subject to a high degree of
control at the time investment decisions are made. However, net deposit inflows
and outflows are far less predictable and are not subject to the same degree of
control. Asset liquidity is provided by cash and assets which are readily
marketable, which can be pledged, or which will mature in the near future.
Liability liquidity is provided by access to core funding sources, principally
the ability to generate customer deposits in the Company's market area.
The Company sold 721,848 shares during its initial public offering in
1996, with net proceeds, after offering expenses, of $7.1 million.
Approximately $5.3 million of the proceeds of the offering were used to
capitalize the Hattiesburg bank. The remaining offering proceeds were used to
provide working capital for the Company. The Company sold 428,843 shares of
common stock in its 1998 offering in connection with the formation of the
Laurel bank. At December 31, 1998, the Company held in escrow $6.4 million in
subscription proceeds from this offering. The Company released these proceeds
from escrow in January 1999 and used $5.0 million of the proceeds to capitalize
the Laurel bank. The Company will use the remaining net offering proceeds as
working capital. With the successful completion of these two offerings, the
Company has maintained a high level of liquidity that has been adequate to meet
planned capital expenditures, as well as providing the necessary cash
requirements of the Company needed for operations. The Company's Federal Funds
sold position, which is typically its primary source of liquidity, averaged
$1.3 million during the year ended December 31, 1998 and was $3.0 million at
December 31, 1998. Also, the
19
<PAGE> 21
Company has available advances from the Federal Home Loan Bank. Advances
available are generally based upon the amount of qualified first mortgage loans
which can be used for collateral. At December 31, 1998, advances available
totaled approximately $3.3 million (excluding $1.2 million drawn).
Management regularly reviews the liquidity position of the Company and
has implemented internal policies which establish guidelines for sources of
asset-based liquidity and limit the total amount of purchased funds used to
support the balance sheet and funding from non-core sources.
ACCOUNTING MATTERS
In June 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS 130 established standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general purpose financial statements. SFAS 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS 130 requires that companies (i) classify items of other
comprehensive income by their nature in a financial statement and (ii) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the statement
of financial position at the end of an accounting period. SFAS 130 is effective
for fiscal years beginning after December 31, 1997, and the Company began
following the statement in the first quarter of 1998. As required by the
statement, reclassification of earlier periods has been reflected in the
financial statements included elsewhere herein.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in its financial statements and that those instruments be measured
at fair value. Implementation is required for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Company has not determined the impact
the adoption of this statement may have on its consolidated financial
statements.
IMPACT OF INFLATION
Unlike most industrial companies, the assets and liabilities of
financial institutions such as the Company are primarily monetary in nature.
Therefore, interest rates have a more significant effect on the Company's
performance than do the effects of changes in the general rate of inflation and
change in prices. In addition, interest rates do not necessarily move in the
same direction or in the same magnitude as the prices of goods and services. As
discussed previously, management seeks to manage the relationships between
interest sensitive assets and liabilities in order to protect against wide
interest rate fluctuations, including those resulting from inflation.
20
<PAGE> 22
YEAR 2000 ISSUES
Some computers, software, and other equipment include programming
codes in which calendar year data is abbreviated to only two digits. As a
result of this design decision, some of these systems could fail to operate or
fail to produce correct results if "00" is interpreted to mean 1900, rather
than 2000. These problems are widely expected to increase in frequency and
severity as the year 2000 approaches and are commonly referred to as the "Year
2000 Problem."
ASSESSMENT
The Year 2000 Problem could affect computers, software, and other
equipment that the Company uses. Accordingly, the Company has developed a plan
that provides for, among other things, the replacement or modification of
existing information systems as necessary. Because the primary hardware and
software systems are presently certified by their vendors as Year 2000
compliant, the Company has not incurred any significant costs to date relating
to software modifications or new installations for the other systems. Most
systems are made compliant through periodic software upgrades provided by the
various vendors as part of the license agreements. However, while the Company
does not expect the cost of these efforts to be material to its financial
position or any year's operating results, there can be no assurance to this
effect.
INTERNAL INFRASTRUCTURE
The Company utilizes an in-house data processing system for most of
its accounting functions. The Company's primary systems have been tested by
proxy with the vendor, who has tested in environments with like software and
hardware systems as the Company. Banking regulators have approved this type of
testing as a valid means of testing. The Company has received and reviewed the
vendor's Year 2000 test results. Based on this review, the Company does not
believe that the data processing system has any material Year 2000 issues. The
Company's agreement with this vendor includes warranties that their system is
Year 2000 compliant in all respects, although the remedies available under such
agreements are limited and specifically exclude special, incidental, indirect,
and consequential damages. The Company believes that it has also identified
substantially all of the major computers, software applications, and related
equipment used in connection with its internal operations that must be
modified, upgraded, or replaced to minimize the possibility of a material
disruption of its business. Management has completed upgrading and is in the
process of testing the systems that it has determined are not prepared for the
year 2000. Management believes that the testing of its systems should be
completed by June 30, 1999. Management estimates that expenditures associated
with the Year 2000 issues have totaled $20,000. The Company does not believe
that the cost related to these efforts will be material to its business.
21
<PAGE> 23
SYSTEMS OTHER THAN INFORMATION TECHNOLOGY SYSTEMS
In addition to computers and related systems, the operation of the
Company's office and facilities equipment, such as fax machines, photocopiers,
telephone switches, security systems, and other devices, may be affected by the
Year 2000 Problem. The Company has completed its assessment of the potential
effect of, and the costs of remediating, the Year 2000 Problem on this
equipment. The Company estimates that its total cost of completing any required
modifications, upgrades, or replacements of these internal systems will not
have a material effect on its business.
SUPPLIERS AND OTHER THIRD PARTIES
The Company has been gathering information from and has initiated
communications with its suppliers and other third parties to identify and, to
the extent possible, resolve issues involving the Year 2000 Problem. The
Company requires its vendors to provide warranties regarding Year 2000
compliance. The Company believes that the information systems and software it
uses, and the network connections it maintains, are programmed to comply with
Year 2000 requirements. However, there is a risk that they are not.
CUSTOMERS
The Company believes that the largest Year 2000 Problem exposure to
most banks is the preparedness of the customers of the banks. Management is
addressing with its customers the possible consequences of not being prepared
for Year 2000. Should large borrowers not sufficiently address this issue, the
Company may experience an increase in loan defaults. The amount of potential
loss from this issue is not quantifiable. Management is attempting to reduce
this exposure by educating its customers.
The Company has implemented and developed procedures to assess the
level of Year 2000 risk among large loan customers. Loan officers perform a
precredit analysis of all new large loans, and an assessment of the potential
effects of the Year 2000 on the credit worthiness of borrowers is a part of the
analysis. Loan officers are asking new commercial borrowers about compliance
with minimum standards with regard to Year 2000 issues. Loan officers are to
follow up with these borrowers to insure that progress on Year 2000 issues is
being made. For existing large commercial loan customers, the Company is in the
process of completing Year 2000 preparedness reviews.
MOST LIKELY CONSEQUENCES OF YEAR 2000 PROBLEMS
The Company expects to identify and resolve all Year 2000 Problems that
could materially adversely affect its business, financial condition, or
operating results. However, the Company believes that it is not possible to
determine with complete certainty that all Year 2000 Problems affecting it have
been identified or corrected. The number of devices that could be affected and
the interactions among these devices are simply too numerous. In addition, the
Company cannot accurately predict how many failures related to the Year 2000
22
<PAGE> 24
Problem will occur with its suppliers, customers, or other third parties or the
severity, duration, or financial consequences of such failures. As a result, the
Company expects that it could possibly suffer the following consequences:
- - A number of operational inconveniences and inefficiencies for the
Company, its service providers, or its customers that may divert the
Company's time and attention and financial and human resources from
its ordinary business activities;
- - System malfunctions that may require significant efforts by the
Company or its service providers or customers to prevent or alleviate
material business disruptions.
CONTINGENCY PLANS
The Company is currently developing contingency plans to be
implemented as part of its efforts to identify and correct Year 2000 Problems
affecting its internal systems. The Company expects to complete its contingency
plans by the end of the first quarter of 1999. Depending on the systems
affected, these plans could include (a) accelerated replacement of any affected
equipment or software; (b) short term use of backup equipment and software; (c)
increased work hours for the Company's personnel or use of contract personnel
to correct on an accelerated schedule any Year 2000 Problems which arise; and
(d) other similar approaches. If the Company is required to implement any of
these contingency plans, these plans could have a material adverse effect on
its business, financial condition, or operating results.
23
<PAGE> 25
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, 1998 and 1997, 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
/s/ T. E. LOTT & COMPANY
Columbus, Mississippi
February 11, 1999
24
<PAGE> 26
THE FIRST BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ ------------ ------------
<S> <C> <C>
Cash and due from banks $ 1,457,280 $ 970,262
Interest-bearing deposits with banks 95,205 --
Federal funds sold 2,963,203 1,870,000
------------ ------------
Total cash and cash equivalents 4,515,688 2,840,262
Securities (Note C) 7,486,251 4,303,587
Loans, net of reserve for loan losses of $347,305 in
1998 and $193,566 in 1997 (Note D) 32,058,567 17,293,861
Premises and equipment (Note E) 3,604,364 2,092,225
Interest receivable 324,805 188,365
Other assets 1,922,966 808,338
------------ ------------
$ 49,912,641 $ 27,526,638
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits:
Noninterest-bearing $ 3,406,983 $ 2,479,084
Time, $100,000 or more 8,372,200 2,631,198
Other interest-bearing 23,887,576 15,948,103
------------ ------------
Total deposits 35,666,759 21,058,385
Interest payable 166,112 94,649
Stock subscriptions deposits (Note A) 6,432,645 --
Borrowed funds (Note F) 1,200,000 --
Other liabilities 24,893 5,900
------------ ------------
Total liabilities 43,490,409 21,158,934
------------ ------------
Commitments and contingent liabilities (Note J)
Stockholders' Equity (Note G):
Common stock, par value $1 per share; 10,000,000
shares authorized; issued and outstanding
721,848 at December 31, 1998 and 1997 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 (750,879) (817,651)
Accumulated other comprehensive income (193) 12,051
------------ ------------
Total stockholders' equity 6,422,232 6,367,704
------------ ------------
$ 49,912,641 $ 27,526,638
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
25
<PAGE> 27
THE FIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 2,557,943 $ 1,141,101
Interest and dividends on investment securities - taxable 400,044 290,247
Interest on federal funds sold 75,122 91,354
Interest on deposits in banks 2,070 --
----------- -----------
3,035,179 1,522,702
INTEREST EXPENSE
Interest on time deposits of $100,000 or more 217,225 68,385
Interest on other deposits 1,194,699 572,762
Interest on borrowed funds 6,440 --
----------- -----------
1,418,364 641,147
----------- -----------
Net interest income 1,616,815 881,555
Provision for loan losses 169,748 156,418
----------- -----------
Net interest income after provision for loan losses 1,447,067 725,137
OTHER INCOME
Service charges on deposit accounts 165,455 67,543
Other service charges and fees 39,187 24,723
Securities gains (losses) 597 --
Other (Note E) 9,675 123,858
----------- -----------
214,914 216,124
OTHER EXPENSES
Salaries 724,098 531,754
Employee benefits 123,468 100,538
Occupancy expense 95,590 77,401
Furniture and equipment expense 152,111 122,739
Supplies and printing 63,653 40,280
Marketing and public relations 39,199 43,245
Other 397,090 287,297
----------- -----------
1,595,209 1,203,254
----------- -----------
Net income (loss) $ 66,772 $ (261,993)
=========== ===========
Net income (loss) per common share:
Basic $ .09 $ (.36)
Diluted .09 (.36)
</TABLE>
The accompanying notes are an integral part of these statements.
26
<PAGE> 28
THE FIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Accumulated
Other
Compre- Compre-
hensive Common Paid-in Accumulated hensive
Income Stock Capital Deficit Income Total
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance,
January 1, 1997 $ 721,848 $ 6,451,456 $ (555,658) $ 2,883 $ 2,620,529
Comprehensive income:
Net loss for 1997 $ (261,993) -- -- (261,993) -- (261,993)
Net change in
unrealized gain (loss)
on available-for-sale
securities, net of tax 9,168 -- -- -- 9,168 9,168
----------- ----------- ----------- ----------- ----------- -----------
Comprehensive income $ (252,825)
===========
Balance,
December 31, 1997 721,848 6,451,456 (817,651) 12,051 6,367,704
Comprehensive income:
Net profit for 1998 $ 66,772 -- -- 66,772 -- 66,772
Net change in
unrealized gain (loss)
on available-for-sale
securities, net of tax (12,244) -- -- -- (12,244) (12,244)
----------- ----------- ----------- ----------- ----------- -----------
Comprehensive income $ 54,528
===========
Balance,
December 31, 1998 $ 721,848 $ 6,451,456 $ (750,879) $ (193) $ 6,422,232
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
27
<PAGE> 29
THE FIRST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIODS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 66,772 $ (261,993)
Adjustments to reconcile net income to net cash:
Depreciation and amortization 189,181 157,333
Provision for loan losses 169,748 156,418
Amortization and accretion (103,499) (101,992)
Increase in interest receivable (136,440) (152,789)
Increase in other assets (1,159,793) (672,157)
Increase in interest payable 71,463 68,003
Securities gains (597) --
Increase (decrease) increase in other liabilities 18,993 (17,036)
------------ ------------
Net cash used in operating activities (884,172) (824,213)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities (15,670,883) (6,252,319)
Proceeds from maturities and calls of available-for-sale
securities 12,195,011 6,782,920
Purchase of securities to be held-to-maturity 385,060 (507,001)
Increase in loans (14,934,454) (13,160,007)
Additions to premises and equipment (1,656,155) (520,826)
------------ ------------
Net cash used in investing activities (19,681,421) (13,657,233)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposits 14,608,374 13,551,736
Increase in borrowed funds 1,200,000 --
Stock subscriptions 6,432,645 --
------------ ------------
Net cash provided by financing activities 22,241,019 13,551,736
------------ ------------
Net increase (decrease) in cash and cash equivalents 1,675,426 (929,710)
Cash and cash equivalents at beginning of year 2,840,262 3,769,972
------------ ------------
Cash and cash equivalents at end of year $ 4,515,688 $ 2,840,262
============ ============
CASH PAID DURING THE YEAR FOR:
Interest $ 1,346,901 $ 573,144
Income taxes -- --
</TABLE>
The accompanying notes are an integral part of these statements.
28
<PAGE> 30
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE A - NATURE OF BUSINESS
The First Bancshares, Inc. (the Company) is a bank holding company whose
business is conducted by its wholly-owned subsidiary, The First National
Bank of South Mississippi (the Bank). The Bank provides a full range of
banking services in its primary market area of Lamar County, Mississippi,
and the surrounding counties. The Company commenced its banking operations
in August, 1996. The Company, as a bank holding company, is regulated by
the Federal Reserve Bank. The Bank is subject to the regulation of the
Office of the Comptroller of the Currency (OCC).
In June, 1998, the Company entered into a development agreement with the
organizers of The First National Bank of the Pine Belt, a proposed de novo
community bank in Laurel, Mississippi (the Laurel Bank), for the purpose of
the Laurel Bank becoming a wholly-owned subsidiary of the Company. In
connection with the formation of the Laurel Bank, the Company made a public
offering for the sale of a minimum of 340,000 shares and a maximum of
533,333 shares of its common stock at a price of $15 per share. The
offering was closed on December 31, 1998. The net proceeds from the sale of
common stock will be used as an initial capital injection into the Laurel
Bank and for general corporate purposes. At December 31, 1998, the Company
had received subscriptions to purchase 428,843 shares of its common stock
for an aggregate purchase price of $6,432,645. Subscription proceeds
remained in escrow as of December 31, 1998, pending issuance of shares and
receipt of routine regulatory approvals. On January 19, 1999, the Laurel
Bank received approval from its banking regulator to begin banking
operations, and the Company used $5 million of the net proceeds to purchase
all of the capital stock of the Laurel Bank.
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. 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.
29
<PAGE> 31
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE B - SUMMARY OF ACCOUNTING POLICIES (Continued)
3. CASH AND DUE FROM BANKS
Included in cash and due from banks are legal reserve requirements which
must be maintained on an average basis in the form of cash and balances due
from the Federal Reserve and other banks.
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, 1998 and 1997.
30
<PAGE> 32
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE B - SUMMARY OF ACCOUNTING POLICIES (Continued)
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. Loan
origination fees and certain direct organization costs are capitalized and
recognized as an adjustment on the related loan.
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. STOCK OPTIONS
Financial Accounting Standards Board (FASB) Statement No. 123, "Accounting
for Stock-Based Compensation," requires a fair value-based method of
measuring employee stock options. Under this method, compensation cost is
measured at the option grant date based on the value of the award and is
recognized over the service period. In lieu of recording the value of such
options, the Company has elected to continue to measure compensation cost
using Accounting Principles Board (APB) No. 25, "Accounting for Stock
Issued to Employees," and to provide pro forma disclosures quantifying the
difference between compensation cost included in reported net income and
the related cost measured by such fair value-based method.
31
<PAGE> 33
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE B - SUMMARY OF ACCOUNTING POLICIES (Continued)
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.
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. PER SHARE AMOUNTS
In February, 1997, the 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.
32
<PAGE> 34
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE B - SUMMARY OF ACCOUNTING POLICIES (Continued)
12. PER SHARE AMOUNTS (Continued)
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, 1998 December 31, 1997
-------------------------------------- ---------------------------------------
Net Income Net Income
(Loss) Shares Per Share (Loss) Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Data
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic per
share $ 66,712 721,848 $ . 09 $ (261,993) 721,848 $ (.36)
========= ========
Effect of
dilutive
shares:
Stock
options -- 20,066 -- 8,865
----------- ------------ ------------ -------------
Diluted per
share $ 66,712 $ 741,914 $ .09 $ (261,993) 730,713 $ (.36)
=========== ============ ========== =========== ============= ========
</TABLE>
The diluted per share amounts were computed by applying the treasury stock
method.
13. RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform to
the current year presentation. Such changes had no effect on previously
reported net results of operations.
14. ACCOUNTING PRONOUNCEMENTS
In June, 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Among other things,
Statement No. 131 requires public companies to report (i) certain financial
and descriptive information about their reportable operating segments (as
defined), and (ii) certain enterprise-wide financial information about
products and services, geographic areas and major customers. The required
segment financial disclosures include a measure of profit or loss, certain
specific revenue and expense items, and total assets in annual and interim
financial statements. Management believes that the Company and its
subsidiary operate under one segment, commercial banking, and additional
disclosure is not required.
33
<PAGE> 35
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE B - SUMMARY OF ACCOUNTING POLICIES (Continued)
In June, 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and for Hedging Activities." Statement No. 133
requires all derivatives to be recorded on the balance sheet at fair value.
Statement No. 133 is effective for fiscal periods beginning after June 15,
1999, and is not expected to have a material effect on the Corporation's
consolidated financial statements.
NOTE C - SECURITIES
Securities at December 31, 1998 and 1997, consisted of available-for-sale
securities with a carrying amount of $7,363,737 and $3,796,862,
respectively, and securities held-to-maturity with a carrying amount of
$122,514 and $506,725, respectively. The amortized cost, gross unrealized
gains, gross unrealized losses and estimated fair value of these securities
at December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Available-for-sale securities:
U. S. Treasury securities $ 499,973 $ 3,307 $ -- $ 503,280
Mortgage-backed securities 3,285,761 7,540 11,040 3,282,261
Corporate obligations 3,343,442 -- -- 3,343,442
Equity securities 234,754 -- -- 234,754
---------- ----------
$7,363,930 $ 10,847 $ 11,040 $7,363,737
========== ========== ========== ==========
Held-to-maturity securities:
Mortgage-backed securities $ 122,514 $ 1,436 $ -- $ 123,950
========== ========== ========== ==========
<CAPTION>
1997
-------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Available-for-sale securities:
U. S. Treasury securities $ 499,928 $ 3,822 $ -- $ 503,280
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>
34
<PAGE> 36
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE C - SECURITIES (Continued)
The scheduled maturities of securities at December 31, 1998, are as
follows:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
---------- ----------
<S> <C> <C>
Due in one year or less $3,843,415 $3,846,722
Mortgage-backed securities and equity securities 3,643,029 3,640,965
---------- ----------
$7,486,444 $7,487,687
========== ==========
</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 and Federal
Home Loan Bank (FHLB), the transferability of which is restricted.
Gross gains of $614 and $-0- and gross losses of $17 and $-0- were realized
on available-for-sale securities in 1998 and 1997, respectively.
Securities with a carrying value of $1,541,000 and $499,310 at December 31,
1998 and 1997, respectively, were pledged to secure public deposits and for
other purposes as required or permitted by law. Securities with a carrying
value of approximately $1,200,000 were pledged as collateral for FHLB
advances at December 31, 1998.
NOTE D - LOANS
Loans outstanding include the following types at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
(In Thousands)
1998 1997
-------- --------
<S> <C> <C>
Commercial, financial, and agricultural $ 12,378 $ 5,187
Real estate - construction 3,166 2,031
Real estate - mortgage 12,935 7,864
Installment loans to individuals 3,718 2,392
Other 209 13
32,406 17,487
Reserve for loan losses (347) (193)
-------- --------
$ 32,059 $ 17,294
======== ========
</TABLE>
35
<PAGE> 37
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE D - LOANS (Continued)
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Balance at beginning of year $193,566 $ 37,148
Additions:
Provision for loan losses charged to operations 169,748 156,418
Recoveries -- --
-------- --------
363,314 193,566
Deductions:
Loans charged off 16,009 --
-------- --------
Balance at end of year $347,305 $193,566
======== ========
</TABLE>
For the period ended December 31, 1998 and 1997, the Bank had no loans
classified as impaired.
NOTE E - PREMISES AND EQUIPMENT
The detail of premises and equipment at December 31, 1998 and 1997, is as
follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Premises:
Land $ 453,366 $ 453,366
Buildings and improvements 1,921,153 1,380,205
Equipment 726,902 421,225
----------- -----------
3,101,421 2,254,796
Less accumulated depreciation (308,305) (162,571)
----------- -----------
$ 2,793,116 $ 2,092,225
=========== ===========
</TABLE>
The amounts charged to operating expense for depreciation were $144,016 and
$120,361 in 1998 and 1997, 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.
36
<PAGE> 38
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE F - BORROWED FUNDS
Borrowed funds consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
---------- ----------
<S> <C> <C>
Advances from FHLB-Dallas:
5.21%, due January 1, 2014 $ 600,000 $ --
5.28%, due January 1, 2014 600,000 --
---------- ----------
$1,200,000 $ --
========== ==========
</TABLE>
The advances are collateralized by securities, first mortgage loans, FHLB
stock and amounts on deposit with the FHLB.
NOTE G - 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, 1998, that the Company and the Bank exceed all capital
adequacy requirements.
At December 31, 1998, 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
37
<PAGE> 39
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE G - REGULATORY MATTERS (Continued)
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, 1998 and 1997, 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, 1998
Total risk-based $6,691 16.7% $5,229 13.3%
Tier I risk-based 6,343 15.8% 4,882 12.5%
Tier I leverage 6,343 12.7% 4,882 10.0%
DECEMBER 31, 1997
Total risk-based $6,496 31.7% $5,023 24.5%
Tier I risk-based 6,303 30.7% 4,829 23.6%
Tier I leverage 6,303 30.3% 4,829 23.2%
</TABLE>
The minimum amounts of capital and ratios as established by banking
regulators at December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
($ In Thousands)
-------------------------------------------------
Company
(Consolidated) Bank
--------------------- ---------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Total risk-based $3,203 8.0% $3,137 8.0%
Tier I risk-based 1,602 4.0% 1,568 4.0%
Tier I leverage 1,995 4.0% 1,958 4.0%
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%
</TABLE>
38
<PAGE> 40
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE G - 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, 1998, the Bank had no retained net
profits free of the restrictions.
NOTE H - COMPREHENSIVE INCOME
As of January 1, 1998, the Company and the Bank adopted FASB Statement No.
130, "Reporting Comprehensive Income." This statement establishes standards
for the reporting and display of comprehensive income and its components in
the financial statements. Unrealized gains and losses on securities
available-for-sale, which prior to adoption were reported separately in
stockholders' equity, are required to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform
to the requirements of Statement No. 130. The adoption of this statement
had no impact on net income or stockholders' equity.
In the calculation of comprehensive income, certain reclassification
adjustments are made to avoid double counting amounts that are displayed as
part of net income for a period that also had been displayed as part of
other comprehensive income. The disclosure of the reclassification amounts
are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997
-------- --------
<S> <C> <C>
Unrealized gains (losses) on securities
available-for-sale, net of tax, arising during year $(11,829) $ 2,883
Less reclassification adjustment for (gains) losses
included in net income, net of tax (395) 9,168
-------- --------
Net change in unrealized gains (losses) on securities
available-for-sale, net of tax $(12,224) $ 12,051
======== ========
</TABLE>
39
<PAGE> 41
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE I - INCOME TAXES
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Current $ -- $ --
Deferred 19,685 (86,681)
Change in valuation allowance (19,685) 86,681
-------- --------
-- --
======== ========
</TABLE>
The Company's income tax expense differs from the amounts computed by
applying the Federal income tax statutory rates to income (loss) before
income taxes. A reconciliation of the differences is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------
1998 1997
------------------------ ------------------------
Amount % Amount %
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Income taxes at statutory rate $ 22,702 34% $(89,077) (34%)
Other items (3,017) (6%) 2,396 1%
Change in valuation allowance (19,685) (28%) 86,681 33%
-------- -------- -------- --------
-- -- -- --
======== ======== ======== ========
</TABLE>
40
<PAGE> 42
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE I - INCOME TAXES (Continued)
The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Reserve for loan losses $ 90,690 $ 50,975
Preopening expenses 79,720 108,872
Bank premises and equipment 43,160 33,240
Net operating loss carryover 99,240 137,470
--------- ---------
312,810 330,557
Valuation allowance (307,427) (327,112)
--------- ---------
5,383 3,445
Deferred tax liabilities:
Securities (5,383) (3,445)
--------- ---------
-- --
========= =========
</TABLE>
The Company has a net operating loss for income tax purposes at December
31, 1998 of approximately $265,000. Net operating losses will expire in the
year 2011, if not previously utilized.
NOTE J - 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. In
July, 1998, the Company renewed the agreement for an additional three
years. 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 are based upon a percentage of net profits after taxes of the
Bank. The agreement also provides for additional benefits in the event of
termination after a change in control.
41
<PAGE> 43
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE J - EMPLOYEE BENEFITS (Continued)
The Company has an employment agreement with the President of the Laurel
Bank for a term of three years beginning June, 1998, to be extended for an
additional three years unless either party serves written notice of its
intent not to renew. The agreement provides for a minimum salary and allows
for participation in management incentive or long-term incentive programs
and to receive annual bonuses based upon criteria established by the
Company's Board of Directors and subject to the discretion of the Company's
Board of Directors. The agreement also provides for additional benefits in
the event of termination after a change in control.
In connection with the three year extension of the employment agreement
with the President and Chief Executive Officer of the Company, the Company
is obligated to issue additional stock options for 28,874 shares. The
President of the Laurel Bank has been granted a stock option, with a term
of seven years, to purchase at $15 per share a number of shares equivalent
to 2.5% of the shares sold in the stock offering associated with the
formation of the Laurel Bank. The options vest one-third per year for each
of the first three years of operations of the Laurel Bank.
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 $10,788 in 1998 and $8,646
in 1997.
NOTE K - STOCK PLANS
In 1997, the Company adopted the 1997 Stock Option Plan (the Plan) which
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
subsidiaries. The Plan is accounted for in accordance with APB Opinion 25
and related interpretations. Options currently outstanding become
exerciseable in equal amounts in three years from the grant date and expire
ten years after the grant date. The options are exercisable at not less
than the market value of the Company's stock at the grant date.
Accordingly, no compensation cost has been recognized for the Plan.
42
<PAGE> 44
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE K - STOCK PLANS (Continued)
A summary of the status of the Plan as of December 31, 1998 and 1997 and
changes during the years ending on those date is presented below:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1998 1997
------------------- -------------------
Exercise Exercise
Shares Price Shares Price
------ ------ ------ ------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 72,185 $ 10 -- $ --
Options granted -- -- 72,185 10
Options exercised -- -- -- --
Options forfeited -- -- -- --
------ ------ ------ ------
Outstanding at end of year 72,185 $ 10 72,185 $ 10
====== ====== ====== ======
Options exerciseable at end of year 47,029 $ 10 24,061 $ 10
====== ====== ====== ======
</TABLE>
Had compensation cost for the Plan been determined based on the fair values
of the options at the grant dates consistent with the method of FASB
Statement No. 123, the Company's net income and net income per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net income, pro forma $ 28,297 $ (300,468)
Basic net income (loss) per share, pro forma .04 (.42)
Diluted net income (loss) per share, pro forma .04 (.42)
</TABLE>
The assumptions used in estimating compensation cost on a pro forma basis
were: dividend yield of 0%, expected life of ten years, volatility of near
0%, and risk-free interest rate of 6.5%.
NOTE L - 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
43
<PAGE> 45
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE L - RELATED PARTY TRANSACTIONS (Continued)
approximately $2,696,000 and $1,565,000 at December 31, 1998 and 1997,
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 new bank buildings. Approximately $435,000 in 1998 and $310,000
in 1997 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 M - 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 $471,000 and
$82,500 at December 31, 1998 and 1997, respectively, and had made loan
commitments of approximately $4,819,000 and $1,882,000, at December 31,
1998 and 1997, respectively. 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, 1998, 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.
44
<PAGE> 46
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE N- FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement 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.
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.
FHLB Borrowed Funds - The fair value of the fixed rate borrowings are
estimated using discounted cash flows, based upon current incremental
borrowing rates for similar types of borrowing arrangements.
Commitments to Extend Credit - Management is of the opinion the estimated
fair value is not significantly different than the contractual or
notational amounts.
45
<PAGE> 47
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The carrying amount and estimated fair value of the Company's consolidated
financial instruments are as follows:
<TABLE>
<CAPTION>
(In Thousands)
-------------------------------------------------------
December 31, 1998 December 31, 1997
------------------------ ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 4,517 $ 4,517 $ 2,840 $ 2,840
======== ======== ======== ========
Investment securities $ 7,486 $ 7,488 $ 4,304 $ 4,304
======== ======== ======== ========
Loans $ 32,406 $ 32,305 $ 17,487 $ 17,466
Reserve for loan losses (347) -- (193) --
-------- -------- -------- --------
Net Loans $ 32,059 $ 32,305 $ 17,294 $ 17,466
======== ======== ======== ========
Financial Liabilities:
Deposits:
Noninterest-bearing demand $ 3,407 $ 3,407 $ 2,479 $ 2,479
Interest-bearing demand 10,190 10,190 6,666 6,666
Savings 415 415 200 200
Certificates of deposit 21,655 21,706 11,713 11,719
-------- -------- -------- --------
Total Deposits $ 35,667 $ 35,718 $ 21,058 $ 21,064
======== ======== ======== ========
Borrowed funds $ 1,200 $ 1,200 $ -- $ --
======== ======== ======== ========
</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.
46
<PAGE> 48
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE O - PARENT COMPANY FINANCIAL INFORMATION
The balance sheets, statements of operations, and cash flows for The First
Bancshares, Inc. (parent only) follow:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
December 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Assets:
Interest-bearing deposit with subsidiary bank $ 7,055,283 $ 1,480,758
Investment in subsidiary bank 4,895,907 4,861,510
Land 811,248 --
Other 96,226 32,861
----------- -----------
$12,858,664 $ 6,375,129
=========== ===========
Liabilities:
Stock subscriptions deposits $ 6,432,645 $ --
Other 3,787 7,425
Stockholders' equity 6,422,232 6,367,704
----------- -----------
$12,858,664 $ 6,375,129
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS
December 31,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
Income:
Interest $ 97,944 $ 73,435
Other -- 8,134
--------- ---------
97,944 81,569
Expenses:
Other 77,813 44,034
--------- ---------
Income before income taxes and equity in
undistributed loss of subsidiary 20,131 37,535
Income taxes -- 7,188
--------- ---------
Income before equity in undistributed loss of
subsidiary 20,131 30,347
Equity in undistributed earnings (loss) of
subsidiary 46,641 (292,340)
--------- ---------
Net income (loss) $ 66,772 $(261,993)
========= =========
</TABLE>
47
<PAGE> 49
THE FIRST BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE O - PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 66,772 $ (261,993)
Adjustments to reconcile net loss to net cash
and cash equivalents:
Equity in undistributed earnings (loss) of
subsidiary (46,641) 292,340
Other, net (67,003) (60,327)
----------- -----------
Net cash used in operating activities (46,872) (29,980)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in subsidiary -- --
Acquisition of fixed assets (811,248) (4,800)
----------- -----------
Net cash used in investing activities (811,248) (4,800)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock subscriptions 6,432,645 --
----------- -----------
Net cash provided by financing activities 6,432,645 --
----------- -----------
Net increase (decrease) in cash and cash
equivalents 5,574,525 (34,780)
Cash and cash equivalents at beginning of
period 1,480,758 1,515,538
----------- -----------
Cash and cash equivalents at end of period $ 7,055,283 $ 1,480,758
=========== ===========
</TABLE>
48
<PAGE> 50
DIRECTORS
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION
- ------------ ----------------------------
<S> <C>
David E. Johnson Chairman of the Board and CEO
David Waldron Bomboy Orthopedic Surgeon
M. Ray (Hoppy) Cole, Jr. Sec/Tres & CFO The Headrick Companies, Inc.
E. Ricky Gibson President and Owner, N & H Electronics
Fred A. McMurry Vice President and General Manager, Havard Pest Control
Dawn T. Parker HP Cattle Company
Perry E. Parker Currency Options Trader, Deutche Bank-NY
Ted E. Parker Cattle Farmer
Dennis L. Pierce Real Estate Developer
David L. Rice, III, DMD Dentist
Charles T. Ruffin President and COO
J. Douglas Seidenburg Owner & President Mulloy-Seidenburg & Co, Ltd. CPA's
Ralph T. Simmons Retired VP Sunbeam-Oster Corp.
A. L. Smith Owner, A. L. Smith Oil Co., Inc.
Andrew D. Stelelman London and Stelelman Realtors
<CAPTION>
OFFICERS
<S> <C>
THE FIRST BANCSHARES, INC. THE FIRST NATIONAL BANK OF SOUTH MISSISSIPPI
David E. Johnson David E. Johnson
Chairman of the Board & CEO Chairman of the Board & CEO
Charles T. Ruffin Charles T. Ruffin
Chief Financial Officer President and COO
William M. Renovich Irvinder "Bandy" Singh
Vice President Sr. Vice President and Senior Lender
Chandra B. Kidd Jessie M. Laird
Corporate Secretary Vice President, Branch Manager, Lincoln Rd. Branch
Canda R. Smith Olmi
Vice President & Mgt. Loan Originator
David O. Thoms, Jr., Vice President, Operations
Chandra B. Kidd, Vice President & Corporate Secretary
Amy J. Davis, Asst. Vice President, Data Processing
Christopher M. Hester, Asst. Vice President
</TABLE>
49
<PAGE> 51
SHAREHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at 5:00 p.m., Thursday, May 27,
1999, at the principal offices of The First National Bank of South Mississippi,
6480 U.S. Highway 98 West Hattiesburg, Mississippi 39402. All shareholders are
invited.
<TABLE>
<CAPTION>
CORPORATE OFFICE GENERAL COUNSEL
<S> <C>
6480 U.S. Highway 98 West Nelson Mullins Riley & Scarborough, L.L.P.
Hattiesburg, Mississippi 39402 First Union Plaza, Suite 1400
(601) 268-8998 999 Peachtree Street, N.E.
(601) 268-8904 (fax) Atlanta, Georgia 30309
<CAPTION>
STOCK TRANSFER AGENT INDEPENDENT AUDITOR
<S> <C>
Registrar and Transfer Company T.E. Lott & Company
10 Commerce Drive A Professional Association
Cranford, NJ 07016 Certified Public Accountants
1-800-368-5948 Columbus, Mississippi
</TABLE>
FORM 10-K
Copies of The First Bancshares, Inc. Annual Report to the Securities and
Exchange Commission, Form 10K, and other information may be obtained from:
Charles T. Ruffin, The First National Bank of South Mississippi, Post Office Box
15549, Hattiesburg, Mississippi 39404-5549.
STOCK INFORMATION
There is currently no established public trading market in the Common
Stock, and trading and quotations of the Common Stock have been limited and
sporadic. The Company issued an additional 428,843 shares of its common stock at
$15.00 per share in its public offering in connection with the formation of the
Laurel bank, which closed on December 31, 1998. Based on information available
to the Company from a limited number of sellers and purchasers of Common Stock,
the Company is aware of several transactions between August 27, 1996 and
December 31, 1996, all of which were at $10.00 per share, and the Company
believes transactions in the Common Stock ranged from $10.00 to $12.00 during
1997 and from $12.00 to $17.50 during 1998.
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. As of December 31, 1999 the Company had 1,200
shareholders of record.
50
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
First National Bank of South Mississippi
First National Bank of the Pine Belt
21
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FIRST BANCSHARES, INC. FOR THE YEAR ENDED DECEMBER 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,457
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,963
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,364
<INVESTMENTS-CARRYING> 122
<INVESTMENTS-MARKET> 124
<LOANS> 32,406
<ALLOWANCE> 347
<TOTAL-ASSETS> 49,913
<DEPOSITS> 35,667
<SHORT-TERM> 0
<LIABILITIES-OTHER> 6,624
<LONG-TERM> 1,200
0
0
<COMMON> 722
<OTHER-SE> (5,700)
<TOTAL-LIABILITIES-AND-EQUITY> 49,913
<INTEREST-LOAN> 2,558
<INTEREST-INVEST> 400
<INTEREST-OTHER> 77
<INTEREST-TOTAL> 3,035
<INTEREST-DEPOSIT> 1,412
<INTEREST-EXPENSE> 1,418
<INTEREST-INCOME-NET> 1,617
<LOAN-LOSSES> 170
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 1,595
<INCOME-PRETAX> (67)
<INCOME-PRE-EXTRAORDINARY> (67)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (67)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
<YIELD-ACTUAL> 4.97
<LOANS-NON> 0
<LOANS-PAST> 1
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 12
<ALLOWANCE-OPEN> 193
<CHARGE-OFFS> 16
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 347
<ALLOWANCE-DOMESTIC> 347
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
