SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
| [X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 20082011 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 0-22842
FIRST BANCSHARES, INC.
----------------------
(Exact
(Exact name of registrant as specified in its charter)
Missouri 43-1654695
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
142 E. First Street
Mountain Grove, Missouri 65711
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(Address of principal executive offices) (Zip Code)
Issuer's
| Missouri | 43-1654695 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
142 E. First Street Mountain Grove, Missouri | 65711 |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number: number, including area code: (417) 926-5151
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per share The Nasdaq Stock Market LLC
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(Title of Class) (Name of each exchange on which
registered)
| Common Stock, par value $0.01 per share | The Nasdaq Stock Market LLC |
| (Title of each class) | (Name of each exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No x --- ---
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes No x --- ---
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No --- ---
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. [x]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [x]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No x
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As of September 26, 2008,27, 2011, the registrant had outstanding 1,550,815 shares of common stock. The registrant's common stock is listed on the Nasdaq Global Market of The Nasdaq Stock Market LLC under the symbol "FBSI." The aggregate market value of the common stock held by non-affiliates of the registrant, based on the closing sales price of the registrant's common stock as quoted on The Nasdaq Stock Market LLC on December 31, 2007,2010, was $24.1$9.6 million. For purposes of this calculation, officers and directors of the registrant and the Employee Stock Ownership Plan are considered affiliates of the registrant. The exclusion of the value of the shares owned by these individuals shall not be deemed an admission by the issuer that such person is an affiliatesaffiliate of the issuer.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
June 30, 2008. (Parts I and II)
2. Portions of the Proxy Statement for the 2008 Annual Meeting of
Stockholders. (Part III)
| 1. | Portions of the Annual Report to Stockholders for the Fiscal Year Ended June 30, 2011. (Parts I and II) |
| 2. | Portions of the Proxy Statement for the 2011 Annual Meeting of Stockholders. (Part III) |
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This reportAnnual Report on Form 10-K contains forward-looking statementscertain "forward-looking statements" that may relate to First Bancshares, Inc. ("Company"(“Company” or "First Bancshares"“First Bancshares”), expected future financial
results, strategic plans or objectives. These statements are based on
management's beliefs, assumptions, current expectations, estimates and
projections about within the financial services industry, the economy, and about the
Company and First Home Savings Bank ("Savings Bank" or "First Home"). Words
such as anticipates, believes, estimates, expects, forecasts, intends, is
likely, plans, projects, variations of such words and similar expressions are
intended to identify such forward-looking statements. These forward-looking
statements are intended to be covered by the safe-harbor provisionsmeaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not
guaranteesmay be identified by the use of words such as "believe," "expect," "anticipate," "intend," "should," "plan," "project," "estimate," "potential," "seek," "strive," or "try" or other conditional verbs such as "will," "would," "should," "could," or "may" or similar expressions. These forward-looking statements relate to, among other things, expectations of the business environment in which we operate and about the Company and First Home Savings Bank (“Savings Bank” or “First Home”), projections of future performance, perceived opportunities in the market, potential future credit experience, and involve certain risks, uncertainties and
assumptions that are difficultstatements regarding our strategies. Our ability to predict with regard to timing, extent,
likelihoodresults or the actual effects of our plans or strategies is inherently uncertain. Although we believe that our plans, intentions and degree of occurrence. Actualexpectations, as reflected in these forward-looking statements are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved or realized. Our actual results, and outcomesperformance, or achievements may differ materially differ from what may bethose suggested, expressed, or forecasted in the forward-
looking statements. The Company undertakes no obligation to update, amend, or
clarifyimplied by forward-looking statements whether as a result of new information,
future events (whether anticipateda wide variety or unanticipated), or otherwise.
Futurerange of factors that could cause actual results to differ materially from the
results anticipated or projected include,including, but are not limited to, the
following:to: the credit risks of lending activities, including changes in the level and directiontrend of loan delinquencies other loans of concern,and write-offs that may be impacted by deterioration in the housing and commercial real estate markets and may lead to increased losses and non-performing assets in our loan write-
offs and changesportfolio, result in estimates of the adequacy of theour allowance for loan losses; competitive pressures among depository institutions;losses not being adequate to cover actual losses, and require us to materially increase our reserves; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rate
movementsrates, and their impact on customer behaviorthe relative differences between short and long term interest rates, deposit interest rates, our net interest margin; the
impact of repricingmargin and competitor pricing initiatives on loan andfunding sources; deposit products; the ability to adapt successfully to technological changes to meet
customers' needs and developmentflows; fluctuations in the marketplace;demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas; secondary market conditions for loans and our ability to access
cost-effective funding;sell loans in the secondary market; adverse changes in financialthe securities markets; changes in economicresults of examinations of First Bancshares by the Federal Reserve Bank of St. Louis (the “Federal Reserve”) and of the Savings Bank by the Federal Deposit Insurance Corporation (“FDIC”), the Missouri Division of Finance (“Division”) or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; the possibility that we will be unable to comply with the conditions in generalimposed upon each of the Company and particularly as relatedthe Savings Bank by the Orders to our market areas; new
legislation or regulatory changes,Cease and Desist entered into with their prior primary banking regulator, the Office of Thrift Supervision (“OTS”), including but not limited to our ability to reduce our non-performing assets, which could result in the imposition of additional restrictions on our operations; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risk associated with the loans on our balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; computer systems on which we depend could fail or experience a security breach, or the implementation of new technologies may not be successful; our ability to manage loan delinquency rates; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; increased competitive pressures among financial services companies; changes in federal and/consumer
spending, borrowing and savings habits; legislative or state taxregulatory changes such as the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”)and its implementing regulations that adversely affect our business including changes in regulatory policies and principles, including the interpretation of regulatory capital or other rules; our ability to attract and retain deposits; further increases in premiums for deposit insurance; the availability of resources to address changes in laws, rules, or interpretations thereof by taxing
authorities;regulations or to respond to regulatory actions; adverse changes in the outcomesecurities markets; the Company’s and Savings Bank’s ability to pay dividends on its common stock; the inability of litigation; results of examinations by our banking
regulators, limitations on our future business activities resulting from the
Memorandum of Understanding between the Savings Bank and the Office of Thrift
Supervision entered into on December 1, 2006;key third-party providers to perform their obligations to us; changes in accounting policies, principles policiesand practices, as may be adopted by the financial institution regulatory agencies or guidelines;the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the economic impact of war or any terrorist actions onactivities; other economic, competitive, governmental, regulatory, and technological factors affecting our loan originationsoperations; pricing, products and loan repayments;services; our ability to lease excess space in Company-owned buildings; and other risks detailed in this Annual Report. Any of the forward-looking statements that we make in this Form 10-K and in the other public statements we make may turn out to be wrong because of the inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Additionally, the timing and occurrence or non-occurrence of events may be subject to circumstances beyond our control. We caution readers not to place undue reliance on any forward-looking statements. We do not undertake and specifically disclaim any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for future periods to differ materially from timethose expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect the Company's operating and stock performance.
As used in this report, the terms “we,” “our,” “us” refer to
time in our filings withFirst Bancshares, Inc. and its consolidated subsidiary, First Home Savings Bank, unless the
Securities and Exchange Commission.
iii
context indicates otherwise.
PART I
Item 1. Description of Business
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General
First Bancshares (the “Company”), a Missouri corporation, was incorporated on September 30, 1993 for the purpose of becoming the holding company for First Home Savings Bank (“Savings Bank” or “First Home”) upon its conversion from a state-chartered mutual to a state-chartered stock savings and loan association ("Conversion"). The Conversion was completed on December 22, 1993. At June 30, 2008,2011, the Company had consolidated total assets of $249.2$210.3 million, total deposits of $194.6$180.7 million and stockholders' equity of $27.1$19.1 million. The Company is not engaged in any significant activity other than holding the stock of First Home. Accordingly, the information set forth in this report, including consolidated financial statements and related data, relates primarily to operations of the Savings Bank. The Company's common shares trade on The Nasdaq Stock Market LLC under the symbol "FBSI."
The Savings Bank is a Missouri-chartered, federally insured stock savings and loan association organized in 1911. The Savings Bank conducts its business from its home office in Mountain Grove and ten full service branch facilities in Marshfield, Ava, Gainesville, Sparta, Theodosia, Crane, Galena, Kissee Mills, Rockaway Beach and Springfield, Missouri. The full service
branch in Springfield, Missouri opened in July 2006. In addition, in March
2007 the Savings Bank opened a loan origination office in Springfield,
Missouri for the purpose of originating primarily loans on single-family
residences for sale into the secondary market. The deposits of the Savings Bank are insured up to applicable limits by the Federal Deposit Insurance Corporation ("FDIC"). As a Missouri-chartered savings and loan association, First Home currently derives its authority from, and is governed by, the provisions of the Missouri Savings and Loan Law ("Missouri Law") and regulations of the Missouri Division of Finance ("Division"). As a result of the enactment of the Dodd-Frank Act, effective July 21, 2011, the FDIC became the Savings Bank’s primary federal banking regulator and the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) became the Company’s primary federal regulator, each assuming the powers and responsibilities of our former primary banking regulator, the Office of Thrift Supervision ("OTS"(“OTS”). SeeFor additional information regarding the Dodd-Frank Act, see " – Regulation of First Home" below.
The Savings Bank provides its customers with a full array of community banking services. The Savings Bank is primarily engaged in the business of attracting deposits from the general public and using such deposits, together with other funding sources, to invest in residential mortgage loans, commercial real estate loans, land loans, second mortgage loans, consumer loans and commercial business loans, for its loan portfolio. As noted above,
the Savings Bank also originates residential mortgage loans for sale into the
secondary market. Excess funds are typically invested in securities and other assets. At June 30, 2008,2011, the Savings Bank's net loans were $167.0$95.8 million, or 67.0%45.6% of consolidated total assets. The $167.0Gross loans of $97.6 million in total loans consisted of $76.0$54.9 million, or 44.8%56.2% of total loans, in residential mortgages, $53.7$29.9 million, or 31.7%30.6% of total loans, in commercial real estate loans, $10.8$3.3 million, or 6.4%3.4% of total loans, in land loans, $7.1$3.9 million, or 4.2%4.0% of total loans, in second mortgage loans, $10.2$2.3 million, or 6.0%2.4% of total loans, in consumer loans, and $11.8$3.3 million, or 6.9%3.4% of total loans, in commercial business loans. Of loans maturing after June 30, 2009,2012, at June 30, 2011, adjustable rate mortgage ("ARM") loans accountaccounted for approximately 62.8%68.2% of loans secured by real estate and 55.5%64.3% of the totalgross loan portfolio. See "-- Lending Activities" below.
Corporate
Recent Developments and Corporate Overview
Economic Conditions
The economic decline that began in calendar 2008 and that has continued to varying degrees into calendar 2011 has created significant challenges for financial institutions such as First Home Savings Bank continuesBank. Dramatic declines in the housing market, marked by falling home prices and increasing levels of mortgage foreclosures, have resulted in significant write-downs of asset values by many financial institutions, including government-sponsored entities and major commercial and investment banks. In addition, many lenders and institutional investors have reduced, and in some cases ceased to operate underprovide, funding to borrowers, including other financial institutions, as a Memorandumresult of Understanding (the "MOU") withconcern about the OTS.stability of the financial markets and the strength of counterparties. While the economy has recently shown some small signs of improvement, no upward trend seems to have been established.
New Federal Legislation
Last year Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act which is significantly changing the current bank regulatory structure and affect the lending, investment, trading and operating activities of financial institutions and their holding companies. The
MOU was entered into duringDodd-Frank Act has eliminated, as of July 21, 2011, the
December 31, 2006 quarter. The MOU resulted from issues noted duringOffice of Thrift Supervision, which had been the
examination ofprimary federal regulator for both the Savings Bank
conductedand the Company. First Home Savings Bank is, as of that date, regulated by the
OTS, the report on which was
dated in July 2006, and included deficiencies in lending policies and
procedures, recent operating losses,FDIC (the primary federal regulator for state chartered banks) and the needDivision. The Dodd-Frank Act also authorizes the Federal Reserve Board to revise both the business
plansupervise and the budget to enhance profitability. The corrective actions required
to be taken by the Savings Bank under the MOU include, among others: (1)
developing procedures concerning ongoing credit administration and monitoring;
(2) continuing to identify, track and correct credit and collateral
documentation exceptionsregulate all savings and loan policy exceptions; (3) preparingholding companies like First Bancshares, Inc., in addition to bank holding companies which it currently regulates. As a result, the Federal Reserve Board’s current regulations applicable to bank holding companies, including holding company capital requirements, will eventually apply to savings and submittingloan holding companies like First Bancshares, Inc. These capital requirements are substantially similar to the capital requirements currently applicable to the Savings Bank'sBank. The Dodd-Frank Act also requires the Federal Reserve Board to set minimum capital levels for bank holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Directors an accurateTier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. Bank holding companies with assets of less than $500 million are exempt from these capital requirements. The legislation also establishes a floor for capital of insured depository institutions that cannot be lower than the standards in effect today, and complete
loan-to-one borrower report; (4) preparingdirects the federal banking regulators to implement new leverage and updating, where appropriate,capital requirements within 18 months that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives. The Dodd-Frank Act also created a workout plannew Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for each classified asseta wide range of consumer protection laws that apply to all banks and savings institutions such as the Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over $250,000; (5) adopting a revised
loan loss allowance policy; (6) amendingall banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets will be examined by their applicable bank regulators, in the Savings Bank's appraisal policy
to require written reviewBank’s case, the FDIC.
The legislation also broadens the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less
tangible equity capital of all appraisals prior to final loan approval; (7)
adopting a revised loan policy that providesfinancial institution. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for underwriting guidelines, loan
documentation,banks, savings institutions and credit administration procedures for unsecured loans; (8)
requestingunions to $250,000 per depositor, retroactive to January 1, 2009, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2013. Additionally, regulatory changes in overdraft and interchange fee restrictions may reduce our noninterest income. Lastly, the consentDodd-Frank Act will increase stockholder influence over boards of the FDIC for the Savings Bank's subsidiary, FYBAR
Service Corporation,directors by requiring companies to hold real estate for investment, or approvinggive stockholders a plan
for divestiture of such investment by June 30, 2007; (9) implementing
corrective actions with respect to the previously conducted independent
information technology audit;non-binding vote on executive compensation and (10) preparing, adoptingso-called “golden parachute” payments, and submitting to
the OTS a comprehensive three year business plan and budget. The Company
believes that the Savings Bank has satisfactorily addressed all of the issues
raised by the MOU. During July 2007, the OTS performed an on-site review of
the progress made on resolving the issues discussed in the MOU. The Savings
Bank did not receive a formal report from the OTS on the results of this
review.
On February 22, 2008, the Company filed a preliminary proxy statement
and a Schedule 13E-3, in connection with the Company's intention to reduce the
number of stockholders to less than 300 through a reverse stock split at a
one-to-one thousand ratio, with the purpose of terminating the Company's
registration and suspending the Company's reporting obligations withauthorizing the Securities and Exchange Commission ("SEC"(“SEC”) to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.
Federal Deposit Insurance
The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009. Non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2013.
Pursuant to the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”), the FDIC is authorized to set the reserve ratio for the Deposit Insurance Fund (“DIF”) annually at between 1.15% and 1.5% of estimated insured deposits. The Dodd-Frank Act mandates that the statutory minimum reserve ratio of the DIF increase from 1.15% to 1.35% of insured deposits by September 30, 2020. Banks with assets of less than $10 billion, such as First Home Savings Bank, are exempt from any additional assessments necessary to increase the reserve fund above 1.15%.
As part of a plan to restore the reserve ratio to 1.15%, the FDIC imposed a special assessment equal to five basis points of assets less Tier 1 capital as of June 30, 2009, which was payable on September 30, 2009. In addition, the FDIC has increased its quarterly deposit insurance assessment rates and amended the method by which rates are calculated. Beginning in the second quarter of 2009, institutions are assigned an initial base assessment rate ranging from 12 to 45 basis points of deposits depending on risk category. The initial base assessment is then adjusted based upon the level of unsecured debt, secured liabilities, and brokered deposits to establish a total base assessment rate ranging from seven to 77.5 basis points.
On November 12, 2009, the FDIC approved a final rule requiring insured depository institutions to prepay on December 30, 2009, their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012. Estimated assessments for the fourth quarter of 2009 and for all of 2010 are based upon the assessment rate in effect on September 30, 2009, with three basis points added for the 2011 and 2012 assessment rates. In addition, a 5% annual growth in the assessment base is assumed. Prepaid assessments are to be applied against the actual quarterly assessments until exhausted, and may not be applied to any special assessments that may occur in the future. Any unused prepayments will be returned to the institution on June 30, 2013. On December 30, 2009, we prepaid $1.6 million in estimated assessment fees for the fourth quarter of 2009 through 2012. Because the prepaid assessments represent the prepayment of future expense, they do not affect our tax obligations or regulatory capital (the prepaid asset will have a risk-weighting of 0%). This would have eliminated
The preceding is a summary of recently enacted laws and regulations that could materially impact our results of operations or financial condition. For
further information, see “Item 1, Business -- Regulation of First Home” and “-- Regulation of First Bancshares” included in our Annual Report on Form 10-K for the significant costs associated with being a public company. year ended June 30, 2011.
On April 8, 2008,August 17, 2009, the Company filed an amendmentand the Savings Bank each entered into a Stipulation and Consent to the preliminary proxy statement filed on
February 22, 2008, changingIssuance of Order to Cease and Desist from the ratios from one-to-one thousand to one-to-
five hundredOTS. The Orders are now enforced by the Federal Reserve and on April 25, 2008 mailed the proxy materials to its
shareholders.
The Annual Meeting of Stockholders' took place in Mountain Grove,
Missouri on June 10, 2008. The resolutions relatedFDIC as the successors to the reverse stock splitOTS.
Under the terms of the orders, the Bank and the forward stock split did not receive required shareholderCompany, without the prior written approval of their respective banking regulators, may not:
| · | Increase assets during any quarter; |
| · | Increase brokered deposits; |
| · | Repurchase shares of the Company’s outstanding common stock; and |
| · | Issue any debt securities or incur any debt (other than that incurred in the normal course of business). |
Other material provisions of the order require the Savings Bank and
consequently did not pass. As a result, the Company to:
| · | develop an acceptable business plan for enhancing, measuring and maintaining profitability, increasing earnings, improving liquidity, maintaining capital levels; |
| · | ensure the Savings Bank’s compliance with applicable laws, rules, regulations and agency guidelines, including the terms of the order; |
| · | not appoint any new director or senior executive officer or change the responsibilities of any current senior executive officers without notifying the applicable banking regulators; |
| · | not enter into, renew, extend or revise any compensation or benefit agreements for directors or senior executive officers; |
| · | not make any indemnification, severance or golden parachute payments; |
| · | enhance its asset classification policy; |
| · | provide progress reports to the FDIC regarding certain classified assets; |
| · | submit a comprehensive plan for reducing classified assets; |
| · | develop a plan to reduce the concentration of certain loans contained in the loan portfolio and that addresses the assessment, monitoring and control of the risks associated with the commercial real estate portfolio; |
| · | not enter into any arrangement or contract with a third party service provider that is significant to the overall operation or financial condition of the Savings Bank, or that is outside the normal course of business; and prepare and submit progress reports to the FDIC and the Federal Reserve. |
All customer deposits remain insured to the fullest extent permitted by the FDIC since entering into the order. The Savings Bank has continued to serve its customers in all areas including making loans, establishing lines of credit, accepting deposits and processing banking transactions. Neither the Company nor the Savings Bank admitted any wrongdoing in entering into the respective Stipulation and Consent to the Issuance of a Cease and Desist Order. No monetary penalties were imposed or recommended in connection with the same reporting obligationsorders.
We believe that the Company and the Savings Bank are currently in substantial compliance with all of the requirements of the orders through their normal business operations. The orders will remain in effect until modified or terminated by the FDIC or Federal. Reserve, as the case may be.
For additional information regarding the terms of the orders, please see our Form 8-K that we filed with the SEC on August 18, 2009. Further, we may be subject to more severe future regulatory enforcement actions, including but not limited to civil money penalties, if we do not comply with the SEC.terms of the order.
Review of Loan Portfolio
Since November 2008, in light of a continually worsening economy, the Savings Bank has conducted ongoing, in depth reviews and analyses of the loans in its portfolio, primarily focusing on its commercial real estate, multi-family, development and commercial business loans. During the fiscal years ended June 30, 2009 and June 30, 2010, based primarily on this ongoing loan review, and in light of the economic conditions, the Company recorded provisions for loan losses of $5.3 million and $852,000, respectively. During the year ended June 30, 2008,2011, an additional provision for loan losses totaling $1.2 million was recorded by the Company.
Beginning with the quarter ended September 30, 2009, the Company has engaged the services of a consultant with an extensive background in commercial real estate, multi-family, development and commercial business lending. The purpose of hiring the consultant was to assist the Company and the Savings Bank in meeting reporting deadlines established in the Orders and, to validate the methodology used internally to review, evaluate and analyze loans. This consultant performed an extensive review of the Company’s credits of $250,000 or larger during the quarter ended September 30, 2009 and performed follow up reviews each quarter through the quarter ended June 30, 2011 in order to assist management’s resolution of problem loans.
Litigation
On January 21, 2011 a jury verdict was entered intoagainst the Company and the Bank in the Circuit Court of Ozark County, Missouri, following a lease agreementjury trial in a claim made by a former employee of the Bank relating to her termination from the Bank in 2007. The former employee claimed that the Bank wrongfully terminated her as a result of her reporting to superiors and Board members what she believed to be illegal activities of two former presidents of the Bank. This alleged cause of action in Missouri is commonly known as a whistleblower lawsuit. Protection for approximately 5,100 square feetwhistleblowers has been carved out as a protected class of office spaceemployees who, as with certain other classes, such as gender, age, and race for example, cannot be terminated as a result of reporting alleged illegal activities. The jury verdict was against the Bank for $182,000 in Springfield, Missouri.compensatory damages (lost wages) and for punitive damages in the amount of $235,000, or a total of $417,000. The Bank believes that the verdict relating to the alleged reporting by the former employee of illegal activities is contrary to the facts and the law, and the Bank filed post-trial motions including a motion for a new space housestrial and other relief. The post-trial motions were denied by the court, and the Bank has filed a notice of appeal. The Bank anticipates its appeal will be filed in September 2011. During the quarter ended December 31, 2010, the Bank recorded a liability in the amount of $300,000 in connection with this litigation in anticipation of the final amount it will owe the plaintiff.
In September 2006, the then Chief Financial Officer of both the Savings Bank's Loan Production
Office, which has been operating outBank and the Company was terminated. Subsequent to her termination, the former CFO filed a lawsuit against the Company and the Savings Bank. The alleged cause of
action is a much smaller location since itwhistleblower lawsuit. The former CFO claimed she was approvedterminated for repeatedly reporting violations of law by the State of Missouri during the third quarter of fiscal 2007. In
addition to the Loan Production Office, the facility has offices for senior
officerstwo former CEOs of the Company and the Savings Bank, who spend timeand others during her tenure with the organization, and for refusing to sign Securities and Exchange Commission certifications subsequent to September 15, 2006. Both the Company and the Savings Bank deny all claims and assertions made by the former CFO.
The case has been set for mediation in Springfield,September 2011, and, if the mediation is unsuccessful, the case is currently scheduled for trial in January 2012.
The law firm representing the Company, the Savings Bank and their insurance carrier has advised that they have not reached an opinion that an unfavorable outcome is either probable or remote, and therefore, they expressed no opinion as well as,to the ultimate outcome of this matter.
Market Area
At June 30, 2011, the unemployment rate in the
Company's home officeSavings Bank’s market area remained higher than levels associated with a growing economy. However, the Savings Bank’s market area unemployment rate has generally decreased over the past two years, it is somewhat lower than the national average. Economic conditions in
Mountain Grove, Missouri.the Savings Bank’s market areas, with the exception of a recent slight downturn in the housing market, have been relatively stable. The
move
to the larger facility was completed in November 2007.
During the year ended June 30, 2008, the operationsoverall condition of the
in-house
brokerage service, which wasprimary market area can be characterized as stable, with modest growth potential, based
in Mountain Grove, Missouri, were
discontinued because of staffing difficulties. This brokerage service operated
under a Savings Bank subsidiary, First Home Investments. The Company entered
into an agreement with an outside company based in Springfield, Missouri to
provide brokerage services to the Savings Bank's customers.
2
Market Area
on regional population and economic projections.
The Savings Bank is headquartered in the town of Mountain Grove, in Wright County, Missouri. Wright County has a population of approximately 17,000 and its economy is highly diversified, with an emphasis on the beef and dairy industries. Except for the branch office openthat opened in July of 2006 in Springfield, Missouri, the Savings Bank's market area is predominantly rural in nature. Its deposit taking and lending activities primarily encompass Wright, Webster, Douglas, Christian, Ozark, Stone, Taney and since July 2006,
Greene counties in Missouri. Significant companies in the rural areas include Hutchens Steel,Industries, Bore Flex, Inc., Copeland Corporation, Dairy Farmers of America and WoodPro Cabinetry. The Springfield, Missouri market has a great manynumber of significant companies, including Kraft Foods, Willow Brook Foods, Bass Pro Shops, O'Reilly Automotive, Positronic Industries Lauren Cook Company and Paul Mueller Company. In addition,Education and health care are the two largest employment segments in the Springfield, Missouri State University,market and provide stability to the economic environment of Springfield and the surrounding area. Both St. John's Hospital and Cox Health Systems are major employers and contributors to the
economic well-beingprovide satellite services that mirror a large portion of the Springfield,Savings Bank’s footprint. Both Missouri State University and Drury University have programs that reach across the Savings Bank’s delineated market area. The Savings Bank also transacts a significant amount of business in Texas County, Missouri. The Savings Bank's market area, especially Ozark County because of its proximity to Norfolk and Bull Shoals lakes, has experienced a rather slow but steady growth from retirees. The Springfield market has shownhad robust growth and development overfor several years, and while that growth and development slowed substantially during the past several years.last three to four years, the market remains relatively strong. Economic conditions in the Savings Bank's market areas have been relatively stable, in spite of the recent downturn in the housing market and the economy in general.
Selected Consolidated Financial Information
This information is incorporated by reference to pages 4 and 5 of the 20082011 Annual Report to Stockholders ("Annual Report") attached hereto as Exhibit 13.
Average Balances, Yields Earned and Rates Paid
This information is incorporated by reference to page 1620 of the Annual Report attached hereto as Exhibit 13.
Yields Earned and Rates Paid
This information is incorporated by reference to page 1721 of the Annual Report attached hereto as Exhibit 13.
Rate/Volume Analysis
This information is incorporated by reference to page 1823 of the Annual Report attached hereto as Exhibit 13.
Lending Activities
General. Historically, the principal lending activity of the Savings Bank has been the origination of conventional mortgage loans for the purpose of purchasing, constructing or refinancing one-to-four family owner occupied homes within its primary market area. While the Savings Bank continues to actively seek originations of such loans, most of the fixed-rate loans of this type are currently originated for sale in the secondary market. In an attempt to diversify its lending portfolio, the Savings Bank also originates commercial real estate loans, land loans, consumer loans, such as mobile home loans, automobile loans and loans secured by savings accounts, and commercial business loans. The ratiosproportion of residential and commercial real estate loans to total loans has shifted gradually in recent years as a result of both this 3
diversification and the minimal number of fixed-rate, one-to-four family loans originated for the portfolio. Additionally, the Savings Bank usedoriginated and purchased loans pursuant to the Small Business Administration's ("SBA") guaranteed programs between September 2000 and December 2005. As of June 30, 2008, 222011, the Savings Bank had eleven commercial business and commercial real estate loans with an aggregate balance of $4.1$2.2 million havethat had SBA guarantees. The Savings Bank washas not involvedbeen active in SBA lending during the
fiscal years ended June 30, 2008 and 2007.
since December 2005.
In addition to loans within the Savings Bank's primary market area, the Savings Bank also has originated eightnine one-to-four family loans, 12six commercial real estate loans, fourthree land loans, three commercial business loans and sevenfour consumer loans in Arkansas, Oregon, Kansas, Nebraska, Oklahoma, NevadaColorado and ninesix other states. The 3425 loans had an aggregate balance of $6.3$4.3 million at June 30, 2008.2011. As of June 30, 20082011 there was one loan of $283,000$303,000 collateralized by a commercial real estatebuilding in excess of 90 days past due. Additionally, at June 30, 2011 there was one out-of-state loan totaling $194,000 collateralized by business equipment that was 36 days past due, and one consumer loan of $250,000 on commercial real estate more than 60 days, but less than 90
days, past due. Additionally, there were three out-of-state loans totaling
$604,000 that were past due between five and 1813 days. The remaining 2922 loans were performing according to their scheduled repayment terms.
At June 30, 2008,2011, the Savings Bank's net loans receivable totaled $167.0$95.8 million, which represented 67.0%45.6% of consolidated total assets. Historically, the Savings Bank has primarily originated ARMadjustable rate loan products. At June 30, 2008, ARM2011, adjustable rate loans with a maturity date after June 30, 20092012 accounted for $98.6$64.4 million or 58.2%66.0% of the total loan portfolio and $92.7$62.7 million or 62.8%68.2% of loans secured by real estate. The Savings Bank focuses on serving the needs of its local community and strongly believes in a lending philosophy that emphasizes individual customer service and flexibility in meeting the needs of its customers. DuringIn the four years ended June 30, 2006,year period since the end of fiscal 2007, the Savings Bank experienced a significant decline in the amount of its one-to-four family loan
portfolio. While this trend was moderately reversed during the year ended June
30, 2007, during the year ended June 30, 2008, the Savings Bankhas experienced a significant decrease in its one-to-four familytotal loan portfolio. The decreasegross portfolio has decreased by $13.4 million or 12.1% over the last fiscal year and by $63.9 million, or 39.6%, over the last four fiscal years to $97.6 million at June 30, 2011. During the last four fiscal years, the Savings Bank’s one-to-four family portfolio decreased by
$31.6 million, or 36.6%, from $86.5 million to $54.9 million. During the year ended June 30, 2011, originations of one-to-four family loans, including those originated for sale in the secondary market, increased by $2.5 million to $6.9 million from $4.4 million in the year ended June 30, 2010. The increase in one-to-four family originations for the portfolio during fiscal 20082011 was the result of the decline in economic conditions duringSavings Bank offering, on a limited basis, both fifteen-year, fixed-rate loans, and lower, more attractive initial rates on its one, three, and five year ARMs. The total of these loans will not exceed $5.0 million. Other than the period and the
resulting negative impact on property values. In addition,fifteen year loans just discussed, the Savings Bank retained primarily adjustable rate in its portfolio and almost all one-to-four family loans with fixed interest rates have beenwere sold to other investors. While the origination of loans for others does not increase the Savings Bank's loan portfolio, it does provide the Savings Bank with the opportunity to generate fee income, and the ability to servicemeet its customer base.customers’ needs. In addition, the Savings Bank historically has retained some fixed-rate mortgage loans in its portfolio. The retained loans generally have a higher interest rate than those loans originated for other investors. Generally, fixed rate loans that are retained in the Savings Bank's portfolio will be smallare loans with smaller principal balances ($50,000 or less) where the value of the acreage is too great for the residence to qualify under the secondary market standard.
standards.
Loan Portfolio Analysis. The following table sets forth the composition of the Savings Bank's loan portfolio by type of loan as of the dates indicated. Construction loans are included in residential and commercial real estate loans depending on the type of security. At June 30, 2008,2011, the Savings Bank had $13.9$3.6 million, or 8.34%3.7% of total loans, in interim construction loans in its portfolio of which $4.4 million$307,000 were for residential construction $574,000 were for multi-family construction and $9.0$3.3 million were for non-residential construction, as described below.commercial construction. At June 30, 2007,2010, the Savings Bank had $11.0$3.7 million, or 6.89%3.3% of total loans, in interim construction loans in its portfolio.portfolio of which $461,000 were for residential construction and $3.2 million were for commercial construction, as described below. Because of the relatively small amount of its construction loans, and the fact that most of these loans are made with the intent for them to convert to permanent financing, the Savings Bank does not separately disclose these types of loans.
4
At June 30,
------------------------------------------------------------------------------------
2008 2007 2006 2005 2004
------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------------------------------------------------------------------------------------
{Dollars in thousands}
Type of Loan:
Real Estate Loans
Residential Mortgage $ 75,992 44.83% $86,530 53.57% $82,519 55.59% $89,220 54.36% $95,339 56.21%
Commercial real
estate (1) 53,730 31.69 40,331 24.97 37,097 24.99 41,492 25.28 40,196 23.70
Land 10,756 6.34 9,095 5.63 7,949 5.36 9,450 5.76 9,019 5.32
Second mortgage loans 7,103 4.19 4,828 2.99 3,659 2.47 4,161 2.54 3,882 2.29
------------------------------------------------------------------------------------
Total mortgage
loans 147,581 87.05 140,784 87.16 131,224 88.41 144,323 87.94 148,436 87.52
------------------------------------------------------------------------------------
Consumer Loans:
Automobile loans 4,726 2.79 4,078 2.53 3,467 2.34 4,910 2.99 5,314 3.14
Savings account loans 1,468 0.87 1,504 0.93 1,709 1.15 1,709 1.04 1,900 1.12
Mobile home loans 2,977 1.76 3,589 2.22 2,438 1.64 2,139 1.30 1,970 1.16
Other consumer 1,007 0.59 2,860 1.77 1,060 0.71 979 0.60 1,629 0.96
------------------------------------------------------------------------------------
Total other loans 10,178 6.01 12,031 7.45 8,674 5.84 9,737 5.93 10,813 6.38
------------------------------------------------------------------------------------
Commercial business 11,769 6.94 8,700 5.39 8,532 5.75 10,057 6.13 10,350 6.10
------------------------------------------------------------------------------------
Total loans 169,528 100.00% 161,515 100.00% 148,430 100.00% 164,117 100.00% 169,599 100.00%
======= ======= ======= ======= =======
Add:
Unamortized deferred loan
costs, net of origination
fees 304 171 184 201 224
Less:
Undisbursed loans in
process* - 1 4,153 3,324 2,324
Allowance for possible
loan losses 2,797 2,692 2,474 2,851 1,240
-------- -------- -------- -------- --------
Total loans receivable,
net $167,035 $158,993 $141,987 $158,143 $166,259
======== ======== ======== ======== ========
____________
(1) Includes multi-family residential loans
6
| | | At June 30, |
| | | 2011 | | | 2010 | | | 2009 | | | 2008 | | | 2007 |
| | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent |
| | | {Dollars in thousands} |
| Type of Loan: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real Estate Loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential Mortgage | | $ | 54,860 | | | | 56.22 | % | | $ | 60,217 | | | | 54.24 | % | | $ | 71,141 | | | | 51.89 | % | | $ | 75,992 | | | | 44.83 | % | | $ | 86,530 | | | | 53.57 | % |
| Commercial real estate (1) | | | 29,877 | | | | 30.61 | | | | 34,573 | | | | 31.15 | | | | 39,816 | | | | 29.04 | | | | 53,730 | | | | 31.69 | | | | 40,331 | | | | 24.97 | |
| Land | | | 3,283 | | | | 3.36 | | | | 4,358 | | | | 3.93 | | | | 7,395 | | | | 5.39 | | | | 10,756 | | | | 6.34 | | | | 9,095 | | | | 5.63 | |
| Second mortgage loans | | | 3,945 | | | | 4.04 | | | | 4,469 | | | | 4.03 | | | | 4,900 | | | | 3.57 | | | | 7,103 | | | | 4.19 | | | | 4,828 | | | | 2.99 | |
| Total mortgage loans | | | 91,965 | | | | 94.23 | | | | 103,617 | | | | 93.35 | | | | 123,252 | | | | 89.89 | | | | 147,581 | | | | 87.05 | | | | 140,784 | | | | 87.16 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consumer Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Automobile loans | | | 807 | | | | 0.83 | | | | 1,127 | | | | 1.02 | | | | 2,052 | | | | 1.50 | | | | 4,726 | | | | 2.79 | | | | 4,078 | | | | 2.53 | |
| Savings account loans | | | 1,143 | | | | 1.17 | | | | 1,181 | | | | 1.06 | | | | 1,165 | | | | 0.85 | | | | 1,468 | | | | 0.87 | | | | 1,504 | | | | 0.93 | |
| Mobile home loans | | | 139 | | | | 0.14 | | | | 188 | | | | 0.17 | | | | 267 | | | | 0.19 | | | | 2,977 | | | | 1.76 | | | | 3,589 | | | | 2.22 | |
| Other consumer | | | 245 | | | | 0.25 | | | | 392 | | | | 0.35 | | | | 561 | | | | 0.41 | | | | 1,007 | | | | 0.59 | | | | 2,860 | | | | 1.77 | |
| Total consumer loans | | | 2,334 | | | | 2.39 | | | | 2,888 | | | | 2.60 | | | | 4,045 | | | | 2.95 | | | | 10,178 | | | | 6.01 | | | | 12,031 | | | | 7.45 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial business | | | 3,302 | | | | 3.38 | | | | 4,491 | | | | 4.05 | | | | 9,817 | | | | 7.16 | | | | 11,769 | | | | 6.94 | | | | 8,700 | | | | 5.39 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total loans | | | 97,601 | | | | 100.00 | % | | | 110,996 | | | | 100.00 | % | | | 137,114 | | | | 100.00 | % | | | 169,528 | | | | 100.00 | % | | | 161,515 | | | | 100.00 | % |
| Add: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unamortized deferred loan costs, net of origination fees | | | 199 | | | | | | | | 214 | | | | | | | | 235 | | | | | | | | 304 | | | | | | | | 171 | | | | | |
| Less: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Undisbursed loans in process | | | - | | | | | | | | - | | | | | | | | 1 | | | | | | | | - | | | | | | | | 1 | | | | | |
| Allowance for probable loan | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Losses | | | 1,983 | | | | | | | | 2,527 | | | | | | | | 4,186 | | | | | | | | 2,797 | | | | | | | | 2,692 | | | | | |
| Total loans receivable, net | | $ | 95,817 | | | | | | | $ | 108,683 | | | | | | | $ | 133,162 | | | | | | | $ | 167,035 | | | | | | | $ | 158,993 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ____________ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) Includes multi-family residential loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
One-to-Four Family Residential Loans.Loans. The Savings Bank originates residential mortgage loans to enable borrowers to purchase existing homes, to construct new one-to-four family homes or refinance existing debt on their homes. Management believes that the origination of one-to-four family
residential mortgage loans has contributed positively to interest income. The
increases in delinquencies and losses over the three years ended June 30, 2006
were primarily the result of lending activities other than one-to-four family
residential mortgage lending. At June 30, 2008, $76.02011, $54.9 million, or 44.8%56.2% of the Savings Bank's gross loan portfolio, consisted of residential mortgage loans (almost all of which are non-indexed ARMs, with the principal amortizing over loan terms ranging from 10 to 30 years). Since 1973 until fiscal 2006, the Savings Bank had originated almost exclusively ARM loan products. Initially, ARM loans were indexed to the Savings Bank's cost of funds. In
1979, theThe Savings Bank discontinued the use of the indexed ARM loans and
changed to its current policy of non-indexedoriginates ARMs, which generally allows, but does not require, the Savings Bank to adjust the interest rate once a year, up or down, not to exceed 1%2% per year. Loans of this nature, with the exception of a small number of loans originated after
1988prior to 1989 generally were limited to a 6% maximum increase over the life of the loan. DuringBeginning in the current year ended June 30, 2007, the Savings Bank began offeringhas offered fixed rate one-to-four family residential mortgage lending in an effort to compete with products offered by other lenders. Most of these loans arewere originated for sale in the secondary market.
The Savings Bank's lending policies generally limit the maximum loan-to-
valueloan-to-value ratio on one-to-four family residential mortgage loans originated for portfolio to 100%80% of the lesser of the appraised value or purchase price of the underlying residential property. Loans exceeding a 80% loan-to-value
ratio have a higher interest rate and loans exceeding a 90% loan-to-value
ratio have private mortgage insurance, which reduces the loan-to-value ratio
to 78%. Reducing theA maximum loan-to-value ratio of these loans80% limits the Savings Bank's exposure and allows these loans to qualify for sale in the secondary market. market. The Savings Bank requires title insurance, fire and casualty coverage and a flood zone determination on all residential mortgage loans originated or purchased. All of the Savings Bank's real estate loans contain "due on sale" clauses. In prior years, theThe Savings Bank's personnel prepared all property
evaluations at no expense to the borrower unless the property is outside its
normal lending territory or the loan exceeds $250,000, in which event,
independent appraisers are utilized. During fiscal 2006, the Savings Bank
changed this practice and now obtains independent appraisals on all residential mortgage loans, except some owner-occupied, single-family residences with a loan balance of $75,000 or less, as well as, all non-residential mortgage loans.
At June 30,
2008,2011, the Savings Bank had
$4.4 million$307,000 in residential construction loans in its residential portfolio with maximum loan-to-value ratios of
85%80% based upon the estimated value upon completion. Typically, the Savings Bank limits its construction lending to individuals who are building their primary residences. Generally, loan proceeds are disbursed as construction progresses, based on invoices presented and inspections made. Construction financing generally is considered to involve a higher degree of risk, and possibly loss, than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the estimated cost of construction and the accuracy of the initial estimate of the property's value at completion of construction or development. During the construction phase, a number of factors could result in delays and cost overruns. The Savings Bank has sought to minimize this risk by primarily limiting construction lending to
qualified borrowersexperienced builders in the Savings Bank's market area. At June 30,
2008,2011, all $307,000 in residential construction loans
to builders amounted to $1.4
million, or 0.83% of the total loan portfolio andwere custom construction loans
amounted to $3.0 million, or 1.78%which represented 0.3% of the total loan portfolio. The majority of these loans are converted into permanent residential real estate loans. During construction, these loans typically require monthly interest-only payments. Once construction is completed, these loans convert to monthly
7
principal and interest based on amortization schedules for conventional residential or commercial buildings.
mortgages.
While construction loans inherently carry a higher level of risk than residential mortgage loans, at June 30, 2008,2011, none of the Savings Bank'sBank’s one-to-four family construction loan portfolio had only one single family construction loan of $170,000 and
one commercial construction loan of $283,000was classified pursuant to federal regulations as substandard. There
are no construction loans classified assubstandard, doubtful or loss at that date. In
addition, there are three one-to-four family construction loans totaling
$247,000 and four commercial construction loans totaling $985,000 on the
Savings Bank's watch list.
loss.
Second Mortgage Loans. The Savings Bank offersoriginates fixed and adjustable rate second mortgage loans that are usuallygenerally made on the security of the borrower's residence. Loans normallytypically do not exceed 80% of the appraised value of the residence, less the outstanding principal of the first mortgage, and have terms of up to 10 years requiring monthly payments of principal and
interest. At June 30, 2008,2011, second mortgage loans amounted to $7.1$3.9 million, or 4.2%4.0% of total loans of the Savings Bank.
During the year ended June 30, 2007, the
The Savings Bank began offeringalso offers home equity lines of credit. Home equity lines of credit have terms of up to ten years and carry an interest rate of prime with a monthly adjustment for those loans that, combined with the first mortgage, result in a loan-to-value ratio of no more than 90%, or a rate of prime plus 1.0% with a monthly adjustment
for those80%. The Savings Bank no longer originates loans that, combined with the first mortgage, result in a loan-to-value ratio of greater than 90%80%. These loans are included with either residential loans, if they have a first lien position, or second mortgages in the various schedules that are part of this report. As of June 30, 2008,2011, home equity lines of credit totaled $3.0$2.5 million, of which $1.1 million was included in the residential loan totals and $1.9$1.4 million was included with the second mortgage total.
Land and Commercial Real Estate Loans.Loans. The Savings Bank had loans outstanding secured by land and commercial real estate of $64.5$33.2 million, or 38.0%34.0% of the Savings Bank's gross loan portfolio, at June 30, 2008. 2011.
The Savings Bank's portfolio ofBank’s commercial real estate loan portfolio consists of loans was $53.7on a variety of types of property with no significant concentrations by property type. In addition to various types of commercial buildings and properties, this portfolio includes loans on farm land used in beef or dairy operations. At June 30, 2011, the portfolio totaled $29.9 million, or 31.7%30.6% of the total loan portfolio, and the collateral properties are primarily located in the Savings Bank's market area. The average size of these loans is $206,000.$143,000. These loans typically are made with a fixed rate for one to five years and then adjust at least annually, thereafter, based on prime rate or the Constant Maturity Treasury Index ("CMT"). The Savings Bank's commercial real estate portfolio
consists of loans on a variety of property types with no large concentrations
by property type. The Savings Bank's largest commercial real estate loan at June 30, 20082011 was a $2.8 million loan.participation loan of $2.6 million. The loan is for a term of threefive years and is collateralized by a residential subdivision locatedshopping center development in Springfield,St. Joseph, Missouri. The Savings Bank also has another loan totaling $695,000 on this development. At June 30, 2008, the loan was2011, these loans were performing according to itstheir repayment terms.
Of primary concern in commercial real estate lending is the feasibility and cash flow potential of the property along with the borrower's creditworthiness and the value of the underlying collateral. Loans secured by income properties are generally larger and involve greater risks than residential mortgage loans because payments on loans secured by income properties are often dependent on successful operation or management of the properties. As a result, repayment of such loans may be subject, to a greater extent than residential real estate loans, to supply and demand in the market infor the type of property securing the loan and, therefore, may be subject to adverse conditions in the real estate market or the economy. If the cash flow from the project is reduced, the borrowers'borrower’s ability to repay the loan may be impaired. Commercial real estate loans also tend to have shorter maturities than residential mortgage loans and may not be fully amortizing, meaning that 8
they may have a significant principal balance or "balloon" payment due on maturity. Commercial real estate loans with principal balances totaling approximately $4.2 million have balance payments at maturity. In addition, commercial real estate properties, particularly industrial properties, are generally subject to relatively greater environmental risks than non-commercial properties and to the corresponding burdens and costs of compliance with environmental laws and regulations. Also, there may be costs and delays involved in enforcing rights of a property owner against tenants in default under the terms of leases with respect to commercial properties. For example, tenants may seek the protection of the bankruptcy laws, which could result in termination of lease contracts, reducing cash flow. Loans secured by farm properties are of particular concern since repayment is dependent upon the successful operation of the farming operations, which is greatly contingent on various factors outside the control of either the borrower or the Savings Bank. These factors include adverse weather conditions, fluctuating market prices of both final product and production costs, factors affecting the physical condition of livestock and government regulations. Weather and grain prices have been favorable for dairy and cattle operations over the past two years, and price increases for both milk and beef products have been rising, improving the outlook for these operations.
At June 30, 2008,2011, the Savings Bank had fourfive loans secured by multi-family residential real estate, totaling approximately $1.8$2.8 million, or 1.1%2.9% of the Savings Bank's gross loan portfolio. At June 30, 2008,2011, all of these loans were performing in accordance with their repayment terms. Multi-family real estate loans are generally originated at 80% of the appraised value of the property or selling price, whichever is less, and carry interest rates that are fixed for one to five years and then adjust annually based on the CMT with the principal amortized over 15 to 30 years. Loans secured by multi-family real estate are generally larger and involve a greater degree of risk than one-to-four family residential loans. In addition, multi-family real estate loans carry risks similar to those associated with commercial real estate lending.
Land loans amounted to $10.8$3.3 million, or 6.3%3.4% of the gross loan portfolio at June 30, 20082011 and are secured primarily by property located in the Savings Bank's primary market area. The Savings Bank'sSaving Bank’s land loans generally are secured by farmof three types: loans on undeveloped land; loans on residential developments, and; loans on commercial development. At June 30, 2011, there was one loan of $109,000, or 3.3%, of land used in beef or dairy operations. Loans secured by farm
properties areloans, that was 42 days delinquent. For additional information concerning the risks related to construction lending, see Item 1A. “Risk Factors – Our loan portfolio includes loans with a higher risk of particular concern since repayment is dependent upon the
successful operation of the farming operations, which is greatly contingent on
various factors outside the control of either the borrower or the Savings
Bank. These factors include adverse weather conditions, fluctuating market
prices of both final product and production costs, factors affecting the
physical condition of livestock and government regulations.
Consumer.loss.”
Consumer Loans. The Savings Bank's consumer loans consist of automobile loans, recreational vehicles, mobile home loans, savings account loans, and various other consumer loans. At June 30, 2008,2011, the Savings Bank's consumer loans totaled $10.2$2.3 million, or 6.0%2.4% of the Savings Bank's total loan portfolio. Subject to market conditions, management expects to continue to market and originate consumer loans as part of its strategy to provide a wide range of personal financial services to its depository customer base and as a means to enhance the interest rate sensitivity of the Savings Bank's interest-earning assets and its interest rate spread.
At June 30,
2008,2011, the Savings Bank's loan portfolio secured by automobiles amounted to
$4.7 million,$807,000, or
2.8%0.8% of total loans. These loans are originated directly with the borrower with a maximum term of 60 months. The Savings Bank may lend up to
100%90% of the purchase price of a new automobile or up to
90% of the purchase price, not to exceed the National Automobile Dealers Association published loan value for a used vehicle. The Savings Bank requires all borrowers to maintain automobile insurance, including collision, fire and theft insurance, with the Savings Bank listed as loss payee.
Loans secured by mobile homes at June 30, 2008 were $3.0 million, or
1.76% of total loans. These loans are generally considered to involve
relatively higher credit risk as compared with conventional one-to-four family
residential mortgage loans because of the typically lower income level and net
worth of the borrower, and the greater likelihood of damage, loss or
depreciation of the mobile home. The age, size and overall condition of the
mobile home are additional factors in the mobile home loan underwriting
consideration process.
9
The Savings Bank's procedures for underwriting consumer loans include an assessment of the applicant's payment history on other debts and ability to meet existing obligations and payments on the proposed loan. Although the borrower's creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the security, if any, to the proposed loan amount.
Consumer loans are considered a greater riskmore risky than residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by rapidly depreciating assets such as automobiles, mobile homes, boats and recreational vehicles. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more
likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. Consumer loans may also give rise to claims and defenses by a borrower against an assignee of such loans such as the Savings Bank, and a borrower may be able to assert against the assignee claims and defenses that it has against the seller of the underlying collateral.collateral. The largest balance of consumer loans are loans for automobiles, boats, recreational vehicles, mobile homes and small unsecured loans. At June 30, 2008,2011, none of loans in the Savings Bank's consumer loan portfolio was 90 days or more past due. However, three loans totaling
approximately $21,000 were on non-accrual status at June 30, 2008.
Commercial Business Loans. Commercial business loans consist of loans to businesses with no real estate as security, such as business equipment loans, farm equipment loans and cattle loans. As of June 30, 2008,2011, these loans totaled $11.8$3.3 million, or 6.9%3.4% of the Savings Bank's total loan portfolio. The Savings Bank has, during the past several years, had a number of commercial business loans that have become problem loans. See "-- Non-Performing Assets and Delinquencies" and "-- Allowance for Loan Losses" for data on loans originated by the Savings Bank.
At June 30, 2008,2011, the average size of a loan in the commercial business categoryloans was $45,265.$30,000. These loans are typically structured withhave maturities of five years or less and have variable interest rates based on the prime rate. The largest commercial business loan at June 30, 20082011 was an amortizing term loan to a Branson, Missouri restaurantrancher, collateralized by restaurant equipmentlivestock and equipment. This loan is 90% guaranteed by a related entity.the Farm Service Agency. At June 30, 2008,2011, the balance of this loan was $596,000$346,000 and all payments had been madethe loan was current according to its repayment terms.
Commercial business loans may involve greater risk than real estate lending. Because payments on commercial business loans are often dependent on successful operation of the business involved, repayment of such loans may be subject to adverse conditions in the economy and other negative circumstances affecting the business. In recognition of this risk, the Savings Bank attempts to make loans secured by adequate collateral to provide the majority of repayment of the principal balance in the event that business operations are not successful. However, collateral for these types of loans may quickly decline in market value through normal usage and changes in technology, and may fluctuate in value based on the success of the business. In addition, the Savings Bank limits this type of lending to its market area and to borrowers with which it has prior experience or who are otherwise well known to the Savings Bank. The Savings Bank generally requires personal guarantees for commercial business loans.
Non-performing
Non-accrual commercial business loans
decreasedincreased by
$151,000$169,000 from
$467,000$82,000 at June 30,
20072010 to
$316,000$251,000 at June 30,
2008. This is reflective of
10
improvements made primarily in2011. The economic environment over the last six months of fiscal 2007,three years resulted in the
underwriting, credit analysis, monitoring and follow-up onadverse market conditions for most businesses. While there was an increase in non-accrual commercial business loans. Noloans during fiscal 2011, the total of non-accrual commercial business loans remains relatively low. The Savings Bank has had some success in working with borrowers to bring their loans current or move them to other institutions. In addition, some of these loans were resolved through repossession of the underlying collateral. However, no assurance can be given however, that non-performing business loans will not increase in future periods, whether originated before or after these
procedural improvements.
periods.
Loan Maturity and RepricingRe-pricing
The following table sets forth certain information at June 30, 20082011 regarding the dollar amount of loans maturing or repricingre-pricing in the Savings Bank'sBank’s portfolio based on their contractual terms to maturity or next repricingre-pricing date, but does not include scheduled payments or potential prepayments.
After
After Three
One Year Years
Through Through After
Within Three Five Five
One Year Years Years Years Total
-------- ------- ------ -------- --------
(Dollars in thousands)
Mortgage Loans
Residential Mortgage $ 6,259 $ 2,922 $1,999 $ 64,812 $ 75,992
Commercial Real Estate 13,661 15,580 1,978 22,511 53,730
Land 2,553 732 874 6,597 10,756
Second Mortgage 1,936 497 628 4,042 7,103
------- ------- ------- -------- --------
Total Mortgage Loans 24,409 19,731 5,479 97,962 147,581
------- ------- ------- -------- --------
Consumer Loans
Automobile 458 2,030 1,983 255 4,726
Savings Account 1,255 170 32 11 1,468
Mobile Home 32 38 182 2,725 2,977
Other 855 87 29 36 1,007
------- ------- ------- -------- --------
Total Consumer Loans 2,600 2,325 2,226 3,027 10,178
------- ------- ------- -------- --------
Commercial Business Loans 4,104 2,175 3,620 1,870 11,769
------- ------- ------- -------- --------
Total Loans $31,113 $24,231 $11,325 $102,859 $169,528
======= ======= ======= ======== ========
| | | | | | | | | After | | | | | | | |
| | | | | | After | | | Three | | | | | | | |
| | | | | | One Year | | | Years | | | | | | | |
| | | | | | Through | | | Through | | | After | | | | |
| | | Within | | | Three | | | Five | | | Five | | | | |
| | | One Year | | | Years | | | Years | | | Years | | | Total | |
| | | (In thousands) | |
| Mortgage Loans | | | | | | | | | | | | | | | |
| Residential Mortgage | | $ | 2,737 | | | $ | 2,488 | | | $ | 1,809 | | | $ | 47,826 | | | $ | 54,860 | |
| Commercial Real Estate | | | 5,542 | | | | 10,959 | | | | 415 | | | | 12,961 | | | | 29,877 | |
| Land | | | 479 | | | | 762 | | | | 256 | | | | 1,786 | | | | 3,283 | |
| Second Mortgage | | | 409 | | | | 188 | | | | 37 | | | | 3,311 | | | | 3,945 | |
| Total Mortgage Loans | | | 9,167 | | | | 14,397 | | | | 2,517 | | | | 65,884 | | | | 91,965 | |
| | | | | | | | | | | | | | | | | | | | | |
| Consumer Loans | | | | | | | | | | | | | | | | | | | | |
| Automobile | | | 118 | | | | 521 | | | | 168 | | | | - | | | | 807 | |
| Savings Account | | | 885 | | | | 242 | | | | 16 | | | | - | | | | 1,143 | |
| Mobile Home | | | 5 | | | | 5 | | | | 5 | | | | 124 | | | | 139 | |
| Other | | | 33 | | | | 139 | | | | 57 | | | | 16 | | | | 245 | |
| Total Consumer Loans | | | 1,041 | | | | 907 | | | | 246 | | | | 140 | | | | 2,334 | |
| | | | | | | | | | | | | | | | | | | | | |
| Commercial Business Loans | | | 1,055 | | | | 772 | | | | 858 | | | | 667 | | | | 3,302 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total Loans | | $ | 11,263 | | | $ | 16,026 | | | $ | 3,621 | | | $ | 66,691 | | | $ | 97,601 | |
The following table sets forth the dollar amount of all loans due more than one year after June 30, 2008,2011, which have fixed interest rates and have floating or adjustable interest rates.
At June 30, 2008
-------------------------------------------------------
Non- Commercial
Commercial Real Estate Commercial
Mortgage and Land Consumer Business Total
Loans Loans Loans Loans Loans
----------- ----------- ---------- -------- --------
(In thousands)
Interest rate terms
on amounts due after
one year:
Fixed $17,188 $13,316 $4,909 $4,373 $ 39,786
Adjustable 57,712 34,956 2,669 3,292 98,629
----------- ----------- ---------- -------- --------
Total $74,900 $48,272 $7,578 $7,665 $138,415
=========== =========== ========== ======== ========
| | | At June 30, 2011 | |
| | | Non- | | Commercial | | | | | | | | | |
| | | Commercial | | Real Estate | | | | | Commercial | | | | |
| | | Mortgage | | And Land | | Consumer | | | Business | | | Total | |
| | | Loans | | | Loans | | | Loans | | | Loans | | | Loans | |
| | | (In thousands) | |
| Interest rate terms | | | | | | | | | | | | | | | |
| on amounts due after | | | | | | | | | | | | | | | |
| one year: | | | | | | | | | | | | | | | |
| Fixed | | $ | 11,608 | | | $ | 8,467 | | | $ | 1,198 | | | $ | 659 | | | $ | 21,932 | |
| Adjustable | | | 44,051 | | | | 18,672 | | | | 95 | | | | 1,588 | | | | 64,406 | |
| Total | | $ | 55,659 | | | $ | 27,139 | | | $ | 1,293 | | | $ | 2,247 | | | $ | 86,338 | |
Loan Solicitation and Processing. The Savings Bank's main source of loans is from contacts and relationships with real estate agents, referrals from customers, and to a lesser extent walk-in applicants. Once a loan application is received, a credit report, along with verification of income, is obtained. An appraisal of the proposed collateral is then ordered. Real estate appraisals are completed by independent appraisers on all one-to-four family 11
loans originated after March 2006 and on all other real estate secured loans. The application is then reviewed by the loan officer and action is taken or loan write-up is presented to the Savings Bank's loan committeeDirectors’ Loan Committee if the amount is greater than the loan officer's lending authority.
Commercial business and commercial real estate loans are also primarily obtained through referrals or loan officer contacts. While loan officers are delegated reasonable commitment authority based on their experience and qualification, credit decisions on significant commercial business loans and commercial real estate loans are made by the loan committee,Directors’ Loan Committee, which is made up of senior loan officers and members of the Board of Directors.
Consumer loans are originated through referrals and existing deposit and loan customers of the Savings Bank. Consumer loan applications below set limits may be processed at branch locations or by loan documentation personnel at the main office.
Loan Originations, Purchases and Sales. During the fiscal year ended
June 30, 2007, the Savings Bank opened a loan origination office in
Springfield, Missouri. This office primarily originates fixed-rate, single-
family loans for sale in the secondary market, as well as, to a lesser extent,
fixed and adjustable rate single family loans for the Savings Bank's
portfolio.Sales. The following table shows total mortgage loans originated, sold and repaid during the periods indicated. No loans were purchased during the periods indicated. Year Ended June 30,
--------------------
2008 2007
-------- --------
(In thousands)
Total grossThe significant decrease in loan originations was the result of several factors, including reduced loan demand resulting from the weak economic climate, and the Savings Bank concentrating its efforts on resolving problem loans at beginningin its existing portfolio rather than on origination of year $161,515 $148,430
Loans originated:
Secondary market loans 21,445 8,900
One-to-four family loans 15,794 32,176
Multi-family residential and commercial
real estate 17,862 24,052
Land 4,013 2,275
-------- --------
Total mortgage loans originated 59,114 67,403
-------- --------
Other loans:
Automobile loans 2,856 4,005
Deposit account loans 655 1,085
Mobile home loans 57 203
Other consumer loans 132 2,640
-------- --------
Total other loans originated 3,700 7,933
-------- --------
Commercial business loans 6,312 6,316
-------- --------
Loans sold:
Secondary market loans 22,343 7,097
-------- --------
22,343 7,097
-------- --------
Loans principal repayments 36,392 60,564
-------- --------
Other decreases:
Loans charged-off 1,222 373
Loans transferred to real estate owned 1,156 533
-------- --------
2,378 906
-------- --------
Total gross loans at end of year $169,528 $161,515
======== ========
new loans.
| | | Year Ended June 30, | |
| | | 2011 | | | 2010 | |
| | | (In thousands) | |
| | | | | | | |
| Total gross loans at beginning of year | | $ | 110,996 | | | $ | 137,114 | |
| Loans originated: | | | | | | | | |
| Secondary market loans | | | 350 | | | | 691 | |
| One-to-four family loans | | | 6,518 | | | | 3,732 | |
Multi-family residential and commercial real estate | | | 3,397 | | | | 4,907 | |
| Land | | | 210 | | | | 242 | |
| Total mortgage loans originated | | | 10,475 | | | | 9,572 | |
| | | | | | | | | |
| Consumer loans: | | | | | | | | |
| Automobile loans | | | 804 | | | | 547 | |
| Deposit account loans | | | 423 | | | | 708 | |
| Mobile home loans | | | 1 | | | | - | |
| Other consumer loans | | | 130 | | | | 166 | |
| Total consumer loans originated | | | 1,358 | | | | 1,421 | |
| | | | | | | | | |
| Commercial business loans originated | | | 785 | | | | 1,293 | |
| | | | | | | | | |
| Loans sold: | | | | | | | | |
| Secondary market loans | | | 289 | | | | 1,531 | |
| | | | | | | | | |
| Loans principal repayments | | | 20,130 | | | | 30,145 | |
| | | | | | | | | |
| Other decreases: | | | | | | | | |
| Loans charged-off | | | 1,850 | | | | 2,915 | |
| Loans transferred to real estate owned | | | 3,901 | | | | 3,736 | |
| Loans transferred to repossessed assets | | | 32 | | | | 77 | |
| | | | 5,783 | | | | 6,728 | |
| Total gross loans at end of year | | $ | 97,601 | | | $ | 110,996 | |
Loan Commitments.Commitments. The Savings Bank issues commitments for one-to-four family residential loans that are honored for up to 60 days from approval. If the commitment expires, it is generally renewed upon request without penalty or 12
expense to the borrower at the current market rate. The Savings Bank had outstanding net loan commitments of $793,000$356,000 at June 30, 20082011 compared to $5.1
million$594,000 at June 30, 2007.2010. The decrease in outstanding loan commitments is primarily the result of the decline in thegenerally poor economic environment, during 2008.generally more restrictive underwriting standards commencing in fiscal 2009 and the Savings Bank’s emphasis on issues relating to the existing loan portfolio. See Note 13 of the Notes to the Consolidated Financial Statements contained in the Annual Report to Shareholders filed as Exhibit 13 to this report.
Non-Performing Assets and Delinquencies.Delinquencies. The Savings Bank generally institutes collection procedures when a monthly payment is two to four weeks delinquent. A first notice is generally mailed to the borrower, or a phone call is made. If necessary, a second notice follows at the end of the next two week period. In most cases, delinquencies are cured promptly. However, if the Savings Bank is unable to make contact with the borrower to obtain full payment, or, full payment is not possible and the Savings Bank cannot work out a repayment schedule, a notice to commence foreclosure may be mailed to the borrower. The Savings Bank makes every reasonable effort, however, to work with delinquent borrowers. Understanding that borrowers sometimes cannot make payments because of illness, loss of employment, etc.,or similar reasons, the Savings Bank will attempt to work with delinquent borrowers who are communicating and cooperating with the Savings Bank.
The Savings Bank generally follows the same collection procedures for non-mortgage loans.
The
During the last two and a half years the Savings BankBank’s senior management team has implemented several new procedures between March 31,
2006 and June 30, 2006 in identifying watch list credits. All loanspolicies to reduce the risk of delinquent loans. The following are some of the key elements of the new policies and procedures: all commercial credits with an aggregate loan balance of $100,000 or greater than $50,000 that are 30must be approved by the Directors’ Loan Committee; individual loan officer commercial lending limits have been lowered; a Credit Administrator position was created to coordinate the loan review process, and; extensive loan officer training has established improved consistency throughout the organization. Also, once a loan is 45 days or more past due, the loan is subject to a full evaluation by the individual loan officer for potential presentation to the Directors’ Loan Committee to review and establish the proper loan grade. Any loan graded a “special mention” or worse is subject to a quarterly review by the loan officer.
These changes were established as a direct result of an extensive internal review of loans that have had events
occur that raise questions as to the ability of the loan to perform in the
future, are added to the watch list. On a quarterly basis, the account
officer must complete a write-up on the credit giving an update and outlining
the status of the credit and what is expected to remove the credit from the
watch list. During fiscal 2007, and againwas initiated in fiscal 2008, the procedures for
identifying and monitoring watch list credits were further refined, and a more
aggressive approach to dealing with such credits was implemented, such as
earlier contact with past due borrowers and consistent follow-up on problem
loans.2009 following changes in senior management. Classified assets increaseddecreased by $1.5$1.1 million to $5.8$10.5 million at June 30, 2008,2011, compared to $4.3$11.6 million of classified assets at June 30, 2007.2010. The increasedecrease in classified assets iswas the result of charge-offs, loan repayments including repayments to bring the impact ofloan current, economic
conditions on borrowers, both individualsshort sales and businesses, and the increased
level of monitoring.
transfers to real estate owned.
The Board of Directors is informed on a monthly basis as to the status of all mortgage and non-mortgage loans that are delinquent, as well as the status on all loans currently in foreclosure or real estate and repossessed assets owned by the Savings Bank through foreclosure.
foreclosure or repossession.
The table below sets forth the amounts and categories of non-performing assets in the Savings Bank's loan portfolio at the dates indicated. Loans are placed on non-accrual status when it is determined that the payment of interest or principal is doubtful of collection, or when interest or principal is past-due 90 days or more. Any accrued but uncollected interest previously recorded on such loans is reversed in the current period and interest income is subsequently recognized upon collection. The Savings Bank would have recorded interest income on non-accrual loans of $219,000$92,000 and $232,000$121,000 during the years ended June 30, 20082011 and 2007,2010, respectively, if such loans had been performing according to their terms during such periods.
Non-accrual loans decreased from $2.9$3.9 million at June 30, 20072010 to $2.3$1.3 million at June 30, 2008.2011. The $2.6 million decrease in non-accrual loans was the result of reductionsa decrease of $151,000$3.2 million in non-accrual residential mortgages, $286,000 in non-
accrual commercial real estate and land loans and $151,000which was partially offset by increases of $184,000 in non-accrual residential mortgages, $169,000 in non-accrual commercial business
loans
which were partially offset by an increase of
$15,000 inand $6,000 non-accrual consumer loans.
13
The decrease in non-accrual commercial real estate loans was primarily the result of the foreclosure on a $2.1 million loan on an office building in downtown Springfield, Missouri, and the foreclosure on a $1.2 million loan on a motel in Branson, Missouri. Both of these properties were in real estate owned at June 30, 2011.
The Savings Bank considers all non-accrual loans, and loans past due 90 days or more and performing trouble debt restructured loans to be impaired. These loans are closely monitored and any necessary additional action will be taken as warranted.
One-to-four family loans which are 60 or more days but less than 90 days
past due increased during the fiscal year 2008 to $294,000 at June 30, 2008
from $119,000 at June 30, 2007.
The following table sets forth information with respect to the Savings Bank's non-performing assets at the dates indicated. At June 30,
-----------------------------------------------
2008 2007 2006 2005 2004
------ ------ ------ ------ ------
(DollarsPerforming trouble debt restructured loans are included in thousands)
Loans accounted for on a
non-accrual basis:
Real estate:
Residential $ 94 $ 245 $ 322 $ 221 $ 158
Commercial 1,882 2,171 306 1,112 386
Commercial business 316 467 65 1,502 1,224
Consumer 21 6 148 19 44
------- ------ ------ ------ ------
Total $2,313 $2,889 $ 841 $2,854 $1,812
======= ====== ====== ====== ======
Accruing loans which are
contractually past due 90
days or more:
Real estate:
Residential $ 296 $ 278 $ - $ 63 $ 555
Commercial 64 81 - 30 142
Commercial business - - - - -
Consumer - - 3 55 13
------- ------ ------ ------ ------
Total $ 360 $ 359 $ 3 $ 148 $ 710
======= ====== ====== ====== ======
Total of non-accrual and
90 days past due
loans $ 2,673 $3,248 $ 844 $3,002 $2,522
Real estate owned 1,206 291 497 340 174
Repossessed assets - 2 - - -
Other non-performing assets:
Impairedthe impaired loans not past due - - - 2,004 -
Slow homedue.
| | | At June 30, | |
| | | 2011 | | | 2010 | | | 2009 | | | 2008 | | | 2007 | |
| | | (Dollars in thousands) | |
Loans accounted for on a non-accrual Basis: | | | | | | | | | | | | | | | |
| Real estate: | | | | | | | | | | | | | | | |
| Residential | | $ | 452 | | | $ | 258 | | | $ | 593 | | | $ | 94 | | | $ | 245 | |
| Commercial and land | | | 630 | | | | 3,587 | | | | 1,714 | | | | 1,882 | | | | 2,171 | |
| Commercial business | | | 251 | | | | 82 | | | | 717 | | | | 316 | | | | 467 | |
| Consumer | | | 6 | | | | - | | | | - | | | | 21 | | | | 6 | |
| Total | | $ | 1,339 | | | $ | 3,927 | | | $ | 3,024 | | | $ | 2,313 | | | $ | 2,889 | |
| | | | | | | | | | | | | | | | | | | | | |
Accruing loans which are contractually past due 90 days or more: | | | | | | | | | | | | | | | | | | | | |
| Real estate: | | | | | | | | | | | | | | | | | | | | |
| Residential | | $ | - | | | $ | - | | | $ | - | | | $ | 296 | | | $ | 278 | |
| Commercial and land | | | - | | | | - | | | | 122 | | | | 64 | | | | 81 | |
| Commercial business | | | - | | | | - | | | | 166 | | | | - | | | | - | |
| Consumer | | | - | | | | - | | | | - | | | | - | | | | - | |
| Total | | $ | - | | | $ | - | | | $ | 288 | | | $ | 360 | | | $ | 359 | |
| | | | | | | | | | | | | | | | | | | | | |
Total of non-accrual and 90 days past due loans | | $ | 1,339 | | | $ | 3,927 | | | $ | 3,312 | | | $ | 2,673 | | | $ | 3,248 | |
| | | | | | | | | | | | | | | | | | | | | |
| Real estate owned | | | 4,914 | | | | 3,885 | | | | 1,549 | | | | 1,206 | | | | 291 | |
| Repossessed assets | | | - | | | | 61 | | | | 158 | | | | - | | | | 2 | |
| Other non-performing assets: | | | | | | | | | | | | | | | | | | | | |
| Impaired loans not past due | | | 4,221 | | | | 5,228 | | | | 7,013 | | | | - | | | | - | |
Slow home loans (60 to 90 days past due) | | | - | | | | - | | | | - | | | | - | | | | - | |
| Total non-performing assets | | $ | 10,474 | | | $ | 13,101 | | | $ | 12,032 | | | $ | 3,879 | | | $ | 3,541 | |
| | | | | | | | | | | | | | | | | | | | | |
Total loans delinquent 90 days or more to net loans | | | - | % | | | - | % | | | 0.22 | % | | | 0.22 | % | | | 0.23 | % |
Total loans delinquent 90 days or more to total consolidated assets | | | - | % | | | - | % | | | 0.13 | % | | | 0.14 | % | | | 0.15 | % |
Total non-performing assets to total consolidated assets | | | 5.00 | % | | | 6.19 | % | | | 5.23 | % | | | 1.56 | % | | | 1.47 | % |
As of June 30, 2011, the Savings Bank had loans (60with an aggregate outstanding balance of $5.7 million with respect to 90
days past due) - - - 450 430
Total non-performing ------- ------ ------ ------ ------which known information concerning possible credit problems with the borrowers or the cash flows of the properties securing the respective loans has caused management to be concerned about the ability of the borrowers to comply with present loan repayment terms, which may result in the future inclusion of such loans in the non-accrual loan category. These loans are reflected in the Savings Bank's classified assets, $ 3,879 $3,541 $1,341 $5,796 $3,126
======= ====== ====== ====== ======
Totaland loans delinquent 90 days
or more to net loans 0.22% 0.23% 0.59% 1.90% 1.52%
Total loans delinquent 90
days or more to total
consolidated assets 0.14% 0.15% 0.37% 1.23% 0.95%
Total non-performing assets
to total consolidated assets 1.56% 1.47% 0.59% 2.39% 1.18%
designated as special mention by the Savings Bank, as described below.
Asset Classification. OTS Federal regulations require that each insured savings institution review and classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, OTS examiners have authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. An asset is classified substandard when it is inadequately protected by the current net worth and paying capacity of the borrower or by the collateral pledged, if any. Assets so classified must have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. The Savings Bank's policy is to classify as substandard, for
14
example, any loan, irrespective of payment record or collateral value, when a bankruptcy filing occurs, the pay record becomes erratic (e.g., the borrower misses several monthly payments, but makes double payments in the future), or a loan becomes contractually delinquent by three monthly payments. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. If an asset or portion thereof is classified loss, the insured institution must either establish specific allowances for loan losses for the full amount of the portion of the asset classified as loss or charge-off such amount. All or a portion of general loan loss allowances established to cover possible losses related to assets classified substandard or doubtful may be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital.
As of June 30, 2008, the Savings Bank had loans with an aggregate
outstanding balance of $5.8 million with respect to which known information
concerning possible credit problems with the borrowers or the cash flows of
the properties securing the respective loans has caused management to be
concerned about the ability of the borrowers to comply with present loan
repayment terms, which may result in the future inclusion of such loans in the
non-accrual loan category. These loans are reflected in the Savings Bank's
classified assets, discussed below. In addition, the Savings Bank has
identified an additional $4.7 million of loans on its internal watch list
(discussed below) to review quarterly for any deterioration in their capacity
to perform as agreed. The $4.7 million of watch list credits at June 30, 2008
includes $2.1 million, $2.0 million, $480,000 and $119,000 of commercial real
estate, commercial business, one-to-four family and consumer loans,
respectively. The $4.8 million of watch list credits at June 30, 2007 included
$3.0 million, $805,000, $989,000 and $96,000 of commercial real estate,
commercial business, one-to-four family and consumer loans, respectively.
At June 30, 2008 and 2007 the aggregate amounts of the Savings Bank's
classified assets as determined by the Savings Bank, and of the Savings Bank's
general and specific loss allowances and charge-offs, were as follows:
At June 30,
--------------------
2008 2007
------- ------
(In thousands)
Loss $ - $ -
Doubtful 718 101
Substandard assets 5,062 4,176
------- ------
Sub total 5,780 4,277
Special mention - -
Total classified assets 5,780 4,277
------- ------
Total watch list credits 4,671 4,843
------- ------
Total loans of concern $10,451 $9,120
======= ======
General loss allowances $ 2,436 $1,795
Specific loss allowances 361 897
------- ------
Total loss allowances $ 2,797 $2,692
======= ======
Net charge-offs $ 1,186 $ 208
======= ======
The large increase in net charge-offs in fiscal 2008 compared to fiscal
2007 was the result of completing the foreclosure process on a number of loans
15
during 2008, including several that were non-performing at the end of fiscal
2007.
The $1.5 million increase in substandard assets to $5.8 million at June
30, 2008 from $4.3 million at June 30, 2007, was primarily the result of the
housing crisis that has evolved over the last 12 to 15 months and the related
general downturn in the national and local economic conditions. These recent
economic issues have prompted the Savings Bank to apply more stringent
standards in its loan review process.
At June 30, 2008, the Savings Bank's largest substandard loans to one
borrower consisted of two loans to an individual and related interests with a
collective outstanding balance of $1.1 million. At June 30, 2008, these loans
were all past due at least ten months. The loans are collateralized by first
deeds of trust on commercial real estate in Springfield, Missouri and have a
75% guarantee through the SBA. A specific allowance has been established for
the Savings Bank's portion of the anticipated shortfall from liquidation. Sale
of the property was completed in August 2008. While management believes the
specific allowance is adequate, the final financial impact resulting from the
sale of the property will not be known until the proceeds from the SBA
guarantee are received.
The Savings Bank, until fiscal 2010, rarely uses aused the "special mention" category in its internal loan classification process. Instead, a category titled 'watch' is“watch” was used by the Savings Bank to monitor loans which arewere not typical in their repayment terms, collateral, or a situation with the borrower that may create repayment difficulties in the future. Loans areIn connection with the assistance of a consultant that was retained to review large loans, the Savings Bank’s internal policies on asset classification were reviewed and updated. As a result, an asset is designated as watchspecial mention when it has potential weaknesses that deserve management’s close attention, and which left uncorrected, may result in the abilitydeterioration of the repayment prospects for the asset or in the Savings Bank’s credit position.
At June 30, 2011 and 2010 the aggregate amounts of the Savings Bank's classified assets and special mention credits, as determined by the Savings Bank, and of the Savings Bank's general and specific loss allowances and net charge-offs, were as follows:
| | | At June 30, | |
| | | 2011 | | | 2010 | |
| | | (In thousands) | |
| Loss | | $ | - | | | $ | - | |
| Doubtful loans | | | - | | | | - | |
| Substandard loans | | | 5,560 | | | | 7,678 | |
| Total classified loans | | | 5,560 | | | | 7,678 | |
| Special mention credits | | | 176 | | | | 1,602 | |
| Total loans of concern | | $ | 5,736 | | | $ | 9,280 | |
| | | | | | | | | |
| Total classified loans | | $ | 5,560 | | | $ | 7,678 | |
| Real estate owned | | | 4,914 | | | | 3,885 | |
| Repossessed collateral | | | - | | | | 61 | |
| Total classified assets | | $ | 10,474 | | | $ | 11,624 | |
| | | At June 30, | |
| | | 2011 | | | 2010 | |
| | | (In thousands) | |
| General loss allowances | | $ | 1,277 | | | $ | 1,290 | |
| Specific loss allowances | | | 706 | | | | 1,237 | |
| Total loss allowances | | $ | 1,983 | | | $ | 2,527 | |
| | | | | | | | | |
| | | | | | | | | |
| Net charge-offs | | $ | 1,726 | | | $ | 2,661 | |
Net charge-offs in fiscal 2011 decreased by $935,000, or 35.1%, to meet current payment schedules$1.7 million compared to $2.7 million in fiscal 2010. A substantial majority of the charge-offs for both fiscal years related to credits identified as problem loans during fiscal 2009, the larger portion of which was charged-off during fiscal 2009.
The $1.1 million decrease in classified assets to $10.5 million at June 30, 2011 from $11.6 million at June 30, 2010 was the result of the impact of several factors. Some loans were taken to foreclosure or repossession, which resulted in an increase in real estate owned. Some loans were written down. Some borrowers refinanced with other financial institutions. Finally, some loans were brought current.
At June 30, 2011, the Savings Bank's largest substandard loan to one borrower consisted of two loans to a limited liability corporation with outstanding balances totaling $1.9 million. The first loan is questionable, even though interesta commercial real estate loan of $1.7 million collateralized by a strip mall in Forsyth, Missouri. At June 30, 2011, this loan was 15 days delinquent. A reserve of $301,000 has been provided on this loan. The second loan has a balance of $251,000 and principle are still being paid as agreed.
is collateralized by residential real estate. At June 30, 2011, this loan was current. A reserve of $6,000 has been provided on this loan.
Real Estate Owned and Other Repossessed Assets
Real estate owned and other repossessed assets includes real estate and other assets acquired in the settlement of loans, which is recorded at the lower of the remaining loan balance or estimated fair value less the estimated costs to sell the asset. Any write down at the time of foreclosure is charged against the allowance for loan losses. Subsequently, net expenses related to holding the property and declines in the market value are charged against income. At June 30, 2008,2011, real estate owned consisted of twelvetwenty-three properties (six(twelve single family residences, fiveeight commercial properties and one piecethree parcels of vacant land) with a net book value of $1.2$4.9 million. There wereAt June 30, 2011, there was no other repossessed assetscollateral on the books at June 30, 2008.of either the Savings Bank or the Company. At June 30, 2007,2010, real estate owned consisted of sixeighteen properties (five(ten single family residences, seven commercial properties and one commercial property)parcel of farmland) with a net book value of $292,000$3.9 million. At June 30, 2010, repossessed collateral consisted of 1,168 radiators, 23 sections of steel shelving, a pallet jack and other repossessed assetsa moveable staircase with a net book value of $2,000 on the books.
$53,000, and a motorcycle with a book value of $7,000.
Allowance for Loan Losses
Management recognizes that loan losses may occur over the life of a loan and that the allowance for loan losses must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the loan portfolio.
Management believes that the accounting estimate related to the allowance for loan losses is a critical accounting estimate because it is highly susceptible to change from period to period. This may require management to
make assumptions about losses on loans; and the impact of a sudden large loss could deplete the allowance and potentially require increased provisions to replenish the allowance, which would negatively affect earnings.
16
The allowance for loan losses is evaluated on a monthly basis by management and is based on management's periodic review of the collectibilitycollectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions, such as unemployment rates, bankruptcies and vacancy rates of business and residential properties. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specificfor loan losses includes allowance allocations calculated in accordance with ASC Topic 310, Receivables and general components.allowance allocations calculated in accordance with ASC Topic 450, Accounting for Contingencies. The specific
component relates to loans that are classified as either doubtful, substandard
or special mention. For such loans that are also classified as impaired, an
allowance is established when the discounted cash flows (or collateral value
or observable market price)level of the impairedallowance reflects management’s continuing evaluations of delinquencies, charge-offs and recoveries, loan is lower thanvolumes and terms, changes in underwriting procedures, depth of the carrying
value of that loan. The general component covers non-classified loansCompany’s lending management, national and is
based on historical loss experience adjusted for qualitative factors.
local economy, industry conditions, credit concentrations, and other external factors, including competition and legal and regulatory requirements, as well as trends in the foregoing.
The allowance is increased by the provision for loan losses, which is charged against current period operating results and decreased by the amount of actual loan charge-offs, net of recoveries.
The Savings Bank had an allowance for loan losses at June 30, 20082011 and 20072010 of $2.8$2.0 million and $2.7$2.5 million, respectively. TheSince the end of fiscal 2007, primarily as the result of deterioration in the commercial real estate and commercial business loan portfolios, due to the distressed economic environment, the Savings Bank began
experiencing an increasehas provided $8.6 million in problem loans during fiscal year 2005. This
increase required a significant increase in the allowanceallowances for loan losses. At June 30, 20062008 the allowance for loan losses was $2.5 million, or 1.7%, of
gross loans compared to $2.7 million, or 1.7%, of gross loans at June 30,
2007, and $2.8 million, or 1.6%, of gross loans compared to $4.2 million, or 3.1%, of gross loans at June 30, 2008.
2009, $2.5 million, or 2.3%, of gross loans at June 30, 2010 and $2.0 million, or 2.0%, of gross loans at June 30, 2011. In addition, the allowance as of June 30, 2011 was 26.0% of non-performing assets.
Management believes that the allowance for loan losses was adequate at June 30, 20082011 to absorb the known and inherent risks of loss in the loan portfolio at that date. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of the Savings Bank's allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in the establishment of additional provision based upon their judgment of information available to them at the time of their examination. Any material increase in the allowance may adversely affect the Savings Bank's financial condition and earnings.
The following table sets forth an analysis of the Savings Bank's allowance for loan losses for the periods indicated.
At or For
| | | At or For The Year Ended June 30, | |
| | | 2011 | | | 2010 | | | 2009 | | | 2008 | | | 2007 | |
| | | (Dollars in thousands) | |
| Allowance at beginning of period | | $ | 2,527 | | | $ | 4,186 | | | $ | 2,797 | | | $ | 2,692 | | | $ | 2,474 | |
| Provision for loan losses | | | 1,182 | | | | 852 | | | | 5,314 | | | | 1,291 | | | | 426 | |
| Recoveries: | | | | | | | | | | | | | | | | | | | | |
| Residential real estate | | | 44 | | | | 12 | | | | 7 | | | | 3 | | | | 24 | |
| Commercial real estate | | | 19 | | | | 27 | | | | 91 | | | | 1 | | | | 8 | |
| Consumer | | | 18 | | | | 21 | | | | 77 | | | | 27 | | | | 37 | |
| Commercial business | | | 43 | | | | 194 | | | | 71 | | | | 5 | | | | 96 | |
| Total recoveries | | | 124 | | | | 254 | | | | 246 | | | | 36 | | | | 165 | |
| | | | | | | | | | | | | | | | | | | | | |
| Charge-offs: | | | | | | | | | | | | | | | | | | | | |
| Residential real estate | | | 577 | | | | 694 | | | | 678 | | | | 393 | | | | 169 | |
| Commercial real estate | | | 961 | | | | 1,096 | | | | 2,065 | | | | 325 | | | | 94 | |
| Consumer | | | 30 | | | | 28 | | | | 175 | | | | 62 | | | | 32 | |
| Commercial business | | | 282 | | | | 1,097 | | | | 1,253 | | | | 442 | | | | 78 | |
| Total charge-offs | | | 1,850 | | | | 2,915 | | | | 4,171 | | | | 1,222 | | | | 373 | |
| Net charge-offs | | | 1,726 | | | | 2,661 | | | | 3,925 | | | | 1,186 | | | | 208 | |
| Transfer from allowance on letter of credit | | | - | | | | 150 | | | | - | | | | - | | | | - | |
| Allowance at end of period | | $ | 1,983 | | | $ | 2,527 | | | $ | 4,186 | | | $ | 2,797 | | | $ | 2,692 | |
| | | | | | | | | | | | | | | | | | | | | |
Ratio of allowance to total loans outstanding at the end of the period | | | 2.03 | % | | | 2.28 | % | | | 3.05 | % | | | 1.65 | % | | | 1.59 | % |
Ratio of net charge offs to average loans outstanding during the period | | | 1.70 | % | | | 1.97 | % | | | 2.93 | % | | | 0.74 | % | | | 0.14 | % |
During the last two fiscal years, there were some significant changes in the reserve allocations of the different loan categories. The
Year Ended June 30,
--------------------------------------
2008 2007 2006 2005 2004
------ ------ ------ ------ ------
(Dollarsdecrease in
thousands)
Allowance at beginningthe dollar amount of
period $2,692 $2,474 $2,851 $1,240 $1,144
------ ------ ------ ------ ------
Provision for loan losses 1,291 426 1,520 2,333 340
------ ------ ------ ------ ------
Recoveries:
Residential real estate 3 24 5 1 9
Commercial real estate 1 8 - 9 -
Consumer 27 37 48 62 79
Commercial business 5 96 50 15 14
------ ------ ------ ------ ------
Total recoveries 36 165 103 87 102
------ ------ ------ ------ ------
17
Charge-offs:
Residential real estate 393 169 26 110 41
Commercial real estate 325 94 88 77 127
Consumer 62 32 223 415 147
Commercial business 442 78 1,663 207 31
------ ------ ------ ------ ------
Total charge-offs 1,222 373 2,000 809 346
------ ------ ------ ------ ------
Net charge-offs 1,186 208 1,897 722 244
------ ------ ------ ------ ------
Allowance at endthe allowance and the decrease in the percent of period $2,797 $2,692 $2,474 $2,851 $1,240
====== ====== ====== ====== ======
Ratio ofthe allowance to total loans outstanding atfor residential real estate loan was primarily the endresult of the period 1.65% 1.59% 1.67% 0.46% 0.73%
Ratiomajority of net charge offsthe loans that were past due at June 30, 2009 either having been transferred to averagereal estate owned, charged off or a combination of both. The decrease in the allowance and its percentage to total commercial real estate loans outstandingbetween June 30, 2010 and June 30, 2011 was primarily due to loans with approximately $3.3 million in total principal balances and approximately $800,000 in allowances for loan losses having been foreclosed and included in real estate owned at June 30, 2011. This reversed the increases that occurred during fiscal 2010.
The decrease in the allowance and its percentage to total commercial business loans during fiscal 2010 was primarily due to write-offs during the period 0.74% 0.14% 1.29% 0.10% 0.14%
2010 fiscal year and the upgrade of one loan which had had an allowance of $356,000. The change during fiscal 2011 was not significant.
The following table sets forth the composition of the allowance for loan losses by loan category as of the dates indicated. Management believes that the allowance can be allocated by category only on an approximate basis. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any other categories.
18
Allowance for Loan Losses by Category
At June 30,
---------------------------------------------------------------------------------------
2008 2007 2006
--------------------------- --------------------------- ---------------------------
Percent Percent Percent
Of Percent Of Percent Of Percent
Allowance Of Gross Allowance Of Gross Allowance Of Gross
to Out- Loans in to Out- Loans in to Out- Loans in
Standing Category Standing Category Standing Category
Loans in To Gross Loans in To Gross Loans in To Gross
Amount Category Loans Amount Category Loans Amount Category Loans
------ -------- ----- ------ -------- ----- ------ -------- -----
(Dollars in thousands)
Real estate--
mortgage:
Residential $ 411 0.54% 44.83% $ 164 0.19% 53.58% $ 222 0.27% 55.59%
Commercial 991 1.84 31.69 1,567 3.89 24.97 726 1.96 24.99
Land 196 1.82 6.34 119 1.31 5.63 25 0.31 5.36
Second mortgage
loans 23 0.32 4.19 60 1.24 2.99 31 0.86 2.47
Consumer 228 2.24 6.01 239 1.99 7.44 82 0.95 5.84
Commercial business 948 8.06 6.94 543 6.24 5.39 1,388 16.27 5.75
Total allowance ------ ------ ------ ------ ------ ------
for loan losses $2,797 1.65% 100.00% $2,692 1.59% 100.00% $2,474 1.67% 100.00%
====== ====== ====== ====== ====== ======
At June 30,
---------------------------------------------------------
2005 2004
--------------------------- ---------------------------
Percent Percent Percent
Of Percent Of Percent
Allowance Of Gross Allowance Of Gross
to Out- Loans in to Out- Loans in
Standing Category Standing Category
Loans in To Gross Loans in To Gross
Amount Category Loans Amount Category Loans
------ -------- ----- ------ -------- -----
(Dollars in thousands)
Real estate--
mortgage:
Residential $ 217 0.24% 54.36% $ 283 0.30% 56.21%
Commercial 759 1.83 25.28 337 0.84 23.70
Land 26 0.28 5.76 31 0.34 5.32
Second mortgage
loans 32 0.76 2.54 20 0.52 2.29
Consumer 177 1.82 5.93 240 2.22 6.38
Commercial business 1,640 16.30 6.13 329 3.18 6.10
Total allowance ------ ------ ------ ------
for loan losses $2,851 1.74% 100.00% $1,240 0.73% 100.00%
====== ====== ====== ======
18
Allowance for Loan Losses by Category
| | | At June 30, |
| | | 2011 | | | 2010 | | | 2009 | |
| | | | | | Percent | | | | | | | | | Percent | | | | | | | | | Percent | | | | |
| | | | | | Of | | | Percent | | | | | | Of | | | Percent | | | | | | Of | | | Percent | |
| | | | | | Allowance | | | Of Gross | | | | | | Allowance | | | Of Gross | | | | | | Allowance | | | Of Gross | |
| | | | | | to Out- | | | Loans in | | | | | | to Out- | | | Loans in | | | | | | to Out- | | | Loans in | |
| | | | | | Standing | | | Category | | | | | | Standing | | | Category | | | | | | Standing | | | Category | |
| | | | | | Loans in | | | To Gross | | | | | | Loans in | | | To Gross | | | | | | Loans in | | | To Gross | |
| | | Amount | | | Category | | | Loans | | | Amount | | | Category | | | Loans | | | Amount | | | Category | | | Loans | |
| | | (Dollars in thousands) |
| Real estate -- mortgage: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential | | $ | 203 | | | | 0.37 | % | | | 56.22 | % | | $ | 380 | | | | 0.63 | % | | | 54.24 | % | | $ | 749 | | | | 1.06 | % | | | 51.89 | % |
| Commercial | | | 1,324 | | | | 4.43 | | | | 30.61 | | | | 1,713 | | | | 4.96 | | | | 31.15 | | | | 991 | | | | 2.89 | | | | 29.04 | |
| Land | | | 70 | | | | 2.13 | | | | 3.36 | | | | 73 | | | | 1.68 | | | | 3.93 | | | | 176 | | | | 2.38 | | | | 5.39 | |
| Second mortgage loans | | 105 | | | | 2.67 | | | | 4.04 | | | | 107 | | | | 2.39 | | | | 4.03 | | | | 157 | | | | 3.20 | | | | 3.57 | |
| Consumer | | | 23 | | | | 0.98 | | | | 2.39 | | | | 20 | | | | 0.71 | | | | 2.60 | | | | 86 | | | | 2.13 | | | | 2.95 | |
| Commercial business | | | 258 | | | | 7.81 | | | | 3.38 | | | | 234 | | | | 5.20 | | | | 4.05 | | | | 2,027 | | | | 20.66 | | | | 7.16 | |
loan losses | $ | 1,983 | | | | 2.03 | % | | | 100.00 | % | | $ | 2,527 | | | | 2.28 | % | | | 100.00 | % | | $ | 4,186 | | | | 3.05 | % | | | 100.00 | % |
| | | At June 30, | |
| | | 2008 | | | 2007 | |
| | | | | | Percent | | | | | | | | | Percent | | | | |
| | | | | | Of | | | Percent | | | | | | Of | | | Percent | |
| | | | | | Allowance | | | Of Gross | | | | | | Allowance | | | Of Gross | |
| | | | | | to Out- | | | Loans in | | | | | | to Out- | | | Loans in | |
| | | | | | Standing | | | Category | | | | | | Standing | | | Category | |
| | | | | | Loans in | | | To Gross | | | | | | Loans in | | | To Gross | |
| | | Amount | | | Category | | | Loans | | | Amount | | | Category | | | Loans | |
| | | (Dollars in thousands) |
| Real estate -- mortgage: | | | | | | | | | | | | | | | | | |
| Residential | | $ | 411 | | | | 0.54 | % | | | 44.83 | % | | $ | 164 | | | | 0.19 | % | | | 53.58 | % |
| Commercial | | | 991 | | | | 1.84 | | | | 31.69 | | | | 1,567 | | | | 3.89 | | | | 24.97 | |
| Land | | | 196 | | | | 1.82 | | | | 6.34 | | | | 119 | | | | 1.31 | | | | 5.63 | |
| Second mortgage loans | | | 23 | | | | 0.32 | | | | 4.19 | | | | 60 | | | | 1.24 | | | | 2.99 | |
| Consumer | | | 228 | | | | 2.24 | | | | 6.01 | | | | 239 | | | | 1.99 | | | | 7.44 | |
| Commercial business | | | 948 | | | | 8.06 | | | | 6.94 | | | | 543 | | | | 6.24 | | | | 5.39 | |
Total allowance for loan losses | $ | 2,797 | | | | 1.65 | % | | | 100.00 | % | | $ | 2,692 | | | | 1.59 | % | | | 100.00 | % |
Securities Activity
Savings and loan associations have authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various Federal agencies and of state and municipal governments, deposits at the FHLB,Federal Home Loan Bank (“FHLB”) of Des Moines, certificates of deposit of federally insured institutions, certain bankers' acceptances and federal funds. Subject to various restrictions, savings institutions may also invest a portion of their assets in commercial paper, corporate debt securities and mutual funds, the assets of which conform to the investments that federally chartered savings institutions are otherwise authorized to make directly. Savings institutions are also required to maintain minimum levels of liquid assets which vary from time to time. See "Regulation of First Home -- Federal Home Loan Bank System." The Savings Bank may decide to increase its liquidity above the required levels depending upon the availability of funds and comparative yields on securities in relation to return on loans.
Routine short-term investment decisions, which are reported monthly to the Board of Directors, are made by the Savings Bank’s President, and Chief ExecutiveFinancial Officer and Chief Financial Officer,Controller, who act within policies established by the Board. Those securities include federally insured certificates of deposit, FHLB time obligations, bankers acceptances, treasury obligations, U.S. Government agency obligations, mortgage-backed securities, bank qualifying municipal tax exempt bonds, and corporate bonds. Securities not within the parameters of the policies require prior Board approval. Securities are purchased for investment purposes. The goals of the Savings Bank's investment policy are to select securities based on safety first, flexibility second and diversification third. In addition, as a result of the concern with interest rate risk exposure, there has been a focus on short-term investments. At June 30, 2008,2011, the Company's and the Savings Bank's securities portfolio (which includes securities held by the Savings Bank, including stock in the FHLB) totaled $46.6$72.7 million (of which $40.8$54.1 million were available for sale) and consisted primarily of federal agency obligationsobligation securities, federal agency mortgage-backed securities, common stocks, FHLB stock and municipal bonds. For further information concerning the Savings Bank's securities portfolio, see Note 2 of the Notes to the Consolidated Financial Statements included in the Annual Report.
Securities Analysis
The following table sets forth the Company's and the Savings Bank's securities portfolio at carrying value at the dates indicated. Securities that are held-to-maturity are shown at amortized cost, and securities that are available-for-sale are shown at the current market value.
19
| | | At June 30, | |
| | | 2011 | | | 2010 | | | 2009 | |
| | | Book | | | Percent | | | Book | | | Percent | | | Book | | | Percent | |
| | | Value | | | Of | | | Value | | | Of | | | Value | | | Of | |
| | | (1) | | | Portfolio | | | (1) | | | Portfolio | | | (1) | | | Portfolio | |
| | | (Dollars in thousands) | |
| | | | | | | | | | | | | | | | | | | | | |
| United States Government | | | | | | | | | | | | | | | | | | | | | |
| and Federal agencies | | | | | | | | | | | | | | | | | | | | | |
| obligations | | $ | 39,733 | | | | 54.68 | % | | $ | 27,028 | | | | 43.07 | % | | $ | 8,609 | | | | 17.40 | % |
| Obligations of state and | | | | | | | | | | | | | | | | | | | | | | | | |
| political subdivisions | | | 1,103 | | | | 1.52 | | | | 1,575 | | | | 2.51 | | | | 1,854 | | | | 3.75 | |
backed securities | | | 31,146 | | | | 42.87 | | | | 33,438 | | | | 53.29 | | | | 37,167 | | | | 75.10 | |
| Total debt securities | | | 71,982 | | | | 99.07 | | | | 62,041 | | | | 98.87 | | | | 47,630 | | | | 96.25 | |
| Equity securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| FHLB stock | | | 429 | | | | 0.59 | | | | 434 | | | | 0.69 | | | | 1,581 | | | | 3.19 | |
| Other | | | 244 | | | | 0.34 | | | | 276 | | | | 0.44 | | | | 278 | | | | 0.56 | |
| Total equity securities | | | 673 | | | | 0.93 | | | | 710 | | | | 1.13 | | | | 1,859 | | | | 3.75 | |
| Total securities | | $ | 72,655 | | | | 100.00 | % | | $ | 62,751 | | | | 100.00 | % | | $ | 49,489 | | | | 100.00 | % |
| _____________ |
| (1) | The market value of the Company's securities portfolio amounted to $72.7 million, $62.8 million and $49.5 million at June 30, 2011, 2010 and 2009, respectively. At June 30, ----------------------------------------------------------------
2008 2007 2006
------------------ ------------------ -------------------
Book Percent Book Percent Book Percent
Value Of Value Of Value Of
(1) Portfolio (1) Portfolio (1) Portfolio
----- --------- ----- --------- ----- ---------
(Dollars in thousands)
Debt securities:
United States Government2011, the market value of the principal component of the Company's and Federal agencies
obligations $ 6,157 13.21% $13,460 30.79% $23,564 56.50%
Obligations of state and
political subdivisions 3,109 6.67 3,510 8.03 3,782 9.07
Federalthe Savings Bank’s securities portfolio, which were federal agency mortgage-
backed securities, 35,460 76.06 24,856 56.85 10,451 25.06
------- ------ ------- ------ ------- ------
Total debt securities 44,726 95.94 41,826 95.67 37,797 90.63
------- ------ ------- ------ ------- ------
Equity securities:
FHLB stock 1,613 3.46 1,614 3.69 1,612 3.86
Other 279 0.60 281 0.64 2,297 5.51
Total equity ------- ------ ------- ------ ------- ------
securities 1,892 4.06 1,895 4.33 3,909 9.37
------- ------ ------- ------ ------- ------
Total securities $46,618 100.00% $43,721 100.00% $41,706 100.00%
======= ====== ======= ====== ======= ======
was $39.7 million. |
_____________
(1) The market value of the Company's and the Savings Bank's securities
portfolio amounted to $46.7 million, $43.5 million and $41.3 million at
June 30, 2008, 2007 and 2006, respectively. At June 30, 2008, the market
value of the principal component of the Company's and the Savings Bank's
securities portfolio which were federal agencies mortgage-backed
securities was $35.6 million. The following table sets forth the maturities and weighted average yields of the debt securities in the Company's and the Savings Bank's investment securities portfolio at June 30, 2008.
After After
One Year Five Years
One Year Through Through After
or Less Five Years Ten Years Ten Years
------------- ------------- ------------- -------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)2011.
| | | | | | After One Year | | | After Five Years | | | | |
| | | One Year or Less | | | Through Five Years | | | Through Ten Years | | | After Ten Years | |
| | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | |
| | | (Dollars in thousands) | |
| United States | | | | | | | | | | | | | | | | | | | | | | | | |
| Government | | | | | | | | | | | | | | | | | | | | | | | | |
| and Federal | | | | | | | | | | | | | | | | | | | | | | | | |
| Agency | | | | | | | | | | | | | | | | | | | | | | | | |
| obligations | | $ | - | | | | - | % | | $ | 5,080 | | | | 2.13 | % | | $ | 18,736 | | | | 2.37 | % | | $ | 15,917 | | | | 3.09 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Obligations of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| state and | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Political | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| subdivisions | | | 295 | | | | 4.14 | | | | 808 | | | | 4.54 | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mortgage-backed | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| securities | | | 541 | | | | 3.46 | | | | 338 | | | | 5.50 | | | | 5,671 | | | | 4.15 | | | | 24,596 | | | | 4.14 | |
Total debt securities | | $ | 836 | | | | | | | $ | 6,226 | | | | | | | $ | 24,407 | | | | | | | $ | 40,513 | | | | | |
At June 30, 2011, other than United State Government agency securities and United States Government and Federal
agencies
obligations $1,753 5.07% $3,432 4.16% $ 972 4.12% $ - -%
Obligations of
state and
political
subdivisions 1,240 3.90 1,040 4.03 829 4.55 - -
Mortgage-backedagency mortgage-backed securities, - - 4,338 4.94 6,564 4.98 24,558 5.29
Total debt ------ ------ ------ -------
securities $2,993 $8,810 $8,365 $24,558
====== ====== ====== =======
At June 30, 2008, the Savings BankCompany held no security which had an aggregate book value in excess of 10% of the Company's stockholders' equity.
To supplement lending activities in periods of deposit growth and/or declining loan demand, the Savings Bank has invested in residential
mortgage-
backedmortgage-backed securities. Although such securities are held for investment, they can serve as collateral for borrowings and, through repayments, as a source of liquidity. For information regarding the carrying and market values of the
20
Savings Bank'sCompany's mortgage-backed securities portfolio, see Note 2 of the Notes to Consolidated Financial Statements included in the Annual Report. The Savings Bank has invested in federal agency securities issued by FHLMC, FNMA and Government National Mortgage Association ("GNMA"). As of June 30, 2008,
4.2%2011, 27.4% of the outstanding balance of the mortgage-backed securities had adjustable rates of interest that adjust within the next two years. As of June 30, 2008,2011, the Savings Bank's portfolio included $35.5$31.0 million of mortgage-backed securities purchased as investments to supplement the Savings Bank's mortgage lending activities.
The FHLMC, FNMA and GNMA certificates are modified pass-through mortgage-
backedmortgage-backed securities that represent undivided interests in underlying pools of fixed-rate, or certain types of adjustable-rate, one-to-four family residential mortgages issued by these government-sponsored entities. As a result, the interest rate risk characteristics of the underlying pool of mortgages, such as fixed- or adjustable-rate, as well as prepayment risk, are passed on to the certificate holder. FHLMC and FNMA provide the certificate holder a guarantee of timely payments of interest and ultimate collection of principal, whether or not they have been collected. GNMA's guarantee to the holder of timely payments of principal and interest is backed by the full faith and credit of the U.S. government. Mortgage-backed securities generally yield less than the loans that underlie such securities, because of the cost of payment guarantees
or credit enhancements that reduce credit risk. In addition, mortgage-backed securities are more liquid than individual mortgage loans and may be used to collateralize obligations of the Savings Bank. The Savings Bank has incorporated into its investment policy the
regulatory requirements set forth in the OTS Thrift Bulletin 52, which
addresses the selection of securities dealers, securities policies, unsuitable
investment practices and mortgage derivative products. At June 30, 2008,2011, the Savings Bank owned no mortgage derivative products.
As of June 30, 2008, neither the Company nor the Savings Bank had
investments in preferred or common stock of Fannie Mae or Freddie Mac.
Deposit Activities and Other Sources of Funds
General.
General. Deposits and loan repayments are the major source of the Savings Bank's funds for lending and other investment purposes. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds from other sources. They may also be used on a longer term basis for general business purposes.
Deposit Accounts.Accounts. Deposits are attracted from within the Savings Bank's primary market area through the offering of a broad selection of deposit instruments, including negotiable order of withdrawal ("NOW") accounts, money market accounts, regular savings accounts, certificates of deposit and retirement savings plans. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of its deposit accounts, the Savings Bank considers the rates offered by its competition, profitability to the Savings Bank, matching deposit and loan products and its customer preferences and concerns. The Savings Bank does not have any brokered deposits. The Savings Bank generally reviews its deposit mix and pricing at least weekly, and adjusts it as necessitated by liquidity needs, the interest rate sensitivity gap position (which is the
extent to which interest earning assets repricing during a specified time
period exceed interest bearing liabilities repricing during the same time
period, or vice versa)its asset/liability objectives and competition.
21
On an overall basis, the
The Savings Bank experienced deposit growtha $586,000 increase in deposits during the year ended June 30, 2008. The money market savings2011. However, on June 30, 2011, the Savings Bank received an incoming wire transfer of $13.7 million for credit to the account first
introduced lateof one of its commercial customers. It is not anticipated that these funds will remain on deposit for an extended period of time. Absent this wire deposit, the Savings Bank would have experienced a decrease in calendar 2006, grewdeposits of $13.1 million during the year ended June 30, 2011. Certificates of deposit decreased by $3.6$10.6 million in fiscal 2008 from $36.3$77.2 million at June 30, 20072010 to $39.9$66.6 million at June 30, 2008.
Additionally, certificates of deposit increased2011, and money market savings accounts decreased by $3.8$4.6 million from $83.3$36.0 million at June 30, 20072010 to $87.1$31.4 million at June 30, 2008. The growth in
money market savings and certificates of deposit was partially2011. These decreases were offset by decreasesincreases in regularnon-interest-bearing checking balances which increased by $12.5 million from $11.8 million at June 30, 2010 to $24.3 million at June 30, 2011, savings accounts which increased by $767,000 from $20.5 million at June 30, 2010 to $21.2 million at June 30, 2011 and interest-bearing checking accounts
during the year.in NOW account balances which increased by $2.5 million from $34.6 million at June 30, 2010 to $37.1 million at June 30, 2011. During most of the fiscal year ended June 30, 2008,2011, with the exception of the money market savingour e-checking product and our e-checking product,four and five year certificates of deposit, the rates paid by the Savings Bank were below the mid-point at about the lower
one-third, of the range of rates offered by competitors in each type and maturity of account.
22
The following table sets forth information concerning the Savings Bank's time deposits and other interest-bearing deposits at June 30, 2008.
Weighted Percent-
Average age
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
- -------- -------- ----------------------- -------- ------- --------
(Dollars in
thousands)
0.00% None Non-interest bearing $ 100 $ 12,338 6.34%
0.81 None NOW accounts 100 32,112 16.50
1.32 None Super Saver accounts 1,000 10,738 5.52
0.74 None Savings accounts 2011.
25
12,386 6.37
2.32 None Money Market Savings 10,000 39,904 20.51
Certificates of deposit
-----------------------
2.10 3 months Fixed term, fixed rate 500 605 0.31
2.98 6 months Fixed term, fixed rate 500 11,869 6.10
2.93 9 months Fixed term, fixed rate 500 3,117 1.60
3.95 12 months Fixed term, fixed rate 500 16,607 8.53
2.99 15 months Fixed term, fixed rate 500 470 0.24
4.31 18 months Fixed term, fixed rate 500 1,065 0.55
4.35 24 months Fixed term, fixed rate 500 3,272 1.68
4.18 30 months Fixed term, fixed rate 500 524 0.27
4.36 36 months Fixed term, fixed rate 500 1,093 0.56
3.97 48 months Fixed term, fixed rate 500 542 0.28
4.09 60 months Fixed term, fixed rate 500 2,257 1.16
3.95 72 months Fixed term, fixed rate 500 10 0.01
5.22 120 months Fixed term, fixed rate 500 21 0.01
Various Various Fixed term, adjustable rate 500 18,706 9.61
Various Various Jumbo certificates 100,000 26,957 13.85%
-------- ------
$194,593 100.00%
======== ======
23
| Weighted | | | | | | | | | | | | | |
| Average | | | | | | | | | | | | Percentage | |
| Interest | | | | | | | Minimum | | | | | of Total | |
| Rate | | | Term | | Category | | Amount | | Balance | | | Deposits | |
| | | | | | | | | | (Dollars in thousands) | | | |
| | 0.00 | % | | None | | Non-interest bearing | $ | 100 | | $ | 24,303 | | | | 13.45 | % |
| | 0.36 | | | None | | NOW accounts | | 100 | | | 37,127 | | | | 20.55 | |
| | 0.40 | | | None | | Super Saver accounts | | 1,000 | | | 8,627 | | | | 4.78 | |
| | 0.10 | | | None | | Savings accounts | | 25 | | | 12,606 | | | | 6.98 | |
| | 0.69 | | | None | | Money Market Savings | | 10,000 | | | 31,367 | | | | 17.36 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | Certificates of deposit | | | | | | | | | | |
| | 0.25 | | | 3 months | | Fixed term, fixed rate | | 500 | | | 732 | | | | 0.41 | |
| | 0.61 | | | 6 months | | Fixed term, fixed rate | | 500 | | | 7,298 | | | | 4.04 | |
| | 0.60 | | | 9 months | | Fixed term, fixed rate | | 500 | | | 1,049 | | | | 0.58 | |
| | 1.13 | | | 11 months | | Fixed term, fixed rate | | 500 | | | 1,336 | | | | 0.74 | |
| | 0.96 | | | 12 months | | Fixed term, fixed rate | | 500 | | | 11,718 | | | | 6.49 | |
| | 1.26 | | | 15 months | | Fixed term, fixed rate | | 500 | | | 780 | | | | 0.43 | |
| | 1.18 | | | 18 months | | Fixed term, fixed rate | | 500 | | | 1,210 | | | | 0.67 | |
| | 0.00 | | | 21 months | | Fixed term, fixed rate | | 500 | | | - | | | | 0.00 | |
| | 1.65 | | | 24 months | | Fixed term, fixed rate | | 500 | | | 6,363 | | | | 3.52 | |
| | 0.00 | | | 27 months | | Fixed term, fixed rate | | 500 | | | - | | | | 0.00 | |
| | 2.00 | | | 30 months | | Fixed term, fixed rate | | 500 | | | 272 | | | | 0.15 | |
| | 0.00 | | | 33 months | | Fixed term, fixed rate | | 500 | | | - | | | | 0.00 | |
| | 2.41 | | | 36 months | | Fixed term, fixed rate | | 500 | | | 1,989 | | | | 1.10 | |
| | 2.33 | | | 48 months | | Fixed term, fixed rate | | 500 | | | 1,706 | | | | 0.94 | |
| | 3.12 | | | 60 months | | Fixed term, fixed rate | | 500 | | | 3,905 | | | | 2.16 | |
| | 2.70 | | | 72 months | | Fixed term, fixed rate | | 500 | | | 20 | | | | 0.01 | |
| | 1.36 | | | Various | | Fixed term, adjustable rate | | 500 | | | 6,561 | | | | 3.63 | |
| | 1.60 | | | Various | | Jumbo certificates | | 100,000 | | | 21,692 | | | | 12.01 | |
| | | | | | | | | | | $ | 180,661 | | | | 100.00 | % |
The following table indicates the amount of the Savings Bank's jumbo certificates of deposit by time remaining until maturity as of June 30, 2008.2011. Jumbo certificates of deposit require minimum deposits of $100,000 and rates paid on such accounts are negotiable.
Jumbo
Certificates
Maturity Period Of Deposit
- --------------------------------- ------------
(In thousands)
Three months or less $ 6,879
After three through six months 4,875
After six through twelve months 9,443
After twelve months 5,760
-------
Total $26,957
=======
| | | Jumbo | |
| | | Certificates | |
| Maturity Period | | Of Deposit | |
| | | (In thousands) | |
| Three months or less | | $ | 3,018 | |
| After three through six months | | | 4,505 | |
| After six through twelve months | | | 6,250 | |
| After twelve months | | | 7,919 | |
| Total | | $ | 21,692 | |
Time Deposits by Rates. The following table sets forth the time deposits in the Savings Bank classified by rates as of the dates indicated.
At June 30,
----------------------
2008 2007
------- -------
(In thousands)
0.00 - 1.49% $ - $ -
1.50 - 2.49% 11,561 90
2.50 - 3.49% 23,575 1,891
3.50 - 4.49% 22,754 6,236
4.50 - 5.00% 22,710 58,156
5.01 - 5.49% 6,290 16,430
5.50 - 6.49% 225 493
Over 6.49% - -
------- -------
Total $87,115 $83,296
======= =======
| | | At June 30, | |
| | | 2011 | | | 2010 | |
| | | (In thousands) | |
| 0.00 - 1.49% | | $ | 45,321 | | | $ | 27,712 | |
| 1.50 - 2.49% | | | 11,298 | | | | 23,888 | |
| 2.50 - 3.49% | | | 6,663 | | | | 17,342 | |
| 3.50 - 4.49% | | | 832 | | | | 1,276 | |
| 4.50 - 5.00% | | | 2,517 | | | | 6,173 | |
| 5.01 – 5.49% | | | - | | | | 780 | |
| Over 5.49% | | | - | | | | - | |
| Total | | $ | 66,631 | | | $ | 77,171 | |
The following table sets forth the amount and maturities of time deposits at June 30,
2008.
Amount Due
------------------------------------------
More
than More More
One Than than
One Year 2 Years 3 Years After Certifi-
Year thru thru thru 4 cate
Or less 2 Years 3 Years 4 Years Years Total Accounts
------- ------- ------- ------- ------ ------- ------
(In thousands)
0.00 - 1.49% $ - $ - $ - $ - $ - $ - -%
1.50 - 2.49% 9,972 776 - 813 - 11,561 13.27
2.50 - 3.49% 20,512 2,048 249 412 354 23,575 27.06
3.50 - 4.49% 17,973 3,609 176 821 175 22,754 26.12
4.50 - 5.00% 11,314 5,357 3,941 1,259 839 22,710 26.07
5.01 5.49% 4,851 705 233 237 264 6,290 7.22
5.50 - 6.49% 111 114 - - - 225 0.26
Over 6.49% - - - - - - -
------- ------- ------- ------- ------ ------- ------
Total $64,733 $12,609 $ 4,599 $ 3,542 $1,632 $87,115 100.00%
======= ======= ======= ======= ====== ======= ======
24
2011.| | | Amount Due | | | | | | |
| | | | | | More | | | More | | | More | | | | | | | | | |
| | | | | | Than | | | Than | | | than | | | | | | | | Percent | |
| | | | | | One Year | | | 2 Years | | | 3 Years | | | | | | | | of Total | |
| | | One Year | | | Thru | | | Thru | | | Thru | | | After 4 | | | | | Certifiacte | |
| | | Or less | | | 2 Years | | | 3 Years | | | 4 Years | | | Years | | Total | | | Accounts | |
| 0.00 - 1.49% | | $ | 34,278 | | | $ | 7,494 | | | $ | 1,940 | | | $ | 1,608 | | | $ | 1 | | | $ | 45,321 | | | | 68.01 |
| 1.50 - 2.49% | | | 5,368 | | | | 1,813 | | | | 1,150 | | | | 1,526 | | | | 1,441 | | | | 11,298 | | | | 16.96 |
| 2.50 - 3.49% | | | 1,604 | | | | 2,026 | | | | 2,332 | | | | 686 | | | | 15 | | | | 6,663 | | | | 10.00 |
| 3.50 - 4.49% | | | 669 | | | | 138 | | | | 2 | | | | 23 | | | | - | | | | 832 | | | | 1.25 |
| 4.50 - 5.49% | | | 1,442 | | | | 1,075 | | | | - | | | | - | | | | - | | | | 2,517 | | | | 3.78 |
| Over 5.50% | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - |
| Total | | $ | 43,361 | | | $ | 12,546 | | | $ | 5,424 | | | $ | 3,843 | | | $ | 1,457 | | | $ | 66,631 | | | | 100.00 |
Deposit Flow. The following table sets forth the balances of savings deposits in the various types of savings accounts offered by the Savings Bank at the dates indicated.
At June 30,
--------------------------------------------------------
2008 2007
-------------------------- --------------------------
Percent Percent
Of Increase Of Increase
Amount Total (Decrease) Amount Total (Decrease)
------ ----- -------- ------ ----- --------
(Dollars in thousands)
Non-interest
bearing $ 12,338 6.34% $ (378) $ 12,716 6.69% $ (29)
NOW checking 32,112 16.50 304 31,808 16.73 (3,071)
Regular savings
accounts 12,386 6.37 (223) 12,609 6.63 (10,811)
Super Saver accounts 10,738 5.52 (2,637) 13,375 7.04 (3,511)
Money Market
savings accounts 39,904 20.50 3,618 36,286 19.08 36,286
Fixed-rate
certificates
Which mature (1):
Within 1 year 53,921 27.72 3,651 50,270 26.45 (916)
After 1 year, but
Within 2 years 5,473 2.81 1,710 3,763 1.98 (1,757)
After 2 years, but
Within 5 years 3,608 1.85 1,298 2,310 1.22 (984)
Adjustable-rate
certificates 24,113 12.39 (2,840) 26,953 14.18 (4,258)
-------- ------ ------- -------- ------ -------
Total
certificates 87,115 44.77 3,819 83,296 43.83 (7,915)
-------- ------ ------- -------- ------ -------
Total $194,593 100.00% $ 4,503 $190,090 100.00% $10,949
======== ====== ======= ======== ====== =======
- --------------
(1) At June 30, 2008 and 2007, jumbo certificates of deposit amounted to
$27.0 million and $22.5 million, respectively, and IRAs amounted to
$23.0 million and $23.0 million at those dates, respectively.
| | | At June 30, | |
| | | 2011 | | | 2010 | |
| | | | | | Percent | | | | | | | | | Percent | | | | |
| | | | | | Of | | | Increase | | | | | | Of | | | Increase | |
| | | Amount | | | Total | | | (Decrease) | | | Amount | | | Total | | | (Decrease) | |
| | | | | | | | | (Dollars in thousands) | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Non-interest bearing | | $ | 24,303 | | | | 13.45 | % | | $ | 12,529 | | | $ | 11,774 | | | | 6.54 | % | | $ | (2,966 | ) |
| NOW checking | | | 37,127 | | | | 20.55 | | | | 2,495 | | | | 34,632 | | | | 19.23 | | | | 2,147 | |
| Regular savings | | | | | | | | | | | | | | | | | | | | | | | | |
| accounts | | | 8,627 | | | | 4.78 | | | | 1,226 | | | | 9,086 | | | | 5.05 | | | | (230 | ) |
| Super Saver accounts | | | 12,606 | | | | 6.98 | | | | (459 | ) | | | 11,380 | | | | 6.32 | | | | (398 | ) |
| Money Market | | | | | | | | | | | | | | | | | | | | | | | | |
| savings accounts | | | 31,367 | | | | 17.36 | | | | (4,665 | ) | | | 36,032 | | | | 20.00 | | | | 1,321 | |
| Fixed-rate | | | | | | | | | | | | | | | | | | | | | | | | |
| Certificates | | | | | | | | | | | | | | | | | | | | | | | | |
| Which mature (1): | | | | | | | | | | | | | | | | | | | | | | | | |
| Within 1 year | | | 39,729 | | | | 21.99 | | | | (11,096 | ) | | | 50,825 | | | | 28.23 | | | | (2,034 | ) |
| After 1 year, but | | | | | | | | | | | | | | | | | | | | | | | | |
| Within 2 years | | | 9,703 | | | | 5.37 | | | | 2,848 | | | | 6,855 | | | | 3.81 | | | | (4,347 | ) |
| After 2 years, but | | | | | | | | | | | | | | | | | | | | | |
| Within 5 years | | | 8,224 | | | | 4.55 | | | | 1,429 | | | | 6,795 | | | | 3.77 | | | | 2,872 | |
| After 5 years | | | 30 | | | | 0.02 | | | | 15 | | | | 15 | | | | 0.01 | | | | - | |
| Adjustable-rate | | | | | | | | | | | | | | | | | | | | | | | | |
| Certificates | | | 8,945 | | | | 4.95 | | | | (3,736 | ) | | | 12,681 | | | | 7.04 | | | | (5,508 | ) |
| Total | | | | | | | | | | | | | | | | | | | | | | | | |
| Certificates | | | 66,631 | | | | 36.88 | | | | (10,540 | ) | | | 77,171 | | | | 42.86 | | | | (9,017 | ) |
| Total | | $ | 180,661 | | | | 100.00 | % | | $ | 586 | | | $ | 180,075 | | | | 100.00 | % | | $ | (9,143 | ) |
| (1) | At June 30, 2011 and 2010, jumbo certificates of deposit amounted to $21.7 million and $25.8 million, respectively, and Individual Retirement Accounts (“IRAs”) amounted to $19.8 million and $23.2 million at those dates, respectively. |
The following table sets forth the savings activities of the Savings Bank for the periods indicated.
Years Ended June 30,
------------------------
2008 2007
--------- ---------
(In thousands)
Beginning balance $ 190,090 $ 179,141
--------- ---------
Net increase (decrease)
before interest credited (1,692) 5,000
Interest credited 6,195 5,949
--------- ---------
Net increase/(decrease) in
savings deposits 4,503 10,949
--------- ---------
Ending balance $ 194,593 $ 190,090
========= =========
| | | Years Ended June 30, | |
| | | 2011 | | | 2010 | |
| | | (In thousands) | |
| Beginning balance | | $ | 180,075 | | | $ | 189,218 | |
| Net increase (decrease) | | | | | | | | |
| before interest credited | | | (1,454 | ) | | | (12,411 | ) |
| Interest credited | | | 2,040 | | | | 3,268 | |
| Net increase/(decrease) in | | | | | | | | |
| savings deposits | | | 586 | | | | (9,143 | ) |
| Ending balance | | $ | 180,661 | | | $ | 180,075 | |
In the unlikely event the Savings Bank is liquidated, depositors will be entitled to full payment of their deposit accounts prior to any payment being made to the Company, as sole stockholder of the Savings Bank. Substantially all of the Savings Bank's depositors are residents of the State of Missouri.
Retail Repurchase Agreements. In December 2006, the Savings Bank began to offer retail repurchase agreements. This was done to provide an additional product for its existing customer base and to attract new customers who would find the product beneficial. Customers with large balances in checking accounts benefit by having those balances which exceed a predetermined level "swept" out of the checking account and into a retail repurchase account.accounts. The repurchase account earns interest at a floating market rate and is uninsured.
25
However, the balance is collateralized by designated investment securities of the Savings Bank. At June 30, 2008,2011, the balances ofSavings Bank had $6.4 million in retail repurchase agreements, totaled $4.6 million.
Borrowings.as compared to $5.4 million at June 30, 2010.
Borrowings. Savings deposits are the primary source of funds for the Savings Bank's lending and investment activities and for its general business purposes. The Savings Bank also relies on advances from the FHLB-Des Moines to supply funds and to act as a source of liquidity, if needed. The FHLB-Des Moines has served as the Savings Bank's primary borrowing source. Advances from the FHLB-Des Moines are typically secured by the Savings Bank's first mortgage loans. These advances require monthly payments of interest only with principal due at maturity and have fixed rates. These advances were obtained
in response to the Savings Bank's previous strong loan demand and limited
deposit growth experienced during fiscal years 2001 and 2000. At June 30, 2008,2011, the Savings Bank had $22.0$3.0 million in advances from the FHLB-Des Moines.
The following tables set forth certain information concerning the Savings Bank's borrowings at the dates and for the periods indicated.
At June 30,
-----------------------------
2008 2007 2006
---- ---- ----
Weighted average rate paid on
FHLB advances 5.75% 5.75% 5.74%
Years Ended June 30,
-----------------------------
2008 2007 2006
---- ---- ----
(Dollars in thousands)
Maximum amounts of FHLB advances
outstanding at any month end $22,000 $25,000 $28,394
Approximate average FHLB advances
Outstanding $22,000 24,077 27,653
Approximate average effective rate
paid on FHLB advances 5.85% 5.76% 5.59%
| | | At June 30, | |
| | | 2011 | | | 2010 | | | 2009 | |
| Weighted average rate paid on | | | | | | | | | |
| FHLB advances | | | 4.94 | % | | | 4.94 | % | | | 3.05 | % |
| | | | | | | | | | | | | |
| | | Years Ended June 30, | |
| | | | 2011 | | | | 2010 | | | | 2009 | |
| | | (Dollars in thousands) | |
| Maximum amounts of FHLB advances | | | | | | | | | | | | |
| outstanding at any month end | | $ | 3,000 | | | $ | 10,000 | | | $ | 29,000 | |
| Approximate average FHLB advances | | | | | | | | | | | | |
| outstanding | | $ | 3,000 | | | $ | 5,692 | | | | 22,846 | |
| Approximate average effective rate | | | | | | | | | | | | |
| paid on FHLB advances | | | 5.00 | % | | | 3.18 | % | | | 5.14 | % |
The FHLB-Des Moines functions as a central reserve bank providing credit for savings and loan associations and other member financial institutions. As
a member, the Savings Bank is required to own capital stock in the FHLB-Des Moines and is authorized to apply for advances on the security of such stock and on the security of certain of its mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States) provided certain standards related to creditworthiness have been met. Advances are made pursuant to several different programs. Each credit program has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution's retained earnings or on the FHLB's assessment of the institution's creditworthiness. The FHLB-Des Moines determines specific lines of credit for each member institution. BecauseAs of their prepayment penalties,
it is not currently economical to prepay any of theseJune 30, 2011, the Savings Bank, based on the available collateral, could have borrowed an additional $46.3 million in advances prior to
maturity.
from the FHLB.
Subsidiary Activities
Fybar Service Corporation ("Fybar") is a Missouri corporation wholly-
ownedwholly-owned by the Savings Bank. Until May 2007, Fybar owned five rental
properties, which were transferred to the Company. The transfer of the real
estate was done to comply with one of the requirements of the MOU,
specifically that Fybar either divest itself of its real estate holdings or
apply for an exception from the FDIC. See " -- Corporate Developments and
Overview." Management believes that the transfer to the Company was the best
and most expeditious way to meet the MOU requirement. The transfer was done
at the net book value on Fybar's books. The Company took title to the
properties, assumed the mortgage
26
obligation to the Savings Bank, paid a portion of the difference between the
net book value of the real estate and the balance of the mortgage in cash and
executed a note payable to Fybar for the remainder of the difference. During
the year ended June 30, 2008, the Company paid off its note to Fybar. Fybar serves as Trustee on all the Savings Bank's deeds of trust, is a registered agent and receives limited income from credit life and accident and health policies written in conjunction with the Savings Bank's loans. At June 30, 2008,2011, the Savings Bank had an investment in Fybar of $576,000.
First Home Investments, Inc. is a wholly-owned subsidiary of the Savings
Bank that offered fixed and variable annuities as well as mutual funds to its
customers and members of the general public. First Home Investments, Inc.
also processed stock and bond trades and provided credit life, disability and
health insurance services to the Savings Bank's customers as well as group and
individual coverages. In August 2007, First Home Investments ceased
operations, and the Savings Bank entered into an agreement with an outside
party to provide investments services to its customer base.
$626,000.
Regulation of First Home
As a Missouri-chartered and federally insured savings and loan association, First Home is subject to extensive regulation. Lending activities and other investments must comply with various statutory and regulatory capital requirements. The Savings Bank is regularly examined by its state and federal regulators and files periodic reports concerning the Savings Bank's activities and financial condition. The Savings Bank's relationship with its depositors and borrowers is also regulated to a great extent by federal and state laws, especially in such matters as the ownership of savings accounts and the form and content of the Savings Bank's mortgage documents.
Missouri Savings and Loan Law
General. As a Missouri-chartered savings and loan association, First Home derives its authority from, and is governed by, the provisions of the Missouri Savings and Loan Law ("Missouri Law") and regulations of the Missouri Division of Finance ("Division"). The Director of the Missouri Division of Finance ("Director") proposes regulations which must then be approved, amended, modified or disapproved by the State Savings and Loan Commission ("Commission"). Missouri Law and the resulting regulations are administered by the Director.
Investments and Accounts. Missouri Law and regulations impose restrictions on the types of investments and loans that may be made by a Missouri-chartered institution, generally bringing these restrictions into parity with the regulation of federally chartered institutions. The manner of establishing accounts and evidencing the same is prescribed, as are the obligations of the institution with respect to withdrawals from accounts and redemption of accounts. The Director may also impose or grant the same restrictions, duties and powers concerning deposits as are applicable to federal institutions under federal rules and regulations.
Branch Offices. Under Missouri Law, no institution may establish a branch office or agency without the prior written approval of the Director. The Director reviews the proposed location, the functions to be performed at the office, the estimated volume of business, the estimated annual expense of the office and the mode of payments. Decisions of the Director may be appealed to the Commission. The relocation or closing of any office is subject to additional regulation and in certain circumstances may require prior approval.
27
Merger or Consolidation. Missouri Law permits the merger or consolidation of savings institutions, subject to the approval by the Director, when the Director finds that such merger or consolidation is equitable to the members or account holders of the institutions and will not impair the usefulness and success of other properly conducted institutions in the community. Mergers or consolidations of mutual institutions must also be approved by a majority of the members of each institution. Stock institutions must obtain shareholder approval pursuant to the Missouri statutes relating to general and business corporations.
Holding Companies. Missouri Law requires a savings and loan holding company and its subsidiaries to register with the Director within 60 days of becoming a savings and loan holding company. Following registration it is subject to examination by the Division and thereafter must file periodic reports with the Director. A savings and loan holding company may acquire control of an institution, which is the subsidiary of another savings and loan holding company upon application and prior written approval of the Director. The Director, in reviewing the application, must determine if such acquisition is consistent with the interests of maintaining a sound financial system and that the acquisition does not afford a basis for supervisory objection.
Examination. Periodic reports to the Division must be made by each Missouri-chartered institution. The Division conducts and supervises the examination of state-chartered institutions.
Supervision. The Director has general supervisory authority over Missouri-chartered institutions and upon the Director's finding that an institution is violating the provisions of its articles of incorporation, its bylaws or any law of the state, or is conducting business in an unsafe or injurious manner, the Director may order the institution to discontinue such violation or practice, and to conform with all the requirements of law. The Director may demand and take possession of the institution, if the institution fails to comply with the Director's order, if the Director determines that the institution is insolvent, in an unsafe condition or conducting business in an unsafe manner, or if the institution refuses to submit to examination or inspection by the Division.
Federal Regulation of Savings Banks
Office of Thrift Supervision.
New Legislation. On July 21 2010, the Dodd-Frank Act was signed into law. The OTS is an office inDodd-Frank Act implements far-reaching changes across the Departmentfinancial regulatory landscape, including provisions that, among other things, will:
| · | On July 21, 2011, the responsibilities and authority of the OTS to supervise and examine state savings associations, including the Savings Bank, were transferred to the FDIC, and the responsibilities and authority of the OTS to supervise and examine savings and loan holding companies, including the Company, to the Federal Reserve. |
| · | Centralize responsibility for consumer financial protection by creating a new agency within the Federal Reserve Board, the Bureau of Consumer Financial Protection, with broad rulemaking, supervision and enforcement authority for a wide range of consumer protection laws that would apply to all banks and thrifts. Smaller financial institutions, including the Savings Bank, will be subject to the supervision and enforcement of their primary federal banking regulator with respect to the federal consumer financial protection laws. |
| · | Require new capital rules and apply the same leverage and risk-based capital requirements that apply to insured depository institutions to savings and loan holding companies beginning July 21, 2015. |
| · | Require the federal banking regulators to seek to make their capital requirements countercyclical, so that capital requirements increase in |
| times of economic expansion and decrease in times of economic contraction. |
| · | Provide for new disclosure and other requirements relating to executive compensation and corporate governance. |
| · | Make permanent the $250,000 limit for federal deposit insurance and provide unlimited federal deposit insurance until January 1, 2013 for non-interest bearing demand transaction accounts at all insured depository institutions. |
| · | Effective July 21, 2011, repealed the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts. |
| · | Require all depository institution holding companies to serve as a source of financial strength to their depository institution subsidiaries in the event such subsidiaries suffer from financial distress. |
Many aspects of the
TreasuryDodd-Frank Act are subject to
rulemaking and will take effect over several years, making it difficult to anticipate the
general oversight of the Secretary of the
Treasury. Among other functions, the OTS issues and enforces regulations
affecting federally-insured savings associations and regularly examines these
institutions.
The OTS has extensive authority over the operations of all insured
savings associations. As part of this authority, First Home is required to
file periodic reports with the OTS District Director and is subject to
periodic examinations by the OTS and the FDIC. The OTS and FDIC have
extensive discretion in their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in these policies, whether by the OTS, the FDIC or
Congress, could have a material adverseoverall financial impact on the Company and the
Savings
Bank.financial services industry more generally. The
OTS has established a schedule for the assessment of fees upon all
savings associations to fund the operationselimination of the
OTS. A scheduleprohibition on the payment of
fees
has also been established for the various types of applications and filings
made by savings associations with the OTS. The general assessment, paidinterest on
a
semi-annual basis, is determined based upon the savings association's total
assets, including consolidated subsidiaries, as reporteddemand deposits could materially increase our interest expense, depending our competitors’ responses. Provisions in the
savings
association's latest quarterly thrift financial report. Forlegislation that require revisions to the
first halfcapital requirements of
2008, the
28
Savings Bank's assessment under the semi-annual assessment procedure was
$53,780. Based on the current assessment rates published by the OTSCompany and First
Home's total assets of approximately $247.5 million at March 31, 2008, First
Home will be required to pay a semi-annual assessment of $54,362 for the
second half of calendar year 2008.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings, internal controls and
audit systems, interest rate risk exposure and compensation and other employee
benefits. Any institution that fails to comply with these standards must
submit a compliance plan. In this regard, the Savings Bank entered into a
memorandumcould require the Company and the Savings Bank to seek additional sources of understanding withcapital in the OTS in December 2006. See "-Corporate
Developments and Overview."
future.
Insurance of Accounts and Regulation by the FDIC. The Savings Bank is a
member ofBank's deposits are insured up to applicable limits by the Deposit Insurance Fund (the "DIF"(“DIF”), which is administered by of the FDIC. The DIF is the successor to the Bank Insurance Fund and the Savings
Association Insurance Fund, which were merged effective March 31, 2006. The
FDIC insures depositsDeposits are insured up to the applicable limits and this insurance isby the FDIC, backed by the full faith and credit of the United States government.Government. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the insurance fund. The FDIC also has the authority to initiate enforcement actions against savings institutions, after giving the OTS an opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.
As a result of a decline in the reserve ratio (the ratio of the DIF to estimated insured deposits) and concerns about expected failure costs and available liquid assets in the DIF, the FDIC adopted a rule requiring each insured institution to prepay on December 30, 2009 the estimated amount of its quarterly assessments for the fourth quarter of 2009 and all quarters through the end of 2012 (in addition to the regular quarterly assessment for the third quarter which was due on December 30, 2009). The prepaid amount is recorded as an asset with a zero risk weight and the institution will continue to record quarterly expenses for deposit insurance. For purposes of calculating the prepaid amount, assessments were measured at the institution’s assessment rate as of September 30, 2009, with a uniform increase of three basis points effective January 1, 2011, and were based on the institution’s assessment base for the third quarter of 2009, with growth assumed quarterly at annual rate of 5%. If events cause actual assessments during the prepayment period to vary from the prepaid amount, institutions will pay excess assessments in cash or receive a rebate of prepaid amounts not exhausted after collection of assessments due on June 30, 2013, as applicable. Collection of the prepayment does not preclude the FDIC amended itsfrom changing assessment rates or revising the risk-based assessment system in the future. The rule includes a process for 2007 to implement
authority grantedexemption from the prepayment for institutions whose safety and soundness would be affected adversely. In December 2009, the Savings Bank paid the
prepaid assessment of $1.6 million; and as of June 30, 2011, the outstanding prepaid assessment was $753,000.
As required by the Federal Deposit Insurance ReformDodd-Frank Act, the FDIC adopted rules effective April 1, 2011, under which insurance premium assessments are based on an institution's total assets minus its tangible equity (defined as Tier 1 capital) instead of 2005, which
was enacted in 2006 ("Reform Act").its deposits. Under the revised system, insured
institutions arethese rules, an institution with total assets of less than $10 billion will be assigned to one of four risk categories based on its capital, supervisory evaluations, regulatory capital levelsratings and certain other factors. An
institution'sWell capitalized institutions that are financially sound with only a few minor weaknesses are assigned to Risk Category I. Risk Categories II, III and IV present progressively greater risks to the DIF. A range of initial base assessment rate depends uponrates will apply to each category, subject to adjustment downward based on unsecured debt issued by the category to which it is
assigned.institution and, except for an institution in Risk Category I, which contains those depository institutions that
poseadjustment upward if the smallest risk, is expectedinstitution's brokered deposits exceed 10% of its domestic deposits, to include more than 90% of all
institutions. Unlike the other categories,produce total base assessment rates. Total base assessment rates range from 2.5 to nine basis points for Risk Category I, containsnine to 24 basis points for Risk Category II, 18 to 33 basis points for Risk Category III and 30 to 45 basis points for Risk Category IV, all subject to further risk differentiation basedadjustment upward if the institution holds more than a de minimis amount of unsecured debt issued by another FDIC-insured institution. The FDIC may increase or decrease its rates by 2.0 basis points without further rulemaking. In an emergency, the FDIC may also impose a special assessment.
The Dodd-Frank Act establishes 1.35% as the minimum reserve ratio. The FDIC has adopted a plan under which it will meet this ratio by September 30, 2020, the deadline imposed by the Dodd-Frank Act. The Dodd-Frank requires the FDIC to offset the effect on institutions with assets less than $10 billion of the FDIC's analysisincrease in the statutory minimum reserve ratio to 1.35% from the former statutory minimum of financial ratios,
examination component ratings and other information. Assessment rates are
determined1.15%. The FDIC has not yet announced how it will implement this offset. In addition to the statutory minimum ratio the FDIC must designate a reserve ratio, known as the designated reserve ratio (“DRR”), which may exceed the statutory minimum. The FDIC has established 2.0% as the DRR. In addition, all institutions with deposits insured by the FDIC and currently range from fiveare required to sevenpay assessments to fund interest payments on bonds issued by the Financing Corporation, an agency of the Federal government established to fund the costs of failed thrifts in the 1980s. For the quarterly period ended March 31, 2011, the Financing Corporation assessment equaled 1.00 basis points for each $100 in domestic deposits. These assessments, which may be revised based upon the healthiest institutions (Risk Category I) to 43 basis pointslevel of assessableDIF deposits, will continue until the bonds mature in the years 2017 through 2019.
Under the Dodd-Frank Act, beginning on January 1, 2011, all non-interest bearing transaction accounts and IOLTA accounts qualify for those that poseunlimited deposit insurance by the highest risk (Risk Category IV). The FDIC may
adjust rates uniformly from one quarterthrough December 31, 2012. NOW accounts, which were previously fully insured under the Transaction Account Guarantee Program, are no longer eligible for an unlimited guarantee due to the next, except that no single
adjustment can exceed three basis points. No institution may pay a dividend if
in defaultexpiration of this program on December 31, 2010. NOW accounts, along with all other deposits maintained at the Savings Bank, are now insured by the FDIC assessment.
The Reform Act also provided for a one-time credit for eligible
institutions based on their assessment base as of December 31, 1996. Subjectup to certain limitations with respect to institutions that are exhibiting
weaknesses, credits can be used to offset assessments until exhausted. The
Savings Bank's one-time credit was $159,764 and will be exhausted in the
quarter ending September 30, 2008. The Reform Act also provided for the
possibility that the FDIC may pay dividends to insured institutions once the
DIF reserve ratio equals or exceeds 1.35% of estimated insured deposits.
$250,000 per account owner.
In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund.
ForThis payment is established quarterly and during the
quarter ended June 30, 2008, which is the most recent information available,
29
this payment was established at 1.12fiscal year ending March 31, 2011 averaged 5.33 basis points (annualized) of assessable deposits. The Reform Act providedFinancing Corporation was chartered in 1987, by the OTS’ predecessor, the Federal Home Loan Bank Board, solely for the purpose of functioning as a vehicle for the recapitalization of the deposit insurance system.
As insurer, the FDIC withis authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious threat to the DIF. The FDIC also has the authority to adjusttake enforcement actions against banks and savings associations.
The Dodd-Frank Act contains a number of provisions that will affect the DIF ratio
to insured deposits within a range of 1.15% and 1.50%, in contrastcapital requirements applicable to the prior statutorily fixed ratioCompany and the Savings Bank, including the requirement that thrift holding companies be subject to consolidated capital requirements, effective July 21, 2011, the date the OTS became part of 1.25%.the OCC. In addition, on September 12, 2010, the Basel Committee adopted the Basel III capital rules. These rules, which will be phased in over a period of years, set new standards for common equity, tier 1 and total capital, determined on a risk-weighted basis. The ratio, which is viewed byimpact on the FDIC asCompany and the level thatSavings Bank of the fund should achieve, was established by the agencyBasel III rules cannot be determined at 1.25% for 2008.
The FDIC has authoritythis time. For additional information, see “-- Capital Requirements -- Possible Changes to increase insurance assessments. Capital Requirements Resulting from Basel III” set forth below.
A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Savings Bank. There can be no prediction as to what insurance assessment rates will be in the future. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the Office of
Thrift Supervision.FDIC. Management of the Savings Bank is not aware of any practice, condition or violation that might lead to termination of the Savings Bank'sBank’s deposit insurance.
Federal Home Loan Bank System. The Savings Bank is a member of the FHLB-Des Moines, which is one of 12 regional FHLBs that administer the home financing credit function of member financial institutions. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans or advances to members in accordance with policies and procedures, established by the Board of Directors of the FHLB, which are subject to the oversight of the Federal Housing Finance Board.Agency. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for residential home financing. At June 30, 2008,2011, the Savings Bank had $22.0$3.0 million of outstanding advances from the FHLB-Des Moines. See "Business“Business -- Deposit Activities and Other Sources of Funds -- Borrowings"Borrowings” herein.
As a member, the Savings Bank is required to purchase and maintain stock in the FHLB-Des Moines. At June 30, 2008,2011, the Savings Bank had $1.3 million$434,000 in FHLB-Des Moines stock, which was in compliance with this requirement. In past years, the Savings Bank has received substantial dividends on its FHLB-Des Moines stock. The average dividend yield for fiscal 2011, 2010, 2009 and 2008 2007was 3.00%, 2.56%, 0.94% and 2006 was 4.46%, 4.97% and 2.78%, respectively. There iscan be no guaranteeassurance that the FHLB-Des Moines will maintain its dividend at these levels.
Under federal law, the FHLB is required to provide funds for the resolution of troubled savings institutions and to contribute to lowlow- and moderately pricedmoderately-priced housing programs through direct loans or interest subsidies on advances targeted for community investment and lowlow- and moderate incomemoderate-income housing projects. These contributions have affected adversely affected the level of FHLB dividends paid and could continue to do so in the future. These contributions could also could have an adverse effect on the value of FHLB stock in the future. A reduction in value of the Savings Bank's FHLB stock may result in a corresponding reduction in the Savings Bank's capital.
Prompt Corrective Action. The OTS is required to take certainFederal statutes establish a supervisory actions againstframework based on five capital categories: well capitalized, adequately capitalized, undercapitalized, savings associations, the
severity of whichsignificantly undercapitalized and critically undercapitalized. An institution’s category depends upon the institution's degree of under-
capitalization. Generally,where its capital
levels are in relation to relevant capital measures, which include a risk-based capital measure, a leverage ratio capital measure and certain other factors. The federal banking agencies have adopted regulations that implement this statutory framework. Under these regulations, an institution
that has ais treated as well capitalized if its ratio of total capital to risk-weighted assets
is 10% or more, its ratio of
core capital to risk-weighted assets is 6% or more, its ratio of core capital to adjusted total assets (leverage ratio) is 5% or more, and it is not subject to any federal supervisory order or directive to meet a specific capital level. In order to be adequately capitalized, an institution must have a total risk-based capital ratio of not less than 8%, a
Tier 1 risk-based capital ratio of
Tier I (core) capital to
risk-weighted assets ofnot less than 4%,
or a ratio of core capital to total
30
assets of less than 4% (3% or less for institutions with the highest
examination rating) is considered to be "undercapitalized." An institution
that has a total risk-based capital ratio less than 6%, a Tier I capital ratio
of less than 3% orand a leverage ratio that isof not less than 3%4%. Any institution which is neither well capitalized nor adequately capitalized is considered undercapitalized.
Undercapitalized institutions are subject to be
"significantly undercapitalized"certain prompt corrective action requirements, regulatory controls and restrictions which become more extensive as an institution becomes more severely undercapitalized. Failure by institutions to comply with applicable capital requirements would, if not remedied, result in progressively more severe restrictions on their respective activities and lead to enforcement actions, including, but not limited to, the issuance of a capital directive to ensure the maintenance of required capital levels and, ultimately, the appointment of the FDIC as receiver or conservator. Banking regulators will take prompt corrective action with respect to depository institutions that has a tangibledo not meet minimum capital to assets ratio equal to or less than 1.5% is deemed torequirements. Additionally, approval of any regulatory application filed for their review may be "critically
undercapitalized."
dependent on compliance with capital requirements.
At June 30, 2008,2011, First Home was awould have been categorized as "well capitalized" institution under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The federal bankingOTS, based on its regulatory agencies have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). The
Guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the OTS determines thatratios. However, since the Savings Bank fails to meet any standard prescribed by the Guidelines, or may
require the Savings Bank to submit an acceptable plan to achieve compliance
with the standard. Management is aware of no conditions relating to these
safetyoperating under a Cease and soundness standards which would require submission of a plan of
compliance.
Desist Order, it is not considered “well capitalized” and is deemed “adequately capitalized.”
Qualified Thrift Lender Test. All savings associations, including First Home, are required to meet a qualified thrift lender test to avoid certain restrictions on their operations. This test requires a savings association to have at least 65% of its portfolio asset,total assets, as defined by regulation, in qualified thrift investments on a monthly average for nine out of every 12 months on a rolling basis. As an alternative, the savings association may maintain 60% of its assets in those assets specified in Section 7701(a)(19) of the Code.Internal Revenue Code of 1986, as amended (“Code”). Under either test, such assets primarily consist of residential housing related loans and investments. At June 30, 2008, First Home met the
test and its qualified thrift lender percentage was 65.11%.
AnyA savings association that fails to meet the qualified thrift lender test mustis subject to certain operating restrictions and may be required to convert to a national bank charter. Recent legislation has expanded
the extent to which education loans, credit card loans and small business
loans may be considered "qualified thrift investments." As ofAt June 30, 2008,2011, First Home maintained 63.63% of it portfolio assets in qualified thrift investments and, therefore, at that date was below the Savings Bank metrequirement of the qualified thrift lender test. This was the result of an incoming wire transfer deposit on June 30, 2011, the proceeds from which became part of total assets, but were in excess of the 20% cap on liquidity includable as qualifying in the calculation. The Savings Bank exceeded the 65% requirement in August 2011.
Capital Requirements. The OTS'sFDIC's capital regulations require federal savings institutions to meet three minimum capital standards: a 1.5% tangible capital to total assets ratio, a 4% leveragecore capital ratio (3% for institutions
receiving the highest rating on the CAMELS examination rating system) and an 8% risk-based capital ratio. In addition, the prompt corrective action standards discussed belowabove also establish, in effect, a minimum ratios of 2% tangible capital, standard, a 4% leverage ratiocore capital (3% for institutions receiving the highest rating on the CAMELS system) and, together with the, 8% risk-based capital standard itself, aand, 4% Tier I risk-based capital standard.capital. The OTS regulations also require that, in meeting the tangible, leveragecore and risk-based capital standards,ratios, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal that are not permissible for a national bank.
The risk-based capital standard requires federal savings institutions to maintain Tier I
(core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, recourse obligations, residual
31
interests and direct credit substitutes, are multiplied by a risk-weight factor of 0% to 100%, assigned by the OTSFDIC capital regulation based on the risks believed inherent in the type of asset. Core (Tier I) capital is defined as common stockholders' equity (including retained earnings), certain non-cumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and
lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital.
The OTSFDIC also has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution's capital level is or may become inadequate in light of the particular circumstances. At June 30, 2008,2011, the Savings Bank met each of these capital requirements.
Therequirements, which is reflected in the following table presentstable.
| | | At June 30, 2011 | |
| | | | | | Percent of | |
| | | Amount | | | Assets | |
| | | (Dollars in thousands) | |
| Tangible capital | | $ | 16,387 | | | | 7.90 | % |
| Minimum required tangible capital | | | 3,110 | | | | 1.50 | |
| Excess | | $ | 13,277 | | | | 6.40 | % |
| | | | | | | | | |
| Core capital | | $ | 16,387 | | | | 7.90 | % |
| Minimum required core capital | | | 8,292 | | | | 4.00 | |
| Excess | | $ | 8,095 | | | | 3.90 | % |
| | | | | | | | | |
| Risk-based capital | | $ | 17,568 | | | | 18.34 | % |
| Minimum risk-based capital requirement | | | 7,662 | | | | 8.00 | |
| Excess | | $ | 9,906 | | | | 10.34 | % |
Possible Changes to Capital Requirements Resulting from Basel III. In December 2010 and January 2011, the Basel Committee on Banking Supervision published the final texts of reforms on capital and liquidity generally referred to as “Basel III.” Although Basel III is intended to be implemented by participating countries for large, internationally active banks, its provisions are likely to be considered by United States banking regulators in developing new regulations applicable to other banks in the United States, including the Savings Bank'sBank.
For banks in the United States, among the most significant provisions of Basel III concerning capital levelsare the following:
• A minimum ratio of common equity to risk-weighted assets reaching 4.5%, plus an additional 2.5% as a capital conservation buffer, by 2019 after a phase-in period.
• A minimum ratio of JuneTier 1 capital to risk-weighted assets reaching 6.0% by 2019 after a phase-in period.
• A minimum ratio of total capital to risk-weighted assets, plus the additional 2.5% capital conservation buffer, reaching 10.5% by 2019 after a phase-in period.
• An additional countercyclical capital buffer to be imposed by applicable national banking regulators periodically at their discretion, with advance notice.
• Restrictions on capital distributions and discretionary bonuses applicable when capital ratios fall within the buffer zone.
• Deduction from common equity of deferred tax assets that depend on future profitability to be realized.
• Increased capital requirements for counterparty credit risk relating to OTC derivatives, repos and securities financing activities.
• For capital instruments issued on or after January 13, 2013 (other than common equity), a loss-absorbency requirement such that the instrument must be written off or converted to common equity if a trigger event occurs, either pursuant to applicable law or at the direction of the banking regulator. A trigger event is an event under which the banking entity would become nonviable without the write-off or conversion, or without an injection of capital from the public sector. The issuer must maintain authorization to issue the requisite shares of common equity if conversion were required.
The Basel III provisions on liquidity include complex criteria establishing a liquidity coverage ratio (“LCR”) and net stable funding ratio (“NSFR”). The purpose of the LCR is to ensure that a bank maintains adequate unencumbered, high quality liquid assets to meet its liquidity needs for 30 2008.
At June 30, 2008
---------------------------
Percentdays under a severe liquidity stress scenario. The purpose of Amount Assets
---------- -------------
(Dollars in thousands)
Tangible capital $24,818 10.05 %
Minimum required tangible capital 3,705 1.50
---------- -------------
Excess $21,113 8.55 %
========== =============
Core capital $24,818 10.05 %
Minimum required core capital 9,881 4.00
---------- -------------
Excess $14,937 6.05 %
========== =============
Risk-based capital $26,859 16.27 %
Minimum risk-based capital requirement 13,206 8.00
---------- -------------
Excess $13,653 8.27 %
========== =============
the NSFR is to promote more medium and long-term funding of assets and activities, using a one-year horizon. Although Basel III is described as a “final text,” it is subject to the resolution of certain issues and to further guidance and modification, as well as to adoption by United States banking regulators, including decisions as to whether and to what extent it will apply to United States banks that are not large, internationally active banks.
Limitations on Capital Distributions. OTSFDIC regulations impose various restrictions on savings institutions with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account. Generally, savings institutions, such as the Savings Bank, that before and after the proposed distribution are well-capitalized, may make capital distributions during any calendar year equal to up to 100% of net income for the year-to-date plus retained net income for the two preceding years. However, an institution deemed to be in need of more than normal supervision or in troubled condition by the OTSFDIC may have its dividend authority restricted by the OTS.FDIC. The Savings Bank may paycurrently is required to file an application and receive approval of the FDIC prior to paying any dividends or making any capital distributions. For additional information, see “Item 1A -- Risk Factors--Risks Related to Our Market and Business--We are subject to the restrictions and conditions of Cease and Desist Orders. Failure to comply with the Cease and Desist Orders could result in accordance with this general authority.
Savingsadditional enforcement action against us, including the imposition of monetary penalties.”
Generally, savings institutions proposing to make any capital distribution need not submit written notice to the
OTSFDIC prior to such distribution unless they are a subsidiary of a holding company or would not remain well-capitalized following the distribution. Savings institutions that do not, or would not meet their current minimum capital requirements following a proposed capital distribution or propose to exceed these net income limitations, must obtain
OTSFDIC approval
32
prior to making such distribution. The OTS FDIC may object to the distribution during that 30-day period based on safety and soundness concerns.
Loans to One Borrower. Federal law provides that savings institutions are generally subject to the national bank limit on loans to one borrower. Generally, this limit isA savings institution may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the Savings Bank'sits unimpaired capital and surplus, plus ansurplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if such loan is secured by specified readily-marketable collateral. The OTS by
regulation has amended the loans to one borrower rule to permit savings
associations meeting certain requirements, including capital requirements, to
extend loans to one borrower in additional amounts under circumstances limited
essentially to loans to develop or complete residential housing units. At June 30, 2008,2011, the Savings Bank's largest loanextension of credit outstanding to any one borrower, including related entities, was $2.8$3.8 million, of which $15,000$483,000 was unfunded. This amount is a single loanrepresents two participation loans secured by a subdivisionshopping center development in Springfield,St. Joseph, Missouri. This loan wasThese loans were performing in accordance with its
repaymenttheir terms at that date.
The federal banking agencies have also adopted guidelines establishing safety and soundness standards on such matters as loan underwriting and documentation, asset quality, earnings, internal controls and audit systems, interest rate risk exposure and compensation and other employee benefits. Any institution that fails to comply with these standards must submit a compliance plan.
Activities of Savings Associations and Their Subsidiaries. When a savings association establishes or acquires a subsidiary or elects to conduct any new activity through a subsidiary that the associationsassociation controls, the savings association shallmust notify the FDIC and the OTS 30 days in advance and provide the required information each agency may, by regulation, require.in connection with such notification. Savings associations also must conduct the activities of subsidiaries in accordance with existing regulations and orders.
The
OTSFDIC may determine that the continuation by a savings association of its ownership control of, or its relationship to, the subsidiary constitutes a serious risk to the safety, soundness or stability of the
savings association or is inconsistent with sound banking practices or with the purposes of the
FDIA.Federal Deposit Insurance Act. Based upon that determination, the FDIC
or the OTS has the authority to order the savings association to divest itself of control of the subsidiary. The FDIC also may determine by regulation or order that any specific activity poses a serious threat to the
SAIF.DIF. If so, it may require that no
SAIFDIF member engage in that activity directly.
Accounting and Regulatory Standards. An OTS policy statement applicable
to all savings associations clarifies and re-emphasizes that the investment
activities of a savings association must be in compliance with approved and
documented investment policies and strategies, and must be accounted for in
accordance with generally accepted accounting principles (GAAP). Under the
policy statement, management must support its classification of an accounting
for loans and securities (i.e., whether held for investment, sale or trading)
with appropriate documentation. First Home is in compliance with these
amended rules.
The OTS has adopted an amendment to its accounting regulations, which may
be made more stringent than generally accepted accounting principles by the
OTS, to require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial
reports must incorporate any other accounting regulations or orders prescribed
by the OTS.
Investment Portfolio Policy. OTS supervisory policy requires that
securities owned by thrift institutions must be classified and reported in
accordance with GAAP which establishes three classifications of investment
securities: held-to-maturity, trading and available-for-sale. Trading
securities are acquired principally for the purpose of near term sales. Such
securities are reported at fair value and unrealized gains and losses are
included in income.
33
Securities which are designated as held-to-maturity are designated as
such because the investor has the ability to hold these securities to
maturity. Such securities are reported at amortized cost.
All other securities are designated as available-for-sale, a designation
which provides the investor with certain flexibility in managing its
investment portfolio. Such securities are reported at fair value; net
unrealized gains and losses are excluded from income and reported net of
applicable income taxes as a separate component of stockholders' equity. The
Savings Bank has adopted a reporting policy that complies with these OTS
requirements.
Transactions with Affiliates. The Savings Bank's authority to engage in transactions with "affiliates" is limited by OTSFDIC regulations and by Sections 23A and 23B of the Federal Reserve Act as implemented by the Federal Reserve Board's Regulation W. The term "affiliates" for these purposes generally means any company that controls or is under common control with an institution. The Company and its non-savings institution subsidiaries would be affiliates of the Savings Bank. In general, transactions with affiliates must be on terms that are as favorable to the institution as comparable transactions with non-affiliates. In addition, certain types of transactions are restricted to an aggregate percentage of the institution's capital. Collateral in specified amounts must usually be provided by affiliates in order to receive loans from an institution. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary. Federally insured savings institutions are subject, with certain exceptions, to certain restrictions on extensions of credit to their parent holding companies or other affiliates, on investments in the stock or other securities of affiliates and on the taking of such stock or securities as collateral from any borrower. In addition, these institutions are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or the providing of any property or service. An institution deemed to be in “troubled condition” must file a notice with the OTS and obtain its non-
objection to any transaction with an affiliate (subject to certain exemptions).
The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") generally prohibits a company from making loans to its executive officers and directors. However, that act contains a specific exception for loans by a depository institution to its executive officers and directors in compliance with federal banking laws. Under such laws, the Savings Bank's authority to extend credit to executive officers, directors and 10% stockholders ("insiders"), as well as entities which such person's control, is limited. The law restricts both the individual and aggregate amount of loans the Savings Bank may make to insiders based, in part, on the Savings Bank's capital position and requires certain Board approval procedures to be followed. Such loans must be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. There are additional restrictions applicable to loans to executive officers.
Privacy Standards.
Federal Reserve System. The Gramm-Leach-Bliley Financial Services
Modernization ActFederal Reserve Board requires that all depository institutions maintain reserves on transaction accounts or non-personal time deposits. These reserves may be in the form of 1999 ("GLBA"), which was enacted in 1999, modernizedcash or non-interest-bearing deposits with the financial services industry by establishing a comprehensive framework to
permit affiliations among commercial banks, insurance companies, securities
firmsregional Federal Reserve Bank. Negotiable order of withdrawal (“NOW”) accounts and other financial service providers. The Savings Bank istypes of accounts that permit payments or transfers to third parties fall within the definition of transaction accounts and are subject to OTS regulations implementing the privacy protection provisionsreserve requirements, as are any non-personal time deposits at a savings bank. As of June 30, 2011, the GLBA.
These regulations requireSavings Bank’s deposit with the Federal Reserve Bank and vault cash exceeded its reserve requirements.
Community Reinvestment Act. Under the Community Reinvestment Act (“CRA”), every FDIC-insured institution has a continuing and affirmative obligation consistent with safe and sound banking practices to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the FDIC, in connection with the examination of the Savings Bank, to discloseassess the institution's record of meeting the credit needs of its privacy policy,
including identifying with whom it shares "non-public personal information,"community and to customers attake such record into account in its evaluation of certain applications, such as a merger or the timeestablishment of establishinga branch, by the customer relationship and
annually thereafter.
Anti-Money Laundering and Customer Identification. Congress enactedSavings Bank. The FDIC may use an unsatisfactory rating as the Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Actbasis for the denial of 2001 (the "USA Patriot Act") on
October 26, 2001 in responsean application. Due to the terrorist eventsheightened attention being given to the CRA in the past few years, the Savings Bank may be required to devote additional funds for investment and lending in its local community. The Savings Bank was examined for CRA compliance and received a rating of September 11, 2001.outstanding in its latest examination.
Regulatory and Criminal Enforcement Provisions. The USA PatriotFDIC has primary enforcement responsibility over savings institutions and has the authority to bring action against all "institution-affiliated parties," including stockholders, attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to the removal of officers or directors, receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or $1.1 million per day in especially egregious cases. Federal law also establishes criminal penalties for certain violations.
Environmental Issues Associated with Real Estate Lending. The Comprehensive Environmental Response, Compensation and Liability Act gives
("CERCLA"), a federal statute, generally imposes strict liability on all prior and present "owners and operators" of sites containing hazardous waste. However, Congress asked to protect secured creditors by providing that the
federal government new powersterm "owner and operator" excludes a person whose ownership is limited to
address
terrorist threats through enhanced domesticprotecting its security
measures, expanded
surveillance powers, increased information sharing, and broadened anti-money
34
laundering requirements. In 2006, Congress re-enacted certain expiring
provisionsinterest in the site. Since the enactment of the USA Patriot Act.
CERCLA, this "secured creditor exemption" has been the subject of judicial interpretations which have left open the possibility that lenders could be liable for cleanup costs on contaminated property that they hold as collateral for a loan. In addition, lenders, such as the Savings Bank, may be subject to environmental liabilities with respect to real estate properties that are placed in foreclosure that they subsequently take title to. For additional information, see Item 1A, “Risk Factors -– Risks Related to Our Market and Business -- Our real estate lending also exposes us to the risk of environmental liabilities.” To the extent that legal uncertainty exists in this area, all creditors, including the Savings Bank, that have made loans secured by properties with potential hazardous waste contamination (such as petroleum contamination) could be subject to liability for cleanup costs, which costs often substantially exceed the value of the collateral property.
Regulation of First Bancshares
General. First Bancshares is a unitary savings and loan holding company subject to the regulatory oversight of the Federal Reserve as successor to the powers and authority of the OTS. Accordingly, the Company is registeredrequired to register and file reports with the OTSFederal Reserve and is subject to OTS regulations, examinations,
supervisionregulation and reporting requirements. Theexamination by the Federal Reserve . In addition, the Federal Reserve has enforcement authority over the Company is requiredand its non-savings institution subsidiaries, which also permits the Federal Reserve to file
certain reports with, and otherwise comply withrestrict or prohibit activities that are determined to present a serious risk to the regulations of,subsidiary savings institution. In addition, beginning July 21, 2015, the OTS
and the Securities and Exchange Commission. As a subsidiary ofCompany as a savings and loan holding company will be subject to the same leverage and risk-based capital requirements that apply to insured depository institutions.
Activities Restrictions. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 ("GLBA") provides that no company may acquire control of a savings association after May 4, 1999 unless it engages only in the financial activities permitted for financial holding companies under the law or for multiple savings and loan holding companies as described below. The GLBA also specifies, subject to a grandfather provision, that existing savings and loan holding companies may only engage in such activities. The Company qualifies for the grandfathering and is therefore not restricted in terms of its activities. Upon any non-supervisory acquisition by the company of another savings association as a separate subsidiary, the Company would become a multiple savings and loan holding company and would be limited to those activities permitted multiple savings and loan holding companies by OTS regulation. Multiple savings and loan holding companies may engage in activities permitted for financial holding companies, and certain other activities including acting as a trustee under deed of trust and real estate investments.
If the Savings Bank isfails the qualified thrift lender test, the Company must, within one year of that failure, register as, and will become subject to, certainthe restrictions in
its dealings withapplicable to bank holding companies. See "Regulation of First Home -- Qualified Thrift Lender Test" for information regarding the Company and with other companies affiliated with the
Company and also is subject to regulatory requirements and provisions as
federal institutions.
Savings Bank's qualified thrift lender test.
Mergers and Acquisitions. The Company must obtain approval from the OTSbeforeFederal Reserve before acquiring more than 5% of the voting stock of another savings institution or savings and loan holding company or acquiring such an institution or holding company by merger, consolidation or purchase of its
assets. In evaluating an application for the Company to acquire control of a savings institution, the OTSFederal Reserve would consider the financial and managerial resources and future prospects of the Company and the target institution, the effect of the acquisition on the risk to the insurance funds,DIF, the convenience and the needs of the community and competitive factors.
Activities Restrictions. As
The Federal Reserve may not approve any acquisition that would result in a unitarymultiple savings and loan holding company the Company generally is notcontrolling savings institutions in more than one state, subject to activity restrictions. The Company and
its non-savings institution subsidiaries are subject to statutory and
regulatory restrictions on their business activities specifiedtwo exceptions; (i) the approval of interstate supervisory acquisitions by federal
regulations, which include performing services and holding properties used by
a savings institution subsidiary, activities authorized for savings and loan holding companies asand (ii) the acquisition of March 5, 1987,a savings institution in another state if the laws of the states of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and non-banking activities permissible
for bank holding companies pursuant to the Bank Holding Company Act of 1956 or
authorized for financial holding companies pursuant to the GLBA.
If the Savings Bank fails the qualified thrift lender test, within one
year the Company must register as a bankloan holding company and will become
subject to, the significant activity restrictions applicable to bank holding
companies. See "Regulation of First Home -- Qualified Thrift Lender Test" for
information regarding the Savings Bank's qualified thrift lender test.
acquisitions.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 was signed into law by President Bush on July 30, 2002 in response to public concerns regarding corporate accountability in connection with recent accounting scandals. The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. The Sarbanes-Oxley Act generally applies to all companies that file or are required to file periodic reports with the SEC, under the Securities Exchange Act of 1934, including the Company.
The Sarbanes-Oxley Act includes very specific additional disclosure requirements and new corporate governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules and mandates further studies of certain issues by the SEC and the Comptroller General. The Sarbanes-Oxley Act represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, 35
and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees. As noted above, the Dodd-Frank Act imposes additional disclosure and corporate government requirements and represents further federal involvement in matters historically addressed by state corporate law.
Taxation
Federal Taxation
General. The Company and the Savings Bank report their income on a fiscal year basis using the accrual method of accounting and are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Savings Bank's reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Savings Bank or the Company.
Bad Debt Reserve. Historically, savings institutions such as the Savings Bank which met certain definitional tests primarily related to their assets and the nature of their business ("qualifying thrift") were permitted to establish a reserve for bad debts and to make annual additions thereto, which may have been deducted in arriving at their taxable income. The Savings Bank's deductions with respect to "qualifying real property loans," which are generally loans secured by certain interest in real property, were computed using an amount based on the Savings Bank's actual loss experience, or a percentage equal to 8% of the Savings Bank's taxable income, computed with certain modifications and reduced by the amount of any permitted additions to the non-qualifying reserve. Due to the Savings Bank's loss experience, the Savings Bank generally recognized a bad debt deduction equal to 8% of taxable income.
In August 1996, the provisions repealing the current thrift bad debt rules were passed by Congress as part of "The Small Business Job Protection Act of 1996." The rules eliminate the 8% of taxable income method for deducting additions to the tax bad debt reserves for all thrifts for tax years beginning after December 31, 1995. These rules also require that all institutions recapture all or a portion of their bad debt reserves added since the base year (last taxable year beginning before January 1, 1988). For taxable years beginning after December 31, 1995, the Savings Bank's bad debt deduction will be determined under the experience method using a formula based on actual bad debt experience over a period of years or, if the Savings Bank is a "large" association (assets in excess of $500 million) on the basis of net charge-offs during the taxable year. The unrecapturedun-recaptured base year reserves will not be subject to recapture as long as the institution continues to carry on the business of banking. In addition, the balance of the pre-1988 bad debt reserves continue to be subject to provisions of present law referred to below that require recapture in the case of certain excess distributions to shareholders.
Distributions. To the extent that the Savings Bank makes "non-dividend distributions" to the Company that are considered as made: (i) from the reserve for losses on qualifying real property loans, to the extent the reserve for such losses exceeds the amount that would have been allowed under the experience method; or (ii) from the supplemental reserve for losses on loans ("Excess Distributions"), then an amount based on the amount distributed will be included in the Savings Bank's taxable income. Non-dividend distributions include distributions in excess of the Savings Bank's current and accumulated earnings and profits, distributions in redemption of stock, and distributions in partial or complete liquidation. However, dividends paid out of the Savings Bank's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not be considered to result in a distribution from the Savings Bank's bad debt reserve. Thus, any dividends to the Company that would reduce amounts appropriated to the Savings Bank's bad debt reserve and deducted for federal income tax purposes would create a tax liability for the 36
Savings Bank. The amount of additional taxable income attributable to an Excess Distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, if, the Savings Bank makes a "non-dividend distribution," then approximately one and one-half times the amount so used would be includable in gross income for federal income tax purposes, assuming a 35% corporate income tax rate (exclusive of state and local taxes). See "Regulation of First Home – Limitations on Capital Distributions" for limits on the payment of dividends by the Savings Bank. The Savings Bank does not intend to pay dividends that would result in a recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad debt reserve deduction using the percentage of taxable income method over the deduction that would have been allowable under the experience method is treated as a preference item for purposes of computing the AMTI. AMTI is increased by an amount equal to 75% of the amount by which the Savings Bank's adjusted current earnings exceed its AMTI (determined without regard to this preference and prior to reduction for net operating losses).
Dividends-Received Deduction and Other Matters. The Company may exclude from its income 100% of dividends received from the Savings Bank as a member of the same affiliated group of corporations. The corporate dividends-received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Company and the Savings Bank will not file a consolidated tax return, except that if the Company or the Savings Bank owns more than 20% of the stock of a corporation distributing a dividend, then 80% of any dividends received may be deducted.
Other Federal Tax Matters. Other changes in the federal tax system could also affect the business of the Savings Bank. These changes include limitations on the deduction for personal interest paid or accrued by individual taxpayers, limitations on the deductibility of losses attributable to investment in certain passive activities and limitations on the deductibility of contributions to individual retirement accounts. The Savings Bank does not believe these changes will have a material effect on its operations.
There have not been any IRS audits of the Company's and Savings Bank's consolidated Federal income tax returns during the past five years.
Missouri Taxation
Missouri-based thrift institutions, such as the Savings Bank, are subject to a special financial institutions tax, based on net income without regard to net operating loss carryforwards,carry-forwards, at the rate of 7% of net income. This tax is in lieu of certain other state taxes on thrift institutions, on their property, capital or income, except taxes on tangible personal property owned by the Savings Bank and held for lease or rental to others and on real estate, contributions paid pursuant to the Unemployment Compensation Law of Missouri, social security taxes, sales taxes and use taxes. In addition, First Home is entitled to credit against this tax all taxes paid to the State of Missouri or any political subdivision except taxes on tangible personal property owned by the Savings Bank and held for lease or rental to others and on real estate, contributions paid pursuant to the Unemployment Compensation Law of Missouri, social security taxes, sales and use taxes, and taxes imposed by the Missouri Financial Institutions Tax Law. Missouri thrift institutions are not subject to the regular state corporate income tax.
There have not been any audits of the Savings Bank's state income tax returns during the past five years.
37
For additional information regarding taxation, see Note 9 of the Notes to the Consolidated Financial Statements included in the Annual Report.
Competition
The Savings Bank has been, and continues to be, a community-oriented savings institution offering a variety of financial resources to meet the needs of Wright, Webster, Douglas, Ozark, Christian, Stone, Taney and GreenGreene counties, Missouri. The Savings Bank also transacts a significant amount of business in Texas county,County, Missouri. The Savings Bank's deposit gathering and lending activities are concentrated in these market areas. At June 30, 2008,2011, the Savings Bank's offices were located in Mountain Grove, Marshfield, Ava, Gainesville, Sparta, Theodosia, Crane, Galena, Kissee Mills, Rockaway Beach, and Springfield, Missouri. In addition, a loan production office was opened
in Springfield, Missouri in March 2007.
The Savings Bank is the only thrift institution locatedbased in Wright County, Missouri. The Savings Bank faces strong competition in the attraction of savings deposits and in the origination of loans. Its most direct competition for savings deposits and loans has historically come from other thrift institutions and from commercial banks, small loan companies and credit unions located in its primary market area, some with a state-wide or regional presence. The Savings Bank also competes with securities firms, money market funds and mutual funds in raising deposits. Many of these institutions are substantially larger and have greater financial resources than the Savings Bank.
The competitive factors among financial institutions can be classified into two categories;categories: competitive rates and competitive services. Interest rates are widely advertised and thus competitive, especially in the area of time deposits. From a service standpoint, financial institutions compete against each other in types and quality of services. The Savings Bank is
generally competitive with other financial institutions in its area with respect to interest rates paid on time and savings deposits, fees charged on deposit accounts, and interest rates charged on loans. With respect to services, the Savings Bank offers a customer service-oriented atmosphere which management believes is tailored to its customers' needs.
The Savings Bank also believes it benefits from its
focus on meeting the needs of it community
orientation as well as its relatively high core deposit base.
38
Executive Officers
The following table sets forth certain information with respect to the executive officers of the Company and the Savings Bank.
Name Age(1) Position
- ---- ------ --------
Daniel P. Katzfey 46 President
| Name | Age(1) | Position |
| | |
| R. Bradley Weaver | 55 | Chairman of the Board and Chief Executive Officer of the Company and |
| | |
| Lannie E. Crawford | 60 | President of the Company and the Savings Bank |
| | |
| Ronald J. Walters | 61 | Senior Vice President, Treasurer and Chief Financial Officer of the Company and the Savings Bank
Ronald J. Walters 58 Senior Vice President, Treasurer and
Chief Financial Officer of the
Company and the Savings Bank
Dale W. Keenan 45 Executive Vice President and Senior
Lender of the Savings Bank
Adrian C. Rushing 39 Chief Operating Officer of the Savings Bank |
| | |
| Dale W. Keenan | 48 | Executive Vice President and Senior Lender of the Savings Bank; Vice President of the Company |
_________________
(1) As of June 30, 2008.
The principal occupation of each executive officer of the Company is set forth below. All executive officers reside in the Savings Bank's primary trade area in Missouri, unless otherwise stated. There are no family relationships among or between the executive officers, unless otherwise stated.
Daniel P. Katzfey joined
R. Bradley Weaver was appointed as Chief Executive Officer of the Savings Bank effective May 16, 2011, and Chief Executive Officer of the Company and the Bank on October 3, 2006 as
ExecutiveMay 20, 2011. From 2008 until May 2011, Mr. Weaver, was Senior Vice President and ChiefCommercial Lending Officer, was named interimat BancorpSouth Bank in Springfield, Missouri. He previously held positions of increasing responsibility at Mid Missouri Bancshares, where he became President and Chief Executive Officer, on December 22, 2006 and at UMB Financial Corporation, where he held the position of CEO with two community banks before holding the office of Regional President of UMB Bank n.a. Mr. Weaver is a resident of Springfield, Missouri.
Lannie E. Crawford was appointed as President of the Company and the Savings Bank effective November 6, 2008. Mr. Crawford joined the Savings Bank in November 2007 and has more than 32 years of experience with financial institutions. Prior to joining the Company and the Savings Bank, Mr. Crawford served as Senior Vice President and Chief Executive Officer on January 22, 2007. Previously, Mr.
Katzfey was Executive Vice President, Commercial Lender for VillageRegional Manager of Sun Security Bank, Springfield,Mountain Grove, Missouri from 2004 to 2006. Mr. Katzfey has over 22 years
experience in financial services.
2003 until November 2007.
Ronald J. Walters joined the Company and the Savings Bank on November 20, 2006 as Senior Vice President, Treasurer and Chief Financial Officer. Mr. Walters, a CPA, was previously Senior Vice President, Secretary, Treasurer and Chief Financial Officer of Meta Financial Group and MetaBank in Storm Lake, Iowa from 2003 to 2006. He has over 3034 years experience in financial services.
Dale W. Keenan joined the Savings Bank on March 11, 2007 as Executive Vice President and Senior Lender. Mr. Keenan was previously a Senior Vice President and Senior Lender for Heritage Bank of the Ozarks in Lebanon, Missouri from 2003 to 2007. Mr. Keenan has over 2427 years of experience in financial services.
Adrian C. Rushing joined the Savings Bank on June 21, 2006 as Senior Vice
President and Chief Operating Officer. Mr. Rushing was previously Senior Vice
President, Chief Operations Officer with Southern Missouri Bank and Trust,
Poplar Bluff, Missouri from 1998 to 2006. Mr. Rushing has over 16 years
experience in financial services. Mr. Rushing resigned his positions with the
Savings Bank effective September 23, 2008 to pursue another opportunity.
Personnel
As of June 30,
2008,2011, the Savings Bank had
10775 full-time employees and
1921 part-time employees. The Savings Bank believes that employees play a vital role in the success of a service company and that the Savings Bank's relationship with its employees is good. The employees are not represented by a collective bargaining unit.
39
Item 1A. Risk Factors
- ----------------------
As is the case with all investments in stock, an
An investment in our common stock is subject to risks inherent in our business. Before making anyou invest in our common stock, you should be aware that there are various risks, including those described below, which could affect the value of your investment decision,in the future. The trading price of our common stock could decline as a result of any of these risks, and you may lose all or part of your investment. The risk factors described in this section, as well as any cautionary language in this Form 10-K, provide examples of risks, uncertainties and events that could have a material adverse effect on our business, including our operating results and financial condition. This Form 10-K also contains forward-looking statements that involve risks and uncertainties. These risks could cause our actual results to differ materially from the expectations that we describe in our forward-looking statements. You should carefully consider the risks and uncertainties described below, together with all of the other information included or incorporated by reference in this report. Additional risks and uncertainties
that we are not aware of or focused on or that we currently deem immaterial
may also exist and could materially and adversely affect the Company's
business, financial condition and results of operations. This report is
qualified in its entirety by these risk factors.
If any of the circumstances described in the following risk factors
actually occur, our business, financial condition and results of operations
could be materially and adversely affected. If this were to happen, the value
of our common stock could decline significantly, and you could lose all or
part of your investment.
Form 10-K, before making an investment decision.
We are subject to the restrictions and conditions of a Memorandum of
Understanding with,Cease and other commitments we have made to, the Office of
Thrift Supervision.Desist Orders. Failure to comply with the Memorandum of UnderstandingCease and Desist Orders could result in additional enforcement actionactions against us, including the imposition of monetary penalties.
As discussed above under "Corporate Developments and Overview," we have entered into a MemorandumStipulation and Consent to the issuance of UnderstandingOrder to Cease and Desist with the OfficeOTS, which are now enforced by the Federal Deposit Insurance Corporation in the case of Thrift
Supervision on December 1, 2006, which requires us to, among other things,
take certain actions with respect to deficienciesthe Savings Bank and the Federal Reserve in lending policiesthe case of the Company.
Under the terms of the orders, the Savings Bank and proceduresthe Company, without the prior written approval of their respective banking regulators, may not:
| · | Increase assets during any quarter; |
| · | Increase brokered deposits; |
| · | Repurchase shares of the Company’s outstanding common stock; and |
| · | Issue any debt securities or incur any debt (other than that incurred in the normal course of business). |
Other material provisions of the order require the Savings Bank and recent operating losses, and to revise both our three-year
business plan and budget to enhance profitability. While we believethe Company to:
| · | develop an acceptable business plan for enhancing, measuring and maintaining profitability, increasing earnings, improving liquidity and maintaining capital levels; |
| · | ensure the Savings Bank’s compliance with applicable laws, rules, regulations and agency guidelines, including the terms of the order; |
| · | not appoint any new director or senior executive officer or change the responsibilities of any current senior executive officers without notifying the applicable banking regulator; |
| · | not enter into, renew, extend or revise any compensation or benefit agreements for directors or senior executive officers; |
| · | not make any indemnification, severance or golden parachute payments; |
| · | enhance its asset classification policy; |
| · | provide progress reports to the Federal Deposit Insurance Corporation regarding certain classified assets; |
| · | submit a comprehensive plan for reducing classified assets; |
| · | develop a plan to reduce the concentration of certain loans contained in the loan portfolio and that addresses the assessment, monitoring and control of the risks association with the commercial real estate portfolio; |
| · | not enter into any arrangement or contract with a third party service provider that is significant to the overall operation or financial of the Savings Bank, or that is outside the normal course of business; and |
| · | prepare and submit progress reports to the Federal Deposit Insurance Corporation and the Federal Reserve. The orders will remain in effect until modified or terminated by the Federal Deposit Insurance Corporation or the Federal Reserve. |
If the Federal Deposit Insurance Corporation or the Federal Reserve determines that we are currentlynot in compliance with the terms oforders, they would have available various remedies, including among others, the Memorandum of Understanding, if
we failpower to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to direct an increase in capital, to remove officers and/or directors, to assess civil monetary penalties or to enforce the orders through court proceedings.
Management has been taking action and implementing programs to comply with these terms, the Officerequirements of Thrift Supervisionthe orders and the Savings Bank and the Company believes that they are substantially in compliance with the requirements set forth in the orders, as of the date of this Form 10-K. Compliance with the orders, however, is subject to a determination by the Federal Deposit Insurance Corporation or the Federal Reserve, as the case may be. Either the Federal Deposit Insurance Corporation or the Federal Reserve may determine, in its sole discretion, that we have not addressed the issues raised by the orders satisfactorily, or that any current or past actions, violations or deficiencies could take additionalbe the subject of further regulatory enforcement action against us, including the imposition of
monetaryactions taken by it. Such enforcement actions could involve penalties or the issuance of a ceaselimitations on our business and desist order requiring
further corrective action. We have incurred significant additional regulatory
compliance expense in connection with the Memorandum of Understanding, and
although we do not expect it, it is possible regulatory compliance expenses
related to the Memorandum of Understanding and our other commitments could
have a material adverse impact on us in the future. As required by the
Memorandum of Understanding, we developed a revised three-year business plan
and budget which was submitted to the Office of Thrift Supervision prior to
October 31, 2007. The business plan was approved by the Office of Thrift
Supervision without modification. We have been submitting monthly reports to
the Office of Thrift Supervision on the budget versus actual results beginning
with October 2007. The Office of Thrift Supervision must approve any material
deviation from our approved business plan, which could further limitnegatively affect our ability to make changes toimplement our business activities.
We have had losses and low earnings in recent years.
Our net income has decreased in recent years. Net income was $363,000,
$272,000, $1.3 million, $2.3 million and $2.2 million forplan, the fiscal years
ended June 30, 2008, 2007, 2005, 2004 and 2003, respectively. We had a net
loss of $173,000 for the fiscal year ended June 30, 2006. Our return on
average assets was 0.15%, 0.09%, 0.51%, 0.87% and 0.85 for the fiscal years
ended June 30, 2008, 2007, 2005, 2004 and 2003 and our return on average
equity was 1.34%, 0.77%, 4.60%, 8.49% and 8.68% for the same years. Our
returns on average assets and average equity were negative for the fiscal year
ended June 30, 2006, as we incurred a net loss for that year. We face
significant challenges that will hinder our ability to improve our earnings
significantly. These challenges include the fact that we currently operate
40
under a Memorandum of Understanding with the Office of Thrift Supervision
(discussed above) and have a significant amount of problem loans (discussed
below), and we have a low interest rate spread. Our interest rate spread,
which is the difference between the average yield earned on our interest-
earning assets and the average rate paid on our interest rate spread, declined
from 3.31% for the year ended June 30, 2005 to 2.96% for the year ended
June 30, 2006 to 2.71% for the year ended June 30, 2007. For the year ended
June 30, 2008, our interest rate spread did improve to 3.01% While we have
identified various strategic initiatives we will pursue in our efforts to
overcome these challenges and improve earnings, our strategic initiatives
might not succeed in increasing our net income.
We have had a significant amount of problem loans and losses related to
these loans.
Since 1999, we have focused our efforts on increasing our commercial
business loan and commercial real estate loan portfolios. However, as a
result, we recognized substantial write-offs in the fiscal years ended June
30, 2008, 2006 and 2005. Our ratio of non-performing assets to total assets
increased from 0.59% at June 30, 2006 to 1.47% at June 30, 2007 and to 1.56%
at June 30, 2008. Our total non-accruing loans increased from $841,000 at June
30, 2006 to $2.9 million at June 30, 2007, and decreased to $2.3 million at
June 30, 2008. However, the decrease between June 30, 2007 and June 30, 2008
was primarily attributable to completion of foreclosures which increased the
balance of real estate owned.
At June 30, 2008 classified assets were $5.8 million, an increase from
$4.3 million at June 30, 2007. We also identified an additional $4.7 million
of loans at June 30, 2008 on our internal watch list including $2.1 million,
$2.0 million, $480,000 and $119,000 of commercial real estate, commercial
business, one-to-four family and consumer loans, respectively. We identified
these loans as higher risk loans and any further deterioration in their
financial condition could increase our classified assets. The total watch list
credits of $4.7 million reflected a decrease of $172,000 from the total watch
list credits as of June 30, 2007.
We are highly dependent on key individuals, there has been significant
turnover in our management team in the past five years and we are being led by
a new management.
We are highly dependent on the continued services of a limited numbervalue of our executive officers and key management personnel. The loss of services of
any of these individuals could have a material adverse impact on our
operations because other officers may not have the experience and expertise to
readily replace these individuals.
During the past six years we have had four different Presidents and
Chief Executive Officers. Our current President and Chief Executive Officer
has only served in that position since December 2006 having joined the Savings
Bank in September 2006. Our Chief Financial Officer has only been with the
Savings Bank since November 2006 and many of the other key members of senior
management have been with the Savings Bank for just over a year.
While we believe we have in place qualified individuals to replace the
individuals who have left the Savings Bank, the new individuals will need to
develop a cohesive and unified management team. Changes in key personnel and
their responsibilities may be disruptive to our business and could have a
material adverse effect on our business, financial condition and
profitability.
41
We suspended our regular cash dividend.
On March 1, 2007, in response to our recent operating performance, our
board of directors decided to suspend our regular cash. The Company did not
pay a dividend for six consecutive quarters. A special dividend of $0.10 per
share of common stock was declared by the board of directors at its regular
meeting in July 2008. Whether we pay dividends in the future will depend on a
number of factors, including capital requirements,as well as our financial condition and results of operations,operations.
Our business may be adversely affected by credit risk associated with residential property.
At June 30, 2011, $54.9 million, or 56.2% of our total loan portfolio, was secured by one-to-four family residential real estate loans. This type of lending is generally sensitive to regional and local economic conditions that
significantly impact the ability of borrowers to generate sufficient earningsmeet their loan payment obligations making loss levels difficult to warrantpredict. The decline in residential real estate values as a result of the paymentdownturn in the housing market has reduced the value of dividends, tax considerations, statutorythe real estate collateral securing the majority of our loans held for investment and regulatory
limitationshas increased the risk that we will incur losses if borrowers default on their loans. Continued declines in both the volume of real estate sales and general economic conditions. In addition,the sales prices coupled with the current recession and the associated increases in unemployment may result in higher than expected loan delinquencies or problem assets, a decline in demand for our abilityproducts and services, a lack of growth and/or a decrease in deposits. These potential negative events may cause us to pay
dividendsincur losses, adversely affect our capital and liquidity, and damage our financial condition and business operations. These declines may depend, in part,have a greater effect on our receipt of dividends from the Savings
Bank because the Company has minimal income sources beyondearnings and capital than on the earnings from
the Savings Bank.
and capital of financial institutions whose loan portfolios are more diversified.
Our loan portfolio includes loans with a higher risk of loss.
We originate residential mortgage loans (including second mortgage loans), construction loans, commercial mortgage and land loans, commercial business loans and consumer loans primarily within our market area. Generally, the types of loans other than residential mortgage loans have a higher risk of loss than residential mortgage loans. We had
$89.5$40.4 million or
53.57%41.4% of our total loan portfolio outstanding in these higher risk loans at June 30,
2008.2011. We have had a significant increase in these types of loans since 1999, when we began to diversify the loan portfolio in order to mitigate other types of risk, such as interest-rate risk. While diversification into construction, commercial real estate and land, commercial business, and consumer loans may have reduced interest-rate risk as a result of their typically shorter terms and, in most cases, adjustable nature of their interest rates, they do expose a lender to greater credit risk than loans secured by residential real estate. The collateral securing these loans may not be sold as easily as residential real estate. These loans also have greater credit risk than residential real estate for the following reasons and as discussed in detail under
A-- Lending
Activities:
* Commercial Real Estate and Land Loans. Commercial real estate and
land loans typically involve higher principal amounts than other
types of loans. Repayment is dependent upon income being generated
in amounts sufficient to cover borrowers' operating expenses, as well
as, debt service. Loans on land under development or held for future
use also pose additional risk because of a lack of income produced by
the property and the potential illiquid nature of the security. The
repayment of loans secured by farm properties is dependent upon the
success of farming operations, which is contingent on many factors
outside the control of either the borrowers or us. These factors
include adverse weather conditions, fluctuating market prices of both
final product and production costs, factors affecting the physical
condition of livestock and government regulations.
* Commercial Business Loans. Repayment of these loans is dependent
upon the successful operation of the borrower's businesses.
* Consumer Loans. Consumer loans (such as vehicle loans, mobile home
loans and personal lines of credit) are collateralized, if at all,
with assets that may not provide an adequate source of payment of the
loan due to depreciation, damage, or loss.
* Construction Loans. Construction lending involves the inherent
difficulties of estimating the cost of the project and estimating a
property's value at completion of the project. If the estimate of
construction cost proves to be inaccurate, we may need to advance
42
funds beyond the original loan amount in order to complete the
project. If the estimate of value upon completion proves to be
inaccurate, we may be confronted at, or prior to, the maturity of the
loan with a project the value of which is insufficient to assure full
repayment.
A downturn in the local economy or a decline in real estate values could
hurt our profits.
Nearly all of our loans are secured by collateral or dependent for
repayment on businesses located in our primary market area, consisting of
Wright, Webster, Douglas, Christian, Ozark, Stone, Taney and Greene counties
in the State of Missouri. As a result, a downturn in the local economy could
cause significant increases in non-performing loans, which would adversely
affect our profits. Additionally, a decrease in asset quality could require
additions to our“--Lending Activities”:
| · | Commercial Real Estate and Land Loans. Commercial real estate and land loans typically involve higher principal amounts than other types of loans. Repayment is dependent upon income being generated in amounts sufficient to cover borrowers' operating expenses, as well as, debt service. Loans on land under development or held for future use also pose additional risk because of a lack of income produced by the property and the potential illiquid nature of the security. The repayment of loans secured by farm properties is dependent upon the success of farming operations, which is contingent on many factors outside the control of either the borrowers or us. These factors include adverse weather conditions, fluctuating market prices of both final product and production costs, factors affecting the physical condition of livestock and government regulations. |
| · | Commercial Business Loans. Our commercial business loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The borrowers' cash flow may be unpredictable, and collateral securing these loans may fluctuate in value. Although commercial business loans are often collateralized by equipment or other business assets, the liquidation of collateral in the event of default is often an insufficient source of repayment. Accordingly, the repayment of commercial business loans depends primarily on the cash flow and credit worthiness of the borrower and secondarily on the underlying collateral provided by the borrower. |
| · | Consumer Loans. Consumer loans (such as vehicle loans, mobile home |
| loans and personal lines of credit) are collateralized, if at all, with assets that may not provide an adequate source of payment of the loan due to depreciation, damage, or loss. |
| · | Construction Loans. Construction lending in lending involves the inherent difficulties of estimating the cost of the project and estimating a property's value at completion of the project. If the estimate of construction cost proves to be inaccurate, we may need to advance funds beyond the original loan amount in order to complete the project. If the estimate of value upon completion proves to be inaccurate, we may be confronted at, or prior to, the maturity of the loan with a project the value of which is insufficient to assure full repayment. |
Our allowance for loan losses through increased provisionsmay prove to be insufficient to absorb losses in our loan portfolio.
Lending money is a substantial part of our business and each loan carries a certain risk that it will not be repaid in accordance with its terms or that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other things:
| · | cash flow of the borrower and/or the project being financed; |
| · | changes and uncertainties as to the future value of the collateral, in the case of a collateralized loan; |
| · | the duration of the loan; |
| · | the credit history of a particular borrower; and |
| · | changes in economic and industry conditions. |
We maintain an allowance for loan losses, which would negatively affectis a reserve established through a provision for loan losses charged to expense, which we believe is appropriate to provide for probable losses in our profits. A decline in real
estate values could cause someloan portfolio. The amount of this allowance is determined by our mortgage loans to become inadequately
collateralized, which would expose us to a greater riskmanagement through periodic reviews and consideration of loss.
Changes in interest rates may reduce our net interest income.
Like other financial institutions, our operating results are largely
dependent on our net interest income. Net interest income is the difference
between interest earned on loans and investments and interest expense incurred
on deposits and other borrowings. Our net interest income is impacted by
changes in market rates of interest, changes in the shapeseveral factors, including, but not limited to:
| · | our general reserve, based on our historical default and loss experience and certain macroeconomic factors based on management’s expectations of future events; and |
| · | our specific reserve, based on our evaluation of non-performing loans and their underlying collateral. |
The determination of the
yield curve,appropriate level of the
interest rate sensitivity of our assets and liabilities, prepayments on
our loans and investments and limits on increases in the rates of interest
charged on our loans.
Our interest earning assets and interest bearing liabilities may react in
different degrees to changes in market interest rates. Interest rates on some
types of assets and liabilities may fluctuate prior to changes in broader
market interest rates, while rates on other types may lag behind. The result
of these changes to rates may result in differing spreads on interest earning
assets and interest bearing liabilities. While we take measures intended to
manage the risks from changes in market interest rates, we cannot control or
accurately predict changes in market rates of interest nor be sure our
protective measures are adequate.
There is strong competition in financial services including the market
areas we serve.
We compete in our market areas with numerous commercial banks, savings
institutions, mortgage brokerage firms, credit unions, finance companies,
mutual funds, insurance companies, and brokerage and investment banking firms
operating locally and throughout the county. Some of these competitors have
substantially greater resources and lending limits than we have, have greater
name recognition and market presence that benefit them in attracting business,
and offer certain services that we do not or cannot provide profitably. In
addition, larger competitors may be able to price loans and deposits more
aggressively than we do. Our profitability depends upon the Company's
continued ability to successfully compete in its market areas. The greater
resources and deposit and loan products offered by some of our competitors may
limit the Company's ability to attract funds or increase its interest-earning
assets. For additional information see Item I, ABusiness -- Competition.
While management believes that our allowance for loan losses
is
sufficientinherently involves a high degree of subjectivity and requires us to
cover realized losses, our earnings could be adversely impacted
should additional provisions be required.
43
We make various assumptions and judgments about the collectibilitycollectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans ourand the loss experience and our delinquency experience, and evaluate economic conditions nationally and in our market
areas.make significant estimates of current credit risks and future trends, all of which may undergo material changes. If our assumptions prove to have beenestimates are incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in theour loan portfolio, resulting in the need for additions to our allowance. Material additions to
allowance through an increase in the provision for loan losses. Continuing deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance would materially decrease our net income.for loan losses. Our allowance for loan losses was 1.65%$1.9 million or 2.03% of gross loans held for investment and 72.1%180.9% of non-performing assetsnonperforming loans at June 30, 2008,2011. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. If charge-offs in future periods exceed the allowance for loan losses, we will need additional provisions to increase the allowance for loan losses. Any increases in the provision for loan losses will result in a decrease in net income and may have a material adverse effect on our financial condition, results of operations and our capital.
If our allowance for loan losses is not adequate, we may be required to make further increases in our provisions for loan losses and to charge-off additional loans, which could adversely affect our results of operations.
For the fiscal year ended June 30, 2011 we recorded a provision for loan losses of $1.2 million compared to $852,000 for the fiscal year ended June 30, 2010. Our results of operations for fiscal 2011 were severely impacted by the $1.2 million provision for loan losses. We also recorded net loan charge-offs of $1.7 million for the fiscal year ended June 30, 2011 compared to $2.7 million for the fiscal year ended June 30, 2010. During the fiscal years ended June 30, 2010 and 2009, we experienced increasing loan delinquencies and credit losses. Our non-performing loans and assets for those years reflected operating difficulties of individual borrowers resulting from weakness in the local economy; however, more recently, conditions in the general economy have shown some small signs of improvement and many of the loans that contributed to the increased levels of loan delinquencies and non-performing loans have been resolved through foreclosure, forfeiture, charge down or other forms of resolution. At June 30, 2011, our total non-performing loans had decreased to $1.3 million, or 1.4% of gross loans, compared to $3.9 million, or 3.5% of gross loans, at June 30, 20082010. Current trends in the housing and real estate markets remain challenging. Changes in our allowance was only 48.4% of total
classified loans.
In addition, the bank regulators periodically review,delinquencies and ascredit losses, will also remain unpredictable. As a result, of
their review, may require uswe could be required to increasemake further increases in our provision for loan losses or
recognize further loan charge-offs. An increaseand to charge off additional loans in our allowance for loan
losses or loan charge-offs as required by regulatory authoritiesthe future, which could have a material adverse effect on our financial condition and results of operations.
The current economic recession in the market areas we serve may continue to adversely impact our earnings and could increase our credit risk associated with our loan portfolio.
Substantially all of our loans are to businesses and individuals in the eight counties of Wright, Webster, Douglas, Christian, Ozark, Stone, Taney and Greene in the State of Missouri, which we consider to be our primary market area. In addition to loans within our primary market area, we also have originated loans in 11 other states. The local economic conditions in our market areas have a significant impact on the demand for our products and services as well as the ability of our customers to repay loans, the value of the collateral securing loans and the stability of our deposit funding sources.
A further deterioration in economic conditions in the market areas we serve could result in the following consequences, any of which could have a materially adverse impact on our business, financial condition and results of operations:
| · | loan delinquencies, problem assets and foreclosures may increase; |
| · | demand for our products and services may decline; |
| · | collateral for loans made may decline further in value, in turn reducing customers’ borrowing power, reducing the value of assets and collateral associated with existing loans; |
| · | the amount of our low-cost or non-interest bearing deposits may decrease; and |
| · | the price of our common stock may decrease. |
We may have continuing losses and low earnings.
We have had losses and reduced net income in recent years. For the fiscal years ended June 30, 2011, 2010 and 2009, we had net losses of $4.1 million, $1.5 million and $4.0 million, respectively. Our returns on average assets and average equity were negative for the fiscal years ended June 30, 2011, 2010 and 2009, due to the losses we incurred for those years. We continue to face considerable challenges that will hinder our ability to improve our earnings significantly. These challenges include the restriction on our operations under the Cease and Desist Orders, the increased level of our problem loans, and the pressure on our interest rate spread.
While we have identified and are implementing various strategic initiatives to improve earnings and to overcome these operating and other challenges, our strategic initiatives might not succeed in increasing our net income.
We have had a significant amount of problem loans and related losses.
Between 1999 and 2008, the Savings Bank focused on increasing our commercial business loan and commercial real estate loan portfolios. However, in light of the economic downturn, which began in fiscal 2008, we recognized substantial write-offs in the fiscal years ended June 30, 2011, 2010, and 2009, due primarily to commercial business and commercial real estate loans. Our ratio of non-performing assets to total assets increased steadily from 0.59% at June 30, 2006 to 6.19% at June 30, 2010. Our total non-accruing loans increased from $841,000 at June 30, 2006 to $3.9 million at June 30, 2010. While the economy created difficulties for businesses, consumers quickly felt the impact as jobs disappeared. During fiscal 2011, there was some modest, although short lived, improvement in economic conditions. At June 30, 2011, our non-accruing loans decreased by $2.8 million to $1.1 million from $3.9 million at June 30, 2010. In addition, the ratio of our non-performing assets to total assets decreased to 5.00% at June 30, 2011 from 6.19% at June 30, 2010.
At June 30, 2011, classified assets were $10.5 million, a decrease of $1.1 million from $11.6 million at June 30, 2010, and a decrease of $1.5 million from $12.0 at June 30, 2009. We also indentified an additional loan of $176,000 at June 30, 2011 as Special Mention. This item could increase our classified assets if there was further deterioration in its financial condition. The loan is a commercial real estate loan.
Our profitability is dependent to a large extent upon net interest income, which is the difference, or spread, between the interest earned on loans, securities and other interest-earning assets and the interest paid on deposits, borrowings, and other interest-bearing liabilities. Because of the differences in maturities and re-pricing characteristics of our interest-earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. We principally manage interest rate risk by managing our volume and mix of our earning assets and funding liabilities. In a changing interest rate environment, we may not be able to manage this risk effectively. Changes in interest rates also can affect: (1) our ability to originate and/or sell loans; (2) the value of our
interest-earning assets, which would negatively impact stockholders’ equity, and our ability to realize gains from the sale of such assets; (3) our ability to obtain and retain deposits in competition with other available investment alternatives; and (4) the ability of our borrowers to repay adjustable or variable rate loans. Interest rates are highly sensitive to many factors, including government monetary policies, domestic and international economic and political conditions and other factors beyond our control. If we are unable to manage interest rate risk effectively, our business, financial condition and results of operations could be materially harmed.
Continued weak or worsening credit availability could limit our ability to replace deposits and fund loan demand, which could adversely affect our earnings and capital levels.
Continued or worsening credit availability and the inability to obtain adequate funding to replace deposits and fund continued loan growth may negatively affect asset growth and, consequently, our earnings capability and capital levels. In addition to any deposit growth, maturity of investment securities and loan payments, we rely from time to time on advances from the Federal Home Loan Bank of Des Moines and certain other wholesale funding sources to fund loans and replace deposits. If the economy does not improve or continues to deteriorate, these additional funding sources could be negatively affected, which could limit the funds available to us. Our liquidity position could be significantly constrained if we were unable to access funds from the Federal Home Loan Bank of Des Moines or other wholesale funding sources.
We are dependent on key members of our senior management team, which has changed significantly in the past five years.
We are dependent on the continued efforts and abilities of our executive officers and key management personnel. Their experience and industry contacts significantly benefit us. The loss of any of these individuals could have a material adverse impact on our operations because other officers may not have the experience and expertise to readily replace these individuals.
We have had four different Presidents and five different Chief Executive Officers since 2003. Our current President was appointed in November 2008 and has been employed by the Company and the Savings Bank since November 2007. In addition, our current Chairman of the Board and Chief Executive Officer has only served in that position since May 2011. Finally, our Chief Financial Officer has been with the Company and the Savings Bank since November 2006, and many of our other key members of senior management have been with the Savings Bank for just over four years.
While we believe we have qualified individuals in place to succeed the individuals who have left the Savings Bank, these individuals will need to develop a cohesive and unified senior management team. Any additional changes in key personnel and their responsibilities may be disruptive to our business and could have a material adverse effect on our business, financial condition and profitability.
Increases in deposit insurance premiums and special FDIC assessments will hurt our earnings.
Federal Deposit Insurance Corporation insurance premiums increased significantly in 2009 and we may pay higher Federal Deposit Insurance Corporation premiums in the future.
The Dodd-Frank Act established 1.35% as the minimum reserve ratio. The Federal Deposit Insurance Corporation has adopted a plan under which it will meet this ratio by the statutory deadline of September 30, 2020. The Dodd-Frank Act requires the Federal Deposit Insurance Corporation to offset the effect on institutions with assets less than $10 billion of the increase in
the minimum reserve ratio to 1.35% from the former minimum of 1.15%. The Federal Deposit Insurance Corporation has not announced how it will implement this offset. In addition to the statutory minimum ratio, the Federal Deposit Insurance Corporation must set a designated reserve ratio or DRR, which may exceed the statutory minimum. The Federal Deposit Insurance Corporation has set 2.0 as the DRR.
As required by the Dodd-Frank Act, the Federal Deposit Insurance Corporation has adopted final regulations under which insurance premiums are based on an institution's total assets minus its tangible equity instead of its deposits. While our Federal Deposit Insurance Corporation insurance premiums initially will be reduced by these regulations, it is possible that our future insurance premiums will increase under the final regulations.
Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed or the cost of that capital may be very high.
We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. In addition, we may elect to raise additional capital to support our business or to finance acquisitions, if any. In that regard, a number of financial institutions have recently raised considerable amounts of capital as a result of a deterioration in their results of operations and financial condition arising from the turmoil in the mortgage loan market, deteriorating economic conditions, declines in real estate values and other factors. If we are required by regulatory authorities to raise additional capital, we may seek to do so through the issuance of, among other things, our common stock or preferred stock.
Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance. Accordingly, we cannot make assurances that we will be able to raise additional capital if needed on terms that are acceptable to us, or at all. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired and our financial condition and liquidity could be materially and adversely affected. In addition, if we are unable to raise additional capital when required by our banking regulators, we may be subject to additional adverse regulatory action. See “We are subject to extensive government regulationthe restrictions and supervision.
Weconditions of Cease and Desist Orders. Failure to comply with the Cease and Desist Orders could result in additional enforcement action against us, including the imposition of monetary penalties.”
Competition with other financial institutions could adversely affect our profitability.
The banking and financial services industry is very competitive. Legal and regulatory developments have made it easier for new and sometimes unregulated competitors to compete with us. Consolidation among financial service providers has resulted in fewer very large national and regional banking and financial institutions holding a large accumulation of assets. These institutions generally have significantly greater resources, a wider geographic presence or greater accessibility. Our competitors sometimes are subjectalso able to extensive federaloffer more services, more favorable pricing or greater customer convenience than we do. In addition, our competition has grown from new banks and other financial services providers that target our existing or potential customers. As consolidation continues, we expect additional institutions to try to exploit our market.
Technological developments have allowed competitors including some non-depository institutions, to compete more effectively in local markets and have expanded the range of financial products, services and capital available to our target customers. If we are unable to implement, maintain and use such
technologies effectively, we may not be able to offer products or achieve cost-efficiencies necessary to compete in our industry. In addition, some of these competitors have fewer regulatory constraints and lower cost structures.
New or changing tax, accounting, and regulatory rules and interpretations could significantly impact strategic initiatives, results of operations, cash flows, and financial condition.
The financial services industry is extensively regulated. Federal and state regulation and supervision,
and, as discussed above, we currently operate under a memorandum of
understanding with the Office of Thrift Supervision which places restrictions
on our business activities. Bankingbanking regulations are designed primarily intended to protect depositors' funds, federalthe deposit insurance funds and the banking
system asconsumers, not to benefit a whole, not shareholders.company's stockholders. These regulations may sometimes impose significant limitations on operations. The significant federal and state banking regulations that affect our lending
practices, capital structure, investment practices, dividend policyus are described in this report under the heading “Item 1. Business –- Regulation of First Home” and growth, among other things. Congress“—Regulation of First Bancshares.” These regulations, along with the currently existing tax, accounting, securities, insurance, and federal regulatory agencies
continually review bankingmonetary laws, regulations, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies, for possible
changes. Changes to statutes, regulations or regulatory policies, including
changes in interpretation or implementation of statutes, regulations or
policies, could affect the Company in substantial and unpredictable ways.
interpretations are constantly evolving and may change significantly over time.
Such changes could subject us to additional costs, limit the types of financial services and products we may offer, restrict mergers and acquisitions, investments, access to capital, the location of banking offices, and/or increase the ability of non-banks to offer competing financial services and products, among other things. FailureFor example, a federal rule which took effect on July 1, 2010 prohibits a financial institution from automatically enrolling customers in overdraft protection programs, on ATM and one-time debit card transactions, unless a consumer consents, or opts in, to complythe overdraft service. This new rule adversely affected our non-interest income during the second half of fiscal 2010 and throughout all of fiscal 2011. It is likely to continue to adversely affect the results of our operations by reducing the amount of our non-interest income.
Our success depends on our continued ability to maintain compliance with laws,the various regulations or policies couldto which we are subject. Some of these regulations may increase our costs and thus place other financial institutions in stronger, more favorable competitive positions. We cannot predict what restrictions may be imposed upon us with future legislation.
Financial reform legislation enacted by Congress will, among other things, tighten capital standards, create a new Consumer Financial Protection Bureau and result in sanctionsnew laws and regulations that are expected to increase our costs of operations.
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). This new law will significantly change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.
Among the many requirements in the Dodd-Frank Act for new banking regulations is a requirement for new capital regulations to be adopted within 18 months. These regulations must be at least as stringent as, and may call for higher levels of capital than, current regulations. In addition, the banking regulators are required to seek to make capital requirements for banks and bank holding companies, countercyclical so that capital requirements
increase in times of economic expansion and decrease in times of economic contraction.
Certain provisions of the Dodd-Frank Act are expected to have a near term impact on us. For example, the Dodd-Frank Act eliminates the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest-bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact on our interest expense.
The Dodd-Frank Act also broadens the base for Federal Deposit Insurance Corporation insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor and non-interest-bearing transaction accounts and IOLTA accounts have unlimited deposit insurance through December 31, 2012.
The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments and authorizes the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. The legislation also directs the federal banking regulators to issue rules prohibiting incentive compensation that encourages inappropriate risks. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.
The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Financial institutions with $10 billion or less in assets, such as the Savings Bank, will continue to be examined for compliance with the consumer laws by regulatory agencies, civil money penalties and/their primary bank regulators.
Finally, the Dodd-Frank Act also eliminated the OTS effective July 21, 2011. With the elimination of the OTS, the Federal Deposit Insurance Corporation is now the primary federal banking regulator for the Savings Bank, making the Board of Governors of the Federal Reserve System the primary federal banking regulator for the Company, eventually imposing capital requirements on the Company, and implementing numerous other changes. No assurances can be given as to whether or reputation
damage, whichin what form such changes may occur.
Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on us. However, compliance with this new law and its implementing regulations is expected to result in additional operating costs that could have a material adverse effect on our financial condition and results of operations.
Changes in accounting standards may affect our performance.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time there are changes in the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be difficult to predict and can materially impact how we report and record our financial condition and results of operations. In some cases, we could be
required to apply a new or revised standard retroactively, resulting in a retrospective adjustment to prior financial statements.
We have suspended our regular cash dividend.
We have not paid a regular cash dividend since March 2007, when our board of directors determined to suspend our regular cash dividend in response to our operating performance. A special dividend of $0.10 per share of common stock was declared by the board of directors at its regular meeting in July 2008. Any dividends we pay in the future will depend on a number of factors, including our capital requirements, our financial condition and results of operations, our ability to generate sufficient earnings to warrant the payment of dividends, tax considerations, statutory and regulatory limitations and general economic conditions. In addition, our ability to pay dividends may depend, in part, on our receipt of dividends from the Savings Bank because the Company has minimal income sources beyond the earnings from the Savings Bank. Under the Cease and Desist Orders currently in place, both the Company and the Savings Bank must request permission from their respective federal banking regulators in order to make a dividend payment.
Our real estate lending also exposes us to the risk of environmental liabilities.
In the course of our business, we may foreclose and take title to real estate, and we could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third persons for property damage, personal injury, investigation, and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business, financial condition and results of operations.
operations could be materially and adversely affected.
We rely on effective internal controls.
If we fail to maintain an effective system of disclosure controls and procedures and internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud, and, as a result, investors and depositors could lose confidence in our financial reporting, which could adversely affect our business, the trading price of our stock and our ability to attract additional deposits.
In connection with the enactment of the Sarbanes-Oxley Act of 2002 and the implementation of the rules and regulations promulgated by the SEC, the Company must maintain disclosure controls and procedures and internal control over financial reporting. If the Company fails to identify and correct any significant deficiencies in the design or operating effectiveness of its disclosure controls and procedures or internal control over financial reporting or fails to prevent fraud, current and potential shareholders, and depositors could lose confidence in our internal controls and financial reporting, which could adversely affect our business, financial condition and results of operations, the trading price of our stock and our ability to attract additional deposits.
44
Item 1B. Unresolved Staff Comments
- -----------------------------------
The Company has not received any written comments from the staff of the SEC regarding its periodic or current reports under the Securities Exchange Act of 1934 that remain unresolved.
Item 2. Properties
- -------------------
The following table sets forth information regarding the Savings Bank's offices as of June 30,
2008.
Net
Book
Value Land Building
Year as of Owned/ Owned/ Square
Location County Opened 6/30/08 Leased Leased Footage
- --------------------- ------ ------ ------- ------ -------- -------
(Dollars
Main Office in thousands)
- -----------
142 East First Street Wright 1911 $1,032 Owned Owned 15,476
Mountain Grove, MO 65711
Branch Offices
- --------------
1208 N. Jefferson Street Douglas 1978 253 Owned Owned 3,867
Ava, MO 65608
103 South Clay Street Webster 1974 229 Owned Owned 3,792
Marshfield, MO 65706
203 Elm Street Ozark 1992 469 Owned Owned 3,321
Gainesville, MO 65655
7164 Highway 14 East Christian 1995 201 Owned Owned 3,000
Sparta, MO 65753
Business Highway 160 Ozark 1997 19 Leased Leased 1,824
Theodosia, MO 65761
123 Main Street Stone 1998 225 Owned Owned 5,000
Crane, MO 65633
South Side of Square Stone 1998 50 Owned Owned 1,100
Galena, MO 65656
20377 US Highway 160 Taney 2000 760 Owned Owned 3,386
Forsyth, MO 65653 (1)
2536 State Highway 176 Taney 2000 402 Owned Owned 2,500
Rockaway Beach, MO 65740
(table continued on the following page)
45
Net
Book
Value Land Building
Year as of Owned/ Owned/ Square
Location County Opened 6/30/08 Leased Leased Footage
- --------------------- ------ ------ ------- ------ -------- -------
(Dollars
in thousands)
2655 South Campbell Greene 2006 71 Leased Leased 2,963
Springfield, MO 65807
Drive-in Facilities
- -------------------
Route 60 and Oakland Wright 1986 105 Owned Owned 2,268
Mountain Grove, MO 65711
Drive-in Facilities
- -------------------
223 West Washington Webster 1993 200 Owned Owned 1,000
Marshfield, MO 65706
Loan Production Office
1411 East Primrose, Suite
A Greene 2007 - Leased Leased 5,100
Springfield, MO 65804
Loan Processing Office
- ----------------------
3050 South Fremont Greene 2006 10 Leased Leased 2,450
Springfield, MO 65804
_____________
(1) This office is located in Kissee Mills, Missouri, but has a
mailing address in Forsyth, Missouri.
2011.| | | | | | | Net Book | | | | | | | |
| | | | | | | Value | | Land | | Building | | | |
| | | | | Year | | as of | | Owned/ | | Owned/ | | Square | |
| Location | | County | | Opened | | June 30, 2011 | | Leased | | Leased | | Footage | |
| Main Office | | | | | (In thousands) | | | | | | |
| 142 East First Street | | Wright | | 1911 | | $ | 917 | | Owned | | Owned | | | 15,476 | |
| Mountain Grove, MO 65711 | | | | | | | | | | | | | | | |
| Branch Offices | | | | | | | | | | | | | | | |
| 1208 N. Jefferson Street | | Douglas | | 1978 | | | 204 | | Owned | | Owned | | | 3,867 | |
| Ava, MO 65608 | | | | | | | | | | | | | | | |
| 103 South Clay Street | | Webster | | 1974 | | | 238 | | Owned | | Owned | | | 3,792 | |
| Marshfield, MO 65706 | | | | | | | | | | | | | | | |
| 203 Elm Street | | Ozark | | 1992 | | | 444 | | Owned | | Owned | | | 3,321 | |
| Gainesville, MO 65655 | | | | | | | | | | | | | | | |
| 7164 Highway 14 East | | Christian | | 1995 | | | 195 | | Owned | | Owned | | | 3,000 | |
| Sparta, MO 65753 | | | | | | | | | | | | | | | |
| Business Highway 160 (2) | | Ozark | | 1997 | | | 161 | | Owned | | Owned | | | 1,824 | |
| Theodosia, MO 65761 | | | | | | | | | | | | | | | |
| 123 Main Street | | Stone | | 1998 | | | 285 | | Owned | | Owned | | | 5,000 | |
| Crane, MO 65633 | | | | | | | | | | | | | | | |
| South Side of Square | | Stone | | 1998 | | | 46 | | Owned | | Owned | | | 1,100 | |
| Galena, MO 65656 | | | | | | | | | | | | | | | |
| 20377 US Highway 160 | | Taney | | 2000 | | | 693 | | Owned | | Owned | | | 3,386 | |
| Forsyth, MO 65653 (1) | | | | | | | | | | | | | | | |
| 2536 State Highway 176 | | Taney | | 2000 | | | 364 | | Owned | | Owned | | | 2,500 | |
| Rockaway Beach, MO 65740 | | | | | | | | | | | | | | | |
| 2655 South Campbell | | Greene | | 2006 | | | 41 | | Leased | | Leased | | | 2,963 | |
| Springfield, MO 65807 | | | | | | | | | | | | | | | |
| Drive-in Facilities | | | | | | | | | | | | | | | |
| Route 60 and Oakland | | Wright | | 1986 | | | 112 | | Owned | | Owned | | | 2,268 | |
| Mountain Grove, MO 65711 | | | | | | | | | | | | | | | |
| 223 West Washington | | Webster | | 1993 | | | 181 | | Owned | | Owned | | | 1,000 | |
| Marshfield, MO 65706 | | | | | | | | | | | | | | | |
| | | | | | | $ | 3,881 | | | | | | | | |
____________
| (1) | This office is located in Kissee Mills, Missouri, but has a mailing address in Forsyth, Missouri. |
| (2) | The Theodosia office was leased until the Savings Bank acquired the property at a sheriff’s sale on June 29, 2009. |
Item 3. Legal Proceedings
- --------------------------
From time
There are no material pending legal proceedings to time,which the Company and the Savings Bank may be involved in
various legal proceedings that areor its subsidiaries is a party other than ordinary routine litigation incidental to their business. Inrespective businesses. See “Recent Developments and Corporate Overview – Litigation” for discussion regarding a lawsuit by a former employee and the opinion of management, neither the Company nor the Savings Bank isaccrual for a party to
any current legal proceedings that are expected to be material to the
financial condition or results of operations of the Company or the Savings
Bank, either individually or in the aggregate.
possible settlement.
Item 4.
Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The Company's Annual Meeting of Stockholders for the year ended June 30,
2007 was held on June 10, 2008 at the Days Inn located at 300 East 19th
Street, Mountain Grove, Missouri. The results of the vote on items presented
at the meeting are as follows:
1) Amendment to the Company's Articles of Incorporation to effect a reverse
1-for-500 stock split
46
The proposal did not pass because it required the approval of a majority
of the Company's outstanding shares to be adopted. Votes for the proposal
were as follows:
Votes Votes Broker
For Against Abstentions Non-votes
----- --------- ------------- -------------
643,515 252,266 16,655 372,721
2) Amendment to the to the Company's Articles of incorporation to effect a
forward 500-for-1 stock split of common shares immediately following the
reverse stock split
The proposal did not pass because it required the approval of a majority
of the Company's outstanding shares to be adopted. Votes for the proposal
were as follows:
Votes Votes Broker
For Against Abstentions Non-votes
------ --------- ------------- -------------
718,083 173,498 20,855 372,721
3) Election of Directors
The stockholders elected the following nominees to the Board of
Directors for a three-year term ending in 2010 by the following vote:
Number of
Number of Votes
Votes For Percentage Withheld Percentage
--------- ---------- -------- ----------
Billy E. Hixon 1,120,726 87.2% 164,431 12.8%
John G. Moody 1,103,254 85.8% 181,903 14.2%
The following directors, whose terms did not expire in 2007,Removed and were
not up for re-election at the Annual Meeting of Stockholders, continue
to serve as directors: D. Mitch Ashlock, Thomas M. Sutherland, Harold F.
Glass and Daniel P. Katzfey.
4) Declassification of the Board of Directors
The stockholders voted against a proposal to declassify the Board of
Directors by the following vote:
Votes Votes Broker
For Against Abstentions Non-votes
----- -------- ------------- -----------
344,811 538,289 20,855
47
reserved
PART II
Item 5. Market for Registrant'sRegistrant’s Common Equity, Related Stockholder Matters - ---------------------------------------------------------------------------
and Issuer Purchases of Equity Securities
- -----------------------------------------
The information contained in the section captioned "Common Stock Information" in the Annual Report to Stockholders attached to this Form 10-K
as Exhibit 13 is incorporated herein by reference. In addition, the "Equity Compensation Plan Information" contained in Part III, Item 12 of this Form 10-K is incorporated herein by reference.
Share Repurchase Activity
The Company completed 11 separate stock repurchase programs between March 9, 1994 and April 27, 2007. On June 24, 2008, a repurchase program of 50,000 shares was initiated. This repurchase program willinitiated and was terminated at the end of calendar 2008.2008, without any shares being purchased. Since the termination of this repurchase program, no shares have been repurchased by the Company. As of June 30, 2008,2011, 1,344,221 shares had been repurchased under repurchase programs at a cost of $19.1 million or an average cost per share of $14.22.
The table below sets forth information regarding the Company's
repurchases of its common stock during the fourth quarter of fiscal 2008.
Maximum
Total Number Number of
of Shares Shares that
Purchased as May Yet Be
Total Number Average Part of Purchased
of Shares Price Paid Publicly Under the
Period Purchased per Share Announced Plan Plan
- ------------------------------------------------------------------------------
April 1 - 30, 2008 - - - -
May 1 - 31, 2008 - - - -
June 1 - 30, 2008 - - - 50,000
------------ ---------- ----------- ------------
Total - - - 50,000
------------ ---------- ----------- ------------
Item 6. Selected Financial Data
- --------------------------------
This
The information contained in the section captioned “Selected Consolidated Financial Information” in the Annual Report is incorporated herein by reference to pages 4 and 5 of the
2008 Annual Report attached hereto as Exhibit 13.
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and - ----------------------------------------------------------------------
Results of Operations
- ---------------------
The information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
The information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
Independent Auditors Reports *
(a) Consolidated Statements of Financial Condition as of June 30,
2008 and 2007*
(b) Consolidated Statements of Income for the Years Ended June 30,
2008 and 2007*
48
(c) Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 2008 and 2007*
(d) Consolidated Statements of Cash Flows for the Years Ended June
30, 2008 and 2007*
(e) Notes to Consolidated Financial Statements*
* Contained in the Annual Report to Stockholders attached to this Form
10-K as Exhibit 13, which is incorporated herein by reference. All
schedules have been omitted as the required information is either
inapplicable or contained in the Consolidated Financial Statements or
related Notes contained in the Annual Report to Stockholders.
| (a) Consolidated Statements of Financial Condition as of June 30, 2011 and 2010* |
| (b) Consolidated Statements of Operations for the Years Ended June 30, 2011 and 2010* |
| (c) Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 2011 and 2010* |
| (d) Consolidated Statements of Cash Flows for the Years Ended June 30, 2011 and 2010* |
| (e) Notes to Consolidated Financial Statements* |
| * | Contained in the Annual Report to Stockholders attached to this Form 10-K as Exhibit 13, which is incorporated herein by reference. All schedules have been omitted as the required information is either inapplicable or contained in the Consolidated Financial Statements or related Notes contained in the Annual Report to Stockholders. |
Item 9. Changes in and Disagreements With Accountants on Accounting and - ------------------------------------------------------------------------
Financial Disclosure
- --------------------
There have been no changes in and no disagreements with the Company's independent accountants on accounting and financial disclosures during the two most recent fiscal years.
Item 9A(T).9A. Controls and Procedures
- ------------------------------------
(a) EvaluationA material weakness is a significant deficiency (within the meaning of Disclosure ControlsPCAOB Auditing Standard No. 2), or a combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual of interim financial statements will not be prevented or detected on a timely basis by management or employees in the normal course of performing their assigned functions.
As of December 31, 2010, the Company did not identify or record certain transactions related to additional allowances for loan losses and Procedures: valuation allowances on real estate owned. These transactions were identified after discussion with the Company's independent registered public accounting firm and were corrected prior to the release of the Company's earnings for the three and six month periods ended December 31, 2010.
Because of the material weakness described above, based on its assessment, management believed that, as of December 31, 2010, the Company did not maintain effective internal control over financial reporting based on the criteria established in Internal Control Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission.
During the quarter ended March 31, 2011, to remediate the material weakness in the Company's internal control over financial reporting described above, the Company has re-examined its policies and procedures relating to identifying potential losses on problem loans and real estate acquired through foreclosure. Based on the review, the Company has amended its policies as necessary, and streamlined its procedures to provide a focal point for the flow of related information through the Company. The person responsible for this information flow will provide the Board of Directors with current information on which the adequacy of loss allowances can be determined.
An evaluation of the Company's disclosure controls and procedures (as defined in Section 13(a)-15(e) of the Securities Exchange Act of 1934 (the "Act")) was carried out as of June 30, 20082011 under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer and several other members of the Company's senior management. The Company's Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 20082010 the Company's disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.
(b)
Management's Annual Report on Internal Control Over Financial
Reporting: Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting (as defined in
Rule 13a- 15(f) under the Securities Exchange Act of 1934). The Company's
internal control over financial reporting is a process designed under the
supervision of the Company's management, including its Chief Executive Officer
and its Chief Financial Officer, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the Company's
financial statements for external reporting purposes in accordance with
generally accepted accounting principles in the United States of America. The
Company's internal control over financial reporting includes policies and
procedures that: pertain to the maintenance of records which, in reasonable
detail, accurately and fairly reflect transactions and dispositions of assets;
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles in the United States of America, and that
receipts and expenditures are being made only in accordance with
authorizations of management and the directors of the Company; and provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company's assets that could have a
material effect on the Company's financial statements.
49
Management recognizes that there are inherent limitations in the
effectiveness of any system of internal control and, accordingly, even
effective internal control can provide only reasonable assurance with respect
to financial statement preparation and fair presentation. Further, because of
changes in conditions, the effectiveness of internal control may vary over
time.
Under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief
Financial Officer, the Company conducted an assessment of the effectiveness of
the Company's internal control over financial reporting based on the framework
established in Internal Control-Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, management has determined that the Company's internal control over
financial reporting as of June 30, 2008 is effective.
This annual report does not include an attestation report of the
Company's registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by
the Company's independent registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit the
Company to provide only management's report in this annual report.
/s/ Daniel P. Katzfey /s/ Ronald J. Walters
- ------------------------------------- ------------------------------------
Daniel P. Katzfey Ronald J. Walters
President and Chief Executive Officer Senior Vice President, Treasurer and
(Principal Executive Officer) Chief Financial Officer
(Principal Financial Officer)
(c) Changes in Internal Control Over Financial Reporting: During the quarter ended June 30, 2008,2011, no change occurred in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
The Company does not expect that its internal control over financial reporting will prevent all errors and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
(c) Management’s Annual Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934). The Company's internal control over financial reporting is a process designed under the supervision of the Company's management, including its Chief Executive Officer and its Chief Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external reporting purposes in accordance with generally accepted accounting principles in the United States of America.
The Company's internal control over financial reporting includes policies and procedures that: pertain to the maintenance of records which, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the Company's financial statements.
Management recognizes that there are inherent limitations in the effectiveness of any system of internal control and, accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation and fair presentation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
Under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, the Company conducted an assessment of the effectiveness of the Company's internal control over financial reporting based on the framework established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined that the Company's internal control over financial reporting as of June 30, 2011 is effective.
This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by
the Company's independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.
| /s/ R. Bradley Weaver | | /s/ Ronald J. Walters |
| R. Bradley Weaver | | Ronald J. Walters |
| Chief Executive Officer | | Senior Vice President, Treasurer and |
| (Principal Executive Officer) | | Chief Financial Officer |
| | (Principal Financial Officer) |
Item 9B. Other Information
- ---------------------------
There was no information to be disclosed by the Company in a report on Form 8-K during the fourth quarter of the year ended June 30,
20082011 that was not so disclosed.
50
PART III
Item 10. Directors, Executive Officers and Corporate Governance
- ----------------------------------------------------------------
| Item 10. Directors, Executive Officers and Corporate Governance |
Directors and Executive Officers
For information required by this item concerning Directors of the Company, see the section captioned "Proposal I -- Election of Directors" included in the Company's annual meeting proxy statement (“Proxy Statement,Statement”), a copy of which will be filed with the SEC no later than 120 days after the Company's fiscal year end and is incorporated herein by reference.
For information concerning Executive Officers of the Company, see the section captioned "-- Executive Officers" in Part I of this Form 10-K, which is incorporated herein by this reference.
Compliance with Section 16(a) of the Exchange Act
The information required by this item will be contained in the section captioned "Compliance with Section 16(a) of the Exchange Act" in the Company's Proxy Statement and is incorporated herein by reference.
Audit Committee and Audit Committee Financial Expert
The Audit Committee consists of Directors Sutherland,Ashlock, Moody and Hixon. The Board of Directors has determined Director Hixon qualifies as an "audit committee financial expert," as defined by the SEC. Mr. Hixon is independent, as independence for audit committee members as defined under the listing standards of the NASDAQ Stock Market.
Code of Ethics
The Company has adopted a Code of Ethics that applies to its directors, executive officers and all other employees. A copy of the Code of Ethics was included as Exhibit 14 to the Company's Form 10-KSB for the year ended June 30, 2006. A copy of the Company's Code of Ethics is available to any person without charge, upon written request made to the Corporate Secretary at P.O. Box 777, Mountain Grove, Missouri 65711.
Item 11. Executive Compensation
- --------------------------------
The information contained under the section captioned "Directors' Compensation" and "Executive Compensation" is included in the Proxy Statement a copy of which will be filed with the SEC no later than 120 days after the
Company's fiscal year end,and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and - ----------------------------------------------------------------------------
Related Stockholder Matters
- ---------------------------
Equity Compensation Plan Information
The following table summarizes share and exercise price information about the Company's equity compensation plans as of June 30,
2008.
51
(c)
Number of
Securities
(a) (b) Remaining
Available for
Number of Future Issuance
Securities to Weighted- Under Equity
Be Issued Upon Average Plans
Exercise of Exercise Price Compensation
Outstanding of Outstanding (Excluding
Options, Options, Securities
Warrants and Warrants and Reflected in
Plan Category Rights Rights Column (a))
- --------------- ------------ ------------- ---------------
Equity Compensation
Plans approved by
security holders:
Option Plan 60,500 $16.75 39,500
Restricted stock plan - - 50,000
Equity Compensation
Plans not approved by
security holders: - - -
------ ------ ------
Total 60,500 $16.75 89,500
====== ====== ======
2011.
| | | | (c) |
| | | | Number of |
| | | | Securities |
| | (a) | (b) | Remaining |
| | | | Available for |
| | Number of | | Future Issuance |
| | Securities to | Weighted- | Under Equity |
| | Be Issued Upon | Average | Plans |
| | Exercise of | Exercise Price | Compensation |
| | Outstanding | of Outstanding | (Excluding |
| | Options, | Options, | Securities |
| | Warrants and | Warrants and | Reflected in |
| Plan Category | Rights | Rights | Column (a)) |
| | | | |
| Equity Compensation Plans approved by security holders: | | | | | | |
| | Option Plan | 22,000 | | 16.85 | | 78,000 | |
| | Restricted stock plan | - | | - | | 50,000 | |
| | | | | | | | |
| Equity Compensation Plans not | | | | | | |
| approved by security holders: | - | | - | | - | |
| | | | | | | | |
| Total | 22,000 | | 16.85 | | 128,000 | |
Security Ownership of Certain Beneficial Owners and Management
The information contained in the section captioned "Voting Securities and Security Ownership of Certain Beneficial Owners and Management" is included in the Proxy Statement a copy of which will be filed with the SEC no later than
120 days after the Company's fiscal year end,and is incorporated herein by reference.
Changes in Control
The Company is not aware of any arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Company.
Item 13. Certain Relationships and Related Transactions, and Director - ----------------------------------------------------------------------
Independence
- ------------
The information contained in the section captioned "Transactions with Management" and "Meetings and Committees of the Board of Directors and Corporate Governance Matters – Corporate Governance – Director Independence" is included in the Company's Proxy Statement a copy of which will be filed
with the SEC no later than 120 days after the Company's fiscal year end,and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
- ------------------------------------------------
The information required by this item is included in the Company's Proxy Statement
a copy of which will be filed with the Securities and Exchange
Commission no later than 120 days after the Company's fiscal year end, and is incorporated herein by reference.
52
Item 15. Exhibits and Financial Statement Schedules
- ----------------------------------------------------
(a) Exhibits
3.1 Articles of Incorporation of First Bancshares, Inc.(1)
2.2 Bylaws of First Bancshares, Inc.(1)
4.1 Specimen stock certificate of First Bancshares (1)
10.1 First Home Savings Bank 1994 Employee Stock Ownership
Plan(1)
10.2 First Bancshares, Inc. 1993 Stock Option Plan (2)
10.3 First Home Savings Bank Management Recognition and
Development Plan (2)
10.4 First Bancshares, Inc. 2004 Management Recognition Plan(4)
9.5 First Bancshares, Inc. 2004 Stock Option Plan (4)
9.6 Form of Incentive Stock Option Agreement (5)
9.7 Form of Non-Qualified Stock Option Agreement (5)
9.8 First Bancshares, Inc. 2004 Management Recognition Plan(4)
10.9 Severance Agreement between First Bancshares, Inc. and
First Home Savings Bank and Charles W. Schumacher (6)
10.10 Employment Agreement with James W. Duncan (7)
10.11 Employment Agreement with Daniel P. Katzfey (8)
13. 2008 Annual Report to Stockholders (Except for the
portions of the 2008 Stockholder Report that are
expressly incorporated by reference in this Annual
Report on Form 10-K, the 2008 Stockholder Report of the
Company shall not be deemed filed as a part hereof.)
14. Code of Ethics (9)
16. Letter on change in certifying accountant (10)
21. Subsidiaries of the Registrant
23. Auditors' Consent
31.1 Rule 13a-14(a) Certification (Chief Executive Officer)
31.2 Rule 13a-14(a) Certification (Chief Financial Officer)
32.1 Section 1350 Certification (Chief Executive Officer)
32.2 Section 1350 Certification (Chief Financial Officer)
- -------------------
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1 File No. 33-69886.
(2) Incorporated by reference to the Company's 1994 Annual Meeting Proxy
Statement dated September 14, 1994.
(3) Incorporated by reference to the Company's Form 10-KSB for the fiscal
year ended June 30, 2001. An updated Employment Agreement with Mr.
Schumacher was entered into in November 2004 and terminated in June
2005.
(4) Incorporated by reference to the Company's 2004 Annual Meeting Proxy
Statement dated September 15, 2004.
(5) Filed as an exhibit to the Current Report on Form 8-K dated February 22,
2006 and incorporated herein by reference.
(6) Filed as an exhibit to the Current Report on Form 8-K dated October 31,
2005.
(7) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended December 31, 2005.
(8) Filed as an exhibit to the Current Report on Form 8-K dated July 20,
2007.
(9) Filed as an exhibit to the Company's Form 10-KSB for the fiscal year
ended June 30, 2006.
(10) Filed as an exhibit to the Company's Current Report on Form 8-K filed on
May 2, 2006 and incorporated herein by reference.
53
| 3.1 | Articles of Incorporation of First Bancshares, Inc.(1) |
| 3.2 | Bylaws of First Bancshares, Inc.(2) |
| 4.1 | Specimen stock certificate of First Bancshares (1) |
| 10.1 | First Home Savings Bank 1994 Employee Stock Ownership Plan(1) |
| 10.2 | First Bancshares, Inc. 1993 Stock Option Plan (3) |
| 10.3 | First Home Savings Bank Management Recognition and Development Plan (3) |
| 10.4 | First Bancshares, Inc. 2004 Management Recognition Plan (4) |
| 10.5 | First Bancshares, Inc. 2004 Stock Option Plan (4) |
| 10.6 | Form of Incentive Stock Option Agreement (5) |
| 10.7 | Form of Non-Qualified Stock Option Agreement (5) |
| 10.8 | First Bancshares, Inc. 2004 Management Recognition Plan (4) |
| 13. | 2010 Annual Report to Stockholders (Except for the portions of the 2010 Annual Report to Stockholders that are expressly incorporated by reference in this Annual Report on Form 10-K, the 2010 Annual Report to Stockholders shall not be deemed filed as a part hereof.) |
| 14. | Code of Ethics (6) |
| 21. | Subsidiaries of the Registrant |
| 23. | Auditors' Consent |
| 31.1 | Rule 13a-14(a) Certification (Chief Executive Officer) |
| 31.2 | Rule 13a-14(a) Certification (Chief Financial Officer) |
| 32.1 | Section 1350 Certification (Chief Executive Officer) |
| 32.2 | Section 1350 Certification (Chief Financial Officer) |
______________
| (1) | Incorporated by reference to the Company's Registration Statement on Form S-1 File No. 33-69886. |
| (2) | Filed as an exhibit to the Current Report on Form 8-K dated November 30, 2007 and incorporated herein by reference. |
| (3) Incorporated by reference to the Company's 1994 Annual Meeting Proxy Statement dated September 14, 1994. |
| (4) | Incorporated by reference to the Company's 2004 Annual Meeting Proxy Statement dated September 15, 2004. |
| (5) | Filed as an exhibit to the Current Report on Form 8-K dated February 22, 2006 and incorporated herein by reference. |
| (6) | Filed as an exhibit to the Company's Form 10-KSB for the fiscal year ended June 30, 2006. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST BANCSHARES, INC.
Date: September 26, 2008 By: /s/Daniel P. Katzfey
------------------------------
Daniel P. Katzfey
President and
| FIRST BANCSHARES, INC. |
| |
| |
| Date: September 27, 2011 | By: /s/R. Bradley Weaver |
| R. Bradley Weaver |
| Chief Executive Officer |
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.
By: /s/Daniel P. Katzfey September 26, 2008
--------------------------------------------
Daniel P. Katzfey
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/Ronald J. Walters September 26, 2008
--------------------------------------------
Ronald J. Walters
Senior Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/Thomas M. Sutherland September 26, 2008
--------------------------------------------
Thomas M. Sutherland
Chairman of the Board
By: /s/Harold F. Glass September 26, 2008
--------------------------------------------
Harold F. Glass
Director
By: /s/John G. Moody September 26, 2008
--------------------------------------------
John G. Moody
Director
By: /s/D. Mitch Ashlock September 26, 2008
--------------------------------------------
D. Mitch Ashlock
Director
By: /s/Billy E. Hixon September 26, 2008
--------------------------------------------
Billy E. Hixon
Director
| By: /s/ R. Bradley Weaver | September 27, 2011 |
| R. Bradley Weaver | |
| Chief Executive Officer | |
| (Principal Executive Officer) | |
| |
| |
| By: /s/ Lannie E. Crawford | September 27, 2011 |
| Lannie E. Crawford | |
| President | |
| |
| By: /s/ Ronald J. Walters | September 27, 2011 |
| Ronald J. Walters | |
Senior Vice President, Treasurer and Chief Financial Officer | |
| (Principal Financial and Accounting Officer) | |
| |
| By: /s/ Thomas M. Sutherland | September 27, 2011 |
| Thomas M. Sutherland | |
| Director | |
| |
| By: /s/ Harold F. Glass | September 27, 2011 |
| Harold F. Glass | |
| Director | |
| |
| By: /s/ John G. Moody | September 27, 2011 |
| John G. Moody | |
| Director | |
| |
| By: /s/ D. Mitch Ashlock | September 27, 2011 |
| D. Mitch Ashlock | |
| Director | |
| |
| By: /s/ Billy E. Hixon | September 27, 2011 |
| Billy E. Hixon | |
| Director | |
| |
| By: /s/ Robert J. Breidenthal | September 27, 2011 |
| Robert J. Breidenthal | |
| Director | |
EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT DESCRIPTION
- -------------- -------------------
13 2008 Stockholder Report.
| 13 | 2011 Annual Report to Stockholders. Except for the portions of the
2008 Stockholder Report that are expressly incorporated by
reference in this Annual Report on Form 10-K, the 2008
Stockholder Report of the Company shall not be deemed filed
as a part hereof.
21 Subsidiaries of the Registrant
23 Consent of Auditors
31.1 Rule 13a - 14(a) Certification (Chief Executive Officer)
31.2 Rule 13a - 14(a) Certification (Chief Financial Officer)
32.1 Rule 1350 Certification (Chief Executive Officer)
32.2 Rule 1350 Certification (Chief Financial Officer)
Exhibit 13
Annual Report to Stockholders
First Bancshares, Inc.
2008 Annual Report
First Home Savings Bank
A wholly owned subsidiary of First Bancshares, Inc.
www.fhsb.com
----
TABLE OF CONTENTS
Page
----
Letter to Shareholders....................................... 1
Business of the Company...................................... 4
Selected Consolidated Financial Information.................. 5
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 7
Independent Registered Public Accounting Firm's report....... 24
Consolidated Financial Statements............................ 25
Notes to Consolidated Financial Statements................... 30
Common Stock Information..................................... 56
Directors and Executive Officers............................. 57
Corporate Information........................................ 58
Dear Fellow Shareholder:
There is no doubt that our fiscal year ended June 30, 2008 will be remembered
as a challenging year for the banking industry and it was no different for
First Bancshares, Inc.
Like the industry as a whole, our growth in profitability was reduced by a
slow housing market, credit quality issues, and increased competition for our
deposits. Our net income was reduced by the increased expenses from further
investment in technology, increased costs related to the insurance of
accounts, which was felt industry-wide, and the need for additional office
space.
Despite these challenges, we made progress in meeting our strategic objectives
related to increased loan growth, a better mix of fixed rate loans with short
term maturities and enhanced product offerings, growth in low cost deposits,
and improved technology. We saw an improvement in our net interest margin,
which was 3.30% for 2008 compared to 3.01% for 2007. During 2008, we also
continued our emphasis on resolving outstanding regulatory issues.
Some of our performance highlights include:
* Net income for the year ended June 30, 2008 of $363,000, or $0.23 per
diluted share, compared to net income of $272,000, or $0.18 per diluted
share for the year ended June 30, 2007.
* Loans receivable, net increased by $8.0 million or 5.1% during 2008 to
$167.0 million.
* We sold $22.3 million of residential loans in the secondary market in 2008
resulting in gains on loan sales of $508,000.
* Customer deposits grew by $4.5 million or 2.4% during 2008.
* Stockholders' equity at June 30, 2008 was $27.1 million, up $631,000 from
June 30, 2007. Average stockholders' equity was 11.05% of average total
assets during the year ended June 30, 2008.
In order to improve our profitability we have continued our focus on the
reduction of expenses and the enhancement of revenue, especially in our branch
network. We have continued to utilize budgets and a proper business plan to
establish targets and goals and to help us increase our earnings. Our loan
and deposit rates continue to be competitive within our market area and are
established with a view toward improving First Home Savings Bank's ("Bank")'s
margin.
Our branch network, and specifically our location in the Springfield, Missouri
market, has helped us increase our interest rate spread by allowing for higher
loan rates and increased loan originations. We are proud of our growth in the
competitive Springfield market, which began in July 2006 when our branch was
opened. The following year, we opened a loan origination office in that area
for the purpose of originating primarily loans on single-family residences for
sale into the secondary market. We continue to consider Springfield, Missouri
and other market areas for possible expansion, including evaluating these
areas for potential ATM sites.
Resolving regulatory issues also has continued to be an important focus of our
senior management. During 2008, we continued to work diligently to resolve
the regulatory issues that resulted in the December 2006 Memorandum of
Understanding ("MOU") between the Bank and the Office of Thrift Supervision
("OTS"). During 2008, we addressed the final issue of the MOU, which was to
develop a three-year business plan. In October, 2008, we finalized our
business plan, and filed it with the OTS. Our senior management continues to
make the resolution of any regulatory issues a high priority.
1
Continued Transition to a Community Bank Business Model
As we have reported to you in recent years, we have been slowly transitioning
the Bank from a traditional savings and loan business model to a community
commercial bank business model. As a result of the economic environment, the
progress toward this goal in 2008 was not as rapid as we would have liked. The
following is a summary of some of the progress we have made in areas that are
critical to this transition:
Information Technology - Management has focused a considerable amount of
its time and resources over the past two years on developing new banking
products and services, increasing capacity for all business lines. In
this regard, we have made significant expenditures on hardware and
software upgrades. Some of the software expenditures have included those
for implementation of a corporate wide e-mail and Internet access, online
banking, documentation scanning, mortgage loan origination and processing
software and loan documentation software. This investment will be
increasingly leveraged over the next several years as each department
realizes operating efficiencies and expands existing product offerings,
and as more customers take advantage of our convenience products, such as
online banking, remote deposit and free bill payment services.
Mortgage Banking - Management realized that in order for our mortgage
lending process to be competitive, we needed to originate loans for sale
in the secondary market, including the origination of additional fixed
rate loans. To that end, we have added loan products and, since March
2007, have originated fixed rate loans for sale into the secondary
market. To support this endeavor, an investment in personnel was made
during the past two years in order to assemble a team of mortgage banking
professionals who could serve an increased volume of mortgage loans and
implement the secondary market program. Our mortgage banking operation
during the past year was hampered by the challenging economic environment
and the resulting reduced demand for home loans. However, management
believes that the significant changes we have made in mortgage lending
will allow us to better serve our mortgage loan customers with the
additional products and mortgage banking professionals, which will
permit us to be more competitive in our market areas.
Commercial Banking - Management has continued in the implementation of a
"community commercial lending" philosophy, which was established on the
principles of safety, soundness and profitability. We have hired
experienced commercial lenders with successful business development track
records and formal credit training in their backgrounds, and placed them
in locations where they have a customer following. The commercial
lending review and new credit function has increased the quality of our
commercial loan portfolio. As lenders, we are now more committed to a
"relationship banking approach" to business development.
Deposit Mix - Management recognized that our past reliance on
certificates of deposit and traditional passbook savings accounts would
not be a sufficient source of funds. We needed new and better deposit
products in order to compete more effectively. Accordingly, we enhanced
our deposit product offerings. We implemented several new pricing
options for certificates of deposit in an effort to move the high cost
time deposit customer into longer or shorter terms based upon
management's anticipation of interest rate movements; and we placed
increased emphasis on better online banking products.
2
Even though we were hampered by market conditions, we are pleased with the
progress we made toward our goals in 2008. There is no question that this is
a difficult time for our industry and our company has not been immune from
these challenges. Economic cycles are a fact of business life and we are
working through this one diligently.
We thank you for your loyalty, your patience and your support.
Sincerely,
/s/Daniel P. Katzfey
Daniel P. Katzfey
President and Chief Executive Officer
First Bancshares, Inc.
3
Business of the Company
First Bancshares, Inc. ("Company"), a Missouri corporation, was incorporated
on September 30, 1993 for the purpose of becoming the holding company for
First Home Savings Bank ("First Home" or the "Savings Bank") upon the
conversion of First Home from a Missouri mutual to a Missouri stock savings
and loan association. That conversion was completed on December 22, 1993. At
June 30, 2008, the Company had total consolidated assets of $249.2 million and
consolidated stockholders' equity of $27.1 million.
The Company is not engaged in any significant business activity other than
holding the stock of First Home. Accordingly, the information set forth in
this report, including the consolidated financial statements and related data,
applies primarily to First Home.
First Home is a Missouri-chartered, federally-insured stock savings bank
organized in 1911. The Savings Bank is regulated by the Missouri Division of
Finance and the Office of Thrift Supervision ("OTS"). Its deposits are
insured up to applicable limits by the Federal Deposit Insurance Corporation.
First Home also is a member of the Federal Home Loan Bank ("FHLB") System.
First Home conducts its business from its home office in Mountain Grove and
ten full service branch facilities in Marshfield, Ava, Gainesville, Sparta,
Theodosia, Crane, Galena, Kissee Mills, Rockaway Beach, and Springfield,
Missouri. In addition to the branch offices, during fiscal 2007, the First
Home opened a loan origination office in Springfield, Missouri. First Home
provides its customers with a full array of community banking services and is
primarily engaged in the business of attracting deposits from, and making
loans to, the general public, including individuals and small to medium size
businesses. First Home originates real estate loans, including one-to-four
family residential mortgage loans, multi-family residential loans, commercial
real estate loans and home equity loans, as well as, non-real estate loans,
including commercial business loans and consumer loans. First Home also
invests in mortgage-backed, United States Government and agency securities and
other assets.
At June 30, 2008, First Home's total gross loans were $169.5 million, or 68.0%
of total consolidated assets, including residential first mortgage loans of
$76.0 million, or 44.8% of total gross loans and other mortgage loans of $71.6
million, or 42.2% of total gross loans. Of the mortgage loans, over 71.3% are
adjustable-rate loans.
4
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth certain information concerning the consolidated
financial position and operating results of the Company as of and for the
dates indicated. The Company is primarily in the business of directing,
planning and coordinating the business activities of First Home. The
consolidated data is derived in part from, and should be read in conjunction
with, the Consolidated Financial Statements of the Company and its
subsidiaries presented herein.
At June 30,
--------------------------------------------
2008 2007 2006 2005 2004
---- ---- ---- ---- ----
(In thousands)
FINANCIAL CONDITION DATA:
Total assets $ 249,232 $ 241,331 $ 228,395 $ 244,007 $ 264,978
Loans receivable, net 167,035 158,993 141,987 158,143 166,259
Cash, interest-bearing deposits
and securities 64,195 65,498 69,007 68,600 81,971
Deposits 194,593 190,090 179,141 187,143 207,247
Retail repurchase agreements 4,648 2,103 - - -
Borrowed funds 22,000 22,000 22,000 28,394 29,121
Stockholders' equity 27,100 26,468 26,291 26,817 27,276
Years Ended June 30,
--------------------------------------------
2008 2007 2006 2005 2004
---- ---- ---- ---- ----
(In thousands, except per share information)
OPERATING DATA:
Interest income $ 14,828 $ 13,724 $ 12,913 $ 13,265 $ 13,735
Interest expense 7,451 7,354 5,987 5,091 5,727
------- ------- ------- ------- -------
Net interest income 7,377 6,370 6,926 8,174 8,008
Provision for loan losses 1,291 426 1,520 2,333 340
------- ------- ------- ------- -------
Net interest income after
provision for loan losses 6,086 5,944 5,406 5,841 7,668
Impairment of and gains/(losses)
on securities - 177 (421) (4) 178
Non-interest income, excluding
gains (losses) on securities 2,903 2,127 1,902 2,911 2,310
Non-interest expense 8,557 8,094 7,151 7,415 6,744
------- ------- ------- ------- -------
Income (loss) before taxes 432 154 (264) 1,333 3,412
Income tax expense (benefit) 69 (118) (91) 16 1,065
------- ------- ------- ------- -------
Net income (loss) $ 363 $ 272 $ (173) $ 1,317 $ 2,347
======= ======= ======= ======= =======
Basic earnings (loss) per
share $ 0.23 $ 0.18 $ (0.11) $ 0.83 $ 1.42
======= ======= ======= ======= =======
Diluted earnings(loss)per
share $ 0.23 $ 0.18 $ (0.11) $ 0.83 $ 1.42
======= ======= ======= ======= =======
Dividends per share $ 0.00 $ 0.08 $ 0.16 $ 0.16 $ 0.16
======= ======= ======= ======= =======
5
At or For the Years Ended June 30,
----------------------------------------
2008 2007 2006 2005 2004
---- ---- ---- ---- ----
KEY OPERATING RATIOS:
Return on average assets 0.15% 0.09% NA% 0.51%
0.87%
Return on average equity 1.34 0.77 NA 4.60 8.49
Average equity to average assets 11.05 11.32 11.52 11.10 10.22
Interest rate spread for period 3.01 2.71 2.96 3.31 3.04
Net interest margin for period 3.30 3.01 3.21 3.48 3.22
Non-interest expense to average
assets 3.49 3.46 2.99 2.88 2.49
Average interest-earning assets to
interest-bearing liabilities 108.95 108.66 108.98 108.01 107.16
Allowance for loan losses to total
loans at end of period 1.65 1.59 1.67 1.74 0.73
Net charge-offs to average loans
outstanding during the period 0.74 0.14 1.29 0.44 0.14
Ratio of non-performing assets to
total assets 1.56 1.47 0.59 2.21 1.02
Ratio of loan loss allowance to
non-performing assets 72.10 79.08 184.52 52.93 45.98
Dividend payout ratio 0.00 44.44 NA 19.28 11.27
June 30,
----------------------------------------
OTHER DATA: 2008 2007 2006 2005 2004
---- ---- ---- ---- ----
Number of:
Loans outstanding 3,388 3,450 3,644 4,263 4,771
Deposit accounts 23,221 23,983 24,724 25,021 25,419
Full service offices 11 11 10 10 10
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this
section should be read in conjunction with the Consolidated Financial
Statements, the accompanying Notes to Consolidated Financial Statements and
the other sections contained in this report.
Management's Discussion and Analysis and other portions of this report contain
certain "forward-looking statements" that may relate to the Company's expected
future financial results, strategic plans or objectives. These statements are
based on Management's beliefs, assumptions, current expectations, estimates
and projections about the financial services industry, the economy, and about
the Company and the Savings Bank. Words such as anticipates, believes,
estimates, expects, forecasts, intends, is likely, plans, projects, variations
of such words and similar expressions are intended to identify such
forward-looking statements. These forward-looking statements are intended to
be covered by the safe-harbor provisions of the Private Securities Litigation
Reform Act of 1995. These statements are not guarantees of future performance
and involve certain risks, uncertainties and assumptions that are difficult to
predict with regard to timing, extent, likelihood and degree of occurrence.
Actual results and outcomes may materially differ from what may be expressed
or forecasted in the forward-looking statements. The Company undertakes no
obligation to update, amend, or clarify forward looking statements, whether as
a result of new information, future events (whether anticipated or
unanticipated), or otherwise.
Future factors that could cause actual results to differ materially from the
results anticipated or projected include, but are not limited to, the
following: the credit risks of lending activities, including changes in the
level and direction of loan delinquencies, other loans of concern, loan
write-offs and changes in estimates of the adequacy of the allowance for loan
losses; competitive pressures among depository institutions; interest rate
movements and their impact on customer behavior and net interest margin; the
impact of repricing and competitor pricing initiatives on loan and deposit
products; the ability to adapt successfully to technological changes to meet
customers' needs and development in the marketplace; our ability to access
cost-effective funding; changes in financial markets; changes in economic
conditions in general and particularly as related to our market areas; new
legislation or regulatory changes, including but not limited to changes in
federal and/or state tax laws or interpretations thereof by taxing
authorities; the outcome of litigation results of examinations by our banking
regulators; limitations on our future business activities resulting from the
Memorandum of Understanding between the Savings Bank and the Office of Thrift
Supervision ("OTS") entered into on December 1, 2006; changes in accounting
principles, policies or guidelines; the economic impact of any terrorist
actions on our loan originations and loan repayments; and other risks detailed
from time to time in our filings with the Securities and Exchange Commission.
Corporate Developments and Overview
The Savings Bank continues to operate under a Memorandum of Understanding (the
"MOU") with the Office of Thrift Supervision (the "OTS"). The MOU was entered
into during the December 31, 2006 quarter. The MOU resulted from issues noted
during the examination of the Savings Bank conducted by the OTS, the report on
which was dated in July 2006, and included deficiencies in lending policies
and procedures, recent operating losses, and the need to revise both the
business plan and the budget to enhance profitability. The corrective actions
required to be taken by the Savings Bank under the MOU include, among others:
(1) developing procedures concerning ongoing credit administration and
monitoring; (2) continuing to identify, track and correct credit and
collateral documentation exceptions and loan policy exceptions; (3) preparing
and submitting to the Savings Bank's Board of Directors an
7
accurate and complete loan-to-one borrower report; (4) preparing and updating,
where appropriate, a workout plan for each classified asset over $250,000; (5)
adopting a revised loan loss allowance policy; (6) amending the Savings Bank's
appraisal policy to require written review of all appraisals prior to final
loan approval; (7) adopting a revised loan policy that provides for
underwriting guidelines, loan documentation, and credit administration
procedures for unsecured loans; (8) either request the consent of the FDIC for
the Savings Bank's subsidiary, FYBAR Service Corporation, to hold real estate
for investment or approve a plan for divestiture of such investment by June
30, 2007; (9) implementing corrective actions with respect to the previously
conducted independent information technology audit; and (10) preparing,
adopting and submitting to the OTS a comprehensive three year business plan
and budget. The Company believes that the Savings Bank has satisfactorily
addressed all of the issues raised by the MOU. During July 2007, the OTS
performed an on-site review of the progress made on resolving the issues
discussed in the MOU. The Savings Bank did not receive a formal report from
the OTS on the results of this review.
On February 22, 2008, the Company filed a preliminary proxy statement and a
Schedule 13E-3, in connection with the Company's intention to reduce the
number of stockholders to less than 300 through a reverse stock split at a
one-to-one thousand ratio, with the purpose of terminating the Company's
registration and suspending the Company's reporting obligations with the
Securities and Exchange Commission ("SEC"). This would have eliminated the
significant costs associated with being a public company. On April 8, 2008,
the Company filed an amendment to the preliminary proxy statement filed on
February 22, 2008, changing the ratios from one-to-one thousand to one-to-five
hundred and on April 25, 2008 mailed the proxy materials to its shareholders.
The Annual Meeting of Stockholders' took place in Mountain Grove, Missouri on
June 10, 2008. The resolutions related to the reverse stock split and the
forward stock split did not receive required shareholder approval and
consequently did not pass. The Company will continue with its reporting
obligations to the SEC.
During the year ended June 30, 2008, the Savings Bank entered into a lease
agreement for approximately 5,100 square feet of office space in Springfield,
Missouri. The new space houses the Savings Bank's Loan Production Office,
which has been operating out of a much smaller location since it was approved
by the State of Missouri during the third quarter of fiscal 2007. In addition
to the Loan Production Office, the facility has offices for senior officers of
the Company and the Savings Bank, who spend time in Springfield, as well as,
in the Company's home office in Mountain Grove, Missouri. The move to the
larger facility was completed in November 2007.
During the year ended June 30, 2008, the operations of the in-house brokerage
service, which was based in Mountain Grove, Missouri, were discontinued
because of staffing difficulties. This brokerage service operated under a
Savings Bank subsidiary, First Home Investments. The Company entered into an
agreement with an outside company based in Springfield, Missouri to provide
brokerage services to the Savings Bank's customers.
Operating Strategy
The primary goals of management are to reduce and manage risk, improve
profitability and promote the growth of the Company. Operating results depend
primarily on net interest income, which is the difference between the income
earned on interest-earning assets, consisting of loans and securities, and the
cost of interest-bearing liabilities, consisting of deposits and borrowings.
Net income is also affected by, among other things, provisions for loan losses
and operating expenses. Operating results are also significantly affected by
general economic and competitive conditions, primarily changes in market
interest rates, governmental legislation and policies concerning monetary and
fiscal affairs and housing,
8
as well as, by other financial institutions and the actions of the regulatory
authorities. Management's strategy is to strengthen First Home's presence in,
and expand the boundaries of, its primary market area.
Management has implemented various general strategies with the intent of
improving profitability while maintaining, and as necessary, improving safety
and soundness. Primary among those strategies are, to the extent that market
conditions allow, increasing the volume of originated one-to-four family
loans, actively seeking high quality commercial real estate loans, continuing
improvement in, and maintaining, asset quality, and managing interest-rate
risk. Since the establishment of the loan origination office in Springfield,
Missouri in March 2007, most of the fixed-rate, single-family mortgages
originated by the Company have been sold to third parties, while adjustable
rate loans are retained in the portfolio. This is consistent with First
Home's historical general practice of primarily being an adjustable rate
lender. It is anticipated, subject to market conditions, that no changes will
be made in these strategies.
Lending. Historically, First Home predominantly originated one-to-four family
residential loans. One-to-four family residential loans were 63% of the
mortgage loans originated during fiscal year 2008, compared with 55% of the
mortgage loans originated during fiscal 2007. At June 30, 2008, residential
mortgage loans as a percent of the Savings Bank's total gross loan portfolio
were approximately 45% compared to approximately 54% at June 30, 2007. First
Home has gradually increased its commercial real estate loan originations
within its traditional lending territory over the past seven years from 20% of
loan originations for the year ended June 30, 2001 to approximately 40% of
loan originations for over the past two fiscal years. It is anticipated that
commercial real estate loans will continue to be a significant part of the
real estate loans originated by the Savings Bank, particularly as it enters
new markets and develops new products.
Asset Quality. Asset quality remains a significant concern of management and
the Company's Board of Directors. The Savings Bank's asset quality is
monitored and measured using various benchmarks. The two key items are
non-performing loans and classified loans. Non-performing loans consist of
non-accrual loans, loans past due over 90 days and impaired loans not past due
or past due less than 60 days. Classified loans are loans internally
identified as having greater credit risk and requiring additional monitoring.
Past due and non-accrual loans, including loans 30-89 days delinquent, at June
30, 2008 were 3.66% of the total loan portfolio and included 1.44% of total
residential loans, 4.49% of total commercial real estate loans, including land
loans, 16.59% of total commercial business loans and 1.93% of total consumer
loans.
The table below shows the risk classification of the Savings Bank's loan
portfolio at the dates indicated. Non-performing loans decreased by $575,000
to $2.7 million at June 30, 2008 from $3.2 million at June 30, 2007. The
decrease in non-performing loans was due, in part, to the Savings Bank
completing the foreclosure process on real estate loans and the repossession
and disposal process on non-real estate loans that were non-performing at the
end of fiscal 2007. During fiscal 2008, real estate owned and repossessed
assets increased by $912,000 from $293,000 to $1.2 million. In addition, net
charge-offs for fiscal 2008 increased by $978,000 over those for fiscal 2007,
to $1.2 million from $208,000. Classified loans increased by $1.5 million, or
35%, to $5.8 million at June 30, 2008 compared to $4.3 million at June 30,
2007. Stricter internal policies relating to the identification and
monitoring of loans in the current economic climate have identified potential
problems, and has also resulted in a significant increase in classified loans.
In addition to the classified loans, the Savings Bank has identified an
additional $4.7 million of credits at June 30, 2008 on its internal watch list
including $2.1 million, $2.0 million, $480,000 and $119,000 of commercial real
estate, commercial business, one-to-four family and consumer loans,
respectively. Management has identified these loans as high risk credits and
any deterioration in their financial condition could increase the classified
loan totals.
9
Asset quality: (in thousands)
At or for the
Year Ended June 30,
-------------------
2008 2007
Non-performing assets: ---- ----
- ----------------------
Past due over 90 days $ 360 $ 359
Non-accrual loans 2,313 2,889
Other - -
------ ------
Total non-performing loans 2,673 3,248
Real estate owned 1,206 291
------ ------
Total non-performing assets $ 3,879 $ 3,539
====== ======
Classified loans:
- -----------------
Loss $ - $ -
Doubtful 718 101
Substandard 5,062 4,176
------ ------
Total classified assets 5,780 4,277
Total watch list credits 4,671 4,843
------ ------
Total loans of concern $ 10,451 $ 9,120
====== ======
Net charge-offs $ 1,187 $ 208
====== ======
Provision for loan losses $ 1,291 $ 426
====== ======
The Savings Bank's provision for loan losses for the year ended June 30, 2008
increased $865,000 to $1.3 million from $426,000 for the year ended June 30,
2007. This was primarily the result of Management's efforts to identify
problem loans and the deteriorating economic environment during most of fiscal
2008. Most businesses and individuals have been negatively impacted. Customer
cash flows are strained and loan evaluations reflect an increased awareness of
the potential for problems in the loan portfolio. In addition, a number of
loans that were non-performing at the end of fiscal 2007, resulting in higher
net charge offs during fiscal 2008 than had been experienced in fiscal 2007.
Over one-half of the charge offs for fiscal 2008 related to loans that were on
Management's watch list at the end of fiscal 2007. These factors resulted in a
significantly higher provision during fiscal 2008 than there had been in
fiscal 2007.
Managing Interest-Rate Risk. First Home has relied primarily on adjustable
interest rate loans and short-term fixed-rate loans to manage the inherent
risks of interest rate changes. During fiscal 2006, in order to compete in
the current interest rate environment, First Home began offering long-term
fixed rate mortgages to borrowers with good credit quality. With the goal of
mitigating risk on these long-term fixed rate products, management monitors
the number, outstanding balance and other amounts related to these loans to
determine when changes should be made to the terms of the loans offered.
While a small number of fixed-rate loans are retained in portfolio, most fixed
rate loans originated since the opening of the loan origination office have
been originated for sale in the secondary market. Management also utilizes
FHLB advances with terms that correspond with the terms of the loan products.
Critical Accounting Policies. The Company uses estimates and assumptions in
its financial statements in accordance with generally accepted accounting
principles. Material or critical estimates that are susceptible to
significant change include the determination of the allowance for loan losses
and the associated provision for loan losses, as well as the estimation of
fair value for a number of the Company's assets.
10
Allowance for Loan Losses. Management recognizes that loan losses may
occur over the life of a loan and that the allowance for loan losses must be
maintained at a level necessary to absorb specific losses on impaired loans
and probable losses inherent in the loan portfolio. Management of the Savings
Bank assesses the allowance for loan losses on a monthly basis, through the
analysis of several different factors including delinquency, charge-off rates
and the changing risk profile of the Company's loan portfolio, as well as
local economic conditions such as unemployment rates, bankruptcies and vacancy
rates of business and residential properties.
Management believes that the accounting estimate related to the allowance for
loan losses is a critical accounting estimate because it is highly susceptible
to change from period to period. This may require management to make
assumptions about losses on loans; and the impact of a sudden large loss could
require increased provisions, which would negatively affect earnings.
The allowance for loan losses is evaluated on a regular basis by management
and is based on Management's periodic review of the collectibility of the
loans in light of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to repay,
the estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information becomes
available.
The allowance consists of specific and general components. The specific
component relates to loans that are classified as doubtful, substandard or
special mention. For such loans that are also classified as impaired, an
allowance is established when the discounted cash flows (or collateral value
or observable market price) of the impaired loan is lower than the carrying
value of that loan. The general component covers non-classified loans and is
based on historical loss experience adjusted for qualitative factors.
The allowance is increased by the provision for loan losses, which is charged
against current period operating results and decreased by the amount of actual
loan charge-offs, net of recoveries.
Estimation of Fair Value. The estimation of fair value is significant to
a number of the Company's assets, including securities and real estate owned.
These assets are all recorded at either fair value or at the lower of cost or
fair value.
Declines in fair value of held-to-maturity and available-for-sale
securities below their cost that are deemed to be other-than-temporary are
reflected in earnings as realized losses. In estimating other-than-temporary
impairment losses, management considers (1) the length of time and the extent
to which the fair value has been less than cost, (2) the financial condition
and near-term prospects of the issuer, and (3) the intent and ability of the
Company to retain its investment in the issuer for a period of time sufficient
to allow for any anticipated recovery in fair value. Furthermore, accounting
principles generally accepted in the United States require disclosure of the
fair value of financial instruments as a part of the notes to the consolidated
financial statements. Fair values are volatile and may be influenced by a
number of factors, including market interest rates, prepayment speeds,
discount rates and the shape of yield curves.
Real estate owned is recorded at the lower of the remaining loan
balance or estimated fair value less the estimated costs to sell the asset.
Any write down at the time of foreclosure is charged against the allowance for
loan losses. Subsequently, net expenses related to holding the property and
declines in the market value are charged against income.
11
Comparison of Financial Condition at June 30, 2008 and June 30, 2007
General. The most significant change in the Company's financial condition
during the year ended June 30, 2008 was an increase in net loans receivable of
$8.0 million. This increase was funded primarily by an increase of $4.5
million in deposits and $2.5 million in customer funds invested in retail
repurchase agreements, which the Savings Bank began to offer in December 2006.
In addition, the total investments, including both those available-for-sale
and those held to maturity, increased by $2.9 million, while cash and cash
equivalents decreased by $4.0 million.
Total Assets. Total assets increased $7.9 million, or 3.3%, to $249.2 million
at June 30, 2008 from $241.3 million at June 30, 2007. The increase was
primarily attributable to a $8.0 million increase in loans receivable and an
increase of $2.9 million in investments which were partially offset by a
decrease of $4.0 million in cash and cash equivalents.
Cash and Cash Equivalents. Cash and cash equivalents was $17.0 million at
June 30, 2008 compared to $21.0 million at June 30, 2007, a decrease of $4.0
million, or 19.1%. The decrease was the result of using available cash to
fund loan growth and an increase in investments, which exceeded the growth of
deposits and the growth of retail repurchase agreements. The Savings Bank
continued to operate with a lower level of cash on hand in the main office and
the branch offices. The lower level of cash on hand helps to maximize
investable funds.
Certificates of Deposit. Certificates of deposit purchased as investments
decreased $180,000 to $567,000 at June 30, 2008 from $747,000 at June 30,
2007. As certificates of deposit purchased matured during the year ended June
30, 2008, the proceeds were used to fund loans and purchase mortgage-backed
securities.
Securities. Securities increased $2.9 million to $45.0 million at June 30,
2008 from $42.1 million at June 30, 2007. Proceeds from the sales,
maturities, calls and prepayments on securities were reinvested, along with
other excess funds, primarily in mortgage-backed securities. The
available-for-sale portfolio increased by $9.5 million, or 30.4%, to $40.8
million at June 30, 2008 from $31.3 million at June 30, 2007. The held to
maturity portfolio decreased by $6.6 million, or 61.3%, to $4.2 million at
June 30, 2008 from $10.8 million at June 30, 2007. This change was the result
of a decision, made in fiscal 2007, to allow the held to maturity portfolio to
run off through maturities while new purchases were categorized as
available-for-sale, providing the greatest level of flexibility in the
investment portfolio.
Loans Receivable. Net loans receivable increased from $159.0 million at June
30, 2007 to $167.0 million at June 30, 2008. The $8.0 million, or 5.1%,
increase was the result of loan originations exceeding paydowns and payoffs on
loans. This was the second consecutive year that the outstanding loan total
grew, which is a reversal of the trend that covered the five fiscal years
ended June 30, 2006.
Commercial real estate loans, including land loans, increased by $15.1
million, or 30.5%, to $64.5 million at June 30, 2008 from $49.4 million at
June 30, 2007. Commercial business loans increased by $3.1 million, or 35.3%,
to $11.8 million at June 30, 2008 from $8.7 at June 30, 2007. Consumer loans,
including second mortgages, increased by $422,000, or 2.5%, to $17.3 million
at June 30, 2008 from $16.9 million at June 30, 2007. One-to-four family loans
decreased by $10.5 million, or 12.2%, to $76.0 million at June 30, 2008 from
$86.5 million at June 30, 2007.
The increase in net loans receivable took place even though the origination of
loans for portfolio decreased by $12.5 million, or 15.3%, to $69.1 million in
fiscal 2008 from $81.6 million in fiscal 2007. Real estate loan originations,
including loans originated for sale, decreased by $8.3 million, or 12.3%, to
$59.1 million for the year ended June 30, 2008 compared to $67.4 million for
the year ended June 30,
12
2007. Commercial real estate, multi-family and land loan originations
decreased by $4.5 million, while one-to-four family loan originations
decreased by $3.8 million. Consumer loan originations decreased by $4.2
million to $3.7 million for the year ended June 30, 2008 from $7.9 million for
the year ended June 30, 2007. The origination of commercial business loans was
$6.3 million for both years. The primary reason for the reduction in loan
volume was the nationwide deteriorating economic climate that prevailed during
most of fiscal 2008 which did have an impact on the Savings Bank's local
market areas to some extent.
Non-accrual Loans. Non-accrual loans decreased from $2.9 million at June 30,
2007 to $2.3 million at June 30, 2008, primarily due to charge-offs during the
year ended June 30, 2008. The $575,000 decrease in non-accrual loans between
June 30, 2007 and June 30, 2008 was due to decreases of $440,000 in real
estate loans, including decreases of $150,000 and $290,000 in non-accrual
residential mortgages and commercial real estate, respectively. Non-accrual
commercial business loans decreased by $151,000 during the year ended June 30,
2008. These decreases were partially offset by an increase of $15,000 in
non-accrual consumer loans.
Non-performing Assets. Non-performing assets increased $340,000 from $3.5
million at June 30, 2007 to $3.9 million at June 30, 2008. At June 30, 2008,
the ratio of non-performing assets to total assets was 1.56% compared to 1.47%
at June 30, 2007. The Savings Bank's non-performing loans consist of
non-accrual loans and past due loans over 90 days. Non-performing assets also
include real estate owned and other repossessed assets.
The Savings Bank has identified an additional $4.7 million of credits at June
30, 2008 on its internal watch list including $2.1 million, $2.0 million,
$480,000 and $119,000 of commercial real estate, commercial business,
one-to-four family and consumer loans, respectively. Management has
identified these loans as high risk credits and any deterioration in their
financial condition could increase the classified loan totals.
Deposits. Deposits increased $4.5 million, or 2.4%, to $194.6 million at June
30, 2008 from $190.1 million at June 30, 2007. The increase in deposit
balances during fiscal 2008 included an increase of $3.6 million in savings
accounts, almost all of which was in money market savings accounts, first
introduced in December 2006. The money market savings account had $39.9
million in balances at June 30, 2008. In addition, certificates of deposits
increased $3.8 million, from $83.3 at June 30, 2007 to $87.1 million at June
30, 2008. These increases were partially offset by a decrease of $2.9 million
in checking balances from $58.0 million at June 30, 2007 to $55.1 million at
June 30, 2008. The rates paid by the Savings Bank on deposits, with the
exception of special offerings and specifically designed accounts, usually
fall in the lower half to lower third of the range of rates offered by the
Savings Bank's competitors.
Retail Repurchase Agreements. In December 2006, the Savings Bank began to
offer retail repurchase agreements. This was done to provide an additional
product for its existing customer base and to attract new customers who would
find the product beneficial. Customers with large balances in checking
accounts benefit by having those balances which exceed a predetermined level
"swept" out of the checking account and in to a retail repurchase account. The
repurchase account earns interest at a floating market rate and is uninsured.
However, the balance is collateralized by designated investment securities of
the Savings Bank. At June 30, 2008, the balances of retail repurchase
agreements totaled $4.6 million, representing an increase of $2.5 million, or
121.0%, over the $2.1 million balance at June 30, 2007. It should be noted
that during most of fiscal 2008, the balances of the retail repurchase
agreements were less than $500,000, and that the increase from one year to the
next was the result of funds from one new customer during June 2008.
13
Borrowings. Advances from the Federal Home Loan Bank of Des Moines were $22.0
million at both June 30, 2008 and June 30, 2007. During the year ended June
30, 2008, there were no funds borrowed by the Savings Bank from the Federal
Home Loan Bank of Des Moines and no advances were repaid. There was no other
borrowed money during the year ended June 30, 2008.
Stockholders' Equity. Stockholders' equity was $27.1 million at June 30, 2008
compared to $26.5 million at June 30, 2007. The $632,000 increase was the
result of net income of $363,000, an increase in paid-in-capital of $84,000,
which resulted from the implementation of FASB 123R in regard to stock based
compensation, and an improvement of $185,000 in other comprehensive income,
related to net unrealized losses on securities. At June 30, 2008, there were
1,550,815 shares of stock outstanding, or the same number of shares that were
shares outstanding at June 30, 2007. The book value per share increased to
$17.47 at June 30, 2008 from $17.07 at June 30, 2007.
Comparison of Operating Results for the Years Ended June 30, 2008 and June 30,
2007
Net Income. Net income increased $91,000 from $272,000 for the fiscal year
ended June 30, 2007 to $363,000 for the fiscal year ended June 30, 2008. The
increase was primarily attributable to a $1.0 million increase in net interest
income, and a $599,000 increase in non-interest income. These items were
partially offset by an increase of $865,000 in the provision for loan losses
and an increase in non-interest expense of $463,000.
Net Interest Income. Net interest income increased $1.0 million, or 15.8%, to
$7.4 million for the fiscal year ended June 30, 2008 from $6.4 million for the
fiscal year ended June 30, 2007. Total interest income increased $1.1
million, while total interest expense increased by $97,000.
Interest Income. Interest income increased $1.1 million, or 8.0%, to $14.8
million for the fiscal year ended June 30, 2008, from $13.7 million for the
fiscal year ended June 30, 2007. Interest income on loans receivable
increased by $976,000, or 8.9%, to $11.9 million for the fiscal year ended
June 30, 2008 from $10.9 million for the fiscal year ended June 30, 2007.
During the year ended June 30, 2008, the average balance of net loans
outstanding increased $8.7 million, or 5.7%, to $160.8 million from $152.2
million for the fiscal year ended June 30, 2007. In addition, the yield on net
loans outstanding increased to 7.41% in fiscal 2008 from 7.19% in fiscal 2007,
due to continuing origination of consumer, commercial real estate and
commercial business loans which have higher rates. Total loan originations
were $69.2 million during the year ended June 30, 2008, while sales of loans
totaled $22.3 million and repayments on loans were $36.4 million.
Interest income from securities increased $443,000, or 23.0% to $2.4 million
for the year ended June 30, 2008 from $1.9 million for the year ended June 30,
2007. The increase was the result of an increase in the yield on securities
to 5.29% for fiscal 2008 from 4.46% for fiscal 2007, and to an increase of
$2.0 million, or 4.6%, in the average balance of securities to $44.8 million
in fiscal 2008 from $43.2 million in fiscal 2007.
Interest income from other interest-earning assets (primarily overnight funds)
decreased $315,000, or 36.9%, to $538,000 for the fiscal year ended June 30,
2008 from $853,000 for the fiscal year ended June 30, 2007. The decrease is
attributable to a decrease in the yield on other interest-earning assets from
5.33% for the year ended June 30, 2007 to 3.09% for the year ended June 30,
2008, which was partially offset by an increase in the average balance of
other interest-earning assets from $16.0 million in fiscal 2007 to $17.4
million during fiscal 2008.
Interest Expense. Interest expense for the fiscal year ended June 30, 2008
increased $97,000, or 1.3%, to $7.5 million from $7.4 million for the fiscal
year ended June 30, 2007. Expense on interest-bearing
14
customer deposits increased by $182,000, or 3.1%, to $6.1 million for fiscal
2008 from $5.9 million for fiscal 2007. This increase was the result of an
increase of $11.7 million, or 6.9%, in the average balance of deposits to
$181.6 million for the fiscal year ended June 30, 2008 from $169.9 million for
the fiscal year ended June 30, 2007, which was partially offset by a decrease
in the average cost of deposits to 3.37% for fiscal 2008 from 3.50% for fiscal
2007. The decrease in the average cost of deposits was the result of
decreased short-term interest rates during fiscal 2007 and maturities of
higher costing time deposits.
Interest expense on retail repurchase agreements increased by $15,000 to
$36,000 during the fiscal year ended June 30, 2008 from $21,000 for the fiscal
year ended June 30, 2007. The increase was the result of an increase in the
average balance of retail repurchase agreements of $901,000 to $1.5 million
for fiscal 2008 from $575,000 for fiscal 2007, and by an increase in the
average cost on retail repurchase agreements to 3.73% for fiscal 2008 from
3.65% for fiscal 2007. Interest expense on other interest-bearing liabilities
decreased $120,000, or 7.3%, to $1.3 million for the fiscal year ended June
30, 2008 from $1.4 million for the fiscal year ended June 30, 2007. The
decrease was the result of a decrease of $2.1 million in the average balance
of other interest bearing liabilities from $24.1 million for fiscal 2007 to
$22.0 million for fiscal 2008. There was no change in the average cost of
these liabilities between fiscal 2007 and fiscal 2008. It remained at 5.76%.
Provision for Loan Losses. The provision for loan losses increased $865,000,
or 203.1%, to $1.3 million for the fiscal year ended June 30, 2008 from
$426,000 for the fiscal year ended June 30, 2007. The allowance for loan
losses was $2.7 million, or 1.59%, of gross loans at June 30, 2007 compared to
$2.8 million, or 1.65%, of gross loans at June 30, 2008. Loan charge-offs,
net of recoveries was $1.2 million for the fiscal year ended June 30, 2008
compared to $208,000 for the fiscal year ended June 30, 2007. The increase in
net loan charge-offs was the result of many of the loans identified as
problems at the end of fiscal 2007 having been charged-off, or in the case of
foreclosed real estate or repossessed assets, partially charged-off, during
fiscal year 2008. On the majority of loans charged off that had been
previsously identified as problem loans at June 30, 2007 , the charge-off was
against an allowance for loan losses that existed at June 30 2007 .
Non-interest Income. Non-interest income increased $599,000, or 26.0%, to
$2.9 million for the fiscal year ended June 30, 2008 compared to $2.3 million
for the fiscal year ended June 30, 2007. During fiscal 2008, there was an
increase of $248,000, or 13.8%, in service charges and other fee income, an
increase of $369,000, or 264.8%, in gain on the sale of loans, and a decrease
of $271,000, or 100.0%, in write-down on real estate held for investment.
These items were partially offset by decreases of $177,000, or 100.0% in gain
on the sale of securities, $55,000, or 95.4%, in gain on the sale of property
and equipment and real estate owned, $13,000, or 6.1%, in income on BOLI, and
$44,000, or 23.8% in other. The loan origination office, which opened in
March 2007, recorded gain on the sale of loans of $139,000 in fiscal 2007, and
with a full year of operations in fiscal 2008, recorded gain on the sale of
loans of $508,000.
Non-interest Expense. Non-interest expense increased $463,000, or 5.7%, to
$8.6 million for the fiscal year ended June 30, 2008 from $8.1 million for the
fiscal year ended June 30, 2007.
Compensation and employee benefits increased $122,000, or 2.8%, to $4.4
million for the fiscal year ended June 30, 2008 from $4.3 million for the
fiscal year ended June 30, 2007. The increase in compensation and benefits
included an increase of $470,000, or 13.7%, in compensation and related
payroll taxes, and an increase of $33,000, or 90.0%, in directors'
compensation. These increases were partially offset by reductions of $96,000,
or 49.9%, and $136,000, 23.3%, in defined benefit pension plan expense and
group health insurance costs, respectively. The decrease in defined benefit
pension plan expense was the result of freezing the plan in March 2006, which
reduced the annual contribution to administrative costs and significantly
lowered funding requirements. The decrease in health insurance
15
costs was the result of requiring employees to pay for a portion of the
monthly cost of their coverage. The Company's employees began to share in the
health insurance costs in January 2007, so fiscal 2008 was the first year in
which the change was effective for the entire period. In addition to these
decreases, the amount of compensation deferred under FASB 91 as part of the
cost of loan origination increased from $120,000 in fiscal 2007 to $270,000 in
fiscal 2008. This was due to updating the cost analysis for each loan type,
which resulted in more compensation expense being deferred.
Occupancy and equipment expense for the fiscal year ended June 30, 2008
increased $120,000, or 7.8%, to $1.6 million from $1.5 million during the
fiscal year ended June 30, 2007. The increase was partially attributable to
the opening of a loan production office in March 2007, and its subsequent move
to a larger facility in November 2007. The loan production office is a leased
facility located in Springfield, Missouri. In addition, the Savings Bank has
addressed some maintenance issues at the main office and the other branches.
Upgrades and additions in computer hardware and software also resulted in
increased costs, either directly or through increases in depreciation expense.
Professional fees increased $40,000, or 7.3%, from $554,000 in fiscal 2007 to
$594,000 in fiscal 2008. Included in the professional fees for fiscal 2008
was approximately $225,000 in accounting, legal and consulting work related to
the unsuccessful effort to take the Company private. Absent these items, there
would have been a substantial reduction in professional fees for fiscal 2008.
Professional fees for fiscal 2007 were significantly higher than normal due to
the use of an outside accounting firm to handle monthly closing of books,
reporting and other tasks during a two month period during fiscal 2007 when
the Company was without a Chief Financial Officer and due to higher legal and
auditing costs during the same period.
Deposit insurance premiums increased $87,000 from $22,000 in fiscal 2007 to
$109,000 in fiscal 2008, primarily as the result of higher premium assessments
from the FDIC. Additionally, growth in customer deposits contributed to the
increase.
Other non-interest expense increased by $94,000, or 5.7%, from $1.7 million
for fiscal 2007 to $1.8 million for fiscal 2008. The increase in this
category, which covers all other operating expense of the Company is related
to additional facilities, improvements in procedures and upgrades in computer
technology, as well as, general price increases.
Income Taxes. Income tax expense for the fiscal year ended June 30, 2008
totaled $69,000 compared to a benefit of $117,000 for fiscal 2007. Income
before income taxes increased by almost three and one-half times between the
year ended June 30, 2008 and the year ended June 30, 2007.
Net Interest Margin. Net interest margin for the fiscal year ended June 30,
2008 was 3.30% compared to 3.01% for the fiscal year ended June 30, 2007. The
increase in the net interest margin was the result of an increase on the yield
on interest-bearing assets and a decrease in the cost on interest-bearing
liabilities. While the ratio of interest-earning assets to interest-bearing
liabilities remained unchanged during fiscal 2008 compared to fiscal 2007, the
interest rate spread between interest-earning assets and interest-bearing
liabilities increased 30 basis points from 2.71% to 3.01%.
Average Balances, Interest and Average Yields/Costs
The earnings of the Savings Bank depend largely on the spread between the
yield on interest-earning assets (primarily loans and securities) and the cost
of interest-bearing liabilities (primarily deposit accounts and FHLB
advances), as well as the relative size of the Savings Bank's interest-earning
assets and interest-bearing liability portfolios.
16
Yields Earned and Rates Paid
The following table sets forth (on a consolidated basis) for the periods and
at the date indicated, the weighted average yields earned on the Company's and
First Home's assets, the weighted average interest rates paid on First Home's
liabilities, together with the net yield on interest-earning assets.
Years Ended June 30
At June 30, -------------------
2008 2008 2007
---- ---- ----
Weighted average yield
on loan portfolio 6.98% 7.39% 7.19%
Weighted average yield
on securities 4.82 5.29 4.46
Weighted average yield on other
interest-earning assets 1.85 3.10 5.33
Weighted average yield
on all interest-earning assets 6.24 6.64 6.49
Weighted average rate
paid on total deposits 2.61 3.37 3.50
Weighted average rate paid on retail
repurchase agreements 1.75 2.44 3.65
Weighted average rate paid on other
interest-bearing liabilities 5.75 5.85 5.76
Weighted average rate paid on
All interest-bearing liabilities 2.92 3.63 3.78
Interest rate spread (spread
between weighted average
rate on all interest-earning assets
and all interest-bearing liabilities) 3.32 3.01 2.71
Net interest margin (net interest
income (expense) as a percentage
of average interest-earning assets) N/A 3.30 3.01
The following table sets forth, for the periods indicated, information
regarding average balances of assets and liabilities as well as the total
dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities, resultant yields,
interest rate spread, net interest margin, and ratio of average
interest-earning assets to average interest-bearing liabilities.
17
Years Ended June 30,
-----------------------------------------------------------------
2008 2007
------------------------------ -------------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance(2) Dividends Cost Balance(2) Dividends Cost
--------- --------- ------ --------- --------- ------
(Dollars in thousands)
Interest-earning assets:
Loans(1) $ 161,318 $ 11,920 7.39% $ 152,182 $ 10,945 7.19%
Securities 44,780 2,370 5.29 43,229 1,927 4.46
Other 17,357 538 3.10 15,999 853 5.33
------- ------- ------- -------
Total interest-earning assets 223,455 14,828 6.64 211,410 13,725 6.49
Non-interest earning assets
Office properties and equipment, net 7,100 8,075
Real estate, net 825 325
Other non-interest earning assets 13,868 14,332
------- -------
Total assets $ 245,248 $ 234,142
======= =======
Interest-bearing liabilities:
Savings and Money Market savings accounts $ 52,556 1,700 3.23 $ 33,392 1,193 3.57
Checking and Super Saver accounts 43,126 544 1.26 51,041 753 1.48
Certificates of deposit 85,949 3,885 4.52 85,471 4,000 4.68
------- ------- ------- -------
Total deposits 181,631 6,129 3.37 169,904 5,946 3.50
Retail repurchase agreements 1,476 36 2.44 575 21 3.65
Advances from Federal Home Loan Bank 22,000 1,286 5.85 24,077 1,387 5.76
------- ------- ------- -------
Total interest-bearing liabilities 205,107 7,451 3.63 194,556 7,354 3.78
Non-interest bearing liabilities:
Other liabilities 13,045 13,074
------- -------
Total liabilities 218,152 207,630
Stockholders' equity 27,096 26,512
Total liabilities and ------- -------
stockholders' equity $ 245,248 $ 234,142
======= =======
Net interest income $ 7,377 $ 6,371
======= =======
Interest rate spread 3.01% 2.71%
Net interest margin 3.30% 3.01%
Ratio of average interest-earning
assets to average interest-
bearing liabilities 108.9% 108.7%
(1) Average balances include non-accrual loans and loans 90 days or more past
due. The corresponding interest up to the date of non-accrual status has
been included in the "Interest and Dividends" column.
(2) Average balances for a period have been calculated using the average
monthly balances for the respective year.
18
Rate/Volume Analysis
The following table presents certain information regarding changes in interest
income and interest expense of the Company and Savings Bank for the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided with respect to (i) effects on interest
income and interest expense attributable to changes in volume (changes in
volume multiplied by prior rate); (ii) effects on interest income and interest
expense attributable to changes in rate (changes in rate multiplied by prior
volume); (iii) the net changes (the sum of the previous columns). The effects
on interest income and interest expense attributable to changes in both rate
and volume are allocated to the change in volume variance and the change in the
rate variance on a pro rated basis.
2008 Compared to 2007 2007 Compared to 2006
Increase/(Decrease) Increase/(Decrease)
Due to Due to
--------------------- ---------------------
Volume Rate Net Volume Rate Net
------ ---- -- ------ ---- ---
(In thousands)
Interest-earning assets:
Loans (1) $ 671 $ 304 $ 975 $ 333 $ 200 $ 533
Securities 70 373 443 (194) 441 247
Other 62 (377) (315) (134) 166 32
Total net change in income on ----- ----- ----- ----- ----- -----
interest-earnings assets 803 300 1,103 5 807 812
----- ----- ----- ----- ----- -----
Interest-bearing liabilities:
Interest-bearing deposits 406 (223) 183 (7) 1,523 1,516
Retail repurchase agreements 33 (18) 15 21 - 21
Other interest-bearing
liabilities (101) - (101) (199) 30 (169)
----- ----- ----- ----- ----- -----
Total net change in expense on
interest-bearing liabilities 338 (241) 97 (185) 1,553 1,368
----- ----- ----- ----- ----- -----
Net change in net interest income $ 465 $ 541 $1,006 $ 190 $(746) $(556)
===== ===== ===== ===== ===== =====
(1) Includes interest on loans 90 days or more past due not on non-accrual
status.
Liquidity and Capital Resources
First Home's primary sources of funds are proceeds from principal and interest
payments on loans and securities, customer deposits, customer retail repurchase
agreements and FHLB advances. While maturities and scheduled amortization of
loans and securities are a relatively predictable source of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest
rates, economic conditions and competition.
19
The primary investing activity of First Home is the origination of mortgage
loans. Mortgage loans originated by First Home decreased by $8.3 million to
$59.1 million for the year ended June 30, 2008 from $67.4 million for the year
ended June 30, 2007. Other investing activities include the purchase of
securities, which totaled $21.2 million and $19.2 million for the years ended
June 30, 2008 and 2007, respectively. These activities were funded primarily
by principal repayments on loans, securities, and deposit growth.
OTS regulations require First Home to maintain an adequate level of liquidity
to ensure the availability of sufficient funds to support loan growth and
deposit withdrawals, to satisfy financial commitments and to take advantage of
investment opportunities. First Home's sources of funds include customer
deposits, customer retail repurchase agreements, principal and interest
payments from loans and securities, and FHLB advances. During fiscal years
2008 and 2007, First Home used its sources of funds primarily to purchase
securities, fund loan commitments and to pay maturing savings certificates and
deposit withdrawals. At June 30, 2008, First Home had approved loan
commitments totaling $793,000 and unused lines of credit totaling $1.1 million.
Liquid funds necessary for the normal daily operations of First Home are
maintained in checking accounts, a daily time account with the FHLB - Des
Moines and a repurchase agreement account at a regional bank. It is the
Savings Bank's current policy to maintain adequate collected balances in
checking accounts to meet daily operating expenses, customer withdrawals, and
fund loan demand. Funds received from daily operating activities are
deposited, on a daily basis, in one of the checking accounts and transferred,
when appropriate, to the daily time account, used to purchase investments or
reduce FHLB advances to enhance net interest income.
At June 30, 2008, certificates of deposit amounted to $87.1 million, or 44.7%,
of First Home's total deposits, including $64.7 million which are scheduled to
mature by June 30, 2009. Historically, First Home has been able to retain a
significant amount of its deposits as they mature. Management of First Home
believes it has adequate resources to fund all loan commitments with savings
deposits and FHLB advances and that it can adjust the offering rates of savings
certificates to retain deposits in changing interest rate environments.
Capital
OTS regulations require First Home to maintain specific amounts of capital. As
of June 30, 2008, First Home was in compliance with all current regulatory
capital requirements with tangible, core and risk-based capital ratios of
10.1%, 10.1% and 16.3%, respectively. These ratios exceed the 1.5%, 4.0% and
8.0% tangible, core and risk-based capital ratios required by OTS regulations.
In addition, the OTS amended its capital regulations that require savings
institutions to maintain specified amounts of regulatory capital based on the
estimated effects of changes in market rates and that could further increase
the amount of regulatory capital required to be maintained by the Savings Bank.
Consistent with our goal to operate a sound and profitable financial
organization, we actively seek to maintain a "well capitalized" institution in
accordance with regulatory standards. Total equity capital was $27.1 million
at June 30, 2008, or 10.87%, of total assets on that date. As of June 30, 2008,
we exceeded all regulatory capital requirements. Our regulatory capital ratios
at June 30, 2008 were as follows: Tier 1 (core) capital 10.05%; Tier 1
risk-based capital 15.03%; and total risk-based capital 16.27%. The regulatory
capital requirements to be considered well capitalized are 5%, 6% and 10%,
respectively.
20
Off-Balance Sheet Arrangements
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business in order to meet the financing needs of our
customers. These financial instruments generally include commitments to
originate mortgage, commercial and consumer loans, and involve to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the balance sheet. The Company's maximum exposure to credit loss
in the event of nonperformance by the borrower is represented by the
contractual amount of those instruments. Since some commitments may expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company uses the same credit policies
in making commitments as it does for on-balance sheet instruments. Collateral
is not required to support commitments.
Undisbursed balances of loans closed include funds not disbursed but committed
for construction projects. Unused lines of credit include funds not disbursed,
but committed to, home equity, commercial and consumer lines of credit.
Commercial letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Those guarantees
are primarily used to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held
varies as specified above and is required in instances where we deem it
necessary.
The following is a summary of commitments and contingent liabilities with
off-balance sheet risks as of June 30, 2008:
Commitments to originate loans
(In thousands)
Fixed rate $ 526
Adjustable rate 267
Undisbursed balance of loans closed -
Unused lines of credit 1,120
Commercial standby letters of credit 488
--------
Total $ 2,401
========
Accounting Policies
Various elements of the Company's accounting policies, by their nature, are
inherently subject to estimation techniques, valuation assumptions and other
subjective assessments. In particular, management has identified several
accounting policies that, as a result of the judgments, estimates and
assumptions inherent in those policies, are critical to an understanding of the
financial statements of the Company. These policies relate to the methodology
for the determination of the provision and allowance for loan losses and the
valuation of real estate held for sale. These policies and the judgments,
estimates and assumptions are described in greater detail in this Management's
Discussion and Analysis of Financial Condition and Results of Operations
section and in the section entitled "New accounting standards" contained in
Note 1 of the Notes to Consolidated Financial Statements. Management believes
that the judgments, estimates and assumptions used in the preparation of the
financial statements are appropriate based on the factual circumstances at the
time. However, because of the sensitivity of the
21
financial statements to these critical accounting policies, the use of other
judgments, estimates and assumptions could result in material differences in
the results of operations or financial condition.
Effect of Inflation and Changing Prices
The Consolidated Financial Statements and related financial data presented
herein have been prepared in accordance with accounting principles generally
accepted in the United States of America, which require the measurement of
financial position and operating results in terms of historical dollars,
without considering the changes in relative purchasing power of money over time
due to inflation. The primary impact of inflation on operations of First Home
is reflected in increased operating costs. Unlike most industrial companies,
virtually all the assets and liabilities of a financial institution are
monetary in nature. As a result, interest rates generally have a more
significant impact on a financial institution's performance than do general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services. During
the current interest rate environment, management believes that the liquidity
and the maturity structure of First Home's assets and liabilities are critical
to the maintenance of acceptable profitability.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity of Net Portfolio Value. The following table sets
forth the change in the Savings Bank's net portfolio value at June 30, 2008,
based on (OTS) models. Net portfolio value is the present value of expected
cash flows from assets, liabilities and off-balance sheet contracts. The
calculation is intended to illustrate the change in net portfolio value that
will occur upon an immediate and permanent change in interest rates at the
various levels of change indicated. There is no effect given to any steps that
management might take to counter the effect of that interest rate movement.
Net Portfolio as % of
Net Portfolio Value Portfolio Value of Assets
-------------------------- -------------------------
Basis Point ("bp") Dollar Dollar Percent Net Portfolio
Change in Rates Amount Change(1) Change Value Ratio(2) Change(3)
- ---------------- ------ -------- ------- ------------- --------
(Dollars in thousands)
300 bp $ 40,718 $ (548) (1)% 15.86% (3) bp
200 41,207 (60) - 15.68 8
100 41,500 234 1 16.02 13
50 41,512 246 1 16.00 11
- 41,266 - - 15.89 -
(50) 41,006 (261) (1) 15.78 (11)
(100) 40,702 (564) (1) 15.66 (24)
(1) Represents the increase (decrease) of the estimated net portfolio value
at the indicated change in interest rates compared to the net portfolio
value assuming no change in interest rates.
(2) Calculated as the estimated net portfolio value divided by the portfolio
value of total assets.
(3) Calculated as the increase (decrease) of the net portfolio value ratio
assuming the indicated change in interest rates over the estimated net
portfolio value ratio assuming no change in interest rates.
The above table illustrates, for example, that at June 30, 2008 an
instantaneous 200 basis point increase in market interest rates would decrease
the Savings Bank's net portfolio value by approximately $60,000, or less than
1%, and an instantaneous 100 basis point decrease in market interest rates
would decrease the Savings Bank's net portfolio value by $564,000, or just over
1%.
22
The following summarizes key exposure measures for the dates indicated. They
measure the change in net portfolio value ratio for a 200 basis point increase
and for a 100 basis point decrease in interest rates.
June 30, March 31, June 30,
2008 2008 2007
------ ------ ------
Pre-shock net portfolio
Value ratio 15.89% 13.70% 15.40%
Post-shock net portfolio
Value ratio (Up 200 bp) 15.98% 14.31% 14.49%
Increase (decrease) in portfolio
Value ratio (Up 200 bp) 8 bp 61 bp (91)bp
Post-shock net portfolio
Value ratio (Down 100 bp) 15.66% 13.18% 15.61%
Increase (decrease) in portfolio
Value ratio (Down 100 bp) (24)bp (52)bp 21 bp
The calculated risk exposure measures indicate the Savings Bank's interest rate
risk at June 30, 2008 has shifted from the previous year end, in that the
"shock" increase in market rates would increase the net portfolio value while
the "shock" decrease in market rates would decrease the net portfolio value.
The OTS uses certain assumptions in assessing the interest rate risk of thrift
institutions. These assumptions relate to interest rates, loan prepayment
rates, deposit decay rates, and the market values of certain assets under
differing interest rate scenarios, among others. As with any method of
measuring interest rate risk, certain shortcomings are inherent in the method
of analysis presented in the foregoing table. For example, although certain
assets and liabilities may have similar maturities or period to repricing, they
may react in different degrees to changes in market interest rates. Also, the
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other
types may lag behind changes in market interest rates. Additionally, certain
assets, such as adjustable rate mortgage loans, have features that restrict
changes in interest rates on a short-term basis and over the life of the asset.
Further, in the event of a change in interest rates, expected rates of
prepayments on loans and early withdrawals from certificates of deposit could
deviate significantly from those assumed in calculating the table.
23
Report of Independent Registered Public Accounting Firm
To the Board of Directors
First Bancshares, Inc.
Mountain Grove, Missouri
We have audited the accompanying consolidated statements of financial condition
of First Bancshares, Inc. and subsidiaries as of June 30, 2008 and 2007 and the
related consolidated statements of income, 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit 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 statements presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Bancshares,
Inc. and subsidiaries as of June 30, 2008 and 2007 and the results of their
operations and their cash flows for the years then ended in conformity with
U.S. generally accepted accounting principles.
We were not engaged to examine managements' assertion about the effectiveness
of First Bancshares, Inc.'s internal control over financial reporting as of
June 30, 2008 included in the Company's 10K filed with the Securities and
Exchange Commission and, accordingly, we do not express an opinion thereon.
/s/McGladrey & Pullen, LLP
Kansas City, Missouri
September 26, 2008
24
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- - - - - - - - - - - - - - - - - - - - - - - -
June 30, 2008 and 2007
2008 2007
ASSETS ------ ------
------
Cash and cash equivalents $ 17,010,093 $ 21,030,321
Certificates of deposit purchased 566,800 746,632
Securities available-for-sale 40,830,284 31,321,225
Securities held to maturity 4,174,886 10,786,182
Federal Home Loan Bank stock, at cost 1,613,200 1,613,800
Loans receivable, net 167,034,726 158,992,921
Loans held for sale 755,357 -
Accrued interest receivable 1,135,894 1,259,460
Prepaid expenses 243,368 360,375
Property and equipment, net 6,913,125 7,506,862
Real estate owned and other repossessed assets, net 1,205,737 293,337
Intangible assets, net 235,470 285,584
Deferred tax asset, net 795,688 817,373
Income taxes recoverable 57,653 86,380
Bank-owned life insurance 6,121,360 5,919,973
Other assets 538,121 310,334
----------- -----------
Total assets $249,231,762 $241,330,759
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits $194,593,283 $190,090,359
Retail repurchase agreements 4,647,587 2,103,105
Advances from Federal Home Loan Bank 22,000,000 22,000,000
Accrued expenses 891,320 669,202
----------- -----------
Total liabilities 222,132,190 214,862,666
----------- -----------
Commitments and contingencies (Note 13)
Preferred stock, $.01 par value; 2,000,000 shares
authorized, none issued - -
Common stock, $.01 par value; 8,000,000 shares
authorized, issued 2,895,036 in 2008 and in 2007,
outstanding 1,550,815 in 2008 and in 2007 28,950 28,950
Paid-in capital 18,019,852 17,936,224
Retained earnings-substantially restricted 28,214,183 27,850,962
Treasury stock, at cost-1,344,221 shares in 2008
and in 2007 (19,112,627) (19,112,627)
Accumulated other comprehensive loss (50,786) (235,416)
----------- -----------
Total stockholders' equity 27,099,572 26,468,093
----------- -----------
Total liabilities and stockholders' equity $249,231,762 $241,330,759
=========== ===========
See notes to the consolidated financial statements
25
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- - - - - - - - - - - - - - - - -
Years Ended June 30, 2008 and 2007
2008 2007
------ ------
Interest Income:
Loans receivable $ 11,920,427 $ 10,944,655
Securities 2,369,758 1,926,562
Other interest-earning assets 537,997 853,090
---------- ----------
Total interest income 14,828,182 13,724,307
---------- ----------
Interest Expense:
Deposits 6,128,745 5,946,278
Retail repurchase agreements 36,279 21,223
Advances from Federal Home Loan Bank 1,286,063 1,386,582
---------- ----------
Total interest expense 7,451,087 7,354,083
---------- ----------
Net interest income 7,377,095 6,370,224
Provision for loan losses 1,291,300 426,000
Net interest income after ---------- ----------
Provision for loan losses 6,085,795 5,944,224
---------- ----------
Non-interest Income:
Service charges and other fee income 2,050,561 1,802,231
Gain on the sale of loans 507,702 139,161
Gain on sale of securities - 177,000
Gain on sale of property and equipment
and real estate owned 2,653 57,913
Write-down on real estate held for investment - (271,009)
Income from bank-owned life insurance 201,387 214,480
Other 140,437 184,190
---------- ----------
Total non-interest income 2,902,740 2,303,966
---------- ----------
Non-interest Expense:
Compensation and employee benefits 4,430,314 4,307,930
Occupancy and equipment 1,646,733 1,527,115
Professional fees 594,311 553,852
Deposit insurance premiums 109,042 22,290
Other 1,776,067 1,682,550
---------- ----------
Total non-interest expense 8,556,467 8,093,737
---------- ----------
Income before income taxes 432,068 154,453
Income taxes (benefit) 68,847 (117,407)
---------- ----------
Net income $ 363,221 $ 271,860
========== ==========
Basic earnings per share $ 0.23 $ 0.18
========== ==========
Diluted earnings per share $ 0.23 $ 0.18
========== ==========
See notes to the consolidated financial statements
26
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- - - - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2008 and 2007
Common
Stock Other Total
---------------- Paid-in Retained Treasury Comprehensive Stockholders'
Shares Amount Capital Earnings Stock Income (Loss) Equity
------ ------ ------- -------- ----- ------------ ------
Balances at June 30, 2006 1,552,480 $28,950 $17,851,736 $27,703,268 $(19,085,173) $(208,212) $26,290,569
Comprehensive income:
Net income - - - 271,860 - - 271,860
Other comprehensive income, netportions of tax:
Changethe 2011 Annual Report to Stockholders that are expressly incorporated by reference in unrealized gain(loss)this Annual Report on securities available-for-sale, netForm 10-K, the 2011 Annual Report to Stockholders shall not be deemed filed as a part hereof.
| 21 | Subsidiaries of deferred income taxesthe Registrant |
| 23 | Consent of $(14,014) - - - - - (204,204) (204,204)
Reclassification adjustment - - - - - 177,000 177,000
----------
Total Comprehensive Income (Loss) 244,656
----------
Stock based compensation - - 84,488 - - - 84,488
Cash dividends ($.08 per share) - - - (124,166) - - (124,166)
Purchase of treasury stock at cost (1,665) - - - (27,454) - (27,454)
--------- ------- ---------- ---------- ---------- --------- ----------
Balances at June 30, 2007 1,550,815 28,950 17,936,224 27,850,962 (19,112,627) (235,416) 26,468,093
Comprehensive income:
Net income - - - 363,221 - - 363,221
Other comprehensive income, net of tax:
Change in unrealized gain(loss) on
securities available-for-sale, net of
deferred income taxes of $95,112 - - - - - 184,630 184,630
----------
Total Comprehensive Income 666,834
----------
Stock based compensation - - 83,628 - - - 83,628
--------- ------- ---------- ---------- ---------- --------- ----------
Balances at June 30, 2008 1,550,815 $28,950 $18,019,852 $28,214,183 $(19,112,627) $(50,786) $27,099,572
========= ======= ========== ========== ========== ========= ==========
See notes to the consolidated financial statements
27
Auditors |
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2008 and 2007
2008 2007
------ ------
Cash flows from operating activities:
Net income $ 363,221 $ 271,860
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 812,798 757,492
Amortization 50,114 50,115
Net premium amortization and (discount accretion)
on securities (151,357) (105,339)
Stock based compensation 83,628 84,488
(Gain) loss on sale of securities - (177,000)
Provision for loan losses 1,291,300 426,000
Provision for loss on real estate owned 27,850 7,000
Write down on real estate held for investment - 271,009
Gain on the sale of loans (507,702) (139,161)
Proceeds from the sale of loans originated for
sale 22,851,155 9,039,543
Loans originated for sale (21,444,857) (8,900,382)
Deferred income taxes (73,427) (98,579)
Gain on sale of property and equipment
and real estate owned (29,286) (66,618)
Loss on the sale of other repossessed assets 18,252 -
Increase in cash surrender value on bank-owned
life insurance (201,387) (214,480)
Net change in operating accounts:
Accrued interest receivable, prepaid expenses
and other assets 445,691 (130,048)
Deferred loan costs (133,844) 13,744
Income taxes recoverable 28,727 230,376
Accrued expenses 222,118 (293,691)
---------- ----------
Net cash provided by operating activities 3,652,994 1,026,329
---------- ----------
Cash flows from investing activities:
Purchase of securities available-for-sale (21,172,637) (18,902,694)
Purchase of securities held-to-maturity - (345,000)
Proceeds from sale of securities available-for-sale - 1,986,000
Proceeds from maturities of securities
available-for-sale 12,097,222 6,513,834
Proceeds from maturities of securities
held-to-maturity 6,608,751 8,961,543
Purchase of Federal Home Loan Bank stock - (85,600)
Proceeds from redemption of Federal Home Loan
Bank stock 600 83,600
Net change in certificates of deposit 179,832 3,080,215
Net change in loans receivable (12,409,241) (17,951,445)
Purchases of property and equipment (473,450) (624,727)
Proceeds from sale of property and equipment 287,112 92,636
Proceeds from sale of real estate owned 161,183 821,281
---------- ----------
Net cash used in investing activities (14,720,628) (16,370,357)
---------- ----------
Continued
28
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
- - - - - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2008 and 2007
2008 2007
---------- ----------
Cash flows from financing activities:
Net change in deposits $ 4,502,924 $10,949,219
Net change in retail repurchase agreements 2,544,482 2,103,105
Payments on borrowed funds - (3,000,000)
Proceeds from borrowed funds - 3,000,000
Cash dividends paid - (124,166)
Purchase of treasury stock - (27,454)
---------- ----------
Net cash provided by financing activities 7,047,406 12,900,704
---------- ----------
Net decrease in cash and cash equivalents (4,020,228) (2,443,324)
Cash and cash equivalents -
beginning of period 21,030,321 23,473,645
Cash and cash equivalents - ---------- ----------
end of period $17,010,093 $21,030,321
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and
other borrowings $ 7,480,518 $ 7,342,359
Income taxes 17,300 18,585
Supplemental schedule of non-cash investing and
financing activities:
Loans transferred to real estate owned $ 1,155,722 $ 533,243
See notes to consolidated financial statements
29
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2008 and 2007
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Nature of business - First Bancshares, Inc., a Missouri corporation
("Company"), was organized on September 30, 1993 for the purpose of
becoming a unitary savings and loan holding company for First Home
Savings Bank ("Savings Bank"). The Savings Bank is primarily engaged
in providing a full range of banking and mortgage services to
individual and corporate customers in southern Missouri. The Company
and Savings Bank are also subject to the regulation of certain
federal and state agencies and undergo periodic examinations by those
regulatory authorities.
Principles of consolidation - The accompanying consolidated financial
statements include the accounts of the Company, and its wholly-owned
subsidiaries, the Savings Bank and SCMG, Inc. (formerly South Central
Missouri Title, Inc.) and the wholly-owned subsidiaries of the
Savings Bank, Fybar Service Corporation and First Home Investments.
In consolidation, all significant intercompany balances and
transactions have been eliminated.
Estimates - In preparing the consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America, management is required to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of
the date of the balance sheet and reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the
determination of the fair value of financial instruments and the
allowance for loan losses.
Segment reporting - An operating segment is defined as a component of a
business for which separate financial information is available that
is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and evaluate performance. The
Company has one operating segment, community banking.
Consolidated statements of cash flows - For purposes of the consolidated
statements of cash flows, cash consists of cash on hand and deposits
with other financial institutions. Cash equivalents include
highly-liquid instruments with an original maturity of three months
or less.
Securities - Securities which are designated as held-to-maturity are
designated as such because the Company has the ability and intent to
hold these securities to maturity. Such securities are reported at
amortized cost.
30
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2008 and 2007
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
All other securities are designated as available-for-sale, a
designation which provides the Company with certain flexibility in
managing its investment portfolio. Such securities are reported at
fair value; net unrealized gains and losses are excluded from income
and reported net of applicable income taxes as a separate component
of Stockholders' equity.
Interest income on securities is recognized on the interest method
according to the terms of the security. Gains or losses on sales of
securities are recognized in operations at the time of sale and are
determined by the difference between the net sales proceeds and the
cost of the securities using the specific identification method,
adjusted for any unamortized premiums or discounts. Premiums or
discounts are amortized or accreted to income using the interest
method over the period to maturity.
Declines in fair value of individual securities below their amortized
cost that are determined to be other than temporary result in
write-downs of the individual securities to their fair value with the
resulting write-downs included in current earnings as realized
losses. In estimating other-than-temporary impairment losses,
management considers independent price quotations, projected target
prices of investment analysis within the short term, the financial
condition of the issuer, the length of time and the extent to which
the fair value has been less than cost, and the intent and ability of
the Company to retain its investment in the issues for a period of
time sufficient to allow for any anticipated recovery in fair value.
Federal Home Loan Bank stock - The Savings Bank, as a member of the
Federal Home Loan Bank ("FHLB") system, is required to maintain an
investment in capital stock of the FHLB of Des Moines. No ready
market exists for this stock and it has no quoted market value. The
stock is subject to repurchase by the FHLB at par and is reported at
cost.
Loans receivable - Loans receivable are stated at their principal amount
outstanding, net of deferred loan origination fees and certain direct
costs. Loan origination fees and certain direct loan origination
costs are deferred and recognized in interest income over the
contractual lives of the related loans using the interest method.
When a loan is paid-off, the unamortized balance of these deferred
fees and costs is recognized in income.
Interest income on loans is recognized on an accrual basis.
The accrual of interest on impaired loans is discontinued when it is
determined that the payment of interest or principal is doubtful of
collection, or when interest or principal is past due 90 days or
more. The interest on these loans is accounted for on the cash-basis
method, until qualifying for return to accrual. Any accrued but
uncollected interest previously recorded on such loans is generally
reversed in the current period and interest income is subsequently
recognized upon collection.
31
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2008 and 2007
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Loans are returned to accrual status when all the principal and
interest amounts contractually due are brought current and future
payments are reasonably assured.
Allowance for loan losses - The allowance for loan losses is established
as losses are estimated to have occurred through a provision for loan
losses charged to earnings. Loan losses are charged against the
allowance when management believes the uncollectibility of a loan
balance is confirmed. Subsequent recoveries, if any, are credited
to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based on Management's periodic review of the
collectibility of the loans in light of historical experience, the
nature and volume of the loan portfolio, adverse situations that may
affect the borrower's ability to repay, estimated value of any
underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes
available.
The allowance consists of specific and general components. The
specific component relates to loans that are classified as doubtful,
substandard or special mention. For such loans that are also
classified as impaired, an allowance is established when the
discounted cash flows (or collateral value or observable market
price)of the impaired loan is lower than the carrying value of that
loan. The general component covers non-classified loans and is based
on historical loss experience adjusted for qualitative factors.
A loan is considered impaired when, based on current information and
events, it is probable that the Savings Bank will be unable to
collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Factors
considered by management in determining impairment include payment
status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not
classified as impaired. Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking
into consideration all of the circumstances surrounding the loan and
the borrower, including the length of the delay, the reasons for the
delay, the borrower's prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. Impairment
is measured on a loan-by-loan basis for commercial and real estate
loans by either the present value of expected future cash flows
discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the
loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Savings Bank does not
separately identify individual consumer loans for impairment
disclosures.
32
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2008 and 2007
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Loans held for sale - Loans held for sale are originated on a loan by loan
basis with terms established with both the borrower and the investor
prior to commitment and closing. Funding by the investor, based on
the established terms, generally takes place in three to four weeks.
Loans held for sale are carried at carried at cost, which
approximates fair value, due to the short term nature of the loans.
Gains on loans sold are recognized based on the net cash flow of each
sale.
Property and equipment and related depreciation - Property and equipment
has been stated at cost, net of accumulated depreciation. Property
and equipment depreciation has been principally computed by applying
the following methods and estimated lives:
Category Estimated Life Method
-------------------------- -------------- -------------
Automobiles 5 Years Straight-line
Office furniture, fixtures
and equipment 3-10 Years Straight-line
Buildings 15-40 Years Straight-line
Investment real estate 15-40 Years Straight-line
Intangible assets - The intangible asset relates to customer relationships
that were acquired in connection with the acquisition of two
branches. The premium paid by the Savings Bank for the branches is
being amortized on a straight-line basis over 15 years.
Bank-owned life insurance - Bank-owned life insurance is carried at its
cash surrender value. Changes in cash surrender value are recorded
in non-interest income.
Income taxes - Deferred taxes are determined using the liability (or
balance sheet) method whereby deferred tax assets are recognized for
deductible temporary differences and operating loss and tax credit
carry-forwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities
and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
The Company adopted the provisions of Financial Accounting Standards
Board (FASB) Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN 48), as of July 1, 2007. The Interpretation
provides clarification on accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with
FASB Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. The Interpretation prescribes a
recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. As a result of the Company's
evaluation of the implementation of FIN 48, no significant income tax
uncertainties were identified. Therefore, the Company recognized no
33
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2008 and 2007
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
adjustment for unrecognized income tax benefits during the year ended
June 30, 2008.
Real estate owned and repossessed assets - Includes real estate and other
assets acquired in the settlement of loans, which, is recorded at
the lower of the remaining loan balance or estimated fair value less
the estimated costs to sell the asset. Any write down at the time of
foreclosure/repossession is charged against the allowance for loan
losses. Subsequently, net expenses related to holding the property
and declines in the market value are charged against income.
Earnings per share - Basic earnings per share is computed by dividing net
income available to common stockholders by the weighted average
number of common shares outstanding during the period. Diluted
earnings per share reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised
or resulted in the issuance of common stock that would share in the
earnings of the Company. Dilutive potential common shares are added
to weighted average shares used to compute basic earnings per share.
The number of shares that would be issued from the exercise of stock
options has been reduced by the number of shares that could have been
purchased from the proceeds at the average market price of the
Company's stock.
Comprehensive income - Accounting principles generally require that
recognized revenue, expenses, gains and losses be included in net
income. Although certain changes in assets and liabilities, such as
unrealized gains and losses on available-for-sale securities, are
reported as a separate component of the equity section of the balance
sheet, such items, along with net income, are components of
comprehensive income.
Employee stock options - The Company has stock-based employee compensation
plans which are described more fully in Note 10, Employee Benefit
Plans.
Effective July 1, 2006, the Company is required to account for stock
options using Statement of Financial Accounting Standards ("SFAS")
SFAS No. 123(R), "Share-Based Payment". It requires that all
stock-based compensation be measured at fair value and recognized as
expense in the income statement. This Statement also clarifies and
expands guidance on measuring fair value of stock compensation,
requires estimation of forfeitures when determining expense, and
requires that excess tax benefits be shown as financing cash inflows
versus a reduction of taxes paid in the statement of cash flows.
Revenue recognition - Deposit account transaction fees and other ancillary
non-interest income related to the Savings Bank's deposit and lending
activities are recognized as services are performed.
Transfers of financial assets - Transfers of financial assets are
accounted for as sales only when control over the assets has been
surrendered. Control over transferred assets is deemed to be
surrendered when: (1) the assets have been isolated from the Company,
(2) the transferee obtains the right to pledge or exchange the assets
it received, and no
34
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2008 and 2007
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
condition both constrains the transferee from taking advantage of its
right to pledge or exchange and provides more than a modest benefit
to the transferor, and (3) the Company does not maintain effective
control over the transferred assets through an agreement to
repurchase them before their maturity or the ability to unilaterally
cause the holder to return specific assets.
Impairment of long-lived assets - Long-lived assets, including property
and equipment, real estate held for investment and intangible assets,
are reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be
recoverable. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets.
New accounting standards - In September 2006, the FASB issued SFAS No.
157, "Fair Value Measurements." This Statement defines fair value,
establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. It clarifies that fair
value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants in the market in which the reporting entity transacts.
This Statement does not require any new fair value measurements, but
rather, it provides enhanced guidance to other pronouncements that
require or permit assets or liabilities to be measured at fair value.
This Statement is effective for fiscal years beginning after November
15, 2007, with earlier adoption permitted. However, in February 2008,
FASB decided that an entity need not apply this standard to
non-financial assets and liabilities that are recognized or disclosed
at fair value in the financial statements on a non-recurring basis
until the subsequent year. Accordingly, adoption of this standard on
July 1, 2008 will be limited financial assets and liabilities, and
any non-financial assets and liabilities recognized or disclosed at
fair value on a recurring basis. The Company does not expect that the
adoption of this Statement will have a material impact on its
financial position, results of operation or cash flows.
In February 2007, the Financial Accounting Standards Board (FASB)
issued FASB Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115, which provides all entities, including
not-for-profit organizations, with an option to report selected
financial assets and liabilities at fair value. The objective of the
Statement is to improve financial reporting by providing entities
with the opportunity to mitigate volatility in earnings caused by
measuring related assets and liabilities differently without having
to apply the complex provisions of hedge accounting. Certain
specified items are eligible for the irrevocable fair value
measurement option as established by Statement No. 159. Statement
No. 159 is effective as of the beginning of an entity's first fiscal
year beginning after November 15, 2007. The Company did not elect
any fair value options as of July 1, 2008.
35
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2008 and 2007
(2) SECURITIES
----------
A summary of the securities available-for-sale at June 30, 2008 is as
follows:
Gross Unrealized Estimated
Amortized ------------------ Fair
Cost Gains Losses Value
United States Government and --------- ------ ------- ---------
Federal agency obligations $5,439,272 $23,308 $(55,930) $5,406,650
Obligations of states and
political subdivisions 1,165,000 705 1,165,705
Mutual funds 21,682 - - 21,682
Federal agency mortgage
back securities 34,023,279 220,594 (265,626) 33,978,247
Common and preferred stocks 258,000 - - 258,000
---------- ------- ------- ----------
Total $40,907,233 $244,607 $(321,556) $40,830,284
========== ======= ======= ==========
A summary of securities held to maturity at June 30, 2008 is as follows:
Gross Unrealized Estimated
Amortized ------------------ Fair
Cost Gains Losses Value
--------- ------ ------- ---------
United States Government and
Federal agency obligations $ 750,000 $ 7,973 $ - $ 757,973
Obligations of states and
political subdivisions 1,943,330 16,016 (1,990) 1,957,356
Federal agency mortgage
back securities 1,481,556 1,069 (79,706) 1,402,919
--------- ------ ------- ---------
Total $4,174,886 $25,058 $(81,696) $4,118,248
========== ======= ======= ==========
The amortized cost and estimated market value of securities at June 30,
2008, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Available for Sale
-------------------------
Amortized Estimated
Cost Fair Value
--------- ----------
Due in one year or less $ 1,999,452 $ 2,003,169
Due after one year through five years 3,494,820 3,487,142
Due after five years through ten years 1,110,000 1,082,044
--------- ---------
Subtotal 6,604,272 6,572,355
Mutual funds 21,682 21,682
Federal agency mortgage-backed securities 34,023,279 33,978,247
Common and preferred stocks 258,000 258,000
---------- ----------
Total $40,907,233 $40,830,284
========== ==========
36
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2008 and 2007
(2) SECURITIES (CONTINUED)
----------------------
Held to Maturity
----------------------------
Amortized Estimated
Cost Fair Value
--------- --------
Due in one year or less $ 990,013 $ 998,601
Due after one year through five years 984,736 996,449
Due after five years through ten years 718,581 720,279
Due after ten years - -
--------- --------
Subtotal 2,693 330 2,715,329
Federal agency mortgage-backed securities 1,481,556 1,402,919
--------- --------
Total $4,174,886 $4,118,248
========= =========
A summary of the securities available-for-sale at June 30, 2007 is as
follows:
Gross Unrealized Estimated
Amortized ------------------ Fair
Cost Gains Losses Value
--------- ------ ------- ---------
United States Government and
Federal agency obligations $6,751,838 $ - $(42,045) $6,709,793
Obligations of states and
political subdivisions 1,180,000 - (3,502) 1,176,498
Mutual funds 23,464 - - 23,464
Federal agency mortgage
back securities 23,464,614 1,551 (312,695) 23,153,470
Common and preferred stocks 258,000 - - 258,000
--------- ------ ------- ---------
Total $31,677,916 $1,551 $(358,242) $31,321,225
========== ====== ======= ==========
A summary of securities held to maturity at June 30, 2007 is as follows:
Gross Unrealized Estimated
Amortized ------------------ Fair
Cost Gains Losses Value
--------- ------ ------- ---------
United States Government and
Federal agency obligations $6,750,000 $ 1,250 $(56,247) $6,695,003
Obligations of states and
political subdivisions 2,333,655 5,775 (15,449) 2,323,981
Federal agency mortgage
back securities 1,702,527 321 (107,173) 1,595,675
--------- ------ ------- ---------
Total $10,786,182 $ 7,346 $(178,869) $10,614,659
========== ====== ======= ==========
The following tables present the fair value and gross unrealized losses
of the Company's securities with unrealized losses aggregated by category
and length of time that individual securities have been in a continuous
unrealized loss position, at June 30, 2008 and 2007.
37
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2008 and 2007
(2) SECURITIES (CONTINUED)
----------------------
Available-for-sale as of June 30, 2008
------------------------------------------------------------------------------
Less Than 12 Months 12 Months or More Total
---------------------- ---------------------- ----------------------
Gross Gross Gross
Unrealized Unrealized Unrealized
Fair Value (Losses) Fair Value (Losses) Fair Value (Losses)
---------- ---------- ---------- ---------- ---------- ----------
United States Government and
Federal agency obligations $ 1,944,070 $(55,930) $ - $ - $1,944,070 $(55,930)
Obligations of states and
political subdivisions - - - - - -
Federal agency mortgage-backed
securities 15,195,480 (265,626) - - 15,195,480 (265,626)
---------- -------- --------- ------- ---------- --------
Total temporarily impaired
securities $17,139,550 $(321,556) $ - $ - $17,139,550 $(321,556)
========== ======== ========= ======= ========== ========
| 31.1 | Rule 13a – 14(a) Certification (Chief Executive Officer) |
Held to Maturity as of June 30, 2008
------------------------------------------------------------------------------
Less Than 12 Months 12 Months or More Total
---------------------- ---------------------- ----------------------
Gross Gross Gross
Unrealized Unrealized Unrealized
Fair Value (Losses) Fair Value (Losses) Fair Value (Losses)
---------- ---------- ---------- ---------- ---------- ----------
United States Government and
Federal agency obligations $ - $ - $ - $ - $ - $ -
Obligations of states and
political subdivisions - - 201,592 (1,990) 201,592 (1,990)
Federal agency mortgage-backed
securities - - 1,108,411 (79,706) 1,108,411 (79,706)
---------- ---------- ---------- --------- ---------- ---------
Total temporarily impaired
securities $ - $ - $1,310,003 $ (81,696) $1,310,003 $ (81,696)
========== ========== ========== ========= ========== =========
38
| 31.2 | Rule 13a – 14(a) Certification (Chief Financial Officer) |
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2008 and 2007
(2) SECURITIES (CONTINUED)
----------------------
Available-for-sale as of June 30, 2007
------------------------------------------------------------------------------
Less Than 12 Months 12 Months or More Total
---------------------- ---------------------- ----------------------
Gross Gross Gross
Unrealized Unrealized Unrealized
Fair Value (Losses) Fair Value (Losses) Fair Value (Losses)
---------- ---------- ---------- ---------- ---------- ----------
United States Government and
Federal agency obligations $1,676,465 $ (11,610) $5,033,328 $ (30,435) 6,709,793 $ (42,045)
Obligations of states and
political subdivisions 1,107,819 (2,181) 68,679 (1,321) 1,176,498 (3,502)
Federal agency mortgage-backed
securities 16,886,532 (201,088) 5,266,010 (111,607) 22,152,542 (312,695)
---------- ---------- ---------- --------- ---------- ---------
Total temporarily impaired
securities $19,670,816 $(214,879) $10,368,017 $(143,363) $30,038,833 $(358,242)
========== ========= ========== ========= ========== ========
| 32.1 | Rule 1350 Certification (Chief Executive Officer) |
Held to Maturity as of June 30, 2007
------------------------------------------------------------------------------
Less Than 12 Months 12 Months or More Total
---------------------- ---------------------- ----------------------
Gross Gross Gross
Unrealized Unrealized Unrealized
Fair Value (Losses) Fair Value (Losses) Fair Value (Losses)
---------- ---------- ---------- ---------- ---------- ----------
United States Government and
Federal agency obligations $ - $ - $4,943,753 $ (56,247) $4,943,753 $ (56,247)
Obligations of states and
political subdivisions 511,813 (3,218) 971,687 (12,231) 1,483,500 (15,449)
Federal agency mortgage-backed
securities - - 1,563,976 (107,173) 1,563,976 (107,173)
---------- ---------- ---------- --------- ---------- ---------
Total temporarily impaired
securities $ 511,813 $ (3,218) $7,479,416 $(175,651) $7,991,229 $(178,869)
========== ========== ========= ========= ========= ========
| 32.2 | Rule 1350 Certification (Chief Financial Officer) |
The unrealized losses are related to changes in interest rates and not
from the deterioration in the creditworthiness of the issuer and, as
such, are considered by the Company to be temporary. In addition, the
Company has the ability and intent to hold these investments for a
period of time sufficient to allow for an anticipated recovery.
39
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2008 and 2007
(2) SECURITIES (CONTINUED)
----------------------
The following table presents proceeds from sales of securities and the
gross realized securities gains and losses.
June 30,
-----------------------------
2008 2007
------ ------
Proceeds from sales $ - $1,986,000
======== ==========
Realized gains $ - $ 177,000
Realized (losses) - -
-------- ----------
Net realized (losses) $ - $ 177,000
======== ==========
The carrying value of securities pledged on retail repurchase agreements
at June 30, 2008 and June 30, 2007 was $5,407,000 and $2,496,000,
respectively.
(3) LOANS RECEIVABLE
----------------
Loans receivable at June 30 consist of the following:
2008 2007
------ ------
Residential real estate $ 75,992,066 $ 86,530,040
Commercial real estate 53,730,159 40,331,248
Land 10,755,522 9,094,838
Loans to depositors, secured by savings accounts 1,468,078 1,503,530
Consumer and automobile loans 8,575,973 10,387,221
Second mortgage loans 7,103,278 4,828,083
Commercial business loans 11,768,789 8,700,087
Overdrafts 133,978 140,268
----------- -----------
Total gross loans 169,527,843 161,515,315
Allowance for loan losses (2,796,836) (2,692,594)
Loans in process - (984)
Unamortized deferred loan costs, net
of origination fees 303,719 171,184
----------- -----------
Net loans receivable $167,034,726 $158,992,921
=========== ===========
40
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2008 and 2007
(3) LOANS RECEIVABLE (CONTINUED)
----------------------------
Activity in the allowance for loan losses is summarized as follows for the
years ended June 30:
2008 2007
------ ------
Balance at beginning of year $ 2,692,594 $ 2,474,439
Provision charged to income 1,291,300 426,000
Charge-offs (1,223,380) (372,428)
Recoveries 36,322 164,583
--------- ---------
Balance at end of year $ 2,796,836 $ 2,692,594
========= =========
The Savings Bank primarily grants loans to customers throughout southern
Missouri. The loans are typically secured by real estate or personal
property.
Loans receivable at June 30, 2008 and 2007 that are past 90 days due or
non-accrual consist of the following:
2008 2007
------ ------
Past due 90 days or more and still accruing interest $359,846 $358,965
Non-accrual 2,312,977 2,889,180
--------- ---------
$2,672,823 $3,248,145
========= =========
The following is a summary of information pertaining to impaired loans:
June 30,
-------------------
2008 2007
------ ------
Total impaired loans $ 2,672,823 $ 3,248,145
========= =========
Total impaired loans without an allowance $ - $ 609,116
========= =========
Total impaired loans with an allowance $ 2,672,823 $ 2,639,029
========= =========
Valuation allowance related to impaired loans $ 361,267 $ 896,760
========= =========
Years Ended June 30,
-------------------
2008 2007
------ ------
Average investment in impaired loans $ 2,895,808 $ 1,715,588
========= =========
Interest income recognized on impaired loans $ 72,909 $ 105,502
========= =========
Interest income recognized on a cash basis on
impaired loans $ 72,909 $ 105,502
========= =========
41
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2008 and 2007
(4) PROPERTY AND EQUIPMENT
----------------------
Property and equipment at June 30 consists of the following:
2008
--------------------------------------
Accumulated
Category Cost Depreciation Net
-------------------------- --------- ------------ ---------
Land $ 635,204 $ - $ 635,204
Buildings 5,620,504 2,230,141 3,390,363
Office furniture, fixtures
and equipment 4,290,287 3,039,240 1,251,047
Automobiles 132,530 43,873 88,657
Investment real estate 2,187,025 639,171 1,547,854
---------- --------- ---------
Total $12,865,550 $5,952,425 $6,913,125
========== ========= =========
2007
--------------------------------------
Accumulated
Category Cost Depreciation Net
-------------------------- --------- ------------ ---------
Land $ 635,204 $ - $ 635,204
Buildings 5,582,042 2,059,723 3,522,319
Office furniture, fixtures
and equipment 3,923,448 2,481,701 1,441,747
Automobiles 100,076 32,295 67,781
Investment real estate 2,544,420 704,609 1,839,811
---------- ---------- ---------
Total $12,785,190 $ 5,278,328 $7,506,862
========== ========== =========
Depreciation charged to operations for the years ended June 30, 2008 and
2007 was $812,798 and $757,492, respectively.
The Savings Bank's offices in Theodosia and Springfield, as well as the
Loan Origination Office in Springfield, are leased. The lease on the
Theodosia office is renewable on an annual basis. The lease on the
Springfield office was assumed and it has seven years remaining on the
initial term. The monthly rent under this lease is subject to annual
adjustments based on the annual change in a base index. The lease on the
original Loan Production Office has an initial term of two years and
expires at the end of October 2008. The new loan production office has an
initial term of five years and expires in November 2012. The Savings Bank
also leases three ATM drive-up kiosks located in the parking lots of a
major retailer in Mountain Grove, Marshfield and Ava, Missouri. These
leases were entered into in the third quarter of fiscal 2008, and were for
a four year term.
Minimum future lease payments for leased facilities, including leased
ATMs, for the years ending June 30 are as follows:
2009 $ 262,451
2010 248,058
2011 249,652
2012 229,068
2013 126,191
Thereafter 184,387
---------
$ 1,299,807
=========
42
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2008 and 2007
(4) PROPERTY AND EQUIPMENT (CONTINUED)
----------------------------------
Rent expense for the years ended June 30, 2008 and 2007 was $220,565 and
$139,613, respectively.
(5) INTANGIBLE ASSET
----------------
A summary of the intangible asset at June 30 is as follows:
2008 2007
------ ------
Premium on branch acquisition $ 1,020,216 $ 1,020,216
Accumulated amortization (784,746) (734,632)
--------- ---------
Net premium on branch acquisition $ 235,470 $ 285,584
========= =========
Amortization expense relating to this premium was $50,114 in 2008 and
$50,115 in 2007.
Estimated future amortization expense is as follows for the years ending
June 30:
2009 $ 50,115
2010 50,115
2011 50,115
2012 50,115
Thereafter 35,010
-------
$ 235,470
=======
(6) DEPOSITS
--------
A summary of deposit accounts at June 30 is as follows:
2008 2007
------ ------
Non-interest-bearing checking $ 12,338,284 $ 12,715,947
Interest-bearing checking 32,112,206 31,807,750
Super Saver money market 12,386,264 12,609,062
Savings 10,737,807 13,375,164
Money Market savings accounts 39,904,058 36,286,508
Certificates of Deposit 87,114,664 83,295,928
----------- -----------
Total $ 194,593,283 $190,090,359
=========== ===========
The aggregate amount of certificates of deposit with a minimum
denomination of $100,000 was $26,956,997 and $22,549,073 at June 30, 2008
and 2007, respectively.
At June 30, 2008, scheduled maturities of certificates of deposit are as
follows:
Fiscal 2009 $ 64,733,960
2010 12,608,656
2011 4,598,129
2012 3,541,813
2013 1,632,106
----------
$ 87,114,664
==========
43
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2008 and 2007
(7) RETAIL REPURCHASE AGREEMENTS
----------------------------
In December 2006, the Savings Bank began to offer retail repurchase
agreements as an additional item in its product mix. Retail repurchase
agreements allow customers to have excess checking account balances
"swept" from the checking accounts into a non-insured interest bearing
account. The customers' investment in these non-insured accounts is
collateralized by securities of the Savings Bank pledged at FHLB for that
purpose.
(8) ADVANCES FROM FEDERAL HOME LOAN BANK
------------------------------------
The advances listed below were obtained from the FHLB of Des Moines. The
advances are secured by FHLB stock and a blanket pledge of qualifying
one-to-four family mortgage loans. Advances from the FHLB at June 30 are
summarized as follows:
Weighted Weighted
Average Average
2008 Rate 2007 Rate
Term Advances: ------ ---- ------ ----
Long-term; fixed-rate;
callable quarterly $ 19,000,000 5.88% $ 19,000,000 5.88%
Long-term; fixed-rate;
non-callable 3,000,000 4.94 3,000,000 4.94
---------- ----------
Total $ 22,000,000 5.75% $ 22,000,000 5.75%
========== ==========
As of June 30, 2008 the fixed-rate term advances shown above were subject
to a prepayment fee equal to 100 percent of the present value of the
monthly lost cash flow to the FHLB based upon the difference between the
contract rate on the advance and the rate on an alternative qualifying
investment of the same remaining maturity. Advances may be prepaid
without a prepayment fee if the rate on an advance being prepaid is equal
to or below the current rate for an alternative qualifying investment of
the same remaining maturity.
Maturities of FHLB advances are as follows:
Aggregate
Annual
Year Ended June 30 Maturities
------------------ ----------
2009 $ -
2010 19,000,000
2011 -
2012 -
2013 3,000,000
----------
$ 22,000,000
==========
At June 30, 2008, the Savings Bank had irrevocable letters of credit
issued on its behalf from the FHLB totaling $5,585,000, as collateral for
public entity deposits in excess of federal insurance limits. The letters
of credit expire July 2008 through November 2009.
44
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2008 and 2007
(9) INCOME TAXES
------------
The provision for income taxes (benefit) for the years ended June 30 is as
follows:
2008 2007
------ ------
Current $ 142,274 $ (17,982)
Deferred (73,427) (99,425)
------- --------
Total $ 68,847 $(117,407)
======= ========
The provision for income taxes (benefit) differs from that computed at the
statutory corporate rate, 34%, for the years ended June 30 as follows:
2008 2007
------ ------
Tax at stautory rate $ 146,903 $ 52,514
Increase (decrease) in taxes resulting from:
State taxes, net of federal benefit (13,127) (5,433)
Tax-exempt income (39,167) (43,420)
Bank-owned life insurance (68,472) (72,923)
Dividends received deduction (2,423) (18,921)
Change in valuation allowance 472 (21,910)
Stock based compensation 28,434 28,762
Net effect of other book/tax differences 16,227 (36,076)
------- --------
Provision for income taxes $ 68,847 $(117,407)
======= ========
The components of deferred tax assets and liabilities as of June 30, 2008
and 2007 consisted of:
2008 2007
------ ------
Deferred tax assets:
Reserve for loan losses $ 1,027,146 $ 990,297
Book amortization in excess of tax
amortization 31,119 37,742
Compensated employee absences 24,698 28,375
State net operating loss carry-forwards 73,778 51,644
Capital loss carry-forwards 1,080 22,742
Net unrealized loss on available for sale
securities 26,163 121,275
Other 46,444 45,046
--------- ---------
1,230,428 1,297,121
Valuation allowance (74,858) (74,386)
--------- ---------
Total net deferred tax assets $ 1,155,570 $ 1,222,735
========= =========
Deferred tax liabilities:
Premises and equipment $ (127,998) $ (198,259)
FHLB stock dividends (60,714) (60,936)
Prepaid expenses (58,794) (82,829)
Unamortized deferred loan costs, net of fees (112,376) (63,338)
--------- ---------
Total gross deferred tax liabilities $ (359,882) $ (405,362)
--------- ---------
Total net deferred tax assets $ 795,688 $ 817,373
========= =========
45
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2008 and 2007
(9) INCOME TAXES (CONTINUED)
------------------------
In accordance with SFAS No. 109, a deferred tax liability has not been
recognized for tax basis bad debt reserves of approximately $2,190,825 of
the Savings Bank that arose in tax years that began prior to December 31,
1987. At June 30, 2008 the amount of the deferred tax liability that had
not been recognized was approximately $811,000. This deferred tax
liability could be recognized if, in the future, there is a change in
federal tax law, the Savings Bank fails to meet the definition of a
"qualified savings institution," as defined by the Internal Revenue Code,
certain distributions are made with respect to the stock of the Savings
Bank, or the bad debt reserves are used for any purpose other than
absorbing bad debts.
During the years ended June 30, 2008 and 2007, the Company recorded a
valuation allowance of $74,386 and $74,858, respectively, on the deferred
tax assets to reduce the total to an amount that management believes will
ultimately be realized. Realization of deferred tax assets is dependent
upon sufficient future taxable income during the period that deductible
temporary differences and carry forwards are expected to be available to
reduce taxable income.
(10) EMPLOYEE BENEFIT PLANS
----------------------
The Savings Bank had participated in a multiple-employer defined benefit
pension plan covering substantially all employees. In fiscal 2006, the
Savings Bank opted to freeze the plan. Participants in the plan became
entitled to their vested benefits at the date it was frozen. The Savings
Bank limited its future obligations to the funding amount required by the
annual actuarial evaluation of the plan and administrative costs. No
participants will be added to the plan. Pension expense for the years
ended June 30, 2008 and 2007 was approximately $38,000 and $147,000,
respectively. This plan is not subject to the requirements of FAS 158.
The First Home Savings Bank Employee Stock Ownership and 401(k) Plan
covers all employees that are age 21 and have completed six months of
service. The Company makes contributions on a matching basis of up to 3%
on employee deferrals. Expense for the ESOP and 401(k) plan for the years
ended June 30, 2008 and 2007 was $58,039 and $40,986, respectively.
Effective July 1, 2006, the Company adopted SFAS No. 123R, Share-based
Payments, using the modified prospective transition method. Prior to that
date the Company accounted for stock option awards under APB Opinion No.
25, Accounting for Stock Issued to Employees. In accordance with SFAS No.
123R, compensation expense for stock-based awards is recorded over the
vesting period at the fair values of the award at the time of the grant.
The recording of such compensation began on July 1, 2006 for shares not
yet vested as of that date and for all new grants subsequent to that date.
Prior years' results have not been restated. The exercise price of options
granted under the Company's incentive plans is equal to the fair market
value of the underlying stock at the grant date. The Company assumes no
projected forfeiture rates on its stock-based compensation.
The Company's 2004 Stock Option and Incentive Plan has authorized the
grant of options to certain officers, employees and directors for up to
100,000 shares of the Company's common stock. All options granted have 10
year terms and vest and become exercisable ratably over
46
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2008 and 2007
(10) EMPLOYEE BENEFIT PLANS (CONTINUED)
----------------------------------
five years following the date of grant. The plan was approved by
shareholders in October 2004.
The Company's 2004 Management Recognition Plan has authorized the award of
shares to certain officers, employees and directors for up to 50,000
shares of the Company's common stock. All shares awarded will have a
restricted period to be determined by the Corporation's Compensation
Committee. The restricted period shall not be less than three years if the
award is time based, or not less than one year if performance based. The
plan was approved by shareholders in October 2004. No shares have been
issued from this plan.
The Company uses historical data to estimate the expected term of the
options granted, volatilities, and other factors. Expected volatilities
are based on the historical volatility of the Company's common stock over
a period of time equal to the expected life of the option. The risk-free
rate for periods corresponding with the expected life of the option is
based on the U.S. Treasury yield curve in effect at the time of grant.
The dividend rate is equal to the dividend rate in effect on the date of
grant. The Company used the following assumptions for grants in fiscal
2007, respectively: dividend rates of .00% to .99%, price volatility of
18.36% to 20.29%, risk-free interest rates of 4.58% to 5.02%, and an
expected life of 7.5 to 10 years. The weighted average grant date fair
value for options granted in fiscal 2007 was $5.92 per share. No options
were granted during fiscal 2008.
A summary of the Company's stock option activity, and related information
for the years ended June 30 follows:
2008 2007
---------------- ----------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
------- ------- ------- -------
Outstanding at beginning of year 64,500 $16.76 48,000 $17.46
Granted - - 47,500 16.72
Exercised - - - -
Forfeited (4,000) 16.78 (31,000) 17.78
------- -------
Outstanding at end of year 60,500 16.72 64,500 16.76
------- -------
Exercisable at end of year 15,425 $16.73 3,400 $16.75
======= =======
The following table summarizes information about stock options outstanding
at June 30, 2008:
Number Number Remaining
Exercise Outstanding at Exercisable at Contractual
Price June 30 June 30 Life (Months)
-------- -------- -------- ----------
$ 17.00 32,500 6,625 105
16.78 11,000 5,000 96
16.50 2,000 800 92
16.10 15,000 3,000 100
47
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2008 and 2007
(10) EMPLOYEE BENEFIT PLANS (CONTINUED)
----------------------------------
As of June 30, 2008, there was $92,000 of total unrecognized compensation
cost related to non-vested share-based compensation agreements granted
under the plan. That cost is expected to be recognized over a
weighted-average period of approximately 1.25 years.
There is no intrinsic value of vested options on Company stock as of June
30, 2008.
(11) EARNINGS PER SHARE
------------------
The following information shows the amounts used in computing earnings per
share and the effect on income and the weighted average number of shares
of dilutive potential common stock. The amounts in the income columns
represent the numerator and the amounts in the shares columns represent
the denominator. There was no dilutive effect since the exercise price of
all stock options at June 30, 2008 exceeded the market price of the
Company's common shares at June 30, 2008 and 2007.
Years Ended June 30,
--------------------
2008 2007
----------------------- ------------------------
Per Per
Share Share
Income Shares Amt Income Shares Amt
Basic EPS: ------ ------ ----- ------ ------ -----
Income available to
common stockholders $363,221 1,550,815 $0.23 $271,860 1,547,966 $0.18
Effect of dilutive
securities - - - - - -
Diluted EPS: ------- --------- ----- ------- --------- -----
Income available
to stockholders
plus stock options $363,221 1,550,815 $0.23 $271,860 1,547,966 $0.18
======= ========= ===== ======= ========= =====
(12) RELATED PARTY TRANSACTIONS
--------------------------
Certain employees, officers and directors are engaged in transactions with
the Savings Bank in the ordinary course of business. It is the Savings
Bank's policy that all related party transactions are conducted at "arm's
length" and all loans and commitments included in such transactions are
made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions
with other customers. A summary of the changes in outstanding loans to
officers and directors for the fiscal years ended June 30, 2008 and 2007
is as follows:
2008 2007
-----------------------------
Beginning balances $ 528,752 $ 587,480
Originations and advances 20,000 508,624
Principal repayments (326,144) (567,352)
------- -------
Ending balances $ 222,608 $ 528,752
======= =======
48
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2008 and 2007
(12) RELATED PARTY TRANSACTIONS (CONTINUED)
--------------------------------------
The Company had two directors that perform legal services, primarily on
behalf of the Savings Bank. One of these directors resigned from the
Board prior to the end of calendar 2005, but receives a monthly retainer
until the end of calendar 2007. The services provided by the current
director relate primarily to foreclosures and bankruptcies. During the
years ended June 30, 2008 and 2007, the Savings Bank paid $55,682 and
$64,592, respectively, for legal services performed by these directors.
(13) COMMITMENTS AND CONTINGENCIES
-----------------------------
In the ordinary course of business, the Savings Bank has various
outstanding commitments that are not reflected in the accompanying
consolidated financial statements. The principal commitments of the
Savings Bank are as follows:
Letters of Credit - Outstanding standby letters of credit were
approximately $488,000 and $713,000 at June 30, 2008 and 2007,
respectively.
Loan Commitments - The Savings Bank had outstanding firm commitments to
originate loans in the amount of $793,000 at June 30, 2008 and loans in
the amount of $5,098,000 at June 30, 2007.
Lines of Credit - The unused portion of lines of credit was approximately
$1,120,000 and $2,514,000 at June 30, 2008 and 2007, respectively.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Company
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on Management's credit evaluation of the
party. Collateral held varies, but may include accounts receivable,
crops, livestock, inventory, property and equipment, residential and
commercial real estate as well as income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing and
similar transactions. None of the guarantees extend longer than one year.
The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers.
Collateral held varies as specified above and is required in instances
which the Company deems necessary. All of the standby letters of credit
outstanding at June 30, 2008 were collateralized. No amounts were
recorded as liabilities at June 30, 2008 or 2007 for the Company's
potential obligations under these guarantees.
49
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2008 and 2007
(13) COMMITMENTS AND CONTINGENCIES (CONTINUED)
-----------------------------------------
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management, any liability resulting from
such proceedings would not have a material adverse effect on the Company's
consolidated financial statements.
(14) CONCENTRATION OF CREDIT RISK
----------------------------
The Savings Bank maintains its primary bank accounts with institutions in
Missouri and Iowa. On June 30, 2008, the individual balances of these
accounts exceeded standard insurance limits established by the Federal
Deposit Insurance Corporation. The Savings Bank has not experienced any
losses in such accounts.
(15) REGULATORY CAPITAL REQUIREMENTS
-------------------------------
The Savings Bank is subject to various regulatory capital requirements
administered by its primary federal regulator, the Office of Thrift
Supervision ("OTS"). Failure to meet the minimum regulatory capital
requirements can initiate certain mandatory, and possible additional
discretionary actions by regulators that if undertaken, could have a
direct material affect on the Savings Bank and the consolidated financial
statements. Under the regulatory capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Savings Bank must
meet specific capital guidelines involving quantitative measures of the
Savings Bank's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Savings Bank's
capital amounts and classification under the prompt corrective action
guidelines are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Savings Bank to maintain minimum amounts and ratios (set forth
in the table below) of total risk-based capital and Tier 1 capital to
risk-weighted assets (as defined in the regulations), Tier 1 capital to
adjusted total assets (as defined), and tangible capital to adjusted total
assets (as defined).
Management believes, as of June 30, 2008, that the Savings Bank meets all
capital adequacy requirements to which it is subject.
As of June 30, 2008, the most recent notification from the OTS, the
Savings Bank was categorized as well-capitalized under the regulatory
framework for prompt corrective action. To be categorized as
well-capitalized, the Savings Bank must maintain minimum total risk-based,
Tier 1 risk-based, and core capital leverage ratios as set forth in the
table. There are no conditions or events since that notification that
management believes have changed the institution's category.
50
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2008 and 2007
(15) REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
-------------------------------------------
The Savings Bank's actual capital amounts and ratios are also presented in
the table.
Minimum
Minimum to Be Well-
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
------------- ------------ -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of June 30, 2008: (Dollars in thousands)
Total Risk-Based Capital
(to Risk-Weighted Assets) $26,859 16.27% $13,206 8.0% $16,507 10.0%
Core Capital
(to Adjusted Tangible Assets) 24,818 10.05% 9,881 4.0% 12,351 5.0%
Tangible Capital
(to Adjusted Tangible Assets) 24,818 10.05% 3,705 1.5% N/A
Tier 1 Capital
(to Risk-Weighted Assets) 24,818 15.03% 6,603 4.0% 9,904 6.0%
As of June 30, 2007:
Total Risk-Based Capital
(to Risk-Weighted Assets) $26,078 17.13% $12,179 8.0% $15,224 10.0%
Core Capital
(to Adjusted Tangible Assets) 24,199 10.11% 9,576 4.0% 11,970 5.0%
Tangible Capital
(to Adjusted Tangible Assets) 24,199 10.11% 3,591 1.5% N/A
Tier 1 Capital
(to Risk-Weighted Assets) 24,199 15.90% 6,090 4.0% 9,135 6.0%
(16) COMMON STOCK
------------
As provided in the Company's Articles of Incorporation record holders of
Common Stock who beneficially own, either directly or indirectly, in
excess of 10% of the Company's outstanding shares are not entitled to any
vote with respect to the shares they hold in excess of the 10% limit.
(17) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------------------------
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and cash equivalents and certificates of deposit - For these
short-term instruments, the carrying amount approximates fair value.
Available-for-sale and held-to-maturity securities - Fair values for
securities equal quoted market prices, if available. If quoted market
prices are not available, fair values are estimated based on quoted
market prices of similar securities.
51
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2008 and 2007
(17) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
------------------------------------------------------------------
Loans receivable - The fair value of loans is estimated by discounting the
future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the
same remaining maturities. Loans with similar characteristics are
aggregated for purposes of the calculations.
Loans held for sale - The carrying amounts of loans held for sale
approximate the fair value due to the short term nature of these
loans.
Investment in FHLB stock - Fair value of the Savings Bank's investment in
FHLB stock approximates the carrying value as no ready market exists
for this investment and the stock could only be sold back to the FHLB
at par.
Accrued interest - The carrying amounts of accrued interest approximate
their fair value.
Deposits - The fair value of demand deposits, savings accounts and
interest-bearing demand deposits is the amount payable on demand at
the reporting date (i.e., their carrying amount). The fair value of
fixed-maturity time deposits is estimated using a discounted cash
flow calculation that applies the rates currently offered for
deposits of similar remaining maturities.
Retail repurchase agreements - The fair value of retail repurchase
agreements is the amount payable at the reporting date.
FHLB advances - Rates currently available to the Savings Bank for advances
with similar terms and remaining maturities are used to estimate fair
value of existing advances by discounting the future cash flows.
Commitments to extend credit, letters of credit and lines of credit - The
fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present credit worthiness
of the counterparties. For fixed-rate loan commitments, fair value
also considers the difference between current levels of interest
rates and the committed rates. The fair value of letters of credit
and lines of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate or otherwise settle
the obligations with the counterparties at the reporting date and are
insignificant.
The following table presents estimated fair values of the Company's
financial instruments. The fair values of certain of these instruments
were calculated by discounting expected cash flows, which involves
uncertainties and significant judgments by management. Fair value is the
estimated amount at which financial assets or liabilities could be
exchanged in a current transaction between willing parties, other than in
a forced or liquidation sale. Because no market exists for certain of
these financial instruments and because management does not intend to sell
these financial instruments, the Company does not know whether the fair
values shown below represent values at which the respective financial
instruments could be sold individually or in the aggregate.
52
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2008 and 2007
(17) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
------------------------------------------------------------------
June 30, 2008
--------------------------
Approximate
Carrying Approximate
Amount Fair Value
Financial assets: ----------- -----------
Cash and cash equivalents $ 17,010,000 $ 17,010,000
Certificates of deposit 567,000 567,000
Available-for-sale securities 40,830,000 40,830,000
Held-to-maturity securities 4,175,000 4,118,000
Investment in FHLB stock 1,613,000 1,613,000
Loans, net of allowance for loan losses 167,035,000 166,663,000
Loans held for sale 755,000 755,000
Accrued interest receivable 1,136,000 1,136,000
Financial liabilities:
Deposits 194,593,000 195,816,000
Retail repurchase agreements 4,648,000 4,648,000
FHLB advances 22,000,000 22,986,000
Accrued interest payable 414,000 414,000
June 30, 2007
--------------------------
Approximate
Carrying Approximate
Amount Fair Value
Financial assets: ----------- -----------
Cash and cash equivalents $ 21,030,000 $ 21,030,000
Certificates of deposit 747,000 747,000
Available-for-sale securities 31,321,000 31,321,000
Held-to-maturity securities 10,786,000 10,615,000
Investment in FHLB stock 1,614,000 1,614,000
Loans, net of allowance for loan losses 158,993,000 158,303,000
Accrued interest receivable 1,259,000 1,259,000
Financial liabilities:
Deposits 190,090,000 189,994,000
Retail repurchase agreements 2,103,000 2,103,000
FHLB advances 22,000,000 22,138,000
Accrued interest payable 358,000 358,000
53
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2008 and 2007
(18) PARENT COMPANY ONLY FINANCIAL INFORMATION
-----------------------------------------
The following condensed statements of financial condition and condensed
statements of income and cash flows for First Bancshares, Inc. are as
follows:
Condensed Statements of Financial Condition
ASSETS 2008 2007
------ ------ ------
Cash and cash equivalents $ 86,524 $ 156,673
Certificates of deposit 10,000 10,000
Securities available-for-sale 248,000 248,000
Investment in subsidiaries 25,921,123 24,974,967
Property and equipment, net 1,547,855 1,839,812
Due from subsidiary - 3,017
Deferred tax asset, net 90,138 106,098
Other assets 187,316 94,593
---------- ----------
Total assets $28,090,956 $27,433,160
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Notes payable, subsidiaries $ 636,481 $ 947,765
Accrued expenses 354,903 17,302
---------- ----------
Total Liabilities 991,384 965,067
Stockholders' equity 27,099,572 26,468,093
---------- ----------
Total liabilities and stockholders' equity $28,090,956 $27,433,160
========== ==========
Condensed Statements of Income
2008 2007
------ ------
Income:
Equity in earnings of subsidiaries $ 677,898 $ 582,218
Interest and dividend income 10,708 23,249
Gain/(loss) on sale or write-down
of property and equipment 32,723 (298,887)
Other 49,022 40,080
---------- ----------
Total income 770,351 346,660
---------- ----------
Expenses:
Professional fees 360,454 158,243
Printing and office supplies 17,319 6,826
Interest 60,263 6,747
Other 63,880 71,458
Income tax benefit (94,786) (168,474)
---------- ----------
Total expenses 407,130 74,800
---------- ----------
Net income $ 363,221 $ 271,860
========== ==========
54
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2008 and 2007
(18) PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
-----------------------------------------------------
Condensed Statements of Cash Flows
2008 2007
------ ------
Cash flows from operating activities:
Net income $ 363,221 $ 271,860
Adjustments to reconcile net income to
net cash provided from operating activities:
Equity in earnings of subsidiaries (677,898) (582,218)
Depreciation expense 61,797 36,333
(Gain)/loss on sale or write down of
property and equipment (32,723) 298,887
Net change in operating accounts:
Deferred tax asset, net 15,960 (86,263)
Other assets and liabilities 247,895 (21,565)
---------- ---------
Net cash used in operating activities (21,748) (82,966)
---------- ---------
Cash flows from investing activities:
Proceeds from call of security available-
for- sale - 200,000
Purchase of property and equipment (24,229) (1,138,826)
Proceeds from sales of property and equipment 287,112 50,000
Net cash (used in) provided by ---------- ---------
from investing activities 262,883 (888,826)
Cash flows from financing activities: ---------- ---------
Proceeds from notes payable - 948,915
Payments on notes payable (311,284) (1,150)
Cash dividends paid - (124,166)
Purchase of treasury stock - (27,454)
Net cash provided by (used in) financing ---------- ---------
activities (311,284) 796,145
---------- ---------
Net decrease in cash and cash equivalents (70,149) (175,647)
---------- ---------
Cash and cash equivalents-beginning of period 156,673 332,320
---------- ---------
Cash and cash equivalents-end of period $ 86,524 $ 156,673
========== =========
55
COMMON STOCK INFORMATION
The common stock of First Bancshares, Inc. is traded on The Nasdaq Stock Market
LLC under the symbol "FBSI". As of September 19, 2008, there were 439
registered stockholders and 1,550,815 shares of common stock outstanding. This
does not reflect the number of persons or entities who hold stock in nominee or
"street name."
On August 23 and December 1, 2006, the Company declared a $.04 common stock
dividend payable on September 29 and December 29, 2006 to stockholders of
record on September 15 and December 15, 2006, respectively. At its February
2007 meeting, the Board of Directors decided to suspend dividend payments until
the Company's earnings improved. Dividend payments by the Company are dependent
on its cash flows, which include reimbursement from its subsidiaries for the
income tax savings created by its stand alone operating loss, the operation of
real estate owned by the Company and dividends received by the Company from the
Savings Bank. Under Federal regulations, the dollar amount of dividends a
savings and loan association may pay is dependent upon the association's
capital position and recent net income. Generally, if an association satisfies
its regulatory capital requirements, it may make dividend payments up to the
limits prescribed in the OTS regulations. However, institutions that have
converted to stock form of ownership may not declare or pay a dividend on, or
repurchase any of, its common stock if the effect thereof would cause the
regulatory capital of the institution to be reduced below the amount required
for the liquidation account which was established in accordance with the OTS
regulations and the Savings Bank's Plan of Conversion. In addition, under
Missouri law, the Company is generally prohibited from declaring and paying
dividends at a time when the Company's net assets are less than its stated
capital or when the payment of dividends would reduce the Company's net assets
below its stated capital. During the fiscal year ended June 30, 2008, no
dividend payments were paid by the Savings Bank to the Company.
The following table sets forth market price and dividend information for the
Company's common stock.
Fiscal 2008 High Low Dividend
- ----------- ------ ----- --------
First Quarter $17.51 $15.15 N/A
Second Quarter $17.50 $15.00 N/A
Third Quarter $18.40 $13.01 N/A
Fourth Quarter $16.60 $11.57 N/A
Fiscal 2007 High Low Dividend
- ----------- ------ ----- --------
First Quarter $17.15 $16.00 $.04
Second Quarter $17.85 $16.00 $.04
Third Quarter $17.50 $16.41 N/A
Fourth Quarter $17.00 $15.10 N/A
56
DIRECTORS AND EXECUTIVE OFFICERS
FIRST BANCSHARES, INC. FIRST HOME SAVINGS BANK
DIRECTORS: DIRECTORS:
- ---------- ----------
Thomas M. Sutherland, Chairman Thomas M. Sutherland, Chairman
One of the owners and operators of One of the owners and operators of
Sutherlands Home Improvement Centers Sutherlands Home Improvement Centers
group of stores group of stores
D. Mitch Ashlock D. Mitch Ashlock
Director, President and Chief Director, President and Chief
Executive Officer Executive Officer
First Federal Savings Bank of Olathe First Federal Savings Bank of Olathe
Harold F. Glass Harold F. Glass
Partner Partner
Millington, Glass & Love, Millington, Glass & Love,
Attorneys at Law Attorneys at Law
Billy E. Hixon Billy E. Hixon
Retired partner from regional CPA firm Retired partner from regional CPA firm
of BKD, LLP of BKD, LLP
Daniel P. Katzfey Daniel P. Katzfey
President and Chief Executive Officer President and Chief Executive Officer
First Bancshares, Inc. First Home Savings Bank
John G. Moody John G. Moody
Judge of the 44th Judge of the 44th
Missouri Judicial Circuit Missouri Judicial Circuit
ADVISORY DIRECTOR: ADVISORY DIRECTOR:
- ------------------ ------------------
Robert J. Breidenthal Robert J. Breidenthal
Director Director
Security Bank of Kansas City Security Bank of Kansas City
OFFICERS: OFFICERS:
- --------- ---------
Daniel P. Katzfey Daniel P. Katzfey
President and Chief Executive Officer President and Chief Executive Officer
Ronald J. Walters, CPA Ronald J. Walters, CPA
Senior Vice President, Treasurer Senior Vice President, Treasurer
and Chief Financial Officer and Chief Financial Officer
Shannon Peterson Dale W. Keenan
Secretary Executive Vice President and
Senior Lending Officer
Adrian Rushing
Senior Vice President and
Chief Operating Officer
Shannon Peterson
Secretary
57
CORPORATE INFORMATION
CORPORATE HEADQUARTERS TRANSFER AGENT
142 East First Street Registrar and Transfer Company
P.O. Box 777 10 Commerce Drive
Mountain Grove, Missouri 65711 Cranford, New Jersey 07016
(800) 866-1340
INDEPENDENT AUDITORS
McGladrey & Pullen, LLP COMMON STOCK
Kansas City, Missouri
Traded on The Nasdaq Stock Market LLC
GENERAL COUNSEL Nasdaq Symbol: FBSI
Harold F. Glass
Springfield, Missouri
SPECIAL COUNSEL
Breyer & Associates PC
McLean, Virginia
- -------------------------------------------------------------------------------
ANNUAL MEETING
The Annual Meeting of Stockholders will be held Thursday, November 6, 2008, at
1:00 p.m., Central Time, at the Days Inn Conference Room, 300 East 19th Street,
Mountain Grove, Missouri.
- -------------------------------------------------------------------------------
FORM 10-K
A COPY OF THE FORM 10-K AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
WILL BE FURNISHED WITHOUT CHARGE TO STOCKHOLDERS AS OF THE RECORD DATE FOR
VOTING AT THE ANNUAL MEETING OF STOCKHOLDERS UPON WRITTEN REQUEST TO THE
SECRETARY, FIRST BANCSHARES, INC., P.O. BOX 777, MOUNTAIN GROVE, MISSOURI
65711.
THE COMPANY'S FORMS 10-K, 10-Q AND OTHER DISCLOSURE DOCUMENTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION CAN BE OBTAINED FROM THE SEC HOME PAGE ON
THE WORLD WIDE WEB AT http://www.sec.gov.
----------------------
58
Exhibit 21
Subsidiaries of the Registrant
Parent
- ------
First Bancshares, Inc.
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
- ---------------- ------------ ----------------------
First Home Savings Bank 100% Missouri
SCMG, Inc. 100% Missouri
(formerly South Central
Missouri Title, Inc.)
Fybar Service Corporation (b) 100% Missouri
First Home Investments, Inc. (b) 100% Missouri
- ---------------
(a) The operation of the Company's wholly owned subsidiaries are included in
the Company's Consolidated Financial Statements contained in the Annual
Report attached hereto as Exhibit 13.
(b) Wholly owned subsidiary of First Home Savings Bank.
Exhibit 23
Consent of Auditors
McGladrey & Pullen, LLP
Certified Public Accountants
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement (No.
33-87234) on Form S-8 of First Bancshares, Inc. of our report dated
September 26, 2008 relating to our audit of the consolidated financial
statements, which appear in the Annual Report to Shareholders, which is
incorporated in this Annual Report on Form 10-K of First Bancshares, Inc. as
of and for the year ended June 30, 2008.
/s/McGladrey & Pullen, LLP
MCGLADREY & PULLEN, LLP
Kansas City, Missouri
September 26, 2008
Exhibit 31.1
Rule 13a - 14(a) Certification
(Chief Executive Officer)
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Daniel P. Katzfey, certify that:
1. I have reviewed this Annual Report on Form 10-K of First Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report.
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the
registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: September 26, 2008 /s/Daniel P. Katzfey
-----------------------------------
Daniel P. Katzfey
President and Chief Executive
Officer
Exhibit 31.2
Rule 13a - 14(a) Certification
(Chief Financial Officer)
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Ronald J. Walters, certify that:
1. I have reviewed this Annual Report on Form 10-K of First Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report.
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the
registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: September 26, 2008 /s/Ronald J. Walters
------------------------------------
Ronald J. Walters
Senior Vice President, Treasurer
and Chief Financial Officer
Exhibit 32.1
Section 1350 Certifications
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
OF FIRST BANCSHARES, INC.
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certifies, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and in connection with this Annual Report on Form
10-K for the fiscal year ended June 30, 2008, that:
1. the report fully complies with the requirements of Sections 13(a)
and 15(d) of the Securities Exchange Act of 1934, as amended, and
2. the information contained in the report fairly presents, in all
material respects, the company's financial condition and results of
operations as of the dates and for the periods presented in the
financial statements included in the report.
Date: September 26, 2008 /s/Daniel P. Katzfey
-------------------------------------
Daniel P. Katzfey
President and Chief Executive Officer
Exhibit 32.2
Section 1350 Certifications
CERTIFICATION OF CHIEF FINANCIAL OFFICER
OF FIRST BANCSHARES, INC.
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certifies, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and in connection with this Annual Report on Form
10-K for the fiscal year ended June 30, 2008, that:
3. the report fully complies with the requirements of Sections 13(a)
and 15(d) of the Securities Exchange Act of 1934, as amended, and
4. the information contained in the report fairly presents, in all
material respects, the company's financial condition and results of
operations as of the dates and for the periods presented in the
financial statements included in the report.
Date: September 26, 2008 /s/Ronald J. Walters
---------------------------------
Ronald J. Walters
Senior Vice President, Treasurer
and Chief Financial Officer
|