U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission file number: 33-94288
THE FIRST BANCSHARES. INC.
(Exact name of small business issuer as specified in its charter)
MISSISSIPPI 64-0862173
(State of Incorporation)
(I.R.S.Employer I.D. Number)
6480 U.S. Highway 98 West, Hattiesburg. Mississippi 39402
(Address of principal executive offices)
(601) 268-8998
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date.
On June 30, 1998, 721,848 shares of the issuer's common stock,
par value $1.00 per share, were issued and outstanding.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
The First Bancshares, Inc. and Subsidiary
Consolidated Balance Sheets
( Dollars in Thousands, except Per Share Data)
ASSETS JUNE 30, DECEMBER 31,
1998 1997
(UNAUDITED) (AUDITED)
Cash and due from $665 $970
banks
Federal funds sold 2,875 1,870
Investment securities 397 507
held-to-maturity
Investment securities 5,993 3,797
available for sale
Loans, net of reserve for 23,081 17,293
loan losses of $264 and
$194, respectively
Premises and equipment, 2,152 2,093
net
Interest Receivable 436 188
Other assets 940 809
Total assets $36,539 $27,527
LIABILITIES AND
SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits
Noninterest bearing $2,988 2,479
deposits
Time, $100,000 or more 6,309 2,631
Other interest bearing 20,714 15,948
deposits
Total deposits 30,011 21,058
Interest payable 133 95
Other liabilities 18 6
Total liabilities 30,162 21,159
COMMITMENTS AND
CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $1 par value; $722 722
10,000,000
shares authorized; 721,848
shares issued and outstanding
Paid-in capital 6,451 6,451
Retained deficit (804) (817)
Accumulated Other
Compensation Income 8 12
Total shareholders' 6,377 6,368
equity
Total liabilities and $36,539 27,527
shareholders' equity
THE FIRST BANCSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS AND THREE MONTHS, RESPECTIVELY
ENDED JUNE 30, 1998 AND 1997
(Dollars in Thousands, Except Per Share Data)
SIX MONTHS THREE MONTHS
INTEREST INCOME 1998 1997 1998 1997
Interest and fees on $1,171 $367 $618 $229
loans
Interest and dividends 171 144 92 81
on investment securities
- taxable
Interest on federal 34 49 23 20
funds sold
Interest on deposits in 0 0 0 0
banks
Total Interest Income 1,376 560 733 330
INTEREST EXPENSE
Interest on time 137 23 77 17
deposits of $100 or more
Interest on other 495 202 265 123
deposits
Interest on borrowed 32 0 27 0
funds
Total Interest Expense 664 225 369 140
Net interest income 712 335 364 190
Provision for loan 71 84 28 38
losses
Net interest income
after provision for loan 641 251 336 152
losses
NON-INTEREST INCOME
Service charges on 68 6 39 4
deposits
Other service charges 15 0 8 0
and fees
Other 10 39 7 24
Total Non-Interest 94 45 54 28
Income
OTHER EXPENSES
Salaries 316 247 167 132
Employee benefits 59 50 27 27
Occupancy expense 49 25 26 16
Furniture and equipment 67 53 35 25
expense
Other 231 175 123 90
Total Non-Interest 722 550 378 290
Expense
Income(loss) before 13 (254) 12 (110)
taxes
Income taxes 0 0 0 0
Net income 13 (254) 12 (110)
Net income (loss) per $ .02 $(.35) $.02 ($.15)
share
The Company paid no cash dividends.
THE FIRST BANCSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998
(Dollars in Thousands, Except Per Share Data)
ACCUMULATED
OTHER
COMMON PAID-IN ACCUMULATED COMPREHENSIVE TOTAL
STOCK CAPITAL DEFICIT INOME
Balance
January 1,1998 $721,848 $6,451,456 $(817,651) $12,051 $6,367,704
Net Income
for six $13,520
months
Net change
on
unrealized
gain (loss) $(4,057)
on available-
for-sale
securities
Accumulated
Other
Compensation
Income $9,463
Totals $721,848 $6,451,456 $(804,131) $7,994 $6,377,167
THE FIRST BANCSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
1998 1997
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss) $13,520 $(253,793)
Adjustments to reconcile net
income to net cash:
Depreciation and amortization 100,642 60,261
Provision for loan losses 70,248 84,358
Amortization and accretion (42,536) 48,761
Increase in interest receivable (248,296) (618,984)
Increase in other assets (162,623) (12,168)
Increase in interest payable 38,207 64,604
Increase (decrease) in other 12,077 (5,725)
liabilities
Net cash used in operating (218,761) (632,686)
activities
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchases of available-for-sale (4,330,979) (4,248,013)
securities
Proceeds from maturities and
calls of available-for-sale 2,283,350 3,00,425
securities
Increase in loans (5,857,297) (6,823,985)
Additions to premises and (129,555) (545,228)
equipment
Net cash used in investing (8,034,481) (8,616,801)
activities
CASH FLOWS FROM FINANCING
ACTIVITIES
Increase in deposits 8,953,043 7,124,501
Net cash provided by financing 8,953,043 7,124,501
activities
Net increase (decrease) in cash 699,801 (2,124,986)
and cash equivalents
Cash and cash equivalents at
beginning of period 2,840,262 3,769,972
Cash and cash equivalents at $3,540,063 $1,644,986
end of period
Cash paid during the period
for:
Interest $626,041 $262,726
Income taxes 0 0
-
The First Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (UNAUDITED)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-QSB and Item 310 (b) of Regulation S-B of
the Securities and Exchange Commission. Accordingly they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
However, in the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the six
months ended June 30, 1998 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1998.
For further information, please refer to the consolidated financial
statements and footnotes thereto included in the Company's Form 10-
KSB for the year ended December 31, 1997.
Note 2 - Summary of Organization
The First Bancshares, Inc., Hattiesburg, Mississippi (the
"Company"), was incorporated June 23, 1995 under the laws of the
State of Mississippi for the purpose of operating as a bank holding
company with respect to a then proposed de novo bank, The First
National Bank, Hattiesburg, Mississippi (the "Bank").
The Company offered its common stock for sale to the public
under an initial public offering price of $10 per share. As of
August 27, 1996, when the offering was terminated, 721,848 shares
were sold, resulting in net proceeds of $7,218,480.
During 1996, the Company obtained regulatory approval to
operate a national bank in Hattiesburg, Mississippi. The Bank opened
for business on August 5, 1996, with a total capitalization of $5.2
million. Upon the opening of the Bank, the Company ceased to be
considered as a "development stage enterprise" as its planned
principal operations had commenced. The Bank's deposits are each
insured up to $100,000 by the Federal Deposit Insurance Corporation.
The Bank is engaged in a general commercial banking business,
emphasizing in its marketing the Bank's local management and
ownership. The Bank offers a full range of banking services designed
to meet the basic financial needs of its customers. These services
include checking accounts, NOW accounts, money market deposit
accounts, savings accounts, certificates of deposit and individual
retirement accounts. The Bank also offers short- to medium-term
commercial and personal loans. At June 30, 1998, the Company had
approximately $36.5 million in assets, $23 million in loans, $30
million in deposits, and $6.4 million in shareholders' equity.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The following discussion contains forward-looking statements
that involve risks and uncertainties. The Company's actual results
may differ materially from the results discussed in the forward-
looking statements. These forward-looking statements relate to,
without limitation, future economic performance, plans and objectives
of management for future operations, and projections of revenues and
other financial items that are based on the beliefs of the Company's
management, as well as assumptions made by and information currently
available to the Company's management. The words "expect", "estimate",
"anticipate", and "believe", as well as similiar expressions, are intended
to identify forward-looking statements. The cautionary statements set
forth in this Report and in the Registration Statement on Form SB-2
recently filed by the Company identify important factors with respect
to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to differ materially from
those in such forward-looking statements. The Bank completed its first full
year of operations in 1997 and has grown substantially since opening in
August 1996. Comparisons of the Bank's results for the periods presented
should be made with an understanding of the Bank's short history.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Income
The Company's net income for the six months ended June 30, 1998
was $13,000, or $0.02 per share, as compared to a net loss of
$(254,000), or $(0.35) per share, for the six months ended June 30,
1997. The Company's net income for the three months ended June 30,
1998 was $12,000 or $0.02 per share, as compared to a net loss of
$(110,000), or $(0.15) per share, for the three months ended June 30,
1997. Average earning assets increased to $28.3 million for the six
months ended June 30, 1998, as compared to $14.0 million for the
comparable period of 1997. The increase in average earning assets
resulted in an increase in net interest income of $377,000, or
112.5%, to $712,000 for the six months ended June 30, 1998 as
compared to $335,000 for the six months ended June 30, 1997. In
addition, noninterest income increased 108.9%, to $94,000, for the
six months ended June 30, 1998 as compared to $45,000 for the
comparable period of 1997, while noninterest expense increased
31.3%, to $722,000, for the six months ended June 30, 1998 as
compared to $550,000 for the six months ended June 30, 1997. In
addition, noninterest income increased to $54,000 for the three months
ended June 30, 1998 as compared to $28,000 for the comparable period of
1997, while noninterest expense increased to $378,000 for the three
months ended June 30, 1998 as compared to $290,000 for the three months
ended June 30, 1997.
Net Interest Income
The largest component of net income for the Company is net
interest income, which is the difference between the income earned
on assets and interest paid on deposits and borrowings used to
support such assets. Net interest income is determined by the rates
earned on the Company's interest-earning assets and the rates paid
on its interest-bearing liabilities, the relative amounts of
interest-earning assets and interest-bearing liabilities, and the
degree of mismatch and the maturity and repricing characteristics of
its interest-earning assets and interest-bearing liabilities.
Net interest income was $712,000 for the six months ended June
30, 1998 as compared to $335,000 for the six months ended June 30,
1997. This 112.5% increase reflected the substantial growth of the
Company's loan portfolio between these periods, which resulted in
substantial improvements in the Company's net interest spread and
net interest margin. Net interest income was $364,000 for the three
months ended June 30, 1998 as compared to $190,000 for the three months
ended June 30, 1997. Net interest spread, the difference between
the yield on earning assets and the rate paid on interest-bearing
liabilities, was 4.13% for the six months ended June 30, 1998 as
compared to 3.01% for the six months ended June 30, 1997. Net
interest margin (which is net interest income divided by average
interest-earning assets) increased to 5.03% for the six months ended
June 30, 1998 as compared to 4.78% for the six months ended June 30,
1997. These increases reflect the fact that loans comprised 75.7%
of average earning assets during the first six months of 1998 as
compared to only 53.7% during the same period of 1997. Loans
typically provide a higher yield than the other types of earning
assets and thus one of the Company's goals is to continue to grow
the loan portfolio as a percentage of total earning assets.
Average Balances, Income and Expenses, and Rates. The
following table depicts, for the periods indicated, certain
information related to the Company's average balance sheet and its
average yields on assets and average costs of liabilities. Such
yields are derived by dividing income or expense by the average
balance of the corresponding assets or liabilities. Average
balances have been derived from daily averages.
Average Balances, Income and Expenses, and Rates
Six Months Ended June 30,
1
1998 997
Average Income Yield Average Income Yield
Balance Expense Rate(2) Balance Expense Rate(2)
(2)
(2)
(Dollars in thousands)
Assets
Earning Assets
Loans (1) $21,403 $1,171 10.94 $7,517 $367 9.76%
Securities 5,863 171 5.83 4,666 144 6.17
Federal funds sold 1,027 34 6.62 1,825 49 5.37
Total earning assets 28,293 1,376 9.73 14,008 560 8.00
Cash and due from banks 721 448
Premises and equipment 2,094 1,813
Other assets 2,060 1,462
Allowance for loan (228) (80)
losses
Total assets $32,940 $17,651
Liabilities
Interest-bearing $23,725 $664 5.60% $9,009 $225 4.99%
liabilities
Demand deposits (1) 2,716 1,617
Other liabilities 126 528
Shareholders' equity 6,373 6,497
Total liabilities and $32,940 $17,651
shareholders' equity
Net interest spread 4.13% 3.01%
Net interest $712 5.03% $335 4.78%
income/margin
____________________
(1) All loans and deposits were made to borrowers in the United
States. The Company had no nonaccrual loans during the periods
presented.
(2) Annualized.
Analysis of Changes in Net Interest Income. The following
table presents the dollar amount of changes in interest income and
interest expense attributable to changes in volume and the amount
attributable to changes in rate. The combined effect in both volume
and rate which cannot be separately identified has been allocated
proportionately to the change due to volume and due to rate.
Analysis of Changes in Net Interest Income
Six Months Ended Years Ended
June 30, December 31,
1998 versus 1997 1997 versus 1996
Increase (decrease) Increase
due to (decrease) due to
Volume Rate Net Volume Rate Net
(Dollars in thousands)
Earning Assets
Loans $754 $50 $804 $ 1,067 $(6) 1,061
Securities 35 ( 8) 27 219 10 229
Federal funds sold and (30) 15 (15) (35) 1 (34)
securities purchased
under agreements to
resell
Other short-term _ - - (92) (90) (182)
Investments
Total interest income 759 57 816 1,159 (85) 1,074
Interest-Bearing
Liabilities
Interest-bearing 23 (2) 21 58 2 60
transaction accounts
Money market accounts (23) 18 (5) 123 - 123
Savings deposits 3 - 3 2 - 2
Time deposits 347 73 420 398 ( 21) 377
Total interest 350 89 439 581 (19) 562
expense
Net interest income $409 $(32) $377 $578 $(66) $512
Interest Sensitivity. The Company monitors and manages the
pricing and maturity of its assets and liabilities in order to
diminish the potential adverse impact that changes in interest
rates could have on its net interest income. A monitoring technique
employed by the Company is the measurement of the Company's
interest sensitivity "gap," which is the positive or negative
dollar difference between assets and liabilities that are subject
to interest rate repricing within a given period of time. The
Company also performs asset/liability modeling to assess the impact
varying interest rates and balance sheet mix assumptions will have
on net interest income. Interest rate sensitivity can be managed
by repricing assets or liabilities, selling securities available-
for-sale, replacing an asset or liability at maturity, or adjusting
the interest rate during the life of an asset or liability.
Managing the amount of assets and liabilities repricing in the same
time interval helps to hedge the risk and minimize the impact on
net interest income of rising or falling interest rates. The
Company evaluates interest sensitivity risk and then formulates
guidelines regarding asset generation and repricing, funding
sources and pricing, and off-balance sheet commitments in order to
decrease interest rate sensitivity risk.
The following tables illustrate the Company's interest rate
sensitivity and cumulative gap position at December 31, 1997 and
June 30, 1998.
December 31, 1997
Within After Within Greater Total
Three Three One Than
Months Through Year One Year
Twelve or
Months Nonsensi
tive
(Dollars in thousands)
Assets
Earnings Assets
Loans $6,687 $3,636 $10,323 $ 7,164 $17,487
Securities 1,007 1,776 2,783 1,521 4,304
Funds sold 1,870 _ 1,870 _ 1,870
Total earning assets 9,564 5,412 14,976 8,685 23,661
Liabilities
Interest-bearing
liabilities
Interest-bearing
deposits
NOW accounts (1) _ 2,370 2,370 - 2,370
Money market accounts 4,296 _ 4,296 4,296
Savings deposits (1) _ 200 200 _ 200
Time deposits 1,464 5,423 6,887 4,826 11,713
Total interest-bearing 5,760 7,993 13,753 4,826 18,579
deposits
Interest-sensitivity $3,804 $(2,581) $1,223 $3,859 $5,802
gap per period
Cumulative gap at
December 31, 1997 $3,804 $1,223 $1,223 $5,082 $5,082
Ratio of cumulative 16.08% 5.17% 5.17% 21.47%
gap to total
Earning assets at
December 31, 1997
June 30, 1998
Within After Within Greater Total
Three Three One Than
Months Through Year One Year
Twelve or
Months Nonsensit
ive
(Dollars in thousands)
Assets
Earnings Assets
Loans $9,493 $3,624 $13,117 $10,228 $23,345
Securities 897 1,488 2,385 4,005 6,390
Funds sold 2,875 _ 2,875 _ 2,875
Total earning
assets 13,265 5,112 18,377 14,233 32,610
Liabilities
Interest-bearing
liabilities
Interest-bearing
deposits
NOW accounts (1) _ _
2,680 2,680 2,680
Money market 5,498 _ 5,498 _ 5,498
accounts
Savings deposits(1) _ 306 306 _ 306
Time deposits 3,102 6,712 9,814 8,725 18,539
Total interest-bearing
deposits 8,600 9,698 18,298 8,725 27,023
Interest-sensitivity $4,665 $(4,586) $79 $5,508 $5,587
gap per period
Cumulative gap at $4,665 $ 79 $ 79 $5,587 $5,587
June 30, 1998
Ratio of cumulative 14.31% 0.24% 0.24% 17.13%
gap to total
Earning assets at
June 30, 1998
__________________
(1) NOW and savings accounts are subject to immediate
withdrawal and repricing. These deposits do not tend
to immediately react to changes in interest rates and
the Company believes these deposits are a stable and
predictable funding source. Therefore, these deposits
are included in the repricing period that management
believes most closely matches the periods in which they
are likely to reprice rather than the period in which
the funds can be withdrawn contractually.
The Company generally would benefit from increasing market
rates of interest when it has an asset-sensitive gap and
generally from decreasing market rates of interest when it is
liability sensitive. The Company currently is asset sensitive
over the three month and greater-than-one-year time frames.
However, the Company's gap analysis is not a precise indicator of
its interest sensitivity position. The analysis presents only a
static view of the timing of maturities and repricing
opportunities, without taking into consideration that changes in
interest rates do not affect all assets and liabilities equally.
For example, rates paid on a substantial portion of core deposits
may change contractually within a relatively short time frame,
but those rates are viewed by management as significantly less
interest-sensitive than market-based rates such as those paid on
non-core deposits. Accordingly, management believes a liability
sensitive-position would not be as indicative of the Company's
true interest sensitivity as it would be for an organization
which depends to a greater extent on purchased funds to support
earning assets. Net interest income is also affected by other
significant factors, including changes in the volume and mix of
earning assets and interest-bearing liabilities.
Provision and Allowance for Loan Losses
The Company has developed policies and procedures for
evaluating the overall quality of its credit portfolio and the
timely identification of potential problem loans. Management's
judgment as to the adequacy of the allowance is based upon a
number of assumptions about future events which it believes to be
reasonable, but which may or may not be valid. Thus, there can
be no assurance that charge-offs in future periods will not
exceed the allowance for loan losses or that additional increases
in the loan loss allowance will not be required.
Additions to the allowance for loan losses, which are
expended as the provision for loan losses on the Company's
statement of operations, are made periodically to maintain the
allowance at an appropriate level based on management's analysis
of the potential risk in the loan portfolio. Currently, the
allowance for loan losses is evaluated on an overall portfolio
basis. Management intends to begin allocating the allowance to
loan categories once the loan portfolio becomes large and
diversified enough to support such an allocation system. The
amount of the provision is a function of the level of loans
outstanding, the level of nonperforming loans, historical loan
loss experience, the amount of loan losses actually charged
against the reserve during a given period, and current and
anticipated economic conditions.
At June 30, 1998 the allowance for loan losses amounted to
$264,000, or 1.13% of outstanding loans. At December 31, 1997
and 1996, the allowance for loan losses amounted to $193,000 and
$37,000, respectively. The allowance represented 1.10% and 0.86%
of outstanding loans at December 31, 1997 and 1996, respectively.
The Company's provision for loan losses was $71,000 and $85,000
for the six months ended June 30, 1998 and 1997, respectively,
and was $156,000 and $37,000 for the years ended December 31,
1997 and 1996, respectively. The provision for loan losses was
$28,000 and $38,000 for the three months ended June 30, 1998 and 1997,
respectively. In each case, the provision was made based on
management's assessment of general loan loss risk and asset
quality.
The Company discontinues accrual of interest on loans when
management believes, after considering economic and business
conditions and collection efforts, that a borrower's financial
condition is such that the collection of interest is doubtful.
Generally, the Company will place a delinquent loan in nonaccrual
status when the loan becomes 90 days or more past due. At the
time a loan is placed in nonaccrual status, all interest which
has been accrued on the loan but remains unpaid is reversed and
deducted from earnings as a reduction of reported interest
income. No additional interest is accrued on the loan balance
until the collection of both principal and interest becomes
reasonably certain. The Company had no nonaccrual, restructured,
or other nonperforming loans at June 30, 1998 or at December 31,
1997 or 1996. At June 30, 1998 the Company had loans in the
principal amount of $2,000 delinquent by more than 30 days, and
no loans that were delinquent by more than 90 days. At December
31, 1997 and 1996, the Company did not have any loans that were
delinquent by more than 30 days.
A potential problem loan is one in which management has
serious doubts about the borrower's future performance under the
terms of the loan contract. These loans are current as to
principal and interest and, accordingly, they are not included in
nonperforming assets categories. The level of potential problem
loans is one factor used in the determination of the adequacy of
the allowance for loan losses. At June 30, 1998 and December 31,
1997, the Company had $225,000 and $30,000, respectively, in
potential problem loans.
Allowance For Loan Losses
Six Months Ended Years Ended
June 30, December 31,
1998 1997 1997 1996
(Dollars in thousands)
Average loans outstanding $21,403 $7,517 $12,692 $1,432
Loans outstanding at period $23,345 $11,151 $17,487 $4,327
end
Total nonperforming loans _ _ _ _
Beginning balance of allowance 193 37 37
Loans charged-off
Total loans charged-off _ _ _ _
Total recoveries _ _ _ _
Net loans charged-off _ _ _ _
Provision for loan losses 71 85 156 37
Balance at period end $ 264 $122 $193 $ 37
Net charge-offs to average _ _ _ _
loans
Allowance as percent of total 1.13% 1.09% 1.10% 0.86%
loans
Nonperforming loans as a _ _ _ _
percentage of total loans
Allowance as a percentage of _ _ _ _
nonperforming loans
Noninterest Income and Expense
Noninterest Income. The Company's primary source of
noninterest income is service charges on deposit accounts. In
addition, the Company originates mortgage loans, which are closed
in the name of a third party, for which the Company receives a
fee. Other sources of noninterest income include bankcard fees,
commissions on check sales, safe deposit box rent, wire transfer,
and official check fees.
Total noninterest income increased by $49,000 or 108.9%, to
$94,000 during the first six months of 1998 as compared to
$45,000 during the same period in 1997, reflecting increased
activity fees related to increases in deposit and loan balances.
Deposit service charges were $68,000 for the first six months of
1998 as compared to $6,000 for the first six months of 1997.
Total noninterest income increased by $54,000 to $94,000 during the three
months ended June 30, 1998 as compared to $45,000 during the same
period in 1997. Deposit service charges were $39,000 for the three
months ended June 30, 1998 as compared to $4,000 for the three months
ended June 30, 1997.
Noninterest Expense. Total noninterest expense increased by
$172,000 or 31.3%, to $722,000 during the first six months of
1998 as compared to $550,000 during the same period of 1997 as a
result of the Company's continued growth. This increase includes
a $78,000 increase in salary and benefits expense, as the Company
employed additional full time employees, a $24,000 increase in
occupancy expense, and a $16,000 increase in deposit and other
insurance expense. Total noninterest expense increased by $54,000 to
$722,000 during the three months ended June 30, 1998 as compared to
$28,000 during the same period of 1997.
Analysis of Financial Condition
Earning Assets
Loans. Loans typically provide higher yields than the other
types of earning assets, and thus one of the Company's goals is
for loans to be the largest category of the Company's earning
assets. At June 30, 1998, loans accounted for 72% of earning
assets, as compared to 74% and 40% of earning assets at December
31, 1997, and 1996, respectively. Management attempts to control
and counterbalance the inherent credit and liquidity risks
associated with the higher loan yields without sacrificing asset
quality to achieve its asset mix goals. Loans averaged $12.7
million during 1997, as compared to $1.4 million in 1996,
reflecting the substantial growth of the Company during the
period.
The following table shows the composition of the Hattiesburg
Bank's loan portfolio by category:
Composition of Loan Portfolio
June 30, December 31,
1998 1997 1996
Amount Percent Amount Percent Amount Percent
of of of
Total Total Total
(Dollars in thousands)
Commercial, $8,421 36.1% $5,187 29.7% $1,106 25.6%
financial and
agricultural
Real Estate:
Mortgage-commercial 4,551 19.5 4,166 23.8 1,508 34.9
Mortgage-residential 4,142 17.7 3,698 21.1 1,205 27.8
Construction 2,442 10.5 2,031 11.6 36 0.8
Consumer and 3,789 16.2 2,405 13.8 472 10.9
other
Total loans $23,345 100.0% $17,487 100.0 $4,327 100.0
Allowance for loan 264 193 37
losses
Total net loans
$ 23,081 $17,294 $4,290
In the context of this discussion, a "real estate mortgage
loan" is defined as any loan, other than loans for construction
purposes, secured by real estate, regardless of the purpose of
the loan. The Company follows the common practice of financial
institutions in the Company's market area of obtaining a security
interest in real estate whenever possible, in addition to any
other available collateral. This collateral is taken to
reinforce the likelihood of the ultimate repayment of the loan
and tends to increase the magnitude of the real estate loan
portfolio component. Generally, the Company limits its loan-to-
value ratio to 80%. Due to the short term the loan portfolio has
existed, the current portfolio may not be indicative of the
ongoing portfolio mix. Management attempts to maintain a
conservative philosophy regarding its underwriting guidelines and
believes it will reduce the risk elements of its loan portfolio
through strategies that diversify the lending mix.
Investment Securities. The investment securities portfolio
is a significant component of the Company's total earning assets.
At June 30, 1998, investment securities were $6.4 million and
represented 19.6% of earning assets. The Company attempts to
maintain a portfolio of high quality, highly liquid investments
with returns competitive with short term U.S. Treasury or agency
obligations. This objective is particularly important as the
Company continues to emphasize increasing the percentage of the
loan portfolio to total earning assets. The Company primarily
invests in U.S. Treasury securities and securities of other U.S.
Government agencies with maturities up to five years.
The following table summarizes the book value of securities
for the dates indicated.
Securities Portfolio
June 30, December 31,
1998 1997 1996
(In thousands)
Available-for-sale
U.S. Treasury $503 $504 $
_
U.S. Government 3,774 2,635 4,058
agencies
Other 1,716 658 158
Total available-for- 5,993 3,797 4,216
sale
Held-to-maturity
U.S. Government $397 $507 $ -
agencies
Total $6,390 $4,304 $4,216
Short-Term Investments. At June 30, 1998 and December 31,
1997, short-term investments totaled $2.9 million and $1.8
million, respectively. These funds are a primary source of the
Company's liquidity and are generally invested in an earning
capacity on an overnight basis.
Deposits
Deposits. The following table sets forth the deposits of the
Company by category for the periods indicated.
Deposits
June 30, December 31,
1998 1997 1996
Amount Percent Amount Percent Amount Percent
Deposits Deposits Deposits
(Dollars in thousands)
Demand deposit $3,001 10.0% $2,479 11.8% $1,566 20.9%
accounts
NOW accounts 2,680 9.0 2,370 11.3 1,257 16.7
Money market 5,497 18.3 4,296 20.4 2,655 35.4
accounts
Savings accounts 306 1.0 200 0.9 71 0.9
Time deposits 12,218 40.7 7,267 34.5 1,256 16.7
less than
$100,000
Time deposits of 6,309 21.0 4,446 21.1 702 9.4
$100,000 or over
Total deposits $30,011 100.0% $21,058 100.0% $7,507 100.0
The Company's loan-to-deposit ratio was 77.8% at June 30, 1998,
83.0% at December 31, 1997, and 57.6% at December 31, 1996. The
loan-to-deposit ratio averaged 79.2% during 1997. Core deposits,
which exclude time deposits of $100,000 or more, provide a
relatively stable funding source for the Company's loan portfolio
and other earning assets. The Company's core deposits were $23.7
million at June 30, 1998 and $16.6 million at December 31, 1997.
Management anticipates that a stable base of deposits will be the
Company's primary source of funding to meet both its short-term
and long-term liquidity needs in the future. The Company also
purchases brokered deposits from time to time to help fund loan
growth and maintain a loan-to-deposit ratio under 80.0%.
Brokered deposits and jumbo certificates of deposit generally
carry a higher interest rate than traditional core deposits.
Further, brokered deposit customers typically do not have loan or
other relationships with the Company. The Company has adopted a
policy not to permit brokered deposits to represent more than 10%
of all of the Company's deposits. Certificates of deposit
included brokered deposits totaling $500,000 at June 30, 1998,
representing only 1.7% of the Company's total deposits at that
date.
The maturity distribution of the Company's certificates of
deposits of $100,000 or more at June 30, 1998 and December 31,
1997 is shown in the following table. The Company did not have
any other time deposits of $100,000 or more at either of these
dates.
Maturities of Certificates of Deposit
of $100,000 or More
Within After After Total
Three Three Twelve
Months Through Months
Twelve
Months
(Dollars in thousands)
December 31, 1997 $508 $2,639 $1,299 $4,446
June 30, 1998 $1,631 $2,108 $2,570 $6,309
Borrowed funds. Borrowed funds consist primarily of short-
term borrowings in the form of Federal Funds purchased from
correspondent banks and securities sold under agreements to
repurchase. The Company did not have any short-term borrowings
in 1997 or during the first six months of 1998. Although the
Company may use short-term borrowings as a secondary funding
source from time to time, management expects that core deposits
will continue to be the Company's primary funding source.
Capital
Total shareholders' equity as of June 30, 1998 was
$6,377,167, an increase of $9,463, or 0.15%, compared with
shareholders' equity of $6,367,704 as of December 31, 1997. This
increase was primarily attributable to a net profit from
operations for the six months ended June 30, 1998 of $13,520,
offset by an unrealized loss on available-for-sale securities of
$4,057.
Accounting Matters
In June 1998, the FASB issued SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in its
financial statements and that those instruments be measured at
fair value. Implementation is required for all fiscal quarters
of fiscal years beginning after June 15, 1999. The Company has
not determined the impact the adoption of this statement may have
on it consolidated financial statements.
Year 2000
Like many financial institutions, the Company relies upon
computers for the daily conduct of its business and for
information systems processing. There is concern among industry
experts that on January 1, 2000 computers will be unable to
"read" the new year, which may result in widespread computer
malfunctions. While the Company believes that it has available
resources and has adopted a plan to address Year 2000 compliance,
it is largely dependent on third party vendors. The Company
handles its own data processing using an IBM AS 400 mainframe
computer and software licensed from a third party vendor. The
Company has been informed by this vendor that this software is
Year 2000 compliant. The Company is seeking assurances about the
Year 2000 compliance with respect to the other third party
hardware or software system it uses, and the Company believes
that its internal systems and software and the network
connections it maintains will be adequately programmed to address
the Year 2000 issue. The Company has also begun testing these
systems to confirm that they will be Year 2000 compliant. Based
on information currently available, management does not believe
that the Company will incur significant costs in connection with
the year 2000 issue. Nevertheless, there is a risk that some of
the hardware or software that the Company uses will not be Year
2000 compliant, and the Company cannot predict with any certainty
the costs the Company will incur to respond to any Year 2000
issues. Factors which may affect the amount of these costs
include the Company's inability to control third party
modification plans, the Company's ability to identify and correct
all relevant computer codes, the availability and cost of
engaging personnel trained in solving Year 2000 issues, and other
similar uncertainties.
Further, the business of many of the Company's customers may
be negatively affected by the Year 2000 issue, and any financial
difficulties incurred by the Company's customers in solving Year
2000 issues could negatively affect those customers' ability to
repay any loans which the Company may have extended. Therefore,
even if the Company does not incur significant direct costs in
connection with responding to the Year 2000 issue, there can be
no assurance that the failure or delay of the Company's customers
or other third parties in addressing the Year 2000 issue or the
costs involved in such process will not have a material adverse
effect on the Company's business, financial condition, or results
of operations.
PART II
OTHER INFORMATION
Item I. Legal Proceedings.
There are no material legal proceedings to which the Company
is a party or of which any of their property is subject.
Item 2. Changes in Securities. Not applicable.
Item 3. Defaults Upon Senior Securities. Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
At the annual meeting of Shareholders held on April 28,
1998, three members were reelected to the Board of Directors.
The Company's Bylaws provides that the Board of Directors shall
be divided into three classes with each class to be as nearly
equal in number as possible. The Bylaws also provide that the
three classes of directors are to have staggered terms, so that
the terms of only approximately one-third of the Board members
will expire at each annual meeting of shareholders. The current
Class I directors are Perry E. Parker, Ted E. Parker, Dennis L.
Pierce, and A. L. Smith. The current Class II directors are John
Hudson, David E. Johnson, Dawn T. Parker, Andrew D. Stetelmen,
and Charles T. Ruffin. The current Class III directors are David
W. Bomboy, E. Ricky Gibson, and Fred A. McMurry. The current
terms of the Class III directors were set to expire at the
Meeting held April 28, 1998. Each of the current Class III
directors was nominated for reelection and stood for election at
the Meeting for a three year term. The terms of the Class I
directors will expire at the 1999 Annual Meeting of Shareholders,
and the terms of the Class II directors will expire at the 2000
Annual Shareholders Meeting.
Item 5.
As previously announced, the Company has entered into a bank development
agreement with the organizers of The First National Bank of the Pinebelt, a
proposed de novo community bank in Laurel, Mississippi (the "Laurel Bank").
On August 10, 1998, the Company filed a registration satatement on Form SB-2
relating to the issuance of up to 533,333 shares of Common Stock in connection
with the information of the Laurel Bank.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
27.1 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K on June 25, 1998
relating to the execution of the bank development agreement with
the organizers of the Laurel bank.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"), the registrant caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
THE FIRST BANCSHARES, INC.
Date: August 18, 1998
By: /S/ David E. Johnson
David E. Johnson
Chief Executive Officer
/S/ Charles T. Ruffin
Charles T. Ruffin
Principal Accounting
and Financial Officer
of the Company