First Bancshares, Inc.

What they do

First Bancshares, Inc. operates as a savings and loan holding company, with its primary subsidiary First Home Savings Bank taking deposits and originating loans. The company's total assets were $197.1 million as of March 31, 2012, with net loans receivable of $95.3 million and total deposits of $169.9 million. Its common stock trades on the Nasdaq Global Market under the symbol 'FBSI'.

Revenue drivers

• Net interest income — Primary revenue source; for the quarter ended March 31, 2012, net interest income was $1.3 million, down from $1.5 million in the prior-year quarter, with a net interest margin of 2.85%.
• Non-interest income — Includes service charges, gains on sale of investments, loans, and real estate owned, and BOLI income. For the quarter ended March 31, 2012, non-interest income was $174,000, down from $366,000 a year earlier.
• Loan portfolio — Net loans receivable were $95.3 million at March 31, 2012, a key asset generating interest income. The provision for loan losses was $208,000 in the third quarter of fiscal 2012, down from $245,000.

Recent performance

For the quarter ended March 31, 2012, the company reported a net loss of $584,000, or ($0.38) per diluted share, compared to a net loss of $614,000, or ($0.40) per diluted share, in the same quarter of 2011. Net interest income decreased $235,000 to $1.3 million, due to lower yields and a smaller average balance of interest-earning assets. Non-interest income fell $192,000, primarily due to lower gains on investment sales and service charges, partially offset by lower provisions on real estate owned. Non-interest expense decreased $127,000 to $1.8 million, largely due to lower occupancy, professional fees, and deposit insurance premiums.

Strategy

Management is focused on complying with regulatory orders and informal agreements, including maintaining Tier 1 Capital at or above 7.0% of total assets (the Bank exceeded at 7.79% at March 31, 2012). The Bank has agreed to reduce classified assets and correct loan documentation exceptions. Management is evaluating the costs and benefits of deregistering its common stock under the JOBS Act, which could reduce liquidity. The company purchased $3.0 million in bank-owned life insurance (BOLI) during the first quarter of fiscal 2012 to generate non-interest income. Management is reviewing proposals to establish a secondary market relationship for loan sales.

Risks

• Regulatory restrictions — The Company and Bank are subject to cease and desist orders (now enforced by Federal Reserve and FDIC) that restrict asset growth, dividends, brokered deposits, share repurchases, and debt issuance, potentially limiting strategic flexibility.
• Economic downturn — The prolonged economic decline has depressed housing prices, increased foreclosures, and reduced asset values, which could lead to further loan losses and write-downs.
• Regulatory change — The Dodd-Frank Act and recent rules on overdraft fees have reduced non-interest income, and future rules may increase costs or limit products.
• Capital and asset quality — The Bank must maintain a Tier 1 Capital ratio of at least 7.0% and is required to reduce classified assets; failure to meet these requirements could trigger further enforcement actions.

Outlook

Management notes that the economic downturn continues, though there were some positive indicators in early 2012. The company expects that the overdraft rule will continue to adversely affect non-interest income. The Dodd-Frank Act is expected to increase costs of operations, and new capital regulations may be more stringent. The company is evaluating deregistration under the JOBS Act, but no decision has been made.