First Bancshares, Inc.







2005 Annual Report

















First Home Savings Bank





www.firsthomesavingsbank.com



A wholly owned subsidiary of First Bancshares, Inc.





















1























TABLE OF CONTENTS







|                                                              | Page
|------------------------------------------------------------- | ----
|                                                              |     
|Letter to Stockholders....                                   | 1   
|Business of the Company...                                    | 3   
|Selected Consolidated Financial Information....             | 4   
|Managements Discussion and Analysis of Financial Condition.. |     
|and Results of Operations...                                | 6   
|Independent Auditors Report....                         | 21  
|Consolidated Financial Statements....                        | 22  
|Notes to Consolidated Financial Statements......            | 27  
|Common Stock Information...                                   | 56  
|Directors and Officers                                        | 57  
|Corporate Information....                                    | 58  



2





Dear Shareholder:



The noted economist John Maynard Keynes once wrote that it is better for the reputation to fail conventionally than to succeed unconventionally.  For better or worse, we have managed to do both at First Home Savings Bank.



By almost any standard, our success has been unconventional.  Few would have predicted that a small, mutual savings and loan association established in 1911 in Mountain Grove, Missouri would grow to become a thriving, full-service bank with nine branches and a tenth branch under construction in Rogersville, Missouri.  Or that this same bank, known in its earliest years as Mountain Grove Home Building and Loan Association, would successfully convert to a publicly traded stock company in December 1993 and that total assets of $118 million at the time of that conversion would continue to grow to $244 million as of June 30, 2005.



Its probably safe to say that even the best Wall Street analysts wouldnt have predicted that a person who paid $10,000 for 1,000 shares of First Bancshares stock when the Savings Bank went public in 1993 would see that stock split in January 1998 and be valued at $37,500 as of June 30, 2005.



Were proud of our unconventional success.  We’re especially pleased that in addition to delivering steady returns for shareholders, we’ve been able to help customers build family homes, send children to college, and then lend a hand ─ in the form of needed cash ─ to those college graduates when they were ready to start their own businesses or build their own homes.



But our history has not been without failures.  This past year, in particular, has seen disappointments, especially in our loan department, where loan loss reserves and reserves for related expenses were increased by just over $1.9 million  and in our asset structure, which decreased by almost $21 million.  We are, however, in the process of a thorough review of what caused those disappointments and are firmly committed to making any and all necessary changes.



On a more positive note, with the increases in loan loss and related reserves somewhat offset by other revenue streams, net income for the year ended June 30, 2005 was just over $1.3 million.  While stockholders equity decreased almost $500,000, book value per share increased from $16.77 a year ago to $17.28 at June 30, 2005 because we were able to repurchase 77,809 shares of FBSI stock.





3





Charles Schumacher resigned in September 2005 and the Board of Directors is currently searching for a new President ─ one who shares the vision of shareholders and the commitment to customers.  The directors are committed to hiring a new Chief Executive Officer who will provide the strong and effective leadership needed to manage both success and failures in the future.



Until then, I will serve as Interim President and Chief Executive Officer of First Home Savings Bank and of First Bancshares, Inc.  In those roles, and with all due respect to the late Mr. Keynes, I will strive to keep conventional failures at bay while we pursue success of every kind:  conventional, unconventional, but in the end, profitable.







Sincerely,







Stephen H. Romines

Interim President and Chief Executive Officer



4









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, 2005, the Company had total consolidated assets of $244.0 million and consolidated stockholders equity of $26.8 million.



While the Company owns some rental real estate and, until July 2004, a title insurance agency through a subsidiary, it 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 Savings Association Insurance Fund (SAIF) of 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 nine full service branch facilities in Marshfield, Ava, Gainesville, Sparta, Theodosia, Crane, Galena, Kissee Mills and Rockaway Beach, Missouri.  First Home provides its customers with a full array of community banking services.  The Savings Bank is primarily engaged in the business of attracting deposits from, and making loans to, the general public.  It emphasizes one-to-four family residential mortgage loans along with multi-family residential, consumer, commercial and home equity loans.  First Home also invests in mortgage-backed U. S. Government and agency securities and other assets.



At June 30, 2005, First Homes total gross loans were $164.1 million, or 67.3% of total consolidated assets, including $88.7 million, or 54.1% of total gross loans secured by one-to-four family properties and $54.1 million, or 33.0% of total gross loans secured by other real estate.  Of the loans secured by real estate, over 95.0% are adjustable-rate loans.



5







|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.                                                                                   
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|FINANCIAL CONDITION DATA:                                                                                        
|Total assets                                                                                                     
|Loans receivable, net                                                                                            
|Mortgage-backed certificates                                                                                     
|Cash, interest-bearing deposits                                                                                  
|and investment securities                                                                                        
|Customer deposits                                                                                                
|Borrowed funds                                                                                                   
|Stockholders' equity                                                                                             
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|OPERATING DATA:                                                                                                  
|                                                                                                                 
|Interest income                                                                                                  
|Interest expense                                                                                                 
|Net interest income                                                                                              
|Provision for loan losses                                                                                        
|Net interest income after provision                                                                              
|for loan losses                                                                                                  
|Gains/(losses) on investments and                                                                                
|mortgage-backed securities                                                                                       
|Noninterest income, excluding gains                                                                              
|on securities                                                                                                    
|Noninterest expense                                                                                              
|Income before taxes                                                                                              
|Income taxes                                                                                                     
|Net income                                                                                                       
|Basic earnings per share                                                                                         



6







|                                               |      |      | At or For the Years Ended June 30,
|---------------------------------------------- | ---- | ---- | ----------------------------------
|                                               |      |      | 2005                              
|KEY OPERATING RATIOS:                          |      |      |                                   
|                                               |      |      |                                   
|Return on average assets                       |      |      | 0.51                              
|Return on average equity                       |      |      | 4.60                              
|Average equity to average assets               |      |      | 11.10                             
|Interest rate spread for period                |      |      | 3.31                              
|Net interest margin for period                 |      |      | 3.48                              
|Non-interest expense to average assets         |      | 2.88 |                                   
|Average interest-earning assets to             |      |      |                                   
|interest-bearing liabilities                   |      |      | 108.00                            
|Allowance for loan losses to total loans       |      |      |                                   
|at end of period                               |      |      | 1.74                              
|Net charge-offs to average outstanding loans   |      |      |                                   
|during the period                              |      |      | 0.44                              
|Ratio of non-performing assets to total assets | 1.55 |      | 1.18                              
|Ratio of loan loss reserves to non-performing  |      |      |                                   
|assets                                         |      |      | 75.18                             
|                                               |      |      |                                   
|Dividend payout ratio                          |      |      | 19.28                             
|                                               |      |      |                                   
|                                               |      |      |                                   
|                                               |      |      | At June 30,                       
|                                               |      |      | 2005                              
|OTHER DATA:                                    |      |      |                                   
|                                               |      |      |                                   
|Number of:                                     |      |      |                                   
|Loans outstanding                              |      |      | 4,263                             
|Deposit accounts                               |      |      | 25,021                            
|Full service offices                           |      |      | 10                                



7





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 (MD&A) and other portions of this report contain certain forward-looking statements concerning the future operations of the Company.  Management desires to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and is including this statement for the express purpose of availing the Company of the protections of such safe harbor with respect to all forward-looking statements contained in our Annual Report.  We have used forward-looking statements to describe future plans and strategies, including our expectations of the Companys future financial results.  Managements ability to predict results or the effect of future plans or strategies is inherently uncertain.  Factors which could affect actual results include interest rate trends, the general economic climate in the Companys market area and the country as a whole, the ability of the Company to control costs and expenses, the ability of the Company to efficiently incorporate acquisitions into its operations, competitive products and pricing, loan delinquency rates, results of lending activities and loan loss experience, and changes in federal and state regulation.  These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements.



Operating Strategy



The primary goals of management are to minimize risk, improve profitability and promote growth.  Operating results depend primarily on net interest income, which is the difference between the income earned on its interest-earning assets, such as loans and investments, and the cost of its 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, as well as financial institutions and the attendant 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 designed to continue profitability while maintaining safety and soundness.  Primary among those strategies are emphasizing, if possible, one-to-four family lending, maintaining asset quality and managing interest-rate risk.  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.  Single family residential loans were 63% of the mortgage loans originated during fiscal year 2005, stable with 62% during fiscal 2004 but a decrease from 68% during fiscal 2003.  Even though originations of single family residential loans remained constant during fiscal 2005, single family residential loans as a percent of the Savings Banks total loan portfolio has declined.  While First Home gradually increased commercial loan origination within its traditional lending territory over the past four years from 20% of loan origination at June 30, 2001 to 28% at June 30, 2005, it is anticipated that trend will be discontinued for the foreseeable future as emphasis is again placed on single family residential lending.



8





Maintaining Asset Quality.  First Home has emphasized maintaining asset quality through sound underwriting, constant monitoring and effective collection techniques.  At June 30, 2005, however, First Home's ratio of nonperforming loans to total assets was 1.55%, an increase from 1.18% at June 30, 2004.  Further, the quality of the nonperforming loans deteriorated during the current fiscal year as evidenced in Note (5) of the Notes to Consolidated Financial Statements.  Loans past 90 days due and still accruing interest and loans not accruing interest have increased $800,000 from $2.2 million at June 30, 2004 to $3.0 million at June 30, 2005.  In addition, impaired loans have increased from $2.0 million to $5.0 million at June 30, 2004 and 2005, respectively.  The decreases in the quality of the past due and impaired loans are reflected in the increase of the allowance for loan losses as a percentage of total loans from 0.73% to 1.74% at June 30, 2004 and 2005, respectively. Actual loan losses, net of recoveries, of loans originated by First Home were $722,000for the year ended June 30, 2005.  During the year ended June 30, 2004, actual loan losses, net of recoveries, of loans originated by First Home were $244,000.  An extensive review, conducted by an outside consultant, of the majority of outstanding loans and current underwriting and monitoring procedures is currently underway.  Completion of the review is anticipated by mid- to late October.



Managing Interest-Rate Risk.  First Home relies primarily on adjustable interest rate loans to minimize the inherent risks of interest rate changes.  All long-term mortgage loans originated since 1973, that are retained in its portfolio, have had adjustable rates rather than fixed rates.  Further, with few exceptions, the majority of other loans including, but not limited to, commercial loans, cattle loans and agricultural loans that have maturities exceeding two years also have adjustable rates rather than fixed rates.As a response to customer requests, First Home processes a minimal number of fixed rate loans as a correspondent for a third party mortgage company.  Those loans, with prior customer notification, are not retained by the Savings Bank.



Critical Accounting Policies



We use estimates and assumptions in our 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 deferred income taxes and the associated income tax expense.  Management reviews the allowance for loan losses for adequacy on a quarterly basis and establishes a provision for loan losses that is sufficient for the loan portfolio growth expected and the loan quality of the existing portfolio.  Income tax expense and deferred income taxes are calculated using an estimated tax rate and are based on management's and our tax advisor's understanding of our effective tax rate and the tax code.  These estimates are reviewed by our independent auditors on an annual basis and by our regulators when they examine the Savings Bank.



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. The Savings Banks Asset Classification Committee assesses the allowance for loan losses on a quarterly basis.  The Committee analyzes several different factors including delinquency, charge-off rates and the changing risk profile of our 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 requiring management to make assumptions about future 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.



The Savings Banks methodology for analyzing the allowance for loan losses consists of three components: formula, specific and general allowances.  The formula allowance is determined by



9





applying an estimated loss percentage to various groups of loans.  The loss percentages are generally based on various historical measures such as the amount and type of classified loans, past due ratios and loss experience, which could affect the collectibility of the respective loan types.



The specific allowance component is created when management believes that the collectibility of a specific large loan, such as a real estate, multi-family or commercial real estate loan, has been impaired and a loss is probable.



The general allowance element relates to assets with no well-defined deficiency or weakness (i.e., assets classified pass or watch) and takes into consideration loss that is inherent within the portfolio but has not been realized.  Borrowers are impacted by events well in advance of a lender's knowledge that may ultimately result in a loan default and eventual loss.  Examples of such loss-causing events in the case of consumer or one- to four-family residential loans would be a borrower job loss, divorce or medical crisis.  Examples in commercial or construction loans may be the loss of customers due to competition or changes in the economy.  General allowances for each major loan type are determined by applying to the associated loan balance loss factors that take into consideration past loss experience, asset duration, economic conditions and overall portfolio quality.



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.



Deferred Income Taxes.  Deferred income taxes are reported for temporary differences between items of income or expense reported in the financial statements and those reported for income tax purposes.  Deferred taxes are computed using the asset and liability approach as prescribed in SFAS No. 109, "Accounting for Income Taxes."  Under this method, a deferred tax asset or liability is determined based on the enacted tax rates that will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in an institution's income tax returns.  The deferred tax provision for the year is equal to the net change in the net deferred tax asset from the beginning to the end of the year, less amounts applicable to the change in value related to investments available for sale.  The effect on deferred taxes of a change in tax rates is recognized as income in the period that includes the enactment date.  The primary differences between financial statement income and taxable income result from depreciation expense, mortgage servicing rights, loan loss reserves and dividends received from the FHLB.  Deferred income taxes do not include a liability for pre-1988 bad debt deductions allowed to thrift institutions which may be recaptured if the institution fails to qualify as a bank for income tax purposes in the future.



Comparison of Financial Condition at June 30, 2005 and June 30, 2004



General.The most significant change in the Companys financial condition during the year ended June 30, 2005 was a decrease in customer deposits of $20.1 million.  The decrease was funded by a reduction in cash and cash equivalents of $12.2 million and loans receivable of $8.1 million funded that decrease.  The Savings Bank maintained rates paid on deposits at a level lower than its competitors which was the primary cause of the deposit decrease.  The low fixed rate terms on single family mortgage loans offered by secondary market loan originators continued to cause Savings Bank customers to refinance through other sources.



Total Assets. Total assets decreased $21.0 million, or 7.9% to $244.0 million at June 30, 2005 from $265.0 million.  The decrease was attributable to a $12.2 million decrease in cash and cash equivalents and a $8.1 million decrease in net loans receivable.



Cash and Cash Equivalents.Cash and cash equivalents was $20.6 million at June 30, 2005 compared to $32.8 million at June 30, 2004, a decrease of $12.2 million, or 37.1%.  The decrease was used to fund withdrawals of customer deposits.



10





Certificates of Deposit.Certificates of deposit purchased as investments decreased $424,000 to $3.0 million at June 30, 2005 from $3.4 million at June 30, 2004.  The balance held in certificates of deposit purchased was reduced to place funds in interest bearing accounts at another financial institution.



Investment Securities. Investment securities decreased $4.7 million to $32.3 million at June 30, 2005 from $37.0 million at June 30, 2004.  Funds from maturities and early call redemptions on investment securities were used to purchase mortgage-backed securities.



Mortgage-backed Securities.Mortgage-backed securities increased $3.9 million from $6.9 million at June 30, 2004 to $10.8 million at June 30, 2005.  Additional mortgage-backed securities were purchased to provide monthly cash inflows from repayments on the underlying mortgages.



Loans Receivable.  Net loans receivable decreased from $166.3 million at June 30, 2004 to $158.1 million at June 30, 2005  The $8.1 million, or 4.9%, decrease was the result of loan payments and payoffs exceeding loan originations.  The sustained low long-term rates caused some of the Savings Banks customers to seek long-term fixed rate products that First Home does not offer.



Nonaccrual Loans.Nonaccrual loans increased from $1.8 million at June 30, 2004 to $2.9 million at June 30, 2005.  The balance of nonaccrual loans at June 30, 2005 consisted primarily of commercial loans to one borrower and related companies that have filed for protection under Chapter 11 bankruptcy.



Nonperforming Assets.  Nonperforming assets increased $717,000 from $3.2 million at June 30, 2004 to $3.8 million at June 30, 2005.  At June 30, 2005, the ratio of nonperforming loans to total assets was 1.55%, an increase from 1.18% at June 30, 2004.  However, the quality of the nonperforming loans deteriorated during the current fiscal year as evidenced in Note (5) of the Notes to Consolidated Financial Statements.  Loans past 90 days due and still accruing interest and loans not accruing interest have increased $800,000 from $2.2 million at June 30, 2004 to $3.0 million at June 30, 2005.  In addition, impaired loans have increased from $2.0 million to $5.0 million at June 30, 2004 and 2005, respectively.  Loans included as impaired are not necessarily on nonaccrual status or 90 days past due.  Some loans that are current as of June 30, 2005 have continued regular payment problems or underlying collateral deficiencies.



Customer Deposits and Borrowings.Customer deposits decreased $20.1 million, or 9.7%, to $187.1 million at June 30, 2005 from $207.3 million at June 30, 2004.  Certificates of deposit decreased $14.9 million while money market accounts decreased $9.0 million.  These decreases were somewhat offset by increases in checking and savings accounts totaling $3.7 million. In addition, small FHLB advances were paid off during this period resulting in a decrease of $726,000.



Stockholders Equity.Stockholders equity was $26.8 million at June 30, 2005 compared to $27.3 million at June 30, 2004.  The $500,000 decrease was the result of $1.6 million used for the repurchase of treasury stock and $253,000 for the payment of dividends offset by net income of $1.3 million.  At June 30, 2005, shares of stock outstanding had been reduced to 1,552,010 from 1,627,819 shares outstanding at June 30, 2004 as the result of repurchases by the Company reduced by the exercise of employee stock options.





11





Fiscal Year Ended June 30, 2005 Compared to June 30, 2004



Net Income.Net income decreased $1.0 million, or 43.9%, to $1.3 million for the fiscal year ended June 30, 2005 from $2.3 million for the fiscal year ended June 30, 2004.  The decrease was attributable to a $2.0 million increase in the provision for loan losses, an increase in noninterest expense of $671,000 and a decrease in total interest income of $469,000. Partially offsetting these items was a $1.0 million decrease in income tax expense, a $635,000 decrease in total interest expense and a $419,000 increase in noninterest income.



Net Interest Income.Net interest income increased $166,000 or 2.1%, to $8.2 million for the fiscal year ended June 30, 2005 from $8.0 million for the fiscal year ended June 30, 2004.  Total interest expense decreased $635,000 primarily because interest expense on customer deposits decreased.  The decrease in total interest expense was partially offset by a decrease in interest income of $469,000 due to a reduction in income from loans receivable.



Interest Income.For the fiscal year ended June 30, 2005, interest income decreased $469,000, or 3.4%, to $13.3 million from $13.7 million for the fiscal year ended June 30, 2004.  The majority of the change was a decrease in interest income from loans receivable of $652,000, or 5.5%, to $11.3 million for the fiscal year ended June 30, 2005 from $12.0 million during the fiscal year ended June 30, 2004.  The average rate on those loans decreased from 7.03% to 6.93% while the average balance of net loans outstanding decreased $6.9 million, or 4.0%.  The lower average balance of net loans outstanding was the primary contributor to the decrease in interest income.



A decrease in customer deposits resulted in a decrease in investment securities as proceeds from maturing investment securities were used to fund customer withdrawals.  Interest income from investment securities and mortgage-backed securities decreased $108,000, or 6.7% to $1.5 million for the year ended June 30, 2005 from $1.6 million for the year ended June 30, 2004



Interest income from other interest-earning assets, (primarily overnight funds accounts) increased $291,000, or 188.3%, attributable to an increase in the average rate from 0.66% for the year ended June 30, 2004 to 1.75% for the year ended June 30, 2005.



Interest Expense.Interest expense for the fiscal year ended June 30, 2005 decreased $635,000, or 11.10%, to $5.1 million from $5.7 million for the fiscal year ended June 30, 2004.  The average rate paid on customer deposits decreased from 2.01% for the fiscal year ended June 30, 2004 to 1.84% for the fiscal year ended June 30, 2005.  That decrease combined with a $15.0 million decrease in the average interest-bearing customer deposits resulted in a $620,000, or 15.2%, decrease in interest expense on customer deposits for the fiscal year ended June 30, 2005.



Interest expense on borrowed funds for the fiscal year ended June 30, 2005 also decreased $15,000, or 0.9%, to $1.6 million from $1.7 million for the fiscal year ended June 30, 2004 as principal reductions were made on FHLB advances and several small balance advances were paid in full.



Provision for Loan Losses.Provision for loan losses increased from $340,000 for the fiscal year ended June 30, 2004 to $2.3 million for the fiscal year ended June 30, 2005.  This $2.0 million increase was a result of an increase in nonperforming loans, secured by commercial real estate, from $3.1 million at June 30, 2004 to $3.8 million at June 30, 2005 and a substantial increase in impaired loans.  Actual loan charge-offs, net of recoveries, of First Home originated loans were $722,000 for the fiscal year ended June 30, 2005 compared to $244,000 for the fiscal year ended June 30, 2004.  See Note 5 of Notes to Consolidated Financial Statements for additional information.



12







The calculation of the provision for loan losses at June 30, 2005 contained a substantial increase for loans identified as impaired.  The collectibility of these loans was analyzed on an individual basis and any probable loss was included in the calculation.  Significant charge offs over the past two years have increased the Banks historical loss ratios causing the formula allowance portion to increase.



Noninterest Income.  Noninterest income increased $419,000, or 16.8%, to $2.9 million for the fiscal year ended June 30, 2005 compared to $2.5 million for the fiscal year ended June 30, 2004.  Income from bank-owned life insurance increased $759,000, or 288.8%.  In September 2004, the Savings Bank recorded income from proceeds as a result of the death of an insured covered under policies purchased in June 2003.



Service charges and other fee income decreased $22,000, or 1.2%, from $1.8 million for the fiscal year ended June 30, 2004 to $1.8 million for the fiscal year ended June 30, 2005.  A $62,000 decrease in the fee income on insufficient checks was slightly offset by a $39,000 increase in processing income from debit card transactions.



Late payment fees on loans decreased $36,000 based on one-time late payment fee refunds to loan customers and a reduction in the fee for late payment on certain loans.  These refunds and reduction in fee income were the result of a state consumer credit examination.  During the fiscal year ended June 30, 2005, fee income as a correspondent on behalf of a fixed rate real estate mortgage company decreased $10,000, as fewer fixed rate loans were originated.



Title insurance commissions earned by the Companys subsidiary, SCMG, Inc. (formerly South Central Missouri Title, Inc.), decreased $81,000 during the fiscal year ended June 30, 2005 as the majority of the assets of the title company were sold in July 2004.



Sales of investment real estate during the fiscal year ended June 30, 2005 resulted in a net gain of $9,000, and the sale of the majority of the assets of SCMG, Inc. (formerly South Central Missouri Title, Inc.) created a $7,000 gain.  The sale of the assets of SCMG, Inc. was accounted for on an installment sale basis as shown in Note (18) of the Notes to Consolidated Financial Statements.  Net losses from the sales of foreclosed property amounted to $58,000 during the fiscal year ended June 30, 2005 compared to $37,000 in net losses during the fiscal year ended June 30, 2004.



Losses on sales of mortgage-backed securities during the fiscal year ended June 30, 2005 were $4,000.  During the fiscal year ended June 30, 2004, common stock in a Missouri savings and loan holding company undergoing an acquisition was redeemed and other equity securities were sold for a combined $178,000 pre-tax gain.



Noninterest Expense.Noninterest expense increased $671,000, or 10.0%, from $6.7 million for the fiscal year ended June 30, 2004 to $7.4 million for the fiscal year ended June 30, 2005.



Compensation and employee benefits for the fiscal year ended June 30, 2005 decreased $228,000, or 5.9%, to $3.7 million from $3.9 million for the fiscal year ended June 30, 2004.  Group health insurance costs decreased $347,000, or 36.2%, as a result of a reduction in serious claims paid through the partially self-funded component of the Savings Banks health insurance plan.  The expense for compensated absences decreased $24,000 as  several long-term employees retired.  Those decreases were partially offset by three items.  First, payroll expense during fiscal 2005 increased $110,000, or 4.3% as a result of annual pay rate increases.  Second, the allocation of compensation and employee benefits to capitalized loan costs decreased $23,000 which caused



13





an increase in the overall expense.  Retirement plan expenses increased $19,000 during fiscal 2005 as contributions were required to fund the Savings Banks defined benefit plan.



Occupancy and equipment expense for the fiscal year ended June 30, 2005 increased $49,000, or 4.4%, to $1.2 million. Maintenance expense increased $27,000, or 9.1% due to upgrades of computer software and hardware and ATMs installed in the previous year.  Depreciation expense also increased as a result of purchases of computer software, hardware and ATMs in the previous year.



Other credit losses and related expenses for the fiscal year ended June 30, 2005 were $590,000.  Of this amount, $440,000 represented the amount paid on the letters of credit issued on behalf of the Savings Banks largest substandard borrower and $150,000 accrued for estimated costs for attorneys fees and litigation expenses.  The beneficiary of the letters of credit has claimed an additional $895,000 in pending litigation, however, the Savings Bank believes that claim is without substantial merit.



Professional fees, which includes legal, accounting and auditing expenses, increased $83,000, or 46.3%.  The increase was comprised of legal fees relating to assistance with additional regulatory disclosures and filings.  Assistance from third parties with the implementation of required provisions pursuant to the Sarbanes-Oxley Act of 2002 also contributed to the increase.



The outsourcing of check imaging, customer deposit statement preparation and mailing increased customer deposit account processing fees by $144,000.  The imaging of checks will allow the Savings Bank to have the option to exchange the images with other financial institutions which is more cost effective than processing the actual check.



Deposit insurance premiums increased $5,000, or 20.5%, to $29,000 for the fiscal year ended June 30, 2005.  Deposit premiums for the fiscal year ended June 30, 2004 included a refund from excess coverage relating to the purchase of the Crane and Galena branches in 1998.



Other noninterest expense for the fiscal year ended June 30, 2005 increased $23,000, or 1.6% to $1.5 million from $1.4 million for the fiscal year ended June 30, 2004.  Consulting expenses increased $65,000.  The Savings Bank used a consultant to assist in asset/liability and interest rate risk management for part of fiscal year 2004 and all of fiscal year 2005.  The Company also used consultants to assist in planning for future growth and expansion.



During the fiscal year ended June 30, 2005, amortization of Missouri low-income housing credits increased $28,000.  These credits were purchased in December 2003, therefore, the fiscal year ended 2004 did not include a full year of amortization expense. Employee education expense increased $11,000 as a result of training for employees who were assigned additional duties and to obtain training in areas that had changes in regulations.



Other noninterest expense also reflects a decrease in loss on checking accounts of $43,000, or 55.1%, during the fiscal year ended June 30, 2005.  The decrease is attributable to standardized payment decisions of insufficient customer checks combined with enhanced tracking and timely followup on overdrawn checking accounts.  The discontinuance of the title company operation as a result of the sale of the majority of the assets resulted in a decrease of related expenses of $17,000.



During the fiscal year ended June 30, 2005, advertising expense decreased $12,000, or 9.29%, to $118,000 from $130,000 for the fiscal year ended June 30, 2004.  The Savings Bank decreased advertising and promotion of deposit account services.  Office supplies expense decreased $11,000 through efforts by employees to reduce costs in this area.  Dues and



14





subscriptions decreased $10,000 as the Savings Bank discontinued its membership in several organizations.



Income Taxes.Income tax expense for the fiscal year ended June 30, 2005 decreased $1.0 million, or 98.5% to $16,000 from $1.1 million as income before taxes decreased and the Savings Bank received $800,000 in bank-owned life insurance proceeds which was nontaxable income.



Net Interest Margin.Net interest margin for the fiscal year ended June 30, 2005 was 3.48% compared to 3.22% for the fiscal year ended June 30, 2004.  The increase was the result of the reduction in the cost of customer deposits and the increase in yield on other interest-earnings assets offset slightly by the reduction in the yield on loans.



Fiscal Year Ended June 30, 2004 Compared to June 30, 2003



Net Income.Net income increased $103,000, or 4.6%, to $2.3 million for the fiscal year ended June 30, 2004 from $2.2 million for the fiscal year ended June 30, 2003.  Total interest expense decreased $1.4 million, provision for loan losses decreased $87,000, noninterest income increased $584,000 and income taxes decreased $199,000.  Those factors were offset by a $1.8 million decrease in total interest income and a $387,000 increase in noninterest expense.



Net Interest Income.Net interest income decreased $380,000, or 4.5%, to $8.0 million for the fiscal year ended June 30, 2004 from $8.4 million for the fiscal year ended June 30, 2003.  Interest income decreased $1.8 million while interest expense decreased $1.4 million.



Interest Income.Interest income decreased $1.8 million, or 11.3%, to $13.7 million for the fiscal year ended June 30, 2004 from $15.5 million for the fiscal year ended June 30, 2003.  A two year trend of declining overall balances in loans combined with declining rates on those loans continued into the current year.  The average yield on loans decreased from 7.47% to 7.03% while the average balance of net loans outstanding decreased $13.9 million, or 7.6%.  The overall effect was a decrease in interest income from loans receivable of $1.8 million, or 13.0%, to $12.0 million for the fiscal year ended June 30, 2004 from $13.8 million during the fiscal year ended June 30, 2003.



A portion of the funds from early loan payoffs during fiscal years 2004 and 2003 was invested in mortgage-backed securities, which caused interest income on mortgage-backed securities to increase $136,000, or 89.7%.  The average balance maintained in mortgage-backed securities increased $4.0 million, or 68.8%, while the average yield increased from 2.58% for the fiscal year ended June 30, 2003 to 2.91% for the fiscal year ended June 30, 2004.



Interest income from investment securities decreased $35,000, or 2.62% from $1.4 million for the fiscal year ended June 30, 2003 to $1.3 million for the fiscal year ended June 30, 2004.  Funds from early loan payoffs were invested to increase the average balance in investment securities from $36.0 million for the fiscal year ended June 30, 2003 to $42.7 million for the fiscal year ended June 30, 2004.  The reduction in interest income from investment securities was caused by a decline in the average rate earned from 3.79% for the fiscal year ended June 30, 2003 to 3.11% for the fiscal year ended June 30, 2004.



Interest income from other interest-earning assets decreased $66,000, or 29.8%.  That income is primarily earnings on balances at the FHLB and other financial institutions.  The reduction in income was caused by a decline in the average rate earned on those funds.  The average yield for the fiscal year ended June 30, 2004 was 0.59% compared to 0.95% for the fiscal year ended June 30, 2003.





15





Interest Expense.Interest expense for the fiscal year ended June 30, 2004 decreased $1.4 million, or 19.3%, to $5.7 million from $7.1 million for the fiscal year ended June 30, 2003.  The average rate paid on customer deposits decreased from 2.72% for the fiscal year ended June 30, 2003 to 2.01% for the fiscal year ended June 30, 2004.  Even though the balance in customer deposits at June 30, 2004 compared to June 30, 2003 decreased $4.4 million, there was a $3.3 million increase in the average balance outstanding during the fiscal year.   The effect of the decrease in the average rate paid on customer deposits was only slightly offset by the increase in average balance to result in a $1.3 million, or 24.9%, decrease in interest expense on customer deposits for the fiscal year ended June 30, 2004. Interest expense on borrowed funds for the fiscal year ended June 30, 2004 decreased $22,000, or 1.3%, from the fiscal year ended June 30, 2003 as principal reductions were made on FHLB advances.



Provision for Loan Losses.Provision for loan losses decreased from $427,000 for the fiscal year ended June 30, 2003 to $340,000 for the fiscal year ended June 30, 2004.  The $87,000 decrease was attributable to an $80,000 provision in 2003 for a group of loans to one borrower that became impaired in 2003.  Actual loan charge-offs, net of recoveries, of loans originated by First Home were $244,000 for the fiscal year ended June 30, 2004 compared to $167,000 for the fiscal year ended June 30, 2003.



Noninterest Income.  Noninterest income was $2.5 million for the fiscal year ended June 30, 2004 which was an increase of $584,000, or 30.7%, from $1.9 million for the fiscal year ended June 30, 2003.  Service charges and other fee income increased $252,000, or 16.2%.  This is primarily the result of the continuation of the overdraft protection program the Savings Bank began in October 2002 that automatically pays overdraft checks up to a certain amount for customers that have good credit history with the Savings Bank.  The normal overdraft check fee is charged for each check paid.  During the fiscal year ended June 30, 2004, there was no increase in losses on checking accounts as an effect of allowing more customer accounts to pay into an overdrawn status.  Service charges and other fee income also increased $11,000 during fiscal year ended 2004 with the issuance of debit cards to more of the Savings Banks customer base and the addition of three ATMs.



Late in June 2003, the Savings Bank purchased $5.5 million in bank-owned life insurance.  The earnings on this product were $263,000 during the fiscal year ended June 30, 2004.



During the fiscal year ended June 30, 2004, income from real estate operations decreased $63,000 to $47,000 as a result of lower rent income on a commercial building.  The building is being rented to an area college at a reduced rate to assist in providing additional classroom facilities for the Mountain Grove campus.



During the fiscal year ended June 30, 2004, net losses from the sales of foreclosed property amounted to $37,000 compared to $16,000 in net losses during the fiscal year ended June 30, 2003.



Common stock in a Missouri savings and loan holding company undergoing an acquisition was redeemed and other equity securities were sold for a combined $178,000 pre-tax gain during the fiscal year ended June 30, 2004.  The $27,000 gain on the sale of investments during the fiscal year ended June 30, 2003 resulted from the sale of an equity security and the above par redemption of another equity security.



Noninterest Expense.Noninterest expense increased $387,000, or 6.1%, from $6.4 million for the fiscal year ended June 30, 2003 to $6.7 million for the fiscal year ended June 30, 2004.





16





Compensation and employee benefits for the fiscal year ended June 30, 2004 increased $210,000, or 5.7%, to $3.9 million from $3.7 million for the fiscal year ended June 30, 2003.  First, payroll expense during fiscal 2004 increased $85,000, or 3.5%, as a result of annual pay rate increases.  Second, and most significantly, retirement plan expenses increased $148,000 during fiscal 2004 as additional contributions were required to fund a defined benefit plan, established in 1969.  The Plan had been fully funded for the 15 years previous to the fiscal year 2003. Group health insurance costs decreased $21,000, or 2.1%.  A comprehensive review of the components of the Savings Banks partially self-funded health insurance plan was performed to limit or reduce future years costs of this benefit.  Finally, the expense for the compensated absences policy decreased $8,000 during fiscal 2004.



Occupancy and equipment expense for the fiscal year ended June 30, 2004 increased $114,000, or 11.4%, to $1.1 million from $999,000 for the fiscal year ended June 30, 2003.  Depreciation expense on computer systems increased $49,000 from computer upgrades and enhancements on both hardware and software.



Maintenance expense for the fiscal year ended June 30, 2004 increased $49,000.  With the addition of more ATMs, upgrades and enhancements in computer hardware and software (including telephone and internet banking products), the cost of the related maintenance agreements have increased accordingly.  The expense related to furniture and equipment not required to be capitalized increased $16,000 as the result of items purchased for additional offices at the main bank.



As the result of new and increased regulations for public companies, professional fees, which includes legal, accounting and auditing expenses, increased $17,000, or 10.5%.



Customer deposit account processing fees increased $90,000 due to the outsourcing of customer deposit statement preparation and mailing.  The process includes sending customers images of their checks rather than the actual check.  A major factor in the decision process to outsource this function is in preparation of Check 21 Act.  This change in law, which becomes effective in October 2004, allows financial institutions to exchange electronic images of customer checks rather than the physical item.  This electronic exchange should result in lower fees from check processing.  In connection with the implementation of the overdraft protection program, the Savings Bank paid an additional $22,000 (10% of the net increase in related fees) to a marketing firm for ongoing support.



Other noninterest expense for the fiscal year ended June 30, 2004 decreased $41,000, or 2.8%, to $1.4 million from $1.5 million for the fiscal year ended June 30, 2003.



Outside consultant fees increased $18,000 as the Savings Bank began using a consultant to assist in asset/liability and interest rate risk management.  Charitable contributions increased $16,000 for the fiscal year ended June 30, 2004 as the Savings Bank made additional contributions to area programs.  The Savings Bank purchased Missouri low-income housing tax credits in December 2003 to use to offset Missouri Savings and Loan tax for approximately the next 10 years. Amortization related to those credits was $14,000 during fiscal 2004.



As an offset to the above increases, the following items decreased during the fiscal year ended June 30, 2004.  Advertising expense decreased $43,000, or 24.6%, to $130,000 from $173,000 for the fiscal year ended June 30, 2003.  The Savings Bank reduced the coverage area and amount of advertising run in local newspapers during fiscal 2004. Office supplies decreased $25,000 through the software purchases and enhancements noted above.  More forms are completed through these software programs which reduces the amount of paper forms to be purchased and stored.  The costs associated with in-house printing of customer checks decreased $17,000 as volume discounts were utilized when purchasing the related supplies.



17







Employee education expense decreased $13,000 as the majority of the training costs for the computer hardware and software upgrades occurred in fiscal 2003.  Correspondent bank service charges decreased $14,000 during fiscal 2004 attributable to the outsourcing of the customer check processing function and as the volume of items processed began to decrease.  Postage expense decreased $7,000, or 4.2%, which was attributable to the outsourcing of customer statement preparation in which customers are sent check images rather than the actual checks, providing for lower mailing weight.



Income Taxes.Income tax expense for the fiscal year ended June 30, 2004 decreased $199,000, or 15.7%, to $1.0 million from $1.3 million for the fiscal year ended June 30, 2003.  The reduction is primarily due to earnings on the bank-owned life insurance, which are not taxable, and the decrease in income before taxes.



Net Interest Margin.Net interest margin for the fiscal year ended June 30, 2004 was 3.22% compared to 3.37% for the fiscal year ended June 30, 2003.  The decrease was the result of the reduction in the yield on loans and investments offset slightly by the reduction in the cost of customer deposits.



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 investments) 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.



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.  Average balances for a period have been calculated using the average monthly balances for the period.





18





|                                     | Years Ended June 30,   |          
|------------------------------------ | ---------------------- | ---------
|                                     | 2005                   |          
|                                     |                        | Interest 
|                                     | Average                | and      
|                                     | Balance(2)             | Dividends
|                                     | (Dollars in thousands) |          
|Interest-earning assets:            
|Loans(1)                             | $163,273               | $11,313  
|Mortgage-backed securities           | 8,421                  | 295      
|Investment securities                | 37,942                 | 1,211    
|Daily interest-bearing deposits      | 25,048                 | 446      
|Total interest-earning assets        | 234,684                | 13,265   
|Non-interest earning assets         
|Office properties and equipment, net | 5,853                  |          
|Real estate, net                     | 2,844                  |          
|Other non-interest earning assets    | 14,510                 |          
|Total assets                         | $257,891               |          
|                                     |                        |          
|Interest-bearing liabilities:       
|Passbook accounts                    | $17,541                | 142      
|NOW and Super Saver accounts         | 74,594                 | 641      
|Certificates of deposit              | 95,885                 | 2,672    
|Total deposits                       | 188,020                | 3,455    
|Other interest-bearing liabilities   | 29,261                 | 1,636    
|Total interest-bearing liabilities   | 217,281                | 5,091    
|Non-interest bearing liabilities:   
|Other liabilities                    | 11,997                 |          
|Total liabilities                    | 229,278                |          
|Stockholders' equity                 | 28,613                 |          
|Total liabilities and               
|stockholders' equity                 | $257,891               |          
|Net interest income                  | $8,174                 |          
|Interest rate spread                 | 3.31                   | %        
|Net interest margin                  | 3.48                   | %        
|Ratio of average interest-earning   
|assets to average interest-         
|bearing liabilities                  | 1.080094               |          



__________________

(1)

Average balances include nonaccrual loans and loans 90 days or more past due. The corresponding interest up to the date of nonaccrual 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.



19





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.



|                                  | Years Ended June 30,  |  | Years Ended June 30, 
|--------------------------------- | --------------------- |  | ---------------------
|                                  | 2005 Compared to 2004 |  | 2004 Compared to 2003
|                                  | Increase/(Decrease)   |  | Increase/(Decrease)  
|                                  | Due to                |  | Due to               
|                                  |                       |  |                      
|                                  | Volume                |  | Rate                 
|                                  | (In thousands)       
|Interest-earning assets:         
|Loans (1)                         | $(478)                |  | $(174)               
|Mortgage-backed securities        | (19)                  |  | 26                   
|Investment securities             | (152)                 |  | 44                   
|Daily interest-earning deposits   | (6)                   |  | 290                  
|Total net change in income on    
|interest-earnings assets          | (655)                 |  | 186                  
|                                  |                       |  |                      
|Interest-bearing liabilities:    
|Interest-bearing deposits         | (289)                 |  | (331)                
|FHLB advances                     | 1                     |  | (16)                 
|Total net change in expense on   
|Interest-bearing deposits         | (288)                 |  | (347)                
|Net change in net interest income | $(367)                |  | $533                 





(1)  Includes interest on loans 90 days or more past due not on nonaccrual status.





Liquidity and Capital Resources



First Homes primary sources of funds are deposits, proceeds from principal and interest payments on loans, mortgage-backed securities, investment securities, net operating income and FHLB advances.  While maturities and scheduled amortization of loans and mortgage-backed securities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.



The primary investing activity of First Home is the origination of mortgage loans.  Mortgage loans originated by First Home have remained consistent at $37.8 million, $43.7 million and $39.2 million for the years ended June 30, 2005, 2004 and 2003, respectively.  Other investing activities include the purchase of investment securities, which totaled $4.8 million,



20





$26.3 million and $29.4 million for the years ended June 30, 2005, 2004, and 2003, respectively, and the purchase of mortgage-backed securities, which totaled $6.8 million, $2.6 million and $13.3 for the fiscal years ended June 30, 2005, 2004 and 2003, respectively.  These activities were funded primarily by principal repayments on loans, mortgage-backed securities, other investment 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 deposits, principal and interest payments from loans, mortgage-backed securities and investments, and FHLB advances.  During fiscal years 2005, 2004 and 2003, First Home used its sources of funds primarily to purchase investment securities and mortgage-backed securities, fund loan commitments and to pay maturing savings certificates and deposit withdrawals.  At June 30, 2005, First Home had approved loan commitments totaling $1.3 million and undisbursed loans in process totaling $3.3 million.



Liquid funds necessary for the normal daily operations of First Home are maintained in two working 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 those 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 working checking accounts and transferred, when appropriate, to the daily time account, the repurchase agreement account, used to purchase investments or reduce FHLB advances to enhance net interest income.



At June 30, 2005, certificates of deposit amounted to $89.6 million, or 47.9%, of First Homes total deposits, including $57.6 million which are scheduled to mature by June 30, 2006.  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 by savings deposits and FHLB advances and that it can adjust the offering rates of savings certificates to retain deposits in changing interest rate environments.



OTS regulations require First Home to maintain specific amounts of capital.  As of June 30, 2005, First Home was in compliance with all current regulatory capital requirements with tangible, core and risk-based capital ratios of 9.9%, 9.9% and 16.6%, respectively.  These ratios exceed the 1.5%, 4.0% and 8.0%, respectively, 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.  See Note 19 of the Notes to Consolidated Financial Statements.





Contractual Obligations



Through the normal course of operations, we have entered into certain contractual obligations.  Our obligations generally relate to funding of operations through deposits and borrowings.



At June 30, 2005, scheduled maturities of contractual obligations were as follows:



21





|                        |         | Within 1 Year | 1-3 Years | 4-5 Years | Over 5 Years | Total Balance
|----------------------- | ------- | ------------- | --------- | --------- | ------------ | -------------
|(in thousands)         
|Certificates of Deposit | $57,580 | 21,092        | 10,959    | -         | $89,631     
|FHLB Advances           | 27      | 60            | 70        | 28,237    | 28,394      
|Total contractual      
|obligations             | $57,607 | $21,152       | $11,029   | $28,237   | $118,025    





22





Capital



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 $26.8 million at June 30, 2005, or 10.99%, of total assets on that date. As of June 30, 2005, we exceeded all regulatory capital requirements.  Our regulatory capital ratios at June 30, 2005 were as follows: Tier 1 (core) capital 9.85%; Tier 1 risk-based capital 15.44%; and total risk-based capital 16.54%.  The regulatory capital requirements to be considered well capitalized are 5%, 6% and 10%, respectively.  See "Item I.  Business - Regulation - Capital Requirements."





Off-Balance Sheet Arrangements



We are 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.  Our 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.  We use the same credit policies in making commitments as we do 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 us 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, 2005:



|                                    | Contract or           
|----------------------------------- | ----------------------
|                                    | Notional Amount       
|                                    | (dollars in thousands)
|Commitments to originate loans     
|Fixed Rate                          | $25                   
|Adjustable Rate                     | 1,278                 
|Undisbursed balance of loans closed | 3,325                 
|Unused line of credit               | 3,135                 
|Commercial letters of credit        | 1,598                 
|Total                               | $9,361                









23





Impact of New Accounting Standards



See Note (1) of the Notes to Consolidated Financial Statements.





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.



24







|FIRST BANCSHARES, INC. AND SUBSIDIARIES                                                      
|---------------------------------------------------------------------------------------------
|                                                                                             
|CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION                                               
|- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
|June 30, 2005 and 2004                                                                       
|                                                                                             
|                                                                                             
|ASSETS                                                                                       
|                                                                                             
|Cash and cash equivalents, including interest-bearing accounts                               
|of $17,474,994 in 2005 and $27,430,860 in 2004                                               
|Certificates of deposit purchased                                                            
|Investment securities available-for-sale, at fair value                                      
|Investment securities held-to-maturity (estimated fair value of                              
|$21,247,249 in 2005 and $28,635,456 in 2004)                                                 
|Investment in Federal Home Loan Bank stock, at cost                                          
|Mortgage-backed certificates available-for-sale,                                             
|at fair value                                                                                
|Mortgage-backed certificates held-to-maturity (estimated fair                                
|value of $2,768,846 in 2005 and $3,922,555 in 2004)                                          
|Loans receivable held-for-investment, net                                                    
|Accrued interest receivable                                                                  
|Prepaid expenses                                                                             
|Property and equipment, less accumulated depreciation                                        
|and valuation reserve                                                                        
|Real estate owned                                                                            
|Intangible assets, less accumulated amortization                                             
|Deferred tax asset, net                                                                      
|Income taxes recoverable                                                                     
|Bank-owned life insurance                                                                    
|Other assets                                                                                 
|Total assets                                                                                 
|                                                                                             
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                         
|                                                                                             
|Customer deposits                                                                            
|Advances from Federal Home Loan Bank                                                         
|Borrowings                                                                                   
|Income taxes payable                                                                         
|Accrued expenses                                                                             
|Total liabilities                                                                            
|                                                                                             
|Commitments and contingencies                                                                
|                                                                                             
|Preferred stock, $.01 par value; 2,000,000 shares authorized,                                
|none issued                                                                                  
|Common stock, $.01 par value; 8,000,000 shares authorized,                                   
|issued 2,893,036 in 2005 and 2,891,036 in 2004, outstanding                                  
|1,552,010 in 2005 and 1,627,819 in 2004                                                      
|Paid-in capital                                                                              
|Retained earnings - substantially restricted                                                 
|Treasury stock, at cost - 1,341,026 shares in 2005 and                                       



25





|1,263,217 shares in 2004                           | (19,059,171)      |  | (17,460,644)      
|-------------------------------------------------- | ----------------- |  | ------------------
|Accumulated other comprehensive income (loss)      | (106,016)         |  | (134,497)         
|Total stockholders' equity                         | 26,817,329        |  | 27,296,243        
|Total liabilities and stockholders' equity         | $     244,006,918 |  | $      264,977,538
|                                                   |                   |  |                   
|The accompanying notes are an integral part of the
|consolidated financial statements                 





26







|FIRST BANCSHARES, INC. AND SUBSIDIARIES                              
|---------------------------------------------------------------------
|                                                                     
|CONSOLIDATED STATEMENTS OF INCOME                                    
|- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
|Years Ended June 30, 2005, 2004, and 2003                            
|                                                                     
|                                                                     
|Interest Income:                                                     
|Loans receivable                                                     
|Investment securities                                                
|Mortgage-backed and related securities                               
|Other interest-earning assets                                        
|Total interest income                                                
|                                                                     
|Interest Expense:                                                    
|Customer deposits                                                    
|Borrowed funds                                                       
|Total interest expense                                               
|                                                                     
|Net interest income                                                  
|                                                                     
|Provision for loan losses                                            
|                                                                     
|Net interest income after                                            
|provision for loan losses                                            
|                                                                     
|Noninterest Income:                                                  
|Service charges and other fee income                                 
|Gain (loss) on sale of investments                                   
|Loss on sale of property and equipment                               
|and real estate owned                                                
|Income from bank-owned life insurance                                
|Income from real estate operations                                   
|Insurance commissions                                                
|Other                                                                
|Total noninterest income                                             
|                                                                     
|Noninterest Expense:                                                 
|Compensation and employee benefits                                   
|Occupancy and equipment                                              
|Other credit losses and related expenses                             
|Professional fees                                                    
|Customer deposit account processing fees                             
|Deposit insurance premiums                                           
|Other                                                                
|Total noninterest expense                                            
|                                                                     
|Income before taxes                                                  
|                                                                     
|Income taxes                                                         



27





|                                                   |                        |  |                     |  |                         
|-------------------------------------------------- | ---------------------- |  | ------------------- |  | ------------------------
|Net income                                         | $        1,316,933     |  | $     2,347,200     |  | $          2,244,419    
|                                                   |                        |  |                     |  |                         
|Basic earnings per share                           | $                 0.83 |  | $              1.42 |  | $                   1.37
|                                                   |                        |  |                     |  |                         
|Diluted earnings per share                         | $                 0.83 |  | $              1.42 |  | $                   1.35
|                                                   |                        |  |                     |  |                         
|The accompanying notes are an integral part of the
|consolidated financial statements                 





28







|FIRST BANCSHARES, INC. AND SUBSIDIARIES                                      
|-----------------------------------------------------------------------------
|                                                                             
|CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY                              
|- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
|Years Ended June 30, 2005, 2004 and 2003                                     
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Balances at June 30, 2002                                                    
|Comprehensive Income:                                                        
|Net Income                                                                   
|Other comprehensive income, net of tax:                                      
|Change in unrealized gain(loss) on                                           
|securities available-for-sale, net of deferred                               
|income taxes of $110,787                                                     
|Less: reclassification adjustment, net of                                    
|deffered income of taxes of $(9,937)                                         
|Total Comprehensive Income                                                   
|Proceeds from exercise of stock options                                      
|Tax Benefit from stock options exercised                                     
|Cash dividends ($.16 per share)                                              
|Purchase of treasury stock at cost                                           
|Balances at June 30, 2003                                                    
|Comprehensive Income:                                                        
|Net Income                                                                   
|Other comprehensive income, net of tax:                                      
|Change in unrealized gain(loss) on                                           
|securities available-for-sale, net of deferred                               
|income taxes of $(188,904)                                                   
|Less:  reclassification adjustment, net of                                   
|deferred income taxes of $(65,925)                                           
|Total Comprehensive Income                                                   
|Proceeds from exercise of stock options                                      
|Tax Benefit from stock options exercised                                     



29





|Cash dividends ($.16 per share)                                                      | -         |  | -                |  | -                     |  | (263,520)             |  | -                 |  | -                 |  | (263,520)       
|------------------------------------------------------------------------------------ | --------- |  | ---------------- |  | --------------------- |  | --------------------- |  | ----------------- |  | ----------------- |  | ----------------
|Purchase of treasury stock at cost                                                   | (50,668)  |  | -                |  | -                     |  | -                     |  | (1,037,281)       |  | -                 |  | (1,037,281)     
|Balances at June 30, 2004                                                            | 1,627,819 |  | 28,910           |  | 17,801,316            |  | 27,061,158            |  | (17,460,644)      |  | (134,497)         |  | 27,296,243      
|Comprehensive Income:                                                                |           |  |                  |  |                       |  |                       |  |                   |  |                   |  |                 
|Net Income                                                                           | -         |  | -                |  | -                     |  | 1,316,933             |  | -                 |  | -                 |  | 1,316,933       
|Other comprehensive income, net of tax:                                              |           |  |                  |  |                       |  |                       |  |                   |  |                   |  |                 
|Change in unrealized gain(loss) on                                                   |           |  |                  |  |                       |  |                       |  |                   |  |                   |  |                 
|securities available-for-sale, net of deferred                                       |           |  |                  |  |                       |  |                       |  |                   |  |                   |  |                 
|income taxes of $15,209                                                              | -         |  | -                |  | -                     |  | -                     |  | -                 |  | 25,897            |  | 25,897          
|Less:  reclassification adjustment, net of                                           |           |  |                  |  |                       |  |                       |  |                   |  |                   |  |                 
|deferred income taxes of $1,518                                                      | -         |  | -                |  | -                     |  | -                     |  | -                 |  | 2,584             |  | 2,584           
|Total Comprehensive Income                                                           |           |  |                  |  |                       |  |                       |  |                   |  |                   |  | 1,345,414       
|Proceeds from exercise of stock options                                              | 2,000     |  | 20               |  | 19,730                |  | -                     |  | -                 |  | -                 |  | 19,750          
|Tax Benefit from stock options exercised                                             | -         |  | -                |  | 7,968                 |  | -                     |  | -                 |  | -                 |  | 7,968           
|Cash dividends ($.16 per share)                                                      | -         |  | -                |  | -                     |  | (253,519)             |  | -                 |  | -                 |  | (253,519)       
|Purchase of treasury stock at cost                                                   | (77,809)  |  | -                |  | -                     |  | -                     |  | (1,598,527)       |  | -                 |  | (1,598,527)     
|Balances at June 30, 2005                                                            | 1,552,010 |  | $         28,930 |  | $          17,829,014 |  | $          28,124,572 |  | $    (19,059,171) |  | $       (106,016) |  | $     26,817,329
|                                                                                     |           |  |                  |  |                       |  |                       |  |                   |  |                   |  |                 
|                                                                                     |           |  |                  |  |                       |  |                       |  |                   |  |                   |  |                 
|                                                                                     |           |  |                  |  |                       |  |                       |  |                   |  |                   |  |                 
|                                                                                     |           |  |                  |  |                       |  |                       |  |                   |  |                   |  |                 
|                                                                                     |           |  |                  |  |                       |  |                       |  |                   |  |                   |  |                 
|                                                                                     |           |  |                  |  |                       |  |                       |  |                   |  |                   |  |                 
|The accompanying notes are an integral part of the consolidated financial statements
|24                                                                                  





30







|FIRST BANCSHARES, INC. AND SUBSIDIARIES                                      
|-----------------------------------------------------------------------------
|                                                                             
|CONSOLIDATED STATEMENTS OF CASH FLOWS                                        
|- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
|Years Ended June 30, 2005, 2004 and 2003                                     
|                                                                             
|                                                                             
|Cash flows from operating activities:                                        
|Net income                                                                   
|Adjustments to reconcile net income to net                                   
|cash provided by operating activities:                                       
|Depreciation                                                                 
|Amortization                                                                 
|Premiums and discounts on mortgage-backed                                    
|securities and investment securities                                         
|(Gain)/loss on sale of mortgage-backed securities and investment             
|securities                                                                   
|Loss on loans, net of recoveries                                             
|Gain on sale of property and equipment                                       
|Loss on sale of real estate owned                                            
|Gain from death benefit of bank-owned life insurance                         
|Increase in cash surrender value on bank-owned                               
|life insurance                                                               
|Net change in operating accounts:                                            
|Accrued interest receivable and other assets                                 
|Deferred loan costs                                                          
|Accrued expenses                                                             
|Deferred income taxes                                                        
|Income taxes payable - current                                               
|Net cash from operating activities                                           
|                                                                             
|Cash flows from investing activities:                                        
|Purchase of investment securities available-for-sale                         
|Purchase of investment securities held-to-maturity                           
|Purchase of Federal Home Loan Bank stock                                     
|Proceeds from sale of investment securities                                  
|available-for-sale                                                           
|Proceeds from maturities of investment securities                            
|available-for-sale                                                           
|Proceeds from maturities of investment securities                            
|held-to-maturity                                                             
|Net change in certificates of deposit                                        
|Net change in loans receivable                                               
|Purchase of mortgage-backed certificates available-for-sale                  
|Purchase of mortgage-backed certificates held-to-maturity                    
|Proceeds from sale of mortgage-backed certificates available-for-sale        
|Proceeds from principal payments and maturities                              
|of mortgage-backed certificates available-for-sale                           
|Proceeds from principal payments and maturities                              
|of mortgage-backed certificates held-to-maturity                             
|Purchases of property and equipment                                          
|Proceeds from sale of property and equipment                                 
|Purchase of bank owned life insurance                                        
|Proceeds from pay out of death benefit on bank-owned                         
|life insurance                                                               
|Proceeds from payments on note receivable                                    
|Net proceeds from sale of real estate owned                                  
|Net cash from (used in) investing activities                                 
|25                                                                           





31







|FIRST BANCSHARES, INC. AND SUBSIDIARIES                                                                        
|---------------------------------------------------------------------------------------------------------------
|                                                                                                               
|CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)                                                              
|- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -                                  
|Years Ended June 30, 2005, 2004 and 2003                                                                       
|                                                                                                               
|                                                                                                               
|Cash flows from financing activities:                                                                          
|Net change in demand deposits, savings accounts,                                                               
|and certificates of deposit                                                                                    
|Payments on borrowed funds                                                                                     
|Proceeds from borrowed funds                                                                                   
|Proceeds from issuance of common stock                                                                         
|Cash dividends paid                                                                                            
|Purchase of treasury stock                                                                                     
|Net cash from (used in) financing activities                                                                   
|                                                                                                               
|Net increase (decrease) in cash and cash equivalents                                                           
|                                                                                                               
|Cash and cash equivalents -                                                                                    
|beginning of period                                                                                            
|Cash and cash equivalents -                                                                                    
|end of period                                                                                                  
|                                                                                                               
|                                                                                                               
|Supplemental disclosures of cash flow information:                                                             
|                                                                                                               
|Cash paid during the year for:                                                                                 
|Interest on deposits and                                                                                       
|other borrowings                                                                                               
|Income taxes                                                                                                   
|                                                                                                               
|                                                                                                               
|Supplemental schedule of non-cash investing and                                                                
|financing activities:                                                                                          
|Loans and other real estate                                                                                    
|charged off to reserve                                                                                         
|                                                                                                               
|Loans transferred to real estate                                                                               
|acquired in settlement of loans                                                                                
|                                                                                                               
|On July 16, 2004 the property and equipment of South Central Missouri Title, Inc was sold for $252,000. The    
|property and equipment had a net value of approximately $102,000. As part of the sale, the company issued      
|a note payable to a former employee of South Central Missouri Title, Inc. for  $60,000.The gain from this sale,
|approximately $90,000, was deferred and is being recognized under the installment sale method. See Note 18,    
|Sale of Subsidiary for further details.                                                                        
|                                                                                                               
|                                                                                                               
|The accompanying notes are an integral part of the                                                             
|consolidated financial statements                                                                              





32





(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.



Use of estimates  Management uses estimates and assumptions in preparing these financial statements in accordance with accounting principles generally accepted in the United States of America.  Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses.  Actual results could vary from the estimates that were used.



Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans.



While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowances may be necessary based on changes in local economic conditions.  In addition, regulatory agencies, as an integral part of their examination process, periodically review the Savings Banks allowances for loan losses and foreclosed real estate.  Such agencies may require the Savings Bank to recognize additions to the allowances based on their judgments about information available to them at the time of their examination.



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 which are unrestricted as to withdrawal or use.  Cash equivalents include highly-liquid instruments with an original maturity of three months or less.





33





(1)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



Investment securities and mortgage-backed certificates  Securities are classified in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, 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.  At June 30, 2005 and 2004, the Company had no securities designated as trading securities.  Securities which are designated as held-to-maturity are designated as such because the investor has the ability and intent 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.  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.



Loans receivable  Loans receivable are stated at their principal amount outstanding, net of deferred loan origination and commitment fees and certain direct costs, which are recognized over the contractual life of the loan as an adjustment of the loans yield.  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.  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.  Loans not secured by real estate are then charged against the Savings Banks allowance for loan losses.  Loans secured by real estate that become 180 days or more past due that have not been foreclosed upon are then charged against the Savings Banks allowance for loan losses, unless the loan is adequately collateralized.  Cash collections subsequently received are applied against outstanding principal until the loan is considered fully collectible, after which cash collections are recognized as interest income.



The Company reports the change in present value of the expected future cash flows related to impaired loans as an increase or decrease in bad debt expense.











34





(1)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



Property and equipment and related depreciation  Property and equipment has been stated at cost except as discussed in Note 7.  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



Maintenance and repairs are charged to expense.  Improvements which extend the lives of the respective assets are capitalized.  When property or equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts and the resulting gain or loss is reflected in income.



Intangible assets  An intangible asset was recorded by the Savings Bank in connection with the acquisition of two branches from NationsBank. The intangible asset relates to customer relationships that were acquired.  The premium paid by the Savings Bank for the branches is being amortized on a straight-line basis over 15 years.



Income taxes  The Company files a consolidated federal income tax return with its wholly-owned subsidiaries.  The income tax effect of timing differences in reporting transactions for financial reporting and income tax purposes is reflected in the consolidated financial statements as deferred income taxes.



Income taxes are accounted for under the asset and liability method in accordance with SFAS No. 109, Accounting for Income Taxes.  Under this method, deferred income taxes are recognized for temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities.  The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.



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.



Loans are charged against the allowance at the time management has the information to consider it a loss or the loan is 120 days or more past due and not adequately collateralized with real estate.  If the loan is adequately secured by the real estate and becomes 180 days or more past due, foreclosure proceedings are initiated.





35





(1)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



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.



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.



Real estate owned  Real estate acquired in the settlement of loans, including in-substance foreclosures, is recorded at the lower of the remaining 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.



Loan origination fees and costs  Loan origination fees and costs are recorded in accordance with SFAS No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.  Under SFAS No. 91, 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 or sold, the unamortized balance of these deferred fees and costs is recognized in income.







36





(1)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



Real estate held for investment  Real estate properties held for investment are carried at the lower of cost, including cost of improvements incurred subsequent to acquisition, or net realizable value.  Costs relating to the development and improvement of property are capitalized, whereas costs relating to the holding of the property are expensed.



Advertising costs  The Company expenses non-direct response advertising costs as they are incurred.



Earnings per share  Basic earnings per share excludes dilution and 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  During the years ended June 30, 2005, 2004 and 2003, respectively, the Company had a stock-based employee compensation plan, which is described more fully in Note 13, Employee Benefit Plans.  The Company accounted for the plan under the recognition and measurement provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and related Interpretations.



New accounting standards - In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 46 Consolidation of Variable Interest Entities.This interpretation of Accounting Research Bulletin (ARB) No. 51, Consolidated Financial Statements, addresses consolidation by business enterprises of variable interest entities.  FIN 46 establishes standards for determining under what circumstances a variable interest entity should be consolidated with its primary beneficiary, including those to which the usual condition for consolidation does not apply.  This Interpretation was effective immediately for variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date.  It applies in the first fiscal year or interim period ending after December 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003.  The adoption of this Interpretation did not have a material impact on the Company.  In December 2003, the



37





SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



FASB issued FASB Interpretations No. 46 (Revised December 2003) Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46R).  FIN 46R is an update of FIN 46 and contains different implementation dates based on the types of entities subject to the standard and based on whether a company has adopted FIN 46.  The adoption of FIN 46R did not have a material impact on the Companys results of operations or financial condition.



In December 2004, the FASB issued a revision to SFAS No. 123, Accounting for Stock Based Compensation.  SFAS No. 123(R), Share Based Payment, supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance.  SFAS No. 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services.  It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entitys equity instruments or that may be settled by the issuance of the equity instruments.  SFAS No. 123(R) focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions.  We currently account for our stock-based compensation using the intrinsic method as defined in APB Opinion No. 25 and accordingly, we have not recognized any expense for our stock option plans in our consolidated financial statements.  SFAS No. 123(R) is effective for interim or annual periods beginning after December 15, 2005.



In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, that addresses accounting for changes in accounting principle, changes in accounting estimates, changes required by an accounting pronouncement in the instance the pronouncement does not include specific transition provisions and error correction.  SFAS No. 154 requires retrospective application to prior periods financial statements of changes in accounting principle and error correction unless impracticable to do so.  SFAS No. 154 states an exception to retrospective application when a change in accounting principle, or the method of applying it, may be inseparable from the effect of a change in accounting estimate.  When a change in principle is inseparable from a change in estimate, such as depreciation, amortization or depletion, the change to the financial statements is to be presented in a prospective manner.  SFAS No. 154 and the required disclosures are effective for accounting changes and error corrections in fiscal years beginning after December 15, 2005



In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position No. 03-3 (SOP 03-3), Accounting for Certain Loans or Debt Securities Acquired in a Transfer.  SOP 03-3 addresses the accounting for differences between contractual cash flows and the cash flows expected to be collected from purchased loans or debt securities if those differences are attributable, in part, to credit quality.  SOP 03-3 requires purchased loans and debt securities to be recorded initially at fair value based on the present value of the cash flows expected to be collected with no carryover of any valuation allowance



38







(1)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



previously recognized by the seller.  Interest income should be recognized based on the effective yield from the cash flows expected to be collected.  To the extent that the purchased loans or debt securities experience subsequent deterioration in credit quality, a valuation allowance would be established for any additional cash flows that are not expected to be received.  However, if more cash flows were subsequently expected to be received than originally estimated, the effective yield would be adjusted on a prospective basis.  SOP 03-3 was adopted by the Company on July 1, 2005.  The adoption of this statement is not expected to have a material impact on the Corporations financial position, results of operations, or cash flows.



In June 2005, the FASB decided not to provide additional guidance on the meaning of other-than-temporary impairment, and directed the staff to issue proposed FASB Staff Position (FSP) Emerging Issues Task Force  (EITF) 03-1-a, Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1, as final. The final FSP will supersede EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, and EITF Topic No. D-44, Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value. The final FSP (retitled FSP FAS 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments) will replace the guidance set forth in paragraphs 10-18 of EITF Issue 03-1 with references to existing other-than-temporary impairment guidance, such as SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, SEC Staff Accounting Bulletin No. 59, Accounting for Noncurrent Marketable Equity Securities, and APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock. FSP FAS 115-1 will codify the guidance set forth in EITF Topic D-44 and clarify that an investor should recognize an impairment loss no later than when the impairment is deemed other than temporary, even if a decision to sell has not been made.  FSP FAS 115-1 will be effective for other-than-temporary impairment analysis conducted in periods beginning after September 15, 2005.



Reclassifications  Certain accounts in the prior-years consolidated financial statements have been reclassified for comparative purposes to conform to the presentation in the current-year consolidated financial statements.



39





(2)

INVESTMENT SECURITIES



As discussed in Note 1, Summary of Significant Accounting Policies, the Company has designated certain securities as available-for-sale.  A summary of the investment securities available-for-sale at June 30, 2005 is as follows:

Estimated



Amortized

Gross Unrealized

Fair



Cost

Gains

Losses

Value



United States Government and

Federal Agencies obligations

$        8,258,419

$     6,441

$ 6,561   $     8,178,299



Obligations of states and

political subdivisions

340,000

3,079

1,620

341,459

Mutual funds

26,236

-

-



26,236



Common and preferred stocks

2,527,260

12,000

111,460

2,427,800

Total

$

11,151,915

$

21,520

$

199,641

$

10,973,794





A summary of investment securities held-to-maturity at June 30, 2005 is as follows:

Estimated



Amortized

Gross Unrealized

Fair



Cost

Gains

Losses

Value



United States Government and

Federal Agencies obligations

$

18,247,274

$

155

$

127,999

$

18,119,430

Obligations of states and

political subdivisions

3,089,722

44,265

6,168

3,127,819

Total

$

21,336,996

$

44,420

$

134,167

$

21,247,249



The amortized cost and estimated market value of debt securities at June 30, 2005, 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

$

1,000,000

$       982,810

Due after one year through five years

6,638,419

6,576,915



Due after five years through ten years

960,000

960,033

Total

$

8,598,419

$

8,519,758



Held to Maturity



Amortized

Estimated



Cost

Fair Value



Due in one year or less

$

4,090,361

$

4,064,722

Due after one year through five years

14,532,593

14,444,738

Due after five years through ten years

1,509,501

1,536,136

Due after ten years

1,204,541

1,201,653

Total

$

21,336,996

$

21,247,249



40





(2)

INVESTMENT SECURITIES (CONTINUED)



A summary of the investment securities available-for-sale at June 30, 2004 is as follows:

Estimated



Amortized

Gross Unrealized

Fair



Cost

Gains

Losses

Value



United States Government and

Federal Agencies obligations

$

5,510,957

$

17,324

$

85,698

$

5,442,583

Obligations of states and

political subdivisions

130,000

-

2,058



127,942

Mutual funds

27,306

-

-

27,306

Corporate senior notes

150,000

-

5,250

144,750

Common and preferred stocks

2,527,260

25,000

120,260



2,432,000

Total

$

8,345,523

$

42,324

$213,266

$

8,174,581



A summary of investment securities held-to-maturity at June 30, 2004 is as follows:

Estimated



Amortized

Gross Unrealized

Fair



Cost

Gains

Losses

Value



United States Government and

Federal Agencies obligations

$

26,258,431

$

4,312

$

213,356

$

26,049,387

Obligations of states and

political subdivisions

2,557,381

34,365

5,677

2,586,069

Total

$

28,815,812

$

38,677

$

219,033

$

28,635,456



The following table presents the fair value and gross unrealized losses of the Companys investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2005.



|                          | Less Than 12 Months |            | 12 Months or More |             | Total     
|------------------------- | ------------------- | ---------- | ----------------- | ----------- | ----------
|                          |                     | Unrealized |                   |             | Unrealized
|                          | Fair Value          | Losses     |                   | Fair Value  | Losses    
|United States            
|Government and           
|Federal Agencies         
|obligations               | $12,921,628         | $75,375    |                   | $10,120,710 | $139,186  
|Obligations of states    
|and political            
|subdivisions              | 431,366             | 3,265      |                   | 480,478     | 4,522     
|Federal agency           
|mortgage backed          
|securities                | 3,591,251           | 23,517     |                   | 2,315,902   | 52,793    
|                          |                     |            |                   |             |           
|Subtotal, debt securities | 16,944,245          | 102,157    |                   | 12,917,090  | 196,501   
|Common and               
|preferred stocks          | -                   | -          |                   | 1,957,800   | 111,460   
|Total temporarily        
|impaired securities       | $16,944,245         | $102,157   |                   | $14,874,890 | $307,961  





41





(2)

INVESTMENT SECURITIES (CONTINUED)



The unrealized losses associated with the Companys debt securities are not considered to be other-than-temporarily impaired because their unrealized losses are related to changes in interest rates and do not affect the expected cash flows of the underlying collateral or issuer.  Because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2005.



The Companys investments in common and preferred stocks consist primarily of two stocks ($1,957,800 of the total fair value and $111,460 of the total unrealized losses).  The Company evaluated the near-term prospects of the issuer in relation to the severity and duration of the impairment.  Based on that evaluation and the Companys ability and intent to hold these investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2005.



The following table presents proceeds from sales of securities, mortgage backed securities and the components of the net securities gains.

June 30,





2005         2004



2003



Proceeds from sales

$

271,745

$

1,172,619

$

519,357



Realized gains

$

-

$

187,925       $      26,857



Realized losses

4,102



9,749     -



Net realized gains (losses)

$           (4,102)

$

178,176       $      26,857





The book value of securities pledged as collateral, to secure public deposits was $259,819 at June 30, 2005 and $427,708 at June 30, 2004.  The approximate fair value of pledged securities was $265,445 at June 30, 2005 and $435,500 at June 30, 2004.



(3)

INVESTMENT IN FEDERAL HOME LOAN BANK STOCK



Investment in stock of the Federal Home Loan Bank is required by law of every federally-insured savings institution.  The Savings Bank is in compliance with this requirement with an investment in Federal Home Loan Bank of Des Moines stock of $1,904,300 at June 30, 2005.  No ready market exists for this stock and it has no quoted market value.  However, redemption of this stock historically has been at par value.







42





(4)

MORTGAGE-BACKED SECURITIES



The amortized cost and estimated market values of mortgage-backed securities available-

for-sale as of June 30, 2005 are summarized below:

Estimated



Amortized

Gross Unrealized

Fair



Cost

Gains

Losses

Value



FHLMC certificates

$

1,246,999

$

13,343

$

41

$

1,260,301

FNMA certificates

5,822,436

17,829

18,806

5,821,459

GNMA certificates

893,501

-

3,162

890,339

Total

$

7,962,936

$

31,172

$

22,009

$

7,972,099



The amortized cost and estimated market values of mortgage-backed securities held-to-

maturity at June 30, 2005 is as follows:

Estimated



Amortized

Gross Unrealized

Fair



Cost

Gains

Losses

Value



FHLMC certificates

$

1,931,471

$

451

$

50,231

$

1,881,691

FNMA certificates

888,147

3,078

4,070

887,155

Total

$

2,819,618

$

3,529

$

54,301

$

2,768,846



The amortized cost and estimated market values of mortgage-backed securities available-

for-sale as of June 30, 2004 are summarized below:

Estimated



Amortized

Gross Unrealized

Fair



Cost

Gains

Losses

Value



FHLMC certificates

$

476,130

$

444

$

3,892

$

472,682

FNMA certificates

1,041,458

2,447

13,338

1,030,567

GNMA certificates

1,302,711

1,416

30,661

1,273,466

Total

$

2,820,299

$

4,307

$

47,891

$

2,776,715









The amortized cost and estimated market values of mortgage-backed securities held-to-

maturity at June 30, 2004 is as follows:

Estimated



Amortized

Gross Unrealized

Fair



Cost

Gains

Losses

Value



FHLMC certificates

$

2,664,104

$

341

$

146,530

$

2,517,915

FNMA certificates

1,242,708

1,890

63,314

1,181,284

GNMA certificates

222,754

602

-

223,356

Total

$

4,129,566

$

2,833

$

209,844

$

3,922,555







43





(5)

LOANS RECEIVABLE HELD-FOR-INVESTMENT



Loans receivable at June 30 consist of the following:



2005

2004



Residential real estate

$

89,220,396

$

95,338,510

Commercial real estate

41,491,575

40,195,511

Land

9,450,129

9,018,858

Loans to depositors, secured by savings accounts

1,709,487

1,900,083

Consumer and automobile loans

7,877,448

8,743,077

Second mortgage loans

4,160,390

3,881,863

Commercial loans

10,046,951

10,334,315

Overdrafts

160,436

185,781

Total gross loans

164,116,812

169,597,998

Reserve for loan losses

(2,850,704)

(1,239,618)

Loans in process

(3,324,502)

(2,323,626)

Unamortized deferred loan costs, net

of origination fees

201,099

224,279

Net loans receivable held-for-investment

$

158,142,705

$

166,259,033



Activity in the allowance for loan losses is summarized as follows for the years ended

June 30:



2005

2004



Balance at beginning of year

$

1,239,618

$

1,144,158

Provision charged to income

2,332,920

339,510

Charge-offs

(808,799)



(346,207)

Recoveries

86,965

102,157

Balance at end of year

$

2,850,704

$

1,239,618



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, 2005 and 2004 that are interest-bearing and past 90 days due or are not accruing interest consist of the following:



2005

2004



Interest-bearing

$

148,408

$

403,027



Nonaccrual

2,854,263

1,811,719



$

3,002,671

$

2,214,746











44







(5)

LOANS RECEIVABLE HELD-FOR-INVESTMENT (CONTINUED)



The following is a summary of information pertaining to impaired loans:



June 30,



2005

2004



Total impaired loans

$

5,044,244

$

1,970,421





Valuation allowance related to impaired loans

$

1,853,713

$

398,546







Years Ended June 30,



2005

2004

2003



Average investment in

impaired loans

$

4,461,607

$

2,008,873

$

1,548,638





Interest income recognized

on impaired loans

$

165,186

$

27,229

$

114,248





Interest income recognized on

a cash basis on impaired loans

$

158,065

$

30,221

$

126,767





The Savings Bank has issued letters of credit totaling $1,335,000 for a customer in bankruptcy with $1.7 million in impaired loans.  The Savings Bank has paid $440,000 on the letters of credit and the beneficiary of the letters of credit has filed suit claiming the balance of $895,000 plus punitive damages and attorneys fees.  The Savings Bank has filed a counterclaim and the case is pending in federal court. Counsel for the Savings Bank has advised that, at this point in the proceedings, the extent of the loss, if any, cannot be predicted.   The Savings Bank believes the beneficiarys claim is without merit, but a $150,000 accrual has been established for attorneys fees and litigation expenses. The $440,000 payment and the $150,000 accrual are shown on the Consolidated Statements of Income in the line labeled Other credit losses and related expenses.



45





(6)

ACCRUED INTEREST RECEIVABLE



Accrued interest receivable at June 30 is summarized as follows:



2005

2004



Investment securities

$

171,602

$

180,649



Mortgage-backed securities

38,861

26,278



Loans receivable

1,125,493

1,374,997



Total

$

1,335,956

$

1,581,924



(7)

PROPERTY AND EQUIPMENT



Property and equipment at June 30 consists of the following:



2005



Accum.

Valuation



Category

Cost

Deprec.

Reserve

Net



Land

$

1,012,757

$

-

$

-

$

1,012,757

Buildings

5,476,960

1,714,923

-

3,762,037



Office furniture, fixtures

and equipment

2,913,221

1,964,221

-

949,000



Automobiles

158,770

132,340

-

26,430

Investment real estate

3,444,751

588,103

271,147

2,585,501

Total

$

13,006,459

$

4,399,587

$

271,147

$

8,335,725





2004



Accum.

Valuation



Category

Cost

Deprec.

Reserve

Net



Land

$

642,704

$

-

$

-

$

642,704

Buildings

5,564,753

1,568,936

-

3,995,817



Office furniture, fixtures

and equipment

2,880,044

1,706,288

-

1,173,756



Automobiles

170,352

123,254

-

47,098

Investment real estate

3,309,531

493,677

271,147

2,544,707

Total

$

12,567,384

$

3,892,155

$

271,147

$

8,404,082



Depreciation charges to operations for the years ended June 30, 2005, 2004 and 2003 were $709,176, $662,040, and $605,148, respectively.  The depreciation policies followed by the Company are described in Note 1, Summary of Significant Accounting Policies.



A valuation reserve was established in a prior year for certain investment real estate to adjust the property to its net realizable value.  The reserve was calculated in 1988 using the income approach as requested by the OTS.



46





(8)

INTANGIBLE ASSET



A summary of the intangible asset at June 30 is as follows:



2005

2004



Premium on branch acquisition

$

1,020,216

$

1,020,216

Accumulated amortization

(607,450)

(539,446)

Net premium on branch acquisition

$

412,766    $

480,770



Amortization expense relating to this premium was $68,004 in 2005, $68,004 in 2004 and $65,502 in 2003.



Estimated amortization expense is as follows for the years ending June 30:



2006

$

50,115

2007

50,115

2008

50,115

2009

50,115

2010

50,115

After

162,191

$

412,766







(9)

CUSTOMER DEPOSITS



A summary of deposit accounts at June 30 is as follows:



2005

2004



Amount               %           Amount

Noninterest-bearing checking

$   11,815,549

6.3%

$

9,961,669

4.8%

Interest-bearing checking

38,237,541

20.4



37,190,834

18.0

Super Saver money market

29,873,995

16.0

38,845,175

18.7

Savings

17,584,391

19.4

16,751,418

8.1

Certificates of Deposit

89,631,230

47.9

104,497,436

50.4

Total

$ 187,142,706

100.0

%

$ 207,246,532

100.0

%



The aggregate amount of jumbo certificates of deposit with a minimum denomination of $100,000 was $24,409,250 and $30,409,979 at June 30, 2005and 2004, respectively.



At June 30, 2005, scheduled maturities of certificates of deposit are as follows:



2006

$

57,580,114

2007

13,593,107

2008

7,498,842

2009

9,774,706

2010

1,184,461

$

89,631,230



47





(10)

ADVANCES FROM FEDERAL HOME LOAN BANK



The advances listed below were obtained from the Federal Home Loan Bank of Des Moines (FHLB).  The advances are secured by FHLB stock and one-to-four family mortgage loans.  The FHLB requires the Savings Bank to maintain collateral equal to outstanding balances of advances.  For collateral purposes, the FHLB values one-to-four family mortgage loans at 70% of their fair value.  Advances from the FHLB at June 30 are summarized as follows:



Weighted

Weighted

Average

Average

2005

Rate

2004

Rate



Term Advances:



Long-term; fixed-rate; callable

$

28,000,000

5.48 %

$28,000,000

5.48 %



Amortizing Advances:



Long-term; fixed-rate; noncallable

394,299

7.42

1,120,741       7.48





Total

$28,394,299

5.50 %

$29,120,741       5.55 %





At June 30, 2005 the $28,000,000 of callable advances are callable quarterly.  In the table below, these advances are shown as maturing on their maturity date instead of their call date because at the interest rates prevailing as of June 30, 2005 it would be to the FHLBs advantage not to call these advances.



As of June 30, 2005 the fixed-rate term advance shown above shall be 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



2006

$

26,997

2007

29,070

2008

31,302

2009

33,705

2010                                                          36,293

Later years

28,236,932

$

28,394,299





48





(10)

ADVANCES FROM FEDERAL HOME LOAN BANK (CONTINUED)



Interest expense on borrowed funds for the years ended June 30 is summarized below:



2005

2004

2003



Advances from FHLB

$

1,620,662

$

1,650,104

$

1,668,258



Other borrowings

15,757

1,600



5,723



Total

$

1,636,419

$

1,651,704

$

1,673,981





(11)

BORROWINGS



Borrowings consist of the following:



2005

2004



Prime minus .5%; Midwest Independent

Bank; $1,000,000 line of credit; secured

by Bank stock; interest payable

semi-annually; due on demand or March, 2006

$

625,000

$

450,000



Other                                                                                          54,737    _________  -

$       679,737    $        450,000



At June 30, 2005, the Savings Bank had irrevocable letters of credit issued on its behalf from the FHLB totaling $10,100,000.  The letters of credit expire in August 2005.





(12)

INCOME TAXES



The provision for income tax expense for the years ended June 30 is as follows:



2005

2004

2003____

Current

$

649,390

$

1,045,444

$   1,374,944



Deferred

(633,718)

19,739

(110,691)



Total

$

15,672

$

1,065,183

$    1,264,253





The provision for income taxes differs from that computed at the statutory corporate rate, 34%, for the years ended June 30 as follows:



2005

2004

2003____

Tax at statutory rate

$

453,086

$

1,160,210

$

1,192,948

Increase (decrease) in taxes resulting from:

State taxes, net of federal benefit

91,902

61,605

102,338



Tax-exempt income

(41,044)

(37,061)

(31,858)



Bank-owned life insurance

(347,333)

(89,337)

-



Tax credits



(45,511)

(35,011)                       -



Dividends received deduction                                   (33,520)             (16,535)            ( 9,966)

Net effect of other book/tax differences

(61,908)

(21,312)

10,791

Provision for income taxes

$

15,672

$

1,065,183

$

1,264,253





49





(12)

INCOME TAXES (CONTINUED)



Deferred income tax expense results from timing differences in the recognition of income and expense for tax and financial reporting purposes.  The sources of the differences and the related tax effects for the years ended June 30 were as follows:



2005

2004

2003



Difference in depreciation methods used

for tax purposes and financial statements

$

(42,251)

$

93,324

$      73,756

Effect of health insurance plan reserves

not currently deductible

31,172

(2,794)



(31,791)



Use of different methods for computing

loan loss reserves for tax purposes and

financial statements

(597,602)



(43,690)



(114,273)



Effect of accrued employee absences not

currently deductible

5,735

(4,440)

(7,400)



Use of different methods for computing net

deferred loan costs/fees for tax purposes

and financial statements



(10,696)

(9,193)

(15,215)

Effect of accrued expenses

not currently deductible                                             (55,500)                      -                          -

Effect of prepaid expenses

currently deductible

71,202

-                           -

Effect of book amortization

in excess of tax amortization                                     (10,555)                      4                      929

Other book/tax differences

(25,223)

(13,472)

(16,697)

Increase (decrease) in deferred income taxes

$

(633,718)

$

19,739

$    (110,691)





The components of deferred tax assets and liabilities as of June 30, 2005 and 2004 consisted of:



2005

2004



Deferred tax assets:



Reserve for loan losses

$

1,048,824

$

451,222

Valuation reserve on investment real estate

92,190

92,190



Unrealized losses on securities available-for-sale

81,781

105,878



Health insurance plan reserves not currently deductible

36,620

67,792



Book amortization in excess of tax amortization

51,574

41,019



Compensated employee absences

50,505

56,240

Accrued expenses not currently deductible

55,500

-

State net operating loss carryforwards

27,016

16,634

Other

2,776

-



Total gross deferred tax benefits

1,446,786

830,975



50





(12)

INCOME TAXES (CONTINUED)



Deferred tax liabilities:

Tax depreciation in excess of book depreciation

494,345

536,596



FHLB stock dividends

60,936

60,936



Prepaid expenses

71,202

-



Unrealized gains on securities available-for-sale

19,496

26,504



Unamortized deferred loan costs, net of fees

82,023

92,719

Other

-

12,066

Total gross deferred tax liabilities

728,002

728,821

Net deferred tax assets/(liabilities)

$     718,784

$     102,154





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, 2005 the amount of the deferred tax liability that had not been recognized was approximately $810,605.  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.



(13)

EMPLOYEE BENEFIT PLANS



The Savings Bank participates in a multiple-employer defined benefit pension plan covering substantially all employees.  Separate actuarial valuations are not available for each participating employer, nor are plan assets segregated.  As of December 2002, the pension plan was no longer over funded as in prior years.  As a result, the Savings Bank has been experiencing increased pension costs.  Pension expense for the years ended June 30, 2005, 2004 and 2003 was approximately $298,145, $239,533, and $91,499 respectively.



During the year ended June 30, 2003, the Company amended its Employee Stock Ownership Plan (ESOP) and changed its name to the First Home Savings Bank Employee Stock Ownership and 401(k) Plan.  The amended plan covers all employees that are age 21 and have completed six months of service.  The Company may make discretionary contributions in the form of Company common stock or cash.  The Company recorded expense related to the ESOP and 401(k) plan of $40,000 in 2004 and 2003.  The Company did not incur any expense related to the ESOP and 401(k) plan in 2005.



The Company has elected to follow Accounting Principles Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, Accounting for Stock-Based Compensation, requires use of option valuation models that were not developed for use in valuing employee stock options.  Under APB 25, because the exercise price of the Companys employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.



51







(13)

EMPLOYEE BENEFIT PLANS (CONTINUED)



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 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.



The Companys 1993 Stock Option and Incentive Plan authorized the grant of options to certain officers, employees and directors for up to 304,174 shares of the Companys common stock.  All options granted had 10 year terms and vest and became exercisable ratably over five years following date of grant.  This plan expired on December 23, 2003.



Pro forma information regarding net income is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement.  The fair value for these options was estimated at the date of grant using a fair value option pricing model.



The effect of applying the fair value method required by SFAS No. 123 to the Companys stock option awards results in net income and earnings per share that are not materially different from amounts reported in the consolidated statements of income, therefore a table reconciling net income and earnings per share as reported and on a pro forma basis will not be presented.



The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable.  In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility.  Because the Companys employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion, the existing models do not necessarily provide a reliable single measure of fair value of its employee stock options.





















52







(13)

EMPLOYEE BENEFIT PLANS (CONTINUED)



A summary of the Companys stock option activity, and related information for the years ended June 30 follows:



2005

2004

2003



Weighted

Weighted

Weighted



Average

Average

Average

Exercise

Exercise

Exercise

Options

Price

Options

Price

Options

Price



Outstanding 

beginning of year

6,000

$

9.17

51,860

$

5.74

89,760

$

5.55



Granted

-

-

-

-

-

-

Exercised

(2,000)

9.875

(45,860)

5.29

(37,900)

5.29



Forfeited

(2,000)

9.875

-

-

-

-

Outstanding 

end of year

2,000

7.75

6,000

9.17

51,860

5.74



Exercisable at end

of year

2,000

$

7.75

2,000

$

7.75

45,860

$

5.20





The following table summarizes information about stock options outstanding at June 30, 2005:



Number

Number

Remaining



Exercise

Outstanding at

Exercisable at

Contractual



Price

June 30

June 30

Life (Months)



$

7.75

2,000

2,000

1





(14)

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.

Years Ended June 30,



2005

2004

2003



Per

Per

Per



Share

Share

Share



Income

Shares

Amt

Income

Shares

Amt

Income

Shares

Amt



Basic EPS:

Income available

to common

stockholders

$

1,316,933

1,595,139

$0.83

$ 2,347,200

1,649,525

$1.42

$   2,244,419

1,634,936

$1.37

Effective of dilutive



securities

-



1,229

-

3,226

-

30,304



Diluted EPS:

Income available

to stockholders

plus stock options

$

1,316,933

1,596,368

$0.83  $ 2,347,200

1,652,751

$  1.42

$   2,244,419

1,665,240

$1.35



53





(15)

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 employees, officers and directors for the years ended June 30 is as follows:



2005

2004



Beginning balances

$

1,706,224

$

2,090,712



Originations and advances

1,882,350

1,684,000



Principal repayments

(2,638,181)

(2,068,488)

Ending balances

$

950,393

$

1,706,224



The Company has two directors that perform legal services on behalf of the Savings Bank.  The services primarily relate to foreclosures and bankruptcies.  During the years ended June 30, 2005, 2004 and 2003, the Savings Bank paid $37,481, $34,044 and $23,985, respectively, for legal services performed by these directors.



(16)

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.  Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  The principal commitments of the Savings Bank are as follows:



Letters of Credit  Outstanding letters of credit were approximately $1,597,568 at June 30, 2005.



Loan Commitments  The Savings Bank had outstanding firm commitments to originate fixed interest rate loans in the amount of $25,000 and variable interest rate loans in the amount of $1,277,750 at June 30, 2005.



Lines of Credit  The unused portion of lines of credit was approximately $3,134,601 at June 30, 2005.



Loans in Process  The Savings Bank has recorded loans in process representing the undisbursed portion of loans in the amount of $3,324,502 at June 30, 2005.  These amounts were recorded as loans receivable, with a corresponding reduction for such loans in process as reflected in Note 5,  Loans Receivable Held-For-Investment.



(17)

CONCENTRATION OF CREDIT RISK



The Savings Bank maintains its primary bank accounts with institutions in Missouri and Iowa.

On June 30, 2005, the individual balances of these accounts exceeded standard insurance limits Established by the Federal Deposit Insurance Corporation.



54







(18)

SALE OF SUBSIDIARY



On June 22, 2004, an agreement was entered into to sell the property and equipment of South Central Missouri Title Company, Inc for $252,000.  In addition, South Central entered into a covenant not to compete agreement with the purchaser.  Expense related to the sale totaled $61,512.  As of the date of the sale, the assets sold had a net book value of $100,166.  The majority of the sales price was in the form of a promissory note to South Central with a five year maturity.  The transaction closed on July 16, 2004.  As a result of this sale, the subsidiary will no longer offer sales of title insurance or real estate closing services.  The company accounted for this sale on the installment method because the initial investment by the buyer was not substantial enough to warrant full recognition of the gain.  However, the recovery of the cost of the property is reasonably assured if the buyer defaults.  The following schedule summarizes certain information for the transaction:



Revenue

$252,000



Cost of Sale

161,678



Deferred Gain

90,322



Deferred Gain  Recognized

8,026

During Fiscal Year 2005



Deferred Gain at



June 30, 2005

$ 82,296



(19)

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).





55





(19)

REGULATORY CAPITAL REQUIREMENTS (CONTINUED)



Management believes, as of June 30, 2005, that the Savings Bank meets all capital adequacy requirements to which it is subject.



As of June 30, 2005, the most recent notification from the OTS, the Savings Bank was categorized as well-capitalized under the 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.



The Savings Banks actual capital amounts and ratios are also presented in the table.



To Be Well-



Capitalized Under



For Capital

Prompt Corrective

Actual            Adequacy Purposes            Action Provisions



Amount   Ratio            Amount       Ratio            Amount     Ratio



(Dollars in thousands)



As of June 30, 2005:





Total Risk-Based Capital



(to Risk-Weighted Assets)

$ 25,367

16.54%

>$ 12,271

8.0%

> $15,339

10.0%

Core Capital



(to Adjusted Tangible Assets)

23,681

9.85%

>9,617

4.0%

>

12,021

5.0%



Tangible Capital



(to Tangible Assets)

23,681

9.85%

> 3,606

1.5%

N/A



Tier 1 Capital



(to Risk-Weighted Assets)

23,681

15.44%

N/A

9,203

6.0%



As of June 30, 2004:



Total Risk-Based Capital



(to Risk-Weighted Assets

$ 23,430

14.4%

≥

$13,041

8.0%

>$16,301



10.0%



Core Capital



(to Adjusted Tangible Assets)

22,237

8.6%

>10,393

4.0%

>

12,991

5.0%



Tangible Capital



(to Tangible Assets)

22,237

8.6%

>

3,897

1.5%

N/A



Tier 1 Capital



(to Risk-Weighted Assets)

22,237

13.6%

N/A

>

9,781



6.0%



(20)

ADVERTISING COSTS



The Company incurred $118,336, $130,459, and $172,980 in non-direct response advertising costs during the years ended June 30, 2005, 2004 and 2003, respectively.  The Company incurred no direct response advertising costs during these years.



56





(21)

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 investment 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.



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.  The carrying value of accrued interest receivable approximates its fair value.



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.



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.  The carrying amount of accrued interest payable approximates its fair value.



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.  The carrying amount of accrued interest payable approximates its fair value.



Borrowings  The carrying amounts of the Companys borrowings approximate their fair values.



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.



57





(21)

DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)



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.



|                                                            |   | June 30, 2005
|----------------------------------------------------------- | - | -------------
|                                                            |   | Carrying     
|                                                            |   | Amount       
|Financial assets:                                           |   |              
|Cash and cash equivalents                                   | $ | 20,617,471   
|Certificates of deposit                                     |   | 2,975,128    
|Available-for-sale securities                               |   | 10,973,794   
|Held-to-maturity securities                                 |   | 21,336,996   
|Investment in FHLB stock                                    |   | 1,904,300    
|Available-for-sale mortgage-backed securities               |   | 7,972,099    
|Held-to-maturity mortgage-backed securities                 |   | 2,819,618    
|Loans, net of allowance for loan losses                     |   | 158,142,705  
|Accrued interest receivable                                 |   | 1,335,956    
|                                                            |   |              
|Financial liabilities:                                      |   |              
|Deposits                                                    |   | 187,142,706  
|FHLB advances                                               |   | 28,394,299   
|Borrowings                                                  |   | 679,737      
|Accrued interest payable                                    |   | 248,504      
|Unrecognized financial instruments (net of contract amount) |   |              
|Commitments to extend credit                                |   | -            
|Letters of credit                                           |   | -            
|Unused lines of credit                                      |   | -            





58







(21)

DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)



|                                                            |   | June 30, 2004
|----------------------------------------------------------- | - | -------------
|                                                            |   | Carrying     
|                                                            |   | Amount       
|Financial assets:                                           |   |              
|Cash and cash equivalents                                   | $ | 32,771,262   
|Certificates of deposit                                     |   | 3,398,674    
|Available-for-sale securities                               |   | 8,174,581    
|Held-to-maturity securities                                 |   | 28,815,812   
|Investment in FHLB stock                                    |   | 1,904,300    
|Available-for-sale mortgage-backed securities               |   | 2,776,715    
|Held-to-maturity mortgage-backed securities                 |   | 4,129,566    
|Loans, net of allowance for loan losses                     |   | 166,259,033  
|Accrued interest receivable                                 |   | 1,581,924    
|                                                            |   |              
|Financial liabilities:                                      |   |              
|Deposits                                                    |   | 207,246,532  
|FHLB advances                                               |   | 29,120,741   
|Borrowings                                                  |   | 450,000      
|Accrued interest payable                                    |   | 253,679      
|Unrecognized financial instruments (net of contract amount) |   |              
|Commitments to extend credit                                |   | -            
|Letters of credit                                           |   | -            
|Unused lines of credit                                      |   | -            



(22)

PARENT COMPANY ONLY FINANCIAL INFORMATION



The following condensed statements of financial condition and condensed statements of income and cash flows for First Bancshares, Inc. should be read in conjunction with the consolidated financial statements and notes thereto.



|                                                        | Condensed Statements of Financial Condition
|------------------------------------------------------- | -------------------------------------------
|                                                        |                                            
|ASSETS                                                  |                                            
|Cash                                                    | $                                          
|Certificates of deposit                                 |                                            
|Investment securities available-for-sale, at fair value | 460,000                                    
|Investment in subsidiaries                              |                                            
|Property and equipment, less accumulated                |                                            
|depreciation                                            |                                            
|Due from subsidiary                                     |                                            
|Other assets                                            |                                            
|Total assets                                            | $                                          





59





(22)

PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)



|LIABILITIES AND STOCKHOLDERS' EQUITY       |   |            |  
|------------------------------------------ | - | ---------- | -
|Note payable                               | $ | 625,000    | $
|Accrued expenses                           |   | 29,983     |  
|Deferred income taxes, net                 |   | 35,211     |  
|Stockholders' equity                       |   | 26,817,329 |  
|Total liabilities and stockholders' equity | $ | 27,507,523 | $





|Condensed Statements of Income        
|--------------------------------------
|                                      
|                                      
|Income:                               
|Equity in earnings of subsidiaries    
|Interest and dividend income          
|Gain on sale of investments           
|Gain on sale of property and equipment
|Other                                 
|Total income                          
|                                      
|Expenses:                             
|Professional fees                     
|Printing and office supplies          
|Interest                              
|Other                                 
|Income tax                            
|Total expenses                        
|Net income                            





60





(22)

PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)



|Condensed Statements of Cash Flows          
|--------------------------------------------
|                                            
|                                            
|Cash flows from operating activities:       
|Net income                                  
|Adjustments to reconcile net income to net  
|cash provided from operating activities:    
|Equity in earnings of subsidiaries          
|Depreciation expense                        
|Gain on sale of investments                 
|Gain on sale of property and equipment      
|Net change in operating accounts:           
|Deferred income taxes, net                  
|Other assets and liabilities                
|Net cash from (used in) operating activities





|Cash flows from investing activities:                |           |             |         |             |             |            
|---------------------------------------------------- | --------- | ----------- | ------- | ----------- | ----------- | -----------
|Dividends from subsidiary                            |           | -           |         | 2,000,000   |             | 2,250,000  
|Proceeds from sale of investments                    |           | -           |         | 425,106     |             | -          
|Purchase of property and equipment                   |           | (189,195)   |         | (375,027)   |             | -          
|Proceeds from sales of property and                  |           |             |         |             |             |            
|equipment                                            |           | 40,000      |         | -           |             | -          
|Net change in certificates of deposit                |           | 1,793,358   |         | (1,793,358) |             | -          
|Net cash from investing activities                   |           | 1,644,163   |         | 256,721     |             | 2,250,000  
|                                                     |           |             |         |             |             |            
|Cash flows from financing activities:                |           |             |         |             |             |            
|Proceeds from borrowed funds                         | 875,000   |             | 450,000 |             | 470,000    
|Payments on borrowed funds                           | (700,000) |             | -       |             | (1,419,946)
|Proceeds from issuance of common stock               | 19,750    |             | 242,799 |             | 200,563    
|Cash dividends paid                                  |           | (253,519)   |         | (263,520)   |             | (258,681)  
|Purchase of treasury stock                           |           | (1,598,527) |         | (1,037,281) |             | (809,310)  
|Net cash used in financing activities                |           | (1,657,296) |         | (608,002)   |             | (1,817,374)
|Net increase (decrease) in cash and cash
equivalents |           | (16,405)    |         | (376,106)   |             | 404,327    
|Cash and cash equivalents -  beginning of period     | 114,754   |             | 490,860 |             | 86,533     
|                                                     |           |             |         |             |             |            
|Cash and cash equivalents -  end of period           | $         | 98,349      | $       | 114,754     | $           | 490,860    





61









COMMON STOCK INFORMATION



The common stock of First Bancshares, Inc. is traded on The Nasdaq Stock Market under the symbol FBSI.  As of August 31, 2005, there were 563 stockholders and 1,552,010 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 25 and November 23, 2004 and February 23, May 25 and August 25, 2005, the Company declared a $.04 common stock dividend payable on September 30 and December 31, 2004 and March 31, June 30, and September 30, 2005 to stockholders of record on September 15 and December 15, 2004 and March 15, June 15, and September 15, 2005, respectively.  Dividend payments by the Company are dependent primarily on 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.



The following table sets forth market price and dividend information for the Companys common stock.



Fiscal 2005

High

Low

Dividend



First Quarter

$22.15

$19.28

$.04



Second Quarter

$20.75

$18.25

$.04



Third Quarter

$22.75

$20.05

$.04





Fourth Quarter

$22.50

$18.50

$.04



Fiscal 2004





First Quarter

$21.04

$16.66

$.04



Second Quarter

$21.21

$19.62

$.04



Third Quarter

$21.88

$20.00

$.04





Fourth Quarter

$21.40

$19.51

$.04







62







DIRECTORS AND OFFICERS





FIRST BANCSHARES, INC.

FIRST HOME SAVINGS BANK



DIRECTORS:

DIRECTORS:





Stephen H. Romines

Stephen H. Romines

Interim President and CEO

Interim President and CEO

Director Emeritus

Director Emeritus



(Retired Chairman of the Board, President

(Retired Chairman of the Board,

and Chief Executive Officer)

President and Chief Executive Officer)



Harold F. Glass

Harold F. Glass

Partner

Partner

Millington, Glass & Love, Attorneys at Law

Millington, Glass & Love, Attorneys at Law



John G. Moody

John G. Moody

Judge of the 44th

Judge of the 44th

Missouri Judicial Circuit

Missouri Judicial Circuit



Dr. James F. Moore

Dr. James F. Moore

Retired Director of State Fruit

Retired Director of State Fruit

Experiment Station of

Experiment Station of

Missouri State University

Missouri State University



Thomas M. Sutherland

Thomas M. Sutherland

One of the owners and operators of

One of the owners and operators of

Sutherlands Home Improvements Centers

Sutherlands Home Improvements Centers

group of stores

group of stores



OFFICERS:

OFFICERS:



Stephen H. Romines

Stephen H. Romines

Interim President and CEO

Interim President and CEO



Susan J. Uchtman,  CPA

Susan J. Uchtman, CPA

Chief Financial Officer

Chief Financial Officer/Treasurer



Gina Gunnels

Colleen B. Stofer

Secretary and Treasurer

Secretary











63







CORPORATE INFORMATION



CORPORATE HEADQUARTERS

TRANSFER AGENT



142 East First Street

Registrar and Transfer Co.

P.O. Box 777

10 Commerce Drive

Mountain Grove, Missouri  65711

Cranford, New Jersey  07016

(800) 866-1340

INDEPENDENT AUDITORS





Kirkpatrick, Phillips & Miller, CPAs, P.C.

COMMON STOCK

Springfield, Missouri



Traded on The Nasdaq Stock Market

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 Monday, October 31, 2005, at 2:00 p.m., Central Time, at the Days Inn Conference Room, 300 East 19th Street, Mountain Grove, Missouri.







FORM 10-KSB



A COPY OF THE FORM 10-KSB 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-KSB, 10-QSB 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.







64