Table of Contents



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General



Market Area



Yields Earned and Rates Paid



Rate/Volume Analysis



Interest Rate Sensitivity of Net Portfolio Value



Lending Activities



Reserve for Loan Losses



Investment Activities



Deposit Activities and Other Sources of Funds



Subsidiary Activities



REGULATION OF FIRST HOME



REGULATION OF FIRST BANCSHARES



TAXATION



Competition.



Item 2.  Properties



PART II



PART III



SIGNATURES



Exhibit 13



Dear Stockholder



Business of the Corporation



SELECTED CONSOLIDATED FINANCIAL INFORMATION



MANAGEMENTS DISCUSSION AND ANALYSIS



INDEPENDENT AUDITORS REPORT



CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION



CONSOLIDATED STATEMENTS OF INCOME



CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY



CONSOLIDATED STATEMENTS OF CASH FLOWS



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



COMMON STOCK INFORMATION



DIRECTORS AND OFFICERS



CORPORATE INFORMATION



Subsidiaries of the Registrant



Consent of Auditors



Exhibit 99.1







SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-KSB



[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934



For the fiscal year ended June 30, 2002 OR



[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



Commission File Number: 0-22842



FIRST BANCSHARES, INC.

(Exact name of registrant as specified in its charter)



Missouri

43-1654695

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)



142 E. First Street

Mountain Grove, Missouri                        65711

(Address of principal executive offices)       (Zip Code)



Registrant's telephone number, including area code:  (417) 926-5151



Securities registered pursuant to Section 12(b) of the Act: None



Securities registered pursuant to Section 12(g) of the Act:



Common Stock, par value $0.01 per share

(Title of Class)



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x  NO



Indicate by check mark whether disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or other information statements incorporated by reference in Part III of this Form 10-KSB or any amendments to this Form 10-KSB.  / X /



The registrant's revenues for the fiscal year ended June 30, 2002 were $16,889,000.



As of September 26, 2002, registrant had outstanding 1,631,239 shares of Common Stock.  The registrant's voting stock is traded over-the-counter and is listed on the Nasdaq Stock Market ("Nasdaq/NMS") under the symbol "FBSI."  The aggregate market value of the voting stock held by nonaffiliates of the registrant, based on the closing sales price of the registrant's common stock as quoted on the Nasdaq/NMS on September 26, 2002, was $14,300,000. For purposes of this calculation, officers and directors of the registrant and the Employee Stock Ownership Plan are considered affiliates of the registrant.



DOCUMENTS INCORPORATED BY REFERENCE



1.  Portions of Annual Report to Stockholders for the Fiscal Year Ended June 30, 2002. (Parts I and II)



2.  Portions of Proxy Statement for the 2002 Annual Meeting of Stockholders. (Part III)



Transitional Small Business Disclosure Format (check one)

Yes  No X

PART I



Item 1.  Business



General



First Bancshares, Inc. ("First Bancshares" or the "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 Savings Bank's conversion from a state-chartered mutual to a state-chartered stock savings and loan association ("Conversion").  The Conversion was completed on December 22, 1993.  At June 30, 2002, the Company had consolidated total assets of $258.2 million, total customer deposits of $202.5 million and stockholders' equity of $24.8 million.  While the Company owns a title insurance agency through a subsidiary and some rental real estate, it is not engaged in any significant activity other than holding the stock of First Home.  Accordingly, the information set forth in this report, including consolidated financial statements and related data, relates primarily to the Savings Bank.



The Savings Bank is a Missouri-chartered, federally insured stock savings and loan association organized in 1911.  The Savings Bank conducts its business from its home office in Mountain Grove and nine full service branch facilities in Marshfield, Ava, Gainesville, Sparta, Theodosia, Crane, Galena, Kissee Mills and Rockaway Beach, Missouri.  The deposits of the Savings Bank are insured up to applicable limits by the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").



The Savings Bank provides its customers with a full array of community banking services.  The Savings Bank is primarily engaged in the business of attracting deposits from the general public and using such deposits, together with other funding sources, to invest in one-to-four family residential mortgage loans along with multi-family residential, consumer, and commercial mortgage loans, including home equity loans, for its loan portfolio, as well as mortgage-backed and U.S. Government and agency securities and other assets.  At June 30, 2002, the Savings Bank's net loans were $189.0 million, or 73.2% of consolidated total assets, including $114.1 million, or 59.14% of total loans, for one-to-four family properties, $57.6 million, or 29.87% of total loans, for other real estate and $21.2 million of consumer and commercial business loans, or 10.99% of total loans.  As discussed in the following, adjustable rate mortgage (ARM) loans account for approximately 98% of loans secured by real estate and 88% of the total loan portfolio.



In March 1998, the Savings Bank purchased two bank branch offices from NationsBank.  The branches are located in Crane and Galena, Missouri.  As part of the agreement, the Savings Bank assumed customer deposits of $17.4 million and other liabilities of $60,000 in exchange for loans of $4.8 million, premises and equipment of $300,000, cash of $11.3 million and other assets of $70,000.  The Savings Bank paid a premium of $1.0 million for the loans purchased and the customer deposits assumed.  The acquisition was recorded using the purchase method of accounting. At June 30, 2002, the premium paid for the branches was being amortized on a straight-line basis over 15 years.  Results of operations of the branches acquired are included in the accompanying consolidated financial statements since the date of acquisition.



1

Market Area



The Savings Bank is headquartered in the town of Mountain Grove, in Wright County, Missouri.  Wright County has a population of approximately 17,000 and its economy is highly diversified, with an emphasis on the beef and dairy industry. The Savings Bank's market area is predominantly rural in nature and its deposit taking and lending activities primarily encompass Wright, Webster, Douglas, Christian, Ozark, Stone and Taney counties. Companies in the area include Hutchens Steel, Arlee Home Fashions, Copeland Corporation, Dairy Farmers of America, WoodPro Cabinetry and Fordick Corporation.  The Savings Bank also transacts a significant amount of business in Texas and Greene counties, Missouri.  The area, especially Ozark County due to its proximity to the Norfolk and Bull Shoals lakes, has experienced a rather slow but steady growth from retirees.  Economic conditions in the Savings Bank's market area have been stable.



Selected Consolidated Financial Information



This information is incorporated by reference to pages 4 and 5 of the 2002 Annual Report to Stockholders ("Annual Report") attached hereto as Exhibit 13.





2





Yields Earned and Rates Paid



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.



3

|                                     | Years Ended June 30,   |          
|------------------------------------ | ---------------------- | ---------
|                                     | 2002                   |          
|                                     |                        | Interest 
|                                     | Average                | and      
|                                     | Balance(2)             | Dividends
|                                     | (Dollars in thousands) |          
|Interest-earning assets:             |                        |          
|Loans(1)                             | $190,119               | $14,920  
|Mortgage-backed securities           | 684                    | 50       
|Investment securities                | 11,498                 | 548      
|Daily interest-bearing deposits      | 26,549                 | 437      
|Federal funds sold                   | -                      | -        
|Total interest-earning assets        | 228,850                | 15,955   
|Non-interest earning assets          |                        |          
|Office properties and equipment, net | 5,374                  |          
|Real estate, net                     | 2,587                  |          
|Other non-interest earning assets    | 5,868                  |          
|Total assets                         | $242,679               |          
|                                     |                        |          
|Interest-bearing liabilities:        |                        |          
|Passbook accounts                    | $ 12,318               | 341      
|NOW and Super Saver accounts         | 64,126                 | 1,734    
|Certificates of deposit              | 101,851                | 4,854    
|Total deposits                       | 178,295                | 6,929    
|Other interest-bearing liabilities   | 31,413                 | 1,800    
|Total interest-bearing liabilities   | 209,708                | 8,729    
|Non-interest bearing liabilities:    |                        |          
|Other liabilities                    | 7,830                  |          
|Total liabilities                    | 217,538                |          
|Stockholders' equity                 | 25,141                 |          
|Total liabilities and                |                        |          
|stockholders' equity                 | $242,679               |          
|Net interest income                  |                        | $ 7,226  
|Interest rate spread                 |                        |          
|Net interest margin                  |                        |          
|Ratio of average interest-earning    |                        |          
|assets to average interest-          |                        |          
|bearing liabilities                  | 109%                   |          
|                                     |                        |          



__________________

(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.

4



Yields Earned and Rates Paid



The following table sets forth (on a consolidated basis) for the periods and at the date indicated, the weighted average yields earned on the Companys and First Home's assets, the weighted average interest rates paid on First Home's liabilities, together with the net yield on interest-earning assets.



|                                                      | At June 30, |   |  | Years Ended June 30, |  
|----------------------------------------------------- | ----------- | - |  | -------------------- | -
|                                                      | 2002        |   |  | 2002                 |  
|Weighted average yield on loan portfolio              | 7.68        | % |  | 7.85                 | %
|Weighted average yield on mortgage-backed             |             |   |  |                      |  
|securities                                            | 5.16        |   |  | 7.31                 |  
|Weighted average yield on investment securities       | 4.48        |   |  | 4.77                 |  
|Weighted average yield on interest-bearing deposits   | 1.45        |   |  | 1.65                 |  
|Weighted average yield on federal funds sold          | -           |   |  | -                    |  
|Weighted average yield on all interest-earning assets | 6.82        |   |  | 6.97                 |  
|Weighted average rate paid on total deposits          | 3.27        |   |  | 3.89                 |  
|Weighted average rate paid on FHLB advances           | 5.56        |   |  | 5.73                 |  
|Weighted average rate paid on all interest            |             |   |  |                      |  
|-bearing liabilities                                  | 3.57        |   |  | 4.16                 |  
|Interest rate spread (spread between weighted         |             |   |  |                      |  
|average rate on all interest-earning assets           |             |   |  |                      |  
|and all interest-bearing liabilities)                 | 3.25        |   |  | 2.81                 |  
|Net interest margin (net interest income              |             |   |  |                      |  
|(expense) as a percentage of average                  |             |   |  |                      |  
|interest-earning assets)                              | N/A         |   |  | 3.16                 |  
|                                                      |             |   |  |                      |  
|                                                      |             |   |  |                      |  









5

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, 
|--------------------------------- | --------------------- |  | ---------------------
|                                  | 2002 Compared to 2001 |  | 2001 Compared to 2000
|                                  | Increase/(Decrease)   |  | Increase/(Decrease)  
|                                  | Due to                |  | Due to               
|                                  | Volume                |  | Rate                 
|                                  | (In thousands)       
|Interest-earning assets:          |                       |  |                      
|Loans (1)                         | $    579              |  | $  (999)             
|Mortgage-backed securities        | 20                    |  | 2                    
|Investment securities             | 166                   |  | (58)                 
|Daily interest-earning deposits   | 202                   |  | (45)                 
|Federal funds sold                | (4)                   |  | (4)                  
|Total net change in income on     |                       |  |                      
|interest-earnings assets          | 963                   |  | (1,104)              
|                                  |                       |  |                      
|Interest-bearing liabilities:     |                       |  |                      
|Interest-bearing deposits         | 11,189                |  | (11,516)             
|FHLB advances                     | 85                    |  | (157)                
|Total net change in expense on    |                       |  |                      
|Interest-bearing deposits         | 11,274                |  | (11,672)             
|Net change in net interest income | $(10,311)             |  | $10,568              
|                                  |                       |  |                      

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

6



Interest Rate Sensitivity of Net Portfolio Value



In order to encourage institutions to reduce interest rate risk, the Office of Thrift Supervision (OTS) adopted a rule incorporating an interest rate risk component into the risk-based capital rules.  Using data compiled by the OTS, the Savings Bank receives a report that measures interest rate risk by modeling the change in net portfolio value over a variety of interest rate scenarios.  The OTS developed this procedure for measuring interest rate risk to replace the "gap" analysis (the difference between interest-earning assets and interest-bearing liabilities that mature or reprice within a specific time period).  Net portfolio value is the present value of expected cash flows from assets, liabilities and off-balance-sheet contracts.  The calculation is intended to illustrate the change in net portfolio value that will occur upon an immediate change in interest rates of at least 200 basis points with no effect given to any steps that management might take to counter the effect of that interest rate movement.  Under OTS regulations, an institution with a greater than normal level of interest rate risk takes a deduction from total capital for purposes of calculating its risk-based capital.  The OTS, however, has delayed the implementation of this regulation.  An institution with a normal level of interest rate risk is defined as one whose measured interest rate risk is less than 2.0%.  Based on the Savings Banks regulatory capital ratios at June 30, 2002, the Savings Bank believes that, if the proposed regulation had been implemented at that date, the Savings Banks level of interest rate risk would not have caused it to be treated as an institution with greater than normal interest rate risk.



The following table illustrates the change in net portfolio value at June 30, 2002, based on OTS assumptions, that would occur in the event of an immediate change in interest rates, with no effect given to any steps which management might take to counter the effect of that interest rate movement.



|                   |    |                        |  |                           |  |         |   | Net Portfolio as % of |  
|------------------ | -- | ---------------------- |  | ------------------------- |  | ------- | - | --------------------- | -
|                   |    | Net Portfolio Value    |  | Portfolio Value of Assets | 
|Basis Point ("bp") |    | Dollar                 |  | Dollar                    |  | Percent |   | Net Portfolio         |  
|Change in Rates    |    | Amount                 |  | Change(1)                 |  | Change  |   | Value Ratio(2)        |  
|                   |    | (Dollars in thousands) | 
|300                | bp | $ 31,685               |  | $       392               |  | 1       | % | 11.98                 | %
|200                |    | 32,095                 |  | 802                       |  | 3       |   | 12.07                 |  
|100                |    | 31,929                 |  | 636                       |  | 2       |   | 11.96                 |  
|-                  |    | 31,293                 |  | -                         |  | -       |   | 11.69                 |  
|(100)              |    | 29,953                 |  | (1,340)                   |  | (4)     |   | 11.17                 |  
|                   |    |                        |  |                           |  |         |   |                       |  

(1) Represents the increase (decrease) of the estimated net portfolio value at the indicated change in interest rates compared to the net portfolio value assuming no change in interest rates.



(2) Calculated as the estimated net portfolio value divided by the portfolio value of total assets.



(3) Calculated as the increase (decrease) of the net portfolio value ratio assuming the indicated change in interest rates over the estimated net portfolio value ratio assuming no change in interest rates.

7



The above table illustrates, for example, that at June 30, 2002 an instantaneous 200 basis point increase in market interest rates would increase the Savings Banks net portfolio value by approximately $800,000, or 3%, and an instantaneous 100 basis point decrease in market interest rates would decrease the Savings Banks net portfolio value by $1.3 million, or 4%.



The following summarizes key exposure measures for the dates indicated.  They measure the change in net portfolio value ratio for a 200 basis point adverse change in interest rates.



|                         |  | June 30, |  | March 31, |  | June 30,
|------------------------ |  | -------- |  | --------- |  | --------
|                         |  | 2002     |  | 2002      |  | 2001    
|Pre-shock net portfolio  |  |          |  |           |  |         
|value ratio              |  | 11.69%   |  | 12.34%    |  | 20.24%  
|Post-shock net portfolio |  |          |  |           |  |         
|value ratio              |  | 11.17%   |  | 11.96%    |  | 18.92%  
|Decline in net portfolio |  |          |  |           |  |         
|value ratio              |  | 52 bp    |  | 38 bp     |  | 132 bp  
|                         |  |          |  |           |  |         





The calculated risk exposure measures indicate the Savings Banks interest rate risk at June 30, 2002 has decreased from the previous year end, in that the shock increase in market rates would have a relatively small negative effect on net portfolio value.



The OTS uses certain assumptions in assessing the interest rate risk of thrift institutions.  These assumptions relate to interest rates, loan prepayment rates, deposits decay rates, and the market values of certain assets under differing interest rate scenarios, among others.  As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table.  For example, although certain assets and liabilities may have similar maturities or period to repricing, they may react in different degrees to changes in market interest rates.  Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market interest rates.  Additionally, certain assets, such as adjustable rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset.  Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates of deposit could deviate significantly from those assumed in calculating the table.





8

Lending Activities



General.  The principal lending activity of the Savings Bank is the origination of conventional mortgage loans for the purpose of purchasing, constructing or refinancing one-to-four family owner occupied homes within its primary market area.  In an attempt to diversify its lending portfolio, however, the Savings Bank also originates nonresidential real estate loans, consumer loans, mobile home loans, home improvement loans, commercial loans, business loans, student loans and loans secured by savings accounts.  The ratios of residential and commercial real estate loans to total loans has shifted gradually in recent years due to market conditions in the Savings Banks lending area and the hiring of seasoned loan officers experienced in commercial or agricultural lending.  The commercial and agricultural loans have been underwritten using the Savings Banks historical conservative approach to collateral values.  Additionally, the Savings Bank has extensively used the Small Business Administrations (SBA) guaranteed programs since September of 2000.



In addition to loans within the Savings Banks primary market area, the Savings Bank also has originated 24 one-to-four family home loans, five land loans and 10 commercial real estate loans in Texas, Arkansas, California, Illinois, Kansas, Nebraska and Oregon.  The aggregate balance of these 39 loans at June 30, 2002 was $6.4 million.  These loans were performing according to the scheduled terms at June 30, 2002.



At June 30, 2002 the Savings Banks net loans receivable totaled approximately $189.0 million representing approximately 73.2% of consolidated total assets.  Since 1973, the Savings Bank has primarily originated ARM loan products.  At June 30, 2002, ARM loans accounted for $169.3 million or 87.74% of the total loan portfolio and 98.53% of loans secured by real estate.  The Savings Bank focuses on serving the needs of its local community and strongly believes in a lending philosophy that stresses individual customer service and flexibility in meeting the needs of its customers.



Loan Portfolio Analysis.  The following table sets forth the composition of the Savings Banks loan portfolio by type of loan and type of security as of the dates indicated.  Construction loans are included in the residential and commercial loan types.  The Savings Bank does not account for construction loans separate from residential and commercial loans.



9



|                                     | At June 30,           
|------------------------------------ | ----------------------
|                                     | 2002                  
|                                     | Amount                
|                                     | (Dollars in thousands)
|Type of Loan:                        |                       
|Residential                          | $114,092              
|Commercial or industrial real estate | 41,179                
|Land                                 | 11,264                
|Second mortgage loans                | 5,195                 
|Total mortgage loans                 | 171,730               
|                                     |                       
|Other Loans:                         |                       
|Automobile loans                     | 6,860                 
|Savings account loans                | 1,733                 
|Mobile home loans                    | 1,543                 
|Other consumer                       | 1,553                 
|Commercial business                  | 9,506                 
|Total other loans                    | 21,195                
|Total loans                          | 192,925               
|Add:                                 |                       
|Unamortized deferred loan costs,     |                       
|net of origination fees              | 265                   
|Less:                                |                       
|Undisbursed loans in process         | 3,358                 
|Allowance for possible loan          |                       
|losses                               | 881                   
|Total loans receivable, net          | $188,951              
|                                     |                       

10



|                                 | At June 30,           
|-------------------------------- | ----------------------
|                                 | 2002                  
|                                 | Amount                
|                                 | (Dollars in thousands)
|Type of Security:                |                       
|Residential real estate          |                       
|Second mortgage loans            | $  3,055              
|One-to-four family               | 114,178               
|Multi-family                     | 1,969                 
|Commercial or industrial real    |                       
|estate                           | 41,397                
|Land                             | 11,148                
|Commercial or industrial         |                       
|assets                           | 9,528                 
|Automobile                       | 6,810                 
|Savings accounts                 | 1,523                 
|Mobile homes                     | 1,518                 
|Other consumer                   | 1,799                 
|Total                            | 192,925               
|Add:                             |                       
|Unamortized deferred loan costs, |                       
|net of origination fees          | 265                   
|Less:                            |                       
|Undisbursed loans in process:    |                       
|Nonconstruction loans            | 1,360                 
|                                 |                       
|Construction loans               | 1,998                 
|Allowance for possible loan      |                       
|losses                           | 881                   
|Total loans receivable, net      | $188,951              
|                                 |                       





11



One-to-Four Family Residential Loans. The primary lending activity of the Savings Bank has been the origination of mortgage loans to enable borrowers to purchase existing homes, to construct new one-to-four family homes or refinance existing debt on their homes.  Management believes that this policy of focusing on single-family residential mortgage loans has been successful in contributing to interest income while keeping delinquencies and losses at a minimum.  At June 30, 2002, approximately $114.2 million, or 59.18% of the Savings Bank's gross loan portfolio, consisted of loans secured by one-to-four family residential real estate.  The Savings Bank presently originates ARM loans secured by one-to-four family properties with loan terms of 10 to 30 years.  Since 1973, the Savings Bank has originated almost exclusively ARM loan products. Initially, ARM loans were indexed to the Savings Bank's cost of money.  In 1979, the Savings Bank discontinued the use of the indexed ARM loans and changed to its current policy of non-indexed ARMs, which generally allows, but does not require, the Savings Bank to adjust the interest rate once a year, up or down, not to exceed 1% per year.  Loans of this nature originated after 1988 generally are limited to a 6% maximum increase over the life of the loan.



The Savings Bank does not charge points on ARM loans and it does not charge appraisal fees.  It quotes an interest rate, or base rate, with no points and gives the borrower the option, if desired, to pay a 1% fee, but obtain the loan at 1% below the Savings Bank's base rate for the first year of the loan.  Construction borrowers can pay a 2% fee and receive a 2% reduction in the initial interest rate for the first year of the loan.  The Savings Bank funds most of its loan commitments in a relatively short period of time.  If a commitment expires, the Savings Bank will generally renew the commitment upon request.



The Savings Bank underwrites ARMs based on an assumed 1% per year interest rate increase.  The Savings Bank's policy to adjust the interest rate once a year within 1% is a self-imposed limit. The Savings Bank's experience has been that most of its borrowers can manage an increased payment resulting from a 1% increase; however, an increase of over 1% may put a strain on the borrowers' ability to repay.  As a result, the potential for a substantial increase in interest payments on the Savings Bank's ARM loans is lessened as is the likelihood of delinquencies and defaults.



The Savings Bank's lending policies generally limit the maximum loan-to-value ratio on adjustable rate residential mortgage loans to 85% of the lesser of the appraised value or purchase price of the underlying residential property.  The Savings Bank requires title insurance or an abstract extension and attorney's opinion, fire and casualty coverage and a flood zone determination on all mortgage loans originated or purchased.  All of the Savings Bank's real estate loans contain "due on sale" clauses.  The Savings Banks personnel prepare all property evaluations at no expense to the borrower unless the property is outside its normal lending territory or the loan exceeds $250,000, in which event, independent appraisers are utilized.  At June 30, 2002 the maximum loan-to-value ratio on loans to local borrowers was generally 85%.



At June 30, 2002, the Savings Bank had $4.4 million in interim construction loans in its portfolio with maximum loan to value ratios of 80% to 85%.  Most of these loans are residential construction loans for single- or multi-family dwelling units.  All of these loans automatically convert into permanent residential real estate loans.



12



Multi-Family Residential Loans.  At June 30, 2002, approximately $2.0 million, or 1.02% of the Savings Bank's gross loan portfolio consisted of 11 loans secured by multi-family residential real estate.  Multi-family real estate loans are generally originated at 80% of the appraised value of the property or selling price, whichever is less, and carry adjustable rate mortgages with the principal amortized over 10 to 30 years.  Loans secured by multi-family real estate are generally larger and involve a greater degree of risk than one-to-four family residential loans.  In addition, multi-family real estate loans carry risks similar to those associated with commercial real estate lending.  See " -- Consumer and Commercial Business Loans."



The Savings Bank's largest multi-family residential loan was a $536,000 loan made in early 1999 with a balance at June 30, 2002 of $470,000.  The loan is secured by a 24-unit apartment complex in Taney County, Missouri (near Branson)with a $565,500 appraisal along with an assignment of a $105,000 promissory note.  At June 30, 2002, only one of the eleven loans was not performing according to its scheduled terms.  The loan has since been brought current.



Land and Commercial Real Estate Loans.  The Savings Bank had loans outstanding secured by land and commercial real estate of $52.5 million, or 27.24% of the Savings Banks gross loan portfolio, at June 30, 2002.  The commercial real estate loans originated by the Savings Bank amounted to $41.4 million, or 21.46%, and are primarily secured by commercial buildings.  Land loans on property located primarily in the Savings Bank's primary market area amounted to $11.1 million or 5.78% of the total loan portfolio at June 30, 2002.  The Savings Bank's land loans generally are secured by farm land used in beef or dairy operations and involve the risks associated with general agricultural conditions relative to those areas of agriculture.



The Savings Bank's largest commercial real estate loan was $1.4 million at June 30, 2002.  The loan was originated to refinance existing debt and is secured by a shopping center in Pittsburg, Kansas.  The loan is performing according to its scheduled terms.



Of primary concern in commercial real estate lending is the borrower's creditworthiness and the feasibility and cash flow potential of the property.  Loans secured by income properties are generally larger and involve greater risks than residential mortgage loans because payments on loans secured by income properties are often dependent on successful operation or management of the properties.  As a result, repayment of such loans may be subject, to a greater extent than residential real estate loans, to supply and demand in the market in the type of property securing the loan and therefore, may be subject to adverse conditions in the real estate market or the economy.  If the cash flow from the project is reduced, the borrowers ability to repay the loan may be impaired.



Consumer and Commercial Business Loans.  The Savings Bank's consumer loans consist of car loans, appliance dealer loans, mobile home loans, savings account loans, and various other consumer loans.  At June 30, 2002, the Savings Bank's consumer loans totaled approximately $11.7 million, or 6.04% of the Savings Bank's total loans.  Subject to market conditions, management expects to continue to market and originate consumer loans as part of its strategy to provide a wide range of personal financial services to its depository customer base and as a means to enhance the interest rate sensitivity of the Savings Bank's interest-earning assets and its interest rate spread.



13



At June 30, 2002, the Savings Banks loan portfolio secured by automobiles amounted to $6.8 million, or 3.53% of total loans.  These loans are originated directly with the borrower.  The maximum term is 60 months for these loans.  The Savings Bank may lend up to 100% of the purchase price of a new automobile or up to the National Automobile Dealers Association published loan value for a used vehicle.  The Savings Bank requires all borrowers to maintain automobile insurance, including collision, fire and theft, with the Savings Bank listed as loss payee.



The Savings Bank also purchases consumer loans from two local appliance dealers.  The loans are made by the appliance dealers to the dealers customers.  At June 30, 2002, the loans amounted to $69,000.  Reserves for losses maintained by the dealers at June 30, 2002 totaled $14,000.  These loans are originated by the dealers and are assigned, with recourse, to the Savings Bank.  Payments are made directly to the dealers by the borrower and any losses are borne by the dealer rather than the Savings Bank.  The Savings Bank obtains and reviews regularly updated financial statements of the appliance dealers and monitors the individual loans purchased.



The Savings Bank's procedures for underwriting consumer loans include an assessment of the applicant's payment history on other debts and ability to meet existing obligations and payments on the proposed loan.  Although the borrower's creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the security, if any, to the proposed loan amount.



Consumer loans entail greater risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by rapidly depreciating assets such as automobiles, mobile homes, boats and recreational vehicles.  Any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance.  The remaining deficiency often does not warrant further collection efforts against the borrower.  In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.  Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.  Such loans may also give rise to claims and defenses by a consumer loan borrower against an assignee of such loans such as the Savings Bank, and a borrower may be able to assert against such assignee claims and defenses that it has against the seller of the underlying collateral.  Historically, the Savings Bank has had a low level of delinquencies on its consumer loans.  See"-- Non-Performing Assets and Delinquencies."  At June 30, 2002, only $146,000 of the Savings Bank's consumer loan portfolio was 90 days or more past due.



Commercial business loans consist of commercial loans with no real estate as security, such as business equipment loans, farm equipment loans and cattle loans.  As of June 30, 2002, 2001 and 2000, these loans totaled $9.5 million, $8.3 million and $5.6 million, respectively.  The ratio of other loans as a percent of total loans increased during the three years ended June 30, 2002 to 4.94%, 4.31% and 3.12%, respectively.  These ratios are an indication that the Savings Bank does not particularly emphasize loans of this type, but may make such loans for well qualified customers.  There have been insignificant losses from First Home originated loans in the "other loans" category in the past three fiscal years.



14



Second Mortgage Loans.  The Savings Bank offers adjustable rate second mortgage loans that are usually made on the security of the borrower's residence.  Loans normally do not exceed 80% to 85% of the appraised value of the residence, less the outstanding principal of the first mortgage, and have terms of up to 25 years requiring monthly payments of principal and interest.  At June 30, 2002, second mortgage loans amounted to $3.1 million, or 1.58% of total loans of the Savings Bank.



15



Loan Maturity and Repricing



The following table sets forth certain information at June 30, 2002 regarding the dollar amount of loans maturing in the Savings Bank's portfolio based on their contractual terms to maturity, but does not include scheduled payments or potential prepayments.  Demand loans, loans having no stated schedule of repayments and no stated maturity, are reported as due in one year or less.  Mortgage loans which have adjustable rates are shown as maturing at their next repricing date.  Loan balances do not include undisbursed loan proceeds, unearned discounts, unearned income and allowance for loan losses.



|                       |  |                 |  | After One Year  |  | After 3 Years   |  | After 5 Years    |  |                 |  |          
|---------------------- |  | --------------- |  | --------------- |  | --------------- |  | ---------------- |  | --------------- |  | ---------
|                       |  | Within One Year |  | Through 3 Years |  | Through 5 Years |  | Through 10 Years |  | Beyond 10 Years |  | Total    
|                       |  | (In thousands) 
|Real estate mortgage   |  | $ 116,390       |  | $    330        |  | $     39        |  | $       -        |  | $     388       |  | $ 117,147
|Commercial real estate |  | 36,643          |  | 205             |  | 5,440           |  | 865              |  | -               |  | 43,153   
|Land                   |  | 11,429          |  | 1               |  | -               |  | -                |  | -               |  | 11,430   
|Mobile home            |  | 1,437           |  | 32              |  | 29              |  | 45               |  | -               |  | 1,543    
|Automobile             |  | 5,381           |  | 631             |  | 848             |  | -                |  | -               |  | 6,860    
|Savings account loans  |  | 1,501           |  | 185             |  | 23              |  | -                |  | 24              |  | 1,733    
|Other consumer         |  | 1,315           |  | 188             |  | 50              |  | -                |  | -               |  | 1,553    
|Commercial business    |  | 8,252           |  | 661             |  | 509             |  | 76               |  | 8               |  | 9,506    
|Total loans            |  | $ 182,348       |  | $  2,233        |  | $  6,938        |  | $     986        |  | $     420       |  | $ 192,925
|                       |  |                 |  |                 |  |                 |  |                  |  |                 |  |          

The following table sets forth the dollar amount of all loans due one year after June 30, 2002, all of which have fixed interest rates.

|                       |  | Fixed          | 
|---------------------- |  | -------------- | 
|                       |  | Rates          | 
|                       |  | (In thousands) | 
|Real estate mortgage   |  | $   427        | 
|Commercial real estate |  | 12             | 
|Land                   |  | 1              | 
|Mobile home            |  | 75             | 
|Automobile             |  | 1,117          | 
|Savings account loans  |  | 232            | 
|Other consumer         |  | 192            | 
|Commercial business    |  | 1,128          | 
|Total                  |  | $ 3,184        | 
|                       |  |                | 

16



The following table sets forth scheduled contractual amortization of loans and mortgage-backed securities at June 30, 2002 and the dollar amount of such loans and mortgage-backed securities at the date which are scheduled to mature after one year which have fixed or adjustable interest rates.  Demand loans, loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less.



|                     |          | At June 30, 2002
|-------------------- | -------- | ----------------
|                     |          |                 
|                     |          | Mortgage        
|                     |          | Loans           
|                     |          | (In thousands)  
|Amounts due:         |          |                 
|Within one year      | $  6,254 |                 
|After one year       |          |                 
|through three years  | 1,703    |                 
|After three years    |          |                 
|through five years   | 2,553    |                 
|After five years     | 161,220  |                 
|Total                |          | $171,730        
|                     |          |                 
|Interest rate terms  |          |                 
|on amounts due after |          |                 
|one year:            |          |                 
|Fixed                |          | $    440        
|Adjustable           |          | 165,036         
|Total                |          | $165,476        
|                     |          |                 



Mortgage Loan Solicitation and Processing.  The Savings Bank's main source of loans is from referrals from current or prior borrowers, limited walk-ins and contact and relationships with real estate agents.   Once a mortgage loan application is received, a credit and property analysis is completed including obtaining a credit report from local reporting agencies, verification of income and deposits through mail or direct contact, asset and liability verification as required and an evaluation of the property offered as collateral.  Real estate evaluations are completed by board approved staff personnel.  The application is then submitted for underwriting by designated staff members and forwarded to a loan officer for review and action along with the underwriter's recommendations.  Decisions are generally made within a week.  Loans in excess of $500,000 are approved by the Board of Directors and loans less than that amount are approved by authorized officers or a loan officer of the Savings Bank.



17



Loan Originations, Purchases and Sales.  Loans are originated to meet or exceed the applicable underwriting requirements of the Savings Bank.  The Savings Bank has never sold loans in the secondary market.



The Savings Bank has occasionally purchased loans from other financial institutions or two local appliance dealers, as discussed above.  See "-- Consumer and Commercial Business Loans."  The Savings Bank did not purchase any mortgage loans during 2002.



18



The following table shows total mortgage loans originated, purchased, sold and repaid during the periods indicated.



|                                                    |          | Years Ended June 30,
|--------------------------------------------------- | -------- | --------------------
|                                                    |          | 2002                
|                                                    |          | (In thousands)      
|Total mortgage loans at beginning of period         | $172,199 |                     
|Loans originated:                                   |          |                     
|One-to-four family residential                      |          | 22,908              
|Multi-family residential and commercial real estate | 15,777   |                     
|Land                                                |          | 2,787               
|Total loans originated                              |          | 41,472              
|                                                    |          |                     
|Loans purchased:                                    |          |                     
|One-to-four family residential                      |          | -                   
|Multi-family residential and commercial real estate | -        |                     
|Land                                                |          | -                   
|Participation loans                                 |          | -                   
|Total loans purchased                               |          | -                   
|                                                    |          |                     
|Loans sold                                          |          | -                   
|                                                    |          |                     
|Mortgage loan principal repayments                  |          | 41,359              
|                                                    |          |                     
|Other-loans charged off or                          |          |                     
|transferred to other real estate(1)                 |          | 582                 
|Total other activity                                |          | 582                 
|Total gross mortgage loans at end of period         | $171,730 |                     
|                                                    |          |                     
|Total mortgage-backed certificates at beginning of  |          |                     
|period                                              |          | $    376            
|Mortgage-backed purchased                           |          | 2,454               
|Mortgage-backed sold                                |          | -                   
|Principal repayments                                |          | (106)               
|Amortization of premiums                            |          | -                   
|Adjustment to market value                          |          | 35                  
|Total mortgage-backed at end of period              |          | $  2,759            
|                                                    |          |                     

-------------

(1)   Loans transferred to other real estate amounted to $523,000, $449,000 and $142,000 during fiscal 2002, 2001 and 2000, respectively.  Mortgage loans charged off amounted to $59,000, $20,000 and $20,000 during fiscal 2002, 2001 and 2000, respectively.



19



Loan Commitments.  The Savings Bank issues commitments for adjustable rate one-to-four family residential mortgage loans that are honored for up to a maximum of 30 days from approval.  If the commitment expires, it is generally renewed upon request without penalty or expense to the borrower at the current market rate.  The Savings Bank had outstanding net loan commitments of approximately $914,000 at June 30, 2002.  See Note 15 of the Notes to the Consolidated Financial Statements.



Loan Origination and Other Fees.  The Savings Bank does not charge points on ARM mortgage loans.  Instead, it quotes an interest rate, or base rate, with no points and gives the borrower the option, if desired, to pay a 1% fee, but obtain the loan at 1% below the Savings Bank's base rate at the time the loan is issued.  Subsequent increases in the loan's interest rate are based upon the reduced rate rather than the base rate.  Construction borrowers can pay a 2% fee and receive a 2% reduction in the initial rate.  Current accounting standards require fees received (net of certain loan origination costs) for originating loans to be deferred and amortized into interest income over the contractual life of the loan.  Net deferred fees associated with loans that are sold are recognized as income at the time of sale.  The Savings Bank had $265,000 net deferred loan costs at June 30, 2002.



Non-Performing Assets and Delinquencies.  The Savings Bank generally institutes collection procedures when a monthly payment is two to four weeks delinquent.  A first notice is generally mailed to the borrower, or a phone call made.  If necessary, a second notice follows at the end of the next two week period.  In most cases, delinquencies are cured promptly; however, if the Savings Bank is unable to make contact with the borrower to obtain full payment, or, if that is not possible, work out a repayment schedule, a notice to commence foreclosure may be mailed to the borrower.  The Savings Bank makes every reasonable effort, however, to work with delinquent borrowers.  Understanding that borrowers sometimes cannot make payments because of illness, loss of employment, etc., the Savings Bank will attempt to work with delinquent borrowers who are communicating and cooperating with the Savings Bank.



The Savings Bank institutes the same collection procedures for non-mortgage loans.



The Board of Directors is informed on a monthly basis as to the status of all mortgage and non-mortgage loans that are delinquent 90 days or more, as well as the status on all loans currently in foreclosure or owned by the Savings Bank through foreclosure.



The table below sets forth the amounts and categories of non-performing assets in the Savings Bank's loan portfolio at the dates indicated.  Loans are placed on non-accrual status only when the Savings Bank determines there is little, if any, likelihood they will be repaid.  The loans are fully reserved at that time, through appropriate loss reserves and are kept on the books as long as some principal is being repaid.  The Savings Bank has no reserves for uncollected interest and does not accrue interest on the non-accrual loans.  The Savings Bank would have recorded interest income on non-accrual loans of $16,300 for the year ended June 30, 2002 and $4,300 annually on non-accrual loans during the years ended June 30, 2001 and 2000, if such loans had been performing during such periods.  The Savings Bank did not recognize interest income on loans after being placed on a non-accrual basis during the years ended June 30, 2002, 2001 and 2000.



20



Accruing loans contractually past due 90 days or more have decreased over the past year.  The vast majority of the remaining past due loans are well secured, and the borrowers are making payments and working with Savings Bank personnel to bring their loans current.



Home loans which are 60 or more days but less than 91 days past due have increased during the fiscal year 2002 as Savings Bank personnel have concentrated efforts on working with borrowers who were past due 90 days or more in the prior year.  This process reduced the amount of residential loans past due 90 days or more and moved these loans into the 60 to 90 days delinquent category.



21

The following table sets forth information with respect to the Savings Bank's non-performing assets at the dates indicated.  At the dates shown, the Savings Bank had no restructured loans within the meaning of SFAS 15.



|                                       |        | At June 30,           
|-------------------------------------- | ------ | ----------------------
|                                       |        | 2002                  
|                                       |        | (Dollars in thousands)
|Loans accounted for on                 |        |                       
|a nonaccrual basis                     |        |                       
|Real estate:                           |        |                       
|Residential                            |        | $  -                  
|Commercial                             |        | 175                   
|Commercial business                    |        | -                     
|Consumer                               |        | -                     
|Total                                  |        | $  175                
|                                       |        |                       
|Accruing loans which are contractually |        |                       
|past due 90 days or more:              |        |                       
|Real estate:                           |        |                       
|Residential                            |        | $  666                
|Commercial                             |        | 261                   
|Commercial business                    |        | 24                    
|Consumer                               |        | 146                   
|Total                                  |        | $1,097                
|Total of nonaccrual and                |        |                       
|90 days past due loans                 | $1,272 |                       
|                                       |        |                       
|Real estate owned                      |        | 399                   
|                                       |        |                       
|Other non-performing assets            | -      |                       
|Impaired loans not past due            | 1,357  |                       
|Slow home loans (60 to 90 days         |        |                       
|delinquent)                            |        | 1,507                 
|Total non-performing assets            | $4,535 |                       
|                                       |        |                       
|Total loans delinquent 90 days         |        |                       
|Or more to net loans                   |        | 0.67%                 
|                                       |        |                       
|Total loans delinquent 90 days         |        |                       
|Or more to total consolidated          |        |                       
|assets                                 |        | 0.49%                 
|                                       |        |                       
|Total non-performing assets            |        |                       
|To total consolidated                  |        |                       
|assets                                 |        | 1.76%                 



22



Asset Classification.  The OTS has adopted various regulations regarding problem assets of savings institutions.  The regulations require that each insured institution review and classify its assets on a regular basis.  In addition, in connection with examinations of insured institutions, OTS examiners have authority to identify problem assets and, if appropriate, require them to be classified.  There are three classifications for problem assets: substandard, doubtful and loss.  Substandard assets must have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected.  Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss.  An asset classified loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted.  If an asset or portion thereof is classified loss, the insured institution must either establish specific allowances for loan losses for the full amount of the portion of the asset classified as loss or charge off such amount.  All or a portion of general loan loss allowances established to cover possible losses related to assets classified substandard or doubtful may be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital.



At June 30, 2002 and 2001 the aggregate amounts of the Savings Bank's classified assets as determined by the Savings Bank, and of the Savings Bank's general and specific loss allowances and charge-offs, were as follows:



|                         |        | At June 30,   
|------------------------ | ------ | --------------
|                         |        | 2002          
|                         |        | (In thousands)
|Loss                     |        | $    -        
|Doubtful                 |        | 304           
|Substandard assets       |        | 1,983         
|Total classified assets  | $2,287 |               
|                         |        |               
|General loss allowances  | $  347 |               
|Specific loss allowances | 534    |               
|Total loss allowances    | $  881 |               
|                         |        |               
|Charge-offs              |        | $  204        
|                         |        |               

The Savings Bank does not use a special mention category in its loan classification process.  Loans classified as substandard, therefore, include all loans for which any perceived weakness occurs even if no possibility has arisen that a loss will occur if the weakness is not corrected.  The Savings Bank's policy is to classify as substandard, for example, any loan, irrespective of payment record or collateral value, when a bankruptcy filing occurs, a divorce petition is filed, the pay record becomes erratic (i.e., miss one monthly payment, but make a double payment the next month), a borrower moves from the area, a major illness occurs, or a loan becomes contractually delinquent by three monthly payments.



23



The Savings Bank also has a policy not to remove a loan from a substandard classification, again, irrespective of pay record or collateral value, until those perceived weaknesses are cured.  Because of this stringent classification policy, the June 30, 2002 substandard classification totals included $1.6 million of loans that were current in their payment obligations.



The following is a discussion of the Savings Bank's largest substandard loans to one borrower at June 30, 2002:  That borrower (a limited liability company and its single member) had eleven loans with a collective outstanding balance of $1.4 million that were classified as substandard during the year.  Even though the loans were performing according to their respective contractual terms at June 30, 2002, the borrower had experienced cash flow difficulties several times in the last twelve months.  The loans are collateralized by commercial real estate and business assets.



Real Estate Owned.Real estate acquired by the Savings Bank as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until it is sold.  When property is acquired, the unpaid principal balance of the related loan plus foreclosure costs are compared to the property's net realizable  value.  The property is then directly written down to the lower of cost or net realizable value.  Subsequently, the property is carried at the lower of cost or net realizable value with any adjustments made through the establishment of a specific reserve.  At June 30, 2002,  five properties were held as real estate owned with value of $399,000.  At June 30, 2001, two properties were held as real estate owned with a value of $193,000.



Reserve for Loan Losses



The Savings Banks Loan Classification Committee performs a monthly assessment of the probable estimated losses in the loan portfolio.  The Committee reviews the following information:



(i)  All loans classified during the previous analysis  Current information such as payment history, or actions taken to correct the deficiency are reviewed and, if justified, the classification level may be upgraded.  If conditions have not improved, the loan classification is reviewed to ensure the appropriate action is being taken to mitigate loss.



(ii)  Past due loans  The committee reviews loans past due 60 days or more, taking into consideration the borrower, the nature of the collateral and its value, the circumstances that have caused the delinquency, and the likelihood of the borrower correcting the conditions that have resulted in the delinquent status.  The committee may recommend more aggressive collection activity, inspection of the collateral, or no change in its classification.



(iii)  Reports from Savings Banks loan officers  Loan officers may be aware of a borrowers circumstances that have not yet resulted in any past due payments but have the potential for problems in the immediate future.  Each loan officer reviews their respective lending units loans and identifies any that may have developing weaknesses.  This self identification process in an important component of maintaining credit quality as each loan officer is accountable for monitoring as well as originating loans.



(iv)  Current economic conditions  The Savings Bank takes into consideration economic conditions in it market area as well as national economic factors that could influence the quality of the loan portfolio in general.



24



Each individual loan, previously classified by the committee or newly classified during the monthly review, is evaluated for loss potential, and any specific estimates of impairment are added to the overall reserve amount.  As a result of the size of the institution, the size of the portfolio and the Savings Banks process for originating loans, the members of the classification committee are often directly familiar with the borrower, the collateral or the circumstances giving rise to the concerns.



In addition to adding specific estimates of impairment to the required reserve amounts, management applies a percentage, based on historical loss ratios and other economic factors, to the loan portfolio.  This calculated amount is compared to the actual amount recorded in the allowance at the end of each month and a determination is made as to whether the allowance is adequate or needs to be increased.  Management increases the amount of the allowance for loan losses by charges to income and decreases it by loans charged off (net of recoveries).   The Savings Bank had reserves for loan losses at June 30, 2002, 2001 and 2000 of approximately $881,000, $696,000 and $597,000, respectively.



Management believes that loan loss reserves were adequate at June 30, 2002.  However, if the underlying facts and circumstances of the loan portfolio change in the future, the adequacy of the allowance for loan losses will be addressed and, if need be, adjusted accordingly.



While the Savings Bank believes it has established its existing allowance for loan losses in accordance with GAAP, there can be no assurance that regulators, in reviewing the Savings Bank's loan portfolio, will not request the Savings Bank to significantly increase its allowance for loan losses.  Any material increase in reserves may adversely affect the Savings Bank's financial condition and earnings.



25



The following table sets forth an analysis of the Savings Bank's gross reserve for possible loan losses for the periods indicated.  Where specific loan loss reserves have been established, any difference between the loss reserve and the amount of loss realized has been charged or credited to current income.



|                                          |             | At June 30,           
|----------------------------------------- | ----------- | ----------------------
|                                          |             | 2002                  
|                                          |             | (Dollars in thousands)
|Allowance at beginning of period          |             | $       696           
|Provision for loan losses                 |             | 373                   
|Recoveries:                               |             |                       
|Residential real estate                   |             | -                     
|Commercial real estate                    |             | -                     
|Consumer                                  |             | 16                    
|Commercial business                       |             | -                     
|Total recoveries                          |             | 16                    
|                                          |             |                       
|Charge offs:                              |             |                       
|Residential real estate                   |             | 36                    
|Commercial real estate                    |             | 23                    
|Consumer                                  |             | 143                   
|Commercial business                       |             | 2                     
|Total charge offs                         |             | 204                   
|Net charge offs                           |             | 188                   
|Allowance at end of period                | $       881 |                       
|                                          |             |                       
|Ratio of allowance to total loans         |             |                       
|outstanding at the end of the period      | 0.46%       |                       
|Ratio of net charge offs to average loans |             |                       
|outstanding during the period             |             | 0.10%                 
|                                          |             |                       



26



Allowance for Loan Losses by Category

|                         | At June 30,            | 
|------------------------ | ---------------------- | 
|                         | 2002                   | 
|                         |                        | 
|                         |                        | 
|                         |                        | 
|                         |                        | 
|                         |                        | 
|                         | Amount                 | 
|                         | (Dollars in thousands) | 
|Real estate -- mortgage: |                        | 
|Residential              | $  252                 | 
|Commercial               | 238                    | 
|Land                     | 22                     | 
|Second mortgage loans    | 19                     | 
|Consumer                 | 135                    | 
|Commercial business      | 215                    | 
|Total allowance for      |                        | 
|loan losses              | $  881                 | 
|                         |                        | 



|                         | At June 30,           
|------------------------ | ----------------------
|                         | 1999                  
|                         |                       
|                         |                       
|                         |                       
|                         |                       
|                         |                       
|                         | Amount                
|                         | (Dollars in thousands)
|Real estate -- mortgage: |                       
|Residential              | $  198                
|Commercial               | 70                    
|Land                     | 16                    
|Second mortgage loans    | 13                    
|Consumer                 | 163                   
|Commercial business      | 80                    
|Total allowance for      |                       
|loan losses              | $  540                
|                         |                       





27



Investment Activities



Savings and loan associations have authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various Federal agencies and of state and municipal governments, deposits at the FHLB-Des Moines, certificates of deposit of federally insured institutions, certain bankers' acceptances and federal funds.  Subject to various restrictions, savings institutions may also invest a portion of their assets in commercial paper, corporate debt securities and mutual funds, the assets of which conform to the investments that federally chartered savings institutions are otherwise authorized to make directly.  Savings institutions are also required to maintain minimum levels of liquid assets which vary from time to time.  See "REGULATION OF FIRST HOME -- Federal Home Loan Bank System."  The Savings Bank may decide to increase its liquidity above the required levels depending upon the availability of funds and comparative yields on investments in relation to return on loans.



Routine short-term investment decisions, which are reported monthly to the Board of Directors, are made by the President and Chief Executive Officer and Chief Financial Officer, who act within policies established by the Board.  Those investments include federally insured certificates of deposit, FHLB term time obligations, bankers acceptances, treasury obligations, U.S. Government agency obligations, mortgage-backed securities, bank qualifying municipal tax exempt bonds and corporate bonds.  Securities not within the parameters of the policies require prior Board approval.  Securities are purchased for investment purposes.  The goals of the Savings Bank's investment policy are to select investments based on safety first, flexibility second and diversification third.  In addition, as a result of the concern with interest rate risk exposure, there has been a focus on short-term investments.  At June 30, 2002, the Company's and the Savings Bank's securities investment portfolio totaled $34.1 million and consisted primarily of federal agency obligations securities, common and preferred stocks, and municipal bonds.  For further information concerning the Savings Bank's investment and mortgage-backed securities portfolio, see Notes  2, 3 and 4 of the Notes to the Consolidated Financial Statements included in the Annual Report.



28



Investment Securities Analysis



The following table sets forth the Company's and the Savings Bank's investment securities portfolio at carrying value at the dates indicated.



|                                 | At June 30,           
|-------------------------------- | ----------------------
|                                 | 2002                  
|                                 | Book                  
|                                 | Value(1)              
|                                 | (Dollars in thousands)
|Debt securities:                 |                       
|U.S. government treasury and     |                       
|obligations of U.S.              |                       
|government agencies              | $29,060               
|Auto and student loan pools      | 11                    
|State and political subdivisions | 1,558                 
|Total debt securities            | 30,629                
|                                 |                       
|Equity securities:               |                       
|Federal Home Loan Bank           |                       
|stock                            | 1,901                 
|Other                            | 1,532                 
|Total equity securities          | 3,433                 
|Total investment securities      | $34,062               
|                                 |                       



-------------------------

(1)  The market value of the Companys and the Savings Bank's investment securities portfolio amounted to $34.1 million, $4.83 million and $6.62 million at June 30, 2002, 2001 and 2000, respectively.  At June 30, 2002, the market value of the principal component of the Companys and the Savings Bank investment securities portfolio which were obligations of U.S. government

agencies was $29.1 million.



29



The following table sets forth the maturities and weighted average yields of the debt securities in the Companys and the Savings Bank's investment securities portfolio at June 30, 2002.



|                                 | Less Than              |  |       | One to     |         |         | Five to   |       |         | Over Ten |        
|-------------------------------- | ---------------------- |  | ----- | ---------- | ------- | ------- | --------- | ----- | ------- | -------- | -------
|                                 | One Year               |  |       | Five Years |         |         | Ten Years |       |         | Years    |        
|                                 | Amount                 |  | Yield |            |         | Amount  |           | Yield |         |          | Amount 
|                                 | (Dollars in thousands)
|U.S. government treasury and     |                        |  |       |            |         |         |           |       |         |          |        
|obligations of U.S.              | $ -                    |  | -     | %          | $27,041 |         | 4.35      | %     | $ 2,019 |          | 4.86   
|government agencies              |                        |  |       |            |         |         |           |       |         |          |        
|Student loan pool                | -                      |  | -     |            |         | 11      |           | 4.60  |         |          | -      
|State and political subdivisions | 300                    |  | 4.55  |            |         | 1,093   |           | 4.60  |         |          | 165    
|Total                            | $ 300                  |  | 4.55  |            |         | $28,145 |           | 4.76  |         |          | $ 2,184
|                                 |                        |  |       |            |         |         |           |       |         |          |        



At June 30, 2002, the Savings Bank held no security which had an aggregate book value in excess of 10% of the Companys stockholders equity.



Mortgage-Backed Securities.  To supplement lending activities in periods of deposit growth and/or declining loan demand, the Savings Bank has invested in residential mortgage-backed securities.  Although such securities are held for investment, they can serve as collateral for borrowings and, through repayments, as a source of liquidity.  For information regarding the carrying and market values of the Savings Bank's mortgage-backed securities portfolio, see Note 4 of the Notes to Consolidated Financial Statements included in the Annual Report.  The Savings Bank has invested in federal agency securities issued by Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA) and Government National Mortgage Association (GNMA).  As of June 30, 2002, 44.6% of the outstanding balance of the mortgage-backed securities had adjustable rates of interest.  As of June 30, 2002, the Savings Bank's portfolio included $2.76 million of mortgage-backed securities purchased as investments to supplement the Savings Bank's mortgage lending activities.



The FHLMC, FNMA and GNMA certificates are modified pass-through mortgage-backed securities that represent undivided interests in underlying pools of fixed-rate, or certain types of adjustable-rate, single-family residential mortgages issued by these government-sponsored entities.  As a result, the interest rate risk characteristics of the underlying pool of mortgages, such as fixed- or adjustable-rate, as well as prepayment risk, are passed on to the certificate holder.  FHLMC and FNMA provide the certificate holder a guarantee of timely payments of interest and ultimate collection of principal, whether or not they have been collected.  GNMAs guarantee to the holder of timely payments of principal and interest is backed by the full faith and credit of the U.S. government.  Mortgage-backed securities generally yield less than the loans that underlie such securities, because of the cost of payment guarantees or credit enhancements that reduce credit risk.  In addition, mortgage-backed securities are more liquid than individual mortgage loans and may be used to collateralize obligations of the Savings Bank.



The Savings Bank has incorporated into its investment policy the regulatory requirements set forth in the OTS TB 52, which deals with the selection of securities dealers, securities policies, unsuitable investment practices and mortgage derivative products.  At June 30, 2002, the Savings Bank owned no derivatives.



30

Deposit Activities and Other Sources of Funds



General.  Deposits and loan repayments are the major source of the Savings Bank's funds for lending and other investment purposes.  Loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions.  Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds from other sources.  They may also be used on a longer term basis for general business purposes.



Deposit Accounts.  Deposits are attracted from within the Savings Bank's primary market area through the offering of a broad selection of deposit instruments, including negotiable order of withdrawal ("NOW") accounts, money market accounts, regular savings accounts, certificates of deposit and retirement savings plans.  Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors.  In determining the terms of its deposit accounts, the Savings Bank considers the rates offered by its competition, profitability to the Savings Bank, matching deposit and loan products and its customer preferences and concerns. The Savings Bank generally reviews its deposit mix and pricing at least weekly, and adjusts it as necessitated by liquidity needs, the gap position and competition.



The Savings Bank experienced a significant increase in SuperSaver accounts during the year ended June 30, 2002.  This type of account limits transactions via check to three per statement cycle but pays a higher rate of interest than regular checking (NOW) accounts.  The interest rate also increases as a higher average collected balance is maintained in the account.  The increase is attributable to customers reaction to national economic activity rather than any promotion by the Savings Bank.  Management believes deposits will continue to gradually increase, net of interest credited, during the remainder of calendar year 2002.



31



The following table sets forth information concerning the Savings Bank's time deposits and other interest-bearing deposits

at June 30, 2002.



|Weighted |  |            |                        |                             |     |         |        |            |      |            |  
|-------- |  | ---------- | ---------------------- | --------------------------- | --- | ------- | ------ | ---------- | ---- | ---------- | -
|Average  |  |            |                        |                             |     |         |        |            |      | Percentage |  
|Interest |  |            |                        |                             |     | Minimum |        |            |      | of Total   |  
|Rate     |  | Term       |                        | Category                    |     | Amount  |        | Balance(1) |      | Deposits   |  
|         |  |            |                        |                             |     |         |        |            |     
|0.00%    |  | None       |                        | Non-interest bearing        |     | $   -   |        | $  7,531   |      | 3.72       | %
|2.07%    |  | None       |                        | NOW accounts                |     | 25      |        | 30,800     |      | 15.21      |  
|2.52%    |  | None       |                        | Super Saver accounts        |     | 1       |        | 41,452     |      | 20.48      |  
|2.18%    |  | None       |                        | Super NOW accounts          |     | 300     |        | 4,526      |      | 2.24       |  
|2.51%    |  | None       |                        | Savings accounts            |     | -       |        | 14,492     |      | 7.16       |  
|         |  |            |                        |                             |     |         |        |            |      |            |  
|         |  |            |                        | Certificates of deposit     |     |         |        |            |      |            |  
|2.69%    |  | 3 months   | Fixed term, fixed rate |                             | 500 |         | 4,497  |            | 2.22 |           
|2.83%    |  | 6 months   | Fixed term, fixed rate |                             | 500 |         | 18,652 |            | 9.21 |           
|3.43%    |  | 12 months  | Fixed term, fixed rate |                             | 500 |         | 18,397 |            | 9.09 |           
|4.03%    |  | 18 months  | Fixed term, fixed rate |                             | 500 |         | 2,149  |            | 1.06 |           
|4.73%    |  | 24 months  | Fixed term, fixed rate |                             | 500 |         | 3,656  |            | 1.81 |           
|5.14%    |  | 30 months  | Fixed term, fixed rate |                             | 500 |         | 1,425  |            | 0.70 |           
|5.69%    |  | 36 months  | Fixed term, fixed rate |                             | 500 |         | 2,279  |            | 1.13 |           
|5.46%    |  | 48 months  | Fixed term, fixed rate |                             | 500 |         | 716    |            | 0.35 |           
|5.73%    |  | 60 months  | Fixed term, fixed rate |                             | 500 |         | 5,838  |            | 2.88 |           
|6.25%    |  | 72 months  | Fixed term, fixed rate |                             | 500 |         | 74     |            | 0.04 |           
|4.98%    |  | 120 months | Fixed term, fixed rate |                             | 500 |         | 21     |            | 0.01 |           
|various  |  | various    |                        | Fixed term, adjustable rate | 500 |         | 19,340 |            | 9.55 |           
|various  |  | various    |                        | Jumbo certificates          |     | 100,000 |        | 26,605     |      | 13.14      |  
|         |  |            |                        |                             |     |         |        | $202,450   |      | 100.00     | %
|         |  |            |                        |                             |     |         |        |            |      |            |  

(1) Dollars in thousands.



The following table indicates the amount of the Savings Bank's jumbo certificates of deposit by time remaining until maturity as of June 30, 2002.  Jumbo certificates of deposit require minimum deposits of $100,000 and rates paid on such accounts are negotiable.



|                          |                | Jumbo       
|------------------------- | -------------- | ------------
|                          |                | Certificates
|Maturity Period           |                | of Deposit  
|                          | (In thousands)
|                          |                |             
|Three months or less      |                | $ 9,714     
|Three through six months  | 6,171         
|Six through twelve months | 4,659         
|Over twelve months        |                | 6,061       
|Total                     |                | $26,605     



32



Time Deposits by Rates



The following table sets forth the time deposits in the Savings Bank classified by rates as of the dates indicated.



|             |           | At June 30,   
|------------ | --------- | --------------
|             |           | 2002          
|             |           | (In thousands)
|2.00 - 4.49% | $  69,880 |               
|4.50 - 5.49% | 11,156    |               
|5.50 - 6.49% | 19,734    |               
|6.50 - 7.49% | 2,879     |               
|Over 7.49%   |           | -             
|Total        |           | $ 103,649     
|             |           |               



The following table sets forth the amount and maturities of time deposits at June 30, 2002.



|             |         | Amount Due     |         |         |         |         |       
|------------ | ------- | -------------- | ------- | ------- | ------- | ------- | ------
|             |         |                |         |         |         |         |       
|             |         |                |         |         |         |         |       
|             |         | Less than      |         | 1-2     |         | 2-3     |       
|             |         | One Year       |         | Years   |         | Years   |       
|             |         | (In thousands) |         |         |        
|2.00 - 4.49% | $59,403 |                | $ 5,948 |         | $   528 |         | $3,484
|4.50 - 5.49% | 6,878   |                | 2,015   |         | 928     |         | 1,008 
|5.50 - 6.49% | 5,900   |                | 5,442   |         | 8,061   |         | 331   
|6.50 - 7.49% | 595     |                | 455     |         | 1,405   |         | 424   
|Over 7.49%   | -       |                | -       |         | -       |         | -     
|Total        |         | $72,776        |         | $13,860 |         | $10,922 |       
|             |         |                |         |         |         |         |       



33







Deposit Flow



The following table sets forth the balances of savings deposits in the various types of savings accounts offered by the Savings Bank at the dates indicated.



|                                  |       | At June 30,            |     
|--------------------------------- | ----- | ---------------------- | ----
|                                  |       | 2002                   |     
|                                  |       |                        |     
|                                  |       |                        |     
|                                  |       | Amount                 |     
|                                  |       | (Dollars in thousands) |     
|Non-interest bearing              |       | $  7,531               |     
|NOW checking                      |       | 30,800                 |     
|Regular savings accounts          |       | 14,492                 |     
|Super Saver accounts              |       | 41,452                 |     
|Super NOW accounts                |       | 4,526                  |     
|Fixed-rate certificates which     |       |                        |     
|mature (1):                       |       |                        |     
|Within 1 year                     |       | 68,382                 |     
|After 1 year, but within 2 years  | 8,208 |                        | 4.05
|After 2 years, but within 5 years | 7,719 |                        | 3.81
|Thereafter                        |       | -                      |     
|Adjustable-rate certificates      |       | 19,340                 |     
|Total certificates                |       | 103,649                |     
|Total                             |       | $202,450               |     
|                                  |       |                        |     

(1)  At June 30, 2002, 2001 and 2000, jumbo certificates of deposit amounted to $26.6 million, $21.6 million and $20.7 million, respectively, and IRAs equaled $20.8 million, $19.0 million and $16.6 million at those dates, respectively.



34



The following table sets forth the savings activities of the Savings Bank for the periods indicated.



|                               |  | Years Ended June 30,
|------------------------------ |  | --------------------
|                               |  | 2002                
|                               |  | (In thousands)      
|Beginning balance              |  | $ 162,438           
|Net increase (decrease) before |  |                     
|interest credited              |  | 34,536              
|Interest credited              |  | 5,476               
|Net increase in                |  |                     
|savings deposits               |  | 40,012              
|                               |  |                     
|Ending balance                 |  | $ 202,450           
|                               |  |                     



In the unlikely event the Savings Bank is liquidated, depositors will be entitled to full payment of their deposit accounts prior to any payment being made to the stockholders of the Savings Bank.  Substantially all of the Savings Bank's depositors are residents of the State of Missouri.



Borrowings.  Savings deposits are the primary source of funds for the Savings Bank's lending and investment activities and for its general business purposes.  The Savings Bank also relies on advances from the FHLB-Des Moines to supplement its supply of lendable funds and to meet deposit withdrawal requirements.  The FHLB-Des Moines has served as the Savings Bank's primary borrowing source.  Advances from the FHLB-Des Moines are typically secured by the Savings Bank's first mortgage loans.  These advances require monthly payments of interest only  with principal due at maturity and have fixed rates.  The short-term advances require interest payable at maturity.  Two long-term advances require monthly payments of principal and interest. These advances were obtained in response to the Savings Bank's previous strong loan demand and limited deposit growth experienced during fiscal years 2001 and 2000.  At June 30, 2002, the Savings Bank had $29.8 million in advances from the FHLB-Des Moines.  Because of their prepayment penalties, it is not currently economical to prepay any of these advances prior to maturity.







The following tables set forth certain information concerning the Savings Banks borrowings at the dates and for the periods indicated.



|                                       |  | At June 30,            |  
|-------------------------------------- |  | ---------------------- | -
|                                       |  | 2002                   |  
|Weighted average rate paid on          |  |                        |  
|FHLB advances                          |  | 5.56                   | %
|                                       |  |                        |  
|                                       |  | Years Ended June 30,   |  
|                                       |  | 2002                   |  
|                                       |  | (Dollars in thousands) |  
|Maximum amounts of FHLB advances       |  |                        |  
|outstanding at any month end           |  | $32,119                |  
|Approximate average FHLB advances      |  |                        |  
|outstanding                            |  | 31,394                 |  
|Approximate weighted average rate paid |  |                        |  
|on FHLB advances                       |  | 5.73                   | %



35



The FHLB-Des Moines functions as a central reserve bank providing credit for savings and loan associations and other member financial institutions.  As a member, the Savings Bank is required to own capital stock in the FHLB-Des Moines and is authorized to apply for advances on the security of such stock and certain of its mortgage loans and other assets (principally securities which are obligations of,  or guaranteed by, the United States) provided certain standards related to creditworthiness have been met.  Advances are made pursuant to several different programs.  Each credit program has its own interest rate and range of maturities.  Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution's retained earnings or on the FHLB's assessment of the institution's creditworthiness.  The FHLB-Des Moines determines specific lines of credit for each member institution.



Subsidiary Activities



Fybar Service Corporation ("Fybar") is a Missouri corporation wholly-owned by the Savings Bank.  Fybar owns five rental properties.  One is an office building in Mountain Grove, Missouri called "The Shannon Centre" which is adjacent to the Savings Bank's drive-in and is currently 70% occupied.  The second is a single family residence in Gainesville, Missouri which is currently occupied.  The third property is a commercial building in Mountain Grove, Missouri which is fully occupied.  The fourth is a single family residence in Mountain Grove, Missouri which is also currently occupied.  The fifth is a commercial building in Sparta, Missouri which is fully occupied.



Fybar serves as Trustee on all the Savings Bank's deeds of trust, is a registered agent and receives limited income from credit life and accident and health policies written in conjunction with the Savings Bank's loans.



At June 30, 2002, the Savings Bank had an investment in Fybar of $576,000.



South Central Missouri Title, Inc., is a Missouri corporation wholly-owned by First Bancshares, Inc.  South Central is a licensed agent for the purpose of selling title insurance and also providing real estate closing services.  It is currently operating profitably with an office in  Wright County.





REGULATION OF FIRST HOME



As a Missouri-chartered and federally insured savings and loan association, First Home is subject to extensive regulation.  Lending activities and other investments must comply with various statutory and regulatory capital requirements.  The Savings Bank is regularly examined by its state and federal regulators and files periodic reports concerning the Savings Bank's activities and financial condition.  The Savings Bank's relationship with its depositors and borrowers is also regulated to a great extent by federal and state laws, especially in such matters as the ownership of savings accounts and the form and content of the Savings Bank's mortgage documents.



Missouri Savings and Loan Law



General.  As a Missouri-chartered savings and loan association, First Home derives its authority from, and is governed by, the provisions of the Missouri Savings and Loan Law ("Missouri Law") and regulations of the Missouri Division of Finance (Division).  The Director of the Missouri Division of Finance (Director) proposes regulations which must then be approved, amended, modified or disapproved by the State Savings and Loan Commission (Commission).  Missouri Law and the resulting regulations are administered by the Director.



36



Investments and Accounts.  Missouri Law and regulations impose restrictions on the types of investments and loans that may be made by a Missouri-chartered institution, generally bringing these restrictions into parity with the regulation of federally chartered institutions.  The manner of establishing accounts and evidencing the same is prescribed, as are the obligations of the institution with respect to withdrawals from accounts and redemption of accounts.  The Director may also impose or grant the same restrictions, duties and powers concerning deposits as are applicable to federal institutions under federal rules and regulations.



Branch Offices.  Under Missouri Law, no institution may establish a branch office or agency without the prior written approval of the Director.  The Director reviews the proposed location, the functions to be performed at the office, the estimated volume of business, the estimated annual expense of the office and the mode of payments.  Decisions of the Director may be appealed to the Commission.  The relocation or closing of any office is subject to additional regulation and in certain circumstances may require prior approval.



Merger or Consolidation.  Missouri Law permits the merger or consolidation of savings institutions, subject to the approval by the Director, when the Director finds that such merger or consolidation is equitable to the members or account holders of the institutions and will not impair the usefulness and success of other properly conducted institutions in the community.  Mergers or consolidations of mutual institutions must also be approved by a majority of the members of each institution.  Stock institutions must obtain shareholder approval pursuant to the Missouri statutes relating to general and business corporations.



Holding Companies.  Missouri Law requires a savings and loan holding company and its subsidiaries to register with the Director within 60 days of becoming a savings and loan holding company.  Following registration it is subject to examination by the Division and thereafter must file certain reports with the Director.  A savings and loan holding company may acquire control of an institution of another savings and loan holding company upon application and prior written approval of the Director.  The Director, in reviewing the application, must determine if such acquisition is consistent with the interests of maintaining a sound financial system and that the acquisition does not afford a basis for supervisory objection.



Examination.  Periodic reports to the Division must be made by each Missouri-chartered institution.  The Division conducts and supervises the examination of state-chartered institutions.



Supervision.  The Director has general supervisory authority over Missouri-chartered institutions and upon the Director's finding that an institution is violating the provisions of its articles of incorporation, its bylaws or any law of the state, or is conducting business in an unsafe or injurious manner, the Director may order the institution to discontinue such violation or practice, and to conform with all the requirements of law.  The Director may demand and take possession of the institution, if the institution fails to comply with the Director's order, if the Director determines that the institution is insolvent, in an unsafe condition or conducting business in an unsafe manner, or if the institution refuses to submit to examination or inspection by the Division.



37



Federal Regulation of Savings Banks



The OTS has extensive authority over the operations of all insured savings associations.  As part of this authority, First Home is required to file periodic reports with the OTS District Director and is subject to periodic examinations by the OTS and the FDIC.  The OTS and FDIC have extensive discretion in their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.  Any change in these policies, whether by the OTS, the FDIC or Congress, could have a material adverse impact on the Company.



The OTS has established a schedule for the assessment of fees upon all savings associations to fund the operations of the OTS.  A schedule of fees has also been established for the various types of applications and filings made by savings associations with the OTS.  The general assessment, to be paid on a semi-annual basis, is determined based upon the savings association's total assets, including consolidated subsidiaries, as reported in the association's latest quarterly thrift financial report.  For the first half of 2002, the Savings Bank's assessment under the semi-annual assessment procedure was $30,000.  Based on the current assessment rates published by the OTS and First Homes total assets of approximately $254.8 million at March 31, 2002, First Home will be required to pay a semi-annual assessment of approximately $33,000 for the second half of calendar year 2002.



In addition, the investment and lending authority of the Savings Bank is prescribed by federal laws and regulations, and the Savings Bank is prohibited from engaging in any activities not permitted by such laws and regulations.  These laws and regulations generally are applicable to all federally chartered savings associations and many also apply to state-chartered savings associations.



Among other things, OTS regulations provide that no savings association may invest in corporate debt securities not rated in one of the four highest rating categories by a nationally recognized rating organization.  In addition, the HOLA provides that loans secured by nonresidential real property may not exceed 400% of regulatory capital, subject to increase by the OTS on a case-by-case basis.



First Home is also subject to limitations on the aggregate amount of loans that it can make to any one borrower, including related entities.  See Investment Rules herein for a discussion of loans-to-one borrower limitations.  At June 30, 2002, First Home was in compliance with applicable loans-to-one borrower limitations.



38



Potential Operational Restrictions Associated with Regulatory Oversight



The Savings Bank is subject to extensive regulation, supervision and examination by the OTS, as its chartering authority and primary federal regulator, and by the FDIC, which insures its deposits up to applicable limits.  The Savings Bank is a member for the FHLB System and is subject to certain limited regulations promulgated by the Board of Governors of the Federal Reserve System (Federal Reserve). As the holding company of the Savings Bank, the Company also is subject to regulation and oversight by the OTS.  Such regulation and supervision govern the activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors.  Regulatory authorities have been granted extensive discretion in connection with their supervisory and enforcement activities which are intended to strengthen the financial condition of the banking industry, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institutions allowance for loan losses.  Any change in such regulation and oversight, whether by the OTS, the FDIC or Congress, could have a material adverse impact on the Company, the Savings Bank and their respective operations.



Office of Thrift Supervision



The OTS is an office in the Department of the Treasury subject to the general oversight of the Secretary of the Treasury.  Among other functions, the OTS issues and enforces regulations affecting federally-insured savings associations and regularly examines these institutions.



Federal Deposit Insurance Corporation



The FDIC is an independent federal agency established originally to insure the deposits, up to prescribed statutory limits, of federally insured banks and to preserve the safety and soundness of the banking industry.  The FDIC maintains two separate insurance funds:  the BIF and the SAIF. The Savings Banks accounts are insured by the FDIC under the SAIF to the maximum extent permitted by law.



As insurer of the Savings Bank's deposits, the FDIC has examination, supervisory and enforcement authority over all savings associations. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the SAIF or the BIF. The FDIC also has the authority to initiate enforcement actions against savings institutions, after giving the OTS an opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.



39



The FDIC's deposit insurance premiums are assessed through a risk-based system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their level of capital and supervisory evaluation. Under the system, institutions classified as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1, or core capital, to risk-weighted assets ("Tier 1 risk-based capital") of at least 6% and a risk-based capital ratio of at least 10%) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a risk-based capital ratio of less than 8%) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period.



The FDIC is authorized to increase assessment rates, on a semi-annual basis, if it determines that the reserve ratio of the SAIF will be less than the designated reserve ratio of 1.25% of SAIF insured deposits. In setting these increased assessments, the FDIC must seek to restore the reserve ratio to that designated reserve level, or such higher reserve ratio as established by the FDIC. The FDIC may also impose special assessments on SAIF members to repay amounts borrowed from the United States Treasury or for any other reason deemed necessary by the FDIC.



The premium schedule for BIF and SAIF insured institutions ranged from 0 to 27 basis points.  However, SAIF insured institutions and BIF insured institutions are required to pay a Financing Corporation assessment in order to fund the interest on bonds issued to resolve thrift failures in the 1980s.  This amount is currently equal to about 1.88 basis points for each $100 in domestic deposits for both BIF and SAIF members.  These assessments, which may be revised based upon the level of BIF and SAIF deposits, will continue until the bonds mature in  2017 through 2019.



Under the FDIA, the FDIC may terminate insurance of deposits upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS.  Management of First Home does not know of any practice, condition or violation that might lead to termination of deposit insurance.



Federal Home Loan Bank System



The FHLB System, consisting of 12 FHLBs, is under the jurisdiction of the Federal Housing Finance Board (FHFB).  The designated duties of the FHFB are to:  supervise the FHLBs; ensure that the FHLBs carry out their housing finance mission; ensure that the FHLBs remain adequately capitalized and able to raise funds in the capital markets; and ensure that the FHLBs operate in a safe and sound manner.



First Home, as a member of the FHLB-Des Moines, is required to acquire and hold shares of capital stock in the FHLB-Des Moines equal to the greater of (i) 1.0% of the aggregate outstanding principal amount of residential mortgage loans, home purchase contracts and similar obligations at the beginning of each year, or (ii) 1/20 of its advances (borrowings) from the FHLB-Des Moines.  First Home complied with this requirement with an investment in FHLB-Des Moines stock of $1.9 million at June 30, 2002.



40



Among other benefits, the FHLB provides a central credit facility primarily for member institutions.  It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System.  It makes advances to members in accordance with policies and procedures established by the FHFB and the Board of Directors of the FHLB-Des Moines.  At June 30, 2002, the Savings Bank had $29.8 million of advances from the FHLB-Des Moines.



The FHLBs are required to provide funds for the resolution of troubled savings institutions and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have adversely affected the level of FHLB dividends paid in the past and could do so in the future. These contributions also could have an adverse effect on the value of FHLB stock in the future.



Prompt Corrective Action



The OTS is required to take certain supervisory actions against undercapitalized savings associations, the severity of which depends upon the institution's degree of undercapitalization.  Generally, an institution that has a ratio of total capital to risk-weighted assets of less than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less than 4%, or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be "undercapitalized."  An institution that has a total risk-based capital ratio less than 6%, a Tier I capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be "significantly undercapitalized" and an institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be "critically undercapitalized."



At June 30, 2002, First Home was a well capitalized institution under the prompt corrective action regulations of the OTS.



Standards for Safety and Soundness.The federal banking regulatory agencies have prescribed, by regulation, standards for all insured depository institutions relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii) earnings; and (viii) compensation, fees and benefits ("Guidelines").  The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired.  If the OTS determines that the  Savings Bank fails to meet any standard prescribed by the Guidelines, the agency may require the Savings Bank to submit to the agency an acceptable plan to achieve compliance with the standard.  Management is aware of no conditions relating to these safety and soundness standards which would require submission of a plan of compliance.



41





Qualified Thrift Lender Test.  All savings associations, including First Home, are required to meet a qualified thrift lender test to avoid certain restrictions on their operations.  This test requires a savings association to have at least 65% of its portfolio asset, as defined by regulation, in qualified thrift investments on a monthly average for nine out of every 12 months on a rolling basis.  As an alternative, the savings association may maintain 60% of its assets in those assets specified in Section 7701(a)(19) of the Code.  Under either test, such assets primarily consist of residential housing related loans and investments.  At June 30, 2002, First Home met the test and its qualified thrift lender percentage was 76.01%.



Any savings association that fails to meet the qualified thrift lender test must convert to a national bank charter, unless it requalifies as a qualified thrift lender and thereafter remains a qualified thrift lender.  If an association does not requalify and converts to a national bank charter, it must remain SAIF-insured until the FDIC permits it to transfer to the BIF.   If such an association has not yet requalified or converted to a national bank, its new investments and activities are limited to those permissible for both a savings association and a national bank, and it is limited to national bank branching rights in its home state.  In addition, First Home is immediately ineligible to receive any new FHLB borrowings and is subject to national bank limits for payment of dividends.  If such association has not requalified or converted to a national bank within three years after the failure, it must divest of all investments and cease all activities not permissible for a national bank.  In addition, it must repay promptly any outstanding  FHLB borrowings, which may result in prepayment penalties.  If any association that fails the qualified thrift lender test is controlled by a holding company, then within one year after the failure, the holding company must register as a bank holding company and become subject to all restrictions on bank holding companies.



Capital Requirements



Federally insured savings associations, such as the Savings Bank, are required to maintain a minimum level of regulatory capital. The OTS has established capital standards, including a tangible capital requirement, a leverage ratio (or core capital) requirement and a risk-based capital requirement applicable to such savings associations.



The capital regulations require tangible capital of at least 1.5% of adjusted total assets (as defined by regulation). At June 30, 2002, the Savings Bank had tangible capital of $21.6 million, or 8.5% of adjusted total assets, which is approximately $17.8 million above the minimum requirement of 1.5% of adjusted total assets in effect on that date. At June 30, 2002, the Savings Bank had $614,000 in intangible assets.



The capital standards also require core capital equal to at least 3% to 4% of adjusted total assets, depending on an institution's supervisory rating. Core capital generally consists of tangible capital.  At June 30, 2002, the Savings Bank had core capital equal to $21.6 million, or 8.5% of adjusted total assets, which is $11.4 million above the minimum leverage ratio requirement of 4% in effect on that date.



The OTS risk-based requirement requires savings associations to have total capital of at least 8% of risk-weighted assets. Total capital consists of core capital, as defined above, and supplementary capital.  Supplementary capital consists of certain permanent and maturing capital instruments that do not qualify as core capital and general valuation loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used to satisfy the risk-based requirement only to the extent of core capital.



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In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet items, are multiplied by a risk weight, ranging from 0% to 100%, based on the risk inherent in the type of asset.  For example, the OTS has assigned a risk weight of 50% for prudently underwritten permanent one-to-four family first lien mortgage loans not more than 90 days delinquent and having a loan-to-value ratio of not more than 80% at origination unless insured to such ratio by an insurer approved by FNMA or FHLMC.



On June 30, 2002, the Savings Bank had total risk-based capital of a approximately $21.9 million, including $21.6 million in core capital and $347,000 in qualifying supplementary capital, and risk-weighted assets of $196.7 million, or total capital of 11.2% of risk-weighted assets.  This amount was $6.2 million above the 8% requirement in effect on that date.



The OTS  is authorized to impose capital requirements in excess of these standards on individual associations on a case-by-case basis. The OTS and the FDIC are authorized and, under certain circumstances required, to take certain actions against savings associations that fail to meet their capital requirements. The OTS is generally required to take action to restrict the activities of an "undercapitalized association" (generally defined to be one with less than either a 4% core capital ratio, a 4% Tier 1 risked-based capital ratio or an 8% risk-based capital ratio). Any such association must submit a capital restoration plan and until such plan is approved by the OTS may not increase its assets, acquire another institution, establish a branch or engage in any new activities, and generally may not make capital distributions.  The OTS is authorized to impose the additional restrictions that are applicable to significantly undercapitalized associations.



The OTS is also generally authorized to reclassify an association into a lower capital category and impose the restrictions applicable to such category if the institution is engaged in unsafe or unsound practices or is in an unsafe or unsound condition.



The imposition by the OTS or the FDIC of any of these measures on the Company or the Savings Bank may have a substantial adverse effect on their operations and profitability.



The following table presents the Savings Bank's capital levels as of June 30, 2002.

|                      |        | At June 30, 2002       |    
|--------------------- | ------ | ---------------------- | ---
|                      |        |                        |    
|                      |        | Amount                 |    
|                      |        | (Dollars in thousands)
|Tangible capital      |        | $21,630                |    
|Minimum required      |        |                        |    
|tangible capital      | 3,825  |                        | 1.5
|Excess                |        | $17,805                |    
|                      |        |                        |    
|Core capital          |        | $21,630                |    
|Minimum required core |        |                        |    
|capital               |        | 10,200                 |    
|Excess                |        | $11,430                |    
|                      |        |                        |    
|Risk-based capital    |        | $21,945                |    
|Minimum risk-based    |        |                        |    
|capital requirement   | 15,738 |                        | 8.0
|Excess                |        | $ 6,207                |    



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Limitations on Capital Distributions



OTS regulations impose various restrictions on savings institutions with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account.  Generally, savings institutions, such as the Savings Bank, that before and after the proposed distribution remain well-capitalized, may make capital distributions during any calendar year equal to the greater of 100% of net income for the year-to-date plus retained net income for the two preceding years. However, an institution deemed to be in need of more than normal supervision by the OTS may have its dividend authority restricted by the OTS. The Savings Bank may pay dividends in accordance with this general authority.



Savings institutions proposing to make any capital distribution need only submit written notice to the OTS 30 days prior to such distribution. Savings institutions that do not, or would not meet their current minimum capital requirements following a proposed capital distribution, however, must obtain OTS approval prior to making such distribution. The OTS may object to the distribution during that 30-day period based on safety and soundness concerns. See "-- Capital Requirements."



Investment Rules



Federal law provides that savings institutions are generally subject to the national bank limit on loans to one borrower.  Generally, this limit is 15% of the Savings Banks unimpaired capital and surplus, plus an additional 10% of unimpaired capital and surplus, if such loan is secured by readily-marketable collateral, which is defined to include certain financial instruments and bullion.  The OTS by regulation has amended the loans to one borrower rule to permit savings associations meeting certain requirements, including capital requirements, to extend loans to one borrower in additional amounts under circumstances limited essentially to loans to develop or complete residential housing units.  At June 30, 2002, the largest loans by the Savings Bank outstanding to any one borrower, including related entities, was $3.2 million.  At June 30, 2002, that borrower had six separate loans secured by six different pieces of real estate.  These loans were performing in accordance with their terms at that date.



Activities of Savings Associations and Their Subsidiaries



When a savings association establishes or acquires a subsidiary or elects to conduct any new activity through a subsidiary that the association controls, the savings association shall notify the FDIC and the OTS 30 days in advance and provide the information each agency may, by regulation, require.  Savings associations also must conduct the activities of subsidiaries in accordance with existing regulations and orders.



The OTS may determine that the continuation by a savings association of its ownership control of, or its relationship to, the subsidiary constitutes a serious risk to the safety, soundness or stability of the association or is inconsistent with sound banking practices or with the purposes of the FDIA.  Based upon that determination, the FDIC or the OTS has the authority to order the savings association to divest itself of control of the subsidiary.  The FDIC also may determine by regulation or order that any specific activity poses a serious threat to the SAIF.  If so, it may require that no SAIF member engage in that activity directly.



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Accounting and Regulatory Standards



An OTS policy statement applicable to all savings associations clarifies and re-emphasizes that the investment activities of a savings association must be in compliance with approved and documented investment policies and strategies, and must be accounted for in accordance with generally accepted accounting principles.  Under the policy statement, management must support its classification of an accounting for loans and securities (i.e., whether held for investment, sale or trading) with appropriate documentation.  First Home is in compliance with these amended rules.



The OTS has adopted an amendment to its accounting regulations, which may be made more stringent than generally accepted accounting principles by the OTS, to require that transactions be reported in a manner that best reflects their underlying economic substance and inherent risk and that financial reports must incorporate any other accounting regulations or orders prescribed by the OTS.



Investment Portfolio Policy



OTS supervisory policy requires that securities owned by thrift institutions must be classified and reported in accordance with GAAP which establishes three classifications of investment securities:  held-to-maturity, trading and available-for-sale.  Trading securities are acquired principally for the purpose of near term sales.  Such securities are reported at fair value and unrealized gains and losses are included in income.



Securities which are designated as held-to-maturity are designated as such because the investor has the ability to hold these securities to maturity.  Such securities are reported at amortized cost.



All other securities are designated as available-for-sale, a designation which provides the investor with certain flexibility in managing its investment portfolio.  Such securities are reported at fair value; net unrealized gains and losses are excluded from income and reported net of applicable income taxes as a separate component of stockholders' equity.  The Savings Bank has adopted a reporting policy that complies with these OTS requirements.



Transactions with Affiliates



Savings associations must comply with Sections 23A and 23B of the Federal Reserve Act relative to transactions with affiliates in the same manner and to the same extent as if the savings association were a Federal Reserve member bank. Generally, transactions between a savings association or its subsidiaries and its affiliates are required to be on terms as favorable to the association as transactions with non-affiliates. In addition, certain of these transactions, such as loans to an affiliate, are restricted to a percentage of the association's capital.  Affiliates of the Savings Bank include the Company and any company which is under common control with the Savings Bank.  In addition, a savings association may not lend to any affiliate engaged in activities not permissible for a bank holding company or acquire the securities of most affiliates.  The OTS has the discretion to treat subsidiaries of savings associations as affiliates on a case by case basis.



Certain transactions with directors, officers or controlling persons are also subject to conflict of interest regulations enforced by the OTS.  These conflict of interest regulations and other statutes also impose restrictions on loans to such persons and their related interests.  Among other things, such loans must be made on terms substantially the same as for loans to unaffiliated individuals.



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REGULATION OF FIRST BANCSHARES



General



First Bancshares is a unitary savings and loan holding company subject to regulatory oversight of the OTS.  Accordingly, the Company is registered with the OTS and subject to OTS regulations, examinations, supervision and reporting requirements.  The Company is required to file certain reports with, and otherwise comply with the regulations of, the OTS and the Securities and Exchange Commission.  As a subsidiary of a savings and loan holding company, the Savings Bank is subject to certain restrictions in its dealings with the Company and with other companies affiliated with the Company and also are subject to regulatory requirements and provisions as federal institutions.



The Gramm-Leach-Bliley Financial Services Modernization Act of 1999.  On November 12, 1999, the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 was signed into law.  The purpose of this legislation was to modernize the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers. Generally, the Act:



(a)

repealed the historical restrictions and eliminated many federal and state law barriers to affiliations among banks, securities firms, insurance companies and other financial service providers;



(b)

provided a uniform framework for the functional regulation of the activities of banks, savings institutions and their holding companies;



(c)

broadend the activities that may be conducted by national banks, banking subsidiaries of bank holding companies and their financial subsidiaries;



(d)

provided an enhanced framework for protecting the privacy of consumer information;



(e)

adopted a number of provisions related to the capitalization, membership, corporate governance and other measures designed to modernize the FHLB system;



(f)

modified the laws governing the implementation of the Community Reinvestment Act; and



(g)

addressed a variety of other legal and regulatory issues affecting day-to-day operations and long-term activities of financial institutions.



The USA Patriot Act. In response to the events of September 11th, President George W. Bush signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, on October 26, 2001. The USA PATRIOT Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the Savings Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures intended to encourage information sharing among 27 bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act.



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Among other requirements, Title III of the USA PATRIOT Act imposes the following requirements with respect to financial institutions:



•

Pursuant to Section 352, all financial institutions must establish anti-money laundering programs that include, at minimum: (i) internal policies, procedures, and controls, (ii) specific designation of an anti-money laundering compliance officer, (iii) ongoing employee training programs, and (iv) an independent audit function to test the anti-money laundering program.



•

Section 326 of the Act authorizes the Secretary of the Department of Treasury, in conjunction with other bank regulators, to issue regulations by October 26, 2002 that provide for minimum standards with respect to customer identification at the time new accounts are opened.



•

Section 312 of the Act requires financial institutions that establish, maintain, administer, or manage private banking accounts or correspondent accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States) to establish appropriate, specific, and, where necessary, enhanced due diligence policies, procedures, and controls designed to detect and report money laundering.



•

Effective December 25, 2001, financial institutions are prohibited from establishing, maintaining, administering or managing correspondent accounts for foreign shell banks (foreign banks that do not have a physical presence in any country), and will be subject to certain recordkeeping obligations with respect to correspondent accounts of foreign banks.



•

Bank regulators are directed to consider a holding company's effectiveness in combating money laundering when ruling on Federal Reserve Act and Bank Merger Act applications.



During the first quarter of 2002 the Federal Crimes Enforcement Network (FinCEN), a bureau of the Department of Treasury, issued proposed and interim regulations to implement the provisions of Sections 312 and 352 of the USA Patriot Act. To date, it has not been possible to predict the impact the USA PATRIOT ACT and its implementing regulations may have on the Company and the Savings Bank.



Sarbanes-Oxley Act of 2002.  On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002 implementing legislative reforms intended to address corporate and accounting fraud. In addition to the establishment of a new accounting oversight board which will enforce auditing, quality control and independence standards and will be funded by fees from all publicly traded companies, the bill restricts provision of both auditing and consulting services by accounting firms. To ensure auditor independence, any non-audit services being provided to an audit client will require preapproval by the company's audit committee members. In addition, the audit partners must be rotated. The bill requires chief executive officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willfully violate this certification requirement. In addition, under the Act, counsel will be required to report evidence of a material violation of the securities laws or a breach of fiduciary duty by a company to its chief executive officer or its chief legal officer, and, if such officer does not appropriately respond, to report such evidence to the audit committee or other similar committee of the board of directors or the board itself.



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Longer prison terms will also be applied to corporate executives who violate federal securities laws, the period during which certain types of suits can be brought against a company or its officers has been extended, and bonuses issued to top executives prior to restatement of a company's financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from insider trading during retirement plan "blackout" periods, and loans to company executives are restricted. In addition, a provision directs that civil penalties levied by the SEC as a result of any judicial or administrative action under the Act be deposited to a fund for the benefit of harmed investors. The Federal Accounts for Investor Restitution ("FAIR") provision also requires the SEC to develop methods of improving collection rates. The legislation accelerates the time frame for disclosures by public companies, as they must immediately disclose any material changes in their financial condition or operations. Directors and executive officers must also provide information for most changes in ownership in a company's securities within two business days of the change.



The Act also increases the oversight of, and codifies certain requirements relating to audit committees of public companies and how they interact with the company's "registered public accounting firm" ("RPAF"). Audit Committee members must be independent and are absolutely barred from accepting consulting, advisory or other compensatory fees from the issuer. In addition, companies must disclose whether at least one member of the committee is a "financial expert" (as such term will be defined by the SEC) and if not, why not. Under the Act, a RPAF is prohibited from performing statutorily mandated audit services for a company if such company's chief executive officer, chief financial officer, comptroller, chief accounting officer or any person serving in equivalent positions has been employed by such firm and participated in the audit of such company during the one-year period preceding the audit initiation date. The Act also prohibits any officer or director of a company or any other person acting under their direction from taking any action to fraudulently influence, coerce, manipulate or mislead any independent public or certified accountant engaged in the audit of the company's financial statements for the purpose of rendering the financial statement's materially misleading. The Act also requires the SEC to prescribe rules requiring inclusion of an internal control report and assessment by management in the annual report to shareholders. The Act requires the RPAF that issues the audit report to attest to and report on management's assessment of the company's internal controls. In addition, the Act requires that each financial report required to be prepared in accordance with (or reconciled to) generally accepted accounting principles and filed with the SEC reflect all material correcting adjustments that are identified by a RPAF in accordance with generally accepted accounting principles and the rules and regulations of the SEC.



Acquisitions



Federal law and OTS regulations issued thereunder generally prohibit a savings and loan holding company, without prior OTS approval, from acquiring more than 5% of the voting stock of any other savings association or savings and loan holding company or controlling the assets thereof.  They also prohibit, among other things, any director or officer of a savings and loan holding company, or any individual who owns or controls more than 25% of the voting shares of such holding company, from acquiring control of any savings association not a subsidiary of such savings and loan holding company, unless the acquisition is approved by the OTS.



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Activities



As a unitary savings and loan holding company, the Company generally is not subject to activity restrictions.  If the Company acquires control of another savings association as a separate subsidiary, it would become a multiple savings and loan holding company, and the activities of the Company and any of its subsidiaries (other than the Savings Bank or any other SAIF-insured savings association) generally become subject to additional restrictions.  There generally are more restrictions on the activities of a multiple savings and loan holding company than on those of a unitary savings and loan holding company.  Federal law provides that, among other things, no multiple savings and loan holding company or subsidiary thereof which is not an insured association shall commence or continue for more than two years after becoming a multiple savings and loan association holding company or subsidiary thereof, any business activity other than:  (i) furnishing or performing management services for a subsidiary insured institution, (ii) conducting an insurance agency or escrow business, (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary insured institution, (iv) holding or managing properties used or occupied by a subsidiary insured institution, (v) acting as trustee under deeds of trust, (vi) those activities previously directly authorized by regulation as of March 5, 1987 to be engaged in by multiple holding companies or (vii) those activities authorized by the Federal Reserve Board as permissible for bank holding companies, unless the OTS by regulation, prohibits or limits such activities for savings and loan holding companies.  Those activities described in (vii) above also must be approved by the OTS prior to being engaged in by a multiple savings and loan holding company.



Qualified Thrift Lender Test. If the Savings Bank fails the qualified thrift lender test, within one year the Company must register as, and will become subject to, the significant activity restrictions applicable to bank holding companies.  See "Regulation of First Home -- Qualified Thrift Lender Test" for information regarding the Savings Banks qualified thrift lender test.





TAXATION

Federal Taxation



General.  The Corporation and the Savings Bank report their income on a fiscal year basis using the accrual method of accounting and will be subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Savings Banks reserve for bad debts discussed below.  The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Savings Bank or the Corporation.



Bad Debt Reserve.Historically, savings institutions such as the Savings Bank which met certain definitional tests primarily related to their assets and the nature of their business (qualifying thrift) were permitted to establish a reserve for bad debts and to make annual additions thereto, which may have been deducted in arriving at their taxable income.  The Savings Banks deductions with respect to qualifying real property loans, which are generally loans secured by certain interest in real property, were computed using an amount based on the Savings Banks actual loss experience, or a percentage equal to 8% of the Savings Banks taxable income, computed with certain modifications and reduced by the amount of any permitted additions to the non-qualifying reserve.  Due to the Savings Banks loss experience, the Savings Bank generally recognized a bad debt deduction equal to 8% of taxable income.



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In August 1996, the provisions repealing the current thrift bad debt rules were passed by Congress as part of  The Small Business Job Protection Act of 1996.  The new rules eliminate the 8% of taxable income method for deducting additions to the tax bad debt reserves for all thrifts for tax years beginning after December 31, 1995.  These rules also require that all institutions recapture all or a portion of their bad debt reserves added since the base year (last taxable year beginning before January 1, 1988).  The Savings Bank has previously recorded a deferred tax liability equal to the bad debt recapture and as such the new rules will have no effect on the net income or federal income tax expense.  For taxable years beginning after December 31, 1995, the Savings Banks bad debt deduction will be determined under the experience method using a formula based on actual bad debt experience over a period of years or, if the Savings Bank is a large association (assets in excess of $500 million) on the basis of net charge-offs during the taxable year.  The new rules allow an institution to suspend bad debt reserve recapture for the 1996 and 1997 tax years if the institutions lending activity for those years is equal to or greater than the institutions average mortgage lending activity for the six taxable years preceding 1996 adjusted for inflation.  For this purpose, only home purchase or home improvement loans are included and the institution can elect to have the tax years with the highest and lowest lending activity removed from the average calculation.  If an institution is permitted to postpone the reserve recapture, it must begin its six year recapture no later than the 1998 tax year.  The unrecaptured base year reserves will not be subject to recapture as long as the institution continues to carry on the business of banking.  In addition, the balance of the pre-1988 bad debt reserves continue to be subject to provisions of present law referred to below that require recapture in the case of certain excess distributions to shareholders.



Distributions.To the extent that the Savings Bank makes nondividend distributions to the Corporation that are considered as made:  (i) from the reserve for losses on qualifying real property loans, to the extent the reserve for such losses exceeds the amount that would have been allowed under the experience method; or (ii)  from the supplemental reserve for losses on loans (Excess Distributions), then an amount based on the amount distributed will be included in the Savings Banks taxable income.  Nondividend distributions include distributions in excess of the Savings Banks current and accumulated earnings and profits, distributions in redemption of stock, and distributions in partial or complete liquidation.  However, dividends paid out of the Savings Banks current or accumulated earnings and profits, as calculated for federal income tax purposes, will not be considered to result in a distribution from the Savings Banks bad debt reserve.  Thus, any dividends to the Corporations that would reduce amounts appropriated to the Savings Banks bad debt reserve and deducted for federal income tax purposes would create a tax liability for the Savings Bank.  The amount of additional taxable income attributable to an Excess Distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution.  Thus, if, the Savings Bank makes a nondividend distribution, then approximately one and one-half times the amount so used would be includable in gross income for federal income tax purposes, assuming a 35% corporate income tax rate (exclusive of state and local taxes).See REGULATION for limits on the payment of dividends by the Savings Bank.  The Savings Bank does not intend to pay dividends that would result in a recapture of any portion of its tax bad debt reserve.



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Corporate Alternative Minimum Tax.The Code imposes a tax on alternative minimum taxable income (AMTI) at a rate of 20%.  The excess of the tax bad debt reserve deduction using the percentage of taxable income method over the deduction that would have been allowable under the experience method is treated as a preference item for purposes of computing the AMTI.  In addition, only 90% of the AMTI can be offset by net operating loss carryovers.  AMTI is increased by an amount equal to 75% of the amount by which the Savings Banks adjusted current earnings exceeds its AMTI (determined without regard to this preference and prior to reduction for net operating losses).



Dividends-Received Deduction and Other Matters.The Corporation may exclude from its income 100% of dividends received from the Savings Bank as a member of the same affiliated group of corporations.  The corporate dividends-received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Corporation and the Savings Bank will not file a consolidated tax return, except that if the Corporation or the Savings Bank owns more than 20% of the stock of a corporation distributing a dividend, then 80% of any dividends received may be deducted.



Other Federal Tax Matter.Other changes in the federal tax system could also affect the business of the Savings Bank.  These changes include limitations on the deduction for personal interest paid or accrued by individual taxpayers, limitations on the deductibility of losses attributable to investment in certain passive activities and limitations on the deductibility of contributions to individual retirement accounts.  The Savings Bank does not believe these changes will have a material effect on its operations.



There have not been any IRS audits of the Savings Bank's Federal income tax returns during the past five years.



Missouri Taxation



Missouri-based thrift institutions, such as the Savings Bank, are subject to a special financial institutions tax, based on net income without regard to net operating loss carryforwards, at the rate of 7% of net income.  This tax is in lieu of certain other state taxes on thrift institutions, on their property, capital or income, except taxes on tangible personal property owned by the Savings Bank and held for lease or rental to others and on real estate, contributions paid pursuant to the Unemployment Compensation Law of Missouri, social security taxes, sales taxes and use taxes.  In addition, First Home is entitled to credit against this tax all taxes paid to the State of Missouri or any political subdivision except taxes on tangible personal property owned by the Savings Bank and held for lease or rental to others and on real estate, contributions paid pursuant to the Unemployment Compensation Law of Missouri, social security taxes, sales and use taxes, and taxes imposed by the Missouri Financial Institutions Tax Law.  Missouri thrift institutions are not subject to the regular state corporate income tax.



There have not been any audits of the Savings Banks state income tax returns during the past five years.



For additional information regarding taxation, see Notes 1 and 11 of the Notes to the Consolidated Financial Statements.



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Competition.



The Savings Bank has been, and continues to be, a community-oriented savings institution offering a variety of financial resources to meet the needs of Wright, Webster, Douglas, Ozark , Christian, Stone and Taney counties, Missouri.  The Savings Bank also transacts a significant amount of business in Texas and Greene counties, Missouri.  The Savings Bank's deposit gathering and lending activities are concentrated in these market areas.  The Savings Bank's offices are located in Mountain Grove, Marshfield, Ava, Gainesville, Sparta, Theodosia, Crane, Galena, Kissee Mills and Rockaway Beach, Missouri.



The Savings Bank is the only thrift institution located in Wright County, Missouri.  The Savings Bank faces strong competition in the attraction of savings deposits and in the origination of loans.  Its most direct competition for savings deposits and loans has historically come from other thrift institutions and from commercial banks located in its primary market area, some with a state-wide or regional presence.  The Savings Bank also competes with securities firms, credit unions, money market funds and mutual funds in raising deposits.



Management considers the Savings Bank's reputation for financial strength and customer service as its major competitive advantage in attracting and retaining customers in its market area.  The Savings Bank also believes it benefits from its community orientation as well as its relatively high core deposit base.



Personnel



As of June 30, 2002, the Savings Bank had 96 full-time employees and eight part-time employees.  The Savings Bank believes that employees play a vital role in the success of a service company and that the Savings Bank's relationship with its employees is good.  The employees are not represented by a collective bargaining unit.



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Item 2.  Properties



The following table sets forth information regarding the Savings Bank's offices as of June 30, 2002.



|                                |  |           |      |        |     | Net                    |       | Land   |       | Building |       |         | 
|------------------------------- |  | --------- | ---- | ------ | --- | ---------------------- | ----- | ------ | ----- | -------- | ----- | ------- | 
|                                |  |           |      | Year   |     | Book Value             |       | Owned/ |       | Owned/   |       | Square  | 
|Location                        |  | County    |      | Opened |     | as of 6/30/02          |       | Leased |       | Leased   |       | Footage | 
|Main Office                     |  |           |      |        |     | (Dollars in thousands) |       |        |       |          |       |         | 
|142 East First Street           |  | Wright    |      | 1911   |     | $ 1,142                |       | Owned  |       | Owned    |       | 10,700  | 
|Mountain Grove, Missouri 65711  |  |           |      |        |     |                        |       |        |       |          |      
|                                |  |           |      |        |     |                        |       |        |       |          |       |         | 
|Branch Offices                  |  |           |      |        |     |                        |       |        |       |          |       |         | 
|1208 N. Jefferson Street        |  | Douglas   |      | 1978   |     | 347                    |       | Owned  |       | Owned    |       | 3,500   | 
|Ava, Missouri  65608            |  |           |      |        |     |                        |       |        |       |          |      
|                                |  |           |      |        |     |                        |       |        |       |          |       |         | 
|103 South Clay Street           |  | Webster   |      | 1974   |     | 372                    |       | Owned  |       | Owned    |       | 4,200   | 
|Marshfield, Missouri  65706     |  |           |      |        |     |                        |       |        |       |          |       |        
|                                |  |           |      |        |     |                        |       |        |       |          |       |         | 
|203 Elm Street                  |  | Ozark     |      | 1992   |     | 658                    |       | Owned  |       | Owned    |       | 3,600   | 
|Gainesville, Missouri  65655    |  |           |      |        |     |                        |       |        |       |          |      
|                                |  |           |      |        |     |                        |       |        |       |          |       |         | 
|7164 Highway 14 East            |  | Christian | 1995 |        | 264 |                        | Owned |        | Owned |          | 3,000 |        
|Sparta, Missouri  65753         |  |           |      |        |     |                        |       |        |       |          |      
|                                |  |           |      |        |     |                        |       |        |       |          |       |         | 
|Business Highway 160            |  | Ozark     |      | 1997   |     | 62                     |       | Leased |       | Leased   |       | 1,200   | 
|Theodosia, Missouri  65761      |  |           |      |        |     |                        |       |        |       |          |      
|                                |  |           |      |        |     |                        |       |        |       |          |       |         | 
|123 Main Street                 |  | Stone     |      | 1998   |     | 249                    |       | Owned  |       | Owned    |       | 3,800   | 
|Crane, Missouri  65633          |  |           |      |        |     |                        |       |        |       |          |      
|                                |  |           |      |        |     |                        |       |        |       |          |       |         | 
|South Side of Square            |  | Stone     |      | 1998   |     | 65                     |       | Owned  |       | Owned    |       | 1,600   | 
|Galena, Missouri  65656         |  |           |      |        |     |                        |       |        |       |          |      
|                                |  |           |      |        |     |                        |       |        |       |          |       |         | 
|20377 US Highway 160            |  | Taney     |      | 2000   |     | 973                    |       | Owned  |       | Owned    |       | 2,250   | 
|Forsyth, Missouri  65653        |  |           |      |        |     |                        |       |        |       |          |      
|                                |  |           |      |        |     |                        |       |        |       |          |       |         | 
|2536 State Highway 176          |  | Taney     |      | 2000   |     | 472                    |       | Owned  |       | Owned    |       | 2,500   | 
|Rockaway Beach, Missouri  65740 |  |           |      |        |     |                        |       |        |       |          |      
|                                |  |           |      |        |     |                        |       |        |       |          |       |         | 
|Drive-in Facilities             |  |           |      |        |     |                        |       |        |       |          |       |         | 
|Route 60 and Oakland            |  | Wright    |      | 1986   |     | 162                    |       | Owned  |       | Owned    |       | 1,200   | 
|Mountain Grove, Missouri  65711 |  |           |      |        |     |                        |       |        |       |          |      
|                                |  |           |      |        |     |                        |       |        |       |          |       |         | 
|223 West Washington             |  | Webster   |      | 1993   |     | 186                    |       | Owned  |       | Owned    |       | 1,100   | 
|Marshfield, Missouri  65706     |  |           |      |        |     |                        |       |        |       |          |      
|                                |  |           |      |        |     |                        |       |        |       |          |       |         | 



53





Item 3.  Legal Proceedings



In the opinion of management, the Savings Bank is not a party to any pending claims or lawsuits that are expected to have a material adverse effect on the Savings Bank's financial condition or operations.  Periodically, there have been various claims and lawsuits involving the Savings Bank mainly as a defendant, such as claims to enforce liens, condemnation proceedings on properties in which the Savings Bank holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Savings Bank's business.  Aside from such pending claims and lawsuits which are incident to the conduct of the Savings Bank's ordinary business, the Savings Bank is not a party to any material pending legal proceedings that would have a material adverse effect on the financial condition or operations of the Savings Bank.



Item 4.  Submission of Matters to a Vote of Security Holders



No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended June 30, 2002.



PART II



Item 5.  Market for the Registrant's Common Equity and Related Stockholder Matters



The information contained in the section captioned "Common Stock Information" in the Annual Report is incorporated herein by reference.



Item 6.  Management's Discussion and Analysis of Financial Condition and Results of Operation



The information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report is incorporated herein by reference.



Item 7.  Financial Statements



Independent Auditors Report*

(a)   Consolidated Statements of Financial Condition as of June 30, 2002 and 2001*

(b)   Consolidated Statements of Income For the Years Ended June 30, 2002, 2001 and 2000*

(c)   Consolidated Statements of Stockholders Equity For the Years Ended June 30, 2002, 2001 and 2000*

(d)   Consolidated Statements of Cash Flows For the Years Ended June 30, 2002, 2001 and 2000*

(e)   Notes to Consolidated Financial Statements*



* Contained in the Annual Report to Stockholders filed as an exhibit hereto and incorporated herein  by reference.  All schedules have been omitted as the required information is either inapplicable or  contained in the Consolidated Financial Statements or related Notes contained in the Annual Report to Stockholders.



54



Item 8.  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure



No disagreement with the Company's independent accountants on accounting and financial disclosure has occurred during the past 24 months.





PART III



Item 9.  Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act



The information contained under the section captioned "Proposal I -- Election of Directors" in the Proxy Statement is incorporated herein by reference.



The following table sets forth certain information with respect to the executive officers of the Company and the Savings Bank.



Name

Age(1)

Position



Stephen H. Romines

60

President and Chief Executive Officer,

First Bancshares, Inc.

Vice-President, First Home Savings Bank



Charles W. Schumacher

50

Vice-President, First Bancshares, Inc.

President and Chief Executive Officer,

First Home Savings Bank

Susan J. Uchtman

39

Chief Financial Officer, First Bancshares,

Inc. and First Home Savings Bank

_________________

(1)  As of June 30, 2002.



The principal occupation of each executive officer of the Company is set forth below.  All of the officers listed above have held positions with or been employed by the Company for at least five years unless otherwise stated.  All executive officers reside in the Savings Banks primary trade area in Missouri, unless otherwise stated.  There are no family relationships among or between the executive officers, unless otherwise stated.



Stephen H. Romines joined the Savings Bank in 1973 and serves as Chairman of the Board.  Previously, Mr. Romines also served as President and Chief Executive Officer of the Savings Bank from 1978 until January 2002.



Charles W. Schumacherjoined the Savings Bank in 2000 as the Senior Vice President and became President of the Savings Bank in January 2002.  Previously, Mr. Schumacher was the Executive Vice President and CEO of Northwoods State Bank in Iowa from 1992-2000.



Susan J. Uchtman has been employed by First Home since June of 1994.  Mrs. Uchtman, a CPA, was previously employed by Kirkpatrick Phillips & Miller, CPAs, P.C., the Companys independent auditors, from September 1985 through May 1994.



55



The information contained under the section captioned "Compliance with Section 16(a) of the Exchange Act" in the Proxy Statement is incorporated herein by reference.



Item 10.  Executive Compensation



The information contained under the section captioned "Proposal I -- Election of Directors" in the Proxy Statement is incorporated herein by reference.



Item 11.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters



Equity Compensation Plan Information.The following table summarizes share and exercise price information about the Companys equity compensation plans as of June 30, 2002.



|                                   |                      |                   | (c)                     
|---------------------------------- | -------------------- | ----------------- | ------------------------
|                                   |                      |                   | Number of securities    
|                                   | (a)                  | (b)               | remaining available     
|                                   | Number of securities | Weighted-average  | for future issuance     
|                                   | to be issued upon    | exercise price    | under equity            
|                                   | exercise of          | of outstanding    | compensation plans      
|                                   | outstanding options, | options, warrants | (excluding securities   
|Plan category                      | warrants and rights  | and rights        | reflected in column (a))
|                                   |                      |                   |                         
|Equity compensation plans approved |                      |                   |                         
|by security holders:               |                      |                   |                         
|Option plan                        | 89,760               | $5.55             | 13,466                  
|Restricted stock plan              | -                    | -                 | -                       
|                                   |                      |                   |                         
|Equity compensation plans not      |                      |                   |                         
|approved by security holders:      | -                    | -                 | -                       
|Total                              | 89,760               | $5.55             | 13,466                  
|                                   |                      |                   |                         



56



(a)   Security Ownership of Certain Beneficial Owners



Information required by this item is incorporated herein by reference to the section captioned "Voting Securities and Security Ownership of Certain Beneficial Owners and Management" of the Proxy Statement.



(b)   Security Ownership of Management



Information required by this item is incorporated herein by reference to the sections captioned "Voting Securities and Security Ownership of Certain Beneficial Owners and Management" and "Proposal I - Election of Directors" of the Proxy Statement.



(c)   Changes in Control



The Company is not aware of any arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Company.



Item 12.  Certain Relationships and Related Transactions



The information required by this item is incorporated herein by reference to the section captioned "Proposal I  -- Election of Directors -- Certain Transactions."





Item 13.  Exhibits, List and Reports on Form 8-K



(a)     Exhibits



3.1   Articles of Incorporation of First Bancshares, Inc.*



3.2   Bylaws of First Bancshares, Inc.*



10.2   First Home Savings Bank 1994 Employee Stock Ownership Plan*



10.3   First Bancshares, Inc. 1993 Stock Option Plan**



10.4   First Home Savings Bank Management Recognition and Development Plan**



10.5   Employment Agreement with Charles W. Schumacher (incorporated by reference to the Form 10KSB filing for the fiscal year ended June 30, 2001)





13.    Annual Report to Stockholders



21.    Subsidiaries of the Registrant



23.    Auditors Consent



99.1   Certification letters pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



57



(b)    Report on Form 8-K



No Forms 8-K were filed during the quarter ended June 30, 2002



Item 14.  Controls and Procedures.



In the year ended June 30, 2002, we did not make any significant changes in, nor take any corrective actions regarding our internal controls or other factors that could significantly affect these controls.  We periodically review our internal controls for effectiveness, and did conduct such a review during this period.  In the future, we plan to conduct an evaluation of our disclosure controls and procedures each quarter.



-------------------

*     Incorporated by reference to the Corporations Registration Statement on Form S-1 File No. 33-69886.



**    Incorporated by reference to the Corporations 1994 Annual Meeting Proxy Statement dated September 14, 1994.



58



SIGNATURES



Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly

authorized.



FIRST BANCSHARES, INC.





Date:  September 30, 2002

By: /s/ Stephen H. Romines

Stephen H. Romines

Chairman of the Board,

President and Chief

Executive Officer (Duly

Authorized Representative)



Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.





By: /s/ Stephen H. Romines

September 30, 2002

Stephen H. Romines

Chairman of the Board, President, Chief

Executive Officer (Principal Executive Officer)



By:/s/ Susan J. Uchtman

September 30, 2002

Susan J. Uchtman

Chief Financial Officer



By: /s/ Harold F. Glass

September 30, 2002

Harold F. Glass

Director



By:/s/ Charles W. Schumacher

September 30, 2002

Charles W. Schumacher

Director



By:/s/ John G. Moody

September 30, 2002

John G. Moody

Director



By: /s/ Dr. James F. Moore

September 30, 2002

Dr. James F. Moore

Director



59



CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002





I, Stephen H. Romines, certify that:



1.

I have reviewed this annual report on Form 10-KSB of First Bancshares, Inc.;



2.

Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;



3.

Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.







Date: September 30, 2002

/s/ Stephen H. Romines

Stephen H. Romines

Chairman, President and Chief Executive Officer





CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002





I, Susan J. Uchtman, certify that:



1.

I have reviewed this annual report on Form 10-KSB of First Bancshares, Inc.;



2.

Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;



3.

Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.



Date: September 30, 2002

/s/ Susan J. Uchtman



Susan J. Uchtman

Chief Financial Officer







60































Exhibit 13



Annual Report to Stockholders



















First Bancshares, Inc.



2002 Annual Report





{First Bancshares, Inc. logo}











First Home Savings Bank

www.firsthomesavingsbank.com

A wholly ownedsubsidiary of First Bancshares, Inc.







TABLE OF CONTENTS







|                                                                                            | Page
|------------------------------------------------------------------------------------------- | ----
|                                                                                            |     
|Letter to Stockholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 1   
|Business of the Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    | 3   
|Selected Consolidated Financial Information. . . . . . . . . . . . . . . . . . .            | 4   
|Managements Discussion and Analysis of Financial Condition                                 |     
|and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      | 6   
|Independent Auditors Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     | 15  
|Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . .        | 16  
|Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . .             | 21  
|Common Stock Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       | 46  
|Directors and Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 47  
|Corporate Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  | 48  







Dear Stockholder:



Economists will be hard-pressed to find a more dramatic 12-month period than the one weve just witnessed.  With financial stories making the front pages (and not always for the best reasons), its no wonder that investors have begun to question the stability of even small publicly traded companies like ours.



In contrast to the drama elsewhere, Im pleased to report that the news for fiscal year 2002 at First Bancshares (FBSI) is refreshingly dull and boring.





Part of the dull (and less than pleasant) news is that net income for fiscal year 2002 decreased slightly from $1.8 million to $1.7 million.  With net income decreasing, net income per share also dropped somewhat from $1.00 per share to $.96 per share.  On the positive side, however, book value per share continued its steady climb.



During the fiscal year ended June 30, 2002, FBSI repurchased 174,673 shares of its stock.  Netting that reduction in outstanding shares against options exercised by Bank employees resulted in a 132,603 reduction in outstanding shares.  With stockholder equity gradually decreasing from $25.2 million to $24.8 million, book value per share increased from $14.09 to almost $15.00.  At August 31, 2002, the remaining repurchase authority was 87,859 shares.





First Bancshares, Inc. paid its 34th quarterly dividend on June 28, 2002. A $.04 per share dividend, to be paid on September 30, 2002, has been announced.



In a complete reversal from the last fiscal year which saw net loan growth of $15.5 million and net deposit growth of  $6.8 million, there was no loan growth during fiscal year 2002 (net loans actually decreased $1 million) while deposits grew by an exceptionally strong $40 million  with no special programs nor incentives.  In fact, advertising costs were reduced from $147,000 to $129,000.



Interestingly, more than 80% of the deposit growth, $33.0 million, was in customer checking and savings accounts.  Certificates of deposit grew $2.0 million while jumbo C/Ds grew $5.0 million.  The majority of the deposit growth has been invested in various securities and short-term interest earning accounts along with a slight reduction in Federal Home Loan Bank advances.



Business of the Corporation





First Bancshares, Inc. (Holding Company or the 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, 2002, the Company had total consolidated assets of $258.2 million and consolidated stockholders equity of $24.8 million.



While the Company owns a title insurance agency through a subsidiary and some rental real estate, it is not engaged in any significant business activity other than holding the stock of First Home.  Accordingly, the information set forth in the report, including 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.  It 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, 2002, First Homes total gross loans were $192.9 million, or 74.7% of total consolidated assets, including $117.1 million, or 60.7% of total gross loans secured by one-to-four family properties and $54.6 million, or 28.3% of total gross loans secured by other real estate.  Of the loans secured by real estate, over 95.0% are adjustable-rate loans.



























3



|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 Savings Bank.  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                                                                                        
|Federal funds sold                                                                                               
|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 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                                                                                         
|                                                                                                                 



4





|                                               |      |      | At or For the Years Ended June 30, |     
|---------------------------------------------- | ---- | ---- | ---------------------------------- | ----
|                                               |      |      | 2002                               |     
|KEY OPERATING RATIOS:                          |      |      |                                    |     
|                                               |      |      |                                    |     
|Return on average assets                       |      |      | 0.68                               | %   
|Return on average equity                       |      |      | 6.60                               |     
|Average equity to average assets               |      |      | 10.36                              |     
|Interest rate spread for period                |      |      | 2.81                               |     
|Net interest margin for period                 |      |      | 3.16                               |     
|Non-interest expense to average assets         |      | 2.28 |                                    | 2.43
|Average interest-earning assets to             |      |      |                                    |     
|interest-bearing liabilities                   |      |      | 109.00                             |     
|Allowance for loan losses to total loans at    |      |      |                                    |     
|end of period                                  |      |      | 0.46                               |     
|Net charge-offs to average outstanding loans   |      |      |                                    |     
|during the period                              |      |      | 0.10                               |     
|Ratio of non-performing assets to total assets | 1.23 |      | 2.14                               |     
|Ratio of loan loss reserves to non-performing  |      |      |                                    |     
|assets                                         |      |      | 27.72                              |     
|                                               |      |      |                                    |     
|Dividend payout ratio                          |      |      | 16.67                              |     
|                                               |      |      |                                    |     
|                                               |      |      |                                    |     
|                                               |      |      | At June 30,                        |     
|                                               |      |      | 2002                               |     
|OTHER DATA:                                    |      |      |                                    |     
|                                               |      |      |                                    |     
|Number of:                                     |      |      |                                    |     
|Loans outstanding                              |      |      | 5,839                              |     
|Deposit accounts                               |      |      | 25,081                             |     
|Full service offices                           |      |      | 10                                 |     
|                                               |      |      |                                    |     
|                                               |      |      |                                    |     



5

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, 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 has predominantly been a one-to-four family residential lender.  While 55% of the loans originated during fiscal year 2002 were single family residential loans, that percent is down somewhat from 58% of 2001 and 2000 mortgage loan originations.  As the percent of loans secured by single family residences has gradually declined, there has been a corresponding gradual increase in loans made within our traditional lending territory that are secured by farms and commercial real estate.  First Home has worked to achieve a reputation within its local lending territory for prompt, efficient and courteous service during both the loan origination and servicing processes.



6



Maintaining Asset Quality.  First Home strongly emphasizes maintaining asset quality through sound underwriting, constant monitoring and effective collection techniques.  At June 30, 2002, First Homes ratio of non-performing assets to total assets was 1.23%, a decrease from 2.14% at June 30, 2001.  Actual loan losses, net of recoveries, of loans originated by First Home were $188,000for the year ended June 30, 2002.  During the year ended June 30, 2001, actual loan losses, net of recoveries, of loans originated by First Home were $55,000.  The 2002 increase resulted from the Savings Banks decision to more aggressively charge off  impaired loans.



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 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.  All loans originated by First Home have been retained in its portfolio.  No loans have been sold in the secondary mortgage market.



Fiscal Year Ended June 30, 2002 Compared to June 30, 2001



Net Income.Net income for the fiscal year ended June 30, 2002 was $1,659,000.  This was a $153,000, or 8.4% decrease, from $1,812,000 for the fiscal year ended June 30, 2001.  Total interest expense decreased $399,000 and noninterest income increased $210,000.  Those two factors, however, were offset by a $141,000 decrease in total interest income, a $219,000 increase in provision for loan losses and a $394,000 increase in noninterest expense.



Net Interest Income.Net interest income for the fiscal year ended June 30, 2002 increased $258,000, or 3.70%, to $7,226,000 from $6,968,000 for the fiscal year ended June 30, 2001.  A $399,000 decrease in interest expense was reduced by a $141,000 decrease in total interest income.



Interest Income.Interest income decreased $141,000, or .89%, to $15,955,000 for the fiscal year ended June 30, 2002 compared to $16,096,000 for the fiscal year ended June 30, 2001.  As noted in the previous years annual report, the rates on First Homes newly originated loans and on existing loans eligible for rate review and adjustment began a general decline.  That trend, of course, continued into the current year as evidenced by a decrease in interest income from loans receivable of $420,000, or 2.74%.  The average balance in net loans outstanding actually increased $6.4 million; however, the average rate on these loans decreased from 8.35% to 7.85%.



An increase in customer deposits without a corresponding increase in loans resulted in an increase in investment securities, mortgage-backed certificates and interest earning accounts at the FHLB.  Interest income from those sources increased $279,000, or 36.90%



Interest Expense.For the fiscal year ended June 30, 2002, interest expense was $8,729,000, a $399,000, or 4.37% decrease, from $9,128,000 for the fiscal year ended June 30, 2001.  The decrease was primarily in interest expense on customer deposits.  Even though average customer deposits increased substantially, the average rate paid decreased from 4.87% for the fiscal year ended June 30, 2001 to 3.89% for the fiscal year ended June 30, 2002.



Interest expense on borrowed funds also decreased $71,000, or 3.79%, as principal reductions were made on FHLB advances.



Provision for Loan Losses.Provision for loan losses increased from $154,000 for the fiscal year ended June 30, 2001 to $373,000 for the fiscal year ended June 30, 2002.  This $219,000 was due to the increase in impaired loans disclosed in Note 5 of the Notes to Consolidated Financial Statements.  Actual loan charge-offs, net of recoveries, of First Home



7



originated loans were $188,000 for the fiscal year ended June 30, 2002 and $55,000 for the fiscal year ended June 30, 2001.



Noninterest Income.For the fiscal year ended June 30, 2002, noninterest income increased $210,000, or 18.8%, to $1,328,000 compared to $1,118,000 for the fiscal year ended June 30, 2001.  Service charges and other fee income, including $74,000 in additional fees from insufficient checks on customer accounts, again increased substantially from the prior year.  Income from debit cards and ATM transactions increased $14,000, or 65%, as Savings Bank bank personnel continue to promote those customer services.



Loan late payment fees increased $40,000 through a more effective and aggressive collection process.  Income from in-house printing of checks for First Home customers increased $12,000 as more customers took advantage of obtaining their checks more quickly and at a lower cost.  Expenses related to this program only increased $3,000.



Title insurance commissions earned by the Companys subsidiary, South Central Missouri Title, Inc., increased $45,000.  Of this amount, $38,000 was related to an adjustment made in the fiscal year ended June 30, 2001 for the accrual of commissions to be paid to the underwriter.  The remaining $7,000 was an increase in net title insurance commissions.



During the fiscal year ended June 30, 2002, income from real estate operations decreased $34,000 as some vacancies occurred coupled with depreciation and property taxes increasing on a Sparta building placed in service during the prior year.



The $14,000 gain from the sale of property and equipment and real estate owned for the fiscal year ended June 30, 2002 was comprised of a $25,000 gain on the sale of a residential rental property offset by losses of $11,000 on the sale of other foreclosed property.



Noninterest Expense.Noninterest expense for the fiscal year ended June 30, 2002 was $5,542,000.  This was a $394,000, or 7.7%, increase from $5,148,000 for the fiscal year ended June 30, 2001.



Compensation and employee benefits increased $200,000 or, 6.47%.  Payroll expense and related taxes  increased $138,000, or 6.8%.  Group health insurance costs increased $103,000, or 20.8%, as more Bank personnel became eligible to participate in the Savings Banks group health plan along with increased premiums and healthcare costs.



During the fiscal year ended June 30, 2002, the shares in the Employee Stock Ownership Plan (ESOP) became fully allocated to the participants in the plan and the related expense decreased $116,000.  No significant ESOP expenses are anticipated for fiscal 2003.



The Company instituted a compensated absences policy during the fiscal year ended June 30, 2001 to be used by employees for illness, medical leave, or work days missed for other personal reasons.  Eligible employees accrue 1⁄2 day per month, up to a maximum of 30 days.  Upon the adoption of that policy, eligible employees received days for prior service with the Company.  Since the prior year included an expense for prior service accrual, the expense for the fiscal year ended June 30, 2002 decreased $20,000.



Occupancy and equipment expense increased $44,000, or 5.6%.  Depreciation expense on computer systems increased $43,000 from computer upgrades and enhancements in the prior year.  Depreciation on buildings increased $30,000 primarily due to the completion of the Kissee Mills branch building and remodeling at the home office.  This increase was partially offset by a $22,000 decrease in building rent for the Kissee Mills location since a leased modular facility was no longer needed.



8



Maintenance expense, also primarily relating to the computer expenditures in the prior year, increased $15,000.  Costs associated with operating the Internet banking system placed in service in March 2002 were $13,000.  Furniture and equipment expense decreased $16,000.



Other noninterest expense increased $150,000, or 12.14%, for the fiscal year ended June 30, 2002.  Employee education increased $52,000.  Telephone costs increased $30,000.  During the past year, the data communication lines between branches were upgraded to frame relay rather than the slower analog lines.  There also continues to be increased usage of the Telebanker system which allows customers to access their account information via telephone 24 hours a day.



Correspondent bank service charges increased $35,000 and office supplies increased $16,000 as the volume of items processed continues to increase.



The increase in asset size also increased the cost of the Savings Banks insurance premiums by $12,000 and the assessments paid to regulatory agencies by $7,000.  Dues and subscriptions increased $14,000 as the Savings Bank became a member of several banking organizations to obtain benefits of membership, including price reductions with vendors and for employee education.



Amortization of the intangible asset associated with the Crane and Galena branch acquisition decreased by $83,000 as fewer purchased accounts were closed by customers during the year.  A reduction in the advertising and marketing programs created an $18,000 decrease in the related expense.



Income Taxes.During the fiscal year ended June 30, 2002, income tax expense increased $8,000 even though income before taxes decreased $145,000.  The income tax expense for the fiscal year ended June 30, 2001 contained additional credits against Missouri taxes for contributions to area programs.



Net Interest Margin.Net interest margin for the fiscal year ended June 30, 2002 was 3.16% compared to 3.49% for the fiscal year ended June 30, 2001.  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.



Fiscal Year Ended June 30, 2001 Compared to June 30, 2000



Net Income.Net income for the fiscal year ended June 30, 2001 decreased $208,000 to $1,812,000 from $2,020,000 for the fiscal year ended June 30, 2000.  Total interest income increased $2,231,000, noninterest income increased $152,000 and income tax expense decreased $149,000.  Those items were more than offset, however, by a $1,871,000 increase in interest expense, a $790,000 increase in noninterest expense, and a $65,000 increase in provision for loan losses.



Net Interest Income.Net interest income increased $360,000, or 5.4%, to $6,968,000 for the fiscal year ended June 30, 2001 from $6,608,000 for the fiscal year ended June 30, 2000.  A $2,231,000 increase in total interest income was reduced by a $1,871,000 increase in interest expense.



Interest Income.  For the year ended June 30, 2001, total interest income increased $2,231,000, or 16.1%, to $16,096,000 from $13,865,000 for the fiscal year ended June 30, 2000.  Interest income from loans receivable increased $2,225,000, or 17.0%.  This increase was the result of a $15,483,000 increase in net loans receivable enhanced by an increase in the annualized yield from 8.06% for the year ended June 30, 2000 to 8.35% for the year ended June 30, 2001.  The increase in the annualized yield was attributable to higher interest rates being charged on new and existing adjustable rate loans beginning in early 2000.  That trend, however, began to reverse as the general trend in interest rates began to decline in mid- to late 2000.  With the onset of a declining interest rate environment, the rates charged on the Savings Banks newly originated loans and on existing loans eligible for rate review and adjustment also began a general decline.



9



Interest income from investment securities decreased $3,000 as the annual yield on the investments was lower attributable to lower interest rates and more investment in tax-exempt securities.



Interest income from other interest-earning assets increased $14,000, or 5.1%.  A higher balance was maintained in these accounts; however, a lower average rate was paid on the funds.



Interest income from mortgage-backed securities decreased $6,000 as principal repayments were received on these securities and no new securities were purchased.



Interest Expense.Interest expense for the year ended June 30, 2001, increased $1,871,000, or 25.8%, to $9,128,000 from $7,257,000 for the year ended June 30, 2000.  The majority of the increase was the result of a $1,451,000 increase in interest on FHLB advances.  The increase in the average outstanding balance of FHLB advances was slightly offset by a lower average rate paid on those advances.  Additional FHLB advances were necessary to fund loan and asset growth.  The remainder of the increase was related to interest expense on customer deposits.  An increase in the average rate paid from 4.55% for the year ended June 30, 2000 to 4.87% for the year ended June 30, 2001 was only partially offset by slightly lower average customer deposits.



Provision for Loan Losses.For the year ended June 30, 2001, provision for loan losses increased $65,000 to $154,000 compared to $89,000 for the year ended June 30, 2000.  The increase was attributable to the increases in loans outstanding and net charge-offs during the year.  Actual loan charge-offs, net of recoveries, of First Home originated loans were $55,000 for the year ended June 30, 2001 compared to $32,000 for the year ended June 30, 2000.



Noninterest Income.Noninterest income for the year ended June 30, 2001 was $1,118,000, an increase of $138,000, or 14.0%, from $980,000 for the fiscal year ended June 30, 2000.  Service charge and other fee income increased $131,000, or 20.0%, as the number of checking accounts increased and additional service and activity charges were received.



Net rental income from real estate operations increased $52,000.  The increase was the effect of a full twelve months of rent income from the Gainesville post office, other properties which were purchased during the year ended June 30, 2000 and completion of the Sparta strip center in August 2000.



During the year ended June 30, 2001, in-house printing of checks for First Home customers continued to enhance noninterest income by increasing $19,000 as well as customer service by allowing our customers to obtain their check orders more quickly and at a lower cost.  The expenses associated with the check printing system are discussed below in "Noninterest Expense."



The $31,000 loss on sale of property and equipment is comprised of a $26,000 loss on the sale of foreclosed property and a $5,000 loss on the sale of a mobile home which had been acquired through a foreclosure in a previous year.  Title insurance commissions earned by the Companys subsidiary, South Central Missouri Title, Inc., decreased by $38,000 through an adjustment of an accrual for the commissions to be paid to the underwriter.



Noninterest Expense.Noninterest expense increased $790,000, or 18.1% from $4,358,000 for the fiscal year ended June 30, 2000 to $5,148,000 for the fiscal year ended June 30, 2001.  Increases in compensation and employee benefits, occupancy and equipment and other noninterest expense were partially offset by the reduction of FDIC deposit insurance premiums.



The majority of the increase in noninterest expense occurred in the area of compensation and employee benefits, which increased by $481,000, or 18.4%.  Annual pay rate increases for personnel at existing locations were $190,000, the search for and the addition of senior management increased expenses by $111,000 and $66,000 of the increase related to personnel at the new Kissee Mills and Rockaway Beach locations.  Group health insurance costs to add new



10



and existing personnel who met the health plan coverage requirements during the year increased $133,000.



During the year ended June 30, 2001, the Company instituted a compensated absences policy to be used by the employees for illness, medical leave, or work days missed for other personal reasons.  Eligible employees accrue 1⁄2 day per month, up to a maximum of 30 days.  Upon the adoption of this policy, current eligible employees received days for prior service with the Company.  An expense of $70,000 was accrued during fiscal year 2001 due to the adoption of this policy.



The above increases were somewhat offset by a $61,000 expense incurred in the year ended June 30, 2000 for partial reimbursement to employees for the purchase of home personal computers.



The Employee Stock Ownership Plan ("ESOP") is a significant component of compensation and employee benefits.  The average fair market value of the Companys common stock decreased slightly during the year ended June 30, 2001 which in turn reduced the expense for the ESOP.  There was also a decrease in the number of shares allocated to participants.  Those two decreases reduced ESOP expense by $28,000.  This treatment is required by the American Institute of Certified Public Accountants Statement of Position 93-6, Employers Accounting for Employee Stock Ownership Plans.  The statement requires the recording of shares released from the ESOP to be recorded at the average fair market value for the period.



Occupancy and equipment expense increased by $194,000, or 32.6%, largely attributable to opening the new Kissee Mills and Rockaway Beach locations.  The upfront costs, including the setup on the modular building at the Kissee Mills location, and the normal monthly operating expenses were $74,000.  The permanent facility at the Kissee Mills location is to be completed this fall.  Computer equipment replacements and upgrades added $31,000 to depreciation and $27,000 to computer items and monthly charges directly expensed.  The computer expenditures were to take advantage of enhanced technology on our existing system and to prepare for the addition of upgrades in the future.



Utility expenses increased by $15,000 due to the increased heating costs during the winter.  Maintenance expense for computer equipment and software, security systems and office equipment increased by $9,000.  The replacement of several small office machines in existing locations increased furniture and equipment expense by $9,000.



Other noninterest expense increased $158,000, or 14.7%.  That increase included advertising costs of $55,000 of which $34,000 was a mass mailing to area zip codes for our checking account promotion and $10,000 directly associated with the opening of the Kissee Mills and the Rockaway Beach locations.  Also in the total increase office supplies increased $29,000, telephone expense increased $25,000, postage expense increased $6,000, insurance expense increased $5,000, employee education increased by $4,000 and legal fees increased by $4,000.



The other noninterest expense increase included $18,000 in loss on checking accounts and check cashing for customers.



The in-house check printing system previously discussed reduced the expense for checks provided free of charge to customers by $7,000.  This was offset by a $13,000 increase in check printing costs.  The net $6,000  expense increase was more than offset by the $19,000 income increase discussed above in "Noninterest Income."



The reduction of FDIC deposit insurance premiums created a $29,000 decrease even though deposits increased slightly.



11



Income Taxes.Income tax expense decreased by $149,000 to $972,000 for the year ended June 30, 2001 compared to $1,121,000 for the year ended June 30, 2000.  The decrease was attributable to the decrease in income before taxes.



Net Interest Margin.Net interest margin was 3.49% for the year ended June 30, 2001 which was a slight decrease from 3.73% for the year ended June 30, 2000.  An increase in the average balance of loans (which have a higher yield than the other earning assets) and an increase in the yield on loans compared to total interest earning assets created an overall increase in the yield on interest earning assets.  This increase was more than offset by an increase in the average balance of FHLB borrowings and the cost of customer certificates of deposit to create the decrease in the net interest margin.





Financial Condition



General.Two events contributed significantly to the overall changes that occurred during the fiscal year ended June 30, 2002.  First, with no special programs or incentives, customer deposits increased $40.0 million.  In fact, advertising costs were reduced.  Secondly, the Savings Bank was unable to match deposit growth with corresponding loan growth.



Total Assets. Primarily as a result of the increased customer deposits, total assets increased $37.2 million, or 16.86% during the year ended June 30, 2002.  A $35.0 million increase in cash, interest-bearing deposits and investments, $2.4 million increase in mortgage-backed certificates and an $800,000 increase in property and equipment were slightly offset by a $1.4 million decrease in loans receivable.



Cash and Cash Equivalents.Cash and cash equivalents increased $6.2 million to $20.5 million at June 30, 2002 from $14.3 million at June 30, 2001.  Additional deposits were held at the FHLB in interest-bearing accounts in order to maintain funds accessible to purchase investment securities and to avoid penalties on insufficient compensating balances on those FHLB accounts.



Certificates of Deposit.Certificates of deposit purchased as investments decreased to $1.0 million at June 30, 2002 from $1.4 million at June 30, 2001.  The balance held in certificates of deposit purchased were reduced due to low interest rates.



Investment Securities. The increase in customer deposits provided funds for an increase in investment securities of $29.3 million to $32.2 million at June 30, 2002 from $2.9 million at June 30, 2001.  The increase in customer deposits not absorbed by local loan demand created excess funds.  Those funds were used to purchase securities to increase yields.  In order to maintain a flexible position, investments are purchased with staggered maturities and call dates.



Mortgage-backed Securities.Again as the result of increased customer deposits, mortgage-backed securities of $376,000 at June 30, 2001 increased $2.4 million to $2.8 million at June 30, 2002.



Loans Receivable.  Net loans receivable decreased $1.4 million from $190.4 million at June 30, 2001 to $189.0 million at June 30, 2002.  The decrease was the result of loan payments and payoffs exceeding loan originations.  The dramatic decline in long-term rates caused some of the Savings Banks customer base to seek long-term fixed rate products that First Home does not offer.



Non-accrual Loans.Non-accrual loans increased to $175,000 at June 30, 2002 from $49,000 at June 30, 2001.   The $49,000 in non-accrual loans at June 30, 2001 was charged off during the year.  The balance of non-accrual loans at June 30, 2002 consisted of one commercial real estate loan.



12



Nonperforming Assets.  Nonperforming assets decreased $1.5 million from $4.7 million at June 30, 2001 to $3.2 million at June 30, 2002.  The decrease resulted from more aggressive collection practices without significant increases in loan losses due to the Savings Banks conservative approach to collateral valuation.



Customer Deposits and Borrowings.Customer deposits increased $40.0 million, or 24.63% from $162.4 million at June 30, 2001 to $202.4 million at June 30, 2002.  The majority of the growth occurred in checking and savings accounts.  FHLB advances decreased from $32.3 million at June 30, 2001 to $29.8 million at June 30, 2002.  Funds from customer deposit growth was used to pay amortizing and maturing advances.



Stockholders Equity.Stockholders equity decreased slightly to $24.8 million at June 30, 2002 from $25.2 million at June 30, 2001.  The decrease was the result of $2.4 million used for the repurchase of treasury stock and $275,000 for the payment of dividends offset by net income of $1.7 million, $220,000 in proceeds from the exercise of stock options, $272,000 in unearned compensation adjustments and an $82,000 change in the net unrealized gain on investment securities available-for-sale.  At June 30, 2002, shares of stock outstanding had been reduced to 1,654,744 from 1,787,347 shares outstanding at June 30, 2001 as the result of repurchases by the Company slightly reduced by the exercise of employee stock options.



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 strong at $41.5 million, $51.0 million and $56.3 million for the years ended June 30, 2002, 2001 and 2000, respectively.  Other investing activities include the purchase of investment securities, which totaled $31.6 million, $1.0 million and $1.1 million for the years ended June 30, 2002, 2001 and 2000.  These activities were funded primarily by deposit growth, principal repayments on loans, mortgage-backed securities, other investment securities, and FHLB advances.



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 2002, 2001 and 2000, First Home used its sources of funds primarily to purchase investment securities, fund loan commitments and to pay maturing savings certificates and deposit withdrawals.  At June 30, 2002, First Home had approved loan commitments totaling $914,000 and undisbursed loans in process totaling $3.4 million.



Liquid funds necessary for the normal daily operations of First Home are maintained in three working checking accounts and a daily time account with the FHLB - Des Moines.  It is the Savings Banks current policy to maintain adequate collected balances in those three 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, or used to reduce FHLB advances to enhance net interest income.



At June 30, 2002, certificates of deposit amounted to $103.6 million, or 51.2%, of First Homes total deposits, including $72.9 million which are scheduled to mature by June 30, 2003.  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.



13



OTS regulations require First Home to maintain specific amounts of capital.  As of June 30, 2002, First Home was in compliance with all current regulatory capital requirements with tangible, core and risk-based capital ratios of 8.5%, 8.5% and 11.2%, 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 which require savings institutions to maintain specified amounts of regulatory capital based on the estimated effects of changes in market rates and which could further increase the amount of regulatory capital required to be maintained by the Savings Bank.  See Note 16 of the Notes to Consolidated Financial Statements.



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 generally accepted accounting principles, 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.



14

{On Kirkpatrick, Phillips & Miller, CPAs, PC letterhead}





INDEPENDENT AUDITORS REPORT

-

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -



To the Board of Directors and Stockholders

First Bancshares, Inc. and Subsidiaries

Mountain Grove, Missouri





We have audited the accompanying consolidated statements of financial condition of First Bancshares, Inc. and Subsidiaries as of June 30, 2002 and 2001, and the related consolidated statements of income, stockholders equity, and cash flows for each of the three years in the period ended June 30, 2002.  These consolidated financial statements are the responsibility of the Companys management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform these audits to obtain reasonable assurance about whether the financial statements are free from material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used an significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Bancshares, Inc. and Subsidiaries as of June 30, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2002, in conformity with account principles generally accepted in the United States of America.







/s/ Kirkpatrick, Phillips & Miller



August 6, 2002

Springfield, Missouri



|FIRST BANCSHARES, INC. AND SUBSIDIARIES                                                      
|---------------------------------------------------------------------------------------------
|                                                                                             
|CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION                                               
|- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
|June 30, 2002 and 2001                                                                       
|                                                                                             
|                                                                                             
|ASSETS                                                                                       
|                                                                                             
|Cash and cash equivalents, including interest-bearing accounts                               
|of $16,335,890 in 2002 and $11,116,196 in 2001                                               
|Certificates of deposit purchased                                                            
|Investment securities available-for-sale, at fair value                                      
|Investment securities held-to-maturity (estimated fair value of                              
|$1,615,776 in 2002 and $1,340,976 in 2001)                                                   
|Investment in Federal Home Loan Bank stock, at cost                                          
|Mortgage-backed certificates available-for-sale,                                             
|at fair value                                                                                
|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                                             
|Prepaid income taxes                                                                         
|Other assets                                                                                 
|Total assets                                                                                 
|                                                                                             
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                         
|                                                                                             
|Customer deposits                                                                            
|Advances from Federal Home Loan Bank                                                         
|Borrowings                                                                                   
|Deferred income taxes, net                                                                   
|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 2,807,276 in 2002 and 2,765,206 in 2001, outstanding                                  
|1,654,744 in 2002 and 1,787,347 in 2001                                                      
|Paid-in capital                                                                              
|Retained earnings - substantially restricted                                                 
|Treasury stock, at cost - 1,152,532 shares in 2002 and                                       
|977,859 shares in 2001                                                                       
|Unearned compensation                                                                        
|Accumulated other comprehensive income                                                       
|Total stockholders' equity                                                                   
|Total liabilities and stockholders' equity                                                   
|                                                                                             
|                                                                                             
|                                                                                             
|The accompanying notes are an integral part of the                                           
|consolidated financial statements                                                            
|16                                                                                           





|FIRST BANCSHARES INC. AND SUBSIDIARIES                               
|---------------------------------------------------------------------
|                                                                     
|CONSOLIDATED STATEMENTS OF INCOME                                    
|- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
|Years Ended June 30, 2002, 2001, and 2000                            
|                                                                     
|                                                                     
|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 property and equipment                        
|and real estate owned                                                
|Income from real estate operations                                   
|Insurance commissions                                                
|Other                                                                
|Total noninterest income                                             
|                                                                     
|Noninterest Expense:                                                 
|Compensation and employee benefits                                   
|Occupancy and equipment                                              
|Deposit insurance premiums                                           
|Other                                                                
|Total noninterest expense                                            
|                                                                     
|Income before taxes                                                  
|                                                                     
|Income Taxes                                                         
|                                                                     
|Net income                                                           
|                                                                     
|Basic earnings per share                                             
|                                                                     
|Diluted earnings per share                                           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|The accompanying notes are an integral part of the                   
|consolidated financial statements                                    
|17                                                                   



|FIRST BANCSHARES, INC. AND SUBSIDIARIES                                             
|------------------------------------------------------------------------------------
|                                                                                    
|CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY                                     
|- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -       
|Years Ended June 30, 2002, 2001 and 2000                                            
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Balances at June 30, 1999                                                           
|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 $(33,936)                                                           
|Total Comprehensive Income                                                          
|Proceeds from exercise of stock options                                             
|Cash dividends ($.16 per share)                                                     
|Purchase of treasury stock at cost                                                  
|Release of ESOP shares                                                              
|                                                                                    
|Balances at June 30, 2000                                                           
|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 $64,054                                                             
|Total Comprehensive Income                                                          
|Proceeds from exercise of stock options                                             
|Cash dividends ($.16 per share)                                                     
|Purchase of treasury stock at cost                                                  
|Release of ESOP shares                                                              
|Balances at June 30, 2001                                                           
|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 $48,090                                                             
|Total Comprehensive Income                                                          
|Proceeds from exercise of stock options                                             
|Cash dividends ($.16 per share)                                                     
|Purchase of treasury stock at cost                                                  
|Release of ESOP shares                                                              
|                                                                                    
|Balances at June 30, 2002                                                           
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|The accompanying notes are an integral part of the consolidated financial statements
|18                                                                                  

|FIRST BANCSHARES, INC. AND SUBSIDIARIES                                      
|-----------------------------------------------------------------------------
|                                                                             
|CONSOLIDATED STATEMENTS OF CASH FLOWS                                        
|- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
|Years Ended June 30, 2002, 2001 and 2000                                     
|                                                                             
|                                                                             
|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                                         
|Loss on loans, net of recoveries                                             
|(Gain)/loss on sale of property and equipment                                
|Loss on sale of real estate owned                                            
|Release of ESOP shares                                                       
|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 maturities of investment securities                            
|available-for-sale                                                           
|Proceeds from maturities of investment securities                            
|held-to-maturity                                                             
|Net change in certificates of deposit                                        
|Net (increase)/decrease in federal funds sold                                
|Net change in loans receivable                                               
|Purchase of mortgage-backed certificated available-for-sale                  
|Proceeds from principal payments and maturities                              
|of mortgage-backed certificates                                              
|Purchases of property and equipment                                          
|Proceeds from sale of property and equipment                                 
|Purchase of real estate owned                                                
|Net proceeds from sale of real estate owned                                  
|Net cash used in investing activities                                        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|19                                                                           





|FIRST BANCSHARES, INC. AND SUBSIDIARIES                                      
|-----------------------------------------------------------------------------
|                                                                             
|CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)                            
|- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
|Years Ended June 30, 2002, 2001 and 2000                                     
|                                                                             
|                                                                             
|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 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                                              
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|The accompanying notes are an integral part of the                           
|consolidated financial statements                                            
|20                                                                           



FIRST BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Years Ended June 30, 2002, 2001 and 2000



(1)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Nature of business  First Bancshares, Inc., a Missouri corporation, was organized on September 30, 1993 for the purpose of becoming a unitary savings and loan holding company for First Home 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 agencies and undergo periodic examinations by those regulatory authorities.



Use of estimates  Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles.  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.



Principles of consolidation  The accompanying consolidated financial statements include the accounts of First Bancshares, Inc. and its wholly-owned subsidiaries, the Savings Bank and South Central Missouri Title, Inc., and Fybar Service Corporation, a wholly-owned subsidiary of the Savings Bank.  In consolidation, all significant intercompany balances and transactions have been eliminated.



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.







21



FIRST BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- - - - - - - - - - - - - - - - - - - - - - - - -

Years Ended June 30, 2002, 2001 and 2000





(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, 2002 and 2001, 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, except when the loan is well secured and in the process of collection.  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.  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.



22

FIRST BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- - - - - - - - - - - - - - - - - - - - - -

Years Ended June 30, 2002, 2001 and 2000



(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).  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  Intangible assets have been recorded by the Savings Bank in connection with the acquisition of two branches from NationsBank. The premium paid by the Savings Bank for the branches is being amortized on a straight-line basis over 15 years.  Amortization expense relating to this premium was $35,000 in 2002 and $117,980 in 2001 and 2000.  During the years ended June 30, 2001 and 2000 amortization expense includes an additional $50,000 write-down per year due to the loss of customers that were acquired from NationsBank.



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 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.





23



FIRST BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- - - - - - - - - - - - - - - - - - - - --

Years Ended June 30, 2002, 2001 and 2000



(1)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



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.  In conjunction with a review of the loan portfolio, the allowance for loan losses is evaluated and adjusted at least quarterly.  In evaluating the allowance for loan losses, management considers various factors including historical loss experience, the level and trend of delinquent and classified loans, current and anticipated economic; and real estate conditions, and the composition of the loan portfolio.  Losses incurred upon initial acquisition of real estate owned through foreclosure are charged to the allowance for loan losses.



Special reserves are established for any impaired loan for which the recorded investment in the loan exceeds the measured value of the loan.  The values of loans subject to impairment valuation are determined based on the present value of expected future cash flows, the market price of the loans, or the fair values of the underlying collateral if the loan is collateral dependent.



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.



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.





24



FIRST BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- - - - - - - - - - - - - - - - - - - -

Years Ended June 30, 2002, 2001 and 2000



(1)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



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.



New accounting standards  In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business CombinationsandSFAS No. 142, Goodwill and other Intangible Assets.SFAS No. 141 requires the use of the purchase method of accounting for all business combinations initiated after June 30, 2001, thereby eliminating the pooling-of-interests methods.  SFAS No. 141 also provides new criteria that determine whether an acquired intangible asset should be recognized separately from goodwill.  SFAS No. 142 provides guidance on how to account for goodwill and intangible assets after a business combination has been completed.  Under SFAS No. 142 goodwill and certain other intangible assets will no longer be amortized and will be tested for impairment at least annually.  Intangible assets with a definite life will continue to be amortized.  The nonamortization and impairment rules will apply to existing goodwill and intangible assets beginning with the fiscal years starting after December 15, 2001.  Early adoption is permitted for entities with fiscal years beginning after March 15, 2001.  The Company adopted SFAS No. 141 and 142 as of July 1, 2001.  The adoption of these standards did not have a material impact on the Company.



In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, Accounting for Asset Retirement Obligations.  This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs.  This Statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees.  As used in this Statement, a legal obligation is an obligation that a party is required to settle as a result of an existing or enacted law, statute, ordinance, or written or oral contract or by legal construction of a contract under the doctrine of promissory estoppel.  This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002.  Management does not believe the adoption of this Statement will have a material impact on the consolidated financial statements.



25



FIRST BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- - - - - - - - - - - - - - - - - - - - - -

Years Ended June 30, 2002, 2001 and 2000



(1)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



New accounting standards (continued)  In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.  SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets.  The Statement supercedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined in that Opinion).  The Statement also amends ARB No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary.  The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years.  Management does not believe the adoption of the Statement will have a material impact on the consolidated financial statements.





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.



(2)

INVESTMENT SECURITIES



As discussed in Note (1), the Company has designated certain securities as available-for-sale.



A summary of the investment securities available-for-sale at June 30, 2002 is as follows:



|                                 |   |            |   |                  |   |        |   | Estimated 
|-------------------------------- | - | ---------- | - | ---------------- | - | ------ | - | ----------
|                                 |   | Amortized  |   | Gross Unrealized |   | Fair  
|                                 |   | Cost       |   | Gains            |   | Losses |   | Value     
|United States Government         |   |            |   |                  |   |        |   |           
|and Federal Agencies obligations | $ | 28,912,210 | $ | 150,892          | $ | 3,128  | $ | 29,059,974
|Mutual funds                     |   | 32,232     |   | 3,114            |   | -      |   | 35,346    
|Common and preferred stocks      |   | 1,487,443  |   | 28,600           |   | 18,895 |   | 1,497,148 
|Total                            | $ | 30,431,885 | $ | 182,606          | $ | 22,023 | $ | 30,592,468





A summary of investment securities held-to-maturity at June 30, 2002 is as follows:



Estimated



Amortized

Gross Unrealized

Fair



Cost

Gains

Losses

Value



Obligations of states and

political subdivisions

$

1,558,265

$

46,173

$

-

$

1,604,438

Student loan pool

11,338

-

-

11,338

Total

$

1,569,603

$

46,173

$

-

$

1,615,776



26





FIRST BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- - - - - - - - - - - - - - - - - - - - -

Years Ended June 30, 2002, 2001 and 2000



(2)

INVESTMENT SECURITIES (CONTINUED)



The amortized cost and estimated market value of debt securities at June 30, 2002, 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.



Amortized

Estimated



Cost

Fair Value



Due in one year or less

$

300,000

$

304,090

Due after one year through five years

28,013,907

28,184,978

Due after five years through ten years

2,167,906

2,186,682

Total

$

30,481,813

$

30,675,750



A summary of the investment securities available-for-sale at June 30, 2001 is as follows:



Estimated



Amortized

Gross Unrealized

Fair



Cost

Gains

Losses

Value



Mutual funds

$

32,232

$

2,882

$

-

$

35,114

Common and preferred stocks

1,487,443

64,363

-

1,551,806

Total

$

1,519,675

$

67,245

$

-

$

1,586,920





A summary of investment securities held-to-maturity at June 30, 2001 is as follows:



Estimated



Amortized

Gross Unrealized

Fair



Cost

Gains

Losses

Value



Obligations of states and

political subdivisions

$

1,317,530

$

12,039

$

4,146

$

1,325,423

Student loan pool

15,553

-

-

15,553

Total

$

1,333,083

$

12,039

$

4,146

$

1,340,976



The book value of securities pledged as collateral, to secure public deposits was $616,379 at June 30, 2002 and $438,428 at June 30, 2001.  The approximate fair value of pledged securities was $623,821 at June 30, 2002 and $439,240 at June 30, 2001.



(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 $1,901,200 at June 30, 2002.  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.



27





FIRST BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- - - - - - - - - - - - - - - - - - - - -

Years Ended June 30, 2002, 2001 and 2000



(4)

MORTGAGE-BACKED SECURITIES



The amortized cost and estimated market values of mortgage-backed securities available-for-sale as of  June 30, 2002 are summarized below:



Estimated



Amortized

Gross Unrealized

Fair



Cost

Gains

Losses

Value



FHLMC certificates

$

2,087,078

$

38,941

$           -

$

2,126,019

FNMA certificates

609,332

3,148

-

612,480

GNMA certificates

20,941

-

-

20,941

Total

$

2,717,351

$

42,089

$           -

$

2,759,440



The amortized cost and estimated market values of mortgage-backed securities available-for-sale as of June 30, 2001 are summarized below:



Estimated



Amortized

Gross Unrealized

Fair



Cost

Gains

Losses

Value



FHLMC certificates

$

135,813

$

2,025

$           -

$

137,838

FNMA certificates

189,876

1,619

-

191,495

GNMA certificates

45,195

1,808

-

47,003

Total

$

370,884

$

5,452

$           -

$

376,336



(5)

LOANS RECEIVABLE HELD-FOR-INVESTMENT



Loans receivable at June 30 consist of the following:



2002

2001



First mortgage loans

$

166,535,017

$

167,122,043

Loans to depositors, secured by savings accounts

1,733,217

1,685,123

Consumer and automobile loans

9,956,276

11,153,884

Second mortgage loans

5,195,013

5,075,907

Other loans

9,505,445

8,344,231

Total gross loans

192,924,968

193,381,188

Reserve for loan losses

(880,665)

(695,670)

Loans in process

(3,357,851)

(2,621,613)

Unamortized deferred loan costs, net

of origination fees

264,504

287,651

Net loans receivable held-for-investment

$

188,950,956

$

190,351,556









28





FIRST BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- - - - - - - - - - - - - - - - - - - - - -

Years Ended June 30, 2002, 2001 and 2000



(5)

LOANS RECEIVABLE HELD-FOR-INVESTMENT (CONTINUED)



Activity in the allowance for loan losses is summarized as follows for the years ended June 30:



2002

2001



Balance at beginning of year

$

695,670

$

596,951

Provision charged to income

372,645

153,452

Charge-offs

(203,837)

(60,713)

Recoveries

16,187

5,980

Balance at end of year

$

880,665

$

695,670



The Savings Bank primarily grants loans to customers throughout southern Missouri.  The loans are typically secured by real estate or personal property.



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



June 30,



2002

2001



Total impaired loans

$

1,531,586

$

49,446



Valuation allowance related to impaired loans

$

273,676

$

49,446



Years Ended June 30,



2002

2001

2000



Average investment in

impaired loans

$

1,093,078

$

49,446

$

55,110



Interest income recognized

on impaired loans

$

97,671

$                 -

$                 -





Interest income recognized on

a cash basis on impaired loans

$

74,000

$                 -

$                 -





The Savings Bank has issued unsecured letters of credit totaling $974,600 for a customer with $1,356,127 in impaired loans.



(6)

ACCRUED INTEREST RECEIVABLE



Accrued interest receivable at June 30 is summarized as follows:



2002

2001



Investment securities

$

282,075

$

51,668

Mortgage-backed securities

16,817

6,799

Loans receivable

1,451,374

1,330,930

Total

$

1,750,266

$

1,389,397



29





FIRST BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- - - - - - - - - - - - - - - - - - - - -

Years Ended June 30, 2002, 2001 and 2000



(7)

PROPERTY AND EQUIPMENT



Property and equipment at June 30 consists of the following:



2002



Accum.

Valuation



Category

Cost

Deprec.

Reserve

Net



Land

$

642,704

$

-

$

-

$

642,704

Buildings

5,272,083

1,244,876

-

4,027,207

Office furniture, fixtures

and equipment

2,375,149

1,314,631

-

1,060,518

Automobiles

190,900

96,103

-

94,797

Investment real estate

2,889,383

338,922

271,147

2,279,314

Total

$

11,370,219

$

2,994,532

$

271,147

$

8,104,540



2001



Accum.

Valuation



Category

Cost

Deprec.

Reserve

Net



Land

$

637,704

$

-

$

-

$

637,704

Buildings

4,352,920

1,111,351

-

3,241,569

Office furniture, fixtures

and equipment

2,115,227

1,164,560

-

950,667

Automobiles

156,580

77,849

-

78,731

Investment real estate

2,942,181

274,151

271,147

2,396,883

Total

$

10,204,612

$

2,627,911

$

271,147

$

7,305,554





Depreciation charges to operations for the years ended June 30, 2002, 2001 and 2000 were $514,269, $431,795, and $342,147, respectively.  The depreciation policies followed by the Company are described in Note (1).



A valuation reserve was established in a prior year for certain investment real estate to adjust the property to its net realizable value.



(8)

CUSTOMER DEPOSITS



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



2002

2001



Amount

%

Amount

%



Noninterest-bearing checking

$

7,530,705

3.7

%

$

6,863,551

4.2

%

Interest-bearing checking

35,326,281

17.4

27,466,134

16.9

Super Saver money market

41,452,390

20.5

19,402,564

11.9

Savings

14,491,614

7.2

11,981,035

7.4

Certificates of Deposit

103,649,449

51.2

96,725,114

59.6



Total

$

202,450,439

100.0

%

$

162,438,398

100.0

%



30





FIRST BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- - - - - - - - - - - - - - - - - - - - -

Years Ended June 30, 2002, 2001 and 2000



(8)

CUSTOMER DEPOSITS (CONTINUED)



The aggregate amount of jumbo certificates of deposit with a minimum denomination of $100,000 was $26,605,186 and $21,646,345 at June 30, 2002 and 2001, respectively.



At June 30, 2002, scheduled maturities of certificates of deposit are as follows:



2003

$

72,893,072

2004

13,760,411

2005

10,905,437

2006

5,246,342

2007

823,187

2008

21,000

$

103,649,449



(9)

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

2002

Rate

2001

Rate





Term Advances:



Long-term; fixed-rate; noncallable

$

533,333

6.34%

$

3,000,000

6.79%



Long-term; fixed-rate; callable

28,000,000

5.46

28,0000,000

5.46



Amortizing Advances:



Long-term; fixed-rate; noncallable

1,245,307

7.48

1,300,966

7.48



Total

$29,778,640

5.56

$32,300,966

5.66



At June 30, 2002, $22,500,000 of the callable advances are callable quarterly and $5,500,000 are callable in September 2003 and every quarter thereafter.  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, 2002, it would be to the FHLBs advantage not to call these advances.





31







FIRST BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- - - - - - - - - - - - - - - - - - - - -

Years Ended June 30, 2002, 2001 and 2000



(9)

ADVANCES FROM FEDERAL HOME LOAN BANK (CONTINUED)



As of June 30, 2002, the fixed-rate term advances 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



2003

$

426,631

2004

231,268

2005

69,599

2006

74,983

2007

80,785

Later years

28,895,374

$

29,778,640



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



2002

2001

2000



Advances from FHLB

$

1,799,595

$

1,872,322

$

419,040

Other borrowings

955

-

2,648

Total

$

1,800,550

$

1,872,322

$

421,688



(10)

BORROWINGS



Borrowings consist of the following:



2002

2001



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, 2003

$

250,000

$                 -



Other

2,648

12,962

Total

$

252,648

$

12,962



At June 30, 2002, the Savings Bank had an irrevocable letter of credit issued on its behalf from the Federal Home Loan Bank of Des Moines in the amount of $7,000,000.  The letter of credit expires in August 2002.





32





FIRST BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- - - - - - - - - - - - - - - - - - - - - -

Years Ended June 30, 2002, 2001 and 2000



(11)

INCOME TAXES



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



2002

2001

2000



Current

$

1,000,343

$

1,103,231

$

1,097,993

Deferred

(20,622)

(131,411)

23,067

Total

$

979,721

$

971,820

$

1,121,060



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



2002

2001

2000



Tax at statutory rate

$

897,114

$

946,450

$

1,067,807

Increase in taxes resulting from:

State taxes, net of federal benefit

81,722

83,660

81,593

Tax-exempt income

(24,098)

(27,298)

(25,714)

Employee benefit plans

2,296

32,068

21,958

Net effect of other book/tax differences

22,687

(63,060)

(24,584)

Provision for income taxes

$

979,721

$

971,820

$

1,121,060



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:



2002

2001

2000



Difference in depreciation methods used

for tax purposes and financial statements

$

53,431

$

22,675

$

28,426

Effect of health insurance plan reserves

not currently deductible

(28,498)

(5,053)

7,136

Use of different methods for computing

loan loss reserves for tax purposes and

financial statements

(85,076)

(63,349)

(59,498)

Effect of accrued employee absences not

currently deductible

(18,500)

(25,900)

-



Use of different methods for computing net

deferred loan costs/fees for tax purposes

and financial statements

(14,203)

7,214

14,970

Other book/tax differences

72,224

(66,998)

32,033

Increase (decrease) in deferred income taxes

$

(20,622)

$

(131,411)

$

23,067





33







FIRST BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- - - - - - - - - - - - - - - - - - - - - -

Years Ended June 30, 2002, 2001 and 2000



(11)

INCOME TAXES (CONTINUED)



The components of deferred tax assets and liabilities as of June 30, 2002 and 2001 consisted of:



2002

2001





Deferred tax assets:



Reserve for loan losses

$

325,846

$

262,495

Valuation reserve on investment real estate

92,190

92,190

Unrealized losses on securities available-for-sale

8,149

-



Health insurance plan reserves not currently deductible

33,207

4,709

Book amortization in excess of tax amortization

41,952

54,168

Compensated employee absences

44,400

25,900

Other

-

34,405

Total gross deferred tax benefits

545,744

473,867



Deferred tax liabilities:

Tax depreciation in excess of book depreciation

369,516

316,085

FHLB stock dividends

60,936

60,936

Bad debt reserves for tax purposes in excess of base

year bad debt reserve

32,587

54,312

Unrealized gains on securities available-for-sale

83,138

26,898

Unamortized deferred loan costs, net of fees

117,127

131,330

Other

26,255

652

Total gross deferred tax liabilities

689,559

590,213

Net deferred tax liabilities

$

(143,815)

$

(116,346)



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, 2002 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.  In August 1996, new legislation was enacted which provided for the recapture into taxable income of certain amounts previously deducted as additions to the bad debt reserves for income tax purposes.  The Savings Bank began changing its method of determining bad debt reserves for tax purposes during 1996.  The amounts to be recaptured for income tax reporting purposes are considered by the Savings Bank in the determination of the net deferred tax liability.







34





FIRST BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- - - - - - - - - - - - - - - - - - - - - -

Years Ended June 30, 2002, 2001 and 2000



(12)

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.  Pension expense for the years ended June 30, 2002, 2001 and 2000 was approximately $4,300, $4,985, and $4,742, respectively.  Plan assets exceeded the present value of accumulated plan benefits at June 30, 2002, the latest actuarial valuation date.



The Company established an internally-leveraged Employee Stock Ownership Plan (ESOP) in December 1993 that covers all employees that are age 21 or older and have completed one year of service with the Savings Bank.  The Savings Bank made annual contributions to the ESOP equal to the ESOPs debt service in addition to dividends received by the ESOP.  All dividends received by the ESOP were used to pay debt service.  The ESOP shares initially were pledged as collateral for its debt to the Company.  As the debt was repaid, shares were released from collateral and allocated to active participants, in proportion to their compensation relative to total compensation of active participants.  The loan was repaid principally from the Savings Banks discretionary contributions to the ESOP over a period of approximately nine years.  As of June 30, 2002 the loan had been paid in full.



The Company accounts for its ESOP in accordance with Statement of Position 93-6, Employers Accounting for Employee Stock Ownership Plans.Accordingly, the debt of the ESOP was eliminated in consolidation and the shares pledged as collateral were reported as unearned ESOP shares as a reduction of stockholders equity in the consolidated statements of financial condition.  As shares were committed to be released from collateral, the Company reported compensation expense equal to the current market price of the shares, and the shares became outstanding for earnings per share computations.  Dividends on allocated ESOP shares were recorded as a reduction of retained earnings; dividends on unallocated ESOP shares were recorded as a reduction of debt and accrued interest.  Benefits generally become 20% vested after each year of credited service beyond two years.  Vesting is accelerated upon retirement, death, or disability of the participant.  Forfeitures are returned to the Savings Bank or reallocated to other participants to reduce future funding costs.  Benefits may be payable upon retirement, death, disability or separation from service.  Since the Savings Banks annual contributions are discretionary, benefits payable under the ESOP cannot be estimated.  The Savings Bank recorded $243,583 of ESOP compensation expense in 2002, $330,171in 2001 and $358,159 in 2000.



A summary of ESOP shares at June 30, 2002 is as follows:



Allocated shares

206,320

Shares committed for release

21,676

Unreleased shares

-



Total

227,996



Fair value of unreleased shares

$              -







35





FIRST BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- - - - - - - - - - - - - - - - - - - - - - -

Years Ended June 30, 2002, 2001 and 2000



(12)

EMPLOYEE BENEFIT PLANS (CONTINUED)



The Company has elected to follow Accounting Principles Board 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.



The Companys 1993 Stock Option and Incentive Plan has 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 have 10 year terms and vest and become exercisable ratably over 5 years following date of grant.



Pro forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the company had accounted for its employee stock options under the fair value method of that Statement.  For options granted during the year June 30, 2001, the estimated fair value of options granted using the Black-Scholes pricing model was based on a weighted average risk-free interest rate of 6.00%, expected option life of 10 years, expected volatility of zero and an expected dividend yield of 1.33%.  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.



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.





36



FIRST BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- - - - - - - - - - - - - - - - - - - - - -

Years Ended June 30, 2002, 2001 and 2000



(12)

EMPLOYEE BENEFIT PLANS (CONTINUED)



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



2002

2001

2000



Weighted

Weighted

Weighted



Average

Average

Average

Exercise

Exercise

Exercise

Options

Price

Options

Price

Options

Price



Outstanding 

beginning of year

131,830

$

5.45

130,320

$

5.08

168,432

$

5.06

Granted

-

-

10,000

9.88

-

-

Exercised

(42,070)

5.24

(8,490)

5.00

(37,920)

5.00

Forfeited

-

-

-

-

(192)

5.00

Outstanding 

end of year

89,760

5.55

131,830

5.45

130,320

5.08



Exercisable at end

of year

81,760

5.13

121,830

5.09

130,320

5.08



Exercise prices for options outstanding as of June 30, 2002 ranged from $5.00 to $9.88.  The weighted-average remaining contractual life of those options is 2.3 years.  The weighted average grant date fair value of options granted during the year ended June 30, 2001 was $9.88.



(13)

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,



2002

2001

2000



Per

Per

Per



Share

Share

Share



Income

Shares

Amt

Income

Shares

Amt

Income

Shares

Amt



Basic EPS:

Income available

to Common

Stockholders

$

1,658,849

1,722,558

$

.96

$

1,811,855

1,806,146

$

1.00

$

2,019,548

1,911,324

$

1.06

Effect of dilutive

securities

-

50,182

-

60,574

-

66,876



Diluted EPS:

Income available

to stockholders

plus stock options

$

1,658,849

1,772,740

$

.94

$

1,811,855

1,866,720

$

.97

$

2,019,548

1,978,200

$

1.02



37



FIRST BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- - - - - - - - - - - - - - - - - - - - - - -

Years Ended June 30, 2002, 2001 and 2000



(14)

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:



2002

2001



Beginning balances

$

1,929,149

$

1,416,042

Originations and advances

1,527,060

1,201,361

Principal repayments

(1,595,864)

(688,254)

Ending balances

$

1,860,345

$

1,929,149



(15)

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 standby letters of credit were approximately $1,170,343 at June 30, 2002.



Loan Commitments  The Savings Bank had outstanding firm commitments to originate real estate loans in the amount of $914,300 at June 30, 2002.



Lines of Credit  The unused portion of lines of credit was approximately $2,927,316 at June 30, 2002.



Loans in Process  The Savings Bank has recorded loans in process representing the undisbursed portion of loans in the amount of $3,357,851 at June 30, 2002.  These amounts were recorded as loans receivable, with a corresponding reduction for such loans in process as reflected in Note (5).



38







FIRST BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- - - - - - - - - - - - - - - - - - - - - - -

Years Ended June 30, 2002, 2001 and 2000



(16)

REGULATORY CAPITAL REQUIREMENTS



The Savings Bank is subject to various regulatory capital requirements administered by its primary federal regulator, the Office of Thrift Supervision (OTS).  Failure to meet the minimum regulatory capital requirements can initiate certain mandatory, and possible additional discretionary actions by regulators, that if undertaken, could have a direct material affect on the Savings Bank and the consolidated financial statements.  Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Savings Bank must meet specific capital guidelines involving quantitative measures of the Savings Banks assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.  The Savings Banks capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.



Quantitative measures established by regulation to ensure capital adequacy require the Savings Bank to maintain minimum amounts and ratios (set forth in the table below) of total risk-based capital and Tier 1 capital to risk-weighted assets (as defined in the regulations), Tier 1 capital to adjusted total assets (as defined), and tangible capital to adjusted total assets (as defined).  Management believes, as of June 30, 2002, that the Savings Bank meets all capital adequacy requirements to which it is subject.



As of June 30, 2002, 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.





39





FIRST BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- - - - - - - - - - - - - - - - - - - - - -

Years Ended June 30, 2002, 2001 and 2000



(16)

REGULATORY CAPITAL REQUIREMENTS (CONTINUED)



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, 2002:





Total Risk-Based Capital



(to Risk-Weighted Assets)

$ 21,945

11.2%

> $15,738

> 8.0%

>  $19,673

> 10.0%



Core Capital





(to Adjusted Tangible Assets)

21,630

8.5%

>   10,200

> 4.0%

>     12,750

>  5.0%



Tangible Capital



(to Tangible Assets)

21,630

8.5%

>     3,825

> 1.5%

N/A



Tier 1 Capital



(to Risk-Weighted Assets)

21,630

11.0%

N/A



>     11,804

>  6.0%



As of June 30, 2001:





Total Risk-Based Capital



(to Risk-Weighted Assets)

$ 20,811

12.4%

> $13,384

> 8.0%

>  $ 16,730

> 10.0%



Core Capital





(to Adjusted Tangible Assets)

20,506

9.5%

>     8,673

> 4.0%



>     10,842     >  5.0%



Tangible Capital



(to Tangible Assets)

20,506

9.5%

>     3,253

> 1.5%

N/A



Tier 1 Capital



(to Risk-Weighted Assets)

20,506

12.3%

N/A

>     10,038

>  6.0%



(17)

ADVERTISING COSTS



The Company incurred $128,742, $147,154, and $87,058 in non-direct response advertising costs during the years ended June 30, 2002, 2001 and 2000, respectively.  The Company incurred no direct response advertising costs during these years.





40







FIRST BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- - - - - - - - - - - - - - - - - - - - - -

Years Ended June 30, 2002, 2001 and 2000



(18)

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.



41





FIRST BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- - - - - - - - - - - - - - - - - - - - - -

Years Ended June 30, 2002, 2001 and 2000



(18)

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, 2002
|----------------------------------------------------------- | - | -------------
|                                                            |   | Carrying     
|                                                            |   | Amount       
|Financial assets:                                           |   |              
|Cash and cash equivalents                                   | $ | 20,461,231   
|Certificates of deposit                                     |   | 1,010,000    
|Available-for-sale securities                               |   | 30,592,468   
|Held-to-maturity securities                                 |   | 1,569,603    
|Investment in Federal Home Loan Bank stock                  |   | 1,901,200    
|Available-for-sale mortgage-backed securities               |   | 2,759,440    
|Loans, net of allowance for loan losses                     |   | 188,950,956  
|Accrued interest receivable                                 |   | 1,750,266    
|                                                            |   |              
|Financial liabilities:                                      |   |              
|Deposits                                                    |   | 202,450,439  
|Federal Home Loan Bank advances                             |   | 29,778,640   
|Borrowings                                                  |   | 252,648      
|Accrued interest payable                                    |   | 463,000      
|Unrecognized financial instruments (net of contract amount) |   |              
|Commitments to extend credit                                |   | -            
|Letters of credit                                           |   | -            
|Unused lines of credit                                      |   | -            





42







FIRST BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- - - - - - - - - - - - - - - - - - - - - - -

Years Ended June 30, 2002, 2001 and 2000



(18)

DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)



|                                                             |   | June 30, 2001
|------------------------------------------------------------ | - | -------------
|                                                             |   | Carrying     
|                                                             |   | Amount       
|Financial assets:                                            |   |              
|Cash and cash equivalents                                    | $ | 14,349,988   
|Certificates of deposit                                      |   | 1,409,000    
|Available-for-sale securities                                |   | 1,586,920    
|Held-to-maturity securities                                  |   | 1,333,083    
|Investment in Federal Home Loan Bank stock                   |   | 1,901,200    
|Available-for-sale mortgage-backed securities                |   | 376,336      
|Loans, net of allowance for loan losses                      |   | 190,351,556  
|Accrued interest receivable                                  |   | 1,389,397    
|                                                             |   |              
|Financial liabilities:                                       |   |              
|Deposits                                                     |   | 162,438,398  
|Federal Home Loan Bank advances                              |   | 32,313,928   
|Accrued interest payable                                     |   | 573,588      
|Unrecognized financial instruments (net of contract amount): |   |              
|Commitments to extend credit                                 |   | -            
|Letters of credit                                            |   | -            
|Unused lines of credit                                       |   | -            



(19)

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.





43







FIRST BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- - - - - - - - - - - - - - - - - - - - - -

Years Ended June 30, 2002, 2001 and 2000



(19)

PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)



|                                                        | Condensed Statements of Financial Condition
|------------------------------------------------------- | -------------------------------------------
|                                                        |                                            
|ASSETS                                                  |                                            
|Cash                                                    | $                                          
|Certificates of deposit                                 |                                            
|Investment securities available-for-sale, at fair value | 736,048                                    
|Investment in subsidiaries                              |                                            
|Loan to ESOP                                            |                                            
|Property and equipment, less accumulated                |                                            
|depreciation                                            |                                            
|Due from subsidiary                                     |                                            
|Other assets                                            |                                            
|Total assets                                            | $                                          



|LIABILITIES AND STOCKHOLDERS' EQUITY       |   |            |  
|------------------------------------------ | - | ---------- | -
|Due to subsidiary                          | $ | 699,946    | $
|Note payable                               |   | 250,000    |  
|Accrued expenses                           |   | 27,585     |  
|Deferred income taxes, net                 |   | 12,663     |  
|Stockholders' equity                       |   | 24,762,672 |  
|Total liabilities and stockholders' equity | $ | 25,752,866 | $



|Condensed Statements of Income        
|--------------------------------------
|                                      
|                                      
|Income:                               
|Equity in earnings of subsidiaries    
|Interest income                       
|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                            



44







FIRST BANCSHARES, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- - - - - - - - - - - - - - - - - - - - -

Years Ended June 30, 2002, 2001 and 2000



(19)

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 property and equipment    
|Net change in operating accounts:         
|Deferred income taxes, net                
|Other assets and liabilities              
|Net cash from operating activities        



|Cash flows from investing activities:            |         |             |         |             |           |            
|------------------------------------------------ | ------- | ----------- | ------- | ----------- | --------- | -----------
|Dividends from subsidiary                        |         | 1,000,000   |         | 1,500,000   |           | 1,500,000  
|Principal payments on ESOP loan                  |         | 171,640     |         | 146,681     |           | 181,895    
|Purchase of investment securities                |         | -           |         | (200,000)   |           | (53,537)   
|Purchase of property and equipment               |         | -           |         | -           |           | (534,709)  
|Proceeds from sales of property and              |         |             |         |             |           |            
|equipment                                        |         | 25,000      |         | 20,296      |           | 78,150     
|Net change in certificates of deposit            |         | -           |         | -           |           | 75,839     
|Net cash from investing activities               |         | 1,196,640   |         | 1,466,977   |           | 1,247,638  
|                                                 |         |             |         |             |           |            
|Cash flows from financing activities:            |         |             |         |             |           |            
|Proceeds from borrowed funds                     | 949,946 |             | -       |             | -        
|Proceeds from issuance of common stock           | 220,288 |             | 42,450  |             | 189,600  
|Cash dividends paid                              |         | (274,508)   |         | (285,507)   |           | (300,818)  
|Purchase of treasury stock                       |         | (2,386,846) |         | (1,335,614) |           | (2,018,480)
|Net cash used in financing activities            |         | (1,491,120) |         | (1,578,671) |           | (2,129,698)
|Net decrease in cash and cash
equivalents        |         | (288,700)   |         | (103,076)   |           | (728,275)  
|Cash and cash equivalents -  beginning of period | 375,233 |             | 478,309 |             | 1,206,584
|                                                 |         |             |         |             |           |            
|Cash and cash equivalents -  end of period       | $       | 86,533      | $       | 375,233     | $         | 478,309    



45

COMMON STOCK INFORMATION



The common stock of First Bancshares, Inc. is traded on The Nasdaq Stock Market under the symbol FBSI.  As of August 30, 2002, there were 657 stockholders and 1,640,069 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 30, and November 27, 2001 and February 28, May 29, and August 29, 2002, the Company declared a $.04 common stock dividend payable September 29, and December 31, 2001 and March 30, June 28, and September 30, 2002 to stockholders of record on September 14 and December 14, 2001 and March 15, June 14, and September 13, 2001, 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 2002

High

Low

Dividend



First Quarter

$12.50

$10.10

$.04



Second Quarter

$14.00

$10.79

$.04



Third Quarter

$14.45

$12.00

$.04





Fourth Quarter

$13.65

$10.61

$.04



Fiscal 2001





First Quarter

$11.00

$9.00

$.04



Second Quarter

$10.25

$9.00

$.04



Third Quarter

$10.50

$9.875

$.04





Fourth Quarter

$11.00

$9.65

$.04



46



DIRECTORS AND OFFICERS





FIRST BANCSHARES, INC.

FIRST HOME SAVINGS BANK



DIRECTORS:

DIRECTORS:





Stephen H. Romines

Stephen H. Romines

Chairman of the Board

Chairman of the Board



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

Director of State Fruit Experiment Station of

Director of State Fruit Experiment Station of

Southwest Missouri State University

Southwest Missouri State University





Charles W. Schumacher

Charles W. Schumacher

President/CEO

President/CEO

First Home Savings Bank

First Home Savings Bank





OFFICERS:

OFFICERS:



Stephen H. Romines

Charles W. Schumacher

President and Chief Executive Officer

President/CEO



Charles W. Schumacher

Stephen H. Romines



Vice-President

Vice-President



Susan J. Uchtman,  CPA

Susan J. Uchtman, CPA

Chief Financial Officer

Chief Financial Officer



Gina Gunnels

Colleen B. Stofer

Secretary and Treasurer

Secretary



Diana Blanton



Treasurer

47



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 Wednesday, October 16, 2002, at 2:00 p.m., Central Time, at the Days Inn Conference Room, 300 East 19th Street, Mountain Grove, Missouri.





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 AThttp://www.sec.gov.



48

















Exhibit 21



Subsidiaries of the Registrant

















Exhibit 21



Subsidiaries of the Registrant







Parent



First Bancshares, Inc.



Percentage

Jurisdiction or

Subsidiaries (a)

of Ownership

State of Incorporation



First Home Savings Bank

100%

Missouri



South Central Missouri Title, Inc.

100%

Missouri



Fybar Service Corporation (b)

100%

Missouri





(a)     The operation of the Company's wholly owned subsidiaries are included in the Company's Consolidated Financial Statements contained in the Annual Report attached hereto as Exhibit 13.

(b)     Wholly owned subsidiary of First Home Savings Bank.











































Exhibit 23



Consent of Auditors



(On CPA firm letterhead)



CONSENT OF INDEPENDENT AUDITORS



We have issued our report dated August 6, 2002, accompanying the Consolidated Financial Statement incorporated by reference in the Annual Report of First Bancshares, Inc. on Form 10-KSB for the year ending June 30, 2002.  We hereby consent to the incorporation by reference of said reports in the Registration Statement of First Bancshares, Inc. on Form S-8 (File No. 33-87234, effective December 9, 1994).





/s/Kirkpatrick, Phillips & Miller

KIRKPATRICK, PHILLIPS & MILLER, CPAs , P.C.



Springfield, Missouri

September 27, 2002















Exhibit 99.1



Certification Letters Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002















CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

OF FIRST BANCSHARES, INC.

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002



The undersigned hereby certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this Annual Report on Form 10-KSB, that:



1.

the report fully complies with the requirements of Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, and



2.

the information contained in the report fairly presents, in all material respects, the company's financial condition and results of operations.







Date: September 30, 2002

/s/ Stephen H. Romines



Stephen H. Romines

Chairman, President and Chief Executive Officer













CERTIFICATION OF CHIEF FINANCIAL OFFICER

OF FIRST BANCSHARES, INC.

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002



The undersigned hereby certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this Annual Report on Form 10-KSB, that:



1.

the report fully complies with the requirements of Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, and



2.

the information contained in the report fairly presents, in all material respects, the company's financial condition and results of operations.





Date: September 30, 2002

/s/ Susan J. Uchtman



Susan J. Uchtman

Chief Financial Officer













# Table of Contents

SECURITIES AND EXCHANGE COMMISSION General Market Area Yields Earned and Rates Paid Rate/Volume Analysis Interest Rate Sensitivity of Net Portfolio Value Lending Activities Reserve for Loan Losses Investment Activities Deposit Activities and Other Sources of FundsTime Deposits by Rates Subsidiary Activities REGULATION OF FIRST HOME REGULATION OF FIRST BANCSHARES TAXATION Competition. Item 2.  Properties PART II PART III SIGNATURESAS ADOPTED PURSUANT TO Exhibit 13 Dear Stockholder Business of the Corporation SELECTED CONSOLIDATED FINANCIAL INFORMATION MANAGEMENTS DISCUSSION AND ANALYSIS INDEPENDENT AUDITORS REPORT CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION CONSOLIDATED STATEMENTS OF INCOME CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY CONSOLIDATED STATEMENTS OF CASH FLOWS NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCondensed Statements of Financial Condition COMMON STOCK INFORMATION DIRECTORS AND OFFICERS CORPORATE INFORMATION Subsidiaries of the Registrant Consent of Auditors Exhibit 99.1