10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2011 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  incorporation or organization)	(I.R.S. Employer   Identification No.)

142 E. First Street Mountain Grove, Missouri	65711
(Address of principal executive offices)	(Zip Code)

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

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

Common Stock, par value $0.01 per share	The Nasdaq Stock Market LLC
(Title of each class)	(Name of each exchange on which     registered)

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes   No   x  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes   No   x  

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No  __

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer [ ]                                                                                Accelerated filer [ ]

Non-accelerated filer [ ]                                                                                Smaller reporting company [x]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes   No x

As of September 27, 2011, the registrant had outstanding 1,550,815 shares of common stock.  The registrant's common stock is listed on the Nasdaq Global Market of The Nasdaq Stock Market LLC under the symbol "FBSI."  The aggregate market value of the common stock held by non-affiliates of the registrant, based on the closing sales price of the registrant's common stock as quoted on The Nasdaq Stock Market LLC on December 31, 2010, was $9.6 million. For purposes of this calculation, officers and directors of the registrant and the Employee Stock Ownership Plan are considered affiliates of the registrant.  The exclusion of the value of the shares owned by these individuals shall not be deemed an admission by the issuer that such person is an affiliate of the issuer.

DOCUMENTS INCORPORATED BY REFERENCE

1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended June 30, 2011. (Parts I and II)

2. Portions of the Proxy Statement for the 2011 Annual Meeting of Stockholders. (Part III)

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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains certain "forward-looking statements" that relate to First Bancshares, Inc. (“Company” or “First Bancshares”) within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by the use of words such as "believe," "expect," "anticipate," "intend," "should," "plan," "project," "estimate," "potential," "seek," "strive," or "try" or other conditional verbs such as "will," "would," "should," "could," or "may" or similar expressions. These forward-looking statements relate to, among other things, expectations of the business environment in which we operate and about the Company and First Home Savings Bank (“Savings Bank” or “First Home”), projections of future performance, perceived opportunities in the market, potential future credit experience, and statements regarding our strategies. Our ability to predict results or the actual effects of our plans or strategies is inherently uncertain. Although we believe that our plans, intentions and expectations, as reflected in these forward-looking statements are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved or realized. Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors including, but not limited to: the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs that may be impacted by deterioration in the housing and commercial real estate markets and may lead to increased losses and non-performing assets in our loan portfolio, result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our reserves; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; deposit flows; fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas; secondary market conditions for loans and our  ability to sell loans in the secondary market; adverse changes in the securities markets; results of examinations of First Bancshares by the Federal Reserve Bank of St. Louis  (the “Federal Reserve”) and of the Savings Bank by the Federal Deposit Insurance Corporation (“FDIC”), the Missouri Division of Finance (“Division”) or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; the possibility that we will be unable to comply with the conditions imposed upon each of the Company and the Savings Bank by the Orders to Cease and Desist entered into with their prior primary banking regulator, the Office of Thrift Supervision (“OTS”), including but not limited to our ability to reduce our non-performing assets, which could result in the imposition of additional restrictions on our operations; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risk associated with the loans on our balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; computer systems on which we depend could fail or experience a security breach, or the implementation of new technologies may not be successful; our ability to manage loan delinquency rates; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; increased competitive pressures among financial services companies; changes in consumer

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spending, borrowing and savings habits; legislative or regulatory changes such as the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”)and its implementing regulations that adversely affect our business including changes in regulatory policies and principles, including the interpretation of regulatory capital or other rules; our ability to attract and retain deposits; further increases in premiums for deposit insurance; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; adverse changes in the securities markets; the Company’s and Savings Bank’s ability to pay dividends on its common stock; the inability of key third-party providers to perform their obligations to us; changes in accounting policies, principles and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the economic impact of war or any terrorist activities; other economic, competitive, governmental, regulatory, and technological factors affecting our operations; pricing, products and services; our ability to lease excess space in Company-owned buildings; and other risks detailed in this Annual Report. Any of the forward-looking statements that we make in this Form 10-K and in the other public statements we make may turn out to be wrong because of the inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Additionally, the timing and occurrence or non-occurrence of events may be subject to circumstances beyond our control. We caution readers not to place undue reliance on any forward-looking statements. We do not undertake and specifically disclaim any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for future periods to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect the Company's operating and stock performance.

As used in this report, the terms “we,” “our,” “us” refer to First Bancshares, Inc. and its consolidated subsidiary, First Home Savings Bank, unless the context indicates otherwise.

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PART I

Item 1.  Description of Business

General

First Bancshares (the “Company”), a Missouri corporation, was incorporated on September 30, 1993 for the purpose of becoming the holding company for First Home Savings Bank (“Savings Bank” or “First Home”) upon its conversion from a state-chartered mutual to a state-chartered stock savings and loan association ("Conversion"). The Conversion was completed on December 22, 1993.  At June 30, 2011, the Company had consolidated total assets of $210.3 million, total deposits of $180.7 million and stockholders' equity of $19.1 million.  The Company is not engaged in any significant activity other than holding the stock of First Home. Accordingly, the information set forth in this report, including consolidated financial statements and related data, relates primarily to operations of the Savings Bank. The Company's common shares trade on The Nasdaq Stock Market LLC under the symbol "FBSI."

The Savings Bank is a Missouri-chartered, federally insured stock savings and loan association organized in 1911.  The Savings Bank conducts its business from its home office in Mountain Grove and ten full service branch facilities in Marshfield, Ava, Gainesville, Sparta, Theodosia, Crane, Galena, Kissee Mills, Rockaway Beach and Springfield, Missouri.  The deposits of the Savings Bank are insured up to applicable limits by the Federal Deposit Insurance Corporation ("FDIC").  As a Missouri-chartered savings and loan association, First Home currently derives its authority from, and is governed by, the provisions of the Missouri Savings and Loan Law ("Missouri Law") and regulations of the Missouri Division of Finance ("Division"). As a result of the enactment of the Dodd-Frank Act, effective July 21, 2011, the FDIC became the Savings Bank’s primary federal banking regulator and the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) became the Company’s primary federal regulator, each assuming the powers and responsibilities of our former primary banking regulator, the Office of Thrift Supervision (“OTS”).  For additional information regarding the Dodd-Frank Act, see " – Regulation of First Home" below.

The Savings Bank provides its customers with a full array of community banking services.  The Savings Bank is primarily engaged in the business of attracting deposits from the general public and using such deposits, together with other funding sources, to invest in residential mortgage loans, commercial real estate loans, land loans, second mortgage loans, consumer loans and commercial business loans, for its loan portfolio.  Excess funds are typically invested in securities and other assets.  At June 30, 2011, the Savings Bank's net loans were $95.8 million, or 45.6% of consolidated total assets. Gross loans of $97.6 million consisted of $54.9 million, or 56.2% of total loans, in residential mortgages, $29.9 million, or 30.6% of total loans, in commercial real estate loans, $3.3 million, or 3.4% of total loans, in land loans, $3.9 million, or 4.0% of total loans, in second mortgage loans, $2.3 million, or 2.4% of total loans, in consumer loans, and $3.3 million, or 3.4% of total loans, in commercial business loans.  Of loans maturing after June 30, 2012, at June 30, 2011, adjustable rate mortgage ("ARM") loans accounted for 68.2% of loans secured by real estate and 64.3% of the gross loan portfolio.  See "-- Lending Activities" below.

Recent Developments and Corporate Overview

Economic Conditions

The economic decline that began in calendar 2008 and that has continued to varying degrees into calendar 2011 has created significant challenges for financial institutions such as First Home Savings Bank.  Dramatic declines in the housing market, marked by falling home prices and increasing levels of mortgage foreclosures, have resulted in significant write-downs of asset values by many financial institutions, including government-sponsored entities and major commercial and investment banks.  In addition, many lenders and institutional investors have reduced, and in some cases ceased to provide, funding to borrowers, including other financial institutions, as a result of concern about the stability of the financial markets and the strength of counterparties. While the economy has recently shown some small signs of improvement, no upward trend seems to have been established.

New Federal Legislation

Last year Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act which is significantly changing the current bank regulatory structure and affect the lending, investment, trading and operating activities of financial institutions and their holding companies.  The Dodd-Frank Act has eliminated, as of July 21, 2011, the Office of Thrift Supervision, which had been the primary federal regulator for both the Savings Bank and the Company. First Home Savings Bank is, as of that date, regulated by the FDIC (the primary federal regulator for state chartered banks) and the Division.  The Dodd-Frank Act also authorizes the Federal Reserve Board to supervise and regulate all savings and loan holding companies like First Bancshares, Inc., in addition to bank holding companies which it currently regulates.  As a result, the Federal Reserve Board’s current regulations applicable to bank holding companies, including holding company capital requirements, will eventually apply to savings and loan holding companies like First Bancshares, Inc.  These capital requirements are substantially similar to the capital requirements currently applicable to the Savings Bank.  The Dodd-Frank Act also requires the Federal Reserve Board to set minimum capital levels for bank holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions.  Bank holding companies with assets of less than $500 million are exempt from these capital requirements.  The legislation also establishes a floor for capital of insured depository institutions that cannot be lower than the standards in effect today, and directs the federal banking regulators to implement new leverage and capital requirements within 18 months that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.

The Dodd-Frank Act also created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws.  The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as the Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices.  The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets.  Banks and savings institutions with $10 billion or less in assets will be examined by their applicable bank regulators, in the Savings Bank’s case, the FDIC.

The legislation also broadens the base for FDIC insurance assessments.  Assessments are now based on the average consolidated total assets less

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tangible equity capital of a financial institution.  The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2013.  Additionally, regulatory changes in overdraft and interchange fee restrictions may reduce our noninterest income.  Lastly, the Dodd-Frank Act will increase stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and authorizing the Securities and Exchange Commission (“SEC”) to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials.  The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.

Federal Deposit Insurance

The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009.  Non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2013.

Pursuant to the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”), the FDIC is authorized to set the reserve ratio for the Deposit Insurance Fund (“DIF”) annually at between 1.15% and 1.5% of estimated insured deposits. The Dodd-Frank Act mandates that the statutory minimum reserve ratio of the DIF increase from 1.15% to 1.35% of insured deposits by September 30, 2020.  Banks with assets of less than $10 billion, such as First Home Savings Bank, are exempt from any additional assessments necessary to increase the reserve fund above 1.15%.

As part of a plan to restore the reserve ratio to 1.15%, the FDIC imposed a special assessment equal to five basis points of assets less Tier 1 capital as of June 30, 2009, which was payable on September 30, 2009.  In addition, the FDIC has increased its quarterly deposit insurance assessment rates and amended the method by which rates are calculated.  Beginning in the second quarter of 2009, institutions are assigned an initial base assessment rate ranging from 12 to 45 basis points of deposits depending on risk category. The initial base assessment is then adjusted based upon the level of unsecured debt, secured liabilities, and brokered deposits to establish a total base assessment rate ranging from seven to 77.5 basis points.

On November 12, 2009, the FDIC approved a final rule requiring insured depository institutions to prepay on December 30, 2009, their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012.  Estimated assessments for the fourth quarter of 2009 and for all of 2010 are based upon the assessment rate in effect on September 30, 2009, with three basis points added for the 2011 and 2012 assessment rates.  In addition, a 5% annual growth in the assessment base is assumed.  Prepaid assessments are to be applied against the actual quarterly assessments until exhausted, and may not be applied to any special assessments that may occur in the future.  Any unused prepayments will be returned to the institution on June 30, 2013.  On December 30, 2009, we prepaid $1.6 million in estimated assessment fees for the fourth quarter of 2009 through 2012.  Because the prepaid assessments represent the prepayment of future expense, they do not affect our tax obligations or regulatory capital (the prepaid asset will have a risk-weighting of 0%).

The preceding is a summary of recently enacted laws and regulations that could materially impact our results of operations or financial condition.  For

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further information, see “Item 1, Business -- Regulation of First Home” and “-- Regulation of First Bancshares” included in our Annual Report on Form 10-K for the year ended June 30, 2011.

On August 17, 2009, the Company and the Savings Bank each entered into a Stipulation and Consent to the Issuance of Order to Cease and Desist from the OTS.  The Orders are now enforced by the Federal Reserve and the FDIC as the successors to the OTS.

Under the terms of the orders, the Bank and the Company, without the prior written approval of their respective banking regulators, may not:

·   Increase assets during any quarter;

·   Pay dividends;

·   Increase brokered deposits;

·   Repurchase shares of the Company’s outstanding common stock; and

·   Issue any debt securities or incur any debt (other than that incurred in the normal course of business).

Other material provisions of the order require the Savings Bank and the Company to:

·   develop an acceptable business plan for enhancing, measuring and maintaining profitability, increasing earnings, improving liquidity, maintaining capital levels;

·   ensure the Savings Bank’s compliance with applicable laws, rules, regulations and agency guidelines, including the terms of the order;

·   not appoint any new director or senior executive officer or change the responsibilities of any current senior executive officers without notifying the applicable banking regulators;

·   not enter into, renew, extend or revise any compensation or benefit agreements for directors or senior executive officers;

·   not make any indemnification, severance or golden parachute payments;

·   enhance its asset classification policy;

·   provide progress reports to the FDIC regarding certain classified assets;

·   submit a comprehensive plan for reducing classified assets;

·   develop a plan to reduce the concentration of certain loans contained in the loan portfolio and that addresses the assessment, monitoring and control of the risks associated with the commercial real estate portfolio;

·   not enter into any arrangement or contract with a third party service provider that is significant to the overall operation or financial condition of the Savings Bank, or that is outside the normal course of business; and prepare and submit progress reports to the FDIC and the Federal Reserve.

All customer deposits remain insured to the fullest extent permitted by the FDIC since entering into the order. The Savings Bank has continued to serve its customers in all areas including making loans, establishing lines of credit, accepting deposits and processing banking transactions. Neither the Company nor the Savings Bank admitted any wrongdoing in entering into the respective Stipulation and Consent to the Issuance of a Cease and Desist Order. No monetary penalties were imposed or recommended in connection with the orders.

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We believe that the Company and the Savings Bank are currently in substantial compliance with all of the requirements of the orders through their normal business operations.  The orders will remain in effect until modified or terminated by the FDIC or Federal. Reserve, as the case may be.

For additional information regarding the terms of the orders, please see our Form 8-K that we filed with the SEC on August 18, 2009. Further, we may be subject to more severe future regulatory enforcement actions, including but not limited to civil money penalties, if we do not comply with the terms of the order.

Review of Loan Portfolio

Since November 2008, in light of a continually worsening economy, the Savings Bank has conducted ongoing, in depth reviews and analyses of the loans in its portfolio, primarily focusing on its commercial real estate, multi-family, development and commercial business loans. During the fiscal years ended June 30, 2009 and June 30, 2010, based primarily on this ongoing loan review, and in light of the economic conditions, the Company recorded provisions for loan losses of $5.3 million and $852,000, respectively. During the year ended June 30, 2011, an additional provision for loan losses totaling $1.2 million was recorded by the Company.

Beginning with the quarter ended September 30, 2009, the Company has engaged the services of a consultant with an extensive background in commercial real estate, multi-family, development and commercial business lending. The purpose of hiring the consultant was to assist the Company and the Savings Bank in meeting reporting deadlines established in the Orders and, to validate the methodology used internally to review, evaluate and analyze loans. This consultant performed an extensive review of the Company’s credits of $250,000 or larger during the quarter ended September 30, 2009 and performed follow up reviews each quarter through the quarter ended June 30, 2011 in order to assist management’s resolution of problem loans.

Litigation

On January 21, 2011 a jury verdict was entered against the Company and the Bank in the Circuit Court of Ozark County, Missouri, following a jury trial in a claim made by a former employee of the Bank relating to her termination from the Bank in 2007. The former employee claimed that the Bank wrongfully terminated her as a result of her reporting to superiors and Board members what she believed to be illegal activities of two former presidents of the Bank. This alleged cause of action in Missouri is commonly known as a whistleblower lawsuit. Protection for whistleblowers has been carved out as a protected class of employees who, as with certain other classes, such as gender, age, and race for example, cannot be terminated as a result of reporting alleged illegal activities. The jury verdict was against the Bank for $182,000 in compensatory damages (lost wages) and for punitive damages in the amount of $235,000, or a total of $417,000. The Bank believes that the verdict relating to the alleged reporting by the former employee of illegal activities is contrary to the facts and the law, and the Bank filed post-trial motions including a motion for a new trial and other relief. The post-trial motions were denied by the court, and the Bank has filed a notice of appeal. The Bank anticipates its appeal will be filed in September 2011. During the quarter ended December 31, 2010, the Bank recorded a liability in the amount of $300,000 in connection with this litigation in anticipation of the final amount it will owe the plaintiff.

In September 2006, the then Chief Financial Officer of both the Savings Bank and the Company was terminated. Subsequent to her termination, the former CFO filed a lawsuit against the Company and the Savings Bank. The alleged cause of

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action is a whistleblower lawsuit. The former CFO claimed she was terminated for repeatedly reporting violations of law by two former CEOs of the Company and the Savings Bank, and others during her tenure with the organization, and for refusing to sign Securities and Exchange Commission certifications subsequent to September 15, 2006. Both the Company and the Savings Bank deny all claims and assertions made by the former CFO.

The case has been set for mediation in September 2011, and, if the mediation is unsuccessful, the case is currently scheduled for trial in January 2012.

The law firm representing the Company, the Savings Bank and their insurance carrier has advised that they have not reached an opinion that an unfavorable outcome is either probable or remote, and therefore, they expressed no opinion as to the ultimate outcome of this matter.

Market Area

At June 30, 2011, the unemployment rate in the Savings Bank’s market area remained higher than levels associated with a growing economy. However, the Savings Bank’s market area unemployment rate has generally decreased over the past two years, it is somewhat lower than the national average. Economic conditions in the Savings Bank’s market areas, with the exception of a recent slight downturn in the housing market, have been relatively stable. The overall condition of the primary market area can be characterized as stable, with modest growth potential, based on regional population and economic projections.

The Savings Bank is headquartered in the town of Mountain Grove, in Wright County, Missouri.  Wright County has a population of approximately 17,000 and its economy is highly diversified, with an emphasis on the beef and dairy industries.  Except for the branch office that opened in July 2006 in Springfield, Missouri, the Savings Bank's market area is predominantly rural in nature.  Its deposit taking and lending activities primarily encompass Wright, Webster, Douglas, Christian, Ozark, Stone, Taney and Greene counties in Missouri. Significant companies in the rural areas include Hutchens Industries, Bore Flex, Inc., Copeland Corporation, Dairy Farmers of America and WoodPro Cabinetry. The Springfield, Missouri market has a number of significant companies, including Kraft Foods, Bass Pro Shops, O'Reilly Automotive, Positronic Industries and Paul Mueller Company. Education and health care are the two largest employment segments in the Springfield, Missouri market and provide stability to the economic environment of Springfield and the surrounding area. Both St. John's Hospital and Cox Health Systems provide satellite services that mirror a large portion of the Savings Bank’s footprint. Both Missouri State University and Drury University have programs that reach across the Savings Bank’s delineated market area. The Savings Bank also transacts a significant amount of business in Texas County, Missouri.  The Savings Bank's market area, especially Ozark County because of its proximity to Norfolk and Bull Shoals lakes, has experienced a rather slow but steady growth from retirees. The Springfield market had robust growth and development for several years, and while that growth and development slowed substantially during the last three to four years, the market remains relatively strong.  Economic conditions in the Savings Bank's market areas have been relatively stable, in spite of the recent downturn in the housing market and the economy in general.

Selected Consolidated Financial Information

This information is incorporated by reference to pages 4 and 5 of the 2011 Annual Report to Stockholders ("Annual Report") attached hereto as Exhibit 13.

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Average Balances, Yields Earned and Rates Paid

This information is incorporated by reference to page 20 of the Annual Report attached hereto as Exhibit 13.

Yields Earned and Rates Paid

This information is incorporated by reference to page 21 of the Annual Report attached hereto as Exhibit 13.

Rate/Volume Analysis

This information is incorporated by reference to page 23 of the Annual Report attached hereto as Exhibit 13.

Lending Activities

General.  Historically, the principal lending activity of the Savings Bank has been the origination of conventional mortgage loans for the purpose of purchasing, constructing or refinancing one-to-four family owner occupied homes within its primary market area.  While the Savings Bank continues to actively seek originations of such loans, most of the fixed-rate loans of this type are currently originated for sale in the secondary market.  In an attempt to diversify its lending portfolio, the Savings Bank also originates commercial real estate loans, land loans, consumer loans, such as mobile home loans, automobile loans and loans secured by savings accounts, and commercial business loans.  The proportion of residential and commercial real estate loans to total loans has shifted gradually in recent years as a result of both this diversification and the minimal number of fixed-rate, one-to-four family loans originated for the portfolio.  Additionally, the Savings Bank originated and purchased loans pursuant to the Small Business Administration's ("SBA") guaranteed programs between September 2000 and December 2005. As of June 30, 2011, the Savings Bank had eleven commercial business and commercial real estate loans with an aggregate balance of $2.2 million that had SBA guarantees. The Savings Bank has not been active in SBA lending since December 2005.

In addition to loans within the Savings Bank's primary market area, the Savings Bank also has originated nine one-to-four family loans, six commercial real estate loans, three land loans, three commercial business loans and four consumer loans in Arkansas, Oregon, Colorado and six other states.  The 25 loans had an aggregate balance of $4.3 million at June 30, 2011.  As of June 30, 2011 there was one loan of $303,000 collateralized by a commercial building in excess of 90 days past due. Additionally, at June 30, 2011 there was one out-of-state loan totaling $194,000 collateralized by business equipment that was 36 days past due, and one consumer loan past due 13 days. The remaining 22 loans were performing according to their scheduled repayment terms.

At June 30, 2011, the Savings Bank's net loans receivable totaled $95.8 million, which represented 45.6% of consolidated total assets.  Historically, the Savings Bank has primarily originated adjustable rate loan products.  At June 30, 2011, adjustable rate loans with a maturity date after June 30, 2012 accounted for $64.4 million or 66.0% of the total loan portfolio and $62.7 million or 68.2% of loans secured by real estate. The Savings Bank focuses on serving the needs of its local community and strongly believes in a lending philosophy that emphasizes individual customer service and flexibility in meeting the needs of its customers.  In the four year period since the end of fiscal 2007, the Savings Bank has experienced a significant decrease in its total loan portfolio. The gross portfolio has decreased by $13.4 million or 12.1% over the last fiscal year and by $63.9 million, or 39.6%, over the last four fiscal years to $97.6 million at June 30, 2011. During the last four fiscal years, the Savings Bank’s one-to-four family portfolio decreased by

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$31.6 million, or 36.6%, from $86.5 million to $54.9 million. During the year ended June 30, 2011, originations of one-to-four family loans, including those originated for sale in the secondary market, increased by $2.5 million to $6.9 million from $4.4 million in the year ended June 30, 2010. The increase in one-to-four family originations for the portfolio during fiscal 2011 was the result of the Savings Bank offering, on a limited basis, both fifteen-year, fixed-rate loans, and lower, more attractive initial rates on its one, three, and five year ARMs. The total of these loans will not exceed $5.0 million. Other than the fifteen year loans just discussed, the Savings Bank retained primarily adjustable rate in its portfolio and almost all one-to-four family loans with fixed interest rates were sold to other investors.While the origination of loans for others does not increase the Savings Bank's loan portfolio, it does provide the Savings Bank with the opportunity to generate fee income, and the ability to meet its customers’ needs. In addition, the Savings Bank historically has retained some fixed-rate mortgage loans in its portfolio. The retained loans generally have a higher interest rate than those loans originated for other investors.  Generally, fixed rate loans that are retained in the Savings Bank's portfolio are loans with smaller principal balances ($50,000 or less) where the value of the acreage is too great for the residence to qualify under secondary market standards.

Loan Portfolio Analysis.  The following table sets forth the composition of the Savings Bank's loan portfolio by type of loan as of the dates indicated. Construction loans are included in residential and commercial real estate loans depending on the type of security.  At June 30, 2011, the Savings Bank had $3.6 million, or 3.7% of total loans, in interim construction loans in its portfolio of which $307,000 were for residential construction and $3.3 million were for commercial construction. At June 30, 2010, the Savings Bank had $3.7 million, or 3.3% of total loans, in interim construction loans in its portfolio of which $461,000 were for residential construction and $3.2 million were for commercial construction, as described below.  Because of the relatively small amount of its construction loans, and the fact that most of these loans are made with the intent for them to convert to permanent financing, the Savings Bank does not separately disclose these types of loans.

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	At June 30,
	2011					2010					2009					2008					2007
	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
	{Dollars in thousands}
Type of Loan:
Real Estate Loans
Residential Mortgage	$	54,860		56.22	%	$	60,217		54.24	%	$	71,141		51.89	%	$	75,992		44.83	%	$	86,530		53.57	%
Commercial real estate (1)		29,877		30.61			34,573		31.15			39,816		29.04			53,730		31.69			40,331		24.97
Land		3,283		3.36			4,358		3.93			7,395		5.39			10,756		6.34			9,095		5.63
Second mortgage loans		3,945		4.04			4,469		4.03			4,900		3.57			7,103		4.19			4,828		2.99
Total mortgage loans		91,965		94.23			103,617		93.35			123,252		89.89			147,581		87.05			140,784		87.16
Consumer Loans:
Automobile loans		807		0.83			1,127		1.02			2,052		1.50			4,726		2.79			4,078		2.53
Savings account loans		1,143		1.17			1,181		1.06			1,165		0.85			1,468		0.87			1,504		0.93
Mobile home loans		139		0.14			188		0.17			267		0.19			2,977		1.76			3,589		2.22
Other consumer		245		0.25			392		0.35			561		0.41			1,007		0.59			2,860		1.77
Total consumer loans		2,334		2.39			2,888		2.60			4,045		2.95			10,178		6.01			12,031		7.45
Commercial business		3,302		3.38			4,491		4.05			9,817		7.16			11,769		6.94			8,700		5.39
Total loans		97,601		100.00	%		110,996		100.00	%		137,114		100.00	%		169,528		100.00	%		161,515		100.00	%
Add:
Unamortized deferred loan    costs, net of origination    fees		199					214					235					304					171
Less:
Undisbursed loans in process		-					-					1					-					1
Allowance for probable loan
Losses		1,983					2,527					4,186					2,797					2,692
Total loans receivable, net	$	95,817				$	108,683				$	133,162				$	167,035				$	158,993
____________
(1) Includes multi-family residential loans

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One-to-Four Family Residential Loans.  The Savings Bank originates residential mortgage loans to enable borrowers to purchase existing homes, to construct new one-to-four family homes or refinance existing debt on their homes. At June 30, 2011, $54.9 million, or 56.2% of the Savings Bank's gross loan portfolio, consisted of residential mortgage loans (almost all of which are ARMs, with the principal amortizing over loan terms ranging from 10 to 30 years).  Since 1973 until fiscal 2006, the Savings Bank had originated almost exclusively ARM loan products. The Savings Bank originates 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 2% per year.  Loans of this nature, with the exception of a small number of loans originated prior to 1989 generally were limited to a 6% maximum increase over the life of the loan. Beginning in the year ended June 30, 2007, the Savings Bank has offered fixed rate one-to-four family residential mortgage lending in an effort to compete with products offered by other lenders.  Most of these loans were originated for sale in the secondary market.

The Savings Bank's lending policies generally limit the maximum loan-to-value ratio on one-to-four family residential mortgage loans originated for portfolio to 80% of the lesser of the appraised value or purchase price of the underlying residential property. A maximum loan-to-value ratio of 80% limits the Savings Bank's exposure and allows these loans to qualify for sale in the secondary market.  The Savings Bank requires title insurance, fire and casualty coverage and a flood zone determination on all residential mortgage loans originated or purchased.  All of the Savings Bank's real estate loans contain "due on sale" clauses. The Savings Bank obtains independent appraisals on all residential mortgage loans, except some owner-occupied, single-family residences with a loan balance of $75,000 or less, as well as, all non-residential mortgage loans.

At June 30, 2011, the Savings Bank had $307,000 in residential construction loans in its residential portfolio with maximum loan-to-value ratios of 80% based upon the estimated value upon completion.  Typically, the Savings Bank limits its construction lending to individuals who are building their primary residences.  Generally, loan proceeds are disbursed as construction progresses, based on invoices presented and inspections made.  Construction financing generally is considered to involve a higher degree of risk, and possibly loss, than long-term financing on improved, occupied real estate.  Risk of loss on a construction loan is dependent largely upon the accuracy of the estimated cost of construction and the accuracy of the initial estimate of the property's value at completion of construction or development. During the construction phase, a number of factors could result in delays and cost overruns.  The Savings Bank has sought to minimize this risk by primarily limiting construction lending to experienced builders in the Savings Bank's market area. At June 30, 2011, all $307,000 in residential construction loans were custom construction loans which represented 0.3% of the total loan portfolio.  The majority of these loans are converted into permanent residential real estate loans. During construction, these loans typically require monthly interest-only payments.  Once construction is completed, these loans convert to monthly principal and interest based on amortization schedules for conventional residential mortgages.

While construction loans inherently carry a higher level of risk than residential mortgage loans, at June 30, 2011, none of the Savings Bank’s one-to-four family construction loan portfolio was classified pursuant to federal regulations as substandard, doubtful or loss.

Second Mortgage Loans.  The Savings Bank originates fixed and adjustable rate second mortgage loans that are generally  made on the security of the borrower's residence.  Loans typically do not exceed 80% of the appraised value of the residence, less the outstanding principal of the first mortgage, and have terms of up to 10 years requiring monthly payments of principal and

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interest.  At June 30, 2011, second mortgage loans amounted to $3.9 million, or 4.0% of total loans of the Savings Bank.

The Savings Bank also offers home equity lines of credit.  Home equity lines of credit have terms of up to ten years and carry an interest rate of prime with a monthly adjustment for those loans that, combined with the first mortgage, result in a loan-to-value ratio of no more than 80%. The Savings Bank no longer originates loans that, combined with the first mortgage, result in a loan-to-value ratio of greater than 80%.  These loans are included with either residential loans, if they have a first lien position, or second mortgages in the various schedules that are part of this report.  As of June 30, 2011, home equity lines of credit totaled $2.5 million, of which $1.1 million was included in the residential loan totals and $1.4 million was included with the second mortgage total.

Land and Commercial Real Estate Loans.  The Savings Bank had loans outstanding secured by land and commercial real estate of $33.2 million, or 34.0% of the Savings Bank's gross loan portfolio, at June 30, 2011.

The Savings Bank’s commercial real estate loan portfolio consists of loans on a variety of types of property with no significant concentrations by property type. In addition to various types of commercial buildings and properties, this portfolio includes loans on farm land used in beef or dairy operations. At June 30, 2011, the portfolio totaled $29.9 million, or 30.6% of the total loan portfolio, and the collateral properties are primarily located in the Savings Bank's market area. The average size of these loans is $143,000. These loans typically are made with a fixed rate for one to five years and then adjust at least annually, thereafter, based on prime rate or the Constant Maturity Treasury Index ("CMT").The Savings Bank's largest commercial real estate loan at June 30, 2011 was a participation loan of $2.6 million.  The loan is for a term of five years and is collateralized by a shopping center development in St. Joseph, Missouri. The Savings Bank also has another loan totaling $695,000 on this development. At June 30, 2011, these loans were performing according to their repayment terms.

Of primary concern in commercial real estate lending is the feasibility and cash flow potential of the property along with the borrower's creditworthiness and the value of the underlying collateral.  Loans secured by income properties are generally larger and involve greater risks than residential mortgage loans because payments on loans secured by income properties are often dependent on successful operation or management of the properties.  As a result, repayment of such loans may be subject, to a greater extent than residential real estate loans, to supply and demand in the market for 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 borrower’s ability to repay the loan may be impaired.  Commercial real estate loans also tend to have shorter maturities than residential mortgage loans and may not be fully amortizing, meaning that they may have a significant principal balance or "balloon" payment due on maturity. Commercial real estate loans with principal balances totaling approximately $4.2 million have balance payments at maturity. In addition, commercial real estate properties, particularly industrial properties, are generally subject to relatively greater environmental risks than non-commercial properties and to the corresponding burdens and costs of compliance with environmental laws and regulations.  Also, there may be costs and delays involved in enforcing rights of a property owner against tenants in default under the terms of leases with respect to commercial properties.  For example, tenants may seek the protection of the bankruptcy laws, which could result in termination of lease contracts, reducing cash flow. Loans secured by farm properties are of particular concern sincerepayment is dependent upon the successful operation of the farming operations, which is greatly contingent on various factors outside the control of either the borrower or

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the Savings Bank.  These factors include adverse weather conditions, fluctuating market prices of both final product and production costs, factors affecting the physical condition of livestock and government regulations. Weather and grain prices have been favorable for dairy and cattle operations over the past two years, and price increases for both milk and beef products have been rising, improving the outlook for these operations.

At June 30, 2011, the Savings Bank had five loans secured by multi-family residential real estate, totaling approximately $2.8 million, or 2.9% of the Savings Bank's gross loan portfolio.  At June 30, 2011, all of these loans were performing in accordance with their repayment terms.  Multi-family real estate loans are generally originated at 80% of the appraised value of the property or selling price, whichever is less, and carry interest rates that are fixed for one to five years and then adjust annually based on the CMT with the principal amortized over 15 to 30 years.  Loans secured by multi-family real estate are generally larger and involve a greater degree of risk than one-to-four family residential loans.  In addition, multi-family real estate loans carry risks similar to those associated with commercial real estate lending.

Land loans amounted to $3.3 million, or 3.4% of the gross loan portfolio at June 30, 2011 and are secured primarily by property located in the Savings Bank's primary market area. The Saving Bank’s land loans generally are of three types: loans on undeveloped land; loans on residential developments, and; loans on commercial development. At June 30, 2011, there was one loan of $109,000, or 3.3%, of land loans, that was 42 days delinquent. For additional information concerning the risks related to construction lending, see Item 1A. “Risk Factors – Our loan portfolio includes loans with a higher risk of loss.”

Consumer Loans.  The Savings Bank's consumer loans consist of automobile loans, recreational vehicles, mobile home loans, savings account loans, and various other consumer loans.  At June 30, 2011, the Savings Bank's consumer loans totaled $2.3 million, or 2.4% of the Savings Bank's total loan portfolio. Subject to market conditions, management expects to continue to market and originate consumer loans as part of its strategy to provide a wide range of personal financial services to its depository customer base and as a means to enhance the interest rate sensitivity of the Savings Bank's interest-earning assets and its interest rate spread.

At June 30, 2011, the Savings Bank's loan portfolio secured by automobiles amounted to $807,000, or 0.8% of total loans.  These loans are originated directly with the borrower with a maximum term of 60 months.  The Savings Bank may lend up to 90% of the purchase price of a new automobile or up to 90% of the purchase price, not to exceed the National Automobile Dealers Association published loan value for a used vehicle.  The Savings Bank requires all borrowers to maintain automobile insurance, including collision, fire and theft insurance, with the Savings Bank listed as loss payee.

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

Consumer loans are considered more risky than residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by rapidly depreciating assets such as automobiles, mobile homes, boats and recreational vehicles. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance.  The remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more

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likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.  Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.  Consumer loans may also give rise to claims and defenses by a borrower against an assignee of such loans such as the Savings Bank, and a borrower may be able to assert against the assignee claims and defenses that it has against the seller of the underlying collateral.  The largest balance of consumer loans are loans for automobiles, boats, recreational vehicles, mobile homes and small unsecured loans.  At June 30, 2011, none of loans in the Savings Bank's consumer loan portfolio was 90 days or more past due.

Commercial Business Loans.  Commercial business loans consist of loans to businesses with no real estate as security, such as business equipment loans, farm equipment loans and cattle loans.  As of June 30, 2011, these loans totaled $3.3 million, or 3.4% of the Savings Bank's total loan portfolio.  The Savings Bank has, during the past several years, had a number of commercial business loans that have become problem loans. See "-- Non-Performing Assets and Delinquencies" and "-- Allowance for Loan Losses" for data on loans originated by the Savings Bank.

At June 30, 2011, the average size of commercial business loans was $30,000.  These loans typically have maturities of five years or less and have variable interest rates based on the prime rate.  The largest commercial business loan at June 30, 2011 was an amortizing term loan to a rancher, collateralized by livestock and equipment. This loan is 90% guaranteed by the Farm Service Agency. At June 30, 2011, the balance of this loan was $346,000 and the loan was current according to its repayment terms.

Commercial business loans may involve greater risk than real estate lending.  Because payments on commercial business loans are often dependent on successful operation of the business involved, repayment of such loans may be subject to adverse conditions in the economy and other negative circumstances affecting the business.  In recognition of this risk, the Savings Bank attempts to make loans secured by adequate collateral to provide the majority of repayment of the principal balance in the event that business operations are not successful.  However, collateral for these types of loans may quickly decline in market value through normal usage and changes in technology, and may fluctuate in value based on the success of the business.  In addition, the Savings Bank limits this type of lending to its market area and to borrowers with which it has prior experience or who are otherwise well known to the Savings Bank.  The Savings Bank generally requires personal guarantees for commercial business loans.

Non-accrual commercial business loans increased by $169,000 from $82,000 at June 30, 2010 to $251,000 at June 30, 2011. The economic environment over the last three years resulted in adverse market conditions for most businesses. While there was an increase in non-accrual commercial business loans during fiscal 2011, the total of non-accrual commercial business loans remains relatively low. The Savings Bank has had some success in working with borrowers to bring their loans current or move them to other institutions.  In addition, some of these loans were resolved through repossession of the underlying collateral. However, no assurance can be given that non-performing business loans will not increase in future periods.

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Loan Maturity and Re-pricing

 The following table sets forth certain information at June 30, 2011 regarding the dollar amount of loans maturing or re-pricing in the Savings Bank’s portfolio based on their contractual terms to maturity or next re-pricing date, but does not include scheduled payments or potential prepayments.

					After
			After		Three
			One Year		Years
			Through		Through		After
	Within		Three		Five		Five
	One Year		Years		Years		Years		Total
	(In thousands)
Mortgage Loans
Residential Mortgage	$	2,737	$	2,488	$	1,809	$	47,826	$	54,860
Commercial Real Estate		5,542		10,959		415		12,961		29,877
Land		479		762		256		1,786		3,283
Second Mortgage		409		188		37		3,311		3,945
Total Mortgage Loans		9,167		14,397		2,517		65,884		91,965
Consumer Loans
Automobile		118		521		168		-		807
Savings Account		885		242		16		-		1,143
Mobile Home		5		5		5		124		139
Other		33		139		57		16		245
Total Consumer Loans		1,041		907		246		140		2,334
Commercial Business Loans		1,055		772		858		667		3,302
Total Loans	$	11,263	$	16,026	$	3,621	$	66,691	$	97,601

The following table sets forth the dollar amount of all loans due more than one year after June 30, 2011, which have fixed interest rates and have floating or adjustable interest rates.

	At June 30, 2011
	Non-		Commercial
	Commercial		Real Estate					Commercial
	Mortgage		And Land			Consumer		Business		Total
	Loans			Loans		Loans		Loans		Loans
	(In thousands)
Interest rate terms
on amounts due after
one year:
Fixed	$	11,608		$	8,467	$	1,198	$	659	$	21,932
Adjustable		44,051			18,672		95		1,588		64,406
Total	$	55,659		$	27,139	$	1,293	$	2,247	$	86,338

Loan Solicitation and Processing.  The Savings Bank's main source of loans is from contacts and relationships with real estate agents, referrals from customers, and to lesser extent walk-in applicants. Once a loan application is received, a credit report, along with verification of income, is obtained.  An appraisal of the proposed collateral is then ordered. Real estate appraisals are completed by independent appraisers on all one-to-four family loans and on all other real estate secured loans.  The application is then reviewed by the loan officer and action is taken or loan write-up is presented to the Savings Bank's Directors’ Loan Committee if the amount is greater than the loan officer's lending authority.

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Commercial business and commercial real estate loans are primarily obtained through referrals or loan officer contacts.  While loan officers are delegated reasonable commitment authority based on their experience and qualification, credit decisions on significant commercial business loans and commercial real estate loans are made by the Directors’ Loan Committee, which is made up of senior loan officers and members of the Board of Directors.

Consumer loans are originated through referrals and existing deposit and loan customers of the Savings Bank.  Consumer loan applications below set limits may be processed at branch locations or by loan documentation personnel at the main office.

Loan Originations, Purchases and Sales.  The following table shows total mortgage loans originated, sold and repaid during the periods indicated.  No loans were purchased during the periods indicated. The significant decrease in loan originations was the result of several factors, including reduced loan demand resulting from the weak economic climate, and the Savings Bank concentrating its efforts on resolving problem loans in its existing portfolio rather than on origination of new loans.

	Year Ended June 30,
	2011		2010
	(In thousands)
Total gross loans at beginning of year	$	110,996	$	137,114
Loans originated:
Secondary market loans		350		691
One-to-four family loans		6,518		3,732
Multi-family residential and commercial         real estate		3,397		4,907
Land		210		242
Total mortgage loans originated		10,475		9,572
Consumer loans:
Automobile loans		804		547
Deposit account loans		423		708
Mobile home loans		1		-
Other consumer loans		130		166
Total consumer loans originated		1,358		1,421
Commercial business loans originated		785		1,293
Loans sold:
Secondary market loans		289		1,531
Loans principal repayments		20,130		30,145
Other decreases:
Loans charged-off		1,850		2,915
Loans transferred to real estate owned		3,901		3,736
Loans transferred to repossessed assets		32		77
		5,783		6,728
Total gross loans at end of year	$	97,601	$	110,996

Loan Commitments.  The Savings Bank issues commitments for one-to-four family residential loans that are honored for up to 60 days from approval.  If the commitment expires, it is generally renewed upon request without penalty or expense to the borrower at the current market rate.  The Savings Bank had outstanding net loan commitments of $356,000 at June 30, 2011 compared to $594,000 at June 30, 2010. The decrease in outstanding loan commitments is primarily the result of the generally poor economic environment, generally more restrictive underwriting standards commencing in fiscal 2009and the Savings Bank’s emphasis on issues relating to the existing loan portfolio. See Note 13

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of the Notes to the Consolidated Financial Statements contained in the Annual Report to Shareholders filed as Exhibit 13 to this report.

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

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

  During the last two and a half years the Savings Bank’s senior management team has implemented several new procedures and policies to reduce the risk of delinquent loans.  The following are some of the key elements of the new policies and procedures:  all commercial credits with an aggregate loan balance of $100,000 or greater must be approved by the Directors’ Loan Committee; individual loan officer commercial lending limits have been lowered; a Credit Administrator position was created to coordinate the loan review process, and; extensive loan officer training has established improved consistency throughout the organization.  Also, once a loan is 45 days past due, the loan is subject to a full evaluation by the individual loan officer for potential presentation to the Directors’ Loan Committee to review and establish the proper loan grade.  Any loan graded a “special mention” or worse is subject to a quarterly review by the loan officer.

These changes were established as a direct result of an extensive internal review of loans that was initiated in fiscal 2009 following changes in senior management. Classified assets decreased by $1.1 million to $10.5 million at June 30, 2011, compared to $11.6 million of classified assets at June 30, 2010. The decrease in classified assets was the result of charge-offs, loan repayments including repayments to bring the loan current, short sales and transfers to real estate owned.

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

The table below sets forth the amounts and categories of non-performing assets in the Savings Bank's loan portfolio at the dates indicated.  Loans are placed on non-accrual status when it is determined that the payment of interest or principal is doubtful of collection, or when interest or principal is past-due 90 days or more.  Any accrued but uncollected interest previously recorded on such loans is reversed in the current period and interest income is subsequently recognized upon collection.  The Savings Bank would have recorded interest income on non-accrual loans of $92,000 and $121,000 during the years ended June 30, 2011 and 2010, respectively, if such loans had been performing according to their terms during such periods.

Non-accrual loans decreased from $3.9 million at June 30, 2010 to $1.3 million at June 30, 2011.  The $2.6 million decrease in non-accrual loans was the result of a decrease of $3.2 million in non-accrual commercial real estate and land loans which was partially offset by increases of $184,000 in non-accrual residential mortgages, $169,000 in non-accrual commercial business

16

loans and $6,000 non-accrual consumer loans. The decrease in non-accrual commercial real estate loans was primarily the result of the foreclosure on a $2.1 million loan on an office building in downtown Springfield, Missouri, and the foreclosure on a $1.2 million loan on a motel in Branson, Missouri. Both of these properties were in real estate owned at June 30, 2011.

The Savings Bank considers all non-accrual loans, loans past due 90 days or more and performing trouble debt restructured loans to be impaired. These loans are closely monitored and any necessary additional action will be taken as warranted.

The following table sets forth information with respect to the Savings Bank's non-performing assets at the dates indicated. Performing trouble debt restructured loans are included in the impaired loans not past due.

	At June 30,
	2011			2010			2009			2008			2007
	(Dollars in thousands)
Loans accounted for on a non-accrual   Basis:
Real estate:
Residential	$	452		$	258		$	593		$	94		$	245
Commercial and land		630			3,587			1,714			1,882			2,171
Commercial business		251			82			717			316			467
Consumer		6			-			-			21			6
Total	$	1,339		$	3,927		$	3,024		$	2,313		$	2,889
Accruing loans which are contractually   past due 90 days or more:
Real estate:
Residential	$	-		$	-		$	-		$	296		$	278
Commercial and land		-			-			122			64			81
Commercial business		-			-			166			-			-
Consumer		-			-			-			-			-
Total	$	-		$	-		$	288		$	360		$	359
Total of non-accrual and             90 days past due loans	$	1,339		$	3,927		$	3,312		$	2,673		$	3,248
Real estate owned		4,914			3,885			1,549			1,206			291
Repossessed assets		-			61			158			-			2
Other non-performing assets:
Impaired loans not past due		4,221			5,228			7,013			-			-
Slow home loans (60 to 90 days     past due)		-			-			-			-			-
Total non-performing assets	$	10,474		$	13,101		$	12,032		$	3,879		$	3,541
Total loans delinquent 90 days   or more to net loans		-	%		-	%		0.22	%		0.22	%		0.23	%
Total loans delinquent 90 days   or more to total consolidated assets		-	%		-	%		0.13	%		0.14	%		0.15	%
Total non-performing assets   to total consolidated assets		5.00	%		6.19	%		5.23	%		1.56	%		1.47	%

As of June 30, 2011, the Savings Bank had loans with an aggregate outstanding balance of $5.7 million with respect to which known information concerning possible credit problems with the borrowers or the cash flows of the properties securing the respective loans has caused management to be concerned about the ability of the borrowers to comply with present loan repayment terms, which may result in the future inclusion of such loans in the non-accrual loan category. These loans are reflected in the Savings Bank's classified assets, and loans designated as special mention by the Savings Bank, as described below.

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Asset Classification.  Federal regulations require that each insured savings institution review and classify its assets on a regular basis.  In addition, in connection with examinations of insured institutions, examiners have authority to identify problem assets and, if appropriate, require them to be classified.  There are three classifications for problem assets: substandard, doubtful and loss.  An asset is classified substandard when it is inadequately protected by the current net worth and paying capacity of the borrower or by the collateral pledged, if any.  Assets so classified must have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. The Savings Bank's policy is to classify as substandard, for example, any loan, irrespective of payment record or collateral value, when a bankruptcy filing occurs, the pay record becomes erratic (e.g., the borrower misses several monthly payments, but makes double payments in the future), or a loan becomes contractually delinquent by three monthly payments. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss.  An asset classified loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted.  If an asset or portion thereof is classified loss, the insured institution must either establish specific allowances for loan losses for the full amount of the portion of the asset classified as loss or charge-off such amount.  All or a portion of general loan loss allowances established to cover possible losses related to assets classified substandard or doubtful may be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital.

The Savings Bank, until fiscal 2010, rarely used the "special mention" category in its internal loan classification process.  Instead, a category titled “watch” was used by the Savings Bank to monitor loans which were not typical in their repayment terms, collateral, or a situation with the borrower that may create repayment difficulties in the future.  In connection with the assistance of a consultant that was retained to review large loans, the Savings Bank’s internal policies on asset classification were reviewed and updated.   As a result, an asset is designated as special mention when it has potential weaknesses that deserve management’s close attention, and which left uncorrected, may result in the deterioration of the repayment prospects for the asset or in the Savings Bank’s credit position.

At June 30, 2011 and 2010 the aggregate amounts of the Savings Bank's classified assets and special mention credits, as determined by the Savings Bank, and of the Savings Bank's general and specific loss allowances and net charge-offs, were as follows:

	At June 30,
	2011		2010
	(In thousands)
Loss	$	-	$	-
Doubtful loans		-		-
Substandard loans		5,560		7,678
Total classified loans		5,560		7,678
Special mention credits		176		1,602
Total loans of concern	$	5,736	$	9,280
Total classified loans	$	5,560	$	7,678
Real estate owned		4,914		3,885
Repossessed collateral		-		61
Total classified assets	$	10,474	$	11,624

18

	At June 30,
	2011		2010
	(In thousands)
General loss allowances	$	1,277	$	1,290
Specific loss allowances		706		1,237
Total loss allowances	$	1,983	$	2,527
Net charge-offs	$	1,726	$	2,661

Net charge-offs in fiscal 2011 decreased by $935,000, or 35.1%, to $1.7 million compared to $2.7 million in fiscal 2010. A substantial majority of the charge-offs for both fiscal years related to credits identified as problem loans during fiscal 2009, the larger portion of which was charged-off during fiscal 2009.

The $1.1 million decrease in classified assets to $10.5 million at June 30, 2011 from $11.6 million at June 30, 2010 was the result of the impact of several factors. Some loans were taken to foreclosure or repossession, which resulted in an increase in real estate owned. Some loans were written down. Some borrowers refinanced with other financial institutions. Finally, some loans were brought current.

At June 30, 2011, the Savings Bank's largest substandard loan to one borrower consisted of two loans to a limited liability corporation with outstanding balances totaling $1.9 million.  The first loan is a commercial real estate loan of $1.7 million collateralized by a strip mall in Forsyth, Missouri. At June 30, 2011, this loan was 15 days delinquent. A reserve of $301,000 has been provided on this loan. The second loan has a balance of $251,000 and is collateralized by residential real estate. At June 30, 2011, this loan was current. A reserve of $6,000 has been provided on this loan.

Real Estate Owned and Other Repossessed Assets

Real estate owned and other repossessed assets includes real estate and other assets acquired in the settlement of loans, which is recorded at the estimated fair value less the estimated costs to sell the asset.  Any write down at the time of foreclosure is charged against the allowance for loan losses.  Subsequently, net expenses related to holding the property and declines in the market value are charged against income. At June 30, 2011, real estate owned consisted of twenty-three properties (twelve single family residences, eight commercial properties and three parcels of vacant land) with a net book value of $4.9 million. At June 30, 2011, there was no repossessed collateral on the books of either the Savings Bank or the Company. At June 30, 2010, real estate owned consisted of eighteen properties (ten single family residences, seven commercial properties and one parcel of farmland) with a net book value of $3.9 million. At June 30, 2010, repossessed collateral consisted of 1,168 radiators, 23 sections of steel shelving, a pallet jack and a moveable staircase with a book value of $53,000, and a motorcycle with a book value of $7,000.

Allowance for Loan Losses

Management recognizes that loan losses may occur over the life of a loan and that the allowance for loan losses must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the loan portfolio.

Management believes that the accounting estimate related to the allowance for loan losses is a critical accounting estimate because it is highly susceptible to change from period to period.  This may require management to

19

make assumptions about losses on loans; and the impact of a sudden large loss could deplete the allowance and potentially require increased provisions to replenish the allowance, which would negatively affect earnings.

The allowance for loan losses is evaluated on a monthly basis by management and is based on management's periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions, such as unemployment rates, bankruptcies and vacancy rates of business and residential properties. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance for loan losses includes allowance allocations calculated in accordance with ASC Topic 310, Receivables and allowance allocations calculated in accordance with ASC Topic 450, Accounting for Contingencies. The level of the allowance reflects management’s continuing evaluations of delinquencies, charge-offs and recoveries, loan volumes and terms, changes in underwriting procedures, depth of the Company’s lending management, national and local economy, industry conditions, credit concentrations, and other external factors, including competition and legal and regulatory requirements, as well as trends in the foregoing.

The allowance is increased by the provision for loan losses, which is charged against current period operating results and decreased by the amount of actual loan charge-offs, net of recoveries.

The Savings Bank had an allowance for loan losses at June 30, 2011 and 2010 of $2.0 million and $2.5 million, respectively. Since the end of fiscal 2007, primarily as the result of deterioration in the commercial real estate and commercial business loan portfolios, due to the distressed economic environment, the Savings Bank has provided $8.6 million in allowances for loan losses. At June 30, 2008 the allowance for loan losses was $2.8 million, or 1.6%, of gross loans compared to $4.2 million, or 3.1%, of gross loans at June 30, 2009, $2.5 million, or 2.3%, of gross loans at June 30, 2010 and $2.0 million, or 2.0%, of gross loans at June 30, 2011. In addition, the allowance as of June 30, 2011 was 26.0% of non-performing assets.

Management believes that the allowance for loan losses was adequate at June 30, 2011 to absorb the known and inherent risks of loss in the loan portfolio at that date. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition and results of operations.  In addition, the determination of the amount of the Savings Bank's allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in the establishment of additional provision based upon their judgment of information available to them at the time of their examination.  Any material increase in the allowance may adversely affect the Savings Bank's financial condition and earnings.

20

The following table sets forth an analysis of the Savings Bank's allowance for loan losses for the periods indicated.

	At or For The Year Ended June 30,
	2011			2010			2009			2008			2007
	(Dollars in thousands)
Allowance at beginning of period	$	2,527		$	4,186		$	2,797		$	2,692		$	2,474
Provision for loan losses		1,182			852			5,314			1,291			426
Recoveries:
Residential real estate		44			12			7			3			24
Commercial real estate		19			27			91			1			8
Consumer		18			21			77			27			37
Commercial business		43			194			71			5			96
Total recoveries		124			254			246			36			165
Charge-offs:
Residential real estate		577			694			678			393			169
Commercial real estate		961			1,096			2,065			325			94
Consumer		30			28			175			62			32
Commercial business		282			1,097			1,253			442			78
Total charge-offs		1,850			2,915			4,171			1,222			373
Net charge-offs		1,726			2,661			3,925			1,186			208
Transfer from allowance on letter of credit		-			150			-			-			-
Allowance at end of period	$	1,983		$	2,527		$	4,186		$	2,797		$	2,692
Ratio of allowance to total loans   outstanding at the end of the   period		2.03	%		2.28	%		3.05	%		1.65	%		1.59	%
Ratio of net charge offs to average   loans outstanding during the   period		1.70	%		1.97	%		2.93	%		0.74	%		0.14	%

During the last two fiscal years, there were some significant changes in the reserve allocations of the different loan categories. The decrease in the dollar amount of the allowance and the decrease in the percent of the allowance to total loans for residential real estate loan was primarily the result of the majority of the loans that were past due at June 30, 2009 either having been transferred to real estate owned, charged off or a combination of both.

The decrease in the allowance and its percentage to total commercial real estate loans between June 30, 2010 and June 30, 2011 was primarily due to loans with approximately $3.3 million in total principal balances and approximately $800,000 in allowances for loan losses having been foreclosed and included in real estate owned at June 30, 2011. This reversed the increases that occurred during fiscal 2010.

The decrease in the allowance and its percentage to total commercial business loans during fiscal 2010 was primarily due to write-offs during the 2010 fiscal year and the upgrade of one loan which had had an allowance of $356,000. The change during fiscal 2011 was not significant.

The following table sets forth the composition of the allowance for loan losses by loan category as of the dates indicated. Management believes that the allowance can be allocated by category only on an approximate basis. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any other categories.

21

Allowance for Loan Losses by Category

	At June 30,
	2011								2010								2009
			Percent								Percent								Percent
			Of			Percent					Of			Percent					Of			Percent
			Allowance			Of Gross					Allowance			Of Gross					Allowance			Of Gross
			to Out-			Loans in					to Out-			Loans in					to Out-			Loans in
			Standing			Category					Standing			Category					Standing			Category
			Loans in			To Gross					Loans in			To Gross					Loans in			To Gross
	Amount		Category			Loans			Amount		Category			Loans			Amount		Category			Loans
	(Dollars in thousands)
Real estate -- mortgage:
Residential	$	203		0.37	%		56.22	%	$	380		0.63	%		54.24	%	$	749		1.06	%		51.89	%
Commercial		1,324		4.43			30.61			1,713		4.96			31.15			991		2.89			29.04
Land		70		2.13			3.36			73		1.68			3.93			176		2.38			5.39
Second mortgage loans		105		2.67			4.04			107		2.39			4.03			157		3.20			3.57
Consumer		23		0.98			2.39			20		0.71			2.60			86		2.13			2.95
Commercial business		258		7.81			3.38			234		5.20			4.05			2,027		20.66			7.16
Total allowance for       loan losses	$	1,983		2.03	%		100.00	%	$	2,527		2.28	%		100.00	%	$	4,186		3.05	%		100.00	%

	At June 30,
	2008								2007
			Percent								Percent
			Of			Percent					Of			Percent
			Allowance			Of Gross					Allowance			Of Gross
			to Out-			Loans in					to Out-			Loans in
			Standing			Category					Standing			Category
			Loans in			To Gross					Loans in			To Gross
	Amount		Category			Loans			Amount		Category			Loans
	(Dollars in thousands)
Real estate -- mortgage:
Residential	$	411		0.54	%		44.83	%	$	164		0.19	%		53.58	%
Commercial		991		1.84			31.69			1,567		3.89			24.97
Land		196		1.82			6.34			119		1.31			5.63
Second mortgage loans		23		0.32			4.19			60		1.24			2.99
Consumer		228		2.24			6.01			239		1.99			7.44
Commercial business		948		8.06			6.94			543		6.24			5.39
Total allowance for            loan losses	$	2,797		1.65	%		100.00	%	$	2,692		1.59	%		100.00	%

22

Securities Activity

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

Routine short-term investment decisions, which are reported monthly to the Board of Directors, are made by the Savings Bank’sPresident, Chief Financial Officer and Controller, who act within policies established by the Board. Those securities include federally insured certificates of deposit, FHLB time obligations, bankers acceptances, treasury obligations, U.S. Government agency obligations, mortgage-backed securities, bank qualifying municipal tax exempt bonds, and corporate bonds.  Securities not within the parameters of the policies require prior Board approval.  Securities are purchased for investment purposes.  The goals of the Savings Bank's investment policy are to select securities based on safety first, flexibility second and diversification third. In addition, as a result of the concern with interest rate risk exposure, there has been a focus on short-term investments.  At June 30, 2011, the Company's and the Savings Bank's securities portfolio (which includes securities held by the Savings Bank, including stock in the FHLB) totaled $72.7 million (of which $54.1 million were available for sale) and consisted primarily of federal agency obligation securities, federal agency mortgage-backed securities, common stocks, FHLB stock and municipal bonds.  For further information concerning the securities portfolio, see Note 2 of the Notes to the Consolidated Financial Statements included in the Annual Report.

Securities Analysis

The following table sets forth the Company's securities portfolio at carrying value at the dates indicated. Securities that are held-to-maturity are shown at amortized cost, and securities that are available-for-sale are shown at the current market value.

	At June 30,
	2011					2010					2009
	Book		Percent			Book		Percent			Book		Percent
	Value		Of			Value		Of			Value		Of
	(1)		Portfolio			(1)		Portfolio			(1)		Portfolio
	(Dollars in thousands)
Debt securities:
United States Government
and Federal agencies
obligations	$	39,733		54.68	%	$	27,028		43.07	%	$	8,609		17.40	%
Obligations of state and
political subdivisions		1,103		1.52			1,575		2.51			1,854		3.75
Federal agency mortgage-    backed securities		31,146		42.87			33,438		53.29			37,167		75.10
Total debt securities		71,982		99.07			62,041		98.87			47,630		96.25
Equity securities:
FHLB stock		429		0.59			434		0.69			1,581		3.19
Other		244		0.34			276		0.44			278		0.56
Total equity securities		673		0.93			710		1.13			1,859		3.75
Total securities	$	72,655		100.00	%	$	62,751		100.00	%	$	49,489		100.00	%

23

_____________
(1)	The market value of the Company's securities portfolio amounted to $72.7 million, $62.8 million and $49.5 million at June 30, 2011, 2010 and 2009, respectively.  At June 30, 2011, the market value of the principal component of the Company's and the Savings Bank’s securities portfolio, which were federal agency securities, was $39.7 million.

       The following table sets forth the maturities and weighted average yields of the debt securities in the Company's investment securities portfolio at June 30, 2011.

						After One Year					After Five Years
	One Year or Less					Through Five Years					Through Ten Years					After Ten Years
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
	(Dollars in thousands)
United States
Government
and Federal
Agency
obligations	$	-		-	%	$	5,080		2.13	%	$	18,736		2.37	%	$	15,917		3.09	%
Obligations of
state and
Political
subdivisions		295		4.14			808		4.54			-		-			-		-
Mortgage-backed
securities		541		3.46			338		5.50			5,671		4.15			24,596		4.14
Total debt       securities	$	836				$	6,226				$	24,407				$	40,513

At June 30, 2011, other than United State Government agency securities and United States Government agency mortgage-backed securities, the Company held no security which had an aggregate book value in excess of 10% of the Company's stockholders' equity.

To supplement lending activities in periods of deposit growth and/or declining loan demand, the Savings Bank has invested in residential mortgage-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 Company's mortgage-backed securities portfolio, see Note 2 of the Notes to Consolidated Financial Statements included in the Annual Report.  The Savings Bank has invested in federal agency securities issued by FHLMC, FNMA and Government National Mortgage Association ("GNMA").  As of June 30, 2011, 27.4% of the outstanding balance of the mortgage-backed securities had adjustable rates of interest that adjust within the next two years.  As of June 30, 2011, the Savings Bank's portfolio included $31.0 million of mortgage-backed securities purchased as investments to supplement the Savings Bank's mortgage lending activities.

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

24

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. At June 30, 2011, the Savings Bank owned no mortgage derivative products.

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 does not have any brokered deposits. The Savings Bank generally reviews its deposit mix and pricing at least weekly, and adjusts it as necessitated by liquidity needs, its asset/liability objectives and competition.

The Savings Bank experienced a $586,000 increase in deposits during the year ended June 30, 2011. However, on June 30, 2011, the Savings Bank received an incoming wire transfer of $13.7 million for credit to the account of one of its commercial customers. It is not anticipated that these funds will remain on deposit for an extended period of time. Absent this wire deposit, the Savings Bank would have experienced a decrease in deposits of $13.1 million during the year ended June 30, 2011. Certificates of deposit decreased by $10.6 million from $77.2 million at June 30, 2010 to $66.6 million at June 30, 2011, and money market savings accounts decreased by $4.6 million from $36.0 million at June 30, 2010 to $31.4 million at June 30, 2011. These decreases were offset by increases in non-interest-bearing checking balances which increased by $12.5 million from $11.8 million at June 30, 2010 to $24.3 million at June 30, 2011, savings accounts which increased by $767,000 from $20.5 million at June 30, 2010 to $21.2 million at June 30, 2011 and in NOW account balances which increased by $2.5 million from $34.6 million at June 30, 2010 to $37.1 million at June 30, 2011. During most of the fiscal year ended June 30, 2011, with the exception of our e-checking product and four and five year certificates of deposit, the rates paid by the Savings Bank were below the mid-point of the range of rates offered by competitors in each type and maturity of account.

The following table sets forth information concerning the Savings Bank's time deposits and other interest-bearing deposits at June 30, 2011.

25

Weighted
Average									Percentage
Interest						Minimum			of Total
Rate			Term	Category		Amount	Balance		Deposits
							(Dollars in thousands)
	0.00	%	None	Non-interest bearing	$	100	$	24,303		13.45	%
	0.36		None	NOW accounts		100		37,127		20.55
	0.40		None	Super Saver accounts		1,000		8,627		4.78
	0.10		None	Savings accounts		25		12,606		6.98
	0.69		None	Money Market Savings		10,000		31,367		17.36
				Certificates of deposit
	0.25		3 months	Fixed term, fixed rate		500		732		0.41
	0.61		6 months	Fixed term, fixed rate		500		7,298		4.04
	0.60		9 months	Fixed term, fixed rate		500		1,049		0.58
	1.13		11 months	Fixed term, fixed rate		500		1,336		0.74
	0.96		12 months	Fixed term, fixed rate		500		11,718		6.49
	1.26		15 months	Fixed term, fixed rate		500		780		0.43
	1.18		18 months	Fixed term, fixed rate		500		1,210		0.67
	0.00		21 months	Fixed term, fixed rate		500		-		0.00
	1.65		24 months	Fixed term, fixed rate		500		6,363		3.52
	0.00		27 months	Fixed term, fixed rate		500		-		0.00
	2.00		30 months	Fixed term, fixed rate		500		272		0.15
	0.00		33 months	Fixed term, fixed rate		500		-		0.00
	2.41		36 months	Fixed term, fixed rate		500		1,989		1.10
	2.33		48 months	Fixed term, fixed rate		500		1,706		0.94
	3.12		60 months	Fixed term, fixed rate		500		3,905		2.16
	2.70		72 months	Fixed term, fixed rate		500		20		0.01
	1.36		Various	Fixed term, adjustable rate		500		6,561		3.63
	1.60		Various	Jumbo certificates		100,000		21,692		12.01
							$	180,661		100.00	%

           The following table indicates the amount of the Savings Bank's jumbo certificates of deposit by time remaining until maturity as of June 30, 2011.  Jumbo certificates of deposit require minimum deposits of $100,000 and rates paid on such accounts are negotiable.

	Jumbo
	Certificates
Maturity Period	Of Deposit
	(In thousands)
Three months or less	$	3,018
After three through six months		4,505
After six through twelve months		6,250
After twelve months		7,919
Total	$	21,692

26

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,
	2011		2010
	(In thousands)
0.00 - 1.49%	$	45,321	$	27,712
1.50 - 2.49%		11,298		23,888
2.50 - 3.49%		6,663		17,342
3.50 - 4.49%		832		1,276
4.50 - 5.00%		2,517		6,173
5.01 – 5.49%		-		780
Over 5.49%		-		-
Total	$	66,631	$	77,171

The following table sets forth the amount and maturities of time deposits at June 30, 2011.

	Amount Due
			More		More		More
			Than		Than		than							Percent
			One Year		2 Years		3 Years							of Total
	One Year		Thru		Thru		Thru		After 4					Certifiacte
	Or less		2 Years		3 Years		4 Years		Years		Total			Accounts
0.00 - 1.49%	$	34,278	$	7,494	$	1,940	$	1,608	$	1		$	45,321		68.01
1.50 - 2.49%		5,368		1,813		1,150		1,526		1,441			11,298		16.96
2.50 - 3.49%		1,604		2,026		2,332		686		15			6,663		10.00
3.50 - 4.49%		669		138		2		23		-			832		1.25
4.50 - 5.49%		1,442		1,075		-		-		-			2,517		3.78
Over 5.50%		-		-		-		-		-			-		-
Total	$	43,361	$	12,546	$	5,424	$	3,843	$	1,457		$	66,631		100.00

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

	At June 30,
	2011								2010
			Percent								Percent
			Of			Increase					Of			Increase
	Amount		Total			(Decrease)			Amount		Total			(Decrease)
						(Dollars in thousands)
Non-interest bearing	$	24,303		13.45	%	$	12,529		$	11,774		6.54	%	$	(2,966	)
NOW checking		37,127		20.55			2,495			34,632		19.23			2,147
Regular savings
accounts		8,627		4.78			1,226			9,086		5.05			(230	)
Super Saver accounts		12,606		6.98			(459	)		11,380		6.32			(398	)
Money Market
savings accounts		31,367		17.36			(4,665	)		36,032		20.00			1,321
Fixed-rate
Certificates
Which mature (1):
Within 1 year		39,729		21.99			(11,096	)		50,825		28.23			(2,034	)
After 1 year, but
Within 2 years		9,703		5.37			2,848			6,855		3.81			(4,347	)
After 2 years, but
Within 5 years		8,224		4.55			1,429			6,795		3.77			2,872
After 5 years		30		0.02			15			15		0.01			-
Adjustable-rate
Certificates		8,945		4.95			(3,736	)		12,681		7.04			(5,508	)
Total
Certificates		66,631		36.88			(10,540	)		77,171		42.86			(9,017	)
Total	$	180,661		100.00	%	$	586		$	180,075		100.00	%	$	(9,143	)

27

(1)   At June 30, 2011 and 2010, jumbo certificates of deposit amounted to $21.7 million and $25.8 million, respectively, and Individual Retirement Accounts (“IRAs”) amounted to $19.8 million and $23.2 million at those dates, respectively.

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

	Years Ended June 30,
	2011			2010
	(In thousands)
Beginning balance	$	180,075		$	189,218
Net increase (decrease)
before interest credited		(1,454	)		(12,411	)
Interest credited		2,040			3,268
Net increase/(decrease) in
savings deposits		586			(9,143	)
Ending balance	$	180,661		$	180,075

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

Retail Repurchase Agreements.  In December 2006, the Savings Bank began to offer retail repurchase agreements.  This was done to provide an additional product for its existing customer base and to attract new customers who would find the product beneficial.  Customers with large balances in checking accounts benefit by having those balances which exceed a predetermined level "swept" out of the checking account and into retail repurchase accounts.  The repurchase account earns interest at a floating market rate and is uninsured. However, the balance is collateralized by designated investment securities of the Savings Bank.  At June 30, 2011, the Savings Bank had $6.4 million in retail repurchase agreements, as compared to $5.4 million at June 30, 2010.

Borrowings.  Savings deposits are the primary source of funds for the Savings Bank's lending and investment activities and for its general business purposes.  The Savings Bank also relies on advances from the FHLB-Des Moines to supply funds and to act as a source of liquidity, if needed.  The FHLB-Des Moines has served as the Savings Bank's primary borrowing source.  Advances from the FHLB-Des Moines are typically secured by the Savings Bank's first mortgage loans.  These advances require monthly payments of interest only with principal due at maturity and have fixed rates. At June 30, 2011, the Savings Bank had $3.0 million in advances from the FHLB-Des Moines.

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

	At June 30,
	2011			2010			2009
Weighted average rate paid on
FHLB advances		4.94	%		4.94	%		3.05	%
	Years Ended June 30,
		2011			2010			2009
	(Dollars in thousands)
Maximum amounts of FHLB advances
outstanding at any month end	$	3,000		$	10,000		$	29,000
Approximate average FHLB advances
outstanding	$	3,000		$	5,692			22,846
Approximate average effective rate
paid on FHLB advances		5.00	%		3.18	%		5.14	%

The FHLB-Des Moines functions as a central reserve bank providing credit for savings and loan associations and other member financial institutions.  As

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a member, the Savings Bank is required to own capital stock in the FHLB-Des Moines and is authorized to apply for advances on the security of such stock and on the security of certain of its mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States) provided certain standards related to creditworthiness have been met.  Advances are made pursuant to several different programs.  Each credit program has its own interest rate and range of maturities.  Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution's retained earnings or on the FHLB's assessment of the institution's creditworthiness. The FHLB-Des Moines determines specific lines of credit for each member institution. As of June 30, 2011, the Savings Bank, based on the available collateral, could have borrowed an additional $46.3 million in advances from the FHLB.

Subsidiary Activities

Fybar Service Corporation ("Fybar") is a Missouri corporation wholly-owned by the Savings Bank.  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, 2011, the Savings Bank had an investment in Fybar of $626,000.

Regulation of First Home

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

Missouri Savings and Loan Law

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

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

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

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

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

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

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

Federal Regulation of Savings Banks

New Legislation.  On July 21 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act implements far-reaching changes across the financial regulatory landscape, including provisions that, among other things, will:

·   On July 21, 2011, the responsibilities and authority of the OTS to supervise and examine state savings associations, including the Savings Bank, were transferred to the FDIC, and the responsibilities and authority of the OTS to supervise and examine savings and loan holding companies, including the Company, to the Federal Reserve.

·   Centralize responsibility for consumer financial protection by creating a new agency within the Federal Reserve Board, the Bureau of Consumer Financial Protection, with broad rulemaking, supervision and enforcement authority for a wide range of consumer protection laws that would apply to all banks and thrifts.  Smaller financial institutions, including the Savings Bank, will be subject to the supervision and enforcement of their primary federal banking regulator with respect to the federal consumer financial protection laws.

·   Require new capital rules and apply the same leverage and risk-based capital requirements that apply to insured depository institutions to savings and loan holding companies beginning July 21, 2015.

·   Require the federal banking regulators to seek to make their capital requirements countercyclical, so that capital requirements increase in 

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times of economic expansion and decrease in times of economic contraction.

·   Provide for new disclosure and other requirements relating to executive compensation and corporate governance.

·   Make permanent the $250,000 limit for federal deposit insurance and provide unlimited federal deposit insurance until January 1, 2013 for non-interest bearing demand transaction accounts at all insured depository institutions.

·   Effective July 21, 2011, repealed the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.

·   Require all depository institution holding companies to serve as a source of financial strength to their depository institution subsidiaries in the event such subsidiaries suffer from financial distress.

Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company and the financial services industry more generally.  The elimination of the prohibition on the payment of interest on demand deposits could materially increase our interest expense, depending our competitors’ responses.  Provisions in the legislation that require revisions to the capital requirements of the Company and the Savings Bank could require the Company and the Savings Bank to seek additional sources of capital in the future.

Insurance of Accounts and Regulation by the FDIC. The Savings Bank's deposits are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC.  Deposits are insured up to the applicable limits by the FDIC, backed by the full faith and credit of the United States Government.  As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions.  It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the insurance fund. The FDIC also has the authority to initiate enforcement actions against savings institutions, after giving the OTS an opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.

As a result of a decline in the reserve ratio (the ratio of the DIF to estimated insured deposits) and concerns about expected failure costs and available liquid assets in the DIF, the FDIC adopted a rule requiring each insured institution to prepay on December 30, 2009 the estimated amount of its quarterly assessments for the fourth quarter of 2009 and all quarters through the end of 2012 (in addition to the regular quarterly assessment for the third quarter which was due on December 30, 2009). The prepaid amount is recorded as an asset with a zero risk weight and the institution will continue to record quarterly expenses for deposit insurance. For purposes of calculating the prepaid amount, assessments were measured at the institution’s assessment rate as of September 30, 2009, with a uniform increase of three basis points effective January 1, 2011, and were based on the institution’s assessment base for the third quarter of 2009, with growth assumed quarterly at annual rate of 5%. If events cause actual assessments during the prepayment period to vary from the prepaid amount, institutions will pay excess assessments in cash or receive a rebate of prepaid amounts not exhausted after collection of assessments due on June 30, 2013, as applicable. Collection of the prepayment does not preclude the FDIC from changing assessment rates or revising the risk-based assessment system in the future. The rule includes a process for exemption from the prepayment for institutions whose safety and soundness would be affected adversely.In December 2009, the Savings Bank paid the

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prepaid assessment of $1.6 million; and as of June 30, 2011, the outstanding prepaid assessment was $753,000.

As required by the Dodd-Frank Act, the FDIC adopted rules effective April 1, 2011, under which insurance premium assessments are based on an institution's total assets minus its tangible equity (defined as Tier 1 capital) instead of its deposits.  Under these rules, an institution with total assets of less than $10 billion will be assigned one of four risk categories based on its capital, supervisory ratings and other factors. Well capitalized institutions that are financially sound with only a few minor weaknesses are assigned to Risk Category I. Risk Categories II, III and IV present progressively greater risks to the DIF. A range of initial base assessment rates will apply to each category, subject to adjustment downward based on unsecured debt issued by the institution and, except for an institution in Risk Category I, adjustment upward if the institution's brokered deposits exceed 10% of its domestic deposits, to produce total base assessment rates.  Total base assessment rates range from 2.5 to nine basis points for Risk Category I, nine to 24 basis points for Risk Category II, 18 to 33 basis points for Risk Category III and 30 to 45 basis points for Risk Category IV, all subject to further adjustment upward if the institution holds more than a de minimis amount of unsecured debt issued by another FDIC-insured institution. The FDIC may increase or decrease its rates by 2.0 basis points without further rulemaking. In an emergency, the FDIC may also impose a special assessment.

The Dodd-Frank Act establishes 1.35% as the minimum reserve ratio. The FDIC has adopted a plan under which it will meet this ratio by September 30, 2020, the deadline imposed by the Dodd-Frank Act.  The Dodd-Frank requires the FDIC to offset the effect on institutions with assets less than $10 billion of the increase in the statutory minimum reserve ratio to 1.35% from the former statutory minimum of 1.15%.  The FDIC has not yet announced how it will implement this offset.  In addition to the statutory minimum ratio the FDIC must designate a reserve ratio, known as the designated reserve ratio (“DRR”), which may exceed the statutory minimum. The FDIC has established 2.0% as the DRR.  In addition, all institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, an agency of the Federal government established to fund the costs of failed thrifts in the 1980s. For the quarterly period ended March 31, 2011, the Financing Corporation assessment equaled 1.00 basis points for each $100 in domestic deposits. These assessments, which may be revised based upon the level of DIF deposits, will continue until the bonds mature in the years 2017 through 2019.

Under the Dodd-Frank Act, beginning on January 1, 2011, all non-interest bearing transaction accounts and IOLTA accounts qualify for unlimited deposit insurance by the FDIC through December 31, 2012.  NOW accounts, which were previously fully insured under the Transaction Account Guarantee Program, are no longer eligible for an unlimited guarantee due to the expiration of this program on December 31, 2010.  NOW accounts, along with all other deposits maintained at the Savings Bank, are now insured by the FDIC up to $250,000 per account owner.

In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. This payment is established quarterly and during the fiscal year ending March 31, 2011 averaged 5.33 basis points of assessable deposits. The Financing Corporation was chartered in 1987, by the OTS’ predecessor, the Federal Home Loan Bank Board, solely for the purpose of functioning as a vehicle for the recapitalization of the deposit insurance system.

As insurer, the FDIC 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

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regulation or order to pose a serious threat to the DIF.  The FDIC also has the authority to take enforcement actions against banks and savings associations.

The Dodd-Frank Act contains a number of provisions that will affect the capital requirements applicable to the Company and the Savings Bank, including the requirement that thrift holding companies be subject to consolidated capital requirements, effective July 21, 2011, the date the OTS became part of the OCC. In addition, on September 12, 2010, the Basel Committee adopted the Basel III capital rules. These rules, which will be phased in over a period of years, set new standards for common equity, tier 1 and total capital, determined on a risk-weighted basis. The impact on the Company and the Savings Bank of the Basel III rules cannot be determined at this time. For additional information, see “-- Capital Requirements -- Possible Changes to Capital Requirements Resulting from Basel III” set forth below.

A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Savings Bank.  There can be no prediction as to what insurance assessment rates will be in the future.  Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.  Management of the Savings Bank is not aware of any practice, condition or violation that might lead to termination of the Savings Bank’s deposit insurance.

Federal Home Loan Bank System.  The Savings Bank is a member of the FHLB-Des Moines, which is one of 12 regional FHLBs that administer the home financing credit function of member financial institutions.  Each FHLB serves as a reserve or central bank for its members within its assigned region.  It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System.  It makes loans or advances to members in accordance with policies and procedures, established by the Board of Directors of the FHLB, which are subject to the oversight of the Federal Housing Finance Agency.  All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB.  In addition, all long-term advances are required to provide funds for residential home financing.  At June 30, 2011, the Savings Bank had $3.0 million of outstanding advances from the FHLB-Des Moines.  See “Business -- Deposit Activities and Other Sources of Funds -- Borrowings” herein.

As a member, the Savings Bank is required to purchase and maintain stock in the FHLB-Des Moines.  At June 30, 2011, the Savings Bank had $434,000 in FHLB-Des Moines stock, which was in compliance with this requirement.  In past years, the Savings Bank has received substantial dividends on its FHLB-Des Moines stock.  The average dividend yield for fiscal 2011, 2010, 2009 and 2008 was 3.00%, 2.56%, 0.94% and 4.46%, respectively.  There can be no assurance that the FHLB-Des Moines will maintain its dividend at these levels.

Under federal law, the FHLB is required to provide funds for the resolution of troubled savings institutions and to contribute to low- and moderately-priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects.  These contributions have affected adversely the level of FHLB dividends paid and could continue to do so in the future.  These contributions could also have an adverse effect on the value of FHLB stock in the future.  A reduction in value of the Savings Bank's FHLB stock may result in a corresponding reduction in the Savings Bank's capital.

Prompt Corrective Action.  Federal statutes establish a supervisory framework based on five capital categories:  well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.  An institution’s category depends upon where its capital

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levels are in relation to relevant capital measures, which include a risk-based capital measure, a leverage ratio capital measure and certain other factors.  The federal banking agencies have adopted regulations that implement this statutory framework.  Under these regulations, an institution is treated as well capitalized if its ratio of total capital to risk-weighted assets is 10% or more, its ratio of core capital to risk-weighted assets is 6% or more, its ratio of core capital to adjusted total assets (leverage ratio) is 5% or more, and it is not subject to any federal supervisory order or directive to meet a specific capital level.  In order to be adequately capitalized, an institution must have a total risk-based capital ratio of not less than 8%, a Tier 1 risk-based capital ratio of not less than 4%, and a leverage ratio of not less than 4%.  Any institution which is neither well capitalized nor adequately capitalized is considered undercapitalized.

Undercapitalized institutions are subject to certain prompt corrective action requirements, regulatory controls and restrictions which become more extensive as an institution becomes more severely undercapitalized.  Failure by institutions to comply with applicable capital requirements would, if not remedied, result in progressively more severe restrictions on their respective activities and lead to enforcement actions, including, but not limited to, the issuance of a capital directive to ensure the maintenance of required capital levels and, ultimately, the appointment of the FDIC as receiver or conservator.  Banking regulators will take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements.  Additionally, approval of any regulatory application filed for their review may be dependent on compliance with capital requirements.

At June 30, 2011, First Home would have been categorized as "well capitalized" under the prompt corrective action regulations of the OTS, based on its regulatory capital ratios. However, since the Savings Bank is operating under a Cease and Desist Order, it is not considered “well capitalized” and is deemed “adequately capitalized.”

Qualified Thrift Lender Test.  All savings associations, including First Home, are required to meet a qualified thrift lender test to avoid certain restrictions on their operations.  This test requires a savings association to have at least 65% of its total assets, as defined by regulation, in qualified thrift investments on a monthly average for nine out of every 12 months on a rolling basis.  As an alternative, the savings association may maintain 60% of its assets in those assets specified in Section 7701(a)(19) of the Internal Revenue Code of 1986, as amended (“Code”).  Under either test, such assets primarily consist of residential housing related loans and investments.  A savings association that fails to meet the qualified thrift lender test is subject to certain operating restrictions and may be required to convert to a national bank charter.  At June 30, 2011, First Home maintained 63.63% of it portfolio assets in qualified thrift investments and, therefore, at that date was below the requirement of the qualified thrift lender test. This was the result of an incoming wire transfer deposit on June 30, 2011, the proceeds from which became part of total assets, but were in excess of the 20% cap on liquidity includable as qualifying in the calculation. The Savings Bank exceeded the 65% requirement in August 2011.

Capital Requirements.  The FDIC's capital regulations require federal savings institutions to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4% core capital ratio and an 8% risk-based capital ratio. In addition, the prompt corrective action standards discussed above also establish, in effect, minimum ratios of 2% tangible capital, 4% core capital (3% for institutions receiving the highest rating on the CAMELS system), 8% risk-based capital and, 4% Tier I risk-based capital. The OTS regulations also require that, in meeting the tangible, core and risk-based capital ratios, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal that are not permissible for a national bank.

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The risk-based capital standard requires federal savings institutions to maintain Tier I and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, recourse obligations, residual interests and direct credit substitutes, are multiplied by a risk-weight factor of 0% to 100%, assigned by the FDIC capital regulation based on the risks believed inherent in the type of asset.  Core capital is defined as common stockholders' equity (including retained earnings), certain non-cumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of unrealized gains on available-for-sale equity securities with readily determinable fair market values.  Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital.

The FDIC also has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution's capital level is or may become inadequate in light of the particular circumstances. At June 30, 2011, the Savings Bank met each of these capital requirements, which is reflected in the following table.

	At June 30, 2011
			Percent of
	Amount		Assets
	(Dollars in thousands)
Tangible capital	$	16,387		7.90	%
Minimum required tangible capital		3,110		1.50
Excess	$	13,277		6.40	%
Core capital	$	16,387		7.90	%
Minimum required core capital		8,292		4.00
Excess	$	8,095		3.90	%
Risk-based capital	$	17,568		18.34	%
Minimum risk-based capital requirement		7,662		8.00
Excess	$	9,906		10.34	%

Possible Changes to Capital Requirements Resulting from Basel III. In December 2010 and January 2011, the Basel Committee on Banking Supervision published the final texts of reforms on capital and liquidity generally referred to as “Basel III.”  Although Basel III is intended to be implemented by participating countries for large, internationally active banks, its provisions are likely to be considered by United States banking regulators in developing new regulations applicable to other banks in the United States, including the Savings Bank.

For banks in the United States, among the most significant provisions of Basel III concerning capital are the following:

• A minimum ratio of common equity to risk-weighted assets reaching 4.5%, plus an additional 2.5% as a capital conservation buffer, by 2019 after a phase-in period.

• A minimum ratio of Tier 1 capital to risk-weighted assets reaching 6.0% by 2019 after a phase-in period.

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• A minimum ratio of total capital to risk-weighted assets, plus the additional 2.5% capital conservation buffer, reaching 10.5% by 2019 after a phase-in period.

• An additional countercyclical capital buffer to be imposed by applicable national banking regulators periodically at their discretion, with advance notice.

• Restrictions on capital distributions and discretionary bonuses applicable when capital ratios fall within the buffer zone.

• Deduction from common equity of deferred tax assets that depend on future profitability to be realized.

• Increased capital requirements for counterparty credit risk relating to OTC derivatives, repos and securities financing activities.

• For capital instruments issued on or after January 13, 2013 (other than common equity), a loss-absorbency requirement such that the instrument must be written off or converted to common equity if a trigger event occurs, either pursuant to applicable law or at the direction of the banking regulator.  A trigger event is an event under which the banking entity would become nonviable without the write-off or conversion, or without an injection of capital from the public sector.   The issuer must maintain authorization to issue the requisite shares of common equity if conversion were required.

The Basel III provisions on liquidity include complex criteria establishing a liquidity coverage ratio (“LCR”) and net stable funding ratio (“NSFR”).  The purpose of the LCR is to ensure that a bank maintains adequate unencumbered, high quality liquid assets to meet its liquidity needs for 30 days under a severe liquidity stress scenario.  The purpose of the NSFR is to promote more medium and long-term funding of assets and activities, using a one-year horizon.  Although Basel III is described as a “final text,” it is subject to the resolution of certain issues and to further guidance and modification, as well as to adoption by United States banking regulators, including decisions as to whether and to what extent it will apply to United States banks that are not large, internationally active banks.

Limitations on Capital Distributions.  FDIC regulations impose various restrictions on savings institutions with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account.  Generally, savings institutions, such as the Savings Bank, that before and after the proposed distribution are well-capitalized, may make capital distributions during any calendar year up to 100% of net income for the year-to-date plus retained net income for the two preceding years. However, an institution deemed to be in need of more than normal supervision or in troubled condition by the FDIC may have its dividend authority restricted by the FDIC.  The Savings Bank currently is required to file an application and receive approval of the FDIC prior to paying any dividends or making any capital distributions.  For additional information, see “Item 1A -- Risk Factors--Risks Related to Our Market and Business--We are subject to the restrictions and conditions of Cease and Desist Orders. Failure to comply with the Cease and Desist Orders could result in additional enforcement action against us, including the imposition of monetary penalties.”

Generally, savings institutions proposing to make any capital distribution need not submit written notice to the FDIC prior to such distribution unless they are a subsidiary of a holding company or would not remain well-capitalized following the distribution.  Savings institutions that do not, or would not meet their current minimum capital requirements following a proposed capital distribution or propose to exceed these net income limitations, must obtain FDIC approval prior to making such distribution.  The

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FDIC may object to the distribution during that 30-day period based on safety and soundness concerns.

Loans to One Borrower.  Federal law provides that savings institutions are generally subject to the national bank limit on loans to one borrower.  A savings institution may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus.  An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if such loan is secured by specified readily-marketable collateral.  At June 30, 2011, the Savings Bank's largest extension of credit outstanding to any one borrower, including related entities, was $3.8 million, of which $483,000 was unfunded.  This amount represents two participation loans secured by a shopping center development in St. Joseph, Missouri. These loans were performing in accordance with their terms at that date.

The federal banking agencies have also adopted guidelines establishing safety and soundness standards on such matters as loan underwriting and documentation, asset quality, earnings, internal controls and audit systems, interest rate risk exposure and compensation and other employee benefits.  Any institution that fails to comply with these standards must submit a compliance plan.

Activities of Savings Associations and Their Subsidiaries.  When a savings association establishes or acquires a subsidiary or elects to conduct any new activity through a subsidiary that the association controls, the savings association must notify the FDIC 30 days in advance and provide the required information in connection with such notification.  Savings associations also must conduct the activities of subsidiaries in accordance with existing regulations and orders.

The FDIC may determine that the continuation by a savings association of its ownership control of, or its relationship to, the subsidiary constitutes a serious risk to the safety, soundness or stability of the savings association or is inconsistent with sound banking practices or with the purposes of the Federal Deposit Insurance Act.  Based upon that determination, the FDIC 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 DIF.  If so, it may require that no DIF member engage in that activity directly.

Transactions with Affiliates. The Savings Bank's authority to engage in transactions with "affiliates" is limited by FDIC regulations and by Sections 23A and 23B of the Federal Reserve Act as implemented by the Federal Reserve Board's Regulation W.  The term "affiliates" for these purposes generally means any company that controls or is under common control with an institution.  The Company and its non-savings institution subsidiaries would be affiliates of the Savings Bank.  In general, transactions with affiliates must be on terms that are as favorable to the institution as comparable transactions with non-affiliates.  In addition, certain types of transactions are restricted to an aggregate percentage of the institution's capital. Collateral in specified amounts must be provided by affiliates in order to receive loans from an institution.  In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary.Federally insured savings institutions are subject, with certain exceptions, to certain restrictions on extensions of credit to their parent holding companies or other affiliates, on investments in the stock or other securities of affiliates and on the taking of such stock or securities as collateral from any borrower.  In addition, these institutions are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or the providing of any property or service.  An institution deemed to be in “troubled condition” must file a notice with the OTS and obtain its non-

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objection to any transaction with an affiliate (subject to certain exemptions).

The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") generally prohibits a company from making loans to its executive officers and directors. However, that act contains a specific exception for loans by a depository institution to its executive officers and directors in compliance with federal banking laws.  Under such laws, the Savings Bank's authority to extend credit to executive officers, directors and 10% stockholders ("insiders"), as well as entities which such person's control, is limited.  The law restricts both the individual and aggregate amount of loans the Savings Bank may make to insiders based, in part, on the Savings Bank's capital position and requires certain Board approval procedures to be followed.  Such loans must be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment.  There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees.  There are additional restrictions applicable to loans to executive officers.

Federal Reserve System.  The Federal Reserve Board requires that all depository institutions maintain reserves on transaction accounts or non-personal time deposits.  These reserves may be in the form of cash or non-interest-bearing deposits with the regional Federal Reserve Bank.  Negotiable order of withdrawal (“NOW”) accounts and other types of accounts that permit payments or transfers to third parties fall within the definition of transaction accounts and are subject to the reserve requirements, as are any non-personal time deposits at a savings bank.  As of June 30, 2011, the Savings Bank’s deposit with the Federal Reserve Bank and vault cash exceeded its reserve requirements.

Community Reinvestment Act.  Under the Community Reinvestment Act (“CRA”), every FDIC-insured institution has a continuing and affirmative obligation consistent with safe and sound banking practices to help meet the credit needs of its entire community, including low and moderate income neighborhoods.  The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA.  The CRA requires the FDIC, in connection with the examination of the Savings Bank, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications, such as a merger or the establishment of a branch, by the Savings Bank.  The FDIC may use an unsatisfactory rating as the basis for the denial of an application.  Due to the heightened attention being given to the CRA in the past few years, the Savings Bank may be required to devote additional funds for investment and lending in its local community.  The Savings Bank was examined for CRA compliance and received a rating of outstanding in its latest examination.

Regulatory and Criminal Enforcement Provisions.  The FDIC has primary enforcement responsibility over savings institutions and has the authority to bring action against all "institution-affiliated parties," including stockholders, attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution.  Formal enforcement action may range from the issuance of a capital directive or cease and desist order to the removal of officers or directors, receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or $1.1 million per day in especially egregious cases.  Federal law also establishes criminal penalties for certain violations.

Environmental Issues Associated with Real Estate Lending.  The Comprehensive Environmental Response, Compensation and Liability Act

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("CERCLA"), a federal statute, generally imposes strict liability on all prior and present "owners and operators" of sites containing hazardous waste.  However, Congress asked to protect secured creditors by providing that the term "owner and operator" excludes a person whose ownership is limited to protecting its security interest in the site.  Since the enactment of the CERCLA, this "secured creditor exemption" has been the subject of judicial interpretations which have left open the possibility that lenders could be liable for cleanup costs on contaminated property that they hold as collateral for a loan.  In addition, lenders, such as the Savings Bank, may be subject to environmental liabilities with respect to real estate properties that are placed in foreclosure that they subsequently take title to.  For additional information, see Item 1A, “Risk Factors -– Risks Related to Our Market and Business -- Our real estate lending also exposes us to the risk of environmental liabilities.”

To the extent that legal uncertainty exists in this area, all creditors, including the Savings Bank, that have made loans secured by properties with potential hazardous waste contamination (such as petroleum contamination) could be subject to liability for cleanup costs, which costs often substantially exceed the value of the collateral property.

Regulation of First Bancshares

General.  First Bancshares is a unitary savings and loan holding company subject to the regulatory oversight of the Federal Reserve as successor to the powers and authority of the OTS.  Accordingly, the Company is required to register and file reports with the Federal Reserve and is subject to  regulation and examination by the Federal Reserve .  In addition, the Federal Reserve has enforcement authority over the Company and its non-savings institution subsidiaries, which also permits the Federal Reserve  to restrict or prohibit activities that are determined to present a serious risk to the subsidiary savings institution. In addition, beginning July 21, 2015, the Company as a savings and loan holding company will be subject to the same leverage and risk-based capital requirements that apply to insured depository institutions.

Activities Restrictions.  The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 ("GLBA") provides that no company may acquire control of a savings association after May 4, 1999 unless it engages only in the financial activities permitted for financial holding companies under the law or for multiple savings and loan holding companies as described below.  The GLBA also specifies, subject to a grandfather provision, that existing savings and loan holding companies may only engage in such activities.  The Company qualifies for the grandfathering and is therefore not restricted in terms of its activities.  Upon any non-supervisory acquisition by the company of another savings association as a separate subsidiary, the Company would become a multiple savings and loan holding company and would be limited to those activities permitted multiple savings and loan holding companies by OTS regulation.  Multiple savings and loan holding companies may engage in activities permitted for financial holding companies, and certain other activities including acting as a trustee under deed of trust and real estate investments.

If the Savings Bank fails the qualified thrift lender test, the Company must, within one year of that failure, register as, and will become subject to, the 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.

Mergers and Acquisitions. The Company must obtain approval from the Federal Reserve before acquiring more than 5% of the voting stock of another savings institution or savings and loan holding company or acquiring such an institution or holding company by merger, consolidation or purchase of its

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assets.  In evaluating an application for the Company to acquire control of a savings institution, the Federal Reserve would consider the financial and managerial resources and future prospects of the Company and the target institution, the effect of the acquisition on the risk to the DIF, the convenience and the needs of the community and competitive factors.

The Federal Reserve may not approve any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions; (i) the approval of interstate supervisory acquisitions by savings and loan holding companies and (ii) the acquisition of a savings institution in another state if the laws of the states of the target savings institution specifically permit such acquisitions.  The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

Sarbanes-Oxley Act of 2002.  The Sarbanes-Oxley Act of 2002 was signed into law on July 30, 2002 in response to public concerns regarding corporate accountability in connection with recent accounting scandals.  The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws.  The Sarbanes-Oxley Act generally applies to all companies that file or are required to file periodic reports with the SEC, under the Securities Exchange Act of 1934, including the Company.

The Sarbanes-Oxley Act includes very specific additional disclosure requirements and corporate governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules and mandates further studies of certain issues by the SEC and the Comptroller General. The Sarbanes-Oxley Act represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees.As noted above, the Dodd-Frank Act imposes additional disclosure and corporate government requirements and represents further federal involvement in matters historically addressed by state corporate law.

Taxation

Federal Taxation

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

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

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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 rules eliminate the 8% of taxable income method for deducting additions to the tax bad debt reserves for all thrifts for tax years beginning after December 31, 1995.  These rules also require that all institutions recapture all or a portion of their bad debt reserves added since the base year (last taxable year beginning before January 1, 1988).   For taxable years beginning after December 31, 1995, the Savings Bank's bad debt deduction will be determined under the experience method using a formula based on actual bad debt experience over a period of years or, if the Savings Bank is a "large" association (assets in excess of $500 million) on the basis of net charge-offs during the taxable year.  The un-recaptured base year reserves will not be subject to recapture as long as the institution continues to carry on the business of banking.  In addition, the balance of the pre-1988 bad debt reserves continue to be subject to provisions of present law referred to below that require recapture in the case of certain excess distributions to shareholders.

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

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

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

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

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

Missouri Taxation

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

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

For additional information regarding taxation, see Note 9 of the Notes to the Consolidated Financial Statements included in the Annual Report.

Competition

The Savings Bank has been, and continues to be, a community-oriented savings institution offering a variety of financial resources to meet the needs of Wright, Webster, Douglas, Ozark, Christian, Stone, Taney and Greene counties, Missouri.  The Savings Bank also transacts a significant amount of business in Texas County, Missouri.  The Savings Bank's deposit gathering and lending activities are concentrated in these market areas.  At June 30, 2011, the Savings Bank's offices were located in Mountain Grove, Marshfield, Ava, Gainesville, Sparta, Theodosia, Crane, Galena, Kissee Mills, Rockaway Beach, and Springfield, Missouri.

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

The competitive factors among financial institutions can be classified into two categories: competitive rates and competitive services.  Interest rates are widely advertised and thus competitive, especially in the area of time deposits.  From a service standpoint, financial institutions compete against each other in types and quality of services.  The Savings Bank is

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generally competitive with other financial institutions in its area with respect to interest rates paid on time and savings deposits, fees charged on deposit accounts, and interest rates charged on loans.  With respect to services, the Savings Bank offers a customer service-oriented atmosphere which management believes is tailored to its customers' needs.

The Savings Bank also believes it benefits from its focus on meeting the needs of it community as well as its relatively high core deposit base.

Executive Officers

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

Name	Age(1)	Position
R. Bradley Weaver	55	Chairman of the Board and Chief    Executive Officer of the Company and    the Savings Bank
Lannie E. Crawford	60	President of the Company and the Savings    Bank
Ronald J. Walters	61	Senior Vice President, Treasurer and    Chief Financial Officer of the    Company and the Savings Bank
Dale W. Keenan	48	Executive Vice President and Senior    Lender of the Savings Bank; Vice    President of the Company

_________________

(1)   As of June 30, 2011.

The principal occupation of each executive officer of the Company is set forth below.  All executive officers reside in the Savings Bank's primary trade area in Missouri, unless otherwise stated. There are no family relationships among or between the executive officers, unless otherwise stated.

R. Bradley Weaver was appointed as Chief Executive Officer of the Savings Bank effective May 16, 2011, and Chief Executive Officer of the Company on May 20, 2011. From 2008 until May 2011, Mr. Weaver, was Senior Vice President Commercial Lending at BancorpSouth Bank in Springfield, Missouri. He previously held positions of increasing responsibility at Mid Missouri Bancshares, where he became President and Chief Executive Officer, and at UMB Financial Corporation, where he held the position of CEO with two community banks before holding the office of Regional President of UMB Bank n.a.Mr. Weaver is a resident of Springfield, Missouri.

Lannie E. Crawford was appointed as President of the Company and the Savings Bank effective November 6, 2008.  Mr. Crawford joined the Savings Bank in November 2007 and has more than 32 years of experience with financial institutions. Prior to joining the Company and the Savings Bank, Mr. Crawford served as Senior Vice President and Regional Manager of Sun Security Bank, Mountain Grove, Missouri from 2003 until November 2007.

Ronald J. Walters joined the Company and the Savings Bank on November 20, 2006 as Senior Vice President, Treasurer and Chief Financial Officer.  Mr. Walters, a CPA, was previously Senior Vice President, Secretary, Treasurer and Chief Financial Officer of Meta Financial Group and MetaBank in Storm Lake, Iowa from 2003 to 2006.  He has over 34 years experience in financial services.

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Dale W. Keenan joined the Savings Bank on March 11, 2007 as Executive Vice President and Senior Lender.  Mr. Keenan was previously a Senior Vice President and Senior Lender for Heritage Bank of the Ozarks in Lebanon, Missouri from 2003 to 2007.  Mr. Keenan has over 27 years of experience in financial services.

Personnel

As of June 30, 2011, the Savings Bank had 75 full-time employees and 21 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.

Item 1A.  Risk Factors

An investment in our common stock is subject to risks inherent in our business. Before you invest in our common stock, you should be aware that there are various risks, including those described below, which could affect the value of your investment in the future. The trading price of our common stock could decline as a result of any of these risks, and you may lose all or part of your investment. The risk factors described in this section, as well as any cautionary language in this Form 10-K, provide examples of risks, uncertainties and events that could have a material adverse effect on our business, including our operating results and financial condition. This Form 10-K also contains forward-looking statements that involve risks and uncertainties. These risks could cause our actual results to differ materially from the expectations that we describe in our forward-looking statements. You should carefully consider the risks described below, together with all of the other information included or incorporated by reference in this Form 10-K, before making an investment decision.

We are subject to the restrictions and conditions of Cease and Desist Orders. Failure to comply with the Cease and Desist Orders could result in additional enforcement actions against us, including the imposition of monetary penalties.

As discussed above under "Corporate Developments and Overview," we have entered into a Stipulation and Consent to the issuance of Order to Cease and Desist with the OTS, which are now enforced by the Federal Deposit Insurance Corporation in the case of the Savings Bank and the Federal Reserve in the case of the Company.

Under the terms of the orders, the Savings Bank and the Company, without the prior written approval of their respective banking regulators, may not:

·   Increase assets during any quarter;

·   Pay dividends;

·   Increase brokered deposits;

·   Repurchase shares of the Company’s outstanding common stock; and

·   Issue any debt securities or incur any debt (other than that incurred in the normal course of business).

Other material provisions of the order require the Savings Bank and the Company to:

·   develop an acceptable business plan for enhancing, measuring and maintaining profitability, increasing earnings, improving liquidity and maintaining capital levels;

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·   ensure the Savings Bank’s compliance with applicable laws, rules, regulations and agency guidelines, including the terms of the order;

·   not appoint any new director or senior executive officer or change the responsibilities of any current senior executive officers without notifying the applicable banking regulator;

·   not enter into, renew, extend or revise any compensation or benefit agreements for directors or senior executive officers;

·   not make any indemnification, severance or golden parachute payments;

·   enhance its asset classification policy;

·   provide progress reports to the Federal Deposit Insurance Corporation  regarding certain classified assets;

·   submit a comprehensive plan for reducing classified assets;

·   develop a plan to reduce the concentration of certain loans contained in the loan portfolio and that addresses the assessment, monitoring and control of the risks association with the commercial real estate portfolio;

·   not enter into any arrangement or contract with a third party service provider that is significant to the overall operation or financial of the Savings Bank, or that is outside the normal course of business; and

·   prepare and submit progress reports to the Federal Deposit Insurance Corporation and the Federal Reserve. The orders will remain in effect until modified or terminated by the Federal Deposit Insurance Corporation or the Federal Reserve.

If the Federal Deposit Insurance Corporation or the Federal Reserve  determines that we are not in compliance with the orders, they would have available various remedies, including among others, the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to direct an increase in capital, to remove officers and/or directors, to assess civil monetary penalties or to enforce the orders through court proceedings.

Management has been taking action and implementing programs to comply with the requirements of the orders and the Savings Bank and the Company believes that they are substantially in compliance with the requirements set forth in the orders, as of the date of this Form 10-K. Compliance with the orders, however, is subject to a determination by the Federal Deposit Insurance Corporation or the Federal Reserve, as the case may be. Either the Federal Deposit Insurance Corporation or the Federal Reserve  may determine, in its sole discretion, that we have not addressed the issues raised by the orders satisfactorily, or that any current or past actions, violations or deficiencies could be the subject of further regulatory enforcement actions taken by it.  Such enforcement actions could involve penalties or limitations on our business and negatively affect our ability to implement our business plan, the value of our common stock as well as our financial condition and results of operations.

Our business may be adversely affected by credit risk associated with residential property.

At June 30, 2011, $54.9 million, or 56.2% of our total loan portfolio, was secured by one-to-four family residential real estate loans. This type of lending is generally sensitive to regional and local economic conditions that

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significantly impact the ability of borrowers to meet their loan payment obligations making loss levels difficult to predict. The decline in residential real estate values as a result of the downturn in the housing market has reduced the value of the real estate collateral securing the majority of our loans held for investment and has increased the risk that we will incur losses if borrowers default on their loans.  Continued declines in both the volume of real estate sales and the sales prices coupled with the current recession and the associated increases in unemployment may result in higher than expected loan delinquencies or problem assets, a decline in demand for our products and services, a lack of growth and/or a decrease in deposits. These potential negative events may cause us to incur losses, adversely affect our capital and liquidity, and damage our financial condition and business operations. These declines may have a greater effect on our earnings and capital than on the earnings and capital of financial institutions whose loan portfolios are more diversified.

Our loan portfolio includes loans with a higher risk of loss.

We originate residential mortgage loans (including second mortgage loans), construction loans, commercial mortgage and land loans, commercial business loans and consumer loans primarily within our market area. Generally, the types of loans other than residential mortgage loans have a higher risk of loss than residential mortgage loans.  We had $40.4 million or 41.4% of our total loan portfolio outstanding in these higher risk loans at June 30, 2011. We have had a significant increase in these types of loans since 1999, when we began to diversify the loan portfolio in order to mitigate other types of risk, such as interest-rate risk.  While diversification into construction, commercial real estate and land, commercial business, and consumer loans may have reduced interest-rate risk as a result of their typically shorter terms and, in most cases, adjustable nature of their interest rates, they do expose a lender to greater credit risk than loans secured by residential real estate. The collateral securing these loans may not be sold as easily as residential real estate. These loans also have greater credit risk than residential real estate for the following reasons and as discussed in detail under “--Lending Activities”:

·   Commercial Real Estate and Land Loans.  Commercial real estate and land loans typically involve higher principal amounts than other types of loans.  Repayment is dependent upon income being generated in amounts sufficient to cover borrowers' operating expenses, as well as, debt service.  Loans on land under development or held for future use also pose additional risk because of a lack of income produced by the property and the potential illiquid nature of the security.  The repayment of loans secured by farm properties is dependent upon the success of farming operations, which is contingent on many factors outside the control of either the borrowers or us.  These factors include adverse weather conditions, fluctuating market prices of both final product and production costs, factors affecting the physical condition of livestock and government regulations.

·   Commercial Business Loans.  Our commercial business loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The borrowers' cash flow may be unpredictable, and collateral securing these loans may fluctuate in value. Although commercial business loans are often collateralized by equipment or other business assets, the liquidation of collateral in the event of default is often an insufficient source of repayment. Accordingly, the repayment of commercial business loans depends primarily on the cash flow and credit worthiness of the borrower and secondarily on the underlying collateral provided by the borrower.

·   Consumer Loans.  Consumer loans (such as vehicle loans, mobile home

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loans and personal lines of credit) are collateralized, if at all, with assets that may not provide an adequate source of payment of the loan due to depreciation, damage, or loss.

·   Construction Loans.  Construction lending in lending involves the inherent difficulties of estimating the cost of the project and estimating a property's value at completion of the project.  If the estimate of construction cost proves to be inaccurate, we may need to advance funds beyond the original loan amount in order to complete the project.  If the estimate of value upon completion proves to be inaccurate, we may be confronted at, or prior to, the maturity of the loan with a project the value of which is insufficient to assure full repayment.

Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.

Lending money is a substantial part of our business and each loan carries a certain risk that it will not be repaid in accordance with its terms or that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other things:

·   cash flow of the borrower and/or the project being financed;

·   changes and uncertainties as to the future value of the collateral, in the case of a collateralized loan;

·   the duration of the loan;

·   the credit history of a particular borrower; and

·   changes in economic and industry conditions.

We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, which we believe is appropriate to provide for probable losses in our loan portfolio. The amount of this allowance is determined by our management through periodic reviews and consideration of several factors, including, but not limited to:

·   our general reserve, based on our historical default and loss experience and certain macroeconomic factors based on management’s expectations of future events; and

·   our specific reserve, based on our evaluation of non-performing loans and their underlying collateral.

The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and the loss and delinquency experience, and evaluate economic conditions and make significant estimates of current credit risks and future trends, all of which may undergo material changes. If our estimates are incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in the need for additions to our allowance through an increase in the provision for loan losses.  Continuing deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in

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the allowance for loan losses.  Our allowance for loan losses was $1.9 million or 2.03% of gross loans held for investment and 180.9% of nonperforming loans at June 30, 2011. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. If charge-offs in future periods exceed the allowance for loan losses, we will need additional provisions to increase the allowance for loan losses. Any increases in the provision for loan losses will result in a decrease in net income and may have a material adverse effect on our financial condition, results of operations and our capital.

If our allowance for loan losses is not adequate, we may be required to make further increases in our provisions for loan losses and to charge-off additional loans, which could adversely affect our results of operations.

For the fiscal year ended June 30, 2011 we recorded a provision for loan losses of $1.2 million compared to $852,000 for the fiscal year ended June 30, 2010. Our results of operations for fiscal 2011 were severely impacted by the $1.2 million provision for loan losses. We also recorded net loan charge-offs of $1.7 million for the fiscal year ended June 30, 2011 compared to $2.7 million for the fiscal year ended June 30, 2010. During the fiscal years ended June 30, 2010 and 2009, we experienced increasing loan delinquencies and credit losses. Our non-performing loans and assets for those years reflected operating difficulties of individual borrowers resulting from weakness in the local economy; however, more recently, conditions in the general economy have shown some small signs of improvement and many of the loans that contributed to the increased levels of loan delinquencies and non-performing loans have been resolved through foreclosure, forfeiture, charge down or other forms of resolution. At June 30, 2011, our total non-performing loans had decreased to $1.3 million, or 1.4% of gross loans, compared to $3.9 million, or 3.5% of gross loans, at June 30, 2010. Current trends in the housing and real estate markets remain challenging. Changes in our delinquencies and credit losses, will also remain unpredictable. As a result, we could be required to make further increases in our provision for loan losses and to charge off additional loans in the future, which could have a material adverse effect on our financial condition and results of operations.

The current economic recession in the market areas we serve may continue to adversely impact our earnings and could increase our credit risk associated with our loan portfolio.

Substantially all of our loans are to businesses and individuals in the eight counties of Wright, Webster, Douglas, Christian, Ozark, Stone, Taney and Greene in the State of Missouri, which we consider to be our primary market area.  In addition to loans within our primary market area, we also have originated loans in 11 other states.  The local economic conditions in our market areas have a significant impact on the demand for our products and services as well as the ability of our customers to repay loans, the value of the collateral securing loans and the stability of our deposit funding sources.

A further deterioration in economic conditions in the market areas we serve could result in the following consequences, any of which could have a materially adverse impact on our business, financial condition and results of operations:

·   loan delinquencies, problem assets and foreclosures may increase;

·   demand for our products and services may decline;

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·   collateral for loans made may decline further in value, in turn reducing customers’ borrowing power, reducing the value of assets and collateral associated with existing loans;

·   the amount of our low-cost or non-interest bearing deposits may decrease; and

·   the price of our common stock may decrease.

We may have continuing losses and low earnings.

We have had losses and reduced net income in recent years.  For the fiscal years ended June 30, 2011, 2010 and 2009, we had net losses of $4.1 million, $1.5 million and $4.0 million, respectively. Our returns on average assets and average equity were negative for the fiscal years ended June 30, 2011, 2010 and 2009, due to the losses we incurred for those years. We continue to face considerable challenges that will hinder our ability to improve our earnings significantly. These challenges include the restriction on our operations under the Cease and Desist Orders, the increased level of our problem loans, and the pressure on our interest rate spread.

While we have identified and are implementing various strategic initiatives to improve earnings and to overcome these operating and other challenges, our strategic initiatives might not succeed in increasing our net income.

We have had a significant amount of problem loans and related losses.

Between 1999 and 2008, the Savings Bank focused on increasing our commercial business loan and commercial real estate loan portfolios.  However, in light of the economic downturn, which began in fiscal 2008, we recognized substantial write-offs in the fiscal years ended June 30, 2011, 2010, and 2009, due primarily to commercial business and commercial real estate loans. Our ratio of non-performing assets to total assets increased steadily from 0.59% at June 30, 2006 to 6.19% at June 30, 2010. Our total non-accruing loans increased from $841,000 at June 30, 2006 to $3.9 million at June 30, 2010. While the economy created difficulties for businesses, consumers quickly felt the impact as jobs disappeared. During fiscal 2011, there was some modest, although short lived, improvement in economic conditions. At June 30, 2011, our non-accruing loans decreased by $2.8 million to $1.1 million from $3.9 million at June 30, 2010. In addition, the ratio of our non-performing assets to total assets decreased to 5.00% at June 30, 2011 from 6.19% at June 30, 2010.

At June 30, 2011, classified assets were $10.5 million, a decrease of $1.1 million from $11.6 million at June 30, 2010, and a decrease of $1.5 million from $12.0 at June 30, 2009.  We also indentified an additional loan of $176,000 at June 30, 2011 as Special Mention. This item could increase our classified assets if there was further deterioration in its financial condition.  The loan is a commercial real estate loan.

Our profitability is dependent to a large extent upon net interest income, which is the difference, or spread, between the interest earned on loans, securities and other interest-earning assets and the interest paid on deposits, borrowings, and other interest-bearing liabilities. Because of the differences in maturities and re-pricing characteristics of our interest-earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities.  We principally manage interest rate risk by managing our volume and mix of our earning assets and funding liabilities. In a changing interest rate environment, we may not be able to manage this risk effectively.  Changes in interest rates also can affect: (1) our ability to originate and/or sell loans; (2) the value of our

49

interest-earning assets, which would negatively impact stockholders’ equity, and our ability to realize gains from the sale of such assets; (3) our ability to obtain and retain deposits in competition with other available investment alternatives; and (4) the ability of our borrowers to repay adjustable or variable rate loans.  Interest rates are highly sensitive to many factors, including government monetary policies, domestic and international economic and political conditions and other factors beyond our control.  If we are unable to manage interest rate risk effectively, our business, financial condition and results of operations could be materially harmed.

Continued weak or worsening credit availability could limit our ability to replace deposits and fund loan demand, which could adversely affect our earnings and capital levels.

Continued or worsening credit availability and the inability to obtain adequate funding to replace deposits and fund continued loan growth may negatively affect asset growth and, consequently, our earnings capability and capital levels. In addition to any deposit growth, maturity of investment securities and loan payments, we rely from time to time on advances from the Federal Home Loan Bank of Des Moines and certain other wholesale funding sources to fund loans and replace deposits. If the economy does not improve or continues to deteriorate, these additional funding sources could be negatively affected, which could limit the funds available to us. Our liquidity position could be significantly constrained if we were unable to access funds from the Federal Home Loan Bank of Des Moines or other wholesale funding sources.

We are dependent on key members of our senior management team, which has changed significantly in the past five years.

We are dependent on the continued efforts and abilities of our executive officers and key management personnel.  Their experience and industry contacts significantly benefit us. The loss of any of these individuals could have a material adverse impact on our operations because other officers may not have the experience and expertise to readily replace these individuals.

We have had four different Presidents and five different Chief Executive Officers since 2003.  Our current President was appointed in November 2008 and has been employed by the Company and the Savings Bank since November 2007.  In addition, our current Chairman of the Board and Chief Executive Officer has only served in that position since May 2011.  Finally, our Chief Financial Officer has been with the Company and the Savings Bank since November 2006, and many of our other key members of senior management have been with the Savings Bank for just over four years.

While we believe we have qualified individuals in place to succeed the individuals who have left the Savings Bank, these individuals will need to develop a cohesive and unified senior management team.  Any additional changes in key personnel and their responsibilities may be disruptive to our business and could have a material adverse effect on our business, financial condition and profitability.

Increases in deposit insurance premiums and special FDIC assessments will hurt our earnings.

Federal Deposit Insurance Corporation insurance premiums increased significantly in 2009 and we may pay higher Federal Deposit Insurance Corporation premiums in the future.

The Dodd-Frank Act established 1.35% as the minimum reserve ratio.  The Federal Deposit Insurance Corporation has adopted a plan under which it will meet this ratio by the statutory deadline of September 30, 2020. The Dodd-Frank Act requires the Federal Deposit Insurance Corporation to offset the effect on institutions with assets less than $10 billion of the increase in

50

the minimum reserve ratio to 1.35% from the former minimum of 1.15%.  The Federal Deposit Insurance Corporation has not announced how it will implement this offset.  In addition to the statutory minimum ratio, the Federal Deposit Insurance Corporation must set a designated reserve ratio or DRR, which may exceed the statutory minimum.  The Federal Deposit Insurance Corporation has set 2.0 as the DRR.

As required by the Dodd-Frank Act, the Federal Deposit Insurance Corporation has adopted final regulations under which insurance premiums are based on an institution's total assets minus its tangible equity instead of its deposits. While our Federal Deposit Insurance Corporation insurance premiums initially will be reduced by these regulations, it is possible that our future insurance premiums will increase under the final regulations.

Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed or the cost of that capital may be very high.

We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations.  In addition, we may elect to raise additional capital to support our business or to finance acquisitions, if any.  In that regard, a number of financial institutions have recently raised considerable amounts of capital as a result of a deterioration in their results of operations and financial condition arising from the turmoil in the mortgage loan market, deteriorating economic conditions, declines in real estate values and other factors.  If we are required by regulatory authorities to raise additional capital, we may seek to do so through the issuance of, among other things, our common stock or preferred stock.

Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance.  Accordingly, we cannot make assurances that we will be able to raise additional capital if needed on terms that are acceptable to us, or at all.  If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired and our financial condition and liquidity could be materially and adversely affected.  In addition, if we are unable to raise additional capital when required by our banking regulators, we may be subject to additional adverse regulatory action.  See “We are subject to the restrictions and conditions of Cease and Desist Orders. Failure to comply with the Cease and Desist Orders could result in additional enforcement action against us, including the imposition of monetary penalties.”

Competition with other financial institutions could adversely affect our profitability.

The banking and financial services industry is very competitive. Legal and regulatory developments have made it easier for new and sometimes unregulated competitors to compete with us. Consolidation among financial service providers has resulted in fewer very large national and regional banking and financial institutions holding a large accumulation of assets. These institutions generally have significantly greater resources, a wider geographic presence or greater accessibility. Our competitors sometimes are also able to offer more services, more favorable pricing or greater customer convenience than we do. In addition, our competition has grown from new banks and other financial services providers that target our existing or potential customers. As consolidation continues, we expect additional institutions to try to exploit our market.

Technological developments have allowed competitors including some non-depository institutions, to compete more effectively in local markets and have expanded the range of financial products, services and capital available to our target customers. If we are unable to implement, maintain and use such

51

technologies effectively, we may not be able to offer products or achieve cost-efficiencies necessary to compete in our industry. In addition, some of these competitors have fewer regulatory constraints and lower cost structures.

New or changing tax, accounting, and regulatory rules and interpretations could significantly impact strategic initiatives, results of operations, cash flows, and financial condition.

The financial services industry is extensively regulated. Federal and state banking regulations are designed primarily to protect the deposit insurance funds and consumers, not to benefit a company's stockholders. These regulations may sometimes impose significant limitations on operations. The significant federal and state banking regulations that affect us are described in this report under the heading “Item 1. Business –- Regulation of First Home” and “—Regulation of First Bancshares.”  These regulations, along with the currently existing tax, accounting, securities, insurance, and monetary laws, regulations, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies, and interpretations are constantly evolving and may change significantly over time.

Such changes could subject us to additional costs, limit the types of financial services and products we may offer, restrict mergers and acquisitions, investments, access to capital, the location of banking offices, and/or increase the ability of non-banks to offer competing financial services and products, among other things.  For example, a federal rule which took effect on July 1, 2010 prohibits a financial institution from automatically enrolling customers in overdraft protection programs, on ATM and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service.  This new rule adversely affected our non-interest income during the second half of fiscal 2010 and throughout all of fiscal 2011. It is likely to continue to adversely affect the results of our operations by reducing the amount of our non-interest income.

Our success depends on our continued ability to maintain compliance with the various regulations to which we are subject.  Some of these regulations may increase our costs and thus place other financial institutions in stronger, more favorable competitive positions. We cannot predict what restrictions may be imposed upon us with future legislation.

Financial reform legislation enacted by Congress will, among other things, tighten capital standards, create a new Consumer Financial Protection Bureau and result in new laws and regulations that are expected to increase our costs of operations.

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).  This new law will significantly change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress.  The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

Among the many requirements in the Dodd-Frank Act for new banking regulations is a requirement for new capital regulations to be adopted within 18 months.  These regulations must be at least as stringent as, and may call for higher levels of capital than, current regulations. In addition, the banking regulators are required to seek to make capital requirements for banks and bank holding companies, countercyclical so that capital requirements

52

increase in times of economic expansion and decrease in times of economic contraction.

Certain provisions of the Dodd-Frank Act are expected to have a near term impact on us.  For example, the Dodd-Frank Act eliminates the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest-bearing checking accounts.  Depending on competitive responses, this significant change to existing law could have an adverse impact on our interest expense.

The Dodd-Frank Act also broadens the base for Federal Deposit Insurance Corporation insurance assessments.  Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution.  The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor and non-interest-bearing transaction accounts and IOLTA accounts have unlimited deposit insurance through December 31, 2012.

The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments and authorizes the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. The legislation also directs the federal banking regulators to issue rules prohibiting incentive compensation that encourages inappropriate risks. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.

The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws.  The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices.  The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets.  Financial institutions with $10 billion or less in assets, such as the Savings Bank, will continue to be examined for compliance with the consumer laws by their primary bank regulators.

Finally, the Dodd-Frank Act also eliminated the OTS effective July 21, 2011.  With the elimination of the OTS, the Federal Deposit Insurance Corporation is now the primary federal banking regulator for the Savings Bank, making the Board of Governors of the Federal Reserve System the primary federal banking regulator for the Company, eventually imposing capital requirements on the Company, and implementing numerous other changes.  No assurances can be given as to whether or in what form such changes may occur.

Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on us.  However, compliance with this new law and its implementing regulations is expected to result in additional operating costs that could have a material adverse effect on our financial condition and results of operations.

Changes in accounting standards may affect our performance.

Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time there are changes in the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be difficult to predict and can materially impact how we report and record our financial condition and results of operations. In some cases, we could be

53

required to apply a new or revised standard retroactively, resulting in a retrospective adjustment to prior financial statements.

We have suspended our regular cash dividend.

We have not paid a regular cash dividend since March 2007, when our board of directors determined to suspend our regular cash dividend in response to our operating performance.  A special dividend of $0.10 per share of common stock was declared by the board of directors at its regular meeting in July 2008.  Any dividends we pay in the future will depend on a number of factors, including our capital requirements, our financial condition and results of operations, our ability to generate sufficient earnings to warrant the payment of dividends, tax considerations, statutory and regulatory limitations and general economic conditions.  In addition, our ability to pay dividends may depend, in part, on our receipt of dividends from the Savings Bank because the Company has minimal income sources beyond the earnings from the Savings Bank. Under the Cease and Desist Orders currently in place, both the Company and the Savings Bank must request permission from their respective federal banking regulators in order to make a dividend payment.

Our real estate lending also exposes us to the risk of environmental liabilities.

In the course of our business, we may foreclose and take title to real estate, and we could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third persons for property damage, personal injury, investigation, and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business, financial condition and results of operations could be materially and adversely affected.

We rely on effective internal controls.

If we fail to maintain an effective system of disclosure controls and procedures and internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud, and, as a result, investors and depositors could lose confidence in our financial reporting, which could adversely affect our business, the trading price of our stock and our ability to attract additional deposits.

In connection with the enactment of the Sarbanes-Oxley Act of 2002 and the implementation of the rules and regulations promulgated by the SEC, the Company must maintain disclosure controls and procedures and internal control over financial reporting.  If the Company fails to identify and correct any significant deficiencies in the design or operating effectiveness of its disclosure controls and procedures or internal control over financial reporting or fails to prevent fraud, current and potential shareholders, and depositors could lose confidence in our internal controls and financial reporting, which could adversely affect our business, financial condition and results of operations, the trading price of our stock and our ability to attract additional deposits.

Item 1B.  Unresolved Staff Comments

The Company has not received any written comments from the staff of the SEC regarding its periodic or current reports under the Securities Exchange Act of 1934 that remain unresolved.

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Item 2.  Properties

The following table sets forth information regarding the Savings Bank's offices as of June 30, 2011.

				Net Book
				Value		Land	Building
		Year		as of		Owned/	Owned/	Square
Location	County	Opened		June 30, 2011		Leased	Leased	Footage
Main Office			(In thousands)
142 East First Street	Wright	1911		$	917	Owned	Owned		15,476
Mountain Grove, MO 65711
Branch Offices
1208 N. Jefferson Street	Douglas	1978			204	Owned	Owned		3,867
Ava, MO 65608
103 South Clay Street	Webster	1974			238	Owned	Owned		3,792
Marshfield, MO 65706
203 Elm Street	Ozark	1992			444	Owned	Owned		3,321
Gainesville, MO 65655
7164 Highway 14 East	Christian	1995			195	Owned	Owned		3,000
Sparta, MO 65753
Business Highway 160 (2)	Ozark	1997			161	Owned	Owned		1,824
Theodosia, MO 65761
123 Main Street	Stone	1998			285	Owned	Owned		5,000
Crane, MO 65633
South Side of Square	Stone	1998			46	Owned	Owned		1,100
Galena, MO 65656
20377 US Highway 160	Taney	2000			693	Owned	Owned		3,386
Forsyth, MO 65653 (1)
2536 State Highway 176	Taney	2000			364	Owned	Owned		2,500
Rockaway Beach, MO 65740
2655 South Campbell	Greene	2006			41	Leased	Leased		2,963
Springfield, MO 65807
Drive-in Facilities
Route 60 and Oakland	Wright	1986			112	Owned	Owned		2,268
Mountain Grove, MO 65711
223 West Washington	Webster	1993			181	Owned	Owned		1,000
Marshfield, MO 65706
				$	3,881

____________

(1)   This office is located in Kissee Mills, Missouri, but has a mailing address in Forsyth, Missouri.

(2)    The Theodosia office was leased until the Savings Bank acquired the property at a sheriff’s sale on June 29, 2009.

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Item 3.  Legal Proceedings

There are no material pending legal proceedings to which the Company or its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses. See “Recent Developments and Corporate Overview – Litigation” for discussion regarding a lawsuit by a former employee and the accrual for a possible settlement.

Item 4.  Removed and reserved

PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The information contained in the section captioned "Common Stock Information" in the Annual Report is incorporated herein by reference.  In addition, the "Equity Compensation Plan Information" contained in Part III, Item 12 of this Form 10-K is incorporated herein by reference.

Share Repurchase Activity

The Company completed 11 separate stock repurchase programs between March 9, 1994 and April 27, 2007.  On June 24, 2008, a repurchase program of 50,000 shares was initiated and was terminated at the end of calendar 2008, without any shares being purchased. Since the termination of this repurchase program, no shares have been repurchased by the Company.  As of June 30, 2011, 1,344,221 shares had been repurchased under repurchase programs at a cost of $19.1 million or an average cost per share of $14.22.

Item 6.  Selected Financial Data

The information contained in the section captioned “Selected Consolidated Financial Information” in the Annual Report is incorporated herein by reference.

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

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

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

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

Item 8.  Financial Statements and Supplementary Data

Independent Auditors Reports *

(a)  Consolidated Statements of Financial Condition as of June 30, 2011 and 2010*

(b)  Consolidated Statements of Operations for the Years Ended June 30, 2011 and 2010*

(c)  Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 2011 and 2010*

(d)  Consolidated Statements of Cash Flows for the Years Ended June 30, 2011 and 2010*

(e)  Notes to Consolidated Financial Statements*

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         * Contained in the Annual Report to Stockholders attached to this Form 10-K as Exhibit 13, which is incorporated herein by reference.  All schedules have been omitted as the required information is either inapplicable or contained in the Consolidated Financial Statements or related Notes contained in the Annual Report to Stockholders.

Item 9.  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

There have been no changes in and no disagreements with the Company's independent accountants on accounting and financial disclosures during the two most recent fiscal years.

Item 9A.  Controls and Procedures

(a) A material weakness is a significant deficiency (within the meaning of PCAOB Auditing Standard No. 2), or a combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual of interim financial statements will not be prevented or detected on a timely basis by management or employees in the normal course of performing their assigned functions.

As of December 31, 2010, the Company did not identify or record certain transactions related to additional allowances for loan losses and valuation allowances on real estate owned. These transactions were identified after discussion with the Company's independent registered public accounting firm and were corrected prior to the release of the Company's earnings for the three and six month periods ended December 31, 2010.

Because of the material weakness described above, based on its assessment, management believed that, as of December 31, 2010, the Company did not maintain effective internal control over financial reporting based on the criteria established in Internal Control Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission.

During the quarter ended March 31, 2011, to remediate the material weakness in the Company's internal control over financial reporting described above, the Company has re-examined its policies and procedures relating to identifying potential losses on problem loans and real estate acquired through foreclosure. Based on the review, the Company has amended its policies as necessary, and streamlined its procedures to provide a focal point for the flow of related information through the Company. The person responsible for this information flow will provide the Board of Directors with current information on which the adequacy of loss allowances can be determined.

An evaluation of the Company's disclosure controls and procedures (as defined in Section 13(a)-15(e) of the Securities Exchange Act of 1934 (the "Act")) was carried out as of June 30, 2011 under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer and several other members of the Company's senior management.  The Company's Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2010 the Company's disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) to allow  timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

(b) During the quarter ended June 30, 2011, no change occurred in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

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The Company does not expect that its internal control over financial reporting will prevent all errors and all fraud.  A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.  The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

(c) Management’s Annual Report on Internal Control Over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934).  The Company's internal control over financial reporting is a process designed under the supervision of the Company's management, including its Chief Executive Officer and its Chief Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external reporting purposes in accordance with generally accepted accounting principles in the United States of America.

The Company's internal control over financial reporting includes policies and procedures that: pertain to the maintenance of records which, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the Company's financial statements.

Management recognizes that there are inherent limitations in the effectiveness of any system of internal control and, accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation and fair presentation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.

Under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, the Company conducted an assessment of the effectiveness of the Company's internal control over financial reporting based on the framework established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined that the Company's internal control over financial reporting as of June 30, 2011 is effective.

This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting.  Management's report was not subject to attestation by

58

the Company's independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.

/s/ R. Bradley Weaver	/s/ Ronald J. Walters
R. Bradley Weaver	Ronald J. Walters
Chief Executive Officer	Senior Vice President, Treasurer and
(Principal Executive Officer)	Chief Financial Officer
	(Principal Financial Officer)

Item 9B.  Other Information

     There was no information to be disclosed by the Company in a report on Form 8-K during the fourth quarter of the year ended June 30, 2011 that was not so disclosed.

PART III

Item 10.  Directors, Executive Officers and Corporate Governance

Directors and Executive Officers

For information required by this item concerning Directors of the Company, see the section captioned "Proposal I -- Election of Directors" included in the Company's annual meeting proxy statement (“Proxy Statement”), a copy of which will be filed with the SEC no later than 120 days after the Company's fiscal year end and is incorporated herein by reference.

For information concerning Executive Officers of the Company, see the section captioned "-- Executive Officers" in Part I of this Form 10-K, which is incorporated herein by this reference.

Compliance with Section 16(a) of the Exchange Act

The information required by this item will be contained in the section captioned "Compliance with Section 16(a) of the Exchange Act" in the Company's Proxy Statement and is incorporated herein by reference.

Audit Committee and Audit Committee Financial Expert

The Audit Committee consists of Directors Ashlock, Moody and Hixon.  The Board of Directors has determined Director Hixon qualifies as an "audit committee financial expert," as defined by the SEC.  Mr. Hixon is independent, as independence for audit committee members as defined under the listing standards of the NASDAQ Stock Market.   

Code of Ethics

The Company has adopted a Code of Ethics that applies to its directors, executive officers and all other employees.  A copy of the Code of Ethics was included as Exhibit 14 to the Company's Form 10-KSB for the year ended June 30, 2006.  A copy of the Company's Code of Ethics is available to any person without charge, upon written request made to the Corporate Secretary at P.O. Box 777, Mountain Grove, Missouri 65711.

Item 11.  Executive Compensation

The information contained under the section captioned "Directors' Compensation" and "Executive Compensation" is included in the Proxy Statement and is incorporated herein by reference.

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Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Equity Compensation Plan Information

The following table summarizes share and exercise price information about the Company's equity compensation plans as of June 30, 2011.

				(c)
				Number of
				Securities
		(a)	(b)	Remaining
				Available for
		Number of		Future Issuance
		Securities to	Weighted-	Under Equity
		Be Issued Upon	Average	Plans
		Exercise of	Exercise Price	Compensation
		Outstanding	of Outstanding	(Excluding
		Options,	Options,	Securities
		Warrants and	Warrants and	Reflected in
Plan Category		Rights	Rights	Column (a))
Equity Compensation Plans approved by security holders:
	Option Plan	22,000	16.85	78,000
	Restricted stock plan	-	-	50,000
Equity Compensation Plans not
approved by security holders:		-	-	-
Total		22,000	16.85	128,000

Security Ownership of Certain Beneficial Owners and Management

The information contained in the section captioned "Voting Securities and Security Ownership of Certain Beneficial Owners and Management" is included in the Proxy Statement and is incorporated herein by reference.

Changes in Control

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

Item 13.  Certain Relationships and Related Transactions, and Director Independence

The information contained in the section captioned "Transactions with Management" and "Meetings and Committees of the Board of Directors and Corporate Governance Matters – Corporate Governance – Director  Independence" is included in the Company's Proxy Statement and is incorporated herein by reference.

Item 14.  Principal Accountant Fees and Services.

     The information required by this item is included in the Company's Proxy Statement and is incorporated herein by reference.

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Item 15.  Exhibits and Financial Statement Schedules

(a)           Exhibits

3.1	Articles of Incorporation of First Bancshares, Inc.(1)
3.2	Bylaws of First Bancshares, Inc.(2)
4.1	Specimen stock certificate of First Bancshares (1)
10.1	First Home Savings Bank 1994 Employee Stock Ownership Plan(1)
10.2	First Bancshares, Inc. 1993 Stock Option Plan (3)
10.3	First Home Savings Bank Management Recognition and Development Plan (3)
10.4	First Bancshares, Inc. 2004 Management Recognition Plan (4)
10.5	First Bancshares, Inc. 2004 Stock Option Plan (4)
10.6	Form of Incentive Stock Option Agreement (5)
10.7	Form of Non-Qualified Stock Option Agreement (5)
10.8	First Bancshares, Inc. 2004 Management Recognition Plan (4)
13.	2010 Annual Report to Stockholders (Except for the portions of the 2010 Annual Report to Stockholders that are expressly incorporated by reference in this Annual Report on Form 10-K, the 2010 Annual Report to Stockholders shall not be deemed filed as a part hereof.)
14.	Code of Ethics (6)
21.	Subsidiaries of the Registrant
23.	Auditors' Consent
31.1	Rule 13a-14(a) Certification (Chief Executive Officer)
31.2	Rule 13a-14(a) Certification (Chief Financial Officer)
32.1	Section 1350 Certification (Chief Executive Officer)
32.2	Section 1350 Certification (Chief Financial Officer)

______________

(1)   Incorporated by reference to the Company's Registration Statement on Form S-1 File No. 33-69886.

(2)   Filed as an exhibit to the Current Report on Form 8-K dated November 30, 2007 and incorporated herein by reference.

(3)  Incorporated by reference to the Company's 1994 Annual Meeting Proxy Statement dated September 14, 1994.

(4)   Incorporated by reference to the Company's 2004 Annual Meeting Proxy Statement dated September 15, 2004.

(5)   Filed as an exhibit to the Current Report on Form 8-K dated February 22, 2006 and incorporated herein by reference.

(6)   Filed as an exhibit to the Company's Form 10-KSB for the fiscal year ended June 30, 2006.

61

SIGNATURES

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

	FIRST BANCSHARES, INC.
Date: September 27, 2011	By: /s/R. Bradley Weaver
	R. Bradley Weaver
	Chief Executive Officer

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By:  /s/ R. Bradley Weaver	September 27, 2011
R. Bradley Weaver
Chief Executive Officer
(Principal Executive Officer)
By:  /s/ Lannie E. Crawford	September 27, 2011
Lannie E. Crawford
President
By:  /s/ Ronald J. Walters	September 27, 2011
Ronald J. Walters
Senior Vice President, Treasurer and           Chief Financial Officer
(Principal Financial and Accounting Officer)
By:  /s/ Thomas M. Sutherland	September 27, 2011
Thomas M. Sutherland
Director
By:  /s/ Harold F. Glass	September 27, 2011
Harold F. Glass
Director
By:  /s/ John G. Moody	September 27, 2011
John G. Moody
Director
By:  /s/ D. Mitch Ashlock	September 27, 2011
D. Mitch Ashlock
Director
By:  /s/ Billy E. Hixon	September 27, 2011
Billy E. Hixon
Director
By:  /s/ Robert J. Breidenthal	September 27, 2011
Robert J. Breidenthal
Director

62

EXHIBIT INDEX

EXHIBIT NUMBER                                                      EXHIBIT DESCRIPTION

13 2011 Annual Report to Stockholders.  Except for the portions of the 2011 Annual Report to Stockholders that are expressly incorporated by reference in this Annual Report on Form 10-K, the 2011 Annual Report to Stockholders  shall not be deemed filed as a part hereof.

21 Subsidiaries of the Registrant

23 Consent of Auditors

31.1 Rule 13a – 14(a) Certification (Chief Executive Officer)

31.2 Rule 13a – 14(a) Certification (Chief Financial Officer)

32.1 Rule 1350 Certification (Chief Executive Officer)

32.2 Rule 1350 Certification (Chief Financial Officer)

 63

EX-13

Exhibit 13

Annual Report to Stockholders

First Bancshares, Inc.

2011 Annual Report

First Home Savings Bank

A wholly owned subsidiary of First Bancshares, Inc.

www.fhsb.com

TABLE OF CONTENTS

	Page
Letter to Shareholders	1
Business of the Company	3
Selected Consolidated Financial Information	4
Management’s Discussion and Analysis of Financial Condition
and Results of Operations	6
Report of Independent Registered Public Accounting Firm	29
Consolidated Financial Statements	30
Notes to Consolidated Financial Statements	35
Common Stock Information	75
Directors and Executive Officers	76
Corporate Information	77

ii

Letter To Shareholders

Dear Shareholders:

I am pleased to forward our 2011 Annual Report for fiscal 2011, which regrettably, describes another difficult year for First Bancshares.  For the year ended June 30, 2011, we reported a net loss of $4.1 million, or a loss of $2.65 per share, compared to a net loss of $1.5 million, or a loss of $0.96 per share, for the year ended June 30, 2010.  These losses continue to be attributable to the ongoing resolution of problem assets and increases in the provision for loan losses.

Despite the losses we experienced in fiscal 2011, we are pleased to report that non-performing loans decreased by $2.6 million, or 66.7%, to $1.3 million at June 30, 2011 from $3.9 million at June 30, 2010.  The decrease in non-performing loans reflects the resolution of many loans initially identified in 2009 as problem loans.  Even with the decrease in non-performing loans, however, our provision for loans losses increased $330,000 to $1.2 million for the year ended June 30, 2011, from $852,000 for the year ended June 30, 2010.  As we indicated last year, we believe that our performance will improve considerably after we resolve our asset quality issues.  In that regard, we believe these asset quality issues have been identified and that we are taking the necessary steps to address them.  Our performance, however, has been hindered since 2008 by the economic downturn that has prevailed over the past three years.  While there were some indications of improvement in the economy during the year ended June 30, 2011, a number of negative reports in the areas of job creation, unemployment, deficits, and real estate values, have negatively impacted the economy.  Although our local economy has not been affected to the same degree as other areas of the country, the slowdown in business activity, the decline in real estate values and the increased level of unemployment have been readily apparent in the increase in delinquencies,  classified assets, foreclosures, repossessions and write-downs on real estate owned.

Our performance also continues to be affected by the operating restrictions imposed by the Cease and Desist Orders that First Home and First Bancshares entered into with our former primary federal regulator, the Office of Thrift Supervision.  We believe that as of June 30, 2011, we were in substantial compliance with the requirements set forth in the Orders.  With respect to the Orders, we intend to continue to take the necessary steps to satisfy the terms and conditions of the Orders, with the purpose of having the Orders lifted.

With the challenges of the current volatile market and changing regulatory environment, our ongoing strategy for fiscal 2012 will continue to focus on:

·   improving efficiencies and profitability through better deposit and loan pricing and reducing our expenses;

·   reducing and managing risk by improving our credit quality and better utilization of our capital and liquidity.

·   cross-selling services to existing customers and attracting new core banking relationships

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As we celebrate the 100th year of First Home’s founding, our Board of Directors, Management and Employees remain more committed than ever to strengthening the Company and returning it to profitability.  Similar to prior years, we will continue to take the necessary actions in fiscal 2012 to establish the foundation for the Company’s future growth. Our goal is to become the premier bank of choice in the market areas we serve through unsurpassed service and loan and deposit products specifically tailored to meet our customers’ needs. We know we have a long way to go, but we are optimistic that we have the commitment and tools in place to achieve this goal. We appreciate your patience and loyalty as we continue to work through resolving our asset quality and other issues.

We look forward to seeing you at our Annual Stockholders Meeting to be held on October 28, 2011 at 1:00 p.m.

/s/ R. Bradley Weaver

R. Bradley Weaver

Chief Executive Officer

2

Business of the Company

First Bancshares, Inc. (“Company”), a Missouri corporation, was incorporated on September 30, 1993 for the purpose of becoming the holding company for First Home Savings Bank (“First Home” or the “Savings Bank”) upon the conversion of First Home from a Missouri mutual to a Missouri stock savings and loan association.  That conversion was completed on December 22, 1993.  At June 30, 2011, the Company had total consolidated assets of $209.3 million and consolidated stockholders’ equity of $18.1 million.

The Company is not engaged in any significant business activity other than holding the stock of First Home.  Accordingly, the information set forth in this report, including the consolidated financial statements and related data, applies primarily to First Home.

First Home is a Missouri-chartered, federally-insured stock savings bank organized in 1911.  The Savings Bank is regulated by the Missouri Division of Finance and the Federal Deposit Insurance Corporation (“FDIC”) as successor to the Office of Thrift Supervision (“OTS”) Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act.  This recently enacted act by Congress will continue to change the banking regulatory framework and create an independent consumer protection bureau that will assume the consumer protection responsibilities of the various federal banking agencies.  First Home’s deposits are insured up to applicable limits by the FDIC.  First Home also is a member of the Federal Home Loan Bank (“FHLB”) System.

First Home conducts its business from its home office in Mountain Grove and ten full service branch facilities in Marshfield, Ava, Gainesville, Sparta, Theodosia, Crane, Galena, Kissee Mills, Rockaway Beach, and Springfield, Missouri. First Home provides its customers with a full array of community banking services and is primarily engaged in the business of attracting deposits from, and making loans to, the general public, including individuals and small to medium size businesses.  First Home originates real estate loans, including one-to-four family residential mortgage loans, multi-family residential loans, commercial real estate loans and home equity loans, as well as, non-real estate loans, including commercial business loans and consumer loans.  First Home also invests in mortgage-backed securities, United States Government and agency securities and other assets.

At June 30, 2011, First Home’s total gross loans were $97.6 million, or 46.6% of total consolidated assets, including residential first mortgage loans of $54.9 million, or 56.2% of total gross loans and other mortgage loans, secured by commercial properties, land and multi-family properties,  of $37.1 million, or 38.0% of total gross loans.  Of the gross mortgage loans, over 68.9% 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. The consolidated data is derived in part from, and should be read in conjunction with, the Consolidated Financial Statements of the Company and its subsidiaries presented herein.

	At June 30,
	2011			2010			2009			2008		2007
	(In thousands)
FINANCIAL CONDITION DATA:
Total assets	$	209,344		$	211,657		$	229,915		$	249,232	$	241,331
Loans receivable, net		95,817			108,683			133,162			167,035		158,993
Cash, interest-bearing deposits
and securities		100,394			90,156			81,335			64,195		65,498
Deposits		180,661			180,075			189,218			194,593		190,090
Retail repurchase agreements		6,416			5,352			5,713			4,648		2,103
Borrowed funds		3,000			3,000			10,000			22,000		22,000
Stockholders' equity		18,065			22,611			23,764			27,100		26,468
	Years Ended June 30,
		2011			2010			2009			2008		2007
	(In thousands, except per share information)
OPERATING DATA:
Interest income	$	8,253		$	9,777		$	12,366		$	14,828	$	13,724
Interest expense		2,104			3,266			5,443			7,451		7,354
Net interest income		6,149			6,511			6,923			7,377		6,370
Provision for loan losses		1,182			852			5,314			1,291		426
Net interest income after provision
for loan losses		4,967			5,659			1,609			6,086		5,944
Impairment of and gains/(losses) on   securities		315			-			143			-		177
Non-interest income, excluding
gains (losses) on securities		(1,051	)		1,535			2,514			2,903		2,127
Non-interest expense		7,751			7,637			9,834			8,557		8,094
Income (loss) before taxes		(3,520	)		(443	)		(5,568	)		432		154
Income tax expense (benefit)		581			1,041			(1,532	)		69		(118	)
Net income (loss)	$	(4,101	)	$	(1,484	)	$	(4,036	)	$	363	$	272
Basic earnings (loss) per share	$	(2.66	)	$	(0.96	)	$	(2.60	)	$	0.23	$	0.18
Diluted earnings (loss) per share	$	(2.65	)	$	(0.96	)	$	(2.60	)	$	0.23	$	0.18
Dividends per share	$	0.00		$	0.00		$	0.10		$	0.00	$	0.08

4

	At or For the Years Ended June 30,
	2011		2010		2009		2008		2007
KEY OPERATING RATIOS:
Return on average assets	N/A	%	N/A	%	N/A	%	0.15	%	0.09	%
Return on average equity	N/A		N/A		N/A		1.34		0.77
Average equity to average assets	10.32		11.07		10.70		11.05		11.32
Interest rate spread for period	3.10		3.11		2.94		3.01		2.71
Net interest margin for period	3.22		3.28		3.16		3.16		3.01
Non-interest expense to average   assets	3.73		3.52		4.00		3.49		2.88
Average interest-earning assets to
interest-bearing liabilities	110.80		109.81		108.87		108.95		108.66
Allowance for loan losses to total loans
at end of period	2.03		2.28		3.05		1.65		1.59
Net charge-offs to average loans
outstanding during the period	1.70		2.21		2.63		0.74		0.14
Ratio of non-performing assets to total   assets	5.00		6.19		5.23		1.56		1.47
Ratio of loan loss allowance to
non-performing assets	18.93		30.13		83.40		72.10		79.08
Dividend payout ratio	N/A		N/A		N/A		N/A		44.44
	June 30,
OTHER DATA:	2011		2010		2009		2008		2007
Number of:
Loans outstanding	2,132		2,370		2,802		3,388		3,450
Deposit accounts	19,103		20,163		21,965		23,221		23,983
Full service offices	11		11		11		11		11

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.

Forward-Looking Statements

This Annual Report contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by the use of words such as "believe," "expect," "anticipate," "intend," "should," "plan," "project," "estimate," "potential," "seek," "strive," or "try" or other conditional verbs such as "will," "would," "should," "could," or "may" or similar expressions. These forward-looking statements relate to, among other things, expectations of the business environment in which we operate, projections of future performance, perceived opportunities in the market, potential future credit experience, and statements regarding our strategies. Our ability to predict results or the actual effects of our plans or strategies is inherently uncertain. Although we believe that our plans, intentions and expectations, as reflected in these forward-looking statements are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved or realized. Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors including, but not limited to: the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs that may be impacted by deterioration in the housing and commercial real estate markets and may lead to increased losses and non-performing assets in our loan portfolio, resulting in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our reserves; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; deposit flows; fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas; secondary market conditions for loans and our ability to sell loans in the secondary market;adverse changes in the securities markets; results of examinations of First Bancshares by the Federal Reserve Bank of St. Louis (the “Federal Reserve”) and of the Savings Bank by the FDIC, the Missouri Division of Finance (“Division”) or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; the possibility that we will be unable to comply with the conditions imposed upon each of the Company and the Savings Bank by the Orders to Cease and Desist entered into with their prior primary banking regulator, the Office of Thrift Supervision, including but not limited to our ability to reduce our non-performing assets, which could result in the imposition of additional restrictions on our operations; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risk associated with the loans on our balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; computer systems on which we depend could fail or experience a security breach, or the implementation of new technologies may not be successful; our ability to manage loan delinquency rates; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; legislative or regulatory changes that adversely affect our business including the effect of the Dodd-Frank Act changes in regulatory polices and principles, including the interpretation of

6

regulatory capital or other rules; our ability to attract and retain deposits; further increases in premiums for deposit insurance; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; adverse changes in the securities markets; the Company’s and Savings Bank’s ability to pay dividends on its common stock; the inability of key third-party providers to perform their obligations to us; changes in accounting policies, principles and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the economic impact of war or any terrorist activities; other economic, competitive, governmental, regulatory, and technological factors affecting our operations; pricing, products and services; our ability to lease excess space in Company-owned buildings; and other risks detailed in this Annual Report. Any of the forward-looking statements that we make in this Annual Report and in the other public statements we make may turn out to be wrong because of the inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Additionally, the timing and occurrence or non-occurrence of events may be subject to circumstances beyond our control. We caution readers not to place undue reliance on any forward-looking statements. We do not undertake and specifically disclaim any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect the Company's operating and stock performance.

As used throughout this report, the terms "we", "our", or "us" refer to First Bancshares, Inc. and its consolidated subsidiary, First Home Savings Bank, unless the context indicates otherwise.

Recent Developments and Corporate Overview

Economic Conditions

The economic decline that began in calendar 2008 and that has continued to varying degrees into calendar 2011 has created significant challenges for financial institutions such as First Home Savings Bank.  Dramatic declines in the housing market, marked by falling home prices and increasing levels of mortgage foreclosures, have resulted in significant write-downs of asset values by many financial institutions, including government-sponsored entities and major commercial and investment banks.  In addition, many lenders and institutional investors have reduced, and in some cases ceased to provide, funding to borrowers, including other financial institutions, as a result of concern about the stability of the financial markets and the strength of counterparties. While the economy has recently shown some small signs of improvement, no upward trend seems to have been established.

New Federal Legislation

Last year Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act which is significantly changing the current bank regulatory structure and affect the lending, investment, trading and operating activities of financial institutions and their holding companies.  The Dodd-Frank Act has eliminated, as of July 21, 2011, the Office of Thrift Supervision, which had been the primary federal regulator for both the Savings Bank and the Company. First Home Savings Bank is, as of that date, regulated by the FDIC (the primary federal regulator for state chartered banks) and the Division.  The Dodd-Frank Act also authorizes the Federal Reserve Board to supervise and regulate all savings and loan holding companies like First Bancshares, Inc., in addition to bank holding companies which it currently regulates.  As a result, the Federal Reserve Board’s current regulations applicable to bank holding companies, including holding company capital requirements, will eventually apply to savings and loan holding companies like First Bancshares, Inc.  These capital requirements are substantially similar to the capital requirements currently applicable to the Savings Bank.  The Dodd-Frank Act also requires the Federal Reserve Board to set minimum capital levels for bank holding companies that are as stringent as

7

those required for the insured depository subsidiaries, and the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions.  Bank holding companies with assets of less than $500 million are exempt from these capital requirements.  The legislation also establishes a floor for capital of insured depository institutions that cannot be lower than the standards in effect today, and directs the federal banking regulators to implement new leverage and capital requirements within 18 months that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.

The Dodd-Frank Act also created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws.  The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as the Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices.  The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets.  Banks and savings institutions with $10 billion or less in assets will be examined by their applicable bank regulators, in the Savings Bank’s case, the FDIC.

The legislation also broadens the base for FDIC insurance assessments.  Assessments are now be based on the average consolidated total assets less tangible equity capital of a financial institution.  The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2013.  Additionally, regulatory changes in overdraft and interchange fee restrictions may reduce our noninterest income.  Lastly, the Dodd-Frank Act will increase stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and authorizing the Securities and Exchange Commission (“SEC”) to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials.  The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.

Federal Deposit Insurance

The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009.  Non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2013.

Pursuant to the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”), the FDIC is authorized to set the reserve ratio for the Deposit Insurance Fund (“DIF”) annually at between 1.15% and 1.5% of estimated insured deposits. The Dodd-Frank Act mandates that the statutory minimum reserve ratio of the DIF increase from 1.15% to 1.35% of insured deposits by September 30, 2020.  Banks with assets of less than $10 billion, such as First Home Savings Bank, are exempt from any additional assessments necessary to increase the reserve fund above 1.15%.

As part of a plan to restore the reserve ratio to 1.15%, the FDIC imposed a special assessment equal to five basis points of assets less Tier 1 capital as of June 30, 2009, which was payable on September 30, 2009.  In addition, the FDIC has increased its quarterly deposit insurance assessment rates and amended the method by which rates are calculated.  Beginning in the second quarter of 2009, institutions are assigned an initial base assessment rate ranging from 12 to 45 basis points of deposits depending on risk category. The initial base assessment is then adjusted based upon the level of unsecured debt, secured liabilities, and brokered deposits to establish a total base assessment rate ranging from seven to 77.5 basis points.

8

On November 12, 2009, the FDIC approved a final rule requiring insured depository institutions to prepay on December 30, 2009, their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012.   Estimated assessments for the fourth quarter of 2009 and for all of 2010 are based upon the assessment rate in effect on September 30, 2009, with three basis points added for the 2011 and 2012 assessment rates.  In addition, a 5% annual growth in the assessment base is assumed.  Prepaid assessments are to be applied against the actual quarterly assessments until exhausted, and may not be applied to any special assessments that may occur in the future.  Any unused prepayments will be returned to the institution on June 30, 2013.  On December 30, 2009, we prepaid $1.6 million in estimated assessment fees for the fourth quarter of 2009 through 2012.  Because the prepaid assessments represent the prepayment of future expense, they do not affect our tax obligations or regulatory capital (the prepaid asset will have a risk-weighting of 0%).

The preceding is a summary of recently enacted laws and regulations that could materially impact our results of operations or financial condition.  For further information, see “Item 1, Business -- Regulation of First Home” and “-- Regulation of First Bancshares” included in our Annual Report on Form 10-K for the year ended June 30, 2011.

On August 17, 2009, the Company and the Savings Bank each entered into a Stipulation and Consent to the Issuance of Order to Cease and Desist from the OTS.  The Orders are now enforced by the Federal Reserve and the FDIC as the successors to the OTS.

Under the terms of the orders, the Bank and the Company, without the prior written approval of their respective banking regulators, may not:

·   Increase assets during any quarter;

·   Pay dividends;

·   Increase brokered deposits;

·   Repurchase shares of the Company’s outstanding common stock; and

·   Issue any debt securities or incur any debt (other than that incurred in the normal course of business).

Other material provisions of the order require the Savings Bank and the Company to:

·   develop an acceptable business plan for enhancing, measuring and maintaining profitability, increasing earnings, improving liquidity, maintaining capital levels;

·   ensure the Savings Bank’s compliance with applicable laws, rules, regulations and agency guidelines, including the terms of the order;

·   not appoint any new director or senior executive officer or change the responsibilities of any current senior executive officers without notifying the applicable banking regulators;

·   not enter into, renew, extend or revise any compensation or benefit agreements for directors or senior executive officers;

·   not make any indemnification, severance or golden parachute payments;

·   enhance its asset classification policy;

·   provide progress reports to the FDIC regarding certain classified assets;

·   submit a comprehensive plan for reducing classified assets;

·   develop a plan to reduce the concentration of certain loans contained in the loan portfolio and that addresses the assessment, monitoring and control of the risks associated with the commercial real estate portfolio;

·   not enter into any arrangement or contract with a third party service provider that is significant to the overall operation or financial condition of the Savings Bank, or that is outside the normal course of business; and prepare and submit progress reports to the FDIC and the Federal Reserve.

9

All customer deposits remain insured to the fullest extent permitted by the FDIC since entering into the order. The Savings Bank has continued to serve its customers in all areas including making loans, establishing lines of credit, accepting deposits and processing banking transactions. Neither the Company nor the Savings Bank admitted any wrongdoing in entering into the respective Stipulation and Consent to the Issuance of a Cease and Desist Order. No monetary penalties were imposed or recommended in connection with the orders.

We believe that the Company and the Savings Bank are currently in substantial compliance with all of the requirements of the orders through their normal business operations.  The orders will remain in effect until modified or terminated by the FDIC or Federal. Reserve,, as the case may be.

For additional information regarding the terms of the orders, please see our Form 8-K that we filed with the SEC on August 18, 2009. Further, we may be subject to more severe future regulatory enforcement actions, including but not limited to civil money penalties, if we do not comply with the terms of the order.

Review of Loan Portfolio

Since November 2008, in light of a continually worsening economy, the Savings Bank has conducted ongoing, in depth reviews and analyses of the loans in its portfolio, primarily focusing on its commercial real estate, multi-family, development and commercial business loans. During the fiscal years ended June 30, 2009 and June 30, 2010, based primarily on this ongoing loan review, and in light of the economic conditions, the Company recorded provisions for loan losses of $5.3 million and $852,000, respectively. During the year ended June 30, 2011, an additional provision for loan losses totaling $1.2 million was recorded by the Company.

Beginning with the quarter ended September 30, 2009, the Company has engaged the services of a consultant with an extensive background in commercial real estate, multi-family, development and commercial business lending. The purpose of hiring the consultant was to assist the Company and the Savings Bank in meeting reporting deadlines established in the Orders and, to validate the methodology used internally to review, evaluate and analyze loans. This consultant performed an extensive review of the Company’s credits of $250,000 or larger during the quarter ended September 30, 2009 and performed follow up reviews each quarter through the quarter ended June 30, 2011 in order to assist management’s resolution of problem loans.

Litigation
 

On January 21, 2011 a jury verdict was entered against the Company and the Bank in the Circuit Court of Ozark County, Missouri, following a jury trial in a claim made by a former employee of the Bank relating to her termination from the Bank in 2007. The former employee claimed that the Bank wrongfully terminated her as a result of her reporting to superiors and Board members what she believed to be illegal activities of two former presidents of the Bank. This alleged cause of action in Missouri is commonly known as a whistleblower lawsuit. Protection for whistleblowers has been carved out as a protected class of employees who, as with certain other classes, such as gender, age, and race for example, cannot be terminated as a result of reporting alleged illegal activities. The jury verdict was against the Bank for $182,000 in compensatory damages (lost wages) and for punitive damages in the amount of $235,000, or a total of $417,000. The Bank believes that the verdict relating to the alleged reporting by the former employee of illegal activities is contrary to the facts and the law, and the Bank filed post-trial motions including a motion for a new trial and other relief. The post-trial motions were denied by the court, and the Bank has filed a notice of appeal. The Bank anticipates its appeal will be filed in September 2011. During the quarter ended December 31, 2010, the Bank recorded a liability in the amount of $300,000 in connection with this litigation in anticipation of the final amount it will owe the plaintiff.

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In September 2006, the then Chief Financial Officer of both the Savings Bank and the Company was terminated. Subsequent to her termination, the former CFO filed a lawsuit against the Company and the Savings Bank. The alleged cause of action is a whistleblower lawsuit. The former CFO claimed she was terminated for repeatedly reporting violations of law by two former CEOs of the Company and the Savings Bank, and others during her tenure with the organization, and for refusing to sign Securities and Exchange Commission certifications subsequent to September 15, 2006. Both the Company and the Savings Bank deny all claims and assertions made by the former CFO.

The case has been set for mediation in September 2011, and, if the mediation is unsuccessful, the case is currently scheduled for trial in January 2012.

The law firm representing the Company, the Savings Bank and their insurance carrier has advised that they have not reached an opinion that an unfavorable outcome is either probable or remote, and therefore, they expressed no opinion as to the ultimate outcome of this matter.

Operating Strategy

The primary goals of management, during fiscal 2011 and for the immediate future, have been to improve profitability, reduce and manage risk and take whatever steps are necessary to satisfy the terms and conditions of the Cease and Desist orders under which both the Company and the Savings Bank are currently conducting business, with the stated purpose of having those orders lifted.  Operating results depend primarily on net interest income, which is the difference between the income earned on interest-earning assets, consisting of loans and securities, and the cost of interest-bearing liabilities, consisting of deposits and borrowings.  Net income is also affected by, among other things, provisions for loan losses and operating expenses. Operating results are also significantly affected by general economic and competitive conditions, primarily changes in market interest rates, governmental legislation and policies concerning monetary and fiscal affairs and housing, as well as, by other financial institutions and the actions of the regulatory authorities.  Management’s strategy is to strengthen First Home’s presence in its primary market area.

Management has implemented various general strategies with the intent of improving profitability while maintaining, and as necessary, improving safety and soundness.  Primary among those strategies are, to the extent that market conditions allow, increasing the volume of originated one-to-four family loans, actively seeking high quality commercial real estate loans, continuing improvement in, and maintaining, asset quality, and managing interest-rate risk.  Historically, First Home has been primarily an originator of adjustable rate loans. However, the Savings Bank, on a limited basis, continues to originate fixed-rate, single-family mortgages for sale into the secondary market.

Lending.  Historically, First Home predominantly originated one-to-four family residential loans.  One-to-four family residential loans were 66% of the mortgage loans originated, or 54% of total loan originations, during fiscal year 2011, compared with 46% of the mortgage loans originated, or 36% of total loan originations, during fiscal 2010.  At June 30, 2011, residential mortgage loans as a percent of the Savings Bank’s total gross loan portfolio were approximately 56% compared to approximately 54% at June 30, 2010.  Commercial real estate and land loan originations were approximately 54% of mortgage loan originations in fiscal 2010. In fiscal 2011, the total amount of commercial real estate and land loans originated decreased to $3.6 million from $5.1 million in fiscal 2010, and the ratio of originations of such loans to total mortgage loan originations decreased to approximately 34%. The decrease in this number was due primarily to the increase in one-to-four family mortgage loan originations and to a lack of demand for, and the Savings Bank’s reduced interest in the origination of, such loans in the existing economic environment.  Commercial real estate and land loans will continue to be a part of the real estate loans originated by the Savings Bank, but it is not anticipated they will exceed 35% of total originations.

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Asset Quality. Asset quality remains a significant concern of the Company’s management and Board of Directors.  The Savings Bank’s asset quality is monitored and measured using various bench-marks.  The two key items are non-performing loans and classified loans. Non-performing loans consist of non-accrual loans, loans past due over 90 days and impaired loans not past due or past due less than 60 days.  Classified loans are loans internally identified as having greater credit risk and requiring additional monitoring. Past due and non-accrual loans, including loans 30-89 days delinquent, at June 30, 2011 were  $2.4 million, or 2.51% of the gross loan portfolio, and included $867,000, or 1.58% of residential loans, $1,162,000, or 3.89% of commercial real estate loans, $109,000, or 3.31% of land loans, $36,000, or 0.91%, of second mortgage loans, $21,000, or 0.92%, of consumer loans, and $253,000; or 7.66% of commercial business loans.

The table below shows the risk classification of the Savings Bank’s loan portfolio at the dates indicated.  Non-performing loans decreased by $2.6 million, or 66.7%, to $1.3 million at June 30, 2011 from $3.9 million at June 30, 2010.  During fiscal 2011, real estate owned and repossessed assets increased by $1.0 million from $3.9 million to $4.9 million. Net charge-offs for fiscal 2011 decreased by $935,000 from net charge-offs for fiscal 2010, to $1.7 million from $2.7 million. Classified loans decreased by $2.1 million, or 27.6%, to $5.6 million at June 30, 2011 compared to $7.7 million at June 30, 2010. Many of the loans initially identified as problems in fiscal 2009 have been resolved, or partially resolved, through foreclosures, repossessions, write downs and refinancing by other lenders. In addition to the classified loans, the Savings Bank has identified an additional credit of $176,000 as ”special mention” on its internal watch list as of June 30, 2011. This loan is a commercial real estate loan. Management has identified this loan as high risk, and any deterioration in the borrower’s financial condition could increase classified loan totals.

Of the $5.6 million in classified loans as of June 30, 2011, one loan with an outstanding balance of $303,000 was outside the Savings Bank’s market area.  This loan is located in Nebraska.  The allowance for loan losses related to this loan was $233,000 as of June 30, 2011.

Asset quality: (in thousands)

	At or for the Year Ended June 30,
	2011		2010
Non-performing assets:
Past due over 90 days	$	-	$	-
Non-accrual loans		1,339		3,927
Other		-		-
Total non-performing loans		1,339		3,927
Real estate owned		4,914		3,885
Repossessed assets		-		61
Impaired loans not past due		4,221		5,228
Total non-performing assets	$	10,474	$	13,101
Classified loans:
Loss	$	-	$	-
Doubtful		-		-
Substandard		5,560		7,678
Total classified loans		5,560		7,678
Special mention loans		176		1,602
Total loans of concern	$	5,736	$	9,280
Net charge-offs	$	1,726	$	2,661
Provision for loan losses	$	1,182	$	852

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The Savings Bank’s provision for loan losses for the year ended June 30, 2011 increased $330,000 to $1.2 million from $852,000 for the year ended June 30, 2010. The provision for loan losses during fiscal 2011 was primarily the result of loss provisions totaling almost $940,000 on three motel loans and a restaurant loan. One of the motels was included in real estate owned as of June 30, 2011, while another of the motel loans and the restaurant loan were charged down as the result of the borrowers having filed bankruptcy. Customer cash flows remain strained and loan evaluations reflect an increased awareness of the potential for problems in the loan portfolio. While the Savings Bank has addressed loan quality issues over the past couple of years, it became clear that the magnitude of problem loans, both in terms of their number and the total dollars, was significantly greater than initially realized when the in-depth loan review process began in fiscal 2009. Steps have been taken on each loan, as appropriate for the type of credit, to determine the current status, the magnitude of the problem, current net value, updated cash flows, proper classification, accrual status and necessary reserves. This process resulted in significant increases in classified assets, watch list credits, the provision for loan losses and net charge offs during the fiscal years ended June 30, 2010 and June 30, 2009. However, while the provision for loan losses increased during the fiscal year ended June 30, 2011, classified loans and non-performing loans, including impaired loans not past due, decreased substantially.

Managing Interest-Rate Risk.  First Home has relied primarily on adjustable interest rate loans and short-term fixed-rate loans to manage the inherent risks of interest rate changes.  During fiscal 2011, in order to compete in the current interest rate environment, First Home began offering fifteen year, fixed rate mortgages to borrowers with good credit quality.  With the goal of mitigating risk on its fixed-rate products, management monitors the number, outstanding balance and other amounts related to these loans to determine when changes should be made to the terms of the loans offered.  While a small number of fifteen year, fixed-rate loans have been retained in portfolio, most long-term, fixed-rate loans originated during the fiscal year ended June 30, 2011 were originated for sale in the secondary market. During the year ended June 30, 2010, most originated fixed-rate loans were sold in the secondary market.

Critical Accounting Policies.  The Company uses estimates and assumptions in its financial statements in accordance with generally accepted accounting principles.  Material or critical estimates that are susceptible to significant change include the determination of the allowance for loan losses and the associated provision for loan losses, the estimation of fair value for a number of the Company’s assets, and valuing deferred tax assets.

Allowance for Loan Losses.  Management believes that the accounting estimate related to the allowance for loan losses is a critical accounting estimate because it is highly susceptible to change from period to period.  This may require management to make assumptions about losses on loans; and the impact of a sudden large loss could require increased provisions, which would negatively affect earnings.

Management recognizes that loan losses may occur over the life of a loan and that the allowance for loan losses must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the loan portfolio. Management of the Savings Bank assesses the allowance for loan losses on a monthly basis, through the analysis of several different factors including delinquency, charge-off rates and the changing risk profile of the Company’s loan portfolio, as well as local economic conditions such as unemployment rates, bankruptcies and vacancy rates of business and residential properties. The allowance is increased by the provision for loan losses, which is charged against current period operating results and decreased by the amount of actual loan charge-offs, net of recoveries.

The allowance for loan losses is evaluated on a regular basis by management and is based on management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and prevailing economic conditions.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

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TheCompany's allowance for possible loan losses consists of three elements: (i) specific valuation allowances determined in accordance with ASC Topic 310 based on probable losses on specific loans; (ii) historical valuation allowances determined in accordance with ASC Topic 450 based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) general valuation allowances determined in accordance with ASC Topic 450 based on general economic conditions and other qualitative risk factors both internal and external to the Company.

The allowances established for probable losses on specific loans are based on a regular analysis and evaluation of problem loans. Loans are classified based on an internal credit risk grading process that evaluates, among other things: (i) the obligor's ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates. This analysis is performed at the relationship manager level for all commercial loans. When a loan has a calculated Risk Grade of 6 or higher, the officer analyzes the loan to determine whether the loan is impaired and, if impaired, the need to specifically allocate a portion of the allowance for possible loan losses to the loan. Specific valuation allowances are determined by analyzing the borrower's ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower's industry, among other things.

Historical valuation allowances are calculated based on the historical loss experience of specific types of loans and the internal risk grade of such loans at the time they were charged-off. The Company calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical loss ratios are updated each quarter based on actual charge-off experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio and the total dollar amount of the loans in the pool. The Company's pools of similar loans include similarly risk-graded groups of commercial and industrial loans, commercial real estate loans, consumer real estate loans and consumer and other loans. During fiscal 2011, each quarterly review included calculations for “look back periods” of 1, 2 and 3 years and the Savings Bank used the highest historical loss rate in its allowance calculations.

General valuation allowances are based on general economic conditions and other qualitative risk factors both internal and external to the Company. In general, such valuation allowances are determined by evaluating, among other things: (i) the experience, ability and effectiveness of the Bank's lending management and staff; (ii) the effectiveness of the Company's loan policies, procedures and internal controls; (iii) changes in asset quality; (iv) changes in loan portfolio volume; (v) the composition and concentrations of credit; (vi) the impact of competition on loan structuring and pricing; (vii) the effectiveness of theinternal loan review function; (viii) the impact of environmental risks on portfolio risks; and (ix) the impact of rising interest rates on portfolio risk. Management evaluates the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis. Each component is determined to have either a high, moderate or low degree of risk. The results are then input into a "general allocation matrix" to determine an appropriate general valuation allowance.

Included in the general valuation allowances are allocations for groups of similar loans with risk characteristics that exceed certain concentration limits established by management. Concentration risk limits have been established, among other things, for certain industry concentrations, large balance and highly leveraged credit relationships that exceed specified risk grades, and loans originated with policy exceptions that exceed specified risk grades.

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Loans identified as losses by management, internal/external loan review and/or bank examiners are charged-off. Furthermore, consumer loan accounts are charged-off automatically based on regulatory requirements.

As mentioned above, one of the factors taken into consideration in the analysis is charge-off rates which are calculated by loan type. Early in fiscal 2010, the Savings Bank shortened the historical time period (“look-back period”) reviewed to calculate these rates from five years to three years. During the Savings Bank’s examination during fiscal 2010, the OTS requested that the “look-back period” be shortened to one year. As a result of the recent charge-off history, this change resulted in the recording of an additional $359,000 in provision for loan losses during fiscal 2010.  This amount represents approximately 42% of the provision for fiscal 2010. During fiscal 2011, each quarterly review included calculations for “look back periods” of 1, 2 and 3 years, and, the Savings Bank used the highest historical loss rate in its allowance calculations.

Net losses in the past three fiscal years have resulted in a cumulative loss of almost $8.6 million. At the end of fiscal 2010, the Company provided a reserve against its net deferred tax asset. Please see the discussion below regarding deferred tax assets.

Estimation of Fair Value.  The estimation of fair value is significant to a number of the Company’s assets, including securities and real estate owned.

Declines in the fair value of equity securities below their amortized cost basis that are deemed to be other-than-temporary impairment losses are reflected as realized losses.  To determine if an other-than-temporary impairment exists on an equity security, the Company considers (a) the length of time and the extent to which the fair value has been less than cost, (b) the financial condition and near-term prospects of the issuer and (c) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for an anticipated recovery in fair value.  To determine if an other-than-temporary-impairment exists on a debt security, the Company first determines if (a) it intends to sell the security or (b) it is more likely than not that it will be required to sell the security before its anticipated recovery.  If either of the conditions is met, the Company will recognize an other-than-temporary-impairment in earnings equal to the difference between the fair value of the security and its adjusted cost basis. In estimating other-than-temporary impairment losses on debt securities, management considers a number of factors, including, but not limited to: (1) the length of time and extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the current market conditions and (4) the intent of the Company to not sell the security or whether it is more-likely-than-not that the Company will be required to sell the security before its anticipated recovery. If neither of the conditions is met, the Company determines (a) the amount of the impairment related to credit loss and (b) the amount of the impairment due to all other factors.  The difference between the present values of the cash flows expected to be collected and the amortized cost basis is the credit loss.  The amount of the credit loss is included in the consolidated statements of income as an other-than-temporary-impairment on securities and is an adjustment to the cost basis of the security.  The portion of the total impairment that is related to all other factors is included in other comprehensive income (loss).

Real estate owned is recorded at 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.

Deferred Tax Assets.The Company accounts for income taxes according to the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates applicable to taxable income for the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are evaluated for recoverability using a consistent approach which considers the relative impact of negative and positive evidence, including historical

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profitability and projections of future taxable income. The Company is required to establish a valuation allowance for deferred tax assets and record a charge to income if it is determined, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, the Company estimates future taxable income based on business and tax planning strategies. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws or variances between our projected operating performance, actual results and other factors.

The Company is in a cumulative book taxable loss position. For purposes of establishing a deferred tax valuation allowance, this cumulative book taxable loss position is considered significant, objective evidence that some portion of the deferred tax asset might not be realized in the foreseeable future.

The Company concluded that it is more likely than not, that there would not be sufficient future taxable income to realize the deferred tax asset in the foreseeable future.

Comparison of Financial Condition at June 30, 2011 and June 30, 2010

General.  The most significant change in the Company’s financial condition during the year ended June 30, 2011 was a decrease in net loans receivable of $12.9 million or 11.8%.  The decrease in loans included $1.7 million in write-downs and $3.9 million in transfers to real estate owned and other repossessed assets. Maturities of certificates of deposit resulted in our investment in certificates of deposit, decreasing by $4.3 million. Retail repurchase agreements increased by $1.1 million and deposits increased by $586,000. Investments in securities, and cash and cash equivalents, increased by $9.9 million and $4.6 million, respectively.

Total Assets. Total assets decreased $2.4 million, or 1.1%, to $209.3 million at June 30, 2011 from $211.7 million at June 30, 2010.  The decrease was primarily attributable to the decreases of $12.9 million decrease in loans receivable and $4.3 million in certificates of deposits which were partially offset by increases of $9.9 million in investment securities and $1.0 million in real estate owned. There was no activity in or additional borrowings from the FHLB of Des Moines during the year ended June 30, 2011.

Cash and Cash Equivalents.  Cash and cash equivalents were $24.8 million at June 30, 2011 compared to $20.2 million at June 30, 2010, an increase of $4.6 million, or 22.8%.  The increase in cash and cash equivalents was the result of a $13.7 million incoming wire transfer on June 30, 2011 for the credit to the account of a commercial customer. It is not anticipated that these funds will remain on deposit for an extended period of time. During the course of fiscal 2011, management had reduced balances in overnight accounts in order to maximize the return on its funds.

Certificates of Deposit Purchased.  Certificates of deposit purchased as investments decreased $4.3 million to $2.9 million at June 30, 2011 from $7.2 million at June 30, 2010.  As a result of the low interest rate environment, management decided to let the maturing certificates of deposit roll off rather than renew them. The remaining certificates of deposit will all mature by the end of calendar 2011.

Securities. Securities increased $9.9 million to $72.2 million at June 30, 2011 from $62.3 million at June 30, 2010.  Proceeds from the sales, maturities, calls and prepayments on securities and payments on loans were reinvested, along with other excess funds, primarily in United States agency securities and some mortgage-backed securities issued by Freddie Mac and Fannie Mae. The portfolio of available-for-sale securities decreased by $6.2 million, or 10.3%, to $54.1 million at June 30, 2011 from $60.3 million at June 30, 2010. The portfolio of held to maturity securities increased by $16.1 million, or 801.5%, to $18.1 million at June 30, 2011 from $2.0 million at June 30, 2010. This change was the result of a decision, made by the Savings Bank’s Boardin December 2010, to classify callable and step-up agency securities as held to maturity at the time of purchase.  During fiscal 2011, $6.3 million in securities,

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including $158,000 in mortgage-backed securities held to maturity with remaining principal balances of less than 10% of the original principal balances, were sold. These sales resulted in a net profit of approximately $315,000. There were no sales of securities during fiscal 2010.

Loans Receivable.  Net loans receivable decreased from $108.7 million at June 30, 2010 to $95.8 million at June 30, 2011. The $12.9 million, or 11.8%, decrease was the result of several factors. The origination of new loans during fiscal 2011 remained at the low levels experienced during both fiscal 2010 and fiscal 2009. The decline also was the result of the ongoing economic downturn, which both decreased demand for loans and resulted in a tightening of the Savings Bank’s underwriting standards.

One-to-four family loans decreased by $5.3 million, or 8.9%, to $54.9 million at June 30, 2011 from $60.2 million at June 30, 2010. Commercial real estate loans decreased by $4.7 million, or 13.6%, to $29.9 million at June 30, 2011 from $34.6 million at June 30, 2010. Land loans decreased by $1.1 million, or 24.7%, to $3.3 million at June 30, 2011 from $4.4 million at June 30, 2010. Commercial business loans decreased by $1.2 million, or 26.4%, to $3.3 million at June 30, 2011 from $4.4 million at June 30, 2010. Consumer loans, including personal and automobile loans, overdrafts, loans on deposit accounts and second mortgages, decreased by $554,000, or 19.2%, to $2.3 million at June 30, 2011 from $2.9 million at June 30, 2010.

The origination of loans for portfolio increased by $673,000, or 5.8%, to $12.3 million in fiscal 2011 from $11.6 million in fiscal 2010. Real estate loan originations, including loans originated for sale, increased by $903,000, or 9.4%, to $10.5 million for the year ended June 30, 2011 compared to $9.6 million for the year ended June 30, 2010. Commercial real estate, multi-family and land loan originations decreased by $1.5 million, while one-to-four family loan originations increased by $2.4 million. Consumer loan originations decreased by $63,000 to less than $1.4 million for the year ended June 30, 2011 from just over $1.4 million for the year ended June 30, 2010. Commercial business loan originations decreased by $508,000 to $785,000 in fiscal 2011, as compared to originations of $1.3 million in fiscal 2010. While there was a 5.8% increase in loan originations between fiscal 2010 and fiscal 2011, the economic climate that prevailed during the previous three fiscal years, continued through fiscal 2011. While there were some indications of improvement in the economy during the twelve months ended June 30, 2011, a number of negative reports in the areas of job creation, unemployment, deficits and real estate values, have negatively impacted the economy. In addition, the Savings Bank began to tighten its underwriting standards in the fourth quarter of fiscal 2008. This process continued throughout fiscal 2010 and 2011. While the Savings Bank’s local market areas have not been impacted to the same degree as other areas of the country, the slowdown in business activity, the decline in real estate values and the increased level of unemployment have been readily apparent in the increase in delinquencies, non-performing assets, classified assets, foreclosures and repossessions.

Non-accrual Loans.Non-accrual loans decreased from $3.9 million at June 30, 2010 to $1.3 million at June 30, 2011. The $2.6 million decrease in non-accrual loans was due to a decrease of $3.2 million in non-accrual commercial real estate loans. This decrease was partially offset by increases of $184,000 in non-accrual residential mortgages, $169,000 in non-accrual land loans and $7,000 in non-accrual consumer loans. There were no non-accrual commercial business loans at either June 30, 2011 or June 30, 2010.

Non-performing Assets. Non-performing assets decreased $2.6 million, from $13.1 million at June 30, 2010 to $10.5 million at June 30, 2011.  At June 30, 2011, the ratio of non-performing assets to total assets was 5.00% compared to 6.19% at June 30, 2010.The Savings Bank’s non-performing loans consist of non-accrual loans and past due loans over 90 days. Non-performing assets also include real estate owned, other repossessed assets and impaired loans not past due.

The Savings Bank has identified an additional credit of $176,000 at June 30, 2011 as “special mention”. This credit is a commercial real estate loan. As of June 30, 2010 the Savings Bank had identified an

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additional $1.6 million of credits as “special mention”, including $623,000, $70,000 and $909,000 of commercial real estate, land and commercial business loans, respectively. Management has identified these loans as high risk credits and any deterioration in their financial condition could increase the classified loan totals.

Deposits. Deposits increased $586,000, or 0.3%, to $180.7 million at June 30, 2011 from $180.1 million at June 30, 2010. However, on June 30, 2011, the Savings Bank received an incoming wire transfer of $13.7 million for credit to the account of one of its commercial customers. It is not anticipated that these funds will remain on deposit for an extended period of time. Absent this wire deposit, the Savings Bank would have experienced a decrease in deposits of $13.1 million during the year ended June 30, 2011. Certificates of deposit decreased by $10.6 million from $77.2 million at June 30, 2010 to $66.6 million at June 30, 2011, and money market savings accounts decreased by $4.6 million from $36.0 million at June 30, 2010 to $31.4 million at June 30, 2011. These decreases were offset by increases in non-interest-bearing checking balances which increased by $12.5 million from $11.8 million at June 30, 2010 to $24.3 million at June 30, 2011, savings accounts which increased by $767,000 from $20.5 million at June 30, 2010 to $21.2 million at June 30, 2011 and in NOW account balances which increased by $2.5 million from $34.6 million at June 30, 2010 to $37.1 million at June 30, 2011. During most of the fiscal year ended June 30, 2011, with the exception of our e-checking product and four and five year certificates of deposit, the rates paid by the Savings Bank were below the mid-point of the range of rates offered by competitors in each type and maturity of account.

Retail Repurchase Agreements.  The Savings Bank began to offer retail repurchase agreements in December 2006. This was done to provide an additional product for our existing customer base and to attract new customers who would find the product beneficial. Customers with large balances in checking accounts benefit by having those balances which exceed a predetermined level “swept” out of the checking account and into a repurchase account. The repurchase account earns interest at a floating market rate and is uninsured. However, the balance is collateralized by designated investment securities of the Savings Bank. At June 30, 2011, the balances of retail repurchase agreements totaled $6.4 million, representing an increase of $1.1 million, or 19.9%, from $5.4 million at June 30, 2010.  During most of fiscal 2011, the balances of the retail repurchase agreements continued to increase due to increases in the balances of the largest user of the program.

Borrowings.  Advances from the FHLB of Des Moines were unchanged during at the fiscal year ended June 30, 2011. The Savings Bank had no activity during the year ended June 30, 2011 in advances from the FHLB of Des Moines.  The $3.0 million advance on the books matures in September 2013. There were no other borrowed funds during the year ended June 30, 2011.

Stockholders’ Equity.  Stockholders’ equity was $18.1 million at June 30, 2011 compared to $22.6 million at June 30, 2010. The $4.5 million decrease was the result of the net loss of $4.1 million and a decrease in the market value of available-for-sale securities of $450,000, net of deferred tax liability. These decreases were partially offset by a small increase in paid-in-capital of $5,000, which resulted from stock based compensation.  At June 30, 2011, there were 1,550,815 shares of stock outstanding, the same number of shares that were shares outstanding at June 30, 2010.  The book value per share decreased to $11.65 at June 30, 2011 from $14.58 at June 30, 2010.

Comparison of Operating Results for the Years Ended June 30, 2011 and June 30, 2010

Net Income.  The Company recorded a net loss of $4.1 million for the fiscal year ended June 30, 2011, compared to a net loss of $1.5 million for the fiscal year ended June 30, 2010.  The primary reasons for the $2.6 million increase in the net loss were increases of $2.0 million and $330,000 in write-downs on real estate owned and in the provision for loan losses, respectively, in fiscal 2011 compared to fiscal 2010. In addition, non-interest income decreased by $2.3 million in fiscal 2011 to a negative $736,000 from $1.5 million in fiscal 2010, Additionally, there was a decrease in net interest income of $361,000 to

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$6.1 million in fiscal 2011 from $6.5 million in fiscal 2010, and an increase in non-interest expense of $114,000 to $7.8 million during fiscal 2011 from $7.6 million during fiscal 2010. The Company recorded a tax provision of $581,000 during fiscal 2011 compared to a provision of $1.0 million during fiscal 2010.

Net Interest Income.  Net interest income decreased $361,000, or 5.6%, to $6.1 million for the fiscal year ended June 30, 2011 from $6.5 million for the fiscal year ended June 30, 2010.  Total interest income decreased $1.5 million, while total interest expense decreased by $1.2 million.

Interest Income.  Interest income decreased $1.5 million, or 15.6%, to $8.3 million for the fiscal year ended June 30, 2011, from $9.8 million for the fiscal year ended June 30, 2010.  Interest income on loans receivable decreased by $1.6 million, or 21.3%, to $5.9 million for the fiscal year ended June 30, 2011 from $7.6 million for the fiscal year ended June 30, 2010.  During the year ended June 30, 2011, the average balance of net loans outstanding decreased $18.8 million, or 15.6%, to $101.7 million from $120.5 million for the fiscal year ended June 30, 2010. In addition, the yield on net loans outstanding decreased to 5.82% in fiscal 2011 from 6.24% in fiscal 2010 due to the continuing low level of market interest rates, and to substantial decreases in the outstanding balances of commercial real estate and commercial business loans during 2011. These types of loans generally have higher rates. Total loan originations were $12.6 million during the year ended June 30, 2011, while the purchase of loans totaled $189,000, the sales of loans totaled $289,000 and repayments on loans were $20.1 million.

Interest income from securities increased $156,000, or 7.7%, to $2.2 million for the year ended June 30, 2011 from $2.0 million for the year ended June 30, 2010.  The increase was the result of an increase of $18.6 million, or 35.8%, in the average balance of securities to $70.6 million in fiscal 2011 from $52.0 million in fiscal 2010, which was partially offset by a decrease in the yield on securities to 3.12% for fiscal 2011 from 3.88% for fiscal 2010.

Interest income from other interest-earning assets (primarily overnight funds) decreased $81,000, or 37.7%, to $133,000 for the fiscal year ended June 30, 2011 from $214,000 for the fiscal year ended June 30, 2010.  The decrease was attributable to a decrease in the yield on other interest-earning assets from 0.91% for the year ended June 30, 2010 to 0.68% for the year ended June 30, 2011, and to a decrease in the average balance of other interest-earning assets from $26.3 million in fiscal 2010 to $18.9 million during fiscal 2011.

Interest Expense.  Interest expense for the fiscal year ended June 30, 2011 decreased $1.2 million, or 35.6%, to $2.1 million from $3.3 million for the fiscal year ended June 30, 2010.  Expense on interest-bearing customer deposits decreased by $1.1 million, or 38.0%, to $1.9 million for fiscal 2011 from $3.0 million for fiscal 2010. This decrease was the result of a decrease of $6.7 million, or 3.9%, in the average balance of deposits to $163.8 million for the fiscal year ended June 30, 2011 from $170.5 million for the fiscal year ended June 30, 2010, and by a decrease in the average cost of deposits to 1.14% for fiscal 2011 from 1.77% for fiscal 2010.  The decrease in the average cost of deposits was the result of low short-term interest rates during fiscal 2011 and maturities of higher costing time deposits.

Interest expense on retail repurchase agreements increased by $13,000 to $83,000 during the fiscal year ended June 30, 2011 from $70,000 for the fiscal year ended June 30, 2010. The increase was the result of an increase in the average balance of retail repurchase agreements of $907,000 to $5.7 million for fiscal 2011 from $4.8 million for fiscal 2010. The average cost on retail repurchase agreements decrease during 2011 by one basis point from 1.45% for fiscal 2010 to 1.44% for fiscal 2011. Interest expense on other interest-bearing liabilities decreased $31,000, or 17.1%, to $150,000 for the fiscal year ended June 30, 2011 from $181,000 for the fiscal year ended June 30, 2010. The decrease was the result of a decrease in the average balance of these liabilities of $2.7 million to $3.0 million for fiscal 2011 from $5.7 million for fiscal 2010, which was partially offset by an increase in the average cost of these liabilities to 5.00% in fiscal 2011 from 3.18% in fiscal 2010.

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Provision for Loan Losses.  The provision for loan losses increased $330,000, or 38.8%, to $1.2 million for the fiscal year ended June 30, 2011 from $852,000 for the fiscal year ended June 30, 2010.  The allowance for loan losses was $2.5 million, or 2.28%, of gross loans at June 30, 2010 compared to $2.0 million, or 2.03%, of gross loans at June 30, 2011.  Loan charge-offs, net of recoveries was $1.7 million for the fiscal year ended June 30, 2011 compared to $2.7 million for the fiscal year ended June 30, 2010.  While net loan charge-offs have decreased over the last two fiscal years, they still remain higher than prior to fiscal 2009. Many of the loans identified as problems during the last three fiscal years were or became delinquent, migrated to classified assets, became subject to specific impairment analysis and were written down, or taken into real estate owned or repossessed collateral at some amount less than the loan balances.

Non-interest Income.  Non-interest income decreased $2.3 million, or 147.9%, to a negative $736,000 for the fiscal year ended June 30, 2011 compared to $1.5 million for the fiscal year ended June 30, 2010.  During fiscal 2011, the total was significantly impacted by $2.2 million in write downs on real estate owned compared to write downs of $181,000 during fiscal 2010. There were decreases of $488,000, or 32.3%, in service charges and other fee income, $15,000, or 100.0%, in income from BOLI, $21,000, or 45.9%, in gain on the sale of loans, $31,000, or 28.4%, in other operating income. These decreases were slightly offset by a profit of $315,000 on the sale of securities. There were no sales of securities in fiscal 2010. The decrease in service charges and other fee income seems to reflect a higher level of caution on the part of checking customers in a difficult economic period. The decrease in income on BOLI was the result of the liquidation during calendar 2009, of the Savings Bank’s BOLI policies with approximately two thirds of the proceeds received in fiscal 2009 and the balance in fiscal 2010. The write downs on real estate owned are the result of decreases in real estate values during the ongoing economic downturn, and a decrease in the number of buyers for such properties. The decrease in gain on the sale of loans was the result of a smaller volume of loans originated for sale in fiscal 2011 compared to fiscal 2010.

Non-interest Expense.  Non-interest expense increased $114,000, or 1.5%, to $7.8 million for the fiscal year ended June 30, 2011 from $7.6 million for the fiscal year ended June 30, 2010. There were increases of $231,000 and $246,000 professional fees and other non-interest expense. These increases were partially offset by decreases of $195,000, $30,000 and $138,000 in compensation and employee benefits, occupancy and equipment expense and deposit insurance premiums, respectively.

Compensation and employee benefits decreased $195,000, or 5.4%, to $3.4 million for the fiscal year ended June 30, 2011. The decrease in compensation and benefits included a decrease of $145,000, or 5.3%, in compensation and a decrease of $33,000, or 7.3%, in group health insurance costs. The decrease in compensation and group health insurance was due primarily to staff reductions during the past two fiscal years. At the beginning of fiscal 2011, the Company had 90 full-time equivalent employees, and at the end of the year the Company had 85 full-time equivalent employees, a reduction 5.6%. In addition, there was an increase of $23,000, or 26.7%, in the amount of compensation costs deferred on loan originations under ASC 310-02. These items were partially offset by an increase of $30,000, or 24.5%, in costs related to retirement plans.

Occupancy and equipment expense for the fiscal year ended June 30, 2011 decreased $31,000, or 2.3%, to $1.3 million from $1.4 million for fiscal 2010. The largest decreases were $62,000 in building rent and $22,000 in furniture, fixture and equipment expense. The decrease in rent was primarily attributable to the Savings Bank subleasing its loan production facility in the first quarter of fiscal 2010, at which time a penalty amounting to $57,000 was expensed. The only significant increase in occupancy and equipment expense for the fiscal year ended June 30, 2011 was a $45,000 increase in computer expense as the Savings Bank continued to make improvements to its systems.

Professional fees increased $231,000, or 43.5%, from $531,000 in fiscal 2010 to $763,000 in fiscal 2011.  The increase in professional fees includes increases in external audit fees, internal audit fees and legal fees related to an employee lawsuit, foreclosure issues and other issues with real estate owned and loans.

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Deposit insurance premiums decreased $138,000, or 22.9%, from $603,000 in fiscal 2010 to $465,000 in fiscal 2011.

Other non-interest expense increased by $246,000, or 16.4%, from $1.5 million for fiscal 2010 to $1.7 million for fiscal 2011. The increase in this category, which covers all other operating expense of the Company, was primarily the result of the recording of a liability of $300,000 related to the lawsuit brought by a former employee discussed above.

Income Taxes.  Income tax expense of $1.0 million was recorded for the fiscal year ended June 30, 2010. This was the result of the reversal of current year and previously recorded net deferred tax benefits. In light of the cumulative net losses the Company has experienced, the Company concluded that it was not more likely than not that there would be sufficient future taxable income to realize the deferred tax assets in the foreseeable future. During the fiscal year ended June 30, 2011, the Company recorded an income tax expense of $581,000 to record additional valuation allowance against the deferred tax assets.

Net Interest Margin.  Net interest margin for the fiscal year ended June 30, 2011 was 3.22% compared to 3.28% for the fiscal year ended June 30, 2010.  The decrease in the net interest margin was the result of a decrease in the yield on interest-earning assets that was only partially offset by a decrease in the cost of interest-bearing liabilities. The ratio of average interest-earning assets to average interest-bearing liabilities increased from 109.8% during fiscal 2010 to 110.8% during fiscal 2011 while the interest rate spread between interest-earning assets and interest-bearing liabilities decreased 1 basis point from 3.11% during fiscal 2010 to 3.10% during fiscal 2011.

Average Balances, Interest and Average Yields/Costs

The earnings of the Savings Bank depend largely on the spread between the yield on interest-earning assets (primarily loans and securities) and the cost of interest-bearing liabilities (primarily deposit accounts, retail repurchase agreements and FHLB advances), as well as the relative size of the Savings Bank's interest-earning assets and interest-bearing liability portfolios.

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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
	2011		2011		2010
Weighted average yield
on loan portfolio	5.69	%	5.82	%	6.24	%
Weighted average yield
on securities	3.29		3.12		3.88
Weighted average yield on other
interest-earning assets	0.37		0.68		0.91
Weighted average yield
on all interest-earning assets	4.11		4.32		4.92
Weighted average rate
paid on total deposits	0.75		1.14		1.77
Weighted average rate paid on retail
repurchase agreements	1.48		1.44		1.45
Weighted average rate paid on other
interest-bearing liabilities	4.94		5.00		3.18
Weighted average rate paid on
All interest-bearing liabilities	0.84		1.22		1.80
Interest rate spread (spread
between weighted average
rate on all interest-earning assets
and all interest-bearing liabilities)	3.27		3.10		3.11
Net interest margin (net interest
income (expense) as a percentage
of average interest-earning assets)	N/A		3.22		3.28

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.

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	Years Ended June 30,
	2011								2010
				Interest								Interest
	Average			and		Yield/			Average			and		Yield/
	Balance(2)			Dividends		Cost			Balance(2)			Dividends		Cost
	(Dollars in thousands)
Interest-earning assets:
Loans(1)	$	101,703		$	5,918		5.82	%	$	120,468		$	7,518		6.24	%
Securities		70,612			2,207		3.13			51,995			2,020		3.88
Other		18,892			128		0.68			26,336			239		0.91
Total interest-earning assets		191,207			8,253		4.32			198,799			9,777		4.92
Non-interest earning assets
Office properties and equipment, net		6,032								6,311
Real estate, net		5,215								3,016
Other non-interest earning assets		5,611								8,766
Total assets	$	208,065							$	216,892
Interest-bearing liabilities:
Savings and Money Market savings     accounts	$	45,717			300		0.66		$	46,738			631		1.35
Checking and Super Saver accounts		45,465			225		0.49			42,459			362		0.85
Certificates of deposit		72,642			1,346		1.85			81,319			2,022		2.49
Total deposits		163,824			1,871		1.14			170,516			3,015		1.77
Retail repurchase agreements		5,744			83		1.44			4,837			70		1.45
Advances  from Federal Home Loan Bank		3,000			150		5.00			5,692			181		3.18
Total interest-bearing liabilities		172,568			2,104		1.22			181,045			3,266		1.80
Non-interest bearing liabilities:
Other liabilities		14,297								11,837
Total liabilities		186,865								192,882
Stockholders' equity		21,200								24,010
Total liabilities and
stockholders' equity	$	208,065							$	216,892
Net interest income				$	6,149							$	6,511
Interest rate spread							3.10	%							3.11	%
Net interest margin							3.22	%							3.28	%
Ratio of average interest-earning
assets to average interest-
bearing liabilities		110.8	%							109.8	%

(1)   Average balances include non-accrual loans and loans 90 days or more past due. The corresponding interest up to the date of non-accrual status has been included in the "Interest and Dividends" column.

(2)   Average balances for a period have been calculated using the average monthly balances for the respective year.

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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,
	2011 Compared to 2010									2010 Compared to 2009
	Increase/(Decrease)									Increase/(Decrease)
	Due to									Due to
	Volume			Rate			Net			Volume			Rate			Net
	(In thousands)
Interest-earning assets:
Loans (1)	$	(1,117	)	$	(483	)	$	(1,600	)	$	(1,820	)	$	(432	)	$	(2,252	)
Securities		632			(445	)		187			133			(565	)		(432	)
Other		(59	)		(52	)		(111	)		44			51			95
Total net change in income on
interest-earnings assets		(544	)		(980	)		(1,524	)		(1,643	)		(946	)		(2,589	)
Interest-bearing liabilities:
Interest-bearing deposits		(113	)		(1,031	)		(1,144	)		(74	)		(1,093	)		(1,167	)
Retail repurchase agreements		13			-			13			(3	)		(13	)		(16	)
Other interest-bearing liabilities		(111	)		80			(31	)		(659	)		(335	)		(994	)
Total net change in expense on
interest-bearing liabilities		(211	)		(951	)		(1,162	)		(736	)		(1,441	)		(2,177	)
Net change in net interest income	$	(333	)	$	(29	)	$	(362	)	$	(907	)	$	495		$	(412	)

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

Liquidity and Capital Resources

First Home’s primary sources of funds are proceeds from principal and interest payments on loans and securities, customer deposits, customer retail repurchase agreements and FHLB advances.  While maturities and scheduled amortization of loans and securities are a relatively predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

The primary investing activity of First Home is the origination of mortgage loans. Mortgage loans originated by First Home increased by $903,000 to $10.5 million for the year ended June 30, 2011 from $9.6 million for the year ended June 30, 2010.  Other investing activities include the purchase of securities and certificates of deposit, which totaled $56.5 million and $45.4, million for the years ended June 30, 2011 and 2010, respectively, and the origination of non-mortgage loans, which totaled $2.1

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million and $2.7 million for the years ended June 30, 2011 and 2010, respectively.  These activities were funded primarily by principal repayments and prepayments on loans and maturities and calls on securities.

During the fiscal year ended June 30, 2011, the Company’s cash and securities increased by $10.2 million to almost $100.4 million from $90.2 million at June 30, 2010. This resulted primarily from the decrease in the loan portfolio, the increase in retail repurchase agreement and the large deposit on June 30, 2011 that was discussed earlier.

Federal regulations require First Home to maintain an adequate level of liquidity to ensure the availability of sufficient funds to support loan growth and deposit withdrawals, to satisfy financial commitments and to take advantage of investment opportunities.  First Home’s sources of funds include customer deposits, retail repurchase agreements, principal and interest payments from loans and securities, FHLB advances and other credit lines. During both fiscal 2011 and fiscal 2010, First Home used its sources of funds primarily to purchase securities and domestic certificates of deposit, fund loan commitments and to pay maturing savings certificates and deposit withdrawals. At June 30, 2011, First Home had approved customer loan commitments totaling $356,000 and unused lines of credit totaling $594,000.

Liquid funds necessary for the normal daily operations of First Home are maintained in checking accounts, a daily time account with the FHLB of Des Moines and a repurchase agreement account at a regional bank.  It is the Savings Bank’s current policy to maintain adequate collected balances in checking accounts to meet daily operating expenses, customer withdrawals, and fund loan demand.  Funds received from daily operating activities are deposited, on a daily basis, in one of the checking accounts and transferred, when appropriate, to the daily time account, used to purchase investments or reduce FHLB advances to enhance net interest income.

At June 30, 2011, certificates of deposit of customers amounted to $66.6 million, or 36.9%, of First Home’s total deposits, including $43.4 million which are scheduled to mature by June 30, 2012.  Historically, First Home has been able to retain a significant amount of its deposits as they mature.  Management of First Home believes it has adequate resources to fund all loan commitments with savings deposits and FHLB advances and that it can adjust the offering rates of savings certificates to retain deposits in changing interest rate environments.

Capital

Federal regulations require First Home to maintain specific amounts of capital.  As of June 30, 2011, First Home was in compliance with all current regulatory capital requirements with tangible, core and risk-based capital ratios of 7.9%, 7.9% and 18.3%, respectively.  These ratios exceed the 1.5%, 4.0% and 8.0% tangible, core and risk-based capital ratios required by Federal regulations.  In addition, capital regulations require savings institutions to maintain specified amounts of regulatory capital based on the estimated effects of changes in market rates and that could further increase the amount of regulatory capital required to be maintained by the Savings Bank.

Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a "well capitalized" institution in accordance with regulatory standards.  Total equity capital was $17.1 million at June 30, 2011, or 8.21%, of total assets on that date. As of June 30, 2011, we exceeded all regulatory capital requirements.  Our regulatory capital ratios at June 30, 2011 were as follows: Tier 1 (core) capital 7.90%; Tier 1 risk-based capital 17.11%; and total risk-based capital 18.34%.  The regulatory capital requirements to be considered well capitalized are 5%, 6% and 10%, respectively. However, the Savings Bank is not considered well capitalized due to the fact that it is operating under a cease and desist order.

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Off-Balance Sheet Arrangements

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the financing needs of our customers.  These financial instruments generally include commitments to originate mortgage, commercial and consumer loans, and involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.  The Company’s maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount of those instruments.  Since some commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments.  Collateral is not required to support commitments.

Undisbursed balances of loans closed include funds not disbursed but committed for construction projects.  Unused lines of credit include funds not disbursed but committed to, on home equity, commercial and consumer lines of credit.

Commercial letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  Those guarantees are primarily used to support public and private borrowing arrangements.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  Collateral held varies as specified above and is required in instances where we deem it necessary.

The following is a summary of commitments and contingent liabilities with off-balance sheet risks at June 30, 2011:

	Contract or
	Notional Amount
	(dollars in thousands)
Commitments:
	(In thousands)
Fixed rate loans	$	292
Adjustable rate loans		64
Undisbursed balance of loans closed		755
Unused lines of credit		991
Commercial standby letters of credit		107
Total	$	2,209

Accounting Policies

Various elements of the Company’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, management has identified several accounting policies that, as a result of the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the financial statements of the Company.  These policies relate to the methodology for the determination of the provision and allowance for loan losses, the valuation of real estate held for sale and the allowance for deferred income taxes.  These policies and the judgments, estimates and assumptions are described in greater detail in this Management’s Discussion and Analysis of Financial Condition and Results of Operations section and in the section entitled “New accounting standards” contained in Note 1 of the Notes to Consolidated Financial Statements.  Management believes that the judgments, estimates and assumptions used in the preparation of the financial statements are appropriate based on the factual circumstances at the time.  However, because of the sensitivity of the financial statements to these critical accounting policies, the

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use of other judgments, estimates and assumptions could result in material differences in the results of operations or financial condition.

Effect of Inflation and Changing Prices

The Consolidated Financial Statements and related financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars, without considering the changes in relative purchasing power of money over time due to inflation.  The primary impact of inflation on operations of First Home is reflected in increased operating costs.  Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature.  As a result, interest rates generally have a more significant impact on a financial institution’s performance than do general levels of inflation.  Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.  During the current interest rate environment, management believes that the liquidity and the maturity structure of First Home’s assets and liabilities are critical to the maintenance of acceptable profitability.

Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity of Net Portfolio Value.  The following table sets forth the change in the Savings Bank’s net portfolio value at June 30, 2011. The calculations were made using the OTS model, and were provided by the Office of the Comptroller of the Currency (“OCC”). The OCC will provide such calculations through the December 2011 quarter, after which the Savings Bank will present information based on its internal model. Net portfolio value is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The calculation is intended to illustrate the change in net portfolio value that will occur upon an immediate and permanent change in interest rates at the various levels of change indicated. There is no effect given to any steps that management might take to counter the effect of that interest rate movement.

											Net Portfolio as % of
			Net Portfolio Value								Portfolio Value of Assets
Basis Point ("bp")			Dollar		Dollar			Percent			Net Portfolio
Change in Rates			Amount		Change(1)			Change			Value Ratio(2)			Change(3)
			(Dollars in thousands)
	300	bp	$	24,135	$	(2,249	)		(9	)		11.30	%		(82	)	bp
	200			25,512		(872	)		(3	)		11.84			(28	)
	100			26,360		(24	)		0			12.14			3
	50			25,762		(622	)		(2	)		11.88			(23	)
	-			26,384		-			-			12.12			-
	(50)			25,579		(805	)		(3	)		11.78			(34	)
	(100)			25,396		(987	)		(4	)		11.69			(42	)

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

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

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

The above table illustrates, for example, that at June 30, 2011 an instantaneous 200 basis point increase in market interest rates would increase the Savings Bank’s net portfolio value by  $872,000, or  3%, and an instantaneous 100 basis point decrease in market interest rates would decrease the Savings Bank’s net portfolio value by $987,000, or  4%.

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The following summarizes key exposure measures for the dates indicated.  They measure the change in net portfolio value ratio for a 200 basis point increase and for a 100 basis point decrease in interest rates.

	June 30,	March 31,	June 30,
	2011	2011	2010
Pre-shock net portfolio
Value ratio	12.12%	12.63%	13.45%
Post-shock net portfolio
Value ratio (Up 200 bp)	11.84%	11.46%	14.07%
Increase (decrease) in portfolio
Value ratio (Up 200 bp)	(28) bp	(117) bp	62 bp
Post-shock net portfolio
Value ratio (Down 100 bp)	11.69%	12.70%	12.83%
Increase (decrease) in portfolio
Value ratio (Down 100 bp)	(43) bp	7 bp	(62) bp

The calculated risk exposure measures of the Savings Bank’s interest rate risk at June 30, 2011 indicate that both the “shock” increase in market rates and the “shock” decrease in market rates would decrease the net portfolio value. There was an improvement of 89 basis points, to negative 28 basis points, for the up 200 basis point scenario at June 30, 2011 compared to a negative 117 basis points for the same scenario at March 31, 2011, but a deterioration of 90 basis points when compared to the same scenario at June 30, 2010. There was an improvement of 19 basis points, to a negative 43 basis points, for the down 100 basis point scenario at June 30, 2011 compared to a negative 62 basis points for the same scenario at June 30, 2010.

The OCC uses certain assumptions in assessing the interest rate risk of thrift institutions.  These assumptions relate to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under differing interest rate scenarios, among others.  As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table.  For example, although certain assets and liabilities may have similar maturities or period to re-pricing, 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.

The model in use by the OCC is the same one used by the Savings Bank’s prior regulator, the OTS. It is scheduled to be phased out by March 31, 2012. The Savings Bank will begin to transition to reporting based on the model used internally.

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

First Bancshares, Inc.

We have audited the accompanying consolidated statements of financial condition of First Bancshares, Inc. and subsidiaries as of June 30, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.   The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and 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, 2011 and 2010 and the results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

/s/ McGladrey & Pullen, LLP

Kansas City, Missouri

September 27, 2011

29

FIRST BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

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

June 30, 2011 and 2010

	2011			2010
ASSETS
Cash and cash equivalents	$	24,798,915		$	20,182,593
Certificates of deposit purchased		2,939,675			7,221,578
Securities available-for-sale		54,080,467			60,304,479
Securities held to maturity. fair value at:
June 30, 2011, $18,193,227; June 30, 2010, $2,072,084		18,145,893			2,012,940
Federal Home Loan Bank stock, at cost		428,800			434,000
Loans receivable, net allowance for loan losses at:
June 30, 2011, $1,982,599; June 30, 2010, $2,526,862		95,816,656			108,683,381
Loans held for sale		61,140			-
Accrued interest receivable		778,420			819,752
Prepaid FDIC insurance premiums		752,998			1,196,465
Prepaid expenses		439,677			380,487
Property and equipment, net		5,897,731			6,051,423
Real estate owned and other repossessed assets, net		4,913,828			3,945,628
Intangible assets, net		85,126			135,241
Income taxes receivable		138,360			152,975
Other assets		66,123			136,031
Total assets	$	209,343,809		$	211,656,973
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits	$	180,660,992		$	180,075,425
Retail repurchase agreements		6,416,491			5,352,402
Advances from Federal Home Loan Bank		3,000,000			3,000,000
Accrued expenses		1,201,657			617,915
Total liabilities		191,279,140			189,045,742
Commitments and contingencies (Note 13)
Preferred stock, $.01 par value; 2,000,000 shares authorized,
none issued		-			-
Common stock, $.01 par value; 8,000,000 shares authorized,
issued 2,895,036 in 2011 and in 2010, outstanding
1,550,815 in 2011 and in 2010		28,950			28,950
Paid-in capital		18,061,442			18,056,714
Retained earnings – substantially restricted		18,437,566			22,538,555
Treasury stock, at cost - 1,344,221 shares in 2011 and in 2010		(19,112,627	)		(19,112,627	)
Accumulated other comprehensive income		649,338			1,099,639
Total stockholders' equity		18,064,669			22,611,231
Total liabilities and stockholders' equity	$	209,343,809		$	211,656,973
See notes to the consolidated financial statements

30

FIRST BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

Years Ended June 30, 2011 and 2010

	2011			2010
Interest Income:
Loans receivable	$	5,918,248		$	7,517,826
Securities		2,201,748			2,045,358
Other interest-earning assets		133,007			213,568
Total interest income		8,253,003			9,776,752
Interest Expense:
Deposits		1,871,096			3,015,281
Retail repurchase agreements		82,550			69,778
Advances from Federal Home Loan Bank		150,258			181,183
Total interest expense		2,103,904			3,266,242
Net interest income		6,149,099			6,510,510
Provision for loan losses		1,182,384			852,182
Net interest income after
provision for loan losses		4,966,715			5,658,328
Non-interest Income:
Service charges and other fee income		1,022,622			1,510,334
Gain on the sale of loans		24,317			44,937
Gain on sale of securities		314,732			-
Gain on sale of property and equipment
and real estate owned		5,656			35,257
Write-down on real estate owned		(2,182,895	)		(181,115	)
Income from bank-owned life insurance		-			15,064
Other		79,460			110,908
Total non-interest income		(736,109	)		1,535,385
Non-interest Expense:
Compensation and employee benefits		3,435,421			3,630,094
Occupancy and equipment		1,343,835			1,374,441
Professional fees		762,532			531,380
Deposit insurance premiums		465,437			603,419
Other		1,743,588			1,497,530
Total non-interest expense		7,750,813			7,636,864
Loss before income taxes		(3,520,207	)		(443,151	)
Income taxes		580,782			1,040,931
Net loss	$	(4,100,989	)	$	(1,484,082	)
Basic loss per share	$	(265	)	$	(0.96	)
Diluted loss per share	$	(2.65	)	$	(0.96	)

See notes to the consolidated financial statements.

31

FIRST BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

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

Years Ended June 30, 2011 and 2010

	Common												Accumulated Other			Total
	Stock				Paid-in		Retained			Treasury			Comprehensive			Stockholders'
	Shares		Amount		Capital		Earnings			Stock			Income (Loss)			Equity
Balances at June 30, 2009		1,550,815	$	28,950	$	18,047,257	$	24,022,637		$	(19,112,627	)	$	777,674		$	23,763,891
Comprehensive income:
Net loss		-		-		-		(1,484,082	)		-			-			(1,484,082	)
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on
securities available-for-sale, net of deferred
income taxes of $165,861		-		-		-		-			-			321,965			321,965
Total Comprehensive Income																	(1,162,117	)
Stock based compensation		-		-		9,457		-			-			-			9,457
Balances at June 30, 2010		1,550,815		28,950		18,056,714		22,538,555			(19,112,627	)		1,099,639			22,611,231
Comprehensive income:
Net loss		-		-		-		(4,100,989	)		-			-			(4,100,989	)
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on
securities available-for-sale, net of deferred
income taxes of $(333,133) and a
reclassification adjustment, net of deferred
income taxes of $101,160		-		-		-		-			-			(450,301	)		(450,301	)
Total Comprehensive Income																	(3,563,790	)
Stock based compensation		-		-		4,728		-			-			-			4,728
Balances at June 30, 2011		1,550,815	$	28,950	$	18,061,442	$	18,437,566		$	(19,112,627	)	$	649,338		$	18,064,669

See notes to the consolidated financial statements.

32

FIRST BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

Years Ended June 30, 2011 and 2010

	2011			2010
Cash flows from operating activities:
Net loss	$	(4,100,989	)	$	(1,484,082	)
Adjustments to reconcile net income  to net
cash provided by operating activities:
Depreciation		574,327			552,515
Amortization		50,115			50,114
Net premium amortization and (discount accretion) on securities		145,541			(43,485	)
Stock based compensation		4,728			9,457
Gain on sale of securities		(314,732	)		-
Provision for loan losses		1,182,384			852,182
Write down on real estate owned		2,182,896			181,115
Gain on the sale of loans		(24,317	)		(44,937	)
Proceeds from the sale of loans originated for sale		1,966,961			1,576,243
Loans originated for sale		(2,003,784	)		(691,130	)
Deferred income taxes		566,481			1,672,924
Gain on sale of property and equipment
and real estate owned		(5,656	)		(39,236	)
Loss on the sale of other repossessed assets		38,310			3,176
Increase in cash surrender value on bank-owned
life insurance		-			(15,064	)
Net change in operating accounts:
Accrued interest receivable, prepaid expenses and other assets		52,050			330,674
Deferred loan costs		15,469			21,171
Income taxes receivable		14,615			121,608
Prepaid FDIC insurance premium		443,467			(1,113,917	)
Accrued expenses		249,324			(602,227	)
Net cash provided by operating activities		1,037,100			1,337,101
Cash flows from investing activities:
Purchase of certificates of deposit purchased		(2,399,000	)		(8,725,856	)
Maturities of certificates of deposit purchased		6,680,903			7,132,340
Purchase of securities available-for-sale		(36,202,920	)		(36,691,737	)
Proceeds from sale of securities available-for-sale		6,120,006			-
Proceeds from maturities of securities
available-for-sale		35,786,548			22,235,498
Purchase of securities held to maturity		(17,936,733	)		-
Proceeds from sale of securities held to maturity		157,982
Proceeds from maturities of securities held to maturity		1,653,093			578,445
Proceeds from redemption of Federal Home Loan Bank stock		5,200			1,146,800
Net (increase) decrease in loans receivable		7,736,098			19,716,395
Proceeds from surrender of bank owned life insurance		-			2,169,089
Purchases of property and equipment		(420,635	)		(248,035	)
Proceeds from sale of property and equipment		-			313,471
Capital expenditures on real estate owned		(7,500	)		(22,000	)
Proceeds from sale of real estate owned and other repossessed assets		756,524			1,526,908
Net cash provided by investing activities		1,929,566			9,131,318

Continued

33

FIRST BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

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

Years Ended June 30, 2011 and 2010

	2011			2010
Cash flows from financing activities:
Net change in deposits	$	585,567		$	(9,142,453	)
Net change in retail repurchase agreements		1,064,089			(360,980	)
Payments on borrowed funds		-			(7,000,000	)
Net cash provided by (used in) financing activities		1,649,656			(16,503,433	)
Net increase (decrease) in cash and cash equivalents		4,616,322			(6,035,014	)
Cash and cash equivalents -
Beginning of period		20,182,593			26,217,607
Cash and cash equivalents -
end of period	$	24,798,915		$	20,182,593
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and
other borrowings	$	2,189,727		$	3,448,021
Income taxes	$	(314	)	$	(754,601	)
Supplemental schedule of non-cash investing and
financing activities:
Loans transferred to real estate owned	$	3,932,774		$	3,888,976
See notes to consolidated financial statements

34

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(1)        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of business – First Bancshares, Inc., a Missouri corporation (“Company”),  was organized on September 30, 1993 for the purpose of becoming a unitary savings and loan holding company for First Home Savings Bank (”Savings Bank”).  The Savings Bank is primarily engaged in providing a full range of banking and mortgage services to individual and corporate customers in southern Missouri.  The Company and Savings Bank are also subject to the regulation of certain federal and state agencies and undergo periodic examinations by those regulatory authorities.

Principles of consolidation – The accompanying consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiaries, the Savings Bank and SCMG, Inc. (formerly South Central Missouri Title, Inc.) and the wholly-owned subsidiaries of the Savings Bank, Fybar Service Corporation and First Home Investments.  In consolidation, all significant intercompany balances and transactions have been eliminated.

Estimates – In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the fair value of financial instruments, the allowance for loan losses and the deferred tax valuation.

Segment reporting – An operating segment is defined as a component of a business for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and evaluate performance. The Company has one operating segment, community banking.

Consolidated statements of cash flows – For purposes of the consolidated statements of cash flows, cash consists of cash on hand and deposits with other financial institutions.  Cash equivalents include highly-liquid instruments with an original maturity of three months or less. Cash flows from loans and deposits are reported net.

Certificates of deposit purchased – These are funds placed on deposit at other financial institutions which mature in one year or less and do not, at any one financial institution, aggregate to more than the insurance of accounts limitation.

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

All other securities are designated as available-for-sale, a designation which provides the Company with certain flexibility in managing its investment portfolio.  Such securities are reported at fair value; net unrealized gains and losses are excluded from income and reported net of applicable income taxes as a separate component of stockholders’ equity.

35

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Interest income on securities is recognized on the interest method according to the terms of the security. Gains or losses on sales of securities are recognized in operations at the time of sale and are determined by the difference between the net sales proceeds and the cost of the securities using the specific identification method, adjusted for any unamortized premiums or discounts. Premiums or discounts are amortized or accreted to income using the interest method over the period to maturity.

Declines in the fair value of equity securities below their amortized cost basis that are deemed to be other-than-temporary impairment losses are reflected as realized losses.  To determine if an other-than-temporary impairment exists on an equity security, the Company considers (a) the length of time and the extent to which the fair value has been less than cost, (b) the financial condition and near-term prospects of the issuer, (c) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for an anticipated recovery in fair value and (d) the current market conditions. To determine if an other-than-temporary-impairment exists on a debt security, the Company first determines if (a) it intends to sell the security or (b) it is more likely than not that it will be required to sell the security before its anticipated recovery.  If either of the conditions is met, the Company will recognize an other-than-temporary-impairment in earnings equal to the difference between the fair value of the security and its adjusted cost basis. In estimating other-than-temporary impairment losses on debt securities, management considers a number of factors, including, but not limited to: (1) the length of time and extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the current market conditions and (4) the intent of the Company to not sell the security or whether it is more-likely-than-not that the Company will be required to sell the security before its anticipated recovery. If neither of the conditions is met, the Company determines (a) the amount of the impairment related to credit loss and (b) the amount of the impairment due to all other factors.  The difference between the present values of the cash flows expected to be collected and the amortized cost basis is the credit loss. The amount of the credit loss is included in the consolidated statements of income as a other-than-temporary impairment on securities and is an adjustment to the cost basis of the security.  The portion of the total impairment that is related to all other factors is included in other comprehensive income (loss).

Federal Home Loan Bank stock – The Savings Bank, as a member of the Federal Home Loan Bank (“FHLB”) system, is required to maintain an investment in capital stock of the FHLB of Des Moines.  The stock does not have a readily determinable fair market value and, as such, is carried at cost and evaluated for impairment in accordance with ASC 942-325-35. In accordance with the guidance, the stock’s value is determined by the ultimate recoverability of the par value rather than recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) The significance of the decline in net assets of the Federal Home Loan Bank as compared to the capital stock amount and the length of time the situation has persisted; (b) Commitments by the Federal home Loan Bank to make payments in relation to the operating performance; (c) The impact of legislative and regulatory changes on the customer base of the Federal Home Loan Bank, and; (d) The liquidity position of the Federal Home Loan Bank.

36

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Prepaid insurance assessment – In November 2009, the Federal Deposit Insurance Corporation (“FDIC”) adopted a final rule amending the assessment regulations to require depository institutions to prepay their quarterly risk-based assessment for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The payment of $1.6 million, which was made December 30, 2009, was recorded as a prepaid asset and is being amortized over the assessment period.

Loans receivable – Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their principal amount outstanding, net of deferred loan origination fees and certain direct costs.  Loan origination fees and certain direct loan origination costs are deferred and recognized in interest income over the contractual lives of the related loans using the interest method.  When a loan is paid-off, the unamortized balance of these deferred fees and costs is recognized in income.

Interest income on loans is recognized on the effective interest method.

Nonaccrual loans are those on which the accrual of interest is discontinued.  Loans are placed on nonaccrual status immediately if, in the opinion of management, full payment of principal or interest is in doubt, or when principal or interest is 90 days past due and collateral, if any, is insufficient to cover principal or interest.  In addition, the amortization of net deferred loan fees is suspended.  Interest income on nonaccrual loans is recognized only to the extent it is received in cash.  However, where these is doubt regarding the ultimate collectability of loan principal, all cash thereafter received is applied to reduce the carrying value of such loans.  Loans are restored to accrual status only when interest and principal payments are brought current and future payments are reasonably assured.

A loan is considered to be delinquent when payments have not been made according to contractual terms, typically evidenced by nonpayment of a monthly installment by due date.  The accrual of interest on other homogeneous loans is discontinued at the time the loan is 90 days delinquent, unless the credit is well-secured and in the process of collection.  Other personal loans are typically charged off no later than 180 days delinquent.

Allowance for loan losses – Management believes that the accounting estimate related to the allowance for loan losses is a critical accounting estimate because it is highly susceptible to change from period to period.  This may require management to make assumptions about losses on loans; and the impact of a sudden large loss could require increased provisions, which would negatively affect earnings.

Management recognizes that loan losses may occur over the life of a loan and that the allowance for loan losses must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the loan portfolio. Management of the Savings Bank assesses the allowance for loan losses on a monthly basis, through the analysis of several different factors including delinquency, charge-off rates and the changing risk profile of the Company’s loan portfolio, as well as local economic conditions such as unemployment rates, bankruptcies and vacancy rates of business and residential properties. The allowance is increased by the provision for loan losses, which is charged against current period operating results and decreased by the amount of actual loan charge-offs, net of recoveries.

37

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The allowance for loan losses is evaluated on a regular basis by management and is based on management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and prevailing economic conditions.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

TheCompany's allowance for possible loan losses consists of three elements: (i) specific valuation allowances determined in accordance with ASC Topic 310 based on probable losses on specific loans; (ii) historical valuation allowances determined in accordance with ASC Topic 450 based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) general valuation allowances determined in accordance with ASC Topic 450 based on general economic conditions and other qualitative risk factors both internal and external to the Company.

A loan is considered impaired when, based on current information and event, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due, according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payments delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrowers, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan-by-loan basis for commercial and construction loans, with either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral. Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment.  Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

A loan is classified as a troubled debt restructured (TDR) when for economic or legal reasons related to the borrower's financial difficulties a concession is granted to the borrower that would not otherwise be considered. Concessions may include a restructuring of the terms of a loan to alleviate the burden of the borrower's near-term cash requirements, such as an extension of the payment terms beyond the original maturity date or a change in the interest rate charged. TDR loans with extended payment terms are accounted for as impaired until performance is established. A change to the interest rate is considered TDR if the restructured loan yields a rate which is below a market rate for that of a new loan with comparable risk. TDR loans with below market rates are considered impaired until fully collected. TDR loans may be reported as nonaccrual rather than TDR, if they are not performing per the restructured terms. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

38

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Based upon the Bank's ongoing assessment of credit quality within the loan portfolio, it maintains a list of Classified and Watch List loans where there is a potential for contractual payment or collateral shortfall. A loan on the Classified and Watch List is considered impaired when it is probable the Bank will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses.

Loans held for sale – Loans held for sale are originated and intended for sale on the secondary market on a loan by loan basis with terms established with both the borrower and the investor prior to commitment and closing. Funding by the investor, based on the established terms, generally takes place in three to four weeks. Loans held for sale are carried at cost, which approximates fair value, due to the short term nature of the loans. Gains on loans sold are recognized based on the net cash flow of each sale. Loans are generally sold with servicing rights released.

Property and equipment and related depreciation – Land is stated at cost. Property and equipment are stated at cost, net of accumulated depreciation. Maintenance and repair costs are charged to expense as incurred. Major improvements are considered individually and are capitalized or expensed as the facts dictate. Property and equipment depreciation is principally computed by applying the following methods and estimated lives:

Category	Estimated Life	Method
Automobiles	5 years	Straight-line
Office furniture, fixtures   and equipment	3-10 years	Straight-line
Buildings	15-40 years	Straight-line
Investment real estate	15-40 years	Straight-line

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

Income taxes – Deferred taxes are determined using the liability (or balance sheet) method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.  Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. As a result of the Company’s operating results over the five year period ended June 30, 2010, management provided a valuation allowance of $1.2 million for the deferred tax assets of both the Company and the Savings Bank as of June 30, 2010. During the fiscal year ended June 30, 2011, management provided an additional valuation allowance of $1.4 million for the deferred tax assets of both the Company and the Savings Bank.

39

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

On of July 1, 2007, the Company adopted the accounting standard on accounting for uncertainty in income taxes, which addresses the determination of whether tax benefits claimed or expected to be claimed on tax returns should be recorded in the financial statements. Under this guidance, the Company may recognize the tax benefit from an uncertain tax position only if it more-likely-than-not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the tax position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The guidance on accounting for uncertainty in income taxes also includes de-recognition, classification, interest and penalties on income taxes, and accounting in interim periods. The Company recognizes interest and penalties on income taxes as a component of income tax expense. As a result of the Company’s evaluation of the implementation of this guidance, no significant income tax uncertainties were identified. Therefore, the Company recognized no adjustment for unrecognized income tax benefits during the years ended June 30, 2011 and June 30, 2010.

The Company is no longer subject to U. S. federal or state and local income tax examinations by tax authorities for years before fiscal 2008.

Real estate owned and repossessed assets – Real estate acquired through foreclosure is initially recorded at fair value, less estimated costs to sell.  If the fair value less costs to sell is less than the respective loan balance, a charge against the allowance for loan losses is recorded upon property acquisition.  Declines in property value subsequent to acquisition are charged to operations.  Holding costs are expensed.

Earnings per share – Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period.  Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or resulted in the issuance of common stock that would share in the earnings of the Company.  Dilutive potential common shares are added to weighted average shares used to compute basic earnings per share.  The number of shares that would be issued from the exercise of stock options has been reduced by the number of shares that could have been purchased from the proceeds at the average market price of the Company’s stock.

Comprehensive income – Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income.  Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

Employee stock options – The Company has stock-based employee compensation plans which are described more fully in Note 10, Employee Benefit Plans.

Compensation costs for all stock-based awards are measured at fair value on the grant date and are recognized over the requisite service period for awards expected to vest.  Management makes an estimate of expected forfeitures and recognizes compensation costs only for those equity awards expected to vest.  The Company uses the Black-Scholes option pricing model to

40

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

estimate the fair value of stock option grants.  Cash flows resulting from the tax benefits of tax deductions in excess of the compensation cost recognized for those options are presented as financing cash flows.

Revenue recognition – Deposit account transaction fees and other ancillary non-interest income related to the Savings Bank’s deposit and lending activities are recognized as services are performed.

Transfers of financial assets – Transfers of financial assets are accounted for as sales only when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or exchange the assets it received, and no condition both constrains the transferee from taking advantage of its right to pledge or exchange and provides more than a modest benefit to the transferor, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

Impairment of long-lived assets – Long-lived assets, including property and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

New accounting standards – In January 2011, the FASB issued FASB ASU No. 2011-01, Receivables (Topic 310), Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. ASU No. 2011-01 temporarily deferred the effective date for disclosures related to troubled debt restructurings to coincide with the effective date of ASU No. 2011-02, which is effective for periods beginning on or after June 15, 2011. The adoption of this pronouncement will not have a significant impact on the Company’s consolidated financial statements.

In April 2011, the FASB issued FASB ASU No. 2011-02, Receivables (Topic 310),A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This guidance will assist creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The guidance is effective for the first interim or annual period beginning on or after June 15, 2011. The adoption of this pronouncement will not havea significant impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued FASB ASU No. 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U. S. GAAP and International Financial Reporting Standards (“IFRS”). This guidance amends previous guidance on fair value measurement to achieve common fair value measurement and disclosure requirement in GAAP and International Financial Reporting Standards (“IFRS”). The guidance is effective for the first interim or annual period beginning after December 15, 2011.  The adoption of this pronouncement will not havea significant impact on the Company’s consolidated financial statements.

41

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(1)           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

In June 2011, the FASB issued FASB ASU No. 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income. This guidance improves the comparability, consistency and transparency of financial reporting and increases the prominence of items reported in other comprehensive income.  The guidance will facilitate convergence of GAAP and IFRS. The guidance is effective for the annual periods, and interim periods within those years, beginning after December 15, 2011.  The adoption of this pronouncement will not havea significant impact on the Company’s consolidated financial statements.

 (2)           SECURITIES

A summary of the securities available-for-sale at June 30, 2011 is as follows:
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
United States Government and
Federal agency obligations	$	22,877,384	$	78,157	$	(165,853	)	$	22,789,688
Obligations of states and
political subdivisions		110,000		297		-			110,297
Mutual funds		16,206		-		-			16,206
Federal agency residential
mortgage-backed securities		29,865,031		1,076,812		(5,567	)		30,936,276
Common and preferred stocks		228,000		-		-			228,000
Total	$	53,096,621	$	1,155,266	$	(171,420	)	$	54,080,467

A summary of the securities held to maturity at June 30, 2011 is as follows:
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
United States Government and
Federal agency obligations	$	16,943,120	$	102,750	$	(98,490	)	$	16,947,380
Obligations of states and
political subdivisions		992,420		31,133		-			1,023,553
Federal agency residential
mortgage-backed securities		210,353		11,941		-			222,294
Total	$	18,145,893	$	145,824	$	(98,490	)	$	18,193,227

42

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(2) SECURITIES (CONTINUED)

The amortized cost and estimated market value of securities at June 30, 2011 by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available for Sale
	Amortized
	Cost		Fair Value
Due in one year or less	$	-	$	-
Due after one year through five years		5,115,228		5,190,467
Due after five years through ten years		9,873,568		9,773,892
Due after ten years		7,998,588		7,935,626
Subtotal		22,987,384		22,899,985
Mutual funds		16,206		16,206
Federal agency residential
mortgage-backed securities		29,865,031		30,936,276
Common and preferred stocks		228,000		228,000
Total	$	53,096,621	$	54,080,467
	Held to Maturity
	Amortized
	Cost		Fair Value
Due in one year or less	$	294,959	$	297,625
Due after one year through five years		495,000		510,004
Due after five years through ten years		9,154,894		9,258,554
Due after ten years		7,990,687		7,904,750
Subtotal		17,935,540		17,970,933
Federal agency residential
mortgage-backed securities		210,353		222,294
Total	$	18,145,893	$	18,193,227

A summary of the securities available-for-sale at June 30, 2010 is as follows:
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
United States Government and
Federal agency obligations	$	26,652,246	$	375,853	$	-		$	27,028,099
Obligations of states and
political subdivisions		130,000		2,064		-			132,064
Mutual funds		17,952		-		-			17,952
Federal agency residential
mortgage-backed securities		31,580,162		1,418,516		(130,314	)		32,868,364
Common and preferred stocks		258,000		-		-			258,000
Total	$	58,638,360	$	1,796,433	$	(130,314	)	$	60,304,479

43

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(2) SECURITIES (CONTINUED)

A summary of the securities held to maturity at June 30, 2010 is as follows:
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
Obligations of states and
political subdivisions	$	1,4442,742	$	34,961	$	(187	)	$	1,477,516
Federal agency residential
mortgage-backed securities		570,198		24,370		-			594,568
Total	$	2,012,940	$	59,331	$	(187	)	$	2,072,084

The following tables present the fair value and gross unrealized losses of the Company’s securities with unrealized losses aggregated by category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2011 and 2010.

Available for Sale as of June 30, 2011
	Less Than 12 Months					12 Months or More					Total
			Gross					Gross					Gross
			Unrealized					Unrealized					Unrealized
	Fair Value		(Losses)			Fair Value		(Losses)			Fair Value		(Losses)
United States
Government and
Federal agency
Obligations	$	13,841,560	$	(165,853	)	$	-	$	-		$	13,841,560	$	(165,853	)
Federal agency
residential mortgaged
-backed securities		1,006,381		(2,921	)		145,828		(2,646	)		1,152,209		(5,567	)
Total temporarily
impaired securities	$	14,847,941	$	(168,774	)	$	145,828	$	(2,646	)	$	14,993,769	$	(171,420	)

Held to Maturity as of June 30, 2011
	Less Than 12 Months					12 Months or More				Total
			Gross					Gross				Gross
			Unrealized					Unrealized				Unrealized
	Fair Value		(Losses)			Fair Value		(Losses)		Fair Value		(Losses)
United States
Government and
Federal agency
Obligations	$	6,901,510	$	(98,490	)	$	-	$	-	$	,6,901,510	$	(98,490	)
Total temporarily
impaired securities	$	6,901,510	$	(98,490	)	$	-	$	-	$	6,901,510	$	(98,490	)

44

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

 (2) SECURITIES (CONTINUED)

Available for Sale as of June 30, 2010
	Less Than 12 Months					12 Months or More					Total
			Gross					Gross					Gross
			Unrealized					Unrealized					Unrealized
	Fair Value		(Losses)			Fair Value		(Losses)			Fair Value		(Losses)
Federal agency
residential mortgage
-backed securities	$	3,092,027	$	(121,661	)	$	324,307	$	(8,653	)	$	3,416,334	$	(130,314	)
Total temporarily
impaired securities	$	3,092,027	$	(121,661	)	$	324,307	$	(8,653	)	$	3,416,334	$	(130,314	)

Held to Maturity as of June 30, 2010
	Less Than 12 Months				12 Months or More					Total
			Gross				Gross					Gross
			Unrealized				Unrealized					Unrealized
	Fair Value		(Losses)		Fair Value		(Losses)			Fair Value		(Losses)
Obligations of states
and political
Subdivisions	$	-	$	-	$	202,666	$	(187	)	$	202,666	$	(187	)
Total temporarily
impaired securities	$	-	$	-	$	202,666	$	(187	)	$	202,666	$	(187	)

The Company evaluates securities for other-than-temporary impairment on a periodic basis. Consideration is given to the length of time and the extent to which the fair value has been less than cost, and the financial condition and near-term prospects of the issuer. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the Federal government or its agencies or sponsored entities, whether downgrades by bond rating agencies have occurred, and the results of review of the issuer’s financial condition.

As of June 30, 2011, the investment portfolio included ninety-seven securities.  Of this number, twenty-two securities have current unrealized losses, 1 of which has existed for longer than one year.  All of the debt securities with unrealized losses are considered to be acceptable credit risks.  Based upon an evaluation of the available evidence, including recent changes in market rates and credit rating information, management believes the decline in fair values for these debt securities are temporary.  In addition, the Company does not have the intent to sell these debt securities prior to their anticipated recovery.

45

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(2) SECURITIES (CONTINUED)

The following table presents proceeds from sales of securities and the gross realized securities gains and losses.

	Years Ended June 30,
	2011			2010
Proceeds from sales	$	6,277,988		$	-
Realized gains	$	315,692		$	-
Realized (losses)		(630	)		-
Net realized	$	315,062		$	-

The carrying value of securities pledged on retail repurchase agreements at June 30, 2011 and June 30, 2010 was $7.0 million and $6.5 million, respectively.

(3)           LOANS RECEIVABLE

At June 30, 2011 and 2010, loans consisted of the following:

	(Dollars in thousands)
	June 30, 2011					June 30, 2010
Type of Loan	Amount		Percent			Amount		Percent
Mortgage Loans:
Residential	$	54,859,965		56.22	%	$	60,217,252		54.24	%
Commercial Real Estate		29,877,216		30.61			34,572,677		31.15
Land		3,283,105		3.36			4,358,033		3.93
Second Mortgage Loans		3,944,786		4.04			4,468,596		4.03
Total Mortgage Loans		91,965,072		94.23			103,616,558		93.35
Consumer Loans:
Automobile Loans		807,282		0.83			1,126,724		1.02
Savings Account Loans		1,143,362		1.17			1,181,204		1.06
Mobile Home Loans		138,488		0.14			188,211		0.17
Other Consumer Loans		244,573		0.25			392,035		0.35
Total Consumer Loans		2,333,705		2.39			2,888,174		2.60
Commercial Business Loans		3,301,645		3.38			4,491,209		4.05
Total Loans		97,600,422		100.00	%		110,995,941		100.00	%
Add: Unamortized deferred loan costs,
net of origination fees		198,833					214,302
Less :Allowance for possible loan losses		1,982,599					2,526,862
Total Loans Receivable, net	$	95,816,656				$	108,683,381

Loan Origination Risk Management. The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

46

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(3)           LOANS RECEIVABLE (CONTINUED)

Commercial business and commercial real estate loans are underwritten after evaluating and understanding the borrower's ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower's management possesses sound ethics and solid business acumen, the Company's management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial business loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial business loans are secured by the assets being financed, including business equipment loans, farm equipment loans and cattle loansand may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial business loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company's commercial real estate portfolio are diverse in terms of type and geographic location. This diversity helps reduce the Company's exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Company avoids financing single-purpose projects unless other underwriting factors are present to help mitigate risk. The Company also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting market areas it serves.In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. At June 30, 2011, approximately 44.0% of the outstanding principal balances of the Company's commercial real estate loans were secured by owner-occupied properties.

With respect to loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

47

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(3)           LOANS RECEIVABLE (CONTINUED)

The Company originates consumer loans utilizing a computer-based credit scoring analysis to supplement the underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value, collection remedies, the total aggregate balance to one borrower and documentation requirements.

The Company employs an independent, outside consultant who reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management and the Board of Directors. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company's policies and procedures.

Concentrations of Credit. Most of the Company's lending activity occurs within the State of Missouri, including eleven counties surrounding one of the largest metropolitan areas in the State of Missouri, Springfield, as well as other markets. The majority of the Company's loan portfolio consists of 1-4 family home loans and commercial and commercial real estate loans. As of June 30, 2011 and 2010, there were no concentrations of loans related to any single industry in excess of 10% of total loans.

Non-Accrual and Past Due Loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management's opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Non-accrual loans segregated by class of loan at June 30, 2011 and 2010 were as follows:

	(Amounts in Thousands)
	June 30,		June 30,
	2011		2010
Non-Accrual Loans
Real Estate:
Residential	$	452	$	258
Commercial and Land		630		3,587
Commercial Business		251		82
Consumer		6		-
Total Non-Accrual Loans	$	1,339	$	3,927

48

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(3)           LOANS RECEIVABLE (CONTINUED)

Had non-accrual loans performed in accordance with their original contract terms, the Company would have recognized additional interest income, net of tax, of approximately $92,000 and $121,000 during the years ended June 30, 2011 and 2010, respectively.

An age analysis of past due loans segregated by class of loans, as of June 30, 2011 was as follows:

	(Amounts in Thousands)
	Accruing Loans				Non-
	30 - 89 Days		90+ Days		Accrual		Current		Total Net
Type of Loan	Past Due		Past Due		Loans		Loans		Loans
Mortgage Loans:
Residential	$	434	$	-	$	433	$	53,993	$	54,860
Commercial Real Estate		532		-		630		28,715		29,877
Land		109		-		-		3,174		3,283
Second Mortgage Loans		17		-		19		3,909		3,945
Total Mortgage Loans		1,092		-		1,082		89,791		91,965
Total Consumer Loans		15		-		6		2,313		2,334
Commercial Business Loans		2		-		251		3,049		3,302
Total Loans	$	1,109	$	-	$	1,339	$	95,153	$	97,601

Impaired Loans. Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated on an individual loan basis for all loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Impaired loans include nonperforming loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties.

These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collections.

Included in impaired loans are troubled debt restructurings totaling $869,000 and $2.8 million at June 30, 2011 and 2010, respectively.  As of June 30, 2011, $327,000 had been placed on non-accrual status.  The remaining troubled debt restructurings were performing in accordance with their modified terms at June 30, 2011.

49

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(3)           LOANS RECEIVABLE (CONTINUED)

Impaired loans at June 30, 2011 and 2010 are set forth in the following table. No interest income was recognized on impaired loans subsequent to their classification as impaired.

June 30, 2011	Unpaid		Recorded		Recorded
	Contractual		Investment		Investment		Total				Average
	Principal		With No		With		Recorded		Related		Recorded
	Balance		Allowance		Allowance		Investment		Allowance		Investment
Residential Real Estate	$	846,833	$	460,134	$	363,732	$	823,866	$	22,967	$	912,850
Commercial Real Estate		3,693,505		1,228,767		1,846,353		3,075,120		618,385		4,153,983
Land		176,147		176,147		-		176,147		-		351,233
Commercial Business		829,023		497,872		266,484		764,356		64,667		465,368
Consumer		14,155		14,155		-		14,155		-		2,831
	$	5,559,663	$	2,377,075	$	2,476,569	$	4,853,644	$	706,019	$	5,886,265

June 30, 2010	Unpaid		Recorded		Recorded
	Contractual		Investment		Investment		Total				Average
	Principal		With No		With		Recorded		Related		Recorded
	Balance		Allowance		Allowance		Investment		Allowance		Investment
Residential Real Estate	$	1,052,316	$	150,301	$	736,296	$	886,597	$	165,719	$	1,378,760
Commercial Real Estate		7,034,762		598,153		5,395,146		5,993,299		1,041,463		3,027,617
Land		480,296		387,097		73,219		460,316		19,980		1,453,010
Commercial Business		587,745		491,459		86,930		578,389		9,356		1,176,730
Consumer		-		-		-		-		-		3,815
	$	9,155,119	$	1,627,010	$	6,291,591	$	7,918,601	$	1,236,518	$	7,039,932

Credit Quality Indicator. As part of the on-going monitoring of the credit quality of the Company's loan portfolio, management tracks certain credit quality indicators includingtrends related to (i) the weighted-average risk grade of commercial loans, (ii) the level of classified commercial loans, (iii) netcharge-offs, (iv) non-performing loans (see details above) and (v) the general economic conditions in the State of Missouri.

The Companyutilizes a risk grading matrix to assign a risk grade to each of its commercial loans. Loans are graded on a scale of 1 to 8. A description of the generalcharacteristics of the 8risk grades is as follows:

·   Grades 1 and 2 - These grades include loans to very high credit quality borrowers. These borrowers (grades 1and 2), generally have significant capital strength, moderate leverage, stable earnings, growth, and readily available financing alternatives.

·   Grades 3 -This grade includes loans that are "pass grade" loans to borrowers of acceptable credit quality and risk. These borrowers have satisfactory asset quality and liquidity, adequate debt capacity and coverage, and good management in critical positions.

·   Grades 4 - This grade includes loans that require ”increased management attention”.  These borrowers generally have limited additional debt capacity and modest coverage and average or below average asset quality, margins, and market share.

50

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(3)           LOANS RECEIVABLE (CONTINUED)

·   Grade 5 - This grade is for "Other Assets Especially Mentioned" in accordance with regulatory guidelines. This grade is intended to be temporary and includes loans to borrowers whose credit quality has clearly deteriorated and are at risk of further decline unless active measures are taken to correct the situation.

·   Grade 6 - This grade includes "Substandard" loans, in accordance with regulatory guidelines, for which the accrual of interest has not been stopped. By definition under regulatory guidelines, a "Substandard" loan has defined weaknesses which make payment default or principal exposure likely, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment or an event outside of the normal course of business.  Also, included in "Substandard" loans, in accordance with regulatory guidelines, are loans for which the accrual of interest has been stopped. This grade includes loans where interest is more than 90 days past due and not fully secured and loans where a specific valuation allowance may be necessary.

·   Grade 7 - This grade includes "Doubtful" loans in accordance with regulatory guidelines. Such loans are placed on non-accrual status and may be dependent upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. Additionally, these loans generally have a specific valuation allowance in excess of 30% of the principal balance.

·   Grade 8 - This grade includes "Loss" loans in accordance with regulatory guidelines. Such loans are to be charged-off or charged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. "Loss" is not intended to imply that the loan or some portion of it will never be paid, nor does it in any way imply that there has been a forgiveness of debt.

The following tables show the outstanding balance of loans by credit quality indicator and loan segment as of June 30, 2011 and June 30, 2010:

June 30, 2011
			Especially
Type of Loan	Pass		Mentioned		Substandard		Doubtful		Total
Mortgage Loans:
Residential	$	54,031,990	$	-	$	827,975	$	-	$	4,859,965
Commercial Real Estate		26,008,159		175,552		3,693,505		-		29,877,216
Land		3,106,958		-		176,147		-		3,283,105
Second Mortgage Loans		3,925,928		-		18,858		-		3,944,786
Total Mortgage Loans		87,073,035		175,552		4,716,485		-		91,965,072
Consumer Loans:
Automobile Loans		793,128		-		14,154		-		807,282
Savings Account Loans		1,143,361		-		-		-		1,143,361
Mobile Home Loans		138,488		-		-		-		138,488
Other Consumer Loans		244,573		-		-		-		244,573
Total Consumer Loans		2,319,550		-		14,154		-		2,333,704
Commercial Business Loans		2,472,622		-		829,023		-		3,301,645
Total Gross Loans	$	91,865,207	$	175,552	$	5,559,662	$	-	$	97,600,421

51

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(3)           LOANS RECEIVABLE (CONTINUED)

June 30, 2010

			Especially
Type of Loan	Pass		Mentioned		Substandard		Doubtful		Total
Mortgage Loans:
Residential	$	59,164,936	$	-	$	1,052,316	$	-	$	0,217,252
Commercial Real Estate		27,512,857		623,211		6,436,609		-		34,572,677
Land		4,195,114		69,720		93,199		-		4,358,033
Second Mortgage Loans		4,468,596		-		-		-		4,468,596
Total Mortgage Loans		95,341,503		692,931		7,582,124		-		103,616,558
Consumer Loans:
Automobile Loans		1,126,724		-		-		-		1,126,724
Savings Account Loans		1,181,204		-		-		-		1,181,204
Mobile Home Loans		188,211		-		-		-		188,211
Other Consumer Loans		392,035		-		-		-		392,035
Total Consumer Loans		2,888,174		-		-		-		2,888,174
Commercial Business Loans		3,485,452		909,471		96,286		-		4,491,209
Total Gross Loans	$	101,715,129	$	1,602,402	$	7,678,410	$	-	$	110,995,941

The following table presents weighted average risk grades and classified loans by class of commercial loan. Classified loans include loans in Risk Grades 6, 7 and 8.

	June 30, 2011				June 30, 2010
	Weighted				Weighted
	Average		Classified		Average		Classified
	Risk Grade		Loans		Risk Grade		Loans
Commercial Real Estate		3.40	$	3,693,505		3.53	$	6,436,609
Land		3.19		176,147		3.22		93,199
Commercial Business		3.81		829,023		3.73		96,286
Total			$	4,698,675			$	6,626,094

 Net (charge-offs) recoveries, segregated by class of loans, were as follows:

	(Dollars in thousands)
	Year Ended			Year Ended
	June 30, 2011			June 30, 2011
Mortgage Loans:
Residential	$	(533	)	$	(682	)
Commercial Real  Estate		(920	)		(1,006	)
Land		(22	)		(126	)
Commercial Business Loans		(239	)		(840	)
Consumer Loans		(12	)		(7	)
Total	$	(1,726	)	$	(2,661	)

52

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(3)           LOANS RECEIVABLE (CONTINUED)

In assessing the general economic conditions in the State of Missouri, management monitors and tracks the State and Counties Unemployment Rates, DJIA, S&P 500, NASDAQ, Fed Funds, Prime Rate, Crude, Gold, LIBOR and Springfield Builder Permits.  Management believes these indexes provide a reliable indication of the direction of overall economy from expansion to recession throughout the United States  and in the State of Missouri.

Allowance for Possible Loan Losses. The allowance for possible loan losses is a reserve established through a provision for possible loan losses charged toexpense, which represents management's best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The Company's allowance for possible loan loss methodology includes allowance allocations calculated in accordance with U.S. GAAP calculated in accordance with ASC 450 and ASC 310. Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Company's process for determining the appropriate level of the allowance for possible loan losses is designed to account for credit deterioration as it occurs. The provision for possible loan losses reflects loan quality trends, including the levels of and trends related to non- accrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors. The provision for possible loan losses also reflects the totality of actions taken on all loans for a particular period. In other words, the amount of the provision reflects not only the necessary increases in the allowance for possible loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools.

The level of the allowance reflects management's continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management's judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company's control, including, among other things, the performance of the Company's loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

TheCompany's allowance for possible loan losses consists of three elements: (i) specific valuation allowances determined in accordance with ASC Topic 310 based on probable losses on specific loans; (ii) historical valuation allowances determined in accordance with ASC Topic 450 based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) general valuation allowances determined in accordance with ASC Topic 450 based on general economic conditions and other qualitative risk factors both internal and external to the Company.

The allowances established for probable losses on specific loans are based on a regular analysis and evaluation of problem loans. Loans are classified based on an internal credit risk grading process that evaluates, among other things: (i) the obligor's ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates. This analysis is performed at the relationship manager level for all commercial loans. When a loan

53

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(3)           LOANS RECEIVABLE (CONTINUED)

has a calculated Risk Grade of 6 or higher, the officer analyzes the loan to determine whether the loan is impaired and, if impaired, the need to specifically allocate a portion of the allowance for possible loan losses to the loan. Specific valuation allowances are determined by analyzing the borrower's ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower's industry, among other things.

Historical valuation allowances are calculated based on the historical loss experience of specific types of loans and the internal risk grade of such loans at the time they were charged-off. The Company calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical loss ratios are updated each quarter based on actual charge-off experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio and the total dollar amount of the loans in the pool. The Company's pools of similar loans include similarly risk-graded groups of commercial and industrial loans, commercial real estate loans, consumer real estate loans and consumer and other loans. During fiscal 2011, each quarterly review included calculations for “look back periods” of 1, 2 and 3 years and the Savings Bank used the highest historical loss rate in its allowance calculations.

General valuation allowances are based on general economic conditions and other qualitative risk factors both internal and external to the Company. In general, such valuation allowances are determined by evaluating, among other things: (i) the experience, ability and effectiveness of the Bank's lending management and staff; (ii) the effectiveness of the Company's loan policies, procedures and internal controls; (iii) changes in asset quality; (iv) changes in loan portfolio volume; (v) the composition and concentrations of credit; (vi) the impact of competition on loan structuring and pricing; (vii) the effectiveness of theinternal loan review function; (viii) the impact of environmental risks on portfolio risks; and (ix) the impact of rising interest rates on portfolio risk. Management evaluates the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis. Each component is determined to have either a high, moderate or low degree of risk. The results are then input into a "general allocation matrix" to determine an appropriate general valuation allowance.

Included in the general valuation allowances are allocations for groups of similar loans with risk characteristics that exceed certain concentration limits established by management. Concentration risk limits have been established, among other things, for certain industry concentrations, large balance and highly leveraged credit relationships that exceed specified risk grades, and loans originated with policy exceptions that exceed specified risk grades.

Loans identified as losses by management, internal/external loan review and/or bank examiners are charged-off. Furthermore, consumer loan accounts are charged-off automatically based on regulatory requirements.

The following table details activity in the allowance for possible loan losses by portfolio segment for the years ended June 30, 2010 and June 30, 2011. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

54

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(3)           LOANS RECEIVABLE (CONTINUED)

	(Amounts in Thousands)
				Commercial
	Mortgage			Business			Consumer
	Loans			Loans			Loans			Total
June 30, 2011:
Balance – June 30, 2010	$	2,273		$	234		$	20		$	2,527
Provision for loan losses		904			263			15			1,182
Charge-offs		(1,538	)		(282	)		(30	)		(1,850	)
Recoveries		63			43			18			124
Net (Charge-offs) / Recoveries		(1,475	)		(239	)		(12	)		(1,726	)
Balance – June 30, 2011	$	1,702		$	258		$	23		$	1,983
Period-end amount allocated to:
Loans individually evaluated	$	641		$	65		$	-		$	706
for impairment
Loans collectively evaluated		1,061			193			23			1,277
for impairment
Balance – June 30, 2011	$	1,702		$	258		$	23		$	1,983

June 30, 2010:
Balance –June 30, 2009	$	2,073		$	2,027		$	86		$	4,186
Provision for loan losses		1,864			(953	)		(59	)		852
Transfer from reserve on		150			-			-			150
Letters of Credit
Charge-offs		(1,853	)		(1,034	)		(28	)		(2,915	)
Recoveries		39			194			21			254
Net (Charge-offs) / Recoveries		(1,814	)		(840	)		(7	)		(2,661	)
Balance –June 30, 2010	$	2,273		$	234		$	20		$	2,527
Period-end amount allocated to:
Loans individually evaluated	$	1,227		$	10		$	-		$	1,237
for impairment
Loans collectively evaluated		1,046			224			20			1,290
for impairment
Balance –June 30, 2010	$	2,273		$	234		$	20		$	2,527

The Company’s recorded investment in loans as of June 30, 2011 and June 30, 2010 related to each balance in the allowance for possible loan losses by portfolio segment and disaggregated on the basis of the Company's impairment methodology was as follows:

55

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(3)           LOANS RECEIVABLE (CONTINUED)

	(Amounts in Thousands)
			Commercial
	Mortgage		Business		Consumer		Total
	Loans		Loans		Loans		Loans
June 30, 2011
Loans individually evaluated for impairment	$	4,717	$	829	$	14	$	5,560
Loans collectively evaluated for impairment		87,248		2,473		2,320		92,041
Ending Balance	$	91,965	$	3,302	$	2,334	$	97,601
June 30, 2010
Loans individually evaluated for impairment	$	7,582	$	96	$	-	$	7,678
Loans collectively evaluated for impairment		96,035		4,395		2,888		103,318
Ending Balance	$	103,617	$	4,491	$	2,888	$	110,996

(4)           PROPERTY AND EQUIPMENT

Property and equipment at June 30 consists of the following:

		2011
		Cost	Accumulated Depreciation		Net
Category
Land	$	643,704	$	-	$	643,704
Buildings		6,006,729		2,769,407		3,237,322
Office furniture, fixtures   and equitpment		4,660,284		3,799,791		860,493
Automobiles		180,852		117,440		63,412
Investment real estate		1,785,856		693,056		1,092,800
Total	$	13,277,425	$	7,379,694	$	5,897,731

		2011
		Cost	Accumulated Depreciation		Net
Category
Land	$	643,704	$	-	$	643,704
Buildings		5,912,409		2,586,224		3,326,185
Office furniture, fixtures   and equipment		4,422,335		3,485,481		936,854
Automobiles		132,530		96,060		36,470
Investment real estate		1,745,812		637,602		1,108,210
Total	$	12,856,790	$	6,805,367	$	6,051,423

Depreciation charged to operations for the years ended June 30, 2011 and 2010 was $574,327 and $552,515, respectively.

The Savings Bank’s full-service branch office in Springfield is leased. The lease on the Springfield full-service branch office was assumed and it has less than five years remaining on the initial term. The Savings Bank also leases three ATM drive-up kiosks located in the parking lots of a major retailer in

56

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(4) PROPERTY AND EQUIPMENT (CONTINUED)

Mountain Grove, Marshfield and Ava, Missouri. These leases were entered into in the third quarter of fiscal 2008, and were for a four year term.

Rent expense for the years ended June 30, 2011 and 2010 was $111,064 and $172,571, respectively.

Minimum future lease payments for the Springfield, Missouri branch office and the three leased ATMs for the years ending June 30 are as follows:

			2655 South
			Campbell
	ATMs		Springfield, MO		Totals
2012	$	64,620	$	94,416	$	159,036
2013		43,080		94,416		137,496
2014		-		94,416		94,416
2015		-		94,416		94,416
2016		-		3,934		3,934
Total	$	107,700	$	381,598	$	489,298

(5)       INTANGIBLE ASSET

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

	2011				2010
Premium on branch acquisition	$	1,020,216		$	1,020,216
Accumulated amortization		(935,090	)		(884,975	)
Net premium on branch acquisition	$	85,126		$	135,241

Amortization expense relating to this premium was $50,115 for the year ended June 30, 2011 and $50,114 for the year ended June 30, 2010.

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

2012	$	50,115
2013		35,011
	$	85,126

57

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(6) DEPOSITS

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

	2011		2010
Non-interest-bearing checking	$	24,303,463	$	11,773,833
Interest-bearing checking		37,126,676		34,632,542
Super Saver money market		12,605,656		11,379,774
Savings		8,627,391		9,086,554
Money Market savings accounts		31,367,281		36,031,680
Certificates of Deposit		66,630,525		77,171,042
Total	$	180,660,992	$	180,075,425

Deposits held at the Savings Bank by a major customer were approximately $14,279,000 at June 30, 2011.

The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was $21.7 million and $25.8 million at June 30, 2011 and 2010, respectively.

At June 30, 2011, scheduled maturities of certificates of deposit are as follows:

Fiscal	2012	$	43,360,888
	2013		11,577,728
	2014		4,058,721
	2015		5,489,882
	2016		2,113,209
	Thereafter		30,097
		$	66,630,525

(7) RETAIL REPURCHASE AGREEMENTS

The Savings Bank offers retail repurchase agreements as an additional item in its product mix. Retail repurchase agreements allow customers to have excess checking account balances “swept” from the checking accounts into a non-insured interest bearing account. The customers’ investment in these non-insured accounts is collateralized by securities of the Savings Bank pledged at FHLB for that purpose.

(8)       ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWED MONEY

The advances listed below were obtained from the FHLB of Des Moines.  The advances are secured by FHLB stock and a blanket pledge of qualifying one-to-four family mortgage loans.  Advances from the FHLB at June 30 are summarized as follows:

58

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(8)         ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWED MONEY (CONTINUED)

	2011		Weighted Average Rate			2010		Weighted Average Rate
Term Advances:
Long-term; fixed-rate;   non-callable	$	3,000,000		4.94	%	$	3,000,000		4.94	%
Total	$	3,000,000		4.94	%	$	3,000,000		4.94	%

As of June 30, 2011 the fixed-rate term advance shown above was 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:             

Year Ended June 30	Aggregate Annual Maturities
2012	$	-
2013		-
2014		3,000,000
		3,000,000

At June 30, 2011, the Savings Bank had irrevocable letters of credit issued on its behalf from the FHLB totaling $1.5 million, as collateral for public entity deposits in excess of federal insurance limits.  The letters of credit expire through April 2012. At June 30, 2011, the Savings Bank had collateralized borrowing capacity with the FHLB of approximately $46.3 million.

The Company had no outstanding borrowed money from other lenders as of June 30, 2011.

(9)           INCOME TAXES

The provision for income taxes (benefit) for the years ended June 30 is as follows:

	2011		2010
Current	$	14,301	$	(631,992	)
Deferred		566,481		1,672,923
Total	$	580,782	$	1,040,931

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

59

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(9) INCOME TAXES (CONTINUED)

	2011			2010
Tax at statutory rate	$	(1,196,870	)	$	(150,671	)
Increase (decrease) in taxes resulting from:
State taxes, net of federal benefit		(109,396	)		(7,682	)
Tax-exempt income		(18,013	)		(24,206	)
Bank-owned life insurance		-			46,671
Dividends received deduction		(2,982	)		(2,979	)
Change in valuation allowance		1,897,659			1,126,326
Stock based compensation		1,608			3,215
Net effect of other book/tax differences		8,776			50,257
Provision for income taxes	$	580,782		$	1,040,931

The components of deferred tax assets and liabilities as of June 30, 2011 and 2010 consisted of:

	2011			2010
Deferred tax assets:
Allowance for loan losses	$	732,608		$	932,648
Write-down of real estate owned		1,419,999			23,312
Book amortization in excess of tax amortization		11,250			17,873
Compensated employee absences		20,025			24,385
State net operating loss carry-forwards		107,803			89,788
Federal net operating loss carry-forwards		1,329,878			917,858
Charitable contributions		24,837			21,162
Other		6,921			107,644
Total gross deferred tax assets		3,653,321			2,134,670
Valuation allowance		(3,114,565	)		(1,216,906	)
		538,756			917,764
Deferred tax liabilities:
Premises and equipment		(258,692	)		(86,747	)
FHLB stock dividends		(60,936	)		(60,936	)
Prepaid expenses		(145,560	)		(124,308	)
Net unrealized gain on available-for-sale securities		(334,508	)		(566,481	)
Unamortized deferred loan costs, net of fees		(73,568	)		(79,292	)
Total gross deferred tax liabilities		(873,264	)		(917,764	)
Total net deferred tax assets (liabilities)	$	(334,508	)	$	-

In accordance with FASB ASC Topics 740-10 and 740-30, a deferred tax liability has not been recognized for tax basis bad debt reserves of $2.2 million of the Savings Bank that arose in tax years that began prior to December 31, 1987.  At June 30, 2011, the amount of the deferred tax liability that had not been recognized was approximately $811,000.  This deferred tax liability could be recognized if, in the future, there is a change in federal tax law, the Savings Bank fails to meet the definition of a “qualified savings institution,” as defined by the Internal Revenue Code, certain distributions are made with respect to the stock of the Savings Bank, or the bad debt reserves are used for any purpose other than absorbing bad debts.

60

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(9)          INCOME TAXES (CONTINUED)

During the years ended June 30, 2011 and 2010, the Company recorded a valuation allowance of $3.1 million and $1.2 million, respectively. As of June 30, 2011, management has provided a full valuation allowance for net deferred tax assets resulting from the Company’s cumulative net losses for the last six years.  Most of these losses have occurred during the three fiscal years ended June 30, 2011. Realization of deferred tax assets is dependent upon sufficient future taxable income during the period that deductible temporary differences and carry forwards are expected to be available to reduce taxable income.

At June 30, 2011, the Company had net operating loss carry forwards of approximately $3.9 million which are available to offset future taxable income with $1.0 million available through 2029, $1.6 million available through 2030 and $1.3 million available through 2031.

(10)       EMPLOYEE BENEFIT PLANS

The Savings Bank had participated in a multiple-employer defined benefit pension plan covering substantially all employees.  In fiscal 2006, the Savings Bank opted to freeze the plan. Participants in the plan became entitled to their vested benefits at the date it was frozen. The Savings Bank limited its future obligations to the funding amount required by the annual actuarial evaluation of the plan and administrative costs. No participants will be added to the plan. Pension expense for the years ended June 30, 2011 and 2010 was approximately $109,000 and $72,000, respectively.  This plan is not subject to the requirements of FASB ASC Topics 715 and 958.

The First Home Savings Bank Employee Stock Ownership and 401(k) Plan covers all employees that are age 21 and have completed six months of service.  The Company makes contributions on a matching basis of up to 3% on employee deferrals. Expense for the ESOP and 401(k) plan for the years ended June 30, 2011 and 2010 was $42,756 and $49,976, respectively.

In accordance with FASB ASC Topics 718 and 505, compensation expense for stock-based awards is recorded over the vesting period at the fair values of the award at the time of the grant. The recording of such compensation began on July 1, 2006 for shares not yet vested as of that date and for all new grants subsequent to that date. The exercise price of options granted under the Company’s incentive plans is equal to the fair market value of the underlying stock at the grant date. The Company assumes no projected forfeiture rates on its stock-based compensation.

The Company’s 2004 Stock Option and Incentive Plan has authorized the grant of options to certain officers, employees and directors for up to 100,000 shares of the Company’s common stock. All options granted have 10 year terms and vest and become exercisable ratably over five years following the date of grant.  The plan was approved by shareholders in October 2004. At June 30, 2011, there were 78,000 shares of stock available for grant under the plan.

The Company’s 2004 Management Recognition Plan has authorized the award of shares to certain officers, employees and directors for up to 50,000 shares of the Company’s common stock.  All shares awarded will have a restricted period to be determined by the Corporation’s Compensation Committee.  The restricted period shall not be less than three years if the award is time based, or not less than one year if performance based.  The plan was approved by shareholders in October 2004. No shares have been issued from this plan.

61

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(10) EMPLOYEE BENEFIT PLANS (CONTINUED)

No options were granted during either fiscal 2011 or fiscal 2010. The last options were granted in fiscal 2007.

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

	2011				2010
			Weighted				Weighted
			Average				Average
			Exercise				Exercise
	Options		Price		Options		Price
Outstanding at beginning of year		22,000	$	16.95		22,000	$	16.95
Granted		-		-		-		-
Exercised		-		-		-		-
Forfeited		-		-		-		-
Outstanding at end of year		22,000		16.95		22,000		16.95
Exercisable at end of year		20,000	$	16.94		15,600	$	16.94

The following table summarizes information about stock options outstanding at June 30, 2011:

Exercise Price		Number Outstanding at June 30		Number Exercisable at June 30		Remaining Contractual Life (Months)
$	17.50		2,000		2,000		56
	17.00		10,000		8,000		69
	16.78		10,000		10,000		60

As of June 30, 2011 there was $1,100 of total unrecognized compensation cost related to non-vested share-based compensation agreements granted under the plan. That cost is expected to be recognized over a weighted-average period of approximately 5 months.There is no intrinsic value of vested options on Company stock as of June 30, 2011.

(11) EARNINGS PER SHARE

The following information shows the amounts used in computing earnings per share and the effect on income and the weighted average number of shares of dilutive potential common stock.  The amounts in the income columns represent the numerator and the amounts in the shares columns represent the denominator. There was no dilutive effect since the exercise price of all stock options at June 30, 2010 and June 30, 2011 exceeded the market price of the Company’s common shares on both of those dates.

62

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(11) EARNINGS PER SHARE (CONTINUED)

	Years Ended June 30,
	2011								2010
						Per Share								Per Share
	Income			Shares		Amount			Income			Shares		Amount
Basic EPS:
Income (loss) available
to stockholders	$	(4,100,989	)		1,550,815	$	(2.65	)	$	(1,484,082	)		1,550,815	$	( 0.96	)
Effect of dilutive
securities:		-			-		-			-			-		-
Diluted EPS:
Income (loss) available
to stockholders
plus stock options	$	(4,100,989	)		1,550,815	$	( 2.65	)	$	(1,484,082	)		1,550,815	$	( 0.96	)

(12) RELATED PARTY TRANSACTIONS

Certain employees, officers and directors are engaged in transactions with the Savings Bank in the ordinary course of business.  It is the Savings Bank’s policy that all related party transactions are conducted at “arm’s length” and all loans and commitments included in such transactions are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other customers.

A summary of the changes in outstanding loans to officers and directors for the fiscal years ended June 30, 2011 and 2010 is as follows:

	2011			2010
Beginning balances	$	125,982		$	104,792
Originations and advances		-			92,000
Principal repayments		(23,481	)		(70,810	)
Ending balances	$	102,501		$	125,982

The Company has one director whose law firm performs legal services, primarily on behalf of the Savings Bank.  These legal services relate primarily to foreclosures and bankruptcies.  During the years ended June 30, 2011 and 2010, the Savings Bank paid $67,020 and $86,660, respectively, for legal services performed by this director’s law firm.

The Company also has one director with ownership interests in a number of related companies that purvey lumber and hardware, and provide other related services. During the years ended June 30, 2011 and 2010, the Savings Bank made purchases of goods and services from four of the related companies totaling $10,313 and $8,936, respectively.

63

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

 (13)           COMMITMENTS AND CONTINGENCIES

In the ordinary course of business, the Savings Bank has various outstanding commitments that are not reflected in the accompanying consolidated financial statements.  The principal commitments of the Savings Bank are as follows:

Letters of Credit – Outstanding standby letters of credit were approximately $107,000 and $132,000 at June 30, 2011 and 2010, respectively.

Loan Commitments – The Savings Bank had outstanding firm commitments to originate loans of $356,000 and $594,000 at June 30, 2011 and 2010, respectively.

Lines of Credit – The unused portion of lines of credit was approximately $990,000 and $3.4 million at June 30, 2011 and 2010, respectively.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party.  Collateral held varies, but may include accounts receivable, crops, livestock, inventory, property and equipment, residential and commercial real estate as well as income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions.

None of the guarantees extend longer than one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  Collateral held varies as specified above and is required in instances which the Company deems necessary.  All of the standby letters of credit outstanding at June 30, 2011 were collateralized.  No amounts were recorded as liabilities at June 30, 2011 or 2010 for the Company’s potential obligations under these guarantees.

In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the Company’s consolidated financial statements.

(14)           CONCENTRATION OF CREDIT RISK

The Savings Bank maintains its primary bank accounts with institutions in Missouri and Iowa.  On June 30, 2011, the individual balances of these accounts exceeded standard insurance limits established by the FDIC.  The Savings Bank has not experienced any losses in such accounts.

(15)           REGULATORY MATTERS

The Savings Bank is subject to various regulatory capital requirements administered by its primary federal regulator, the FDIC. Failure to meet the minimum regulatory capital requirements can initiate

64

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(15)       REGULATORY MATTERS (CONTINUED)

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, 2011, that the Savings Bank meets all capital adequacy requirements to which it is subject.

As of June 30, 2011, the Savings Bank’s capital levels were such that it would have been categorized as well-capitalized under the regulatory framework for prompt corrective action. However, since the Savings Bank is operating under a Cease and Desist Order, it does not qualify as well capitalized.  To be categorized as well-capitalized, the Savings Bank must maintain minimum total risk-based, Tier 1 risk-based, and core capital leverage ratios as set forth in the table.  There are no conditions or events since that notification that management believes have changed the institution’s category.

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

	Actual					Minimum For Capital Adequacy Purposes					Minimum to Be Well- Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of June 30, 2011:
Total Risk-Based Capital   (to Risk-Weighted Assets)	$	17,568		18.34	%	$	7,662		8.0	%	$	9,577		10.0	%
Core Capital   (to Adjusted Tangible Assets)		16,387		7.90	%		8,292		4.0	%		10,365		5.0	%
Tangible Capital   (to Adjusted Tangible Assets)		16,387		7.90	%		3,110		1.5	%		N/A
Tier 1 Capital   (to Risk-Weighted Assets)		16,387		17.11	%		3,831		4.0	%		5,746		6.0	%

65

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(15)       REGULATORY MATTERS (CONTINUED)

As of June 30, 2010:
Total Risk-Based Capital   (to Risk-Weighted Assets)	$	21,419	19.99	%	$	8,572	8.0	%	$	10,715	10.0	%
Core Capital   (to Adjusted Tangible Assets)		20,153	9.65	%		8,354	4.0	%		10,443	5.0	%
Tangible Capital   (to Adjusted Tangible Assets)		20,153	9.65	%		3,133	1.5	%		N/A
Tier 1 Capital   (to Risk-Weighted Assets)		20,153	18.81	%		4,286	4.0	%		6,429	6.0	%

On August 17, 2009, the Company and the Bank each entered into a Stipulation and Consent to the Issuance of Order to Cease and Desist with the OTS.

Under the terms of the orders, the Bank and the Company, without the prior written approval of their respective banking regulators, may not:

·   Increase assets during any quarter;

·   Pay dividends;

·   Increase brokered deposits;

·   Repurchase shares of the Company’s outstanding common stock; and

·   Issue any debt securities or incur any debt (other than that incurred in the normal course of business).

Other material provisions of the order require the Bank and the Company to:

·   develop an acceptable business plan for enhancing, measuring and maintaining profitability, increasing earnings, improving liquidity, maintaining capital levels;

·   ensure the Bank’s compliance with applicable laws, rules, regulations and agency guidelines, including the terms of the order;

·   not appoint any new director or senior executive officer or change the responsibilities of any (15) current senior executive officers without notifying the applicable banking regulators;

·   not enter into, renew, extend or revise any compensation or benefit agreements for directors or senior executive officers;

·   not make any indemnification, severance or golden parachute payments;

·   enhance its asset classification policy;

·   provide progress reports to the FDIC regarding certain classified assets;

·   submit a comprehensive plan for reducing classified assets;

·   develop a plan to reduce the concentration of certain loans contained in the loan portfolio and that addresses the assessment, monitoring and control of the risks association with the commercial real estate portfolio;

·   not enter into any arrangement or contract with a third party service provider that is significant to the overall operation or financial of the Bank, or that is outside the normal course of business; and prepare and submit progress reports to the FDIC and the Federal Reserve. The orders will remain in effect until modified or terminated by the FDIC or the Federal Reserve.

All customer deposits remain insured to the fullest extent permitted by the FDIC. The Bank expects to continue to serve its customers in all areas including making loans, establishing lines of credit, accepting deposits and processing banking transactions. Neither the Company nor the Bank admitted

66

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(15)       REGULATORY MATTERS (CONTINUED)

any wrongdoing in entering into the respective Stipulation and Consent to the Issuance of a Cease and Desist Order. No monetary penalties were imposed or recommended in connection with the orders.

For additional information regarding the terms of the orders, please see the Company’s Form 8-K that we filed with the SEC on August 18, 2009. Further, the Company or the Savings Bank may be subject to more severe future regulatory enforcement actions, including but not limited to civil money penalties, if they do not comply with the terms of their order.

(16)     COMMON STOCK

As provided in the Company’s Articles of Incorporation, record holders of Common Stock who beneficially own, either directly or indirectly, in excess of 10% of the Company’s outstanding shares are not entitled to any vote with respect to the shares they hold in excess of the 10% limit.

(17) FAIR VALUE MEASUREMENTS

The fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact. Valuation techniques require the use of inputs that are consistent with the market approach, the income approach and/or the cost approach.

The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy for valuation inputs gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in

67

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(17) FAIR VALUE MEASUREMENTS (CONTINUED)

active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity's own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Company's creditworthiness, among other things, as well as unobservable parameters.

Any such valuation adjustments are applied consistently over time. The Company's valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company's valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Securities Available for Sale:  Where quoted prices are available in an active market, securities are classified within level 1 of the valuation hierarchy.  Level 1 securities would include highly liquid government bonds and exchange traded equities.  If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows.  Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities.  In certain cases where there is limited activity of less transparency around the input to the valuation, securities are classified within Level 3 of the valuation hierarchy.

Impaired loans:  The Company does not record loans at fair value on a recurring basis.  From time to time, a loan is considered impaired and an allowance for loan losses is established.  Once a loan has been identified as impaired, management measures impairment based upon the value of the underlying collateral.  Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable.  Loan impairment is measured based upon the present value of expected future cash flows discounts at the loan’s effective interest rate, expect where more practical, at the observable market price of the loan based upon appraisals by qualified licensed appraisers hired by the Company, and are, generally, considered level 2 measurements.  In some cases, adjustments are made to the appraised values due to various factors including age of the appraisal, age of comparables included in the appraisal, and known changes in the market and in the collateral.  When significant adjustments are based on unobservable inputs, the resulting fair market measurement is categorized as a level 3 measurement.

68

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(17) FAIR VALUE MEASUREMENTS (CONTINUED)

Real estate owned:  Other real estate owned is carried at the estimated fair value of the property, less disposal costs.  The fair value of the property is determined based upon appraisals.  As with impaired loans, if significant adjustments are made to the appraised value, based upon unobservable inputs, the resulting fair value measurement is categorized as a level 3 measurement.

There have been no changes in valuation techniques used for any assets or liabilities measured at fair value during the year ended June 30, 2011.

The following tables summarize financial assets measured at fair value on a recurring basis as of June 30, 2011 and June 30, 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

June 30, 2011	Level 1		Level 2		Level 3		Total
	Inputs		Inputs		Inputs		Fair Value
	(dollars in thousands)
Securities available-for-sale:
U. S. Agency Securities	$	-	$	22,790	$	-	$	22,790
Residential mortgage-
backed Securities		-		30,936		-		30,936
Municipal Securities		-		110		-		110
Other		-		244		-		244
Total	$	-	$	54,080	$	-	$	54,080

June 30, 2010	Level 1		Level 2		Level 3		Total
	Inputs		Inputs		Inputs		Fair Value
	(dollars in thousands)
Securities available-for-sale:
U. S. Agency Securities	$	5,100	$	21,928	$	-	$	27,028
Residential mortgage-
backed Securities		-		32,722		146		32,868
Municipal Securities		-		132		-		132
Other		-		276		-		276
Total	$	5,100	$	55,058	$	146	$	60,304

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets and financial liabilities, excluding impaired loans, measured at fair value on a non-recurring basis were not significant at June 30, 2010.

69

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(17)   FAIR VALUE MEASUREMENTS (CONTINUED)

The following tables summarize financial assets measured at fair value on a non-recurring basis as of June 30, 2011 and June 30, 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

June 30, 2011	Level 1			Level 2		Level 3		Total
	Inputs			Inputs		Inputs		Fair Value
	(dollars in thousands)
Impaired Loans		$	-	$	-	$	5,377	$	5,377
Real estate owned			-		-		5,503		5,503
Total		$	-	$	-	$	10,880	$	10,880

June 30, 2010	Level 1			Level 2		Level 3		Total
	Inputs			Inputs		Inputs		Fair Value
	(dollars in thousands)
Impaired Loans		$	-	$	-	$	8,360	$	8,360
Real estate owned			-		-		3,885		3,885
Other repossessed assets							61		61
Total		$	-	$	-	$	12,306	$	12,306

ASC Topic 820-10, “Fair Value of Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis.  The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above.  The methodologies for other financial assets and financial liabilities are discussed below.

	June 30, 2011
	Approximate Carrying		Approximate
	Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	24,799,000	$	24,799,000
Certificates of deposit purchased		2,940,000		2,940,000
Available-for-sale securities		54,080,000		54,080,000
Held-to-maturity securities		18,146,000		18,193,000
Investment in FHLB stock		429,000		429,000
Loans, net of allowance for loan losses		95,817,000		96,356,000
Accrued interest receivable		778,000		778,000
Financial liabilities:
Deposits		180,661,000		180,642,000
Retail repurchase agreements		6,416,000		6,416,000
FHLB advances		3,000,000		3,276,000
Accrued interest payable		118,000		118,000

70

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(17) FAIR VALUE MEASUREMENTS (CONTINUED)

	June 30, 2010
	Approximate Carrying		Approximate
	Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	26,218,000	$	26,218,000
Certificates of deposit purchased		5,628,000		5,628,000
Available-for-sale securities		45,317,000		45,317,000
Held-to-maturity securities		2,592,000		2,626,000
Investment in FHLB stock		1,581,000		1,581,000
Loans, net of allowance for loan losses		133,162,000		134,947,000
Loans held for sale		820,000		820,000
Accrued interest receivable		955,000		955,000
Financial liabilities:
Deposits		189,218,000		190,096,000
Retail repurchase agreements		5,713,000		5,713,000
FHLB advances		10,000,000		10,450,000
Accrued interest payable		385,000		385,000

Cash and cash equivalents and certificates of deposit purchased – For these short-term instruments, the carrying amount approximates fair value.

Loans receivable – The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics are aggregated for purposes of the calculations.

Loans held for sale – The carrying amounts of loans held for sale approximate the fair value due to the short term nature of these loans.

Investment in FHLB stock – Fair value of the Savings Bank’s investment in FHLB stock approximates the carrying value as no ready market exists for this investment and the stock could only be sold back to the FHLB at par.

Accrued interest – The carrying amounts of accrued interest approximate their fair value. 

Deposits – The fair value of demand deposits, savings accounts and interest-bearing demand deposits is the amount payable on demand at the reporting date (i.e., their carrying amount).  The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the market rates currently offered for deposits of similar remaining maturities.

Retail repurchase agreements – The fair value of retail repurchase agreements is the amount payable at the reporting date.

FHLB advances – Rates currently available to the Savings Bank for advances with similar terms and remaining maturities are used to estimate fair value of existing advances by discounting the future cash flows.

71

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(17) FAIR VALUE MEASUREMENTS (CONTINUED)

Commitments to extend credit, letters of credit and lines of credit – The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties.  For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.  The fair value of letters of credit and lines of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date and are insignificant.

(18) PARENT COMPANY ONLY FINANCIAL INFORMATION

The following condensed statements of financial condition and condensed statements of operations and cash flows for First Bancshares, Inc. are as follows:

Condensed Statements of Financial Condition
	At June 30,
ASSETS	2011		2010
Cash and cash equivalents	$	24,960	$	233,958
Certificates of deposit		-		10,000
Securities available-for-sale		218,000		248,000
Investment in subsidiaries		17,121,929		21,402,171
Property and equipment, net		1,079,010		1,108,209
Real estate owned		75,600		75,600
Deferred tax asset, net		-		-
Other assets		53,834		51,490
Total assets	$	18,573,333	$	23,129,428

LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable, subsidiaries	$	471,402	$	501,588
Accrued expenses		51,052		16,609
Total Liabilities		522,454		518,197
Stockholders' equity		18,050,879		22,611,231
Total liabilities and stockholders' equity	$	18,573,333	$	23,129,428

72

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(18) PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)

Condensed Statements of Operations
	Years ended June 30,
	2011			2010
Income:
Equity in loss of subsidiaries	$	(3,834,668	)	$	(1,108,365	)
Interest and dividend income		12,609			12,665
Gain/(loss) on sale or write-down     of property and equipment		15,000			-
Other		8,044			31,209
Total income (loss)		(3,799,015	)		(1,064,491	)
Expenses:
Professional fees		176,595			106,294
Printing and office supplies		9,330			7,504
Interest		32,158			40,634
Other		85,337			84,218
Income tax expense (benefit)		(1,446	)		180,941
Total expenses		301,974			419,591
Net loss	$	(4,100,989	)	$	(1,484,082	)

73

FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Years Ended June 30, 2011 and 2010

(18) PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)

Condensed Statements of Cash Flows

	Years ended June 30.
	2011			2010
Cash flows from operating activities:
Net income (loss)	$	(4,100,989	)	$	(1,484,082	)
Adjustments to reconcile net income to
net cash provided from operating activities:
Equity in earnings of subsidiaries		3,834,668			1,153,884
Depreciation expense		55,454			56,476
Gain on sale of securities		(15,000	)		-
Net change in operating accounts:
Deferred tax asset, net		-			183,163
Other assets and liabilities		32,100			121,169
Net cash provided (used) in operating activities		(193,767	)		30,610
Cash flows from investing activities:
Purchase of property and equipment		(40,045	)		(15,276	)
Proceeds from sale of investments		45,000			-
Maturity of certificate of deposit		10,000			-
Proceeds from sales of property and equipment		-			313,471
Purchase of real estate owned		-			(75,600	)
Net cash provided by investing activities		14,955			222,595
Cash flows from financing activities:
Payments on notes payable		(30,186	)		(122,129	)
Cash dividends paid		-			-
Net cash used in financing activities		(30,186	)		(122,129	)
Net increase (decrease)  in cash and cash equivalents		(208,998	)		131,076
Cash and cash equivalents-beginning of period		233,958			102,882
Cash and cash equivalents-end of period	$	24,960		$	233,958

74

FIRST BANCSHARES, INC. AND SUBSIDIARIES

ADDITIONAL INFORMATION

COMMON STOCK INFORMATION

The common stock of First Bancshares, Inc. is traded on The Nasdaq Stock Market LLC under the symbol “FBSI”.  As of September 6, 2011, there were 398 registered stockholders and 1,550,815 shares of common stock outstanding.  This does not reflect the number of persons or entities who hold stock in nominee or “street name.”

At its February 2007 meeting, the Board of Directors decided to suspend dividend payments until the Company’s earnings improved. As a result, there were no dividend payments made during fiscal 2008. Primarily as a result of the operating results for fiscal 2008, on July 31, 2008, the Board of Directors declared a special dividend of $0.10 per share payable on August 29, 2008 to stockholders of record on August 15, 2008. There were no dividend payments during the fiscal years ended June 30, 2011 and 2010.

Dividend payments by the Company are dependent on its cash flows, which include reimbursement from its subsidiaries for the income tax savings created by its stand alone operating loss, the operation of real estate owned by the Company and dividends received by the Company from the Savings Bank.  Under Federal regulations, the dollar amount of dividends a savings and loan association may pay is dependent upon the association’s capital position and recent net income.  Generally, if an association satisfies its regulatory capital requirements, it may make dividend payments up to the limits prescribed in the FDIC 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. The Cease and Desist orders to both the Company and the Savings Bank require advance notice and approval of the proposed dividend by their respective federal regulators.  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 2011	High		Low		Dividend
First Quarter	$	9.00	$	7.00		N/A
Second Quarter	$	8.00	$	5.76		N/A
Third Quarter	$	7.99	$	5.85		N/A
Fourth Quarter	$	7.49	$	5.12		N/A
Fiscal 2010	High		Low		Dividend
First Quarter	$	12.48	$	7.33		N/A
Second Quarter	$	8.97	$	7.28		N/A
Third Quarter	$	10.95	$	6.80		N/A
Fourth Quarter	$	9.70	$	8.30		N/A

75

DIRECTORS AND EXECUTIVE OFFICERS

FIRST BANCSHARES, INC.	FIRST HOME SAVINGS BANK
DIRECTORS:	DIRECTORS:
R. Bradley Weaver, Chairman and	R. Bradley Weaver, Chairman and
Chief Executive Officer	Chief Executive Officer
Thomas M. Sutherland	Thomas M. Sutherland
One of the owners and operators of Sutherlands	One of the owners and operators of Sutherlands
Home Improvement Centers group of stores	Home Improvement Centers group of stores
D. Mitch Ashlock	D. Mitch Ashlock
Director, President and Chief Executive Officer	Director, President and Chief Executive Officer
First Federal Savings Bank of Olathe	First Federal Savings Bank of Olathe
Harold F. Glass	Harold F. Glass
Partner	Partner
Millington, Glass & Love, Attorneys at Law	Millington, Glass & Love, Attorneys at Law
Billy E. Hixon	Billy E. Hixon
Retired partner from regional CPA firm	Retired partner from regional CPA firm
of BKD, LLP	of BKD, LLP
Robert J. Breidenthal	Robert J. Breidenthal
Director	Director
Security Bank of Kansas City	Security Bank of Kansas City
John G. Moody	John G. Moody
Elected Official	Elected Official
OFFICERS:	OFFICERS:
R. Bradley Weaver	R. Bradley Weaver
Chief Executive Officer	Chief Executive Officer
Lannie E. Crawford	Lannie E. Crawford
President	President
Ronald J. Walters, CPA	Ronald J. Walters, CPA
Senior Vice President, Treasurer	Senior Vice President, Treasurer
and Chief Financial Officer	and Chief Financial Officer
Dale W. Keenan	Dale W. Keenan
Vice President	Executive Vice President and
	Senior Lender
Shannon Peterson	Shannon Peterson
Secretary	Secretary

76

CORPORATE INFORMATION

CORPORATE HEADQUARTERS:	TRANSFER AGENT:
142 East First Street	Registrar and Transfer Company
P.O. Box 777	10 Commerce Drive
Mountain Grove, Missouri  65711	Cranford, New Jersey  07016
	(800) 866-1340
INDEPENDENT AUDITORS:	COMMON STOCK:
McGladrey & Pullen, LLP	Traded on The Nasdaq Stock Market LLC
Kansas City, Missouri	Nasdaq Symbol: FBSI
GENERAL COUNSEL:
Harold F. Glass
Springfield, Missouri
SPECIAL COUNSEL:
Breyer & Associates PC
McLean, Virginia

ANNUAL MEETING

The Annual Meeting of Stockholders will be held Friday, October 28, 2011, at 1:00 p.m., Central Time, at the Days Inn Conference Room, 300 East 19th Street, Mountain Grove, Missouri.

FORM 10-K

A COPY OF THE FORM 10-K AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WILL BE FURNISHED WITHOUT CHARGE TO STOCKHOLDERS AS OF THE RECORD DATE FOR VOTING AT THE ANNUAL MEETING OF STOCKHOLDERS UPON WRITTEN REQUEST TO THE SECRETARY, FIRST BANCSHARES, INC., P.O. BOX 777, MOUNTAIN GROVE, MISSOURI   65711.

THE COMPANY’S FORMS 10-K, 10-Q AND OTHER DISCLOSURE DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION CAN BE OBTAINED FROM THE SEC HOME PAGE ON THE WORLD WIDE WEB AT http://www.sec.gov

77

EX-21

Exhibit 21

Subsidiaries of the Registrant

Parent

First Bancshares, Inc.

	Percentage	Jurisdiction or
Subsidiaries (a)	of Ownership	State of Incorporation
First Home Savings Bank	100%	Missouri
SCMG, Inc.	100%	Missouri
(formerly South Central
Missouri Title, Inc.)
Fybar Service Corporation (b)	100%	Missouri
First Home Investments, Inc.(b)	100%	Missouri

_____________

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

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

EX-23

Exhibit 23

Consent of Auditors

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement (No. 33-87234) on Form S-8 of First Bancshares, Inc. of our report dated September 27, 2011 relating to our audit of the consolidated financial statements, which appear in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K of First Bancshares, Inc. as of and for the year ended June 30, 2011.

/s/McGladrey & Pullen, LLP

Kansas City, Missouri

September 27, 2011

EX-31.1

Exhibit 31.1

Rule 13a – 14(a) Certification

(Chief Executive Officer)

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, R. Bradley Weaver, certify that:

1.           I have reviewed this Annual Report on Form 10-K of First Bancshares, Inc.;

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

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

4.           The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:

a.           Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.           Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.           Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.           Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.           The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a.           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.           Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: September 27, 2011	/s/R. Bradley Weaver
	R. Bradley Weaver
	Chief Executive Officer

EX-31.2

Exhibit 31.2

Rule 13a – 14(a) Certification

(Chief Financial Officer)

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, Ronald J. Walters, certify that:

1.           I have reviewed this Annual Report on Form 10-K of First Bancshares, Inc.;

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

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

4.           The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:

a.           Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.           Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.           Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.           Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.           The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a.           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.           Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: September 27, 2011	/s/Ronald J. Walters
	Ronald J. Walters
	Senior Vice President, Treasurer   and Chief Financial Officer

EX-32.1

Exhibit 32.1

Section 1350 Certifications

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

OF FIRST BANCSHARES, INC.

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

The undersigned hereby certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this Annual Report on Form 10-K for the fiscal year ended June 30, 2011, that:

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

2.   the information contained in the report fairly presents, in all material respects, the company's financial condition and results of operations as of the dates and for the periods presented in the financial statements included in the report.

Date: September 27, 2011	/s/R. Bradley Weaver
	R. Bradley Weaver
	Chief Executive Officer

EX-32.2

Exhibit 32.2

Section 1350 Certifications

CERTIFICATION OF CHIEF FINANCIAL OFFICER

OF FIRST BANCSHARES, INC.

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

The undersigned hereby certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this Annual Report on Form 10-K for the fiscal year ended June 30, 2011, that:

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

2.  the information contained in the report fairly presents, in all material respects, the company's financial condition and results of operations as of the dates and for the periods presented in the financial statements included in the report.

Date: September 27, 2011	/s/Ronald J. Walters
	Ronald J. Walters
	Senior Vice President, Treasurer
	and Chief Financial Officer