SCHEDULE 14AUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
(RULE 14a-101)Washington, D.C. 20549
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION
Proxy Statement Pursuant to Section 14(a) OF THE
SECURITIES EXCHANGE ACT OFof
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrantx
Filed by a Party other than the Registrant¨
Check the appropriate box:
¨ | Preliminary Proxy Statement |
¨ | Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) |
x | Definitive Proxy Statement |
¨ | Definitive Additional Materials |
¨ | Soliciting Material Pursuant to Rule 14a-12 |
THE FIRST BANCSHARES, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
x No fee required.
x | No fee required. |
¨ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
¨ | Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. |
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(2) | Aggregate number of securities to which transaction applies: |
(3) | Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): |
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(5) | Total fee paid: |
¨ | Fee paid previously with preliminary materials. |
¨ Fee paid previously with preliminary materials.
¨ Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
¨ | Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. |
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The First Bancshares, Inc.
Notice of Special Meeting of Shareholders
to be held on December 29, 2016April 7, 2021
Dear Fellow Shareholder:
We cordially invite you to attend a Specialthe 2021 Annual Meeting (the “Special Meeting”) of Shareholders of The First Bancshares, Inc., the holding company for The First, A National Banking Association, which will be held on Thursday, May 20, 2021 at 4:00 p.m. Central Time. In light of the coronavirus (COVID-19) pandemic and health related concerns, the Company will hold the 2021 Annual Meeting of Shareholders (the “Annual Meeting”) in a virtual-only meeting format, via the internet at www.meetingcenter.io/220649698. The password for this meeting is FBMS2021. At the meeting, we will report on our performance in 2020. We are excited about our achievements in 2020 and our plans for the future and we look forward to discussing these with you. We hope that you can join the meeting.
The attached Notice of Annual Shareholders’ Meeting describes the formal business to be transacted at the Annual Meeting. Members of our Board of Directors and executive officer team will be present at the virtual meeting and available to answer questions regarding the Company.
It is important that your shares be represented at the Annual Meeting whether or not you are able to attend virtually. Even if you plan to attend the meeting virtually, after reading the accompanying proxy materials, the Company encourages you to promptly submit your proxy by Internet, telephone or mail as described in this proxy statement.
The Board of Directors and our employees thank you for your continued support.
Sincerely, | |
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M. Ray (Hoppy) Cole, Jr. | |
President and Chief Executive Officer |
The First Bancshares, Inc.
Notice of Annual Meeting of Shareholders
to be held on May 20, 2021
This letter serves as your official notice that The First Bancshares, Inc. (the “Company”), the holding company for The First, A National Banking Association. We hope that you can attend the meeting and look forward to seeing you there.
This letter serves as your official notice that the CompanyAssociation (the “Bank”), will hold the Special Meetingits annual meeting of shareholders on Thursday, December 29, 2016,May 20, 2021, at 4:3000 p.m. atCentral Time in a virtual-only meeting format, via the Company’s main office located at 6480 U.S. Highway 98 West, Hattiesburg, Mississippi 39402. At the Special Meeting, you will be asked to consider and vote oninternet, for the following matters:purposes:
1. |
2. |
3. | To ratify the appointment of BKD, LLP as the Company’s independent registered public accounting firm for fiscal year 2021. |
4. | To vote on or transact any other business that may properly come before the meeting or any adjournment of the |
The BoardManagement currently knows of Directors unanimously recommends that you vote in favor of Proposals 1 and 2.
Pursuant to the Company’s bylaws, the onlyno other business permitted to be conductedpresented at the Special Meeting are the matters set forth in this letter and notice of the meeting.
Shareholders owning sharesDue to the public health impact of COVID-19 and our continuing concern for the Company’s common stock athealth and well-being of our employees and shareholders, the meeting will be held in an online-only virtual format. If you were a shareholder of record as of the close of business on November 17, 2016,March 26, 2021, the record date, or hold a legal proxy for the meeting provided by your bank, broker or agent, you are the only persons entitled to attendparticipate in the Annual Meeting by visiting www.meetingcenter.io/220649698 and clicking on “I have a control number”. If you join as a shareholder, you will be able to vote at the meeting. Ayour shares, submit a question and view a complete list of these shareholders and other materials customarily made available at in-person shareholder meetings by following the instructions that will be available on the meeting website. Shareholders may also join as a guest but you will not be able to vote your shares at The First Bancshares, Inc.’s main office prior to and during the meeting.virtual meeting, submit questions, or view otherwise available materials.
IMPORTANT NOTICE REGARDING INTERNET AVAILABILITY OF PROXY MATERIALS The Board of Directors of the Company unanimously recommends that shareholders vote “FOR THE SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON DECEMBER 29, 2016” the election of four Class II director nominees recommended by the Board of Directors in this proxy statement, “FOR” the approval, on an advisory basis, of the compensation of our named executive officers as described in the proxy statement, and “FOR” the ratification of the appointment of BKD, LLP as the Company’s independent registered public accounting firm for the fiscal year 2021.
The Securities and Exchange Commission (the “SEC”) allows issuers to furnish proxy materials to their shareholders over the Internet. You will not receive a printed copy of the proxy materials, unless specifically requested. The Notice of Internet Availability of Proxy Statement forMaterials will instruct you as to how you may access and review all of the special meeting is available atwww.edocumentview.com/FBMS
Please use this opportunity to take partimportant information contained in the affairsproxy materials. The Notice of Internet Availability of Proxy Materials also instructs you as to how you may submit your company by votingproxy on the business to come before this meeting. Even if you planInternet. You are cordially invited to attend the annual meeting virtually. However, to ensure that your vote is counted at the Company encourages you to complete and return the enclosedannual meeting, please vote your proxy to us as promptly as possible.
By Order of the Board of Directors, | ||
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M. Ray | E. Ricky Gibson | |
President and | Chairman of the Board | |
Executive Officer |
Dated and Mailed on or about November 29, 2016, April 7, 2021
Hattiesburg, Mississippi
IMPORTANT NOTICE REGARDING INTERNET AVAILABILITY OF PROXY MATERIALS FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD MAY 20, 2021
Proxy materials for the Annual Meeting of Shareholders of The First Bancshares, Inc., which include this Notice, the proxy statement, the proxy card and the Annual Report to Shareholders for the year ended December 31, 2020, are available at www.edocumentview.com/FBMS. If you would like to receive a printed or emailed copy of the proxy materials, please follow the instructions set forth in the notice that was mailed to you.
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The First Bancshares, Inc.
6480 U.S. Highway 98 West
Hattiesburg, Mississippi 39402
Proxy Statement for the SpecialAnnual Meeting of
Shareholders to be Held on December 29, 2016May 20, 2021
INTRODUCTION
Date, Time, and Place of Meeting
A SpecialThe Annual Meeting of Shareholders (the"Special Meeting" “Meeting”) of The First Bancshares, Inc. (the"Company" “Company”),a Mississippi corporation and the holding company for The First, A National Banking Association (the “Bank”) will be held atin a virtual-only meeting format, via the main office of the Company located at 6480 U.S. Highway 98 West, Hattiesburg, Mississippi 39402,internet, on Thursday, December 29, 2016,May 20, 2021 at 4:3000 p.m., local time, Central Time, or any adjournment(s) thereof, for the purpose of considering and voting upon the matters set out in the foregoing Notice of SpecialAnnual Meeting of Shareholders. Due to the public health impact of COVID-19 and our continuing concern for the health and well-being of our employees and shareholders, the meeting will be held in an online-only virtual format. This Proxy Statementproxy statement is furnished to the shareholders of the Company in connection with the solicitation by the Board of Directors of proxies to be voted at the Meeting. This proxy statement summarizes the information that you need to know in order to cast your vote at the Meeting. You do not need to attend the virtual Meeting to vote your shares of our common stock.
Attending the Virtual Meeting as a Shareholder of Record
If you were a shareholder of record at the close of business on March 26, 2021, you are eligible to attend the virtual meeting by accessing www.meetingcenter.io/220649698 and entering the control number found on the Proxy Card or Notice of Internet Availability of Proxy Materials and the meeting password, FBMS2021.
Registering to Attend the Virtual Meeting as a Beneficial Owner
If you were a beneficial owner of record (i.e., you hold your shares through a broker, bank or other agent) at the close of business on March 26, 2021, and you wish to attend the virtual Annual Meeting, you will need to obtain a legal proxy from your broker, bank or other agent. Once you have received a legal proxy, please email or scan an image of it to our transfer agent, Computershare Shareowner Services LLC, at legalproxy@computershare.com, with “Legal Proxy” noted in the subject line. Please note that the voting instruction form or Notice Regarding Availability of Proxy Materials you received with the Company’s proxy statement is not a legal proxy. If you do request a legal proxy from your broker, bank or other agent, the issuance of the legal proxy will invalidate any prior voting instructions you have given and will prevent you from giving any further voting instructions to your broker, bank or agent to vote on your behalf. You will only be able to vote at the Annual Meeting.
Requests for registration of shareholders who are beneficial owners of record must be received by Computershare no later than 4:00 p.m. Central Daylight Time, on May 17, 2021. You will then receive a confirmation of your registration, with a control number, by email from Computershare. At the time of the meeting, go towww.meetingcenter.io/220649698 and enter your control number and the meeting password, FBMS2021.
Asking Questions
Shareholders are invited to submit questions for consideration for the Annual Meeting by members of the Board of Directors and management. To facilitate the process, the Company asks shareholders to submit their questions on or before 4:00 p.m. Central Daylight Time on May 18, 2021 by accessing the virtual meeting website available atwww.meetingcenter.io/220649698, password FBMS2021. Shareholders who participate in the meeting (by entering a control number and password as detailed above) may also submit questions regarding proposals during the meeting up until the time the relevant proposal is presented. Questions should relate to the official business of the meeting, and management and shareholders in particular.
In accordance with the rules of the U.S. Securities and Exchange Commission (the “SEC”), we are permitted to furnish proxy materials, including this proxy statement and our 2020 annual report, to shareholders by providing access to these documents online instead of mailing printed copies. Most shareholders will not receive printed copies of the proxy materials unless requested. Instead, most shareholders will only receive a notice that provides instructions on how to access and review our proxy materials online. If you would like to receive a printed or emailed copy of our proxy materials free of charge, please follow the instructions set forth in the notice that was mailed to you to request the materials. This proxy statement is available to you online at www.edocumentview.com/FBMS. If you receive more than one notice, it means that your shares are registered differently and are held in more than one account. To ensure that all shares are voted, please either vote each account over the Internet or by telephone or sign and return by mail all proxy cards.
The mailing address of the principal executive office of the Company is Post Office Box 15549, Hattiesburg, Mississippi, 39404-5549.
The approximate date on which this Proxy Statementproxy statement and form of proxy are first being sentmailed or givenmade available to shareholders is November 29, 2016.April 7, 2021
The mattersRecord Date; Voting Rights; Quorum; Matters to be considered and voted uponBe Considered at the Special Meeting will be:Meeting; Vote Required
1.Conversion of Convertible Preferred Stock. To approve, for purposes of NASDAQ Listing Rule 5635, the issuance of 3,563,380 shares of common stock upon the conversion of an equivalent number of Mandatorily Convertible Non-Cumulative Non-Voting Perpetual Preferred Stock, Series E, as contemplated by the Securities Purchase Agreements described below.
2.Adjournment of Special Meeting if Necessary or Appropriate. To approve the adjournment of the Special Meeting, if necessary or appropriate, to solicit additional proxies from shareholders who have not submitted proxies at the time of the initially convened Special Meeting if there are insufficient votes at the time of the Special Meeting to adopt Proposal 1.
Record Date; Quorum; Voting Rights; Vote Required
The record date for determining holders of outstanding common stock of the Company entitled to notice of and to attend and vote at the Special Meeting is November 17, 2016March 26, 2021 (the "Record Date"“Record Date”). Only holders of the Company'sour common stock of record on the books of the Company at the close of business on the Record Date are entitled to notice of and to attend and vote at the Special Meeting or at any adjournment or postponement thereof. As of the Record Date, there were 5,428,01721,018,319 shares of the Company'sour common stock issued and outstanding, each of which is entitled to one vote on all matters. In order for the Special Meeting to be duly convened, a quorum must be present,each matter presented. Shareholders do not have cumulative voting rights.
Under Mississippi law and a quorum requires thatour Amended and Restated Bylaws, as amended (the “Bylaws”), the holders of a majority of the shares ofour common stock beissued and outstanding and entitled to vote, present in person or represented by proxy, will constitute a quorum at the meeting ApprovalMeeting. In the event there are not sufficient votes for a quorum or to approve or ratify any proposal at the time of Proposals 1the Meeting, the Meeting may be adjourned or postponed to permit the further solicitation of proxies. The inspector of election will determine whether a quorum is present at the Meeting. If you are a beneficial owner (as defined below) of shares of our common stock and 2 requiresyou do not instruct your bank, broker, trustee or other nominee how to vote your shares on any of the affirmative vote ofproposals, and your bank, broker, trustee or nominee submits a majority of votes castproxy with respect to your shares on a matter with respect to which discretionary voting is permitted, your shares will be counted as present at a duly convened meeting. Abstentions and broker non-votes are counted onlythe Meeting for purposes of determining whether a quorum exists. In addition, shareholders of record who are present at the Meeting virtually or by proxy will be counted as present at the Meeting for purposes of determining whether a quorum exists, whether or not such holder abstains from voting on any or all of the proposals. Also, a “withhold” vote with respect to the election of a director nominee will be counted for purposes of determining whether there is presenta quorum at the Meeting, but will not be considered to have been voted for the director nominee.
At the Meeting, you will be asked to (1) elect four Class II director nominees; (2) approve, on an advisory basis, the compensation of our named executive officers; (3) ratify the appointment of BKD, LLP as the Company’s independent registered public accounting firm for fiscal year 2021; and (4) consider any other matter that properly comes before the Meeting. As of the date of this proxy statement, management currently knows of no other business to be presented at the meeting.
The Board of Directors recommends that you vote:
· | FOR the election of four Class II director nominees recommended by the Board of Directors in this proxy statement; |
· | FOR the approval, on an advisory basis, of the compensation of our named executive officers as described in the proxy statement; and |
· | FOR the ratification of the appointment of BKD, LLP as the Company’s independent registered public accounting firm for the fiscal year 2021. |
By signing, dating and returning a proxy card or submitting your proxy and voting instructions via the Internet or telephone, you will give to the persons named as proxies discretionary voting authority with respect to any matter that may properly come before the Meeting, and they intend to vote on any such other matter in accordance with their best judgment. We do not expect any matters to be presented for action at the Meeting other than the matters described in this proxy statement. However, if any other matter does properly come before the Meeting, the proxy holders will vote any shares of our common stock, for which they hold a proxy to vote at the Meeting, in their discretion.
Proposal | Voting Options | Vote Required to Adopt the | Effect of | Effect of Broker | ||||
No. 1: Election of four Class II director nominees | For or withhold on each director nominee | Plurality of votes cast | N/A | No effect | ||||
No. 2: Approval, on an advisory basis, of the compensation of our named executive officers | For, against or abstain | Votes cast in favor exceed votes cast against | No effect | No effect | ||||
No. 3: Ratification of the appointment of BKD, LLP as the independent registered public accounting firm of the Company for the fiscal year 2021 | For, against or abstain | Votes cast in favor exceed votes cast against | No effect | N/A |
Our directors are elected by a plurality of the votes cast. This means that the candidates receiving the highest number of “FOR” votes will be elected. Under our Bylaws, to decide any other matters that come before the Meeting, the votes cast in favor of the matter must exceed the votes cast against the matter, unless a different vote is required by law, our Amended and Restated Articles of Incorporation, as amended, or our Bylaws.
Submitting Proxies and Voting Instructions
If your shares of our common stock are registered directly in your name with our transfer agent, Computershare Shareowner Services LLC, you are the shareholder of record of those shares and you will receive proxy materials from the transfer agent. You may submit your proxy and voting instructions via the Internet, telephone or by mail as further described below. Your proxy, whether submitted via the Internet, telephone or by mail, is the person designated on the proxy card to act as your proxy at the Meeting to represent and vote your shares of our common stock as you directed, if applicable.
Holders of record may vote their shares as follows:
· | Submit Your Proxy and Voting Instructions via the Internet or over the telephone |
§ | You may submit your proxy and voting instructions via the Internet or telephone until 10:59 p.m. Central Time on May 19, 2021. |
§ | Please have your proxy card available and follow the instructions on the proxy card. |
· | Submit Your Proxy and Voting Instructions by Mail |
§ | Complete, date and sign your proxy card and return it in the postage-paid envelope provided. |
§ | If you are signing in a representative capacity (for example as guardian, executor, trustee, custodian, attorney or officer of a corporation), you should indicate your name and your title or capacity. |
§ | Your proxy card must be received prior to May 20, 2021 in order for your shares to be voted. |
If you submit your proxy and voting instructions via the Internet or telephone, you do not need to mail your proxy card. The proxies will vote your shares of our common stock at the Meeting as instructed by the latest dated proxy received from you, whether submitted via the Internet, telephone or by mail. You may also vote in person virtually at the Meeting.
In addition, Mississippi law does not provide dissenters’If your shares of our common stock are held by a bank, broker, trustee or appraisal rightsother nominee, you are considered the beneficial owner of shares held in street name and these proxy materials are being forwarded to you by your bank, broker, trustee or other nominee that is considered the shareholder of record of those shares. As the beneficial owner, you have the right to direct your bank, broker, trustee or other nominee on how to vote your shares of our stockholders in connection with eithercommon stock via the Internet or by telephone, if the bank, broker, trustee or other nominee offers these options or by completing, signing, dating and returning a voting instruction form. Your bank, broker, trustee or other nominee will send you instructions on how to submit your voting instructions for your shares of the proposals.
Proxiesour common stock.
Shares of common stock represented by properly executed proxies, unless previously revoked, will be voted at the Special Meeting in accordance with the directions therein. If a properly executed proxy is submitted but no direction isvoting instruction are specified, such shares will be voted as the Board of Directors recommends, namely FOR each director nominee listed in this proxy statement, FOR the approval, on an advisory basis, of the compensation of our named executive officers, and FOR the ratification of the appointment of the independent registered public accounting firm, and in the discretion of the person named asin the proxy holder with respect to any other business that may come before the Special Meeting.
Unless a new record date is fixed, your proxy will still be valid and may be used to vote shares of our common stock at the postponed or adjourned Meeting.
A proxy may be revoked by a shareholder at any time prior to itsthe exercise thereof by filing with the Secretary of the Company a written revocation or a duly executed proxy bearing a later date.date at Post Office Box 15549, Hattiesburg, Mississippi, 39404 Attn: Corporate Secretary. A proxy shallmay also be revoked if the shareholder is presentattends the virtual Meeting and elects to vote in person virtually. Your attendance alone at the Meeting will not be enough to revoke your proxy.
Broker-Non-Votes
Rules of the New York Stock Exchange (“NYSE”) generally govern voting of shares by banks, brokers, trustees and other nominees who hold shares for beneficial owners. In making those determinations, the NYSE rules provide that the broker must first determine whether proposals presented at shareholder meetings are “discretionary” or “non-discretionary.” If you are a beneficial owner and a proposal is determined to be discretionary, then your bank, broker, trustee or other nominee is permitted under NYSE rules to vote on the proposal without receiving voting instructions from you. If you are a beneficial owner and a proposal is determined to be non-discretionary, then your bank, broker, trustee or other nominee is not permitted under NYSE rules to vote on the proposal without receiving voting instructions from you. A “broker non-vote” occurs when a bank, broker, trustee or other nominee holding shares for a beneficial owner returns a valid proxy, but does not vote on a particular proposal because it does not have discretionary authority to vote on the matter and has not received voting instructions from the shareholder for whom it is holding shares.
Under the NYSE rules, the proposal relating to the ratification of the appointment of the independent registered public accounting firm of the Company is a discretionary proposal. If you are a beneficial owner and you do not provide voting instructions to your bank, broker, trustee or other nominee holding shares for you, your bank, broker, trustee or other nominee may vote your shares with respect to the ratification of the appointment of the independent registered public accounting firm.
Under the rules of the NYSE, the proposals relating to the election of directors and the compensation of our named executive officers are non-discretionary proposals. Accordingly, if you are a beneficial owner and you do not provide voting instructions to your bank, broker, trustee or other nominee holding shares for you, your shares will not be voted with respect to these proposals. Without your voting instructions, a broker non-vote will occur with respect to your shares on each non-discretionary proposal for which you have not provided voting instructions.
Householding
We are permitted to send a single Notice of Annual Shareholders’ Meeting (“Notice”) and any other proxy materials we choose to mail to shareholders who share the same last name and address. This procedure is called “householding” and is intended to reduce our printing and postage costs. If you would like to receive a separate copy of a proxy statement or annual report, either now or in the future, or if you would like to request householding and are currently receiving multiple copies, please contact us in writing at the following address: Post Office Box 15549, Hattiesburg, Mississippi, 39404 Attn: Corporate Secretary. In addition, if you would like to receive a separate copy of a proxy statement in the future, you may also contact us at 601-268-8998. If you hold your shares through a bank, broker or trustee or other nominee and would like to receive additional copies of the Notice and any other proxy materials, or if multiple copies of the Notice or other proxy materials are being delivered to your address and you would like to request householding, please contact your nominee.
Voting Results
The Company will publish the voting results in a Current Report on Form 8-K, which will be filed with the SEC within four business days following the Annual Meeting.
Other Matters
Shareholders who have questions about the matters to be voted on at the Annual Meeting or how to submit a proxy should contact Chandra B. Kidd, Secretary, The First Bancshares, Inc., P.O. Box 15549, Hattiesburg, Mississippi, 39404 or by phone at (604) 268-8998 or by e-mail at ckidd@thefirstbank.com.
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PROPOSAL 1 – Election of Directors
Current Membership on the Board of Directors
The Board of Directors is divided into three classes with staggered terms, so that the terms of only approximately one-third of the Board members expire at each annual meeting. The current terms of the Class II directors will expire at the Meeting. The term of each of the Class III directors will expire at the 2022 annual meeting of shareholders and the term of the Class I directors will expire at the 2023 annual meeting of shareholders. Our current directors and their classes as of March 26, 2021 are as follows:
Class I | Class II | Class III | ||
Rodney D. Bennett, Ed.D (I) | Charles R. Lightsey (I) | David W. Bomboy, M.D. (I) | ||
Renee Moore (I) | Fred A. McMurry (I) | M. Ray (Hoppy) Cole, Jr. | ||
Ted E. Parker (I) | Thomas E. Mitchell (I) | E. Ricky Gibson (I) | ||
J. Douglas Seidenburg (I) | Andrew D. Stetelman (I) |
(I) | Indicates independent director under NASDAQ director independence standards. |
There are no arrangements or understandings between any of the directors and any other person pursuant to which he or she was selected as a director. No current director has any family relationship, as defined in Item 401 of Regulation S-K, with any other director or with any of our executive officers. During the previous 10 years, no director, person nominated to become a director, or executive officer of the Company was the subject of any legal proceeding that is material to an evaluation of the ability or integrity of any such person.
Class II Director Nominees
At the Meeting, shareholders are being asked to elect Charles R. Lightsey, Fred A. McMurry, Thomas E. Mitchell and Andrew D. Stetelman as Class II director nominees each to serve a three-year term, expiring at the 2024 annual meeting of shareholders, or until their successors are duly elected and qualified. They all currently serve as Class II Directors. Information regarding the director nominees is provided below under “Information About Director Nominees.”
The person named as proxy on the proxy card intends to vote your shares of our common stock for the election of the four Class II director nominees, unless otherwise directed. Proxies cannot be voted for a greater number of persons than the number of nominees named in this proxy statement. If, contrary to our present expectations, any director nominee is unable to serve or for good cause will not serve, your proxy will be voted for a substitute nominee designated by the Board of Directors, unless otherwise directed.
Vote Required to Elect Director Nominees
Under our Bylaws, our directors are elected by a plurality of votes cast by the shares entitled to vote and present at the Meeting.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” THE four CLASS II director nomineeS, MESSRS. Lightsey, McMurry, Mitchell and Stetelman.
Information about Director Nominees and Continuing Directors
The following provides relevant information regarding each director’s particular experience, qualifications, attributes, or skills that, when considered in the aggregate, led the Board of Directors to conclude that the person should serve as a director of the Company:
Information about Director Nominees
Class II Director Nominees
Charles R. Lightsey, 81, has been a director of the Company since 2003 and is also a director of the Bank.
Background: Mr. Lightsey has owned his own business, Charles R. Lightsey, Social Security Disability Representative, since January 2000. Mr. Lightsey worked with the Social Security Administration from 1961 to 2000, serving as District Manager of the Laurel Office from 1968 to 2000. He is a recipient of The Commissioner's Citation, the highest accolade accorded by the Social Security Administration. His community involvement includes serving as a former deacon of the First Baptist Church of Laurel, member and Board of Directors of the Laurel Kiwanis Club, president of the Laurel-Jones County Council on Aging, member of the Pine Belt Mental Health Association Council and Chairman of the Federal, State and Local Government United Way. He received his degree in Management and Real Estate from the University of Southern Mississippi in 1961. Mr. Lightsey served as director of the First National Bank of the Pine Belt in Laurel, Mississippi prior to its consolidation with The First.
Experience/Qualifications/Skills: Mr. Lightsey has served on the Company’s board since 2003. His background as a manager with the Social Security Administration and his business ownership experience provide the Board with a broad range of knowledge and business acumen. His business experience has equipped him with the skills necessary to be a leader on the Board and to serve as chairman of the corporate governance committee.
Fred A. McMurry, 56, has been a director of the Company since 1995 and is also a director of the Bank.
Background: Mr. McMurry is currently President and General Manager of Havard Pest Control, Inc. a family-owned business where he has served for over 33 years. He also serves on the board of the Bureau of Plant Industry of the Mississippi Department of Agriculture and Commerce and the Dixie National Junior Livestock Sales Committee. In addition, he is President of West Oaks, LLC and Vice President of Oak Grove Land Company, Inc.
Experience/Qualifications/Skills: Mr. McMurry has been a director of the Company since its inception in 1995. He contributes his extensive knowledge of the Lamar County area of Mississippi, which is one of the Company’s primary markets. His many years of experience of small business experience give him a broad understanding of the needs of the Company’s customers as well as insight into the economic trends in the area. He also has been involved in real estate development [through his participation in West Oaks, LLC and Oak Grove Land Company, Inc.], which adds value to loan discussions.
Thomas E. Mitchell, 73, has been a director of the Company since 2017 and is also a director of the Bank.
Background: Mr. Mitchell joined the Board of Directors of the Bank in July 2016. He serves as President of Stuart Contracting Co., Inc. a major area contractor known for large-scale school, government, industrial and commercial projects of all types located in Bay Minette, AL, a position he has held since 1975. Mr. Mitchell is involved in numerous other partnerships and companies and is a part owner in a number of shopping center projects and office parks and various other residential and commercial projects in Alabama. He is a member of First Baptist Church of Bay Minette, where he serves as a deacon.
Experience/Qualifications/Skills: Mr. Mitchell served on the Board of Directors of SouthTrust Corporation from 1996 until 2004 and has served as director for American Fidelity Insurance Company since 2014. Mr. Mitchell’s vast business experience as well as his knowledge of the Alabama and Florida markets is an asset to the Board. Mr. Mitchell’s experience provides the Board with valuable insight into the trends and risks of the market in which he lives and works.
Andrew D. Stetelman, 60, has been a director of the Company since 1995 and is also a director of the Bank.
Background: Mr. Stetelman has served as a realtor with London and Stetelman Realtors since 1981. He graduated from the University of Southern Mississippi in 1983. He has served in many capacities with the National, State, and Hattiesburg Board of Realtors, including serving as President from 1987 to date. He was selected as Realtor of the Year in 1992 of the Hattiesburg Board of Realtors and in 2001 he became the first Mississippi Commercial Realtor of the Year. He has served as the chairman of the Hattiesburg Convention Center since 1994, serves as a board member of the Area Development Partnership, and is a member of the Kiwanis International.
Experience/Qualifications/Skills: Mr. Stetelman has been a director of the Company since its inception in 1995. His experience in commercial real estate and real estate investments provides the Board with insight into the trends and risks associated with residential, rental, and commercial real estate within all of the Company’s markets. His broad insight and knowledge related to real estate is very valuable to the Board and its oversight of the Company’s loan portfolio.
Information about Continuing Directors
Rodney D. Bennett, Ed.D, 54, has been a director of the Company since 2017 and is also a director of the Bank.
Background: Since 2013, Dr. Bennett has served as the President of The University of Southern Mississippi in Hattiesburg, Mississippi. In this role, he is responsible for the management and administrative oversight of every facet of institutional operations on two campuses. He is affiliated with the American College Personnel Association, the New President’s Academy Advisory Committee, American Association of State Colleges and Universities, the NCAA/Conference USA, as well as numerous other organizations.
Experience/Qualifications/Skills: Dr. Bennett’s background and numerous affiliations provide the Board with a broad range of experience and knowledge of organizational management. His insight provides significant value to the Board.
David W. Bomboy, M.D., 75, has been a director of the Company since 1995 and is also a director of the Bank.
Background: Dr. Bomboy is a lifelong resident of Hattiesburg, Mississippi. He received a B.S. with honors in Pre-Medicine from the University of Mississippi in 1968 and earned an M.D. degree from the University of Mississippi Medical Center in 1971. Dr. Bomboy completed his orthopedic surgical training at the University of Mississippi in 1976. He is a board-certified orthopedic surgeon and has practiced orthopedics in southern Mississippi for 41 years. Dr. Bomboy is a member of the Mississippi State Medical Association, the American Medical Association, and the Mississippi Orthopedic Society. He also served as president of the Methodist Hospital Medical Staff.
Experience/Qualifications/Skills: Dr. Bomboy is the sole physician on the Company’s board which enables him to bring a different perspective to the challenges the board faces. His background, experience, and knowledge of the medical and business communities are important in the board’s oversight of management. His past involvement in real estate development adds additional insight to board oversight and review of the Bank’s loan portfolio.
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PROPOSAL 1M. Ray (Hoppy) Cole, Jr., 59, served as director of the Company from 1998 to 1999 and from 2001 through the present and is also a director of the Bank.
Background: Mr. Cole has served as President and CEO of the Company and the Bank since 2009 and has served as the Vice Chairman of the Company’s Board of Directors since 2010. Prior to joining the Bank in September 2002, Mr. Cole was Secretary/Treasurer and Chief Financial Officer of the Headrick Companies, Inc. for eleven years. Mr. Cole began his career with The First National Bank of Commerce in New Orleans, Louisiana and held the position of Corporate Banking Officer from 1985-1988. In December of 1988, Mr. Cole joined Sunburst Bank in Laurel, Mississippi serving as Senior Lender and later as President of the Laurel office. Mr. Cole graduated from the University of Mississippi where he earned a Bachelor's and Master's Degree in Business Administration. Mr. Cole attended the Stonier Graduate School of Banking at the University of Delaware. Mr. Cole also served as director of the First National Bank of the Pine Belt in Laurel, Mississippi prior to its consolidation with The First.
Experience/Qualifications/Skills: Mr. Cole has served on the board of the Company for more than fifteen years and has extensive knowledge of all aspects of the Company’s business. His many years of experience in banking and his leadership in building our Company make him well qualified to serve as a director. His insight is an essential part of formulating the Company’s policies, plans and strategies.
E. Ricky Gibson, 64, serves as Chairman of the Board and has been a director of the Company since 1995 and is also a director of the Bank.
Background: Mr. Gibson has been president and owner of N&H Electronics, Inc., a wholesale electronics distributor, since 1988 and of Mid South Electronics, a wholesale consumer electronics distributor, since 1993. He attended the University of Southern Mississippi. He is a member of Parkway Heights United Methodist Church.
Experience/Qualifications/Skills: Mr. Gibson has served on the board of the Company since its inception in 1995. As a business owner and distributor, Mr. Gibson is knowledgeable about all aspects of running a successful business and he understands the challenges business owners face. Also, he has developed an understanding of the Company’s bank and the banking industry in general, particularly in the area of audit and executive compensation. He serves as Chairman of the Board of both the Company and the Bank and has served as chairman of the audit committee of the Bank’s Board of Directors and is chairman of the compensation committee of the Company’s Board of Directors.
Renee Moore, 59, Hattiesburg, MS, has been a director of the Company since 2020 and is also a director of the Bank.
Background: Ms. Moore, CPA and partner in charge of tax services at Topp McWhorter Harvey, PLLC, is a resident of Hattiesburg, MS and has more than 30 years of public and private accounting experience. She is active in the community, serving on the Forrest General Foundation Planned Giving Committee, the 2019 Heart Walk Executive Leadership Team, and as an Ambassador for the Area Development Partnership of Greater Hattiesburg. She also served as team captain for the Leadership Division of the Area Development Partnership Forward Together Capital Campaign. Ms. Moore earned her Bachelor of Science degree in Accounting from the University of Arkansas at Little Rock.
Experience/Qualifications/Skills: Throughout Ms. Moore’s career, she has held numerous leadership positions. From CFO of a privately-held company to partner in charge of a major service division in the sixth largest firm in the state, her experience in both public accounting and industry, as well as experience gained when she and her husband owned and operated their own business, have given her a unique understanding and perspective. She also has experience as Audit Manager for a national bank. Her experience and skills are a valuable resource to the Board.
Ted E. Parker, 61, has been a director of the Company since 1995 and is also a director of the Bank.
Background: Mr. Parker has been in the stocker-grazer cattle business for more than 30 years as the owner and operator of Ted Parker Farms LLC. He attended the University of Southern Mississippi and served as a licensed commodity floor broker at the Chicago Mercantile Exchange from 1982 to 1983. He served on Bayer Animal Health Advisory Board from 2010 to 2016 and on the Marketing and International Trade Committee of the National Cattleman’s Beef Association from 2015 to 2017. He served as a board member of Farm Bureau Insurance from 1992 to 1994. He is a member of the National Cattlemen's Association, the Texas Cattle Feeders Association, Covington County Cattlemen’s Association, and Seminary Baptist Church.
Experience/Qualifications/Skills: Mr. Parker has served on the board of the Company since its inception in 1995. His experience in the cattle business provides the Board with insight into the needs of the agricultural community in the Company’s markets. His insight into the market in which he lives through his community involvement are important assets to the Board.
J. Douglas Seidenburg, 61, has been a director of the Company since 1998 and is also a director of the Bank.
Background: Mr. Seidenburg has served as the owner and President of Molloy-Seidenburg & Co., P.A., an accounting firm, since 1989. He has been a CPA since 1983. Mr. Seidenburg is involved in many civic, educational, and religious activities in the Jones County area. Past activities include serving as president of the Laurel Sertoma Club, president of the University of Southern Mississippi Alumni Association of Jones County, treasurer of St. John's Day School, director of Leadership Jones County and a member of Future Leaders of Jones County. He was also one of the founders of First Call for Help, a local United Way Agency started in 1990. Mr. Seidenburg is a 1981 graduate of the University of Southern Mississippi, where he earned a B.S. degree in Accounting. Mr. Seidenburg also served as director of the the First National Bank of the Pine Belt in Laurel, Mississippi prior to its consolidation with The First.
Experience/Qualifications/Skills: Mr. Seidenburg has served on the Board of the Company since 1998. He is Chairman of the Audit Committee and has been designated as a financial expert. His experience as a CPA and his knowledge of corporate governance provide the Board with an understanding of the financial and accounting issues that are faced by companies in today’s business environment.
PROPOSAL 2 – Advisory Vote on the Compensation of our Named Executive Officers
Pursuant to Section 14A of the Exchange Act, we provide our shareholders with the opportunity to vote to approve, on a non-binding, advisory basis, the compensation of our named executive officers, as disclosed in this proxy statement in accordance with the rules of the SEC (the “say-on-pay proposal”). This vote does not address any specific item of compensation but rather the overall compensation of our named executive officers and our compensation philosophy and practices as disclosed in the section titled “Executive Officer Compensation.” This disclosure includes the “Compensation Discussion and Analysis” and the “Executive Compensation Tables” set forth below, including the accompanying narrative disclosures. At the 2020 annual meeting of shareholders, we provided our shareholders with the opportunity to cast a non-binding advisory vote regarding the compensation of our named executive officers as disclosed in our proxy statement for the 2020 annual meeting of shareholders. Our say-on-pay proposal was approved by approximately 74% of our shareholders whose shares were present in person or by proxy at the 2020 annual meeting and who voted or affirmatively abstained from voting (excluding broker non-votes). We are again asking our shareholders to vote on the following resolution:
RESOLVED, that the shareholders of The First Bancshares Inc. (the “Company”) approve, on an advisory basis, the compensation of the Company’s named executive officers as disclosed in the proxy statement for the Company’s 2021 Annual Meeting of Shareholders pursuant to Item 402 of Regulation S-K of the rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, the compensation tables and the narrative executive compensation disclosures to the compensation tables included in this proxy statement.
We understand that executive compensation is an important matter for our shareholders. Our core executive compensation philosophy and objectives continue to be designed to reward the achievement of specific annual, long-term and strategic goals by the Company, and which aligns the interests of the executive officers with the Company’s overall business strategy, values and management initiatives intended to reward executives for strategic management and the enhancement of shareholder value and support a performance-oriented environment that rewards achievement of internal goals. In considering how to vote on this proposal, we encourage you to review all the relevant information in this proxy statement, including the “Compensation Discussion and Analysis”, the “Executive Compensation Tables,” and the rest of the narrative disclosures regarding our executive compensation program in the section titled “Executive Officer Compensation”.
While this advisory vote is not binding, the Board of Directors and the Compensation Committee value the opinion of our shareholders and will consider the outcome of the vote when making future compensation decisions for our named executive officers.
Vote Required to Approve, on an Advisory Basis, the Compensation of Our Named Executive Officers:
Proposal No. 2 will be approved if votes cast in favor of the proposal exceed votes cast against it.
Recommendation of the Board of Directors
THE BOARD RECOMMENDS THAT YOU VOTE “FOR” THE APPROVAL, ON AN ADVISORY BASIS, OF THE ISSUANCECOMPENSATION OF SHARES OF COMMON STOCK UPON THE CONVERSION OF THE COMPANY’S SERIES E NONVOTING CONVERTIBLE PREFERRED STOCK INTO COMMON STOCKOUR NAMED EXECUTIVE OFFICERS AS DISCLOSED IN THIS PROXY STATEMENT.
EXECUTIVE OFFICER COMPENSATION
Our named executive officers (“NEOs”) for 2020 and the positions held by them on December 31, 2020 are:
M. Ray (Hoppy) Cole, Jr., 59, CEO and President of the Company and the Bank, Vice Chair of the Company’s Board of Directors. Mr. Cole’s biography is provided above under “Information about Continuing Directors.”
Donna T. (Dee Dee) Lowery, CPA, 54, Executive Vice President and Chief Financial Officer of the Company and the Bank. Ms. Lowery has served as Executive Vice President and Chief Financial Officer of the Company and the Bank since she joined the Company in February 2005. Prior to joining the Company, Ms. Lowery was Vice President and Investment Portfolio Manager of Hancock Holding Company from 2001 to 2005. Ms. Lowery began her career in 1988 with McArthur, Thames, Slay and Dews, PLLC as a staff accountant. In June 1993, she joined Lamar Capital Corporation, and held several positions beginning with Internal Auditor from 1993 to 1995, Comptroller from 1995 to 1998 and then Chief Financial Officer and Treasurer from 1998 to 2001, until the merger in 2001 with Hancock Holding Company. Ms. Lowery graduated from the University of Southern Mississippi where she earned a Bachelor’s Degree in Business Administration with an emphasis in Accounting. Ms. Lowery serves on the Advisory Board for the Business School at the University of Southern Mississippi.
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Compensation Discussion and Analysis
Overview of Compensation Program
The Compensation Committee (for purposes of this analysis, the “Committee”) of the Board of Directors has responsibility for establishing, implementing and monitoring adherence with the Company’s compensation philosophy. The Committee ensures that the total compensation paid to the named executive officers is fair, reasonable and competitive. Generally, the types of compensation and benefits provided to the named executive officers are similar to those provided to other executive officers in publicly traded financial institutions.
2020 Financial Highlights
· | Net income of $52.5 million, increasing 20% from 2019; | |
· | Net interest income of $152.7 million compared to $121.8 million in 2019, an increase of 20%; and | |
· | On April 2, 2020, the Company closed its acquisition of SWG, parent company of Southwest Georgia Bank, headquartered in Moultrie, GA. The acquisition added 8 full service offices servicing the areas of Moultrie, Valdosta, Albany and Tifton, Georgia. Systems integration was completed during the second quarter of 2020. | |
· | In year-over-year comparison, net income available to common shareholders increased $8.8 million, or 20.0%, from $43.7 million for the year ended December 31, 2019 to $52.5 million for the year ended December 31, 2020. |
· | Excluding the bargain purchase and the sale of land gain of $8.3 million, net of tax, and the increased provision expense of $16.5 million, net of tax, net income available to common shareholders increased $17.0 million in year-over-year comparison. |
· | Provision for loan losses totaled $25.2 million for the year ended December 31, 2020 as compared to $3.7 million for the year ended December 31, 2019, an increase of $21.4 million or 572.8%, primarily resulting from the economic effects of the COVID-19 pandemic. |
· | On September 25, 2020, the Company announced the completion of a private placement of $65.0 million of its 4.25% fixed to floating rate subordinated notes due 2030 to certain qualified institutional buyers. |
· | As of December 31, 2020, total COVID related modifications were $82.0 million, representing 2.6% of the loan portfolio and down from a peak of $672 million or 21% of the loan portfolio. |
· | During the first quarter of 2020, the Company elected to delay the adoption of CECL afforded through the CARES Act. The Company currently anticipates CECL adoption to occur as of January 1, 2021. |
Compensation Philosophy and Objectives
The Committee believes that the most effective executive compensation program is one that is designed to reward the achievement of specific short-term, long-term and strategic goals by the Company, and which aligns the interests of the executive officers with the Company’s overall business strategy, values and management initiatives. The Company’s compensation policies are intended to reward executives for strategic management and the enhancement of shareholder value and support a performance-oriented environment that rewards achievement of internal goals. The Company has also adopted a Compensation Philosophy that provides guidance to the Committee when making decisions surrounding the compensation of the NEOs. . Incentive compensation (cash and/or equity) will target cash and direct compensation at the 50th percentile when target performance is achieved and between the 60th and 75th percentiles when annual/long-term goals are exceeded. The philosophy has a strong emphasis on incentive compensation programs that provide an alignment between pay and performance.
The Committee evaluates both performance and compensation to ensure that the Company maintains its ability to attract and retain superior employees in key positions and that compensation provided to key employees remains competitive relative to the compensation paid to similarly situated executives of peer companies.
Our executive compensation programs are designed to align the interests of our NEOs with those of our shareholders. Based on our performance, findings from the 2019 Executive Compensation Review (discussed later in the CD&A), and our commitment to linking pay and performance, the Committee made the following executive compensation decisions for fiscal year 2020. For more detail, please refer to the “2020 Executive Compensation Components” later in the CD&A:
· | Base Salaries: Base salaries were increased approximately 5% for each NEO, effective December 2019 . |
· | 2020 Short-Term Incentives/Cash Bonuses: Based on our 2020 financial performance and the NEOs’ individual performance, the NEOs earned their maximum short-term incentives equal to 30% to 60% of base salary. The maximum opportunity was set at 60% (for the CEO) and 30% (for the CFO) of base salary. |
· | 2020 Long-Term Incentives: The NEOs were eligible to receive up to 6,500 shares (CEO) and 3,300 shares (CFO) based on performance. The NEOs earned the maximum number of shares. In addition, both NEOs were granted a special restricted stock grant for the successful completion and integration of the acquisition of First Florida Bank and Southwest Georgia Bank. |
Summary of Executive Compensation Practices
Our executive compensation program includes the following practices and policies, which we believe promote sound compensation governance and are in the best interests of our shareholders:
What We Do | |
· | Periodically, compare our NEO compensation levels to the market and take these results into consideration when making compensation related decisions. |
· | Provide our NEOs with a performance-based cash incentive plan on an annual basis. |
· | Grant full-value equity to each of our NEOs with multi-year vesting provisions. |
· | Provide each of our NEOs with supplemental executive retirement plans to encourage retention and promote stability in our executive group. |
· | Utilize the assistance of an outside independent compensation consultant to assist our Compensation Committee with gathering market data and best practices information. |
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Role of Executive Officers in Compensation Decisions
The Committee annually reviews, determines and recommends to the Board for approval the annual compensation, including salary, incentives (cash and/or equity) and other compensation of the Chief Executive Officer, including corporate goals and objectives relevant to compensation of the Chief Executive Officer, and evaluates performance in light of these goals and objectives.
The Committee and the Chief Executive Officer annually review the performance of each of the named executive officers (other than the Chief Executive Officer whose performance is reviewed by the Committee). The CEO recommends salary adjustments and annual award amounts based on these reviews, other than for himself, to the Committee. The Committee can exercise discretion in modifying or adjusting recommended compensation or awards to executives. The Committee then submits its recommendations on executive compensation to the full Board for approval.
Setting Executive Compensation
The Compensation Committee monitors the results of our annual advisory vote on executive compensation each year. Our advisory say-on-pay proposal at the 2020 annual meeting of shareholders received an affirmative vote of approximately 74% in favor of our 2019 executive compensation. As a result, the Compensation Committee did not implement any specific changes to our executive compensation programs based on the 2020 shareholder advisory vote. The Compensation Committee monitors the results of each year’s say-on-pay proposal vote and considers such results as one of many factors in connection with the discharge of its responsibilities. The Company maintains active engagement with our shareholders, communicating directly with the holders of our outstanding common stock each year regarding the Company’s performance and responding to any questions or issues they may raise. We encourage shareholders to communicate with us regarding our corporate governance and executive compensation. Communications from shareholders on these subjects are reported to the Compensation Committee or the Corporate Governance Committee, as appropriate.
Based on the foregoing objectives, the Committee has structured the Company’s annual and long-term incentive-based cash and non-cash executive compensation to motivate executives to achieve the business goals set by the Company and reward the executives for achieving such goals.
Independent Compensation Consultant
The Committee has retained Blanchard Consulting Group (“Blanchard”), an independent third party compensation consultant, to provide research for benchmarking purposes related to executive compensation. Blanchard is a national consulting firm with an exclusive focus on the banking and financial services industry. Blanchard does not provide any services to the Company besides compensation consulting services, and reports directly to the Compensation Committee. The Compensation Committee has evaluated Blanchard’s independence, including the factors relating to independence specified in Nasdaq Stock Market Listing Rules, and determined that Blanchard is independent and that their work with the Committee has not raised any conflict of interest.
Additionally, the Company participates in and utilizes the Mississippi Bankers Association (“MBA”) survey, which provides the Committee with comparative salary data from the Company’s market areas.. The Blanchard and MBA data is used by the Committee to ensure that it is providing competitive compensation comparable to its peer group, thereby allowing the Company to retain talented executive officers who contribute to the Company’s overall long-term success.
In 2019, the Committee utilized Blanchard assessed executive officer base salary and total compensation as compared to a peer group of sixteen publicly traded banks. The peer companies included the following:
1 | Seacoast Banking Corporation of Florida | SBCF |
2 | First Bancorp | FBNC |
3 | Republic Bancorp, Inc. | RBCA.A |
4 | FB Financial Corporation | FBK |
5 | Origin Bancorp, Inc. | OBNK |
6 | Franklin Financial Network, Inc. | FSB |
7 | Community Trust Bancorp, Inc. | CTBI |
8 | Carolina Financial Corporation | CARO |
9 | Live Oak Bancshares, Inc. | LOB |
10 | HomeTrust Bancshares, Inc. | HTBI |
11 | Stock Yards Bancorp, Inc. | SYBT |
12 | Capital City Bank Group, Inc. | CCBG |
13 | Atlantic Capital Bancshares, Inc. | ACBI |
14 | SmartFinancial, Inc. | SMBK |
15 | Home Bancorp, Inc. | HBCP |
16 | Business First Bancshares, Inc. | BFST |
For the 2019 review of executive compensation against benchmarking data, the Committee reviewed the following summary by Blanchard:
· | Total Cash Compensation = Base Salary + Annual Cash Incentives / Bonus; | |
· | Direct Compensation = Total Cash Compensation + Three-Year Average Equity Awards; and | |
· | Total Compensation = Direct Compensation + Other Compensation + Retirement Benefits / Perquisites |
Blanchard’s 2019 assessment of FBMS’ compensation practices and levels concluded that:
· | FBMS’ financial performance was comparable versus peers; comparisons to the peer group/market 50th percentile were appropriate | |
· | “Total Cash Compensation” of the NEOs was relatively conservative when compared to peer at a level that was below the peer group 25th percentile in 2019; | |
· | For “Direct Compensation,” FBMS had provided competitive equity awards but the below market salaries and cash incentives positioned direct compensation at or below the peer group 25th percentile; and | |
· | “Total Compensation” showed that FBMS had conservative executive benefits as total compensation for the NEOs remained below the peer group 25th percentile (this was prior to the implementation of the Mr. Cole’s 2020 SERP and Ms. Lowery’s 2021 SERP). |
The Compensation Committee used Blanchard’s reports and analysis to assist with decisions regarding NEO compensation during 2020 but did not solely rely on such reports and analysis. The ultimate decisions made by the Committee were a balance between the Committee’s compensation philosophy and strategy along with the outside perspective of its independent consultant.
BackgroundFBMS Compensation Peer Group change from 2018 to 2019
The compensation peer group for The First Bancshares, Inc. (FBMS) changed from the 2018 to the 2019 study because of the Bank’s increase in asset size and Reasonsacquisitions in the previous peer group. In 2018 we used an asset size range from $1.5B to $6B in the states of Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina, and Tennessee. Because of FBMS’s asset growth in 2019 to over $3.4B in assets when the study was conducted, we increase the asset size range in the compensation peer group for Requesting Shareholder Approval2019 to $2B to $7B, which is within ISS and Glass Lewis standards. We used the same states as the 2018 study which resulted in a peer group of 16 publicly traded banks (listed above).
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Compensation Policies and Practices as They Relate to Risk Management
The Company’s compensation plans incorporate a balance of profitability and strategic goals, such as core deposit growth, asset quality, and audit/compliance ratings, to ensure the officers of the Company are focusing both on profits and strategic goals that are linked to the long-term viability of the organization.
The Compensation Committee has reviewed with the Bank’s Chief Risk Officer the employee incentive compensation arrangements and has determined that such arrangements do not encourage employees to take unnecessary and excessive risks that are reasonably likely to have a material adverse effect on the Company. The Compensation Committee has adopted the following market practices and policies to reduce risk:
· | We align NEO compensation with stockholder interests; |
· | We tie the majority of NEO pay to objective, challenging financial goals and Company performance; |
· | We avoid excessive risk while designing incentive programs; |
· | We maintain stock ownership guidelines for all NEOs; |
· | We do NOT provide for excise tax gross-up for “excess parachute payments” under Section 280G of the Internal Revenue Code of 1986, as amended (“Code”) in any new management agreements; |
· | We maintain a clawback policy applicable to all NEOs; |
· | We utilize an independent consultant to help the Committee understand compensation practices that impact NEO compensation; and |
· | We provide for minimum required vesting periods for our equity awards. |
2020 Executive Compensation Components
Historically, and for the fiscal year ended December 31, 2020, the principal components of compensation for named executive officers consisted of the following:
· | base salary; |
· | performance-based cash incentive compensation; |
· | equity incentive compensation based on achievement of performance targets; |
· | retirement and other benefits; and |
· | perquisites and other personal benefits. |
Base Salary
The Company provides named executive officers and other employees with base salary to compensate them for services rendered during the fiscal year.
During its review of base salaries for executives, the Committee primarily considers: 1) performance of the Company; 2) market data as discussed above; 3) the level of the executive’s compensation, both individually and relative to other officers; and 4) individual performance of the executive. Salary levels are typically considered annually as part of the Company’s performance review process as well as upon a promotion or other change in job responsibility. When reviewing whether to award salary increases, the Committee determines a base salary range and targets the median of the range (50th percentile) for executives that are meeting performance expectations and the upper quartile of the range (75th percentile) for executives that are high performers or exceeding performance expectations. Base salary ranges for named executive officers are determined for each executive based on the Company’s peer group and the competitive market using market research and based on his or her position and responsibility. Merit based-increases to salaries of the named executive officers are based on the Committee’s assessment of the individual’s performance. Salary reviews are typically performed in the fourth quarter of the year for which the executive’s performance is evaluated, and corresponding salary adjustments are made during the same quarter of the fiscal year. The chart below shows salary adjustments in connection with performance reviews completed in fiscal year 2020.
In light of the performance of the Bank in fiscal year 2020, and the NEO’s contributions to the Bank’s strategy, including completion and negotiation of acquisitions during the fiscal year, the Committee recommended to the Board and the Board approved, the following base salary adjustments:
2019 Base Salary | 2020 Base Salary | % Increase | ||||||||||
M. Ray (Hoppy) Cole, Jr. | $ | 490,640 | $ | 520,078 | 6 | % | ||||||
Donna T. (Dee Dee) Lowery | $ | 281,040 | $ | 295,000 | 5 | % |
Performance-Based Cash Incentive Compensation
The Company has established an incentive bonus compensation plan that is based upon individual performance as well as Company performance. Cash incentives on an annual basis during the year following the year in which the services were performed and are contingent upon such executive officer's continued employment with the Company through the date of payment.
During the first quarter of 2020, independent directors of the Board, upon the recommendation of the Compensation Committee, established short-term cash incentive awards for executive officers as percentages of their 2020 base salary, as reflected in the table below (as a percentage of base salary).
Threshold | Target | Maximum | ||||||||||
M. Ray (Hoppy) Cole, Jr. | 15 | % | 30 | % | 60 | % | ||||||
Donna T. (Dee Dee) Lowery | 7.5 | % | 15 | % | 30 | % |
Fiscal year 2020 performance goals for the NEOs for the cash-based incentive plan included Bank pre-tax net income, loan growth, and deposit growth. The metrics chosen represent company growth in earnings, assets, and deposits.
In addition to financial performance measures described above, each named executive officer was evaluated based upon unique individual performance goals in up to seven categories. The incentive plan provides each eligible officer with a “balanced scorecard” that establishes specific corporate and shareholder-related performance goals balanced by the officer’s area of responsibility, his or her business unit, and his or her expected individual level of contribution to the Company’s achievement of its corporate goals The particular individual performance measures were designed to reward the actions determined to be most important for that individual to achieve for the specified year. A rating of 1 through 4 was assigned for each NEO commensurate with performance. For fiscal year 2020, performance for each of the NEOs was measured in the following areas:
· | Leadership; | |
· | Strategic Planning; | |
· | Financial Results; | |
· | Succession Planning; | |
· | Human Resources; | |
· | Internal Communications; | |
· | External Relations; and | |
· | Board/CEO Communication. |
The range of specific targets and relative weights for each performance metric were as follows:
Threshold 25% of Incentive | Target 50% of Incentive | Maximum 100% of Incentive | Actual | Payout % Earned | ||||||||||||||||
Bank Pre-Tax Pre-Provision Income | $ | 78,162,557 | $ | 86,847,285 | $ | 91,189,649 | $ | 92,537,897 | 100 | % | ||||||||||
Bank Total Loan Growth | 3,165,603 | 3,171,654 | 3,186,782 | 2,969,015 | 0 | % | ||||||||||||||
Bank Total Deposit Growth | 3,683,598 | 3,693,737 | 3,719,084 | 4,282,351 | 100 | % | ||||||||||||||
Individual Scorecard | 3 | 3 | 4 | 4 | 100 | % |
Based on the achievement of the performance metrics described above, the following cash incentives were awarded for the year ended December 31, 2020:
M. Ray (Hoppy) Cole, Jr.:
Potential Payout as a % of Salary | Payout % Earned | Payout as a % of Salary | Actual Incentive Earned | |||||||||||||
Bank Pre-Tax Pre-Provision Income | 20 | % | 100 | % | 20 | % | $ | 104,016 | ||||||||
Bank Loan Growth | 10 | % | 0 | % | 0 | % | $ | 0 | ||||||||
Bank Deposit Growth | 10 | % | 100 | % | 10 | % | $ | 52,007 | ||||||||
Individual Scorecard | 20 | % | 100 | % | 20 | % | $ | 104,016 | ||||||||
Total | 60 | % | 50 | % | $ | 260,039 |
Donna T. (Dee Dee) Lowery:
Potential Payout as a % of Salary | Payout % Earned | Payout as a % of Salary | Actual Incentive Earned | |||||||||||||
Bank Pre-Tax Pre Provision Income | 10 | % | 100 | % | 10 | % | $ | 29,500 | ||||||||
Bank Loan Growth | 5 | % | 0 | % | 0 | % | $ | 0 | ||||||||
Bank Deposit Growth | 5 | % | 100 | % | 5 | % | $ | 14,750 | ||||||||
Individual Scorecard | 10 | % | 100 | % | 10 | % | $ | 29,500 | ||||||||
Total | 30 | % | 25 | % | $ | 73,750 |
Discretional Bonus Payments
No discretionary bonuses were paid to our NEOs in 2020.
Equity Incentive Compensation
The Company makes awards of restricted stock to the NEOs pursuant to the terms and conditions of The First Bancshares, Inc. 2007 Stock Incentive Plan, as amended (the “2007 Plan”), generally based on the achievement of identified performance metrics. The Committee utilizes restricted stock as a long-term retention vehicle for key officers. In 2020, the Board, upon the recommendation of the Compensation Committee, established target performance-based long-term equity incentive awards for executive officers using shares of restricted stock with maximum earning opportunities of up to 6,500 shares for Mr. Cole and up to 3,300 shares for Ms. Lowery. Similar to the cash-based annual incentive plan, a pay-for-performance approach is used to determine the number of shares of restricted stock granted to each plan participant. In February of 2020, the Board established performance goals to be achieved over a one-year performance period ending December 31, 2020. The actual number of shares of restricted stock granted was determined based on the achievement of the performance goals. The performance goals utilized in the long-term plan design are linked to both corporate and shareholder performance criteria. For 2020, the performance goals included bank pre-tax net income, asset growth and credit quality as determined by a bank-wide credit administration score, as described in more detail below. The number of shares of restricted stock earned and issued pursuant to the award is determined based on the Bank’s achievement of the performance goals, and once granted the award is subject to cliff vesting on the fifth anniversary of the vest date. The metrics chosen represent company growth in both income and assets while maintaining asset quality.
The range of specific targets and relative weights for each performance metric were as follows:
Threshold – 25% of Shares Earned | Target – 50% of Shares Earned | Maximum – 100% of Shares Earned | Actual | |||||||||||||
Bank Pre-Tax Pre-Provision Income – 33% of Award | $ | 78,162,557 | $ | 86,847,285 | $ | 91,189,649 | $ | 92,537,897 | ||||||||
Total Bank Assets – 33% of Award | 4,092,983,922 | 4,547,759,913 | 4,775,147,909 | 4,986,648,994 | ||||||||||||
Bank-wide Credit Administration Score – 34% of Award | 3 | 2 | 1 | 1 |
Results falling between the specified values reflected above result in proportional adjustment of the payout amounts.
Achievement of the performance measures set forth above for the year ended December 31, 2020 resulted in the following number of shares granted as restricted stock awards in March of 2021:
Total Number of Shares at Maximum | Bank Pre-Tax Pre-Provision Income – 33% of Award | Total Assets – 33% of Award | Bank-wide Credit Administration Score – 34% of Award | Total Shares of Restricted Stock Awarded | ||||||||||||||||
M. Ray (Hoppy) Cole, Jr. | 6,500 | 2,145 | 2,145 | 2,210 | 6,500 | |||||||||||||||
Donna T. (Dee Dee) Lowery | 3,300 | 1,089 | 1,089 | 1,122 | 3,300 |
Special Equity Grants
On July 17, 2020, the Board of Directors awarded a special grant of restricted stock in the amount of 4,900 shares for Mr. Cole and 732 shares for Ms. Lowery for the successful completion and integration of the acquisition of First Florida Bank and Southwest Georgia Bank. The grants will cliff vest after five years from the grant date, subject to the executive’s continued employment on the vesting date.
Vesting and Retention Provisions Applicable to Equity Awards
The Company has implemented a policy that all shares granted through the 2007 Plan will include at least a three-year vesting schedule, unless extraordinary circumstances are determined by the Board. Beginning in 2014, the restricted stock awards earned based on the satisfaction of performance metrics will cliff vest on the fifth anniversary of the grant date, assuming the continued service of each of the holders through such vesting date. Vesting of such Awards will be accelerated in the event of the holder's death while in the service of the Company or upon such other event as determined by the Committee in its sole discretion. The 2007 Plan also contains a double trigger change-in-control provision pursuant to which unvested shares of stock granted through the plan will be accelerated upon a change in control if the executive is terminated without cause as a result of the transaction (as long as the shares granted remain part of the Company or are transferred into the shares of the new company). In October 12, 2016,2019, the Committee approved a modification to Mr. Cole’s and Ms. Lowery’s outstanding shares of restricted stock to provide that such shares will become fully-vested if (i) the Bank terminates his or her employment without cause; or (ii) he or she resigns for good reason within 24-months following a change in control, in the event that the outstanding restricted stock awards are not assumed by the acquiror in connection with such change in control. Unvested shares of restricted stock are subject to clawback and forfeiture provisions and may not be sold, pledged, or otherwise transferred or hedged during the vesting period.
Stock Ownership Guidelines
The Committee has established expectations for ownership of our common stock by our CEO and CFO. Under these guidelines, our CEO is expected to attain an investment position in our common shares equal to two times his or her base salary and our CFO is expected to attain an investment position in our common shares equal to one times his or her base salary. Exceptions to these ownership guidelines may be approved by Compensation Committee for good reason. At December 31, 2020, each of our NEOs was in compliance with the ownership guidelines.
Clawback, Repricing, Underwater Grant Buyback and Hedging Policies
As a matter of policy, the Committee believes that incentive compensation awards that are made on the basis of financial metrics should contain clawback provisions that would allow the Company to recoup awards under certain circumstances such as a material misstatement of financial results. The Committee implemented a clawback policy applicable to all short-term and long-term incentives beginning in 2018.
The Committee’s philosophy provides that the Company will not reprice options, stock appreciation rights, or other equity awards, or buy back “underwater” stock options from those who hold option grants for cash. The Company’s Board has approved an amendment to the 2007 Plan to prohibit repricing of equity awards granted under the plan and to prohibit the cash buyback or exchange for other stock awards of underwater options and stock appreciation rights.
Certain transactions in the Company’s equity securities, or which are linked to the value of the Company’s equity securities, may be considered short term or speculative in nature. The Board of Directors discourage directors and officers from engaging in derivative or speculative transactions involving unvested company stock, including hedging, holding unvested stock in a margin account, or pledging unvested stock as collateral for a loan. The Board of Directors has not yet implemented a policy that prohibits directors and officers from engaging in derivative or speculative transactions but plans to do so in 2021.
Retirement and Other Benefits
All employees of the Company, including named executive officers, are eligible to participate in The First Bancshares, Inc. 401(k) Plan and Trust (the “401(k) plan”). We adopted the 401(k) plan to enable employees to save for retirement through a tax-advantaged combination of employee and Company contributions and to provide employees the opportunity to directly manage their retirement plan assets through a variety of investment options. The 401(k) plan allows eligible employees to elect to contribute up to 100% of their eligible compensation, up to the annual IRS dollar limit. Eligible compensation generally means all wages, salaries and fees for services paid by us. We contribute 50% of the employee’s deferral (up to a maximum of 6%) for each eligible employee per year to their 401(k) plan. We may also elect to make a discretionary profit sharing contribution for each eligible employee. No discretionary contributions were made in 2020.
The Company sponsors an Employee Stock Ownership Plan (ESOP), which was established in 2006 for employees, including NEOs, who have completed one year of service for the Company and attained age 21. Employees become fully vested after five years of service. Contributions to the plan are made by the Company only and are at the discretion of the Board of Directors. At December 31, 2020, the ESOP held 5,728 shares of Company common stock and had no debt obligation. There were no Company contributions to the ESOP in 2020.
Supplemental Executive Retirement Plans
During 2020, the NEOs participated in supplemental executive retirement plans, the material terms of which are described below under “2020 Pension Benefits”.
Perquisites and Other Personal Benefits
The Company provides named executive officers with perquisites and other personal benefits that the Company and the Committee believe are reasonable and consistent with its overall compensation program to better enable the Company to attract and retain superior employees for key positions. The Committee periodically reviews the levels of perquisites and other personal benefits provided to named executive officers.
The named executive officers participate in the Company’s broad-based employee benefit plans, such as medical, dental, supplemental disability and term life insurance programs. Mr. Cole is provided use of a company automobile which is primarily used for business travel. Personal use is taxed through the Company’s payroll process. Mr. Cole and Ms. Lowery are entitled to receive a cash payment upon such executive’s death through the split dollar death benefit funded by bank owned life insurance.
Attributed costs of the personal benefits described above for the named executive officers for the fiscal year ended December 31, 2020, are included in the “All Other Compensation” column of the “Summary Compensation Table”.
Analysis of Total Mix of Compensation
The Board of Directors feels that the combination of making annual cash incentive/bonus payments based upon specific goals for each NEO and separate cash incentive/bonus payments tied to earnings goals for the Company provides the necessary incentives to reach the Company’s objectives. The cash bonus payments and the base salary together can provide the NEOs with a compensation package that is competitive with peers. Additionally, the 2007 Stock Incentive Plan provides the Company with the ability to better balance executive compensation between short-term components (base salary and annual cash incentives) and longer-term components (equity incentives) by providing the Committee with the ability to grant equity awards. In recent years, equity grants in the form of restricted shares have provided additional variable compensation that promotes retention and ties the NEOs interests to the shareholders of the Company. Another longer-term compensation program that is available to NEOs is the non-qualified deferred compensation benefit plan. We feel that our NEOs have valuable compensation components available at various levels that promote short-term, mid-term, and long-term achievement of goals and financially reward our NEOs for accomplishing the goals of the Company.
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Employment Agreements with NEOs
We are party to an employment agreement with Mr. Cole since 2011. In 2019, we entered into an employment agreement with Ms. Lowery. The Committee believes that the employment agreements with our named executive officers provide a valuable retention tool, while also providing certain protections to the Bank (namely, restrictive covenants). In 2020, we amended the employment agreements with each of Mr. Cole and Ms. Lowery to address the application of Internal Revenue Code Section 280G and replace the current cut-back provision with a “compare and take better” provision, which requires a comparison of the after-tax benefit to the executive of (A) the total parachute payments after he or she pays the excise tax and income taxes thereon, to (B) a cut back of parachute payments to the extent necessary to avoid the imposition of the excise tax (i.e., limited to 2.999 times the executive’s base amount); the executive would be paid whichever amount yields the more favorable result to the executive. The amendment to Mr. Cole’s employment agreement also extends the application of the restrictive covenants in his employment agreement to a termination of employment for any reason.
Employment Agreement with Mr. Cole
In connection with his election as President and CEO of the Bank, the Bank and Mr. Cole entered into an employment agreement, effective May 31, 2011 (the “Agreement”). The Agreement provides for Mr. Cole to serve as President and CEO of the Bank for terms of three years beginning January 1, 2011, with automatic rolling three-year extensions, unless either the Bank or Mr. Cole provides 90 days’ notice of non-extension, in which case the Agreement would expire at the end of the then-current term. No prior notice is required in the case of termination for Cause.
Mr. Cole is paid a base salary subject to annual review as the Board of Directors may determine and is eligible to earn an annual cash bonus. Mr. Cole is also eligible to receive equity compensation awards on such basis as the Board of Directors determines and is eligible to participate in any benefit plans or programs that are offered to senior executives generally.
On any cessation of employment, Mr. Cole will be entitled to his earned but unpaid base salary. If Mr. Cole’s employment is terminated by the Bank without Cause, or if he voluntarily terminates his employment for Good Reason, each, as defined in his agreement, he will be entitled to a pro rata portion of the annual incentive payment for the year in which the termination occurs, and a lump sum payment in an amount equal to the greater of (i) the remaining salary due had Mr. Cole been employed through the end of the current term or (ii) eighteen months of his current salary, in addition to continued benefits through the end of the current term.
In the event there is a change in control, Mr. Cole will be entitled to (i) a lump sum payment equal to two times his base salary, (ii) all payments, benefits, bonuses or incentives, subject to their plan document, that would ordinarily be available to other employees, and (iii) accelerated vesting of any unvested deferred compensation. If Mr. Cole’s employment is terminated by the Bank without Cause or he resigns for Good Reason, he will be entitled to continuing medical, life and disability insurance coverage on the same basis as prior to termination for the remainder of the then current term.
If Mr. Cole’s employment is terminated due to disability, his salary would continue for six months or, if earlier, until the date payment begins under his disability policy, in addition to the earned compensation and bonus described below. If Mr. Cole dies during the term, he or his designated beneficiary, spouse or estate will be entitled to a lump sum payment of his earned compensation and pro-rata share of his annual bonus target amount for that year.
Under the Agreement, Mr. Cole is subject to standard confidentiality, non-solicitation and non-competition obligations during the term of the Agreement and for at least one year after his employment ends.
Employment Agreement with Ms. Lowery
On October 17, 2019, the Company entered into Securities Purchase Agreements (each a “Security Purchase Agreement”)an Employment Agreement with a limited numberMs. Lowery which terminated and superseded in its entirety the Change in Control Agreement. The Agreement provides for Ms. Lowery to serve as the Executive Vice President and Chief Financial Officer of institutional and other accredited investors (the “Purchasers” and each, a “Purchaser”) pursuant to which the Company sold in a private placement (the “Private Placement”) 3,563,380 shares of newly authorized Series E Nonvoting Convertible Preferred Stock (“Series E Preferred Stock”) at a purchase price of $17.75 per share,Bank for aggregate gross proceeds of $63,249,995. The terms of three years beginning October 19, 2019, with automatic rolling one year extensions, unless either the Series E Preferred Stock provide for their mandatory conversion into an equivalent numberBank or Ms. Lowery provides 60 days’ notice of shares ofnon-extension, in which case the Company’s common stock upon approval of this proposal. The Company paid $3,162,499.75 in fees to its financial advisors who acted as placement agents inAgreement would expire at the private placement. The Private Placement transaction was completed on October 14, 2016. The material terms of the Series Preferred Stock are discussed below.
Because our common stock is listed on the NASDAQ Global Select Market, we are subject to NASDAQ Listing Rule 5635(d), which requires shareholder approval prior to the issuance of securities in connection with a transaction, other than a public offering, involving the sale, issuance or potential issuance by a company of common stock (or securities convertible into or exercisable for common stock) equal to 20% or moreend of the then outstandingcurrent term.
Ms. Lowery is paid a base salary subject to annual review as the Board of Directors may determine and is eligible to receive an annual bonus up to a maximum of 30% of Base Salary. Ms. Lowery is also eligible to receive equity compensation awards on such basis as the Board of Directors determines and is eligible to participate in any benefit plans or programs that are offered to senior executives generally.
Ms. Lowery’s employment agreement provides for certain benefits upon a Change in Control. If, following a Change in Control, Ms. Lowery’s employment is involuntarily terminated other than for Cause or she resigns her position for Good Reason, she would be entitled to (i) a lump sum payment equal to two times her then-current base salary, (ii) continued benefits through the closing date of the Change in Control and for twenty-four months following the closing date, and (iii) immediate vesting of all cash-based and stock-based compensation, and any benefits under deferred compensation plans, subject to the achievement of performance-based conditions.
The amounts which would have been payable to Mr. Cole and Ms. Lowery, assuming a termination event on December 31, 2020, are provided in the Potential Payments Upon Termination or Change in Control Table beginning on page 34.
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Compensation Committee Report
The Compensation Committee of the Company has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement.
This Report is submitted by the Compensation Committee of the Board of Directors of The First Bancshares, Inc.
E. Ricky Gibson, Chairman | |
David W. Bomboy | |
Ted E. Parker | |
Andrew D. Stetelman |
Executive Compensation Tables The First Bancshares, Inc. Summary Compensation Table For the Fiscal Years Ended December 31, 2020, December 31, 2019 and December 31, 2018 |
Name and Principal Position | Year | Salary($) | Non-Equity Incentive Plan Compensation ($)(1) | Stock Awards ($)(2) | Change in Pension Value and Non- qualified Deferred Compen- sation Earnings ($)(3) | All Other Compensation ($)(4) | Total($) | |||||||||||||||||||||
M. Ray (Hoppy) Cole, Jr., President and Chief Executive Officer | 2020 | $ | 522,566 | $ | 260,039 | $ | 284,750 | $ | 500,755 | $ | 17,925 | $ | 1,586,035 | |||||||||||||||
2019 | 468,856 | 245,320 | 313,415 | 61,425 | 15,339 | 1,104,355 | ||||||||||||||||||||||
2018 | 413,063 | 132,473 | 274,928 | 58,145 | 14,994 | 893,603 | ||||||||||||||||||||||
Donna T. (Dee Dee) Lowery, Chief Financial Officer | 2020 | 297,978 | 73,750 | 108,728 | 45,844 | 12,243 | 538,543 | |||||||||||||||||||||
2019 | 252,276 | 70,260 | 125,589 | 25,592 | 9,980 | 483,697 | ||||||||||||||||||||||
2018 | 222,675 | 33,450 | 124,594 | 24,225 | 9,182 | 414,126 |
(1) Reflects annual incentive award payments pursuant to our incentive bonus compensation plan. See “Compensation Discussion and Analysis – 2020 Executive Compensation Components-Performance-Based Cash Incentive Compensation” beginning on page 19 for more information.
(2) Represents the grant date fair value of all time-based and performance-based restricted stock awards granted during the fiscal year. Performance-based awards were granted on February 20, 2020 and will be settled solely in shares of commonrestricted stock or 20% or moreat the end of a one-year performance period based on the satisfaction of the voting power beforeperformance criteria. The shares of restricted stock will cliff vest five years from the issuance of such additionaldate the shares at a price that is less thanare earned. The amounts presented for the greater of book or marketperformance-based restricted stock reflect the value of the stock.
Upon conversionaward at maximum payout based on the probable outcome of the Series E Preferred Stock, the Company will issue 3,563,380 shares of common stock, which is 65.6%performance targets determined as of the Company’s 5,428,017 shares of commongrant date. For time-based and performance-based restricted stock outstanding on October 11. Theawards, grant date fair value is calculated using the closing sales price of the Company’s common stock on October 11th, the daydate of grant. Grant date fair value was based on $34.58, the Series E Preferred Stock offering was priced, was $18.29 perclosing share price on the NASDAQ Global Market.grant date of February 20, 2020 for the performance-based awards, and $20.42, the closing share price on the grant date of July 17, 2020 for the time-based awards, in accordance with FASB Topic 718.
(3) Reflects changes in present value of Mr. Cole’s 2016 and 2020 SERP and Ms. Lowery’s 2016 SERP.
(4) Information regarding All Other Compensation for 2020 is reflected in the table below.
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The proposed conversion ofFirst Bancshares, Inc.
All Other Compensation
For the Series E Preferred Stock for shares of our common stock is subject to this NASDAQ rule because the shares of common stock issuable upon conversion of the Series E Preferred Stock exceed 20% of both the voting power and number of shares of our common stock outstanding before the issuance, and the negotiated price per share of common stock on an as-converted basis was less than the book value and market value of our common stock at the time of issuance.Year Ended December 31, 2020
The Private Placement of the Series E Preferred Stock was exempt from Securities and Exchange Commission (“SEC”) registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Rule 506(b) of Regulation D promulgated thereunder.
The proceeds from the Private Placement will be used, in part, to fund the acquisition of Iberville Bank, Plaquemine, Louisiana (the “Iberville Bank Acquisition”). The Iberville Bank Acquisition is NOT part of Proposal 1 and the Company’s shareholders are NOT being asked to vote on the Iberville Bank Acquisition. Further, the results of the vote of the shareholders at the Special Meeting will not affect whether the Company completes the Iberville Bank Acquisition. Iberville Bank’s principal executive office is located at 23405 Eden Street, Plaquemine, LA 70764 and its phone number is (225) 687-2091. Iberville Bank is a community bank that specializes in deposit and lending services throughout southeast Louisiana.
For a more detailed description of the Iberville Bank Acquisition, please see “Acquisition of Iberville Bank” set forth below. The most material terms of the Iberville Bank Acquisition follow:
Name | Auto Allowance | 401(k) Match | Group Term Life Insurance | Split Dollar Death Benefit BOLI | Additional Compensation (1) | Total All Other Compensation | ||||||||||||||||||
M. Ray (Hoppy) Cole, Jr. | $ | 4,625 | $ | 8,550 | $ | 464 | $ | 246 | $ | 4,040 | $ | 17,925 | ||||||||||||
Donna T. (Dee Dee) Lowery | 0 | 10,160 | 464 | 158 | 1,461 | 12,243 |
| (1) | Represents reimbursement for club dues and cell phones for named executive officers. |
The First Bancshares, Inc.
As of December 31, 2020 |
Estimated Future Payouts Under Non-Equity Incentive Plan Awards(1) | Estimated Future Payouts Under Equity Incentive Plan Awards(2) | |||||||||||||||||||||||||||||||
Name |
Grant Date |
Threshold ($) | Target ($) | Maximum ($) | Threshold ($) | Target ($) | Maximum ($) | All Other Stock Awards: Number of Shares of Stock or Units (#) |
Grant Date Fair Value of Stock and Option Awards ($)(4) | |||||||||||||||||||||||
M. Ray (Hoppy) Cole, Jr. |
2/20/20 | 1,625 | 3,250 | 6,500 |
$224,770 | |||||||||||||||||||||||||||
2/20/20 | 78,012 | 156,023 | 312,047 | |||||||||||||||||||||||||||||
7/17/20 | 4,900 | (3) | 100,058 | |||||||||||||||||||||||||||||
Donna T. (Dee Dee) Lowery | 2/20/20 | 825 | 1,650 | 3,300 | $114,114 | |||||||||||||||||||||||||||
2/20/20 | 22,125 | 44,250 | 88,500 | |||||||||||||||||||||||||||||
7/17/20 | 732 | (3) | 14,947 |
(1) Amounts represent potential payments under our annual incentive program. The actual amount earned in 2020 was paid in March 2021 and is shown in the “Non-Equity Incentive Plan Compensation” column of the 2020 Summary Compensation Table. See “Compensation Discussion and Analysis — 2020 Executive Compensation Components – Performance-Based Cash Incentive Compensation,” for more information regarding our 2020 annual incentive program.
(2) Amounts represent awards of performance-based restricted stock that were granted under the 2007 Plan based upon the Company’s achievement of certain performance measures at the end of the one-year performance period. Based on the defined objectives of the awards, the NEO has the opportunity to earn shares of restricted stock (25% at threshold, 50% at target and 100% at maximum) following the one-year performance period, and any such earned shares will cliff vest five years from date earned. The amount shown reflects the value of the award at maximum based on the probable outcome of the performance measures determined as of the grant date in accordance with ASC 718. See “Compensation Discussion and Analysis — 2020 Executive Compensation Components – Equity Incentive Compensation” for more information on the grants of performance-based restricted stock.
(3) Represents special equity grants for completion of acquisition integrations. See “Compensation Discussion and Analysis — 2020 Executive Compensation Components – Special Equity Grants” for more information on these grants.
(4) Represents the aggregate grant date fair value of performance-based and time-based restricted stock awarded during the fiscal year, computed in accordance with FASB ASC Topic 718. Refer to footnote 2 of the 2020 Summary Compensation Table for additional information.
The First Bancshares, Inc.
Outstanding Equity Awards at 2020 Fiscal Year-End
As of December 31, 2020
Stock Awards | ||||||||||
Name | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested ($) | Vesting Date (1) | |||||||
M. Ray (Hoppy) Cole, Jr. | 10,106 | 173,318 | 02/01/2021 | |||||||
575 | 10,350 | 03/01/2021 | ||||||||
10,717 | 296,325 | 02/01/2022 | ||||||||
3,584 | 99,994 | 06/13/2022 | ||||||||
5,829 | 185,071 | 03/01/2023 | ||||||||
1,682 | 68,878 | 08/16/2023 | ||||||||
6,500 | 213,395 | 03/01/2024 | ||||||||
3,334 | 100,320 | 07/18/2024 | ||||||||
5,341 | 175,345 | 03/01/2025 | ||||||||
4,900 | 100,058 | 07/17/2025 | ||||||||
6,500 | (2) | 208,455 | 03/01/2026 | |||||||
Donna T. (Dee Dee) Lowery | 3,276 | 56,183 | 02/01/2021 | |||||||
4,000 | 110,600 | 02/01/2022 | ||||||||
675 | 18,833 | 06/13/2022 | ||||||||
2,960 | 93,980 | 03/01/2023 | ||||||||
488 | 19,984 | 08/16/2023 | ||||||||
3,300 | 108,339 | 03/01/2024 | ||||||||
575 | 17,302 | 07/18/2024 | ||||||||
2,712 | 89,035 | 03/01/2025 | ||||||||
732 | 14,947 | 07/17/2025 | ||||||||
3,300 | (2) | 105,831 | 03/01/2026 |
Time-based awards cliff-vest five years following the grant date or, in the case of performance-based restricted stock, following the date the shares of restricted stock are earned and issued based on achievement of the applicable performance conditions. |
(2) | Reflects performance-based restricted stock that was earned at 100% based on achievement of performance objectives over the one year period ending December 31, 2020. |
The First Bancshares, Inc. Stock Vested For the Year Ended December 31, 2020 |
Stock Awards | ||||||||
Name |
Number of Shares Vesting (#)(1) |
Value Realized on | ||||||
M. Ray (Hoppy) Cole, Jr. | 8,814 | $ | 303,378 | |||||
Donna T. (Dee Dee) Lowery | 4,000 | 137,680 |
(1) | The shares included in the table represent gross shares exercised or vested. No shares were forfeited for taxes. |
(2) | The value realized by the NEO upon the vesting of restricted stock is calculated by multiplying the number of shares of stock vested by $34.42, the market value of the underlying shares on the vesting date, which is the amount that is taxable to the executive. |
The First Bancshares, Inc.
Pension Benefits Table
For the Year Ended December 31, 2020
Name and Principal Position Plan name
(1)(2)(3) Number of years
of credited
service Present Value of
Accumulated
Benefit Payments During
Last Fiscal Year M. Ray (Hoppy) Cole, Jr., 2016 Plan 18 $ 1,215,261 (1) $ 0 2020 Plan 18 2,506,669 (2) 0 Donna T. (Dee Dee) Lowery 2016 Plan 16 506,315 (1) 0 2021 Plan 16 0 (3) 0
(1) Supplemental Executive Retirement Plan (2016 SERP). Each of Mr. Cole and Ms. Lowery participate in a 2016 SERP. The 2016 SERP provides for an annual supplemental retirement benefit in the fixed amount of $164,110 for Mr. Cole and $89,140 for Ms. Lowery. Mr. Cole and Ms. Lowery vest 10% per year until full vesting occurs following ten years of service, and both are currently 60% vested in the benefit. Except as provided below, the benefit will commence on the first day of the month following their 65th birthday and will be paid in equal monthly installments over fifteen years. Amounts become payable upon their death, disability, termination of employment, change in control of the Company or retirement.
· | If Mr. Cole or Ms. Lowery separate from service prior to age 65, other than by reason of death, disability or a termination for cause other than in connection with a change in control, then they will receive a lump sum payment equal to the vested portion of the accrued liability balance of the SERP. |
· | If Mr. Cole or Ms. Lowery becomes disabled, then they will receive a lump sum payment equal to the accrued liability balance portion of the SERP. The benefit is forfeited in the event of termination for "Cause" as defined in the agreement. |
· | In the event of Mr. Cole’s or Ms. Lowery’s death prior to separation from service, their beneficiary will receive a lump sum payment equal to $2,961,650, in the case of Mr. Cole, and $1,337,100, in the case of Ms. Lowery. In the event of Mr. Cole’s or Ms. Lowery’s death following separation from service, their beneficiary will receive an amount equal to any remaining unpaid payments to be paid in equal monthly installments. |
· | In the event of a change of control, Mr. Cole and Ms. Lowery will receive a lump sum payment equal to 100% of the |
The present value of accumulated benefit is based on a 5.5% discount rate. |
(2) Mr. Cole’s 2020 SERP. On January 16, 2020, the Bank entered into an additional Supplemental Executive Retirement Plan (2020 SERP) with Mr. Cole. The effective date of the 2020 SERP was January 1, 2020. The 2020 SERP provides for a lifetime annual payment of $208,695 per year, which will be payable in equal monthly installments upon Mr. Cole’s separation from service following attainment of age 65 while in the employment of the Bank (except in the case of Mr. Cole’s death, in which case the death benefit will be paid in a lump sum). Mr. Cole will vest as to 1.205% of such annual benefit on a monthly basis beginning January 1, 2020 through November 30, 2026. As a condition to receipt of the SERP benefits, Mr. Cole has agreed to a 2-year non-competition covenant following his separation from service with the Bank.
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(3) Ms. Lowery’s 2021 SERP. On December 14, 2020, the Bank entered into an additional supplemental executive retirement plan (2021 SERP) with Ms. Lowery. The effective date of the 2021 SERP is January 1, 2021. The 2021 SERP provides for a lifetime annual payment of $175,231 per year, which will be payable in equal monthly installments upon Ms. Lowery’s separation from service following attainment of age 65 while in the employment of the Bank (except in the case of Ms. Lowery’s death, in which case the death benefit will be paid in a lump sum). Ms. Lowery will vest as to 0.7752% of the annual benefit on a monthly basis beginning January 1, 2021 through September 1, 2031. As a condition to receipt of the 2021 SERP benefits, Ms. Lowery has agreed to a 2-year non-competition covenant following her separation from service with the Bank. The First Bancshares, Inc. Potential Payments Upon Termination or Change-in-Control As of December 31, 2020 The First Bancshares, Inc. Potential Payments upon Termination or Change-in-Control (Continued) As of December 31, 2020 In the event of Mr. Cole’s disability, salary will continue for 6 months or, if earlier, until the date payments begin under disability insurance policy. Mr. Cole will also receive a pro rata bonus for the year of the disability. In the event of termination without cause or a resignation for good reason (as such terms are defined in the employment agreement), Mr. Cole will receive a lump sum severance payment and continuation of health benefits in an amount equal to the greater of 18 months or through the end of the term. Amount shown includes salary of $1,256,855 plus health benefits of $14,854 through the end of the expiration of the contract term, 5-31-23. In the event of a change in control, Mr. Cole will receive a lump sum payment in the amount of two times current annual salary, and bonuses accrued that would have been paid. All unvested restricted stock awards will become fully vested in connection with the NEO’s retirement, death or termination of employment by the Company without cause. As of December 31, 2020, none of the NEOs have reached retirement age under the restricted stock award agreement, which is 65. Calculated based on 12-31-20 stock closing price of $30.88 per share. All unvested restricted stock awards will become fully vested in the event of a change in control in which the acquirer does not assume the awards. Calculated based on 12-31-20 stock closing price of $30.88 per share. In the event of a change in control and termination without cause or for good reason, Ms. Lowery will receive severance of two times then-current base salary in a lump sum and monthly payments equal to employer’s portion of COBRA for 18 months. All unvested restricted stock awards will become fully vested if termination without cause or resignation for good reason occurs within 24 months of a change in control in which the Company is the survivor or the acquirer has assumed the restricted stock awards. Calculated based on 12-31-20 stock closing price of $30.88 per share. As required by Section 953(b) of the To identify the median employee, we conducted a full analysis of our The following Plan Category Number of securities 64,149 shares Director Compensation Directors serving on the Bank’s Board were paid an annual retainer of $8,000. In order to receive the retainer, directors of the Bank must attend at least 75% of the scheduled Bank Board and committee meetings during the year. The Bank directors were paid an additional $700 per meeting which consisted of twelve regularly scheduled meetings in 2020. Directors who served on the risk and loan committees of the Bank’s Board of directors were paid $350 and $300 per meeting, respectively. The chairman of the risk committee of the Bank’s Board of directors was paid an additional retainer of $750 per quarter. Director Compensation Table For the The The following table sets forth certain information regarding the beneficial ownership of common stock in the Company owned by the directors, director nominees, * Represents less than 1% of issued and outstanding common stock. CERTAIN BENEFICIAL OWNERS BlackRock, Inc. 55 East 52nd Street New York, NY 10055 45 Corporate Governance Overview. We are committed to having sound corporate governance principles, which are essential to running our business efficiently and The Board’s Role in Risk Oversight. The Board of Directors is responsible for oversight of management and the business and affairs of the Company, including the management of risk. The Board of Directors has delegated various aspects of its risk oversight responsibilities to the Board’s committees. Each committee has the authority to engage the assistance of outside advisors. The committees of the Board concentrate on specific risks for which they have an expertise, and each committee is required to make regular reports to the Board of Directors on its actions. The Audit Committee assists the Board of Directors in monitoring the Company’s financial reporting risk, which includes the appropriateness of the allowance for loan and lease losses, and regularly monitors the Company’s exposure to certain financial and reputational risks by establishing and evaluating the effectiveness of company programs to detect and report fraud and by monitoring the Company’s internal control over financial reporting. The Risk Committee of the Bank’s Board of Directors is responsible for Bank-level risk oversight and makes regular reports to the Board of Directors. This committee monitors compliance with regulations and policies applicable to the Bank. The Compensation Committee reviews the Company’s incentive plans with the Chief Risk Officer to ensure such plans do not encourage participants to take risks that would be reasonably likely to have a material adverse impact on the Company, and to the extent necessary, reviews and discusses with management any related risk mitigation features and disclosures determined to be advisable. Cybersecurity and Information Security Risk Oversight. Our Board recognizes the importance of maintaining the trust and confidence of our customers, clients, and employees and devotes significant time and attention to oversight of cybersecurity and information security risk. In particular, our Board and management team each receive regular reporting on cybersecurity and information security risk, as well as presentations throughout the year on cybersecurity and information security topics. Our Board also annually reviews and approves our Information Security Policy. The Risk Committee also receives quarterly updates on cybersecurity and information security risk. Board Self-Evaluation. The Board undertakes an evaluation process on an annual basis, using an evaluation platform designed by an independent third party. Each director evaluates his or her own performance, as well as the performance of his or her fellow directors. The evaluations are reviewed by the Chairman of the Board, and the aggregated results are shared and discussed by the Board as a whole. The evaluation process improves the overall effectiveness of the Board by identifying its strengths, as well as areas for which additional training may be needed. In 2020, each committee of the Board also engaged in a self-assessment, which evaluated each committee’s performance and identified areas of improvement. Director Independence. The Board of Directors has established guidelines to assist it in determining director independence which conform to the independence requirements of the Nasdaq Stock Exchange listing standards. In addition to applying these guidelines, the Board of Directors will consider all relevant facts and circumstances in making an independence determination. For a director to be considered independent, the Board of Directors must determine that the director does not have any direct or indirect material relationship with the Company. Based on this evaluation, the Board determined that the Company currently has ten independent directors, which are Rodney D. Bennett, David W. Bomboy, E. Ricky Gibson, Charles R. Lightsey, Fred A. McMurry, Thomas E. Mitchell, Renee Moore, Ted E. Parker, J. Douglas Seidenburg, and Andrew D. Stetelman. Director Qualifications. We believe that our directors should have the highest professional and personal ethics and values, consistent with our longstanding values and standards. They should have broad experience at the policy-making level in business, government or civic organizations. They should be committed to enhancing shareholder value and should have sufficient time to carry out their duties and to provide insight and practical wisdom based on their own unique experience. Each director must represent the interests of all shareholders. When considering potential director candidates, our Board of Directors also considers the candidate’s independence, character, judgment, diversity, age, skills, including financial literacy, and experience in the Board Leadership Structure.The CEO and Chairman positions are separated under the Company’s Board leadership structure. E. Ricky Gibson acts as the non-executive chairman and M. Ray (Hoppy) Cole, Jr., serves as the CEO. The Board of Directors determined that this is the most effective way for its leadership to be structured and believes this is a best practice for governance. The members of the Company’s Board of Directors also serve as directors of the Bank in order to provide effective oversight of the Bank. From time to time, the Board leadership structure will be re-evaluated to ensure that it continues to be the most effective approach in serving the Company’s goals. In addition, to further strengthen the oversight of the full board of directors, our independent directors hold executive sessions at which only independent directors are present. Standards of Conduct. The Company’s Board of Directors has adopted a Code of Ethics for Financial Officers (“Code of Ethics”) that applies to its CEO, CFO, principal accounting officer or controller, or persons performing similar functions. The Company has made the Code of Ethics available on its website at www.thefirstbank.com. Any amendments to, or waivers from, our Code of Ethics applicable to our executive officers will be posted on our website within four days of such amendment or waiver. Communicating Concerns to Directors. The Audit Committee and the non-management directors have established procedures to enable any employee who has a concern about Company’s conduct, policies, accounting, internal accounting controls or auditing matters, to communicate that concern directly to the Board of Directors through written notification directed to the Chairman of the Audit Committee, Doug Seidenburg, at P. O. Box 1197, Laurel, MS 39441, or by email to DougS@sburgcpa.com. Such communications may be confidential or anonymous. The Company’s Whistleblower Policy is available on the Company’s website, www.thefirstbank.com. The status of any outstanding concern, if any, is reported to the non-management directors of the Board of Directors periodically by the Chairman of the Audit Committee. Corporate Social Responsibility. The First is committed to fulfilling its responsibilities to its employees, customers, shareholders and the communities in which it serves. Some highlights are listed below: These highlights are a reflection of The First’s commitment to the fulfillment of its responsibilities. Please refer to The First Bancshares, Inc. 2019-2020 Corporate Social Responsibility Report which is available on the bank’s website, www.thefirstbank.com. Shareholder Communications. Shareholders may communicate with all or any member of the Board of Directors by addressing correspondence to the “Board of Directors” or to the individual director and addressing such communication to Chandra B. Kidd, Secretary, The First Bancshares, Inc., P.O. Box 15549, Hattiesburg, Mississippi, 39404. Communications that are not related to the duties and responsibilities of the Board of Directors or a committee will not be distributed, including spam, junk mail and mass mailings, surveys and business solicitations or advertisements. In addition, we will not distribute unsuitable material to our directors, including material that is unduly hostile, threatening or illegal. Compensation Committee Interlocks and Insider Participation No member of the Compensation Committee was an officer or employee of the Company or any of its subsidiaries during 2020, nor has any member of the Committee ever been an officer or employee of the Company or any of its subsidiaries. In addition, none of the executive officers of the Company served on the Board of Directors or on the compensation committee of any other entity, for which any executive officers of such other entity served either on our Board of Directors or on our Compensation Committee. Additional Information Concerning Officers and Directors Meetings of the Board of Directors It is the policy of the Company that directors attend all meetings. During the year ended December 31, Annual Meeting Attendance The Company encourages attendance of all of its directors at the annual meeting. All of the Board of Directors of the Company who were then serving attended the 2020 annual meeting. Committees of the Board of Directors The Company's Board of Directors has appointed an Audit Committee, a Compensation Committee, a Corporate Governance Committee and an Executive Committee. The Audit Committee is composed of the following members, all of whom are independent directors: J. Douglas Seidenburg (Chairman), E. Ricky Gibson, Charles R. Lightsey, Thomas E. Mitchell, and Renee Moore (Vice-Chairman). The Board has adopted an Audit Committee Charter, a copy of which can be found at the governance documents section of the Investor Relations page of the Company’s internet website at www.thefirstbank.com. The Audit Committee has the responsibility of reviewing the Company’s financial statements, evaluating internal control over financial reporting and reviewing reports of regulatory authorities. The Audit Committee reviews and reassess the adequacy of the Audit Committee Charter on an annual basis. The Committee appoints the independent registered auditing firm and oversees the performance of the firm, reviews and approves the auditor's audit plans, and reviews with the independent auditors the results of the audit and management's responses. The Audit Committee is also responsible for overseeing the internal audit function and appraising its effectiveness. The Audit Committee reports its findings to the Board of Directors of the Company. The Board of Directors has determined that the members of the Audit Committee are independent. The Board of Directors has also determined that J. Douglas Seidenburg is an audit committee financial expert as defined under the SEC rules, and possesses financial sophistication as defined under the rules of NASDAQ, based on his extensive experience with financial reporting and analysis. In addition, each member of the Audit Committee has sufficient knowledge and experience of financial and auditing matters and is able to read and understand fundamental financial statements. The Audit Committee met seven times during 2020, which included three special meetings. The Compensation Committee is composed of the following members, all of whom are independent directors: E. Ricky Gibson (Chairman), David W. Bomboy, M.D., Ted E. Parker (Vice-Chairman), and Andrew D. Stetelman. The Board of Directors has adopted a Compensation Committee Charter and a Compensation Philosophy, which can be found at the governance documents section of the Investor Relations page of the Company’s internet website at www.thefirstbank.com. The Compensation Committee Charter is reviewed and reassessed by the Board annually. The Compensation Committee is responsible for evaluating and approving compensation plans, policies and programs for the Company and the Bank. Its duties include reviewing and making recommendations to the Board with respect to incentive-based compensation plans and equity-based plans, establishing criteria for the terms of awards granted to participants under such plans, and granting awards in accordance with such criteria. The Committee determines and approves corporate goals and objectives relevant to the compensation of the Chief Executive Officer, evaluates performance in light of these goals and objectives, and submits the CEO’s annual compensation, including salary, bonus incentive and other compensation to the full Board for approval. The CEO may not be present during voting or deliberations on the CEO’s compensation. The Committee also reviews, determines and approves corporate goals and objectives relevant to compensation of the other executive officers of the Company, evaluates their performance in light of these goals and objectives, and submits their annual compensation, including salary, bonus, incentive and other compensation of such personnel to the full Board for approval. The CEO provides input on such recommendations and may be present during voting or deliberations on the compensation of executive officers or other personnel at the invitation of the Committee. The Compensation Committee met seven times during 2020, which included one special meeting. The Corporate Governance Committee is composed of the following members, all of whom are independent directors: Charles R. Lightsey (Chairman), Fred A. McMurry (Vice-Chairman), Ted E. Parker, and E. Ricky Gibson. The Corporate Governance Committee is responsible for nominating individuals for election to the Company's Board of Directors and recommending corporate governance principles to the Board. The Corporate Governance Committee recommended, and the Board of Directors adopted, written Corporate Governance Principles which address the size and composition of the Board, requirements for service on the Board, succession planning, annual performance evaluations of the Board and other areas of focus for the Committee. The Board of Directors has adopted a Corporate Governance Committee Charter, which can be found at the governance documents section of the Investor Relations page of the Company’s internet website at www.thefirstbank.com. The Corporate Governance Committee met five times during 2020, which included one special meeting. In considering whether to recommend any candidate for inclusion in the Board of Director’s slate of recommended director nominees, including candidates recommended by shareholders, the Corporate Governance Committee will consider a number of criteria, including, without limitation, financial, regulatory and business experience; familiarity with and participation in the local community; integrity, honesty and reputation; dedication to the Company and its shareholders; independence and any other factors the Corporate Governance Committee deems relevant, including age, diversity, size of the Board of Directors and regulatory disclosure obligations. The Corporate Governance Committee identifies director candidates through business, civic and legal contacts, and may consult with other directors and senior officers of the Company. The Executive Committee’s primary purpose is to act on behalf of the Board of Directors between meetings of the Board of Directors to assure coordination of activity among various standing committees of the Board and to serve as a sounding board for the Chairman of the Board and the CEO in the overall management of the business and affairs of the corporation. Membership consists of the Chairman, Vice-Chairman, CEO, Chairman of the Audit Committee, Chairman of the Compensation Committee and Chairman of the Corporate Governance Committee. Current members are E. Ricky Gibson, M. Ray (Hoppy) Cole, Jr., J. Douglas Seidenburg, and Charles R. Lightsey. The Executive Committee met twenty-four times during 2020. Additionally, the Board of Directors of the Bank appointed a Risk Committee. The Risk Committee is responsible for general oversight and monitoring of the Bank’s risk management strategies, policies and practices that identify, assess, monitor and manage the Bank’s risk and regularly reports to the Board of Directors of the Company on its findings. This Committee monitors compliance with regulations and policies impacting the Bank. Current members are Charles R. Lightsey (Chairman), Rodney D. Bennett, Ed.D., M. Ray (Hoppy) Cole, Jr., Fred A. McMurry and Renee Moore(Vice-Chairman). The committee met four times during the year ended December 31, 2020. Diversity Policy The Board of Directors has adopted a written Diversity Policy to assist the Board in searching for qualified individuals to serve on the Board. The Diversity Policy states that the Corporate Governance Committee should strive for inclusion of diverse groups, knowledge, and viewpoints. For purposes of Board composition, diversity includes, but is not limited to, business experience, geography, age, gender, ethnicity, race, sexual orientation, marital and family status, gender identity, personal style, disabilities, nationality, religion, veteran and active armed service status, or other similar characteristics. To accomplish this, the Corporate Governance Committee may retain an executive search firm to help further the Corporate Governance Committee’s diversity objectives. The Corporate Governance Committee will also periodically review the Board Diversity Policy and the director selection process to assess the policy’s effectiveness in promoting a diverse Board and to ensure that diverse candidates are included in the consideration and selection process. Audit Committee Report The following report of the Audit Committee does not constitute “soliciting material” and should not be deemed to be “filed” with the SEC or incorporated by reference into any other filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates this report by reference in any of those filings. The Audit Committee has the responsibilities and powers set forth in its charter, which include the responsibility to assist the Board of Directors in its oversight of our accounting and financial reporting principles and policies and internal audit controls and procedures, the integrity of our financial statements, our compliance with legal and regulatory requirements, the independent auditor’s qualifications and independence, and the performance of the independent auditor and our internal audit function. The Audit Committee is also required to prepare this report to be included in our annual proxy statement pursuant to the proxy rules of the SEC. Management is responsible for the preparation, presentation and integrity of our financial statements and for maintaining appropriate accounting and financial reporting principles and policies and internal controls and procedures to provide for compliance with accounting standards and applicable laws and regulations. The internal auditor is responsible for testing such internal controls and procedures. Our independent registered public accounting firm is responsible for planning and carrying out a proper audit of our annual financial statements, reviews of our quarterly financial statements prior to the filing of each quarterly report on Form 10-Q, and other procedures. The Audit Committee reviews our financial reporting process. In this context, the Audit Committee has: Based on the review and discussions above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Company's Annual This report is submitted on behalf of the Audit Committee of the Board of Directors of The First Bancshares, Inc. J. Douglas Seidenburg, Chairman E. Ricky Gibson Charles R. Lightsey Thomas E. Mitchell Renee Moore PROPOSAL 3 – Ratification of Appointment of Independent Registered Public Accounting Firm The Audit Committee has appointed BKD, LLP, as its independent registered public accounting firm to audit the Representatives of Vote Required to Ratify the Appointment of our Independent Registered Public Accounting Firm. Proposal No. 3 will be approved if votes cast in favor of the proposal exceed votes cast against it. Recommendation of the Board of Directors THE BOARD RECOMMENDS THAT YOU VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF BKD, LLP AS OUR REGISTERED PUBLIC ACCOUNTING FIRM FOR THE FISCAL YEAR ENDING DECEMBER 31, 2021. Independent Registered Public Accounting Firm Feesand Related Disclosures for Accounting Services The The Audit Committee concluded that the provision of the non-audit services listed above is compatible with maintaining the independence of Crowe. The Audit Committee has adopted pre-approval policies and procedures which require the Audit Committee to pre-approve the audit and non-audit services performed by the Company’s independent registered public accounting firm in order to assure that they do not impair the auditor’s independence. All of the fees set forth above were approved by the Audit Committee. Changes in Independent Registered Public Accountant As previously disclosed in the Company’s Current Report on Form 8-K filed with the SEC on March 24, 2021, the Audit Committee conducted a competitive process to review the appointment of the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2021. The Audit Committee invited multiple firms to participate in this process. As a result of this process and following careful deliberation, on March 11, 2021, the Audit Committee of the Company’s Board of Directors approved the engagement of BKD, LLP (“BKD”) as the Company’s independent registered public accounting firm for the Company’s fiscal year ended December 31, 2021, subject to completion of BKD, LLP’s standard client acceptance procedures and the execution of an engagement letter. The selection of BKD was approved by the Company’s Board of Directors on March 18, 2021. During the Company’s two most recent fiscal years ended December 31, 2020 and 2019, and the subsequent interim period from Other than the matters described above, neither the Company nor anyone acting on its behalf consulted with BKD regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s consolidated financial statements, and neither a written report nor oral advice was provided to the Company that BKD concluded was an important factor considered by the Company in reaching a decision as to any accounting, auditing or financial reporting issue, or (ii) any matter that was either the subject of a “disagreement” or a “reportable event” (as defined in Item 304(a)(1)(iv) and Item 301(a)(1)(v) of Regulation S-K and the related instructions, respectively). Crowe served as the Company’s independent registered public accounting firm for the fiscal year ended December 31, 2020. On March 12, 2021 (the “Filing Date”), the Company filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2020 with the SEC, at which time Crowe completed its audit of the Company’s consolidated financial statements for such fiscal year and the Company’s retention of Crowe LLP as its independent registered public accounting firm with respect to the audit of Company’s consolidated financial statements ended. Crowe’s reports on the Company’s financial statements as of and for the fiscal years ended December 31, 2020 and December 31, 2019 did not contain an adverse opinion or a disclaimer of an opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles. During the fiscal years ended December 31, 2020 and December 31, 2019, and the subsequent interim period through the Filing Date, there were (i) no disagreements with Crowe within the meaning of Item 304(a)(1)(iv) of Regulation S-K and the related instructions on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Crowe, would have caused Crowe to make reference to the subject matter of the disagreements in its reports on the consolidated financial statements of the Company for such years; and (ii) no reportable events within the meaning of Item 304(a)(1)(v) of Regulation S-K. The Company provided Crowe with a copy of the disclosures contained herein prior to filing with the SEC and requested that Crowe furnish the Company with a letter addressed to the SEC stating whether or not it agreed with the statements made above. A copy of Crowe’s letter dated March 24, 2021, was attached as Exhibit 16.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 24, 2021. Certain Relationships and Related Transactions Transactions by us with related parties are Some of the Company’s officers and directors, including members of their families or corporations, partnerships, or other organizations in which such officers or directors have a controlling interest, are customers of the Bank and have transactions with the Bank in the ordinary course of business, and may continue to do so in the future. All outstanding loans and commitments included in such transactions were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than normal risk of collectability or present other unfavorable features. During 2020, Milton R. (Mit) Cole, III, EVP-Division Manager, Private Banking, was paid total gross compensation of $277,227 which included approximately $160,030 in salary, $15,271 in annual incentive bonus paid in cash and a grant of a maximum of 3,300 shares of time vesting restricted stock of the Company. Mr. Cole is the son of M. Ray (Hoppy) Cole, Jr., President and CEO of the Company and the Bank, and also a director. During 2020, Chase Blankenship, SVP and Forrest/Lamar Market President, was paid total gross compensation of $223,188 which included approximately $147,638 in salary and $11,948 in annual incentive bonus paid in cash and a grant of a maximum of 1,700 shares of time vesting restricted stock of the Company. Mr. Blankenship is the son-in-law of Chairman of the Board and Director, E. Ricky Gibson. The Board has affirmatively determined that this relationship has no impact on Mr. Gibson’s independence. There are other personnel throughout the Company related by birth or marriage, however there are no family relationships, whether direct or indirect, between Directors and Executive Officers of the Company. Each year, directors, officers, and employees provide information regarding related party transactions. Although there is no formal written pre-approval procedure governing related party transactions, approval of the Board is sought before engaging in any new related party transaction involving significant sums or risks. Approval of the Board is also sought prior to hiring a family member of a director or executive officer. Delinquent Section 16(a) Reports Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors, executive officers, and beneficial owners of more than 10% to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of common stock. Executive officers and directors are required by Securities and Exchange Commission Regulations to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required during the fiscal year ended December 31, 2020, the Company’s executive officers and directors complied with all applicable Section 16(a) filing requirements with the exception of the filing of the SEC Form 4 for Mr. Thomas E. Mitchell for the purchase of stock in The First Bancshares, Inc. on July 10, 2020, which was inadvertently filed late. SOLICITATION OF PROXIES The cost of soliciting proxies from shareholders will be borne by the Company. The initial solicitation will be by mail. Thereafter, proxies may be solicited by directors, officers and employees of the Company or the 55 Year Ended December 31, 2015 versus 2014 Increase (decrease) due to 2014 versus 2013 Increase (decrease) due to Within Three Months After Three Through Twelve Months Within One Year Greater Than One Year or Nonsensitive Within Three Months After Three Through Twelve Months Within One Year Greater Than One Year or Nonsensitive Within Three Months After Three Through Twelve Months Within One Year Greater Than One Year or Nonsensitive % of loans in each category to total loans % of loans in each category to total loans Percent Of Total Percent of Total Percent of Total One Year or Less Over One Year Through Five Years Over Five Years Percent % of loans in each Past Due 30-89 Past Due 90 days and still accruing Past Due 30-89 Past Due 90 days and still accruing Past Due 30 to 89 Total Past Due and Non-Accrual Total Loans Past Due 30 to 89 Days Past Due 90 Accruing Total Past Due and Non-Accrual Total Loans Percent of Total Percent of Total Real Estate Commercial Real Estate Mortgage Installment and Other Financial and Agriculture Past Due 90 days Real Estate Commercial Real Mortgage Installment Other Financial Agriculture Percento Operating only· In the event of a change of control, Mr. Cole will receive 100% of the lifetime annual benefit. · If Mr. Cole separates from service involuntarily following a change in control prior to age 65, then he will receive 100% of the lifetime annual benefit. · In the event of Mr. Cole’s death, his beneficiary will receive a lump sum payment equal to $3,547,815. · The present value of accumulated benefit is based on a 2.47% discount rate. · If Ms. Lowery separates from service prior to age 65, other than by reason of her death or a termination for cause and other than in connection with a change in control, then she will receive the vested portion of the annual benefit. · In the event of a change of control, Ms. Lowery will receive 100% of the lifetime annual benefit. · If Ms. Lowery separates from service involuntarily following a change in control prior to age 65, then she will receive 100% of the lifetime annual benefit. · In the event of Ms. Lowery’s death prior to her separation from service, her beneficiary will receive a lump sum payment equal to $3,679,851. · The present value of accumulated benefit is based on a 3.0% discount rate. · Amount related to Ms. Lowery’s 2021 SERP are not reflected in the ordinary courseo Limited dividends or distributionso No changes to organizational documentso Limited capital expenditures and compensation increaseso Prior approval for loans and investment purchases over certain thresholdso No incurrence of debt except in the ordinary courseo No acquisitions or significant dispositions of assetsAdditional Agreements:The parties have agreed to certain additional terms, including:·Seller will seek shareholder and regulatory approval· Seller willtable above because such plan was not pursue alternative transactions and may only enter into unsolicited alternative transactions in limited circumstances· Buyer will indemnify directors and officers of Seller to the same extent as Seller currently·Seller will terminate certain employee benefit plans prior to the closing·Buyer will appoint one additional board member to the Bank’s board of directorsConditions:Each of the parties must satisfy certain obligations in order to consummate the Iberville Bank Acquisition, including:·Conditions to Buyer’s Obligations:o All representations, covenants, and additional agreements must be satisfiedo No material adverse effect shall have happenedo Seller will have delivered a certificate of Iberville Bank’s adjusted capital·Conditions to Seller’s Obligations:o All representations, covenants, and additional agreements must be satisfiedo Buyer will have paid the purchase price to SellerTermination:The Iberville Bank Acquisition agreement may be terminated under certain circumstances, including:o If the acquisition is not completed by March 31, 2017o If the Seller’s board of directors changes its recommendationo If either party fails to perform any of its obligations that would give rise to a condition not being satisfied and such failure remains uncuredMiscellaneous:The Buyer and Seller have agreed to escrow approximately $2.5 million of the purchase price while the parties resolve certain loans that were affected by the 2016 flooding in the Baton Rouge, Louisiana area.effective until January 1, 2021.ConsequencesThe following table describes the potential payments and benefits that would have been payable to the NEOs under our existing plans and agreements, assuming (1) a termination of Approval of Proposal 1Shareholder approval of Proposal 1 will have the following consequences:Conversion of Series E Preferred Stock into Common Stock at the Initial Conversion Price. Each share of Series E Preferred Stock will be automatically converted into one share of common stockemployment and/or (2) a change in control occurred, in each case, on the third business day following shareholder approval.Elimination of Dividend and Liquidation Preference of Holders of Series E Preferred Stock. All shares of Series E Preferred Stock will be cancelled upon conversion, resultingDecember 31, 2020. The amounts shown in the eliminationtable do not include payments and benefits to the extent they are provided generally to all salaried employees upon termination of the dividend rightsemployment and liquidation preference existingdo not discriminate in scope, terms or operation in favor of the Series E Preferred Stock. For more information regarding such dividend rightsNEOs. Distributions pursuant to the 2016, 2020 and liquidation preferences, see “Series E Preferred Stock Terms and Provisions”2021 SERPs that would be made are set forth in this proxy statement.the 2020 Pension Benefits table above.Executive Benefits and Payments
Upon Termination or
Change-in-Control Normal
Retirement Death �� Disability Termination
without Cause
or for Good
Reason Change in
Control Only Termination without
Cause/Good Reason
Following Change
in Control M. Ray (Hoppy) Cole, Jr. Compensation: Base Salary $ - $ - $ 260,039 (1) $ 1,271,713 (2) $ 1,664,250 (3) $ 2,935,963 (2)(3) Benefits & Perquisites: BOLI Death Benefit - 200,000 - - - - Restricted Stock Awards - (4) 1,623,300 (4) - 1,623,300 (4) 1,623,300 (5) 1,623,300 (7) Total - 1,823,300 260,039 2,895,013 3,287,550 4,559,263 Donna T. (Dee Dee) Lowery Compensation: Base Salary - - - - - 775,356 (6) Benefits & Perquisites: BOLI Death Benefit - 200,000 - - - - Restricted Stock Awards - (4) 578,012 (4) - 578,012 (4) 578,012 (5) 578,012 (7) Total - 778,012 - 578,012 578,012 1,353,368 5(1)(2) (3) (4) (5) (6) (7) EliminationFor purposes of Separate Voting Rights of Holders of Series E Preferred Stock.. Holders of Series E Preferred Stock have approval rights for certain Company actions, andMr. Cole’s employment agreement, “good reason” means (i) the conversion of Series E Preferred Stock into common stock will eliminate these separate voting rights. For more information regarding such voting, see “Series E Preferred Stock Terms and Provisions”failure to continue in this proxy statement.Market Effects. Despiteeffect any material benefit set forth in the existence of certain restrictionsemployment agreement (unless done on transfer relating to securities law, the issuance of shares of our common stock upon conversiona Bank-wide basis), (ii) a material breach of the Series E Preferred Stock may adversely affect the market price of our common stock. If significant quantities of our common stock issued upon conversion of the Series E Preferred Stock are sold (or if it is perceivedagreement by the market that they may be sold) after their registration into the public market, the trading price of our common stock could be materially adversely affected.Bank, or (iii) a change in control.Dilution. We will issue, throughFor purposes of Mr. Cole’s employment agreement, “change in control” means (i) the conversionacquisition by any person or group of the Series E Preferred Stock, approximately 3,563,380 sharespower to vote, or the acquisition of, commonmore than 50% ownership of the Company’s voting stock, (in addition to(ii) the 5,428,017 shares of common stock currently outstanding). As a result, we expect there to be a dilutive effectacquisition by any person or group, during the twelve month period ending on the earnings per sharedate of our common stock. In addition, our existing shareholders will incur substantial dilutionthe most recent acquisition, of ownership of stock possessing fifty percent (50%) or more of the total voting power of the stock of the Company, (iii) the replacement during any twelve month period of a majority of the members of the Board of Directors of the Company by directors whose appointment or election is not endorsed by a majority of the members of the Board of Directors before the date of such appointment or election, or (iv) the acquisition by any person or group, during the twelve month period ending on the date of the most recent acquisition, of assets of the Bank having a total gross fair market value of more than eighty percent (80%) of the total gross fair market value of all of the assets of the Bank immediately prior to their voting interests and will own a smaller percentage of our outstanding common stock.such acquisition.ConsequencesFor purposes of Failure to Approve Proposal 1Ms. Lowery’s employment agreement, “good reason” means (i) a material diminution in title, authority, duties, or responsibilities; (ii) a material diminution in base salary; (iii) a 50-mile relocation of primary office; or (iv) a material breach of the terms of the employment agreement by the Bank.Series E Preferred Stock Will Remain Outstanding. UnlessFor purposes of Ms. Lowery’s employment agreement, “change in control” means (i) a change in the shareholder approval is receivedownership of the Bank within the meaning of Treasury Regulations § 1.409A-3(i)(5)(v); (ii) a change in the effective control of the Bank within the meaning of Treasury Regulations § 1.409A-3(i)(5)(vi); or unless our shareholders approve(iii) a similar proposal atchange in the ownership of a subsequent meeting,substantial portion of the Series E Preferred Stock will remain outstanding in accordance with its terms, and incurBank’s assets within the potential following effects.meaning of Treasury Regulations § 1.409A-3(i)(5)(vii).Continued Dividend Payment and Potential Market Effects. We would expect that the shares of Series E Preferred Stock will remain outstanding for the foreseeable future and, beginning six months from the issuanceCEO Pay RatioSeries E Preferred Stock, or approximately April 14, 2017,Dodd-Frank Act and for so long as such shares remain outstanding, we would be required to pay dividends on the Series E Preferred Stock, on a non-cumulative basis, at an annual rateItem 402(u) of 6% of the liquidation value of the Series E Preferred Stock, which is $17.75.Continued Separate Voting Rights of Holders of Series E Preferred Stock. Holders of Series E Preferred Stock have certain separate voting rights, and the holders of our common stock will be unable to take certain actions without approval by the holders of the Series E Preferred Stock. For more information regarding such voting, see “Series E Preferred Stock Terms and Provisions” in this proxy statement.Additional Shareholder Meetings. Pursuant to the Securities Purchase Agreement, we would be required to call additional shareholder meetings every three months and recommend approval of Proposal 1 at each meeting to the shareholders, if necessary, until such approval is obtained. We will bear the costs of soliciting the approval of our shareholders in connection with these meetings.Restriction on Payment of Dividends. If shareholder approval is not obtained, the shares of Series E Preferred Stock will remain outstanding and, beginning six months from the issuance of the Series E Preferred Stock, or approximately April 12, 2017, and for so long as such shares remain outstanding, if dividends payable on all outstanding shares of the Series E Preferred Stock have not been declared and paid, or declared and funds set aside therefor, we will not be permitted to declare or pay dividends with respect to, or redeem, purchase, or acquire any of our junior securities, or redeem, purchase or acquire any parity securities, subject to limited exceptions.Participation in Dividends on Common Stock. So long as any shares of Series E Preferred Stock are outstanding, if we declare any dividends on our common stock or make any other distribution to our common shareholders, the holders of the Series E Preferred Stock will be entitled to participate in such distribution on an as-converted basis.Liquidation Preference. For as long as the Series E Preferred Stock remains outstanding, it will retain a senior liquidation preference over shares of our common stock in connection with any liquidation of us and, accordingly, no payments will be made to holders of our common stock upon any liquidation of us unless the full liquidation preference on the Series E Preferred Stock is paid.6Pro Forma Financial InformationTo assist in your understanding of the impact of the Private Placement relating to Proposal No. 1,Regulation S-K, we are providing the following pro forma financial information.information about the relationship of the annual total compensation of our median employee and the annual total compensation of our CEO. The following table sets forthpay ratio included in this information is a reasonable estimate calculated in a manner consistent with Item 402(u) of Regulation S-K. Given the different methodologies that various public companies will use to determine an estimate of their pay ratio, the estimated ratio reported below should not be used as a basis for comparison between companies.capitalizationemployee population, other than the CEO, without the use of statistical sampling. We selected December 31, 2020 as the date upon which we would identify the “median employee”. We determined our median employee using Box 5 wages of the employee’s W-2 for the full year 2020. Using this methodology, we determined that the median employee was a Personal Banker. With respect to the annual total compensation of the median employee, we identified and regulatory capital ratios on a consolidated basis ascalculated the elements of September 30, 2016 on:such employee’s compensation for 2020 in accordance with the requirements of Item 402(c)(2)(x) of Regulation S-K, which included base pay, bonuses, commissions, fringe benefits, incentives, severance, Company contributions to the employee’s 401(k) and any vacation payout. The median employee for 2020 is different from the median employee for 2019.(1) an actual basis;For 2020, our last completed fiscal year, the annual total compensation of our median employee was $44,920 and the annual total compensation of our CEO was $1,586,035. Based on this information, for 2020, the ratio of the annual total compensation of our CEO to the median of the annual total compensation of all employees was 35 to 1.(2) an adjusted basis to give effect to the issuance of 3,563,380 shares of the Series E Preferred Stock in the offering on a (i) non-converted basis and (ii) converted basis.The table should be read in conjunction with and is qualified in its entirety by our audited and unaudited financial statements and notes thereto incorporated by reference into this proxy. For more information, see “Incorporation by Reference of Information About the Company, Financial Statements and Related Information” below. As of September 30, 2016 (in thousands) As Adjusted for the Offering Actual If the Preferred
Stock IS NOT
converted to
Common Stock If the Preferred
Stock IS
converted to
Common Stock Stockholders' Equity: Common Stock - $1.00 par value per share; 20,000,000 shares authorized, 5,454,511 shares issued (including treasury shares held by our Company); 9,017,891 shares issued and outstanding as adjusted for this offering. $ 5,455 $ 5,455 $ 9,018 Preferred stock, no par value, $1,000 per share liquidation, 10,000,000 shares authorized; 17,123 issued and outstanding 17,123 17,123 17,123 Preferred stock, $1.00 par value, $17.75 per share liquidation, 3,563,380 shares authorized; 3,563,380 issued and outstanding and related surplus - 63,250 - Capital surplus 44,996 44,996 104,683 Retained earnings 42,543 42,543 42,543 Accumulated other comprehensive income, net 3,005 3,005 3,005 Treasury stock, at cost, 26,494 shares (464 ) (464 ) (464 ) Total stockholders' equity $ 112,658 $ 175,908 $ 175,908 Consolidated Capital Ratios: Tangible common equity to tangible assets 6.39 % 6.08 % 10.89 % Tangible equity to tangible assets 7.8 % 12.2 % 12.2 % Tier 1 leverage 8.5 % 13.1 % 13.1 % Tier 1 risk based capital ratio 10.5 % 16.2 % 16.2 % Total risk based capital ratio 11.2 % 16.9 % 16.9 % Common equity Tier 1 capital ratio 7.8 % 7.8 % 13.6 % 7Series E Preferred Stock Terms and ProvisionsSECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANSis a summary of the material terms and provisions of the preferences, limitations, voting powers and relative rights of the Series E Preferred Stock as contained in the Certificate of Designation for the Series E Preferred Stock which has been filed with the Secretary of State of the State of Mississippi. Shareholders are urged to carefully read the Certificate of Designation in its entirety. Although we believe this summary covers the material terms and provisions of the Series E Preferred Stock as contained in the Certificate of Designation, it may not contain all of thetable provides information that is important to you.Authorized Shares, Par Value and Liquidation Preference. We have designated 3,563,380 shares as “Mandatorily Convertible Non-Cumulative Non-Voting Perpetual Preferred Stock, Series E,” each of which has a $1.00 par value and a liquidation preference of $17.75 per share.Mandatory Conversion. The Series E Preferred Stock of each holder will convert into shares of common stock on the third business day following the approval by the holders of our common stock of the conversion of the Series E Preferred Stock into common stock as required by the applicable NASDAQ rules. Assuming shareholder approval of Proposal 1 at the Special Meeting, the number of shares of common stock into which each share of Series E Preferred Stock shall be converted will be determined on a one-to-one basis.Dividends. If shareholder approval is not obtained, the shares of Series E Preferred Stock will remain outstanding and, beginning six months from the issuance of the Series E Preferred Stock, or approximately April 12, 2017, and for so long as such shares remain outstanding, we will be required to pay dividends on the Series E Preferred Stock, on a non-cumulative basis, at an annual rate of 6% of the liquidation value of the Series E Preferred Stock, which is $17.75. Dividends after the six month anniversary of issuance will be payable semi-annually in arrears on June 30 and December 31, beginning on June 30, 2017. If all dividends payable on the Series E Preferred Stock have not been declared and paid for an applicable dividend period, the Company shall not declare or pay any dividends on any stock which ranks junior to the Series E Preferred Stock, or redeem, purchase or acquire any stock which ranks pari passu or junior to the Series E Preferred Stock, subject to customary exceptions. If all dividends payable on the Series E Preferred Stock have not been paid in full, any dividend declared on stock which ranks pari passu to the Series E Preferred Stock shall be declared and paid pro rata with respect to the Series E Preferred Stock and such pari passu stock.Participation in Dividends on Common Stock. So long as any shares of Series E Preferred Stock are outstanding, if we declare any dividends on our common stock or make any other distribution to our common shareholders, the holders of the Series E Preferred Stock will be entitled to participate in such distribution on an as-converted basis.Ranking. The Series E Preferred Stock will rank senior tosecurities authorized for issuance under all of the Company’s common stock and equity compensation plans as of December 31, 2020.
to be issued upon
exercise of
outstanding option,
warrants and rights
(a) Weighted-average
exercise price of
outstanding options,
warrants, and rights
(b) Number of securities
remaining available to
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c)(1) Equity compensation plans approved by security holders -0- -0- Equity compensation plans not approved by security holders -0- -0- -0- Total -0- -0- 564,149 shares (1) All of such shares may be issued pursuant to grants of full-value stock awards. pari passuFees Earned or Paid in Cash to. Directors serving on the Company’s outstanding Series CD Preferred StockBoard were paid an annual retainer of $5,000. In order to receive the retainer, directors of the Company must attend at least 75% of the scheduled board and will rank pari passu or senior to all future issuancescommittee meetings during the year. Company directors were paid an additional $750 per meeting, which consisted of four regularly scheduled meetings and six special meetings in 2020. Directors who served on the audit committee of the Company’s preferred stock and junior toBoard of Directors were paid $500 per meeting; directors who served on the compensation committee of the Company’s outstanding Trust Preferred Securities.Board of Directors were paid $350 per meeting; directors who served on the corporate governance committee of the Company’s Board of Directors were paid $350 per meeting; and directors who served on the executive committee of the Company’s Board of Directors were paid $450 per meeting. The Chairman of the Board was paid a retainer of $7,000 per quarter. Each of the chairmen of the audit, compensation and corporate governance committees were paid an additional retainer of $750 per quarter.Voting Rights. Stock Awards.The holders Directors of the Series E Preferred Stock will not have any voting rights other than as required by law, except that the approvalBoards of the holders of a majority of the Series E Preferred Stock, voting as a single class, will be required with respect to certain matters, including (A) charter amendments adversely affecting the rights, preferences or privileges of the Series E Preferred Stock, (B) the consummation of a reorganization event in connection with which the Series E Preferred Stock is not converted or otherwise treated as provided in the Certificate of Designation, or (C) the creation of any series of equal or senior equity securities.Liquidation. In the event the Company voluntarily or involuntarily liquidates, dissolves or winds up, the holders of the Series E Preferred Stock shall be entitled to liquidating distributions equal to $17.75 per share plus any declared and unpaid dividends.8Redemption. The Series E Preferred Stock shall be perpetual unless converted in accordance with the Certificate of Designation. The Series E Preferred Stock will not be redeemable at the option of the Company or any holder of Series E Preferred Stock at any time.Preemptive Rights. Holders of the Series E Preferred Stock have no preemptive rights.Fundamental Change. If the Company enters into a transaction constituting a consolidation or merger of the Company or similar transaction or any sale or other transfer of all or substantially all of the consolidated assets of the Company and its subsidiaries, taken as a whole (in each case pursuant to which its common stock will be converted into cash, securities or other property) or for certain reclassifications or exchanges of its common stock, then each share of Series E Preferred Stock will convert, effective on the day on which such share would automatically convert into common stock of the Company, into the securities, cash and other property receivable in the transaction by the holder of the number of shares of common stock into which such share of Series E Preferred Stock would then be convertible, assuming receipt of any applicable regulatory approval.The Securities Purchase AgreementsThe following is a summary of the material terms of the Securities Purchase Agreements.Purchase and Sale of Stock. Pursuant to the Securities Purchase Agreements, we issued and sold 3,563,380 shares of the Series E Preferred Stock, in the aggregate, to the Purchasers (defined therein).Representations and Warranties. We made customary representations and warranties to the Purchasers relating to us, our business and our capital stock, including with respect to the shares of Series E Preferred Stock issued to the Purchasers pursuant to the Securities Purchase Agreements. The representations and warranties in the Securities Purchase Agreements were made for purposes of the Securities Purchase Agreements and are subject to qualifications and limitations agreed to by the respective parties in connection with negotiating the terms of the Securities Purchase Agreements, including being qualified by confidential disclosures made for the purposes of allocating contractual risk. In addition, certain representations and warranties were made as of a specific date, may be subject to a contractual standard of materiality different from what might be viewed as material to shareholders, or may have been used for purposes of allocating risk between the respective parties rather than establishing matters as facts. The representations and warranties and other provisions of the Securities Purchase Agreements should not be read alone, but instead should only be read together with the information provided elsewhere in this document and in the documents incorporated by reference into this document, including the periodic and current reports and statements that we file with the SEC.Agreement to Seek Shareholder Approval. We agreed to call the Special Meeting, as promptly as reasonably practicable but in no event later than December 31, 2016, and to recommend and seek shareholder approval of Proposal 1. In addition, we agreed to prepare and file this proxy statement with the SEC and to cause the proxy statement to be mailed to shareholders within specified timeframes. If such approval is not obtained at the Special Meeting, we have agreed to call additional meetings and recommend approval of Proposal 1 to the shareholders every three (3) months thereafter until such approval is obtained.Transfer Restrictions. The Series E Preferred Stock issued in the Private Placement constitutes “restricted securities” under federal securities laws and is accordingly subject to significant restrictions on transfer. The Company committed, pursuant to the Registration Rights Agreement into which it also entered with each Purchaser, to register both the Series E Preferred Stock and the Common Stock to be issued upon conversion of the Series E Preferred Stock, for resale under the Securities Act. See “The Registration Rights Agreement.”Other Covenants. We also agreed to a number of customary covenants, including covenants with respect to the reservation and listing on NASDAQ of the common stock to be issued upon conversion of the Series E Preferred Stock.Indemnity. We have agreed to customary indemnification provisions for the benefit of each Purchaser relating to certain losses suffered by each Purchaser arising from breaches of our representations, warranties and covenants in the Securities Purchase Agreements or relating to certain losses arising from actions, suits or claims relating to the Securities Purchase Agreements or the transactions contemplated thereby.9Expenses. The Purchasers and the Company will be solely responsible for and bear all of their own expenses, including, without limitation, expenses of legal counsel, accountants and other advisors (including financial intermediaries and advisors), incurred at any time in connection with the transactions contemplated by the Securities Purchase Agreements.The Registration Rights AgreementOn October 12, 2016, we also entered into a Registration Rights Agreement with the Purchasers pursuant to which we agreed to (i) file a registration statement with the SEC within 90 days of October 14, 2016, to register the Common Stock to be issued upon conversion of the Series E Preferred Stock, for resale under the Securities Act; (ii) use commercially reasonable efforts to cause such registration statement to be declared effective within 120 days of October 14, 2016 (or 150 days in the event of an SEC review), subject to specified exceptions; and (iii) continue to take certain steps to maintain effectiveness of the registration statement and facilitate certain other matters.Failure to meet these deadlines and certain other events may result in the Company’s payment to the Purchasers of liquidated damages in the monthly amount of 0.5% of the purchase price. The Company will bear all expenses incident to performing its obligations under the Registration Rights Agreement regardless of whether any securities are sold pursuant to a relevant registration statement, including registration and filing fees, printing expenses, legal fees, and other incidental expenses. The Company is not responsible for any underwriting discounts, broker or similar fees or commissions, or legal fees, of any Purchaser. The Registration Rights Agreement also provides for customary reciprocal indemnification provisions relating to certain losses suffered by either party arising from any untrue or alleged untrue statement of a material fact, or material omission, in any relevant registration statement or prospectus.Acquisition of Iberville BankBackground of the Iberville Bank AcquisitionIn early June 2016, M. Ray (Hoppy) Cole, Jr., Vice Chairman, President and CEO of FBMS, and other FBMS representatives, including their financial adviser, received information with regard to a potential transaction with Iberville Bank from Iberville Bank’s parent company, A. Wilbert’s Sons Lumber and Shingle Company (“AWS”). FBMS management, legal advisors and financial analysts reviewed preliminary due diligence information provided by AWS and its legal and financial advisors.FBMS subsequently submitted a preliminary LOI on June 28, 2016 which reflected a range of prices FBMS may be willing to pay based on the due diligence received to date. The offer was subject to satisfactory completion of FBMS’s due diligence and proposed an exclusivity period of 90 days, among other conditions. FBMS also inquired whether consideration in the form of stock for all of the common shares of Iberville Bank would be acceptable. AWS and Iberville Bank consulted with its legal adviser and financial adviser regarding the financial and legal terms of the LOI. AWS informed FBMS that they would only be willing to accept cash as consideration.Over the next month, FBMS conducted its due diligence review of Iberville Bank. Iberville Bank also conducted a limited due diligence review of FBMS including an on-site visit by Iberville Bank management and its board of directors. Concurrent with the respective due diligence reviews, Iberville Bank and FBMS began negotiations of a definitive acquisition agreement. On July 27, 2016, AWS sent a draft of a stock purchase agreement (the “Agreement”) to FBMS’s legal counsel.During the next month, FBMS’s management met with representatives of Iberville Bank both on-site and over the telephone and FBMS’s legal counsel and the FBMS financial adviser met with the Iberville Bank management team and legal and financial advisors (via telephone) to update the due diligence process and the status of negotiations related to the Agreement. Subsequently, FBMS asked for an extension of the LOI noting that the exclusivity period was set to expire soon. FBMS requested an extension to the LOI with a target announcement date of September 9, 2016. On August 10, 2016 and again on August 18, 2016, FBMS submitted a revised LOI requesting an extension of the exclusivity period and refining the terms of FBMS’s proposal. All other terms of the original LOI remained as agreed to in the original LOI executed on June 28, 2016. Iberville Bank’s board accepted the terms of the revised LOI on August 26, 2016.10Over the next six weeks, FBMS, AWS, Iberville Bank and their advisers negotiated the terms of the Agreement and reviewed the related disclosure schedules. During this time period, both parties’ directors and management had various discussions, including with their counsel and financial advisors, regarding the status of the negotiations, Agreement issues, employee issues, and related matters. During the first week of September, following extensive flooding in the Baton Rouge, Louisiana area, FBMS indicated to Iberville Bank and its representatives that extensive, additional due diligence would be required in regards to potential loans that may have been affected by the flooding. Over the next several weeks, FBMS conducted flood-related due diligence.The FBMS board met on October 7, 2016 and reviewed and discussed the terms of the proposed Agreement and approved the terms of the Agreement with AWS and Iberville Bank. At a special meeting on October 11, 2016, the AWS board met, along with its financial representative and AWS and Iberville Bank counsel, to review the terms of the proposed Agreement and related agreements. AWS and Iberville Bank’s legal counsel then reviewed the most recent draft of the proposed Agreement and related transaction documents.On October 12, 2016, the Agreement was formally signed by FBMS and AWS. A joint press release was issued, announcing the execution of the Agreement and the terms of the Acquisition on October 14, 2016. The press release also included the announcement of an agreement by FBMS to acquire Gulf Coast Community Bank in an approximately $2.3 million all stock transaction and the private placement of approximately $63.3 million in FBMS capital stock.Terms of the Iberville Bank Acquisition AgreementOn October 12, 2016, the Company and the Bank entered into a Stock Purchase Agreement (the “Iberville Bank Acquisition Agreement”) with A. Wilbert’s Sons Lumber and Shingle Company (the “Iberville Bank Parent”), the parent companyreceive 1,000 shares of Iberville Bank (“Iberville Bank”), under which the Company has agreed to acquire 100%restricted stock. The Chairman of the common stockBoard, who is a director of Iberville Bank for a purchase price of $31.1 million in cash (the “Iberville Bank Acquisition”).The Company will pay the Iberville Bank Parent $31.1 million in cash (“purchase price”) for 100% of the stock of Iberville Bank; provided however, that $2.5 million of the purchase price will be subject to a mutually acceptable escrow agreement pursuant to which the parties have agreed to escrow such amount to cover potential losses on loans that were affected by recent flooding in certain of the Iberville Bank markets.The Iberville Bank Acquisition Agreement contains customary representations and warranties by both the Company and the Iberville Bank, Parent and each have agreed to customary covenants, including, among others, covenants relating to (1) the conductreceives 2,500 shares of Iberville Bank’s businesses during the interim period between the executionrestricted stock. Directors of the Agreement and the completionBank who are not directors of the IbervilleCompany receive 250 shares of restricted stock, and directors of the Company who are not directors of the Bank Acquisition;receive 500 shares of restricted stock. Grants are made as of March 1st each year and (2) cooperationwill vest on the fifth anniversary of the date of grant, with respect to restricted stock awards granted prior to 2021, and on the filingfirst anniversary of regulatory approval applications regarding the Iberville Bank Acquisition.date of grant, with respect to restricted stock awards granted in 2021 and forward.Completion ofThe First Bancshares, Inc.Iberville Bank Acquisition is subject to certain customary conditions, including, among others (1) approval by two-thirds (2/3) of the Iberville Bank Parent shareholders, (2) the accuracy of the representations and warranties of the other party, and (3) performance in all material respects by the other party of its obligations under the Agreement. The Company’s shareholders will not vote on the transaction.Year Ended December 31, 2020Agreement contains certain termination rightstable below summarizes the total compensation paid to or earned by our non-employee directors during 2020. M. Ray (Hoppy) Cole, Jr. did not receive director stock awards nor did he receive director fees for his service on the Board of Directors for the Company and Iberville Bank Parent, asor the case may be, applicable upon (1) March 31, 2017, if the Iberville Bank Acquisition has not been completed by that date, (2) final, non-appealable denial of required regulatory approvals or an injunction prohibiting the transactions contemplated by the Iberville Bank Acquisition Agreement, or (3) a breach by the other party that is not or cannot be cured within 45 days’ notice of such breach if such breach would result in a failure of the conditions to closing set forth in the Iberville Bank Acquisition Agreement.Bank. Fees Earned
or Paid in
Cash ($) (1) Stock
Awards
($)(2)(3) Total ($) Rodney D. Bennett, Ed.D $ 29,100 $ 29,840 $ 58,940 David W. Bomboy, M.D. 32,450 29,840 62,290 E. Ricky Gibson 83,150 74,600 157,750 Charles R. Lightsey 58,050 29,840 87,890 Fred A. McMurry 37,950 29,840 67,790 Thomas E. Mitchell 33,000 29,840 62,840 Renee Moore 26,867 7,460 34,327 Ted E. Parker 33,700 29,840 63,540 J. Douglas Seidenburg 46,800 29,840 76,640 Andrew D. Stetelman 37,550 29,840 67,390 11(1) Includes meeting fees and annual retainer paid to directors of the Bank. (2) Value based on value at grant date of $29.84 per share for 1,000 shares to each director serving on the Boards of both the Bank and the Company, 250 shares to the director serving on the board of the Bank, and 2,500 shares to the Chairman of the Board, and valued in accordance with FASB Topic 718. Under certain circumstances, the Iberville Bank Acquisition Agreement may be terminated in the event that the Iberville Bank Parent Board of Directors approves an alternative transaction. In the event of a termination due to approval of an alternative transaction, the Iberville Bank Parent will be required to pay the Company a termination fee of $1,088,500.Regulatory Approvals Required for the Iberville Bank AcquisitionThe Iberville Bank Acquisition is subject to the prior approval of, or waiver therefrom, of the Office of the Comptroller of the Currency (“OCC”) and the Board of Governors of the Federal Reserve System (“Federal Reserve”). On October 19, 2016, the Company filed an application with the OCC seeking its approval of the Iberville Bank Acquisition. The application with the OCC is still pending and the Company expects to receive a decision from the OCC during the fourth quarter of 2016. On November 10, 2016 the Company received a letter from the Federal Reserve acknowledging that the Iberville Bank Acquisition was exempt from the prior approval of the Federal Reserve.Reasons for the Iberville Bank AcquisitionThe Iberville Bank Acquisition will allow the Company to acquire an established franchise with deep ties to the local community and increase the Company’s presence in one of the Gulf South’s premier markets, ranking it in the top ten in deposit market share in the Baton Rouge, LA MSA. The Company believes the acquisition will allow it to leverage existing local infrastructure in the Baton Rouge, LA MSA while acquiring a low loan-to-deposit ratio and a low-cost deposit base with significant non-interest bearing deposits, which provides significant potential for loan growth. The Company further believes Iberville Bank has excellent credit quality due to their strong existing underwriting standards.Board of Directors’ Recommendation and Required VoteApproval of Proposal 1 requires the affirmative vote of a majority of the shares of the Company’s common stock represented and voting at a duly convened Special Meeting. The directors and executive officers of the Company, owning or controlling the vote with respect to an aggregate of 638,373 voting shares, or approximately 11.76% of the Company’s outstanding common stock as of the Record Date, are expected to vote in favor of Proposal 1. The directors who purchased and are also holders of Series E Preferred Stock recognize that they have a personal interest in the approval of Proposal 1 (see “Interests of Certain Persons in the Share Conversion and Other Matters”).THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” PROPOSAL 1.PROPOSAL 2APPROVAL OF AN ADJOURNMENT OR POSTPONEMENT OF THE MEETINGIf we fail to receive a sufficient number of votes to constitute a quorum to hold the Special Meeting or to approve Proposal 1 at the Special Meeting, we may propose to adjourn or postpone the Special Meeting, whether or not a quorum is present, for a period of not more than 45 days, to (i) constitute a quorum for purposes of the Special Meeting or (ii) solicit additional Proxies from shareholders who have not submitted proxies in favor of the approval of Proposal 1, as necessary. The only business that may be transacted at any reconvened meeting is business that could have been transacted at the meeting that was adjourned, for example, Proposal 1, unless further notice of the adjourned meeting has been given in compliance with the requirements for a special meeting that specifies the additional purpose or purposes for which the meeting is called. During the reconvened meeting, votes that have previously been cast either in person or by proxy at the adjourned or postponed meeting will continue to be counted in the manner voted at the adjourned or postponed meeting.We currently do not intend to propose adjourning or postponing the Special Meeting if there are sufficient votes represented at the Special Meeting to approve Proposal 1.Board of Directors’ Recommendation and Required VoteApproval of Proposal 2 requires the affirmative vote of a majority of the shares of the Company’s common stock represented and voting at the Special Meeting, assuming that a quorum is present.(3) Refer to the Beneficial Ownership Table, “Security Ownership of Directors and Executive Officers” for information on each director’s unvested shares of restricted stock. 12THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” PROPOSAL 2.INTERESTSSECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERSCertain of the Company’s directors and executive officers participated in the Private Placement and therefore have an interest in the outcome of the Proposals. The following directors purchased shares of Series E Preferred Stock in the private placement in the following amounts: David W. Bomboy, M.D., 14,085 shares; M. Ray (Hoppy) Cole, Jr., 2,000 Shares; E. Ricky Gibson, 3,775 shares; Charles R. Lightsey, 28,169 shares; Fred A. McMurry, 5,634 shares (1), Ted E. Parker, 9,859 shares; J. Douglas Seidenburg, 11,584 shares and 2,500(2) shares, and Andrew D. Stetelman, 5,634 shares.(1)Shares held of record by Oak Grove Land Company, Inc. Fred A. McMurry is 33% owner of the company. Fred A. McMurry disclaims beneficial ownership of the shares held by Oak Grove Land Company, Inc. except to the extent of his pecuniary interest therein.(2)Shares held of record by M.D. Outdoor, LLC. J. Douglas Seidenburg is a 50% owner of the company. J. Douglas Seidenburg disclaims beneficial ownership of the shares held by M.D. Outdoor, LLC, except to the extent of his pecuniary interest therein.Assuming shareholder approval of Proposal 1 and the resulting issuance of common stock as described above, none of these individuals will have beneficial ownership in excess of five percent (5%) of the outstanding shares of the common stock.SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENTfor director, and executive officers,NEOs, as of October 21, 2016.March 26, 2021.Name of Amount and Nature Unvested Percent of Amount and Nature Percent of Beneficial Owner of Beneficial Ownership(1) Restricted Stock(2) Class(3) of Beneficial Ownership(1) Class(2) Rodney D. Bennett, Ed.D 6,250 (3) * David W. Bomboy, M.D. 106,995 4,000 2.04 % 130,080 (4) * M. Ray (Hoppy) Cole, Jr. 33,539 29,597 1.16 % 83,941 (5) * E. Ricky Gibson 84,744 8,500 1.72 % 103,918 (6) * Charles R. Lightsey 47,987 4,000 0.96 % 93,356 (7) * Fred A. McMurry 79,885 4,000 1.55 % 229,232 (8)(15) 1.09 % Gregory H. Mitchell 5,001 4,000 0.17 % Thomas E. Mitchell 12,250 (9) * Renee Moore 2,059 (10) * Ted E. Parker 66,813 4,000 1.30 % 86,672 (11) * J. Douglas Seidenburg 78,656 4,000 1.52 % 99,780 (12) * Andrew D. Stetelman 38,283 4,000 0.78 % 54,932 (13) * Dee Dee Lowery 19,282 11,091 0.56 % Donna T. (Dee Dee) Lowery 40,575 (14)(15) * Executive Officers, Directors, and Nominees as a group 561,185 77,188 11.76 % Directors and Executive Officers as a group 943,045 4.49 % 13(1) Includes shares for which the named person: - has sole voting and investment power, - has shared voting and investment power with a spouse, or - holds in an IRA or other retirement plan program, unless otherwise indicated in these footnotes. (2) Restricted Stock granted under The First Bancshares, Inc. 2007 Stock Incentive PlanCalculated based on 21,018,319 shares outstanding.(3) Calculated based on 5,428,017Includes 3,000 shares of unvested restricted stock granted under the 2007 Plan.(4) Includes 3,000 shares of unvested restricted stock granted under the 2007 Plan. (5) Includes 48,387 shares of unvested restricted stock granted under the 2007 Plan. (6) Includes 7,500 shares of unvested restricted stock granted under the 2007 Plan. (7) Includes 3,000 shares of unvested restricted stock granted under the 2007 Plan. (8) Includes 140,347 shares registered to Oak Grove Land Company, Inc. Fred A. McMurry is a 50% owner of Oak Grove Land Company, Inc. Mr. McMurry disclaims beneficial ownership of the shares held by Oak Grove Land Company, Inc. except to the extent of his ownership interest therein. Also includes 3,000 shares of unvested restricted stock granted under the 2007 Plan. (9) Includes 3,000 shares of unvested restricted stock granted under the 2007 Plan. (10) Includes 1,250 shares of unvested restricted stock granted under the 2007 Plan. (11) Includes 3,000 shares of unvested restricted stock granted under the 2007 Plan. (12) Includes 2,500 shares registered to M.D. Outdoor LLC. J. Douglas Seidenburg is a Member and 50% owner of M.D. Outdoor LLC. Mr. Seidenburg disclaims beneficial ownership of the shares held by M.D. Outdoor, LLC except to the extent of his ownership interest therein. Also includes 3,000 shares of unvested restricted stock granted under the 2007 Plan. (13) Includes 3,000 shares of unvested restricted stock granted under the 2007 Plan. (14) Includes 18,742 shares of unvested restricted stock granted under the 2007 Plan. (15) Includes shares pledged as of March 26, 2021 as follows: Fred A. McMurry – 74,287 shares as collateral for a bank loan; Oak Grove Land Company, of which Mr. McMurry owns 50%, 82,318 shares as collateral for a bank loan; and Donna T. (Dee Dee) Lowery – 7,898 shares as collateral for a margin account held at a brokerage firm. The aggregate number of shares pledged by directors and executive officers as of March 26, 2021 represents less than 1% of the Company’s issued and outstanding shares of common stock. Financial StatementsSECURITY OWNERSHIP OFOur Audited Consolidated Financial Statements (including Notes thereto) at December 31, 2015The following table sets forth certain information regarding the beneficial ownership of common stock in the Company owned by certain beneficial owners with more than five percent ownership in the Company’s stock as of March 26, 2021. Amount of Name and Address
of Beneficial Owner Common Stock
Beneficially Owned Percent of
Class (1) 1,572,339 (2) 7.48 % T. Rowe Price Associates, Inc.
100 E. Pratt Street
Baltimore, MD 21202 2,736,062 (3) 13.02 % The Vanguard Group
100 Vanguard Blvd.
Malvern, PA 19355 1,075,372 (4) 5.12 % (1) Calculated based on 21,018,319 shares outstanding. (2) Based on Schedule 13G filed January 29, 2021 by BlackRock, Inc. based on sole voting power over 1,534,968 shares and sole dispositive power over 1,572,339 shares. (3) Based on Schedule 13G filed February 16, 2021 by T. Rowe Price Associates, Inc. based on sole voting power over 640,087 shares and sole dispositive power over 2,736,062 shares. (4) Based on Schedule 13G filed February 8, 2021 by The Vanguard Group based on sole voting power over 0 shares, shared voting power over 19,084 shares, sole dispositive power over 1,033,897 shares and shared dispositive power over 41,475 shares. 2014maintaining our integrity in the marketplace. We understand that corporate governance practices change and for eachevolve over time, and we seek to adopt and use practices that we believe will be of value to our shareholders and will positively aid in the governance of the yearsCompany. We will continue to monitor emerging developments in corporate governance and enhance our policies and procedures when required or when our board of directors determines that it would benefit us and our shareholders.three-year periodcontext of our needs and those of our Board of Directors. Our Board of Directors’ priority in selecting board members is the identification of persons who will further the interests of our shareholders through his or her record of professional and personal experiences and expertise relevant to our growth strategy.● The First is one of the largest Certified Community Development Institutions (CDFI) in the country. ● The First believes that supporting its markets by investing in distressed communities, providing financial education and generating access to affordable housing are fundamental building blocks to improve the standard of living across all of its markets. ● The First is involved in the community through local engagement and engagement through product offerings. ● The First provides opportunities for employees to attain personal goals and professional achievement through excellent benefits, employee development, diversity and inclusion. ● The First is dedicated to doing its part to reduce its environmental impact through use of E-Statements, Digital Banking, Commercial Remote Deposit Capture, and energy efficiency at each of its branch locations. ● The First is committed to maintaining corporate governance best practices. ○ Director independence and separation of Chief Executive Officer and Chairman of the Board roles ○ Establishment of procedures to enable any employee with concerns about the conduct, policies, accounting, internal accounting controls or audit to communicate directly to the Board of Directors through written notification to the Chairman of the Audit Committee ○ Clawback Policy ○ Stock Ownership guidelines for the Chief Executive Officer and the Chief Financial Officer ○ Hedging Policy ○ Diversity and refreshing the Board of Directors ○ In 2020, a female director was named to the Board. She currently serves as the Vice-Chairman of both the Audit and Risk Committees ○ Our ongoing director training program provides continuing education on various issues of importance to the Company ○ Our board has established an ongoing board succession planning process to ensure our board continues to have the depth and breadth of experience and perspective needed for a strong financial institution ○ The Board has created a Risk Department to aid in the identification, evaluation, measurement, monitoring and reporting of risks associated with activities conducted by The First and has a cybersecurity strategy ● The First is dedicated to providing competitive compensation and benefit programs. ● The First strives to maintain a safe and healthy working environment ○ We provide our employees access to Grief Counseling and Confidential Assistance Program ● COVID-19 Response Highlights ○ Informed employees of CDC and internal recommendations, procedures and protocols concerning: social distancing, business travel, sanitation and disinfection; weekly system-wide calls to re-enforce procedures and keep team members up to date on current developments. ○ Distributed inventory of masks, sanitizers and disinfectants system-wide across our branch network ○ Originally restricted access to lobbies to “by appointment only” and maintained full drive thru service – lobbies resumed normal hours and access in early October ○ Moved as many employees to work by remote access ○ Rotated access as much as practical for employees whose function could not be performed remotely ○ Provided lunch daily to on site personnel to limit their off premise exposure during the day; rotated purchasing our meals from our restaurant clients in each market to help support them. during this emergency ○ Assisted customers by granting modifications ○ Improved and upgraded electronic delivery and execution of documents system wide to limit in person exposure but maintain business volume ○ Participated actively in the Paycheck Protection Program to assist our commercial customers 2015,2020, the Board of Directors of the Company held 10 meetings which included 6 special meetings. All of the directors of the Company’s board attended at least 75% of the Board meetings and meetings of each committee on which they served. The Board of Directors of the Bank held 12 regularly scheduled meetings during the year ended December 31, 2020. All of the directors of the Bank’s board attended at least 75% of the Board meetings and meetings of each committee on which they served. In addition, the independent directors of the Company’s Board meet in regular executive sessions without management present.· reviewed and discussed the audited financial statements for the year ended December 31, 2020 with management of the Company; · discussed with the independent auditor the matters required to be discussed under the appropriate Auditing Standards of the Public Company Accounting Oversight Board (PCAOB) and by the Securities Exchange Commission; · received the written disclosures and the letter from the independent auditor required by the applicable requirements of the PCAOB from the auditors regarding the independent auditor’s communications with the Audit Committee concerning independence and has discussed with the independent auditor the auditor’s independence; and · considered whether the provision of non-audit services to the Company by the independent auditor is compatible with maintaining their independence, and has determined that such independence has been maintained. ReportsReport on Form 10-K for the fiscal yearsyear ended December 31, 20152020 for filing with the Securities and 2014, are attachedExchange Commission.proxy statement as Appendix A and thereby incorporated by reference herein. Our Unaudited Consolidated Financial Statements (including Notes thereto) at September 30, 2016 and December 31, 2015 and for the three-month and nine-month periods ended September 30, 2016 and September 30, 2015, as included in our Quarterly Report on Form 10-QCompany’s financial statements for the fiscal quarter ended September 30, 2016, are attached to this proxy statement as Appendix B and thereby incorporated by reference herein. See “Incorporation by Reference of Information About the Company, Financial Statements and Related Information” below.year ending December 31, 2021.Management’s DiscussionAlthough not required to do so, the Board of Directors has chosen to submit its appointment of BKD, LLP for ratification by the Company’s shareholders as a matter of good corporate governance. The Board recommends that our shareholders ratify such appointment. Even if the appointment of BKD, LLP is ratified by the shareholders, the Audit Committee, in its discretion, could decide to terminate the engagement of BKD, LLP and Analysisto engage another audit firm if the Audit Committee determines such action is necessary or desirable. If our shareholders fail to ratify the appointment of Financial Condition and Results of OperationsBKD, LLP the Audit Committee will consider this information when determining whether to retain BKD, LLP for future services.Management’s Discussion and Analysis of Financial Condition at December 31, 2015 and December 31, 2014 and Results of Operations for each of the years in the three-year period ended December 31, 2015, as included in our Annual Reports on Form 10-K for the fiscal years ended December 31, 2015 and 2014, is attached to this proxy statement as Appendix A and thereby incorporated by reference herein. Management’s Discussion and Analysis of Financial Condition at September 30, 2016 and December 31, 2015 and Results of Operations for the three-month and nine-month periods ended September 30, 2016 and September 30, 2015, as included in our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2016, is attached to this proxy statement as Appendix B and thereby incorporated by reference herein. See “Incorporation by Reference of Information About the Company, Financial Statements and Related Information” below.Changes in and Disagreements with Accountants on Accounting and Financial DisclosureThere have been no changes in or disagreements with our accountants required to be disclosed pursuant to Item 304 of Regulation S-K.Quantitative and Qualitative Disclosures About Market RiskInformation regarding our quantitative and qualitative disclosures about market risk is contained in the section entitled “Liquidity and Market Risk Management” in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2016, which is attached hereto as Appendix C. See “Incorporation by Reference of Information About the Company, Financial Statements and Related Information” below.T. E. Lott & CompanyT. E. Lott & Company, the Company’s accounting firm are expected toCrowe, LLP will be presentvirtually in attendance at the meeting to respond to appropriate questions, and those representatives will also Meeting, have anthe opportunity to make a statement if they desire to do so.so, and be available to respond to appropriate questions from shareholders.14INCORPORATION BY REFERENCE OF INFORMATION ABOUT THE COMPANY, FINANCIAL STATEMENTS AND RELATED INFORMATIONCrowe, LLP (“Crowe”) served as the Company’s independent registered auditing firm during the fiscal year ending December 31, 2020.SEC allows usfollowing is a summary of fees related to “incorporate by reference” into this document important business and financial information aboutservices performed for the Company by Crowe for the years ended December 31, 2020 and 2019. 2020 2019 Audit Fees – Audit of the Company’s annual consolidated financial statements, comfort letters, and services in connection with consents and registration statements. $ 662,300 $ 601,000 Audit Related Fees – Services in connection with application of accounting pronouncements and acquisitions, internal controls and SEC matters. 89,600 230,500 Tax Fees – Preparation of federal and state income tax and other returns, tax planning and consulting. 115,760 113,075 Total $ 867,660 $ 944,575 other documents we fileJanuary 1, 2021 through the Notice Date, the Company consulted with BKD on the following matters:i. Valuation services in connection with the Company’s completed acquisitions from 2019 and 2020; and ii. Goodwill impairment testing in 2020. being provided with this proxy statement. This means that we can disclose important informationsubject to you by referring you to those documents. The information incorporated by reference is considered to be a part of this document.regulatory requirements and restrictions. These requirements and restrictions include Sections 23A and 23B of the following documents are incorporated hereinFederal Reserve Act and the Federal Reserve’s Regulation W, which governs certain transactions by reference:us with our affiliates, and the Federal Reserve’s Regulation O, which governs certain loans by us to executive officers, directors and principal shareholders.·Our Audited Consolidated Financial Statements (including Notes thereto), and independent auditor’s reports thereto, at December 31, 2015 and 2014 and for each of the years in the three-year period ended December 31, 2015 on (i) on pages 30 through 74 of the Company's Annual Report to Shareholders for the year ended December 31, 2015 and (ii) pages 30 through 76 of the Company's Annual Report to Shareholders for the year ended December 31, 2014, which are included asAppendix A to this proxy statement;·Management’s Discussion and Analysis of Financial Condition at December 31, 2015 and December 31, 2014 and Results of Operations for each of the years in the three-year period ended December 31, 2015 on (i) on pages 6 through 28 of the Company's Annual Report to Shareholders for the year ended December 31, 2015 and (ii) on pages 6 through 28 of the Company's Annual Report to Shareholders for the year ended December 31, 2014, which are included asAppendix Ato this proxy statement;·Our Unaudited Consolidated Financial Statements (including Notes thereto) at September 30, 2016 and December 31, 2015 and for the three-month and nine-month periods ended September 30, 2016 and September 30, 2015 on pages 2 through 28 (Item 1 of Part I) of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, which is included asAppendix B to this proxy statement;·Management’s Discussion and Analysis of Financial Condition at September 30, 2016 and December 31, 2015 and Results of Operations for the three-month and nine-month periods ended September 30, 2016 and September 30, 2015 on pages 29 through 48 (Item 2 of Part I) of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, which is included asAppendix B to this proxy statement; and·Information regarding our quantitative and qualitative disclosures about market risk is contained in the section entitled “Liquidity and Market Risk Management” in Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 49 of our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2016, which is included asAppendix B to this proxy statement.bank,Bank, by means of telephone, telegraphemail or other electronic means, advertisements or personal contact, but without additional compensation, therefore. The Company will reimburse brokers and other persons holding shares as nominees for their reasonable expenses in sending proxy soliciting material to the beneficial owners.The accompanying Proxy is being solicited by the Board of Directors of the Company.PROPOSALS OF SHAREHOLDERSSHAREHOLDER PROPOSALS FOR THE 2017 ANNUAL MEETINGSEC Rule 14a-8. If you areAny proposal of a shareholder who would like us to include your proposal in our notice ofbe presented for action at the 2017 annual meeting and related proxy materials, youof shareholders to be held in the year 2022 must follow SEC Rule 14a-8. In submitting your proposal, our Corporate Secretary must receive your proposal, in writing,be received at ourthe Company's principal executive offices,office no later than December 16, 2016. If you do not follow8, 2021, if it is to be included in the Company’s proxy statement pursuant to Rule 14a-8 weof the Securities and Exchange Act. After this date, any proposal to be presented at the annual meeting but not included in the Company’s proxy statement will be considered untimely if not consider yourdelivered on a date on or before the later of: (1) 60 days prior to the 2022 annual meeting or (2) 10 days after a notice of the meeting is provided to the shareholders. To ensure prompt receipt by the Company, the proposal for inclusionshould be sent certified mail, return receipt requested. Proposals must comply with the Company's Bylaws relating to shareholder proposals and certain Securities and Exchange Commission Regulations in next year'sorder to be included in the Company's proxy statement.materials.Director Nomination Procedures. Under our Bylaws, aAny shareholder who wishes to nominate an individualnominations for electiondirectors for consideration by the Corporate Governance Committee in making its recommendations to the Board of Directors directly at anfor the 2022 annual meeting orof shareholders should be made in writing addressed to propose any businessthe Corporate Governance Committee, attention Corporate Secretary, at 6480 U.S. Highway 98 West (39402), Post Office Box 15549, Hattiesburg, Mississippi, 39404-5549, by December 17, 2020. It is the Corporate Governance Committee's policy to consider director candidates recommended by shareholders who appear to be consideredqualified to serve on the Company's Board of Directors. The Corporate Governance Committee may choose not to consider an unsolicited recommendation if no vacancy exists on the Board of Directors and the Corporate Governance Committee does not perceive a need to increase the size of the Board of Directors. The Corporate Governance Committee will consider only those director candidates recommended in accordance with the Corporate Governance Committee Shareholder Policies and Procedures, a copy of which can be found at an annualthe governance documents section of the Investor Relations page of the Company’s internet website at www.thefirstbank.com under. Director nominations, other than those made by or at the direction of the Board of Directors, may be made by any shareholder by delivering written notice to the Secretary of the corporation not less than 50 nor more than 90 days prior to the 2022 meeting must deliver advance(unless the Company provides less than 60 days’ prior notice of the 2022 meeting date, in which case such nomination or business to the Company. Thewritten notice by a shareholder must be a shareholder assubmitted within 10 days following the earlier of (i) the date that notice of the date the notice is delivered and at the time of the annual meeting was first mailed to the shareholders or (ii) the day on which public disclosure of such date was made), and must be entitled to vote at the meeting. The notice must be in writing and contain the information specified in our Bylaws for a director nomination, and director nominees must satisfy the requirements specified in our Bylaws. If you would like to receive a printed copy of our Bylaws at no cost you may request these by contacting our Corporate Secretary in writing at The First Bancshares, Inc., 6480 US Highway 98 West, Hattiesburg, Mississippi 39402 or by phone at 601-268-8998.15Based on this year's annual meeting date, to be timely, the written notice must be delivered not earlier than February 25, 2017 (the 90th day prior to the first anniversary of this year's annual meeting) and not later than April 6, 2017 (the 50th day prior to the first anniversary of this year's annual meeting) to the Corporate Secretary at our principal executive offices by mail.WHERE YOU CAN FIND MORE INFORMATIONWe are subject to the informational requirements of the Exchange Act, and we are required to file reports and proxy statements and other informationcomply with the SEC. You may read and copy these reports, proxy statements and information at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference RoomCompany’s Bylaws regarding director nominations by calling the SEC at 1-800-SEC-0330. The SEC maintains a web site that contains reports, proxy and information statements and other information regarding registrants, including Center Financial Corporation, that file electronically with the SEC. You may access the SEC’s web site at http://www.sec.gov. Copies of certain information filed by us with the SEC are also available on our website at www.thefirstbank.com.16APPENDIX AANNUAL REPORTS ON FORM 10-K FOR THE FISCAL YEARS ENDED DECEMBER 31, 2015 AND 2014.shareholders.17THE FIRST BANCSHARES, INC.2015 ANNUAL REPORTSELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS(Dollars In Thousands, Except Per Share Data) December 31, 2015 2014 2013 2012 2011 Earnings: Net interest income $ 36,994 $ 33,398 $ 28,401 $ 22,194 $ 19,079 Provision for loan losses 410 1,418 1,076 1,228 1,468 Noninterest income 7,588 7,803 7,083 6,324 4,598 Noninterest expense 32,161 30,734 28,165 22,164 18,870 Net income 8,799 6,614 4,639 4,049 2,871 Net income applicable to common stockholders 8,456 6,251 4,215 3,624 2,529 Per common share data: Basic net income per share $ 1.57 $ 1.20 $ .98 $ 1.17 $ .83 Diluted net income per share 1.55 1.19 .96 1.16 .82 Per share data: Basic net income per share $ 1.64 $ 1.27 $ 1.07 $ 1.31 $ .94 Diluted net income per share 1.62 1.25 1.06 1.29 .93 Selected Year End Balances: Total assets $ 1,145,131 $ 1,093,768 $ 940,890 $ 721,385 $ 681,413 Securities 254,959 270,174 258,023 226,301 221,176 Loans, net of allowance 769,742 700,540 577,574 408,970 383,418 Deposits 916,695 892,775 779,971 596,627 573,394 Stockholders’ equity 103,436 96,216 85,108 65,885 60,425 18MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONSPurposeThe purpose of management's discussion and analysis is to make the reader aware of the significant components, events, and changes in the consolidated financial condition and results of operations of the Company and The First during the year ended December 31, 2015, when compared to the years 2014 and 2013. The Company's consolidated financial statements and related notes should also be considered.Critical Accounting PoliciesIn the preparation of the Company's consolidated financial statements, certain significant amounts are based upon judgment and estimates. The most critical of these is the accounting policy related to the allowance for loan losses. The allowance is based in large measure upon management's evaluation of borrowers' abilities to make loan payments, local and national economic conditions, and other subjective factors. If any of these factors were to deteriorate, management would update its estimates and judgments which may require additional loss provisions.Companies are required to perform periodic reviews of individual securities in their investment portfolios to determine whether decline in the value of a security is other than temporary. A review of other-than-temporary impairment requires companies to make certain judgments regarding the materiality of the decline, its effect on the financial statements and the probability, extent and timing of a valuation recovery and the company’s intent and ability to hold the security. Pursuant to these requirements, Management assesses valuation declines to determine the extent to which such changes are attributable to fundamental factors specific to the issuer, such as financial condition, business prospects or other factors or market-related factors, such as interest rates. Declines in the fair value of securities below their cost that are deemed to be other-than-temporary are recorded in earnings as realized losses.Goodwill is assessed for impairment both annually and when events or circumstances occur that make it more likely than not that impairment has occurred. As part of its testing, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines the fair value of a reporting unit is less than its carrying amount using these qualitative factors, the Company then compares the fair value of goodwill with its carrying amount, and then measures impaired loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. No impairment was indicated when the annual test was performed in 2015.OverviewThe First Bancshares, Inc. (the Company) was incorporated on June 23, 1995, and serves as a bank holding company for The First, A National Banking Association (“The First”), located in Hattiesburg, Mississippi. The First began operations on August 5, 1996, from its main office in the Oak Grove community, which is on the western side of Hattiesburg. The First has 30 locations in South Mississippi, South Alabama and Louisiana. See Note C of Notes to Consolidated Financial Statements for information regarding branch acquisitions. The Company and The First engage in a general commercial and retail banking business characterized by personalized service and local decision-making, emphasizing the banking needs of small to medium-sized businesses, professional concerns, and individuals.19The Company’s primary source of revenue is interest income and fees, which it earns by lending and investing the funds which are held on deposit. Because loans generally earn higher rates of interest than investments, the Company seeks to employ as much of its deposit funds as possible in the form of loans to individuals, businesses, and other organizations. To ensure sufficient liquidity, the Company also maintains a portion of its deposits in cash, government securities, deposits with other financial institutions, and overnight loans of excess reserves (known as “Federal Funds Sold”) to correspondent banks. The revenue which the Company earns (prior to deducting its overhead expenses) is essentially a function of the amount of the Company’s loans and deposits, as well as the profit margin (“interest spread”) and fee income which can be generated on these amounts.The Company increased from approximately $1.1 billion in total assets, and $892.8 million in deposits at December 31, 2014 to approximately $1.1 billion in total assets, and $916.7 million in deposits at December 31, 2015. Loans net of allowance for loan losses increased from $701.0 million at December 31, 2014 to approximately $769.7 million at December 31, 2015. The Company increased from $96.2 million in stockholders’ equity at December 31, 2014 to approximately $103.4 million at December 31, 2015. The First reported net income of $9,620,000 and $7,385,000 for the years ended December 31, 2015 and 2014, respectively. For the years ended December 31, 2015 and 2014, the Company reported consolidated net income applicable to common stockholders of $8,456,000 and $6,251,000, respectively. The following discussion should be read in conjunction with the “Selected Consolidated Financial Data” and the Company's Consolidated Financial Statements and the Notes thereto and the other financial data included elsewhere.SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS(Dollars In Thousands, Except Per Share Data) December 31, 2015 2014 2013 2012 2011 Earnings: Net interest income $ 36,994 $ 33,398 $ 28,401 $ 22,194 $ 19,079 Provision for loan losses 410 1,418 1,076 1,228 1,468 Noninterest income 7,588 7,803 7,083 6,324 4,598 Noninterest expense 32,161 30,734 28,165 22,164 18,870 Net income 8,799 6,614 4,639 4,049 2,871 Net income applicable to common stockholders 8,456 6,251 4,215 3,624 2,529 Per common share data: Basic net income per share $ 1.57 $ 1.20 $ .98 $ 1.17 $ .83 Diluted net income per share 1.55 1.19 .96 1.16 .82 Per share data: Basic net income per share $ 1.64 $ 1.27 $ 1.07 $ 1.31 $ .94 Diluted net income per share 1.62 1.25 1.06 1.29 .93 Selected Year End Balances: Total assets $ 1,145,131 $ 1,093,768 $ 940,890 $ 721,385 $ 681,413 Securities 254,959 270,174 258,023 226,301 221,176 Loans, net of allowance 769,742 700,540 577,574 408,970 383,418 Deposits 916,695 892,775 779,971 596,627 573,394 Stockholders’ equity 103,436 96,216 85,108 65,885 60,425 20Results of OperationsThe following is a summary of the results of operations by The First for the years ended December 31, 2015 and 2014. 2015 2014 (In thousands) Interest income $ 40,196 $ 36,365 Interest expense 3,022 2,791 Net interest income 37,174 33,574 Provision for loan losses 410 1,418 Net interest income after provision for loan losses 36,764 32,156 Other income 7,589 7,439 Other expense 31,032 29,477 Income tax expense 3,701 2,733 Net income $ 9,620 $ 7,385 21The following reconciles the above table to the amounts reflected in the consolidated financial statements of the Company at December 31, 2015 and 2014: 2015 2014 (In thousands) Net interest income: Net interest income of The First $ 37,174 $ 33,574 Intercompany eliminations (180 ) (176 ) $ 36,994 $ 33,398 Net income applicable to common stockholders: Net income of The First $ 9,620 $ 7,385 Net loss of the Company, excluding intercompany accounts (1,164 ) (1,134 ) $ 8,456 $ 6,251 Consolidated Net IncomeThe Company reported consolidated net income applicable to common stockholders of $8,456,242 for the year ended December 31, 2015, compared to a consolidated net income of $6,250,743 for the year ended December 31, 2014. The increase in income was attributable to an increase in net interest income of $3.6 million or 10.8%, which was offset by an increase in other expenses of $1.4 million or 4.6%.Consolidated Net Interest IncomeThe largest component of net income for the Company is net interest income, which is the difference between the income earned on assets and interest paid on deposits and borrowings used to support such assets. Net interest income is determined by the rates earned on the Company’s interest-earning assets and the rates paid on its interest-bearing liabilities, the relative amounts of interest-earning assets and interest-bearing liabilities, and the degree of mismatch and the maturity and repricing characteristics of its interest-earning assets and interest-bearing liabilities.Consolidated net interest income was approximately $36,994,000 for the year ended December 31, 2015, as compared to $33,398,000 for the year ended December 31, 2014. This increase was the direct result of increased loan volumes during 2015 as compared to 2014. Average interest-bearing liabilities for the year 2015 were $822,708,000 compared to $746,025,000 for the year 2014. At December 31, 2015, the net interest spread, the difference between the yield on earning assets and the rates paid on interest-bearing liabilities, was 3.55% compared to 3.50% at December 31, 2014. The net interest margin (which is net interest income divided by average earning assets) was 3.63% for the year 2015 compared to 3.58% for the year 2014. Rates paid on average interest-bearing liabilities decreased to .39% for the year 2015 compared to .40% for the year 2014. Interest earned on assets and interest accrued on liabilities is significantly influenced by market factors, specifically interest rates as set by Federal agencies. Average loans comprised 71.7% of average earning assets for the year 2015 compared to 67.8% for the year 2014.22Average Balances, Income and Expenses, and Rates. The following tables depict, for the periods indicated, certain information related to the average balance sheet and average yields on assets and average costs of liabilities. Such yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been derived from daily averages.Average Balances, Income and Expenses, and Rates Years Ended December 31, 2015 2014 2013 Average
Balance Income/
Expenses Yield/
Rate Average
Balance Income/
Expenses Yield/
Rate Average
Balance Income/
Expenses Yield/
Rate (Dollars in thousands) Assets Earning Assets Loans (1)(2) $ 730,326 $ 34,242 4.69 % $ 632,049 $ 30,276 4.79 % $ 583,200 $ 25,736 4.41 % Securities 256,462 5,803 2.26 % 271,247 5,957 2.20 % 248,237 5,419 2.18 % Federal funds sold (3) 24,582 64 .26 % 24,845 53 .21 % 18,564 62 .33 % Other 7,585 93 1.23 % 3,827 85 2.22 % 7,404 101 1.36 % Total earning assets 1,018,955 40,202 3.94 % 931,968 36,371 3.90 % 857,405 31,318 3.65 % Cash and due from banks 31,378 30,657 25,447 Premises and equipment 33,797 33,252 30,816 Other assets 44,375 40,428 33,314 Allowance for loan losses (6,313 ) (5,983 ) (5,240 ) Total assets $ 1,122,192 $ 1,030,322 $ 941,742 Liabilities Interest-bearing liabilities $ 822,708 $ 3,208 .39 % $ 746,025 $ 2,973 .40 % $ 728,322 $ 2,917 .40 % Demand deposits (1) 196,284 184,037 115,909 Other liabilities 4,594 11,990 12,430 Stockholders’ equity 98,606 88,270 85,081 Total liabilities and stockholders’ equity $ 1,122,192 $ 1,030,322 $ 941,742 Net interest spread 3.55 % 3.50 % 3.25 % Net yield on interest-earning assets $ 36,994 3.63 % $ 33,398 3.58 % $ 28,401 3.31 % (1)All loans and deposits were madeYour vote matters – here’s how to borrowersvote! You may vote online or by phone instead of mailing this card. Online Go to www.investorvote.com/FBMS or scan the QR code — login details are located in the United States. Includes nonaccrual loans of $7,368, $6,056,shaded bar below. Phone Call toll free 1-800-652-VOTE (8683) within the USA, US territories and $3,181, respectively, during the periods presented. Loans include heldCanada Save paper, time and money! Sign up for sale loans.(2)Includes loan fees of $692, $717, and $525, respectively.(3)Includes EBA-MNBB and Federal Reserve – New Orleans.Analysis of Changes in Net Interest Income. The following table presents the consolidated dollar amount of changes in interest income and interest expense attributable to changes in volume and to changes in rate. The combined effect in both volume and rate which cannot be separately identified has been allocated proportionately to the change due to volume and due to rate.23Analysis of Changes in Consolidated Net Interest Income Year Ended December 31, Volume Rate Net Volume Rate Net (Dollars in thousands) Earning Assets Loans $ 3,826 $ 140 $ 3,966 $ 2,154 $ 2,386 $ 4,540 Securities (298 ) 144 (154 ) 502 36 538 Federal funds sold 19 (8 ) 11 21 (30 ) (9 ) Other short-term investments 3 5 8 (49 ) 33 (16 ) Total interest income 3,550 281 3,831 2,628 2,425 5,053 Interest-Bearing Liabilities Interest-bearing transaction accounts 204 66 270 88 (31 ) 57 Money market accounts and savings 6 (24 ) (18 ) 82 (57 ) 25 Time deposits (108 ) 50 (58 ) 59 62 121 Borrowed funds 77 (36 ) 41 1,113 (1,260 ) (147 ) Total interest expense 179 56 235 1,342 (1,286 ) 56 Net interest income $ 3,371 $ 225 $ 3,596 $ 1,286 $ 3,711 $ 4,997 Interest Sensitivity. The Company monitors and manages the pricing and maturity of its assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on its net interest income. A monitoring technique employed by the Company is the measurement of the Company's interest sensitivity "gap," which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time. The Company also performs asset/liability modeling to assess the impact varying interest rates and balance sheet mix assumptions will have on net interest income. Interest rate sensitivity can be managed by repricing assets or liabilities, selling securities available-for-sale, replacing an asset or liability at maturity, or adjusting the interest rate during the life of an asset or liability. Managing the amount of assets and liabilities repricing in the same time interval helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates. The Company evaluates interest sensitivity risk and then formulates guidelines regarding asset generation and repricing, funding sources and pricing, and off-balance sheet commitments in order to decrease interest rate sensitivity risk.24The following tables illustrate the Company's consolidated interest rate sensitivity and consolidated cumulative gap position at December 31, 2013, 2014, and 2015. December 31, 2013 Total (Dollars in thousands) Assets Earning Assets: Loans $ 89,314 $ 98,315 $ 187,629 $ 395,673 $ 583,302 Securities (2) 10,114 16,006 26,120 231,903 258,023 Funds sold and other 967 14,205 15,172 - 15,172 Total earning assets $ 100,395 $ 128,526 $ 228,921 $ 627,576 $ 856,497 Liabilities Interest-bearing liabilities: Interest-bearing deposits: NOW accounts (1) $ - $ 240,513 $ 240,513 $ - $ 240,513 Money market accounts 107,564 - 107,564 - 107,564 Savings deposits (1) - 55,113 55,113 - 55,113 Time deposits 46,875 87,475 134,350 68,637 202,987 Total interest-bearing deposits 154,439 383,101 537,540 68,637 606,177 Borrowed funds (3) 37,000 4,000 41,000 11,000 52,000 Total interest-bearing liabilities 191,439 387,101 578,540 79,637 658,177 Interest-sensitivity gap per period $ (91,044 ) $ (258,575 ) $ (349,619 ) $ 547,939 $ 198,320 Cumulative gap at December 31, 2013 $ (91,044 ) $ (349,619 ) $ (349,619 ) $ 198,320 $ 198,320 Ratio of cumulative gap to total earning assets at December 31, 2013 (10.6 )% (40.8 )% (40.8 )% 23.2 % December 31, 2014 Total (Dollars in thousands) Assets Earning Assets: Loans $ 99,183 $ 82,644 $ 181,827 $ 524,808 $ 706,635 Securities (2) 14,266 14,880 29,146 241,028 270,174 Funds sold and other 386 13,899 14,285 - 14,285 Total earning assets $ 113,835 $ 111,423 $ 225,258 $ 765,836 $ 991,094 Liabilities Interest-bearing liabilities: Interest-bearing deposits: NOW accounts (1) $ - $ 301,721 $ 301,721 $ - $ 301,721 Money market accounts 117,018 - 117,018 - 117,018 Savings deposits (1) - 66,615 66,615 - 66,615 Time deposits 53,529 78,581 132,110 73,949 206,059 Total interest-bearing deposits 170,547 446,917 617,464 73,949 691,413 Borrowed funds (3) 40,004 40,464 80,468 8,982 89,450 Total interest-bearing liabilities 210,551 487,381 697,932 82,931 780,863 Interest-sensitivity gap per period $ (96,716 ) $ (375,958 ) $ (472,674 ) $ 682,905 $ 210,231 Cumulative gap at December 31, 2014 $ (96,716 ) $ (472,674 ) $ (472,674 ) $ 210,231 $ 210,231 Ratio of cumulative gap to total earning assets at December 31, 2014 (9.8 )% (47.7 )% (47.7 )% 21.2 % 25 December 31, 2015 Total (Dollars in thousands) Assets Earning Assets: Loans $ 101,160 $ 76,996 $ 178,156 $ 598,333 $ 776,489 Securities (2) 14,831 18,100 32,931 222,028 254,959 Funds sold and other 321 17,303 17,624 - 17,624 Total earning assets $ 116,312 $ 112,399 $ 228,711 $ 820,361 $ 1,049,072 Liabilities Interest-bearing liabilities: Interest-bearing deposits: NOW accounts (1) $ - $ 373,686 $ 373,686 $ - $ 373,686 Money market accounts 105,434 - 105,434 - 105,434 Savings deposits (1) - 68,657 68,657 - 68,657 Time deposits 37,222 83,549 120,771 58,702 179,473 Total interest-bearing deposits 142,656 525,892 668,548 58,702 727,250 Borrowed funds (3) 81,130 21,191 102,321 8,000 110,321 Total interest-bearing liabilities 223,786 547,083 770,869 66,702 837,571 Interest-sensitivity gap per period $ (107,474 ) $ (434,684 ) $ (542,158 ) $ 753,659 $ 211,501 Cumulative gap at December 31, 2015 $ (107,474 ) $ (542,158 ) $ (542,158 ) $ 211,501 $ 211,501 Ratio of cumulative gap to total earning assets at December 31, 2015 (10.2 )% (51.7 )% (51.7 )% 20.2 % (1)NOW and savings accounts are subject to immediate withdrawal and repricing. These depositselectronic delivery at Using a black ink pen, mark your votes with an X as shown in this example. www.investorvote.com/FBMS Please do not tend to immediately react to changes in interest rates andwrite outside the designated areas. q IF VOTING BY MAIL, SIGN, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. q + 1. Election of Directors: For Withhold For Withhold For Withhold 01 - Charles R. Lightsey 02 - Fred A. McMurry 03 - Thomas E. Mitchell 04 - Andrew D. Stetelman For Against Abstain For Against Abstain 2. Approval, on an advisory basis, of the compensation of our named executive officers 3. Ratification of the appointment of BKD, LLP as the independent registered public accounting firm of the Company believes these deposits are a stable and predictable funding source. Therefore, these deposits are included in the repricing period that management believes most closely matches the periods in which they are likely to reprice rather than the period in which the funds can be withdrawn contractually.(2)Securities include mortgage backed and other installment paying obligations based upon stated maturity dates.(3)Does not include subordinated debentures of $10,310,000The Company generally would benefit from increasing market rates of interest when it has an asset-sensitive gap and generally from decreasing market rates of interest when it is liability sensitive. The Company currently is liability sensitive within the one-year time frame. However, the Company's gap analysis is not a precise indicator of its interest sensitivity position. The analysis presents only a static view of the timing of maturities and repricing opportunities, without taking into consideration that changes in interest rates do not affect all assets and liabilities equally. For example, rates paid on a substantial portion of core deposits may change contractually within a relatively short time frame, but those rates are viewed by management as significantly less interest-sensitive than market-based rates such as those paid on non-core deposits. Accordingly, management believes a liability sensitive-position within one year would not be as indicative of the Company’s true interest sensitivity as it would be for an organization which depends to a greater extent on purchased funds to support earning assets. Net interest income is also affected by other significant factors, including changes in the volume and mix of earning assets and interest-bearing liabilities.Provision and Allowance for Loan LossesThe Company has developed policies and procedures for evaluating the overall quality of its credit portfolio and the timely identification of potential problem loans. Management’s judgment as to the adequacy of the allowance is based upon a number of assumptions about future events which it believes to be reasonable, but which may not prove to be accurate. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the loan loss allowance will not be required.26The Company’s allowance consists of two parts. The first part is determined in accordance with authoritative guidance issued by the FASB regarding the allowance.The Company’s determination of this part of the allowance is based upon quantitative and qualitative factors. A loan loss history based upon the prior three years is utilized in determining the appropriate allowance. Historical loss factors are determined by criticized and uncriticized loans by loan type. These historical loss factors are applied to the loans by loan type to determine an indicated allowance. The loss factors of peer groups are considered in the determination of the allowance and are used to assist in the establishment of a long-term loss history for areas in which this data is unavailable and incorporated into the qualitative factors to be considered. The historical loss factors may also be modified based upon other qualitative factors including but not limited to local and national economic conditions, trends of delinquent loans, changes in lending policies and underwriting standards, concentrations, and management’s knowledge of the loan portfolio. These factors require judgment upon the part of management and are based upon state and national economic reports received from various institutions and agencies including the Federal Reserve Bank, United States Bureau of Economic Analysis, Bureau of Labor Statistics, meetings with the Company’s loan officers and loan committees, and data and guidance received or obtained from the Company’s regulatory authorities.The second part of the allowance is determined in accordance with guidance issued by the FASB regarding impaired loans. Impaired loans are determined based upon a review by internal loan review and senior loan officers. Impaired loans are loans for which the Bank does not expect to receive contractual interest and/or principal by the due date. A specific allowance is assigned to each loan determined to be impaired based upon the value of the loan’s underlying collateral. Appraisals are used by management to determine the value of the collateral.The sum of the two parts constitutes management’s best estimate of an appropriate allowance for loan losses. When the estimated allowance is determined, it is presented to the Company’s audit committee for review and approval on a quarterly basis.Our allowance for loan losses model is focused on establishing a loss history within the Bank and relying on specific impairment to determine credits that the Bank feels the ultimate repayment source will be liquidation of the subject collateral. Our model takes into account many other factors as well such as local and national economic factors, portfolio trends, non performing asset, charge off, and delinquency trends as well as underwriting standards and the experience of branch management and lending staff. These trends are measured in the following ways:Local Trends: (Updated quarterly usually the month following quarter end)Local Unemployment RateInsurance Issues (Windpool Areas)Bankruptcy Rates (Increasing/Declining)Local Commercial R/E Vacancy RatesEstablished Market/New MarketHurricane Threat27National Trends: (Updated quarterly usually the month following quarter end)Gross Domestic Product (GDP)Home SalesConsumer Price Index (CPI)Interest Rate Environment (Increasing/Steady/Declining)Single Family Construction StartsInflation RateRetail SalesPortfolio Trends: (Updated monthly as the ALLL is calculated)Second MortgagesSingle Pay LoansNon-Recourse LoansLimited Guaranty LoansLoan to Value ExceptionsSecured by Non-Owner Occupied PropertyRaw Land LoansUnsecured LoansMeasurable Bank Trends: (Updated quarterly)Delinquency TrendsNon-Accrual TrendsNet Charge OffsLoan Volume TrendsNon-Performing AssetsUnderwriting Standards/Lending PoliciesExperience/Depth of Bank Lending ManagementOur model takes into account many local and national economic factors as well as portfolio trends. Local and national economic trends are measured quarterly, typically in the month following quarter end to facilitate the release of economic data from the reporting agencies. These factors are allocated a basis point value ranging from -25 to +25 basis points and directly affect the amount reserved for each branch. As of December 31, 2015, most economic indicators both local and national pointed to a weak economy thus most factors were assigned a positive basis point value. This increased the amount of the allowance that was indicated by historical loss factors. Portfolio trends are measured monthly on a per branch basis to determine the percentage of loans in each branch that the Bank has determined as having more risk. Portfolio risk is defined as areas in the Bank’s loan portfolio in which there is additional risk involved in the loan type or some other area in which the Bank has identified as having more risk. Each area is tracked on bank-wide as well as on a branch-wide basis. Branches are analyzed based on the gross percentage of concentrations of the Bank as a whole. Portfolio risk is determined by analyzing concentrations in the areas outlined by determining the percentage of each branch’s total portfolio that is made up of the particular loan type and then comparing that concentration to the Bank as a whole. Branches with concentrations in these areas are graded on a scale from – 25 basis points to + 25 basis points. Second mortgages, single pay loans, loans secured by raw land, unsecured loans and loans secured by non owner occupied property are considered to be of higher risk than those of a secured and amortizing basis. LTV exceptions place the Bank at risk in the event of repossession or foreclosure. 28Measurable Bank Wide Trends are measured on a quarterly basis as well. This consists of data tracked on a bank wide basis in which we have identified areas of additional risk or the need for additional allocation to the allowance for loan loss. Data is updated quarterly, each area is assigned a basis point value from -25 basis points to + 25 basis points based on how each area measures to the previous time period. Net charge offs, loan volume trends and non performing assets have all trended upwards therefore increasing the need for increased funds reserved for loan losses. Underwriting standards/ lending standards as well as experience/ depth of bank lending management is evaluated on a per branch level. Loans are reviewed for impairment when, in the Bank’s opinion, the ultimate source of repayment will be the liquidation of collateral through foreclosure or repossession. Once identified updated collateral values are obtained on these loans and impairment worksheets are prepared to determine if impairment exists. This method takes into account any expected expenses related to the disposal of the subject collateral. Specific allowances for these loans are done on a per loan basis as each loan is reviewed for impairment. Updated appraisals are ordered on real estate loans and updated valuations are ordered on non real estate loans to determine actual market value. At December 31, 2015, the consolidated allowance for loan losses amounted to approximately $6.7 million, or .87% of outstanding loans. Including valuation accounting adjustments on acquired loans, the total valuation plus ALLL was 1.11% of loans at December 31, 2015. At December 31, 2014, the allowance for loan losses amounted to approximately $6.1 million, which was .86% of outstanding loans. The Company’s provision for loan losses was $410,000 for the year ended December 31, 2015, compared to $1,418,000 for the year ended December 31, 2014.A loan is considered impaired when, based on current information and events, 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 payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis. Impaired loans not deemed collateral dependent are analyzed according to the ultimate repayment source, whether that is cash flow from the borrower, guarantor or some other source of repayment. Impaired loans are deemed collateral dependent if in the Bank’s opinion the ultimate source of repayment will be generated from the liquidation of collateral.The Company discontinues accrual of interest on loans when management believes, after considering economic and business conditions and collection efforts, that a borrower’s financial condition is such that the collection of interest is doubtful. Generally, the Company will place a delinquent loan in nonaccrual status when the loan becomes 90 days or more past due. At the time a loan is placed in nonaccrual status, all interest which has been accrued on the loan but remains unpaid is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain.29The following tables illustrate the Company’s past due and nonaccrual loans at December 31, 2015 and 2014. December 31, 2015 (In thousands) Past Due 30 to
89 Days Past Due 90 days or
more and still accruing Non-Accrual Real Estate-construction $ 311 $ - $ 2,956 Real Estate-mortgage 3,339 29 2,055 Real Estate-nonfarm nonresidential 736 - 2,225 Commercial 97 - 100 Consumer 70 - 32 Total $ 4,553 $ 29 $ 7,368 December 31, 2014 (In thousands) Past Due 30 to
89 Days Past Due 90 days or
more and still accruing Non-Accrual Real Estate-construction $ 428 $ - $ 2,747 Real Estate-mortgage 3,208 208 2,164 Real Estate-nonfarm nonresidential 3,408 461 1,102 Commercial 29 - 5 Consumer 90 - 38 Total $ 7,163 $ 669 $ 6,056 Total nonaccrual loans at December 31, 2015, amounted to $7.4 million which was an increase of $1.3 million from the December 31, 2014, amount of $6.1 million. Management believes these relationships were adequately reserved at December 31, 2015.Restructured loans not reported as past due or nonaccrual at December 31, 2015, amounted to $2.8 million.A potential problem loan is one in which management has serious doubts about the borrower’s future performance under the terms of the loan contract. These loans are current as to principal and interest and, accordingly, they are not included in nonperforming asset categories. The level of potential problem loans is one factor used in the determination of the adequacy of the allowance for loan losses. At December 31, 2015 and December 31, 2014, The First had potential problem loans of $17,878,000 and $20,946,000, respectively.30Consolidated Allowance For Loan Losses(In thousands) Years Ended December 31, 2015 2014 2013 2012 2011 Average loans outstanding $ 730,326 $ 632,049 $ 583,200 $ 388,012 $ 354,295 Loans outstanding at year end $ 776,489 $ 706,635 $ 583,302 $ 413,697 $ 387,929 Total nonaccrual loans $ 7,368 $ 6,056 $ 3,181 $ 3,401 $ 5,125 Beginning balance of allowance $ 6,095 $ 5,728 $ 4,727 $ 4,511 $ 4,617 Loans charged-off (843 ) (1,459 ) (759 ) (1,190 ) (1,987 ) Total loans charged-off (843 ) (1,459 ) (759 ) (1,190 ) (1,987 ) Total recoveries 1,085 408 684 178 413 Net loans (charged-off) recoveries 242 (1,051 ) (75 ) (1,012 ) (1,574 ) Provision for loan losses 410 1,418 1,076 1,228 1,468 Balance at year end $ 6,747 $ 6,095 $ 5,728 $ 4,727 $ 4,511 Net charge-offs (recoveries) to average loans (.03 )% .17 % .01 % .26 % .44 % Allowance as percent of total loans .87 % .86 % .98 % 1.14 % 1.16 % Nonperforming loans as a percentage of total loans .95 % .86 % .55 % .82 % 1.32 % Allowance as a multiple of nonaccrual loans .92 X 1.0 X 1.8 X 1.4 X .88 X At December 31, 2015, the components of the allowance for loan losses consisted of the following: Allowance (In thousands) Allocated: Impaired loans $ 957 Graded loans 5,790 $ 6,747 Graded loans are those loans or pools of loans assigned a grade by internal loan review.31The following table represents the activity of the allowance for loan losses for the years 2015 and 2014.Analysis of the Allowance for Loan Losses Years Ended December 31, 2015 2014 (Dollars in thousands) Balance at beginning of year $ 6,095 $ 5,728 Charge-offs: Real Estate-construction (162 ) (47 ) Real Estate-mortgage (372 ) (1,156 ) Real Estate-nonfarm nonresidential (- ) (- ) Commercial (183 ) (89 ) Consumer (126 ) (167 ) Total (843 ) (1,459 ) Recoveries: Real Estate-construction 63 96 Real Estate-mortgage 827 212 Real Estate-nonfarm nonresidential 15 17 Commercial 99 15 Consumer 81 68 Total 1,085 408 Net (Charge-offs) Recoveries 242 (1,051 ) Provision for Loan Losses 410 1,418 Balance at end of year $ 6,747 $ 6,095 The following tables represent how the allowance for loan losses is allocated to a particular loan type as well as the percentage of the category to total loans at December 31, 2015 and 2014.Allocation of the Allowance for Loan Losses December 31, 2015 (Dollars in thousands) Amount Commercial Non Real Estate $ 895 17.1 % Commercial Real Estate 3,018 58.4 % Consumer Real Estate 1,477 21.9 % Consumer 141 2.5 % Unallocated 1,216 0.1 % Total $ 6,747 100 % December 31, 2014 (Dollars in thousands) Amount Commercial Non Real Estate $ 713 15.3 % Commercial Real Estate 3,355 57.9 % Consumer Real Estate 1,852 24.2 % Consumer 175 2.6 % Unallocated - - Total $ 6,095 100 % 32Noninterest Income and ExpenseNoninterest Income. The Company’s primary source of noninterest income is service charges on deposit accounts. Other sources of noninterest income include bankcard fees, commissions on check sales, safe deposit box rent, wire transfer fees, official check fees and bank owned life insurance income.Noninterest income decreased $215,000 or 2.8% during 2015 to $7,589,000 from $7,803,000 for the year ended December 31, 2014. The deposit activity fees were $5,014,000 for 2015 compared to $4,262,000 for 2014. Other service charges decreased by $392,000 or 20.2% from $1,938,000 for the year ended December 31, 2014, to $1,546,000 for the year ended December 31, 2015. Impairment losses on investment securities were $0 for 2015 and 2014.Noninterest expense increased from $30.7 million for the year ended December 31, 2014, to $32.2 million for the year ended December 31, 2015. The Company experienced slight increases in most expense categories. The largest increase was in salaries and employee benefits, which increased by $1.1 million in 2015 as compared to 2014. These increases were due in part to a full year of the Bay Bank branches and the addition of the Mortgage Connection.The following table sets forth the primary components of noninterest expense for the periods indicated:Noninterest Expense Years ended December 31, 2015 2014 2013 (In thousands) Salaries and employee benefits $ 18,537 $ 17,462 $ 14,855 Occupancy 3,422 3,141 2,648 Equipment 1,199 1,541 1,452 Marketing and public relations 497 445 451 Data processing 150 161 169 Supplies and printing 300 498 455 Telephone 631 616 731 Correspondent services 104 83 74 Deposit and other insurance 1,051 1,048 834 Professional and consulting fees 1,332 1,618 2,433 Postage 400 302 303 ATM expense 763 689 639 Other 3,775 3,130 3,121 Total $ 32,161 $ 30,734 $ 28,165 Income Tax ExpenseIncome tax expense consists of two components. The first is the current tax expense which represents the expected income tax to be paid to taxing authorities. The Company also recognizes deferred tax for future income/deductible amounts resulting from differences in the financial statement and tax bases of assets and liabilities.33Analysis of Financial ConditionEarning AssetsLoans. Loans typically provide higher yields than the other types of earning assets, and thus one of the Company's goals is for loans to be the largest category of the Company's earning assets. At December 31, 2015 and 2014, respectively, average loans accounted for 71.7% and 67.8% of average earning assets. Management attempts to control and counterbalance the inherent credit and liquidity risks associated with the higher loan yields without sacrificing asset quality to achieve its asset mix goals. Loans averaged $730.3 million during 2015, as compared to $632.0 million during 2014, and $583.2 million during 2013.The following table shows the composition of the loan portfolio by category:Composition of Loan Portfolio December 31, 2015 2014 2013 Amount Amount Amount (Dollars in thousands) Mortgage loans held for sale $ 3,974 0.5 % $ 2,103 0.3 % $ 3,680 0.6 % Commercial, financial and agricultural 129,197 16.6 % 106,109 15.0 % 81,792 14.0 % Real Estate: Mortgage-commercial 253,309 32.6 % 238,602 33.8 % 212,388 36.4 % Mortgage-residential 272,180 35.1 % 256,406 36.3 % 202,343 34.7 % Construction 99,161 12.8 % 84,935 12.0 % 67,287 11.5 % Lease Financing Receivable 2,650 0.3 % Consumer and other 16,018 2.1 % 18,480 2.6 % 15,812 2.8 % Total loans 776,489 100 % 706,635 100 % 583,302 100 % Allowance for loan losses (6,747 ) (6,095 ) (5,728 ) Net loans $ 769,742 $ 700,540 $ 577,574 In the context of this discussion, a "real estate mortgage loan" is defined as any loan, other than loans for construction purposes, secured by real estate, regardless of the purpose of the loan. The Company follows the common practice of financial institutions in the Company’s market area of obtaining a security interest in real estate whenever possible, in addition to any other available collateral. This collateral is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to increase the magnitude of the real estate loan portfolio component. Generally, the Company limits its loan-to-value ratio to 80%. Management attempts to maintain a conservative philosophy regarding its underwriting guidelines and believes it will reduce the risk elements of its loan portfolio through strategies that diversify the lending mix.Loans held for sale consist of mortgage loans originated by the Bank and sold into the secondary market. Commitments from investors to purchase the loans are obtained upon origination.34The following table sets forth the Company's commercial and construction real estate loans maturing within specified intervals at December 31, 2015.Loan Maturity Schedule and Sensitivity to Changes in Interest Rates December 31, 2015 Type Total (In thousands) Commercial, financial and agricultural $ 44,176 $ 63,078 $ 21,943 $ 129,197 Real estate – construction 44,720 36,189 18,252 99,161 $ 88,896 $ 99,267 $ 40,195 $ 228,358 Loans maturing after one year with: Fixed interest rates $ 115,777 Floating interest rates 23,685 $ 139,462 The information presented in the above table is based on the contractual maturities of the individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon their maturity.Investment Securities.The investment securities portfolio is a significant component of the Company's total earning assets. Total securities averaged $256.5 million in 2015, as compared to $271.2 million in 2014 and $248.2 million in 2013. This represents 25.2%, 29.1%, and 29.0% of the average earning assets for the years ended December 31, 2015, 2014, and 2013, respectively. At December 31, 2015, investment securities were $255.0 million and represented 24.5% of earning assets. The Company attempts to maintain a portfolio of high quality, highly liquid investments with returns competitive with short-term U.S. Treasury or agency obligations. This objective is particularly important as the Company focuses on growing its loan portfolio. The Company primarily invests in securities of U.S. Government agencies, municipals, and corporate obligations with maturities up to five years.The following table summarizes the carrying value of securities for the dates indicated.Securities Portfolio December 31, 2015 2014 2013 (In thousands) Available-for-sale U. S. Government agencies and Mortgage-backed Securities $ 118,536 $ 120,407 $ 108,148 States and municipal subdivisions 97,889 104,582 108,079 Corporate obligations 22,346 28,785 26,852 Mutual finds 961 972 972 Total available-for-sale 239,732 254,746 244,051 Held-to-maturity U.S. Government agencies 1,092 2,193 2,438 States and municipal subdivisions 6,000 6,000 6,000 Total held-to-maturity 7,092 8,193 8,438 Total $ 246,824 $ 262,939 $ 252,489 35The following table shows, at carrying value, the scheduled maturities and average yields of securities held at December 31, 2015.Investment Securities Maturity Distribution and Yields (1) December 31, 2015 After One But After Five But (Dollars in thousands) Within One Year Within Five Years Within Ten Years After Ten Years Amount Yield Amount Yield Amount Yield Amount Yield Held-to-maturity: U.S. Government agencies (2) $ - - $ - - $ - - $ - - States and municipal subdivisions - - - - 6,000,000 .93 % - - Total investment securities held-to-maturity $ - $ - $ 6,000,000 $ - Available-for-sale: U.S. Government agencies (3) $ 7,034,600 .85 % $ 9,602,910 1.25 % $ 469,976 2.78 % $ 2,503,464 3.20 % States and municipal subdivisions 11,873,559 2.39 % 33,931,040 3.07 % 39,538,380 4.09 % 12,546,352 4.70 % Corporate obligations and other 3,520,980 2.24 % 16,291,456 1.91 % 2,476,187 2.0 % 1,018,402 2.00 % Total investment securities available-for-sale $ 22,429,139 $ 59,825,406 $ 42,484,543 $ 16,068,218 (1)Investments with a call feature are shown as of the contractual maturity date.(2)Excludes mortgage-backed securities totaling $1.1 million with a yield of 2.63%.(3)Excludes mortgage-backed securities totaling $98.9 million with a yield of 2.34% and mutual funds of $.9 million.Short-Term Investments.Short-term investments, consisting of Federal Funds Sold, funds in due from banks and interest-bearing deposits with banks, averaged $24.6 million in 2015, $24.8 million in 2014, and $18.6 million in 2013. At December 31, 2015, and December 31, 2014, short-term investments totaled $321,000 and $386,000, respectively. These funds are a primary source of the Company's liquidity and are generally invested in an earning capacity on an overnight basis.DepositsDeposits. Average total deposits increased $109.8 million, or 14.3% in 2014. Average total deposits increased $75.2 million, or 8.6% in 2015. At December 31, 2015, total deposits were $916.7 million, compared to $892.8 million a year earlier, an increase of $23.9 million, or 2.7%.36The following table sets forth the deposits of the Company by category for the period indicated.Deposits December 31, (Dollars in thousands) 2015 2014 2013 Percent of Percent of Percent of Amount Deposits Amount Deposits Amount Deposits Noninterest-bearing accounts $ 189,445 20.6 % $ 201,362 22.6 % $ 173,793 22.3 % NOW accounts 373,686 40.8 % 301,721 33.8 % 240,514 30.8 % Money market accounts 105,434 11.5 % 117,018 13.1 % 107,564 13.8 % Savings accounts 68,657 7.5 % 66,615 7.5 % 55,113 7.1 % Time deposits less than $100,000 73,868 8.1 % 85,365 9.6 % 86,363 11.1 % Time deposits of $100,000 or over 105,605 11.5 % 120,694 13.4 % 116,624 14.9 % Total deposits $ 916,695 100 % $ 892,775 100 % $ 779,971 100 % The Company’s loan-to-deposit ratio was 84.3% at December 31, 2015 and 78.9% at December 31, 2014. The loan-to-deposit ratio averaged 76.8% during 2015. Core deposits, which exclude time deposits of $100,000 or more, provide a relatively stable funding source for the Company's loan portfolio and other earning assets. The Company's core deposits were $811.1 million at December 31, 2015 and $772.1 million at December 31, 2014. Management anticipates that a stable base of deposits will be the Company's primary source of funding to meet both its short-term and long-term liquidity needs in the future. The Company has purchased brokered deposits from time to time to help fund loan growth. Brokered deposits and jumbo certificates of deposit generally carry a higher interest rate than traditional core deposits. Further, brokered deposit customers typically do not have loan or other relationships with the Company. The Company has adopted a policy not to permit brokered deposits to represent more than 10% of all of the Company’s deposits.The maturity distribution of the Company's certificates of deposit of $100,000 or more at December 31, 2015, is shown in the following table. The Company did not have any other time deposits of $100,000 or more.Maturities of Certificates of Depositof $100,000 or More After Three Within Three Through After Twelve (In thousands) Months Twelve Months Months Total December 31, 2015 $ 22,363 $ 48,497 $ 34,745 $ 105,605 Borrowed FundsBorrowed funds consist of advances from the Federal Home Loan Bank of Dallas, federal funds purchased and reverse repurchase agreements. At December 31, 2015, advances from the FHLB totaled $100.0 million compared to $84.5 million at December 31, 2014. The advances are collateralized by a blanket lien on the first mortgage loans in the amount of the outstanding borrowings, FHLB capital stock, and amounts on deposit with the FHLB. There were $5.3 million and $0 federal funds purchased at December 31, 2015 and December 31, 2014, respectively.37Reverse Repurchase Agreements consist of one $5,000,000 agreement. The agreement is secured by securities with a fair value of $5,501,503 at December 31, 2015 and $7,443,951 at December 31, 2014. The maturity date of the remaining agreement is September 26, 2017, with a rate of 3.81%.Subordinated DebenturesIn 2006, the Company issued subordinated debentures of $4,124,000 to The First Bancshares, Inc. Statutory Trust 2 (Trust 2). The Company is the sole owner of the equity of the Trust 2. The Trust 2 issued $4,000,000 of preferred securities to investors. The Company makes interest payments and will make principal payments on the debentures to the Trust 2. These payments will be the source of funds used to retire the preferred securities, which are redeemable at any time beginning in 2011 and thereafter, and mature in 2036. The Company entered into this arrangement to provide funding for expected growth.In 2007, the Company issued subordinated debentures of $6,186,000 to The First Bancshares, Inc. Statutory Trust 3 (Trust 3). The Company is the sole owner of the equity of the Trust 3. The Trust 3 issued $6,000,000 of preferred securities to investors. The Company makes interest payments and will make principal payments on the debentures to the Trust 3. These payments will be the source of funds used to retire the preferred securities, which are redeemable at any time beginning in 2012 and thereafter, and mature in 2037. The Company entered into this arrangement to provide funding for expected growth.CapitalTotal stockholders’ equity as of December 31, 2015, was $103.4 million, an increase of $7.2 million or approximately 7.5%, compared with stockholders' equity of $96.2 million as of December 31, 2014.The Federal Reserve Board and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 600%. Under the risk-based standard, capital is classified into two tiers. Tier 1 capital consists of common stockholders' equity, excluding the unrealized gain (loss) on available-for-sale securities, minus certain intangible assets. Tier 2 capital consists of the general reserve for loan losses, subject to certain limitations. An institution’s total risk-based capital for purposes of its risk-based capital ratio consists of the sum of its Tier 1 and Tier 2 capital. The risk-based regulatory minimum requirements are 6% for Tier 1 and 8% for total risk-based capital.Bank holding companies and banks are also required to maintain capital at a minimum level based on total assets, which is known as the leverage ratio. The minimum requirement for the leverage ratio is 4%. All but the highest rated institutions are required to maintain ratios 100 to 200 basis points above the minimum. The Company and The First exceeded their minimum regulatory capital ratios as of December 31, 2015 and 2014.38The Federal Reserve and the Federal Deposit Insurance Corporation approved final capital rules in July 2013, that substantially amend the existing capital rules for banks. These new rules reflect, in part, certain standards initially adopted by the Basel Committee on Banking Supervision in December 2010 (which standards are commonly referred to as “Basel III”) as well as requirements contemplated by the Dodd-Frank Act.Under the new capital rules, the Company is required to meet certain minimum capital requirements that differ from past capital requirements. The rules implement a new capital ratio of common equity Tier 1 capital to risk-weighted assets. Common equity Tier 1 capital generally consists of retained earnings and common stock (subject to certain adjustments) as well as accumulated other comprehensive income (“AOCI”), except to the extent that the Company exercised a one-time irrevocable option to exclude certain components of AOCI as of March 31, 2015. The Company will also be required to establish a “conservation buffer,” consisting of a common equity Tier 1 capital amount equal to 2.5% of risk-weighted assets to be phased in by 2019. An institution that does not meet the conservation buffer will be subject to restrictions on certain activities including payment of dividends, stock repurchases, and discretionary bonuses to executive officers.The prompt corrective action rules are modified to include the common equity Tier 1 capital ratio and to increase the Tier 1 capital ratio requirements for the various thresholds. For example, the requirements for the Company to be considered well-capitalized under the rules will be a 5.0% leverage ratio, a 6.5% common equity Tier 1capital ratio, an 8.0% Tier 1 capital ratio, and a 10.0% total capital ratio. To be adequately capitalized, those ratios are 4.0%, 4.5%, 6.0%, and 8.0%, respectively.The rules modify the manner in which certain capital elements are determined. The rules make changes to the methods of calculating the risk-weighting of certain assets, which in turn affects the calculation of the risk-weighted capital ratios. Higher risk weights are assigned to various categories of assets, including commercial real estate loans, credit facilities that finance the acquisition, development or construction of real property, certain exposures or credit that are 90 days past due or are nonaccrual, securitization exposures, and in certain cases mortgage servicing rights and deferred tax assets.The Company was required to comply with the new capital rules on January 1, 2015, with a measurement date of March 31, 2015. The conservation buffer will be phased-in beginning in 2016, and will take full effect on January 1, 2019. Certain calculations under the rules will also have phase-in periods.Analysis of Capital Adequately Well The Company The First Capital Ratios Capitalized Capitalized December 31, December 31, 2015 2014 2015 2014 Leverage 4.0 % 5.0 % 8.7 % 8.4 % 8.6 % 8.4 % Risk-based capital: Common equity Tier 1 4.5 % 6.5 % - - - - Tier 1 6.0 % 8.0 % 11.1 % 11.5 % 11.0 % 11.4 % Total 8.0 % 10.0 % 11.9 % 12.3 % 11.8 % 12.2 % 39Ratios 2015 2014 2013 Return on assets (net income applicable to common stockholders divided by average total assets) .75 % .61 % .45 % Return on equity (net income applicable to common stockholders divided by average equity) 8.58 % 7.1 % 5.0 % Dividend payout ratio (dividends per share divided by net income per common share) 9.7 % 12.6 % 15.6 % Equity to asset ratio (average equity divided by average total assets) 8.8 % 8.6 % 9.0 % Liquidity ManagementLiquidity management involves monitoring the Company's sources and uses of funds in order to meet its day-to-day cash flow requirements while maximizing profits. Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of the investment portfolio is very predictable and subject to a high degree of control at the time investment decisions are made; however, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control. Asset liquidity is provided by cash and assets which are readily marketable, which can be pledged, or which will mature in the near future. Liability liquidity is provided by access to core funding sources, principally the ability to generate customer deposits in the Company’s market area.The Company's Federal Funds Sold position, which includes funds in due from banks and interest-bearing deposits with banks, is typically its primary source of liquidity, averaged $24.6 million during the year ended December 31, 2015 and totaled $17.6 million at December 31, 2015. Also, the Company has available advances from the Federal Home Loan Bank. Advances available are generally based upon the amount of qualified first mortgage loans which can be used for collateral. At December 31, 2015, advances available totaled approximately $342.9 million of which $100.0 million had been drawn, or used for letters of credit.Management regularly reviews the liquidity position of the Company and has implemented internal policies which establish guidelines for sources of asset-based liquidity and limit the total amount of purchased funds used to support the balance sheet and funding from non-core sources.40Subprime AssetsThe Bank does not engage in subprime lending activities targeted towards borrowers in high risk categories.Accounting MattersInformation on new accounting matters is set forth in Footnote B to the Consolidated Financial Statements included at Item 8 in this report. This information is incorporated herein by reference.Impact of InflationUnlike most industrial companies, the assets and liabilities of financial institutions such as the Company are primarily monetary in nature. Therefore, interest rates have a more significant effect on the Company's performance than do the effects of changes in the general rate of inflation and change in prices. In addition, interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. As discussed previously, management seeks to manage the relationships between interest sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.41REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and StockholdersThe First Bancshares, Inc.Hattiesburg, MississippiWe have audited The First Bancshares, Inc.’s (the Company) internal control over financial reporting as of December 31, 2015, based on criteria established inInternal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) 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 financial statements.42Board of Directors and StockholdersThe First Bancshares, Inc.Page 2Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.In our opinion, The First Bancshares, Inc., maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established inInternal Control-Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of The First Bancshares, Inc., as of December 31, 2015 and 2014, and for each of the years in the two-year period ended December 31, 2015, and our report dated March 30, 2016, expressed an unqualified opinion thereon./s/ T. E. Lott & CompanyColumbus, MississippiOctober 11, 201643REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and StockholdersThe First Bancshares, Inc.Hattiesburg, MississippiWe have audited the accompanying consolidated balance sheets of The First Bancshares, Inc., as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income (loss), changes in stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2015. The management of The First Bancshares, Inc. is responsible for these financial statements. 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 audits 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 audits 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of The First Bancshares, Inc., as of December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America./s/ T. E. LOTT & COMPANYColumbus, MississippiMarch 30, 201644THE FIRST BANCSHARES, INC.CONSOLIDATED BALANCE SHEETSDECEMBER 31, 2015 AND 2014 2015 2014 ASSETS Cash and due from banks $ 23,634,536 $ 30,332,502 Interest-bearing deposits with banks 17,303,381 13,899,287 Federal funds sold 321,000 386,000 Total cash and cash equivalents 41,258,917 44,617,789 Held-to-maturity securities (fair value of $8,547,832 in 2015 and $9,993,816 in 2014) 7,092,120 8,192,741 Available-for-sale securities 239,732,426 254,746,446 Other securities 8,134,850 7,234,350 Total securities 254,959,396 270,173,537 Loans held for sale 3,973,765 2,103,351 Loans, net of allowance for loan losses of $6,747,103 in 2015 and $6,095,001 in 2014 765,768,073 698,436,345 Interest receivable 3,953,338 3,659,006 Premises and equipment 33,623,011 34,809,843 Cash surrender value of life insurance 14,871,742 14,463, 207 Goodwill 13,776,040 12,276,040 Other real estate owned 3,082,694 4,654,604 Other assets 9,863,743 8,573,997 Total assets $ 1,145,130,719 $ 1,093,767,719 LIABILITIES AND STOCKHOLDERS’ EQUITY Deposits: Noninterest-bearing $ 189,444,815 $ 201,362,468 Interest-bearing 727,250,297 691,413,018 Total deposits 916,695,112 892,775,486 Interest payable 245,732 315,844 Borrowed funds 110,321,245 89,450,067 Subordinated debentures 10,310,000 10,310,000 Other liabilities 4,122,540 4,700,738 Total liabilities 1,041,694,629 997,552,135 Stockholders’ Equity: Preferred stock, no par value, $1,000 per share liquidation, 10,000,000 shares authorized; 17,123 shares issued and outstanding in 2015 and 2014, respectively 17,123,000 17,123,000 Common stock, par value $1 per share: 20,000,000 shares authorized; 5,403,159 shares issued and outstanding in 2015; 10,000,0000 shares authorized; 5,342,670 shares issued and outstanding in 2014. 5,403,159 5,342,670 Additional paid-in capital 44,650,274 44,420,149 Retained earnings 35,624,715 27,975,049 Accumulated other comprehensive income 1,098,587 1,818,361 Treasury stock, at cost (463,645 ) (463,645 ) Total stockholders’ equity 103,436,090 96,215,584 Total liabilities and stockholders’ equity $ 1.145,130,719 $ 1,093,767,719 The accompanying notes are an integral part of these statements.45THE FIRST BANCSHARES, INC.CONSOLIDATED STATEMENTS OF INCOMEYEARS ENDED DECEMBER 31, 2015 AND 2014 2015 2014 INTEREST INCOME Interest and fees on loans $ 34,242,067 $ 30,276,477 Interest and dividends on securities: Taxable interest and dividends 3,948,459 3,884,321 Tax-exempt interest 1,854,213 2,071,782 Interest on federal funds sold 63,841 52,945 Interest on deposits in banks 93,276 85,257 Total interest income 40,201,856 36,370,782 INTEREST EXPENSE Interest on time deposits of $100,000 or more 762,119 782,441 Interest on other deposits 1,800,122 1,586,897 Interest on borrowed funds 645,207 603,469 Total interest expense 3,207,448 2,972,807 Net interest income 36,994,408 33,397,975 Provision for loan losses 410,069 1,418,260 Net interest income after provision for loan losses 36,584,339 31,979,715 OTHER INCOME Service charges on deposit accounts 5,013,983 4,261,795 Other service charges and fees 1,545,960 1,938,079 Bank owned life insurance income 408,535 369,804 Gain on sale of premises 133,339 110,734 Gain on sale of securities - 237,174 Loss on sale of other real estate (246,859 ) (85,256 ) Other 733,574 971,138 Total other income 7,588,532 7,803,468 OTHER EXPENSE Salaries 15,089,136 14,207,216 Employee benefits 3,447,367 3,254,399 Occupancy 3,422,116 3,140,738 Furniture and equipment 1,198,930 1,540,796 Supplies and printing 300,022 497,755 Professional and consulting fees 1,331,928 1,617,828 Marketing and public relations 496,638 445,451 FDIC and OCC assessments 965,642 938,378 ATM expense 763,248 688,766 Telephone 631,261 616,160 Other 4,514,834 3,786,121 Total other expense 32,161,122 30,733,608 46THE FIRST BANCSHARES, INC.CONSOLIDATED STATEMENTS OF INCOMEYEARS ENDED DECEMBER 31, 2015 AND 2014Continued: 2015 2014 Income before income taxes 12,011,749 9,049,575 Income taxes 3,213,047 2,435,879 Net income 8,798,702 6,613,696 Preferred dividends and stock accretion 342,460 362,953 Net income applicable to common stockholders $ 8,456,242 $ 6,250,743 Net income per share: Basic $ 1.64 $ 1.27 Diluted 1.62 1.25 Net income applicable to common stockholders: Basic $ 1.57 $ 1.20 Diluted 1.55 1.19 The accompanying notes are an integral part of these statements.47THE FIRST BANCSHARES, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)YEARS ENDED DECEMBER 31, 2015 AND 2014 2015 2014 Net income $ 8,798,702 $ 6,613,696 Other comprehensive income: Unrealized gains on securities: Unrealized holding gains (losses) arising during the period (1,093,182 ) 4,804,818 Less reclassification adjustment for gains included in net income - (237,173 ) (1,093,182 ) 4,567,645 Unrealized holding gains on loans held for sale 2,753 83,826 Income tax benefit (expense) 370,655 (1,584,266 ) Other comprehensive income (loss) (719,774 ) 3,067,205 Comprehensive income $ 8,078,928 $ 9,680,901 The accompanying notes are an integral part of these statements.48THE FIRST BANCSHARES, INC.CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITYYEARS ENDED DECEMBER 31, 2015 AND 2014 Common
Stock Preferred
Stock Stock
Warrants Additional
Paid-in
Capital Retained
Earnings Accum-
ulated
Other
Compre-
hensive
Income
(Loss) Treasury
Stock Total Balance, January 1, 2014 $ 5,122,941 $ 17,102,507 $ 283,738 $ 41,802,725 $ 22,508,918 $ (1,248,844 ) $ (463,645 ) $ 85,108,340 Net income 2014 - - - - 6,613,696 - - 6,613,696 Other comprehensive income - - - - - 3,067,205 - 3,067,205 Dividends on preferred stock - - - - (342,460 ) - - (342,460 ) Cash dividend declared, $.15 per common share - - - - (784,612 ) - - (784,612 ) Grant of restricted stock 67,627 - - (67,627 ) - - - - Compensation cost on restricted stock - - - 617,779 - - - 617,779 Preferred stock accretion - 20,493 - - (20,493 ) - - - Repurchase of restricted stock for payment of taxes (5,981 ) - - (79,551 ) - - - (85,532 ) Issuance of 158,083 common shares for BCB Holding 158,083 - - 1,863,085 - - - 2,021,168 Balance, December 31, 2014 $ 5,342,670 $ 17,123,000 $ 283,738 $ 44,136,411 $ 27,975,049 $ 1,818,361 $ (463,645 ) $ 96,215,584 Net income 2015 - - - - 8,798,702 - - 8,798,702 Other comprehensive (loss) - - - - - (719,774 ) - (719,774 ) 49THE FIRST BANCSHARES, INC.CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITYYEARS ENDED DECEMBER 31, 2015 AND 2014Continued: Common
Stock Preferred
Stock Stock
Warrants Additional
Paid-in
Capital Retained
Earnings Accum-
ulated
Other
Compre-
hensive
Income
(Loss) Treasury
Stock Total Dividends on preferred stock - - - - (342,460 ) - - (342,460 ) Cash dividend declared, $.15 per common share - - - - (806,576 ) - - (806,576 ) Grant of restricted stock 69,327 - - (69,327 ) - - - - Compensation cost on restricted stock - - - 721,124 - - - 721,124 Repurchase of restricted stock for payment of taxes (6,324 ) - - (86,066 ) - - - (92,390 ) Adjustment to consideration issued in BCB Holding acquisition (2,514 ) - - (33,196 ) - - - (35,710 ) Repurchase warrants - - (283,738 ) (18,672 ) - - - (302,410 ) Balance, December 31, 2015 $ 5,403,159 $ 17,123,000 $ - $ 44,650,274 $ 35,624,715 $ 1,098,587 $ (463,645 ) $ 103,436,090 The accompanying notes are an integral part of these statements.50THE FIRST BANCSHARES, INC.CONSOLIDATED STATEMENTS OF CASH FLOWSYEARS ENDED DECEMBER 31, 2015 AND 2014 2015 2014 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 8,798,702 $ 6,613,696 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,296,985 2,182,630 FHLB Stock dividends (8,600 ) (6,000 ) Provision for loan losses 410,069 1,418,260 Deferred income taxes 255,638 331,399 Restricted stock expense 721,124 617,779 Increase in cash value of life insurance (408,535 ) (369,804 ) Amortization and accretion, net 921,853 900,913 Gain on sale of land/bank premises (133,339 ) (110,734 ) Gain on sale of securities - (237,174 ) Loss on sale/writedown of other real estate 386,590 395,379 Changes in: Loans held for sale (1,867,661 ) 1,659,996 Interest receivable (294,332 ) (152,307 ) Other assets 135,620 2,643,956 Interest payable (70,112 ) (109,218 ) Other liabilities (1,406,347 ) (8,721,513 ) Net cash provided by operating activities 9,737,655 7,057,258 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of available-for-sale securities (29,571,287 ) (38,459,683 ) Purchases of other securities (4,079,400 ) (3,296,800 ) Proceeds from maturities and calls of available-for-sale securities 42,569,677 42,723,486 Proceeds from maturities and calls of held-to-maturity securities 1,099,898 246,980 Proceeds from sales of securities available-for-sale - 10,909,239 Proceeds from redemption of other securities 3,187,500 2,514,485 Increase in loans (68,588,377 ) (89,190,269 ) Net additions to premises and equipment (1,230,531 ) (988,736 ) Purchase of bank owned life insurance - (7,500,000 ) Proceeds from sale of land/bank premises 949,516 76,375 Cash received (paid) in excess of cash paid for acquisition (843,895 ) 4,272,735 Net cash used in investing activities (56,506,899 ) (78,692,188 ) CASH FLOWS FROM FINANCING ACTIVITIES Increase in deposits 24,090,591 53,845,509 Proceeds from borrowed funds 194,340,000 180,000,000 Repayment of borrowed funds (173,468,821 ) (155,653,580 ) Dividends paid on common stock (778,428 ) (763,143 ) Dividends paid on preferred stock (342,460 ) (342,460 ) Repurchase of shares issued in BCB acquisition (35,710 ) - Repurchase of warrants (302,410 ) - The accompanying notes are an integral part of these statements.51THE FIRST BANCSHARES, INC.CONSOLIDATED STATEMENTS OF CASH FLOWSYEARS ENDED DECEMBER 31, 2015 AND 2014Continued: 2015 2014 Repurchase of restricted stock for payment of taxes (92,390 ) (85,532 ) Net cash provided by financing activities 43,410,372 77,000,794 Net increase (decrease) in cash and cash equivalents (3,358,872 ) 5,365,864 Cash and cash equivalents at beginning of year 44,617,789 39,251,925 Cash and cash equivalents at end of year $ 41,258,917 $ 44,617,789 Supplemental disclosures: Cash paid during the year for: Interest $ 3,448,525 $ 3,056,939 Income taxes 4,152,050 275,075 Non-cash activities: Transfers of loans to other real estate 1,050,342 2,208,010 Issuance of restricted stock grants 69,327 67,627 Loans originated to facilitate the sale of land - 402,982 The accompanying notes are an integral part of these statements.52THE FIRST BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE A - NATURE OF BUSINESSThe First Bancshares, Inc. (the Company) is a bank holding company whose business is primarily conducted by its wholly-owned subsidiary, The First, A National Banking Association (the Bank). The Bank provides a full range of banking services in its primary market area of South Mississippi, South Alabama, and Louisiana. The Company is regulated by the Federal Reserve Bank. Its subsidiary bank is subject to the regulation of the Office of the Comptroller of the Currency (OCC).NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESThe Company and the Bank follow accounting principles generally accepted in the United States of America including, where applicable, general practices within the banking industry.1.Principles of ConsolidationThe consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated.2.EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the 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 allowance for loan losses and the valuation of deferred tax assets.3.Cash and Due From BanksIncluded in cash and due from banks are legal reserve requirements which must be maintained on an average basis in the form of cash and balances due from the Federal Reserve. The reserve balance varies depending upon the types and amounts of deposits. At December 31, 2015, the required reserve balance on deposit with the Federal Reserve Bank was approximately $11,621,000.4.SecuritiesInvestments in securities are accounted for as follows:Available-for-Sale SecuritiesSecurities classified as available-for-sale are those securities that are intended to be held for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available-for-sale would be based on various factors, including movements in interest rates, liquidity needs, security risk assessments, changes in the mix of assets and liabilities and other similar factors. These securities are carried at their estimated fair value, and the net unrealized gain or loss is reported net of tax, as a component of accumulated other comprehensive income (loss) in stockholders' equity, until realized. Premiums and discounts are recognized in interest income using the interest method. Gains and losses on the sale of available-for-sale securities are determined using the adjusted cost of the specific security sold.53Securities to be Held-to-MaturitySecurities classified as held-to-maturity are those securities for which there is a positive intent and ability to hold to maturity. These securities are carried at cost adjusted for amortization of premiums and accretion of discounts, computed by the interest method.Trading Account SecuritiesTrading account securities are those securities which are held for the purpose of selling them at a profit. There were no trading account securities on hand at December 31, 2015 and 2014.Other SecuritiesOther securities are carried at cost and are restricted in marketability. Other securities consist of investments in the Federal Home Loan Bank (FHLB), Federal Reserve Bank and First National Bankers’ Bankshares, Inc. Management reviews for impairment based on the ultimate recoverability of the cost basis.Other-than-Temporary ImpairmentManagement evaluates investment securities for other-than-temporary impairment on a quarterly basis. A decline in the fair value of available-for-sale and held-to-maturity securities below cost that is deemed other-than-temporary is charged to earnings for a decline in value deemed to be credit related and a new cost basis for the security is established. The decline in value attributed to non-credit related factors is recognized in other comprehensive income.5.Loans held for saleThe Bank originates fixed rate single family, residential first mortgage loans on a presold basis. The Bank issues a rate lock commitment to a customer and concurrently “locks in” with a secondary market investor under a best efforts delivery mechanism. Such loans are sold without the servicing retained by the Bank. The terms of the loan are dictated by the secondary investors and are transferred within several weeks of the Bank initially funding the loan. The Bank recognizes certain origination fees and service release fees upon the sale, which are included in other income on loans in the consolidated statements of income. Between the initial funding of the loans by the Bank and the subsequent purchase by the investor, the Bank carries the loans held for sale at the lower of cost or fair value in the aggregate as determined by the outstanding commitments from investors.6.LoansLoans are carried at the principal amount outstanding, net of the allowance for loan losses. Interest income on loans is recognized based on the principal balance outstanding and the stated rate of the loan. Loan origination fees and certain direct origination costs are deferred and recognized as an adjustment of the related loan yield using the interest method.A loan is considered impaired, in accordance with the impairment accounting guidance of Accounting Standards Codification (ASC) Section 310-10-35,Receivables, Subsequent Measurement, when—based upon current events and information—it is probable that the scheduled payments of principal and interest will not be collected in accordance with the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral values, and the probability of collecting scheduled payments of principal and interest when due. Generally, impairment is measured on a loan by loan basis using the fair value of the supporting collateral.54Loans are generally placed on a nonaccrual status when principal or interest is past due ninety days or when specifically determined to be impaired. When a loan is placed on nonaccrual status, interest accrued but not received is generally reversed against interest income. If collectibility is in doubt, cash receipts on nonaccrual loans are used to reduce principal rather than recorded in interest income. Past due status is determined based upon contractual terms.7.Allowance for Loan LossesFor financial reporting purposes, the provision for loan losses charged to operations is based upon management's estimation of the amount necessary to maintain the allowance at an adequate level. Allowances for any impaired loans are generally determined based on collateral values. Loans are charged against the allowance for loan losses when management believes the collectibility of the principal is unlikely.Management evaluates the adequacy of the allowance for loan losses on a regular basis. These evaluations are based upon a periodic review of the collectibility considering historical experience, the nature and value of the loan portfolio, underlying collateral values, internal and independent loan reviews, and prevailing economic conditions. In addition, the OCC, as a part of the regulatory examination process, reviews the loan portfolio and the allowance for loan losses and may require changes in the allowance based upon information available at the time of the examination. The allowance consists of two components: allocated and unallocated. The components represent an estimation performed pursuant to either ASC Topic 450,Contingencies, or ASC Subtopic 310-10,Receivables. The allocated component of the allowance reflects expected losses resulting from an analysis developed through specific credit allocations for individual loans, including any impaired loans, and historical loan loss history. The analysis is performed quarterly and loss factors are updated regularly.The unallocated portion of the allowance reflects management’s estimate of probable inherent but undetected losses within the portfolio due to uncertainties in economic conditions, changes in collateral values, unfavorable information about a borrower’s financial condition, and other risk factors that have not yet manifested themselves. In addition, the unallocated allowance includes a component that explicitly accounts for the inherent imprecision in the loan loss analysis.8.Premises and EquipmentPremises and equipment are stated at cost, less accumulated depreciation. The depreciation policy is to provide for depreciation over the estimated useful lives of the assets using the straight-line method. Repairs and maintenance expenditures are charged to operating expenses; major expenditures for renewals and betterments are capitalized and depreciated over their estimated useful lives. Upon retirement, sale, or other disposition of property and equipment, the cost and accumulated depreciation are eliminated from the accounts, and any gains or losses are included in operations.9.Other Real EstateOther real estate, carried in other assets in the consolidated balance sheets, consists of properties acquired through foreclosure and, as held for sale property, is recorded at the lower of the outstanding loan balance or current appraisal less estimated costs to sell. Any write-down to fair value required at the time of foreclosure is charged to the allowance for loan losses. Subsequent gains or losses on other real estate are reported in other operating income or expenses. At December 31, 2015 and 2014, other real estate totaled $3,082,694 and $4,654,604, respectively.5510.Goodwill and Other Intangible AssetsGoodwill totaled $13,776,040 and $12,276,040 for the years ended December 31, 2015 and 2014, respectively.Goodwill totaling $1,500,000 acquired during the year ended December 31, 2015, was a result of the acquisition of The Mortgage Connection. Footnote C to these consolidated financial statements provides additional information on the acquisition during 2015.The Company performed the required annual impairment tests of goodwill as of December 1, 2015. The Company’s annual impairment test did not indicate impairment as of the testing date, and subsequent to that date, management is not aware of any events or changes in circumstances since the impairment test that would indicate that goodwill might be impaired.The Company’s acquisition method recognized intangible assets, which are subject to amortization, and included in other assets in the accompanying consolidated balance sheets, include core deposit intangibles, amortized on a straight-line basis, over a 10 year average life. The definite-lived intangible assets had the following carrying values at December 31, 2015 and 2014. 2015 2014 Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Amount Amortization Amount Amount Amortization Amount (Dollars in thousands) Core deposit intangibles $ 4,000 $ (1,885 ) $ 2,115 $ 4,000 $ (1,486 ) $ 2,514 The related amortization expense of business combination related intangible assets is as follows:(dollars in thousands) Amount Aggregate amortization expense for the year ended December 31: 2014 $ 387 2015 399 Estimated amortization expense for the year ending December 31: 2016 $ 383 2017 331 2018 331 2019 331 2020 331 Thereafter 408 $ 2,115 5611.Other Assets and Cash Surrender ValueFinancing costs related to the issuance of junior subordinated debentures are being amortized over the life of the instruments and are included in other assets. The Company invests in bank owned life insurance (BOLI). BOLI involves the purchasing of life insurance by the Company on a chosen group of employees. The Company is the owner of the policies and, accordingly, the cash surrender value of the policies is reported as an asset, and increases in cash surrender values are reported as income.12.Stock OptionsThe Company accounts for stock based compensation in accordance with ASC Topic 718,Compensation - Stock Compensation. Compensation cost is recognized for all stock options granted based on the weighted average fair value stock price at the grant date.13.Income TaxesIncome taxes are provided for the tax effects of the transactions reported in the financial statements and consist of taxes currently payable plus deferred taxes related primarily to differences between the bases of assets and liabilities as measured by income tax laws and their bases as reported in the financial statements. The deferred tax assets and liabilities represent the future tax consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.The Company and its subsidiary file consolidated income tax returns. The subsidiary provides for income taxes on a separate return basis and remits to the Company amounts determined to be payable.ASC Topic 740,Income Taxes,provides guidance on financial statement recognition and measurement of tax positions taken, or expected to be taken, in tax returns. ASC Topic 740 requires an evaluation of tax positions to determine if the tax positions will more likely than not be sustainable upon examination by the appropriate taxing authority. The Company at December 31, 2015 and 2014, had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements.14.Advertising CostsAdvertising costs are expensed in the period in which they are incurred. Advertising expense for the years ended December 31, 2015 and 2014, was $437,085 and $394,363, respectively.15.Statements of Cash FlowsFor purposes of reporting cash flows, cash and cash equivalents include cash, amounts due from banks, interest-bearing deposits with banks and federal funds sold. Generally, federal funds are sold for a one to seven day period.16.Off-Balance Sheet Financial InstrumentsIn the ordinary course of business, the subsidiary bank enters into off-balance sheet financial instruments consisting of commitments to extend credit, credit card lines and standby letters of credit. Such financial instruments are recorded in the financial statements when they are exercised.5717.Earnings Applicable to Common StockholdersPer share amounts are presented in accordance with ASC Topic 260,Earnings Per Share. Under ASC Topic 260, two per share amounts are considered and presented, if applicable. Basic per share data is calculated based on the weighted-average number of common shares outstanding during the reporting period. Diluted per share data includes any dilution from potential common stock, such as outstanding stock options.The following table discloses the reconciliation of the numerators and denominators of the basic and diluted computations applicable to common stockholders: For the Year Ended
December 31, 2015 For the Year Ended
December 31, 2014 Net
Income
(Numerator) Shares
(Denominator) Per Share
Amount Net
Income
(Numerator) Shares
(Denominator) Per Share
Amount Basic per common Share $ 8,456,242 5,371,111 $ 1.57 $ 6,250,743 5,227,768 $ 1.20 Effect of dilutive shares: Restricted Stock 70,939 42,901 $ 8,456,242 5,442,050 $ 1.55 $ 6,250,743 5,270,669 $ 1.19 The diluted per share amounts were computed by applying the treasury stock method.18.ReclassificationsCertain reclassifications have been made to the 2014 financial statements to conform with the classifications used in 2015. These reclassifications did not impact the Company's consolidated financial condition or results of operations.19.Accounting PronouncementsIn January 2014, the FASB issued ASU No. 2014-01, Investments—Equity Method and Joint Ventures (Topic 323), “Accounting for Investments in Qualified Affordable Housing Projects,” which permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). For those investments in qualified affordable housing projects not accounted for using the proportional method, the investment should be accounted for as an equity method investment or a cost method investment. The decision to apply the proportional amortization method of accounting is an accounting policy decision that should be applied consistently to all qualifying affordable housing project investments rather than a decision to be applied to individual investments. This amendment should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. ASU 2014-01 is effective for fiscal years beginning on or after December 15, 2014, and interim periods within those annual periods. The Company adopted this standard, which had no material impact on the consolidated financial statements.58In January 2014, the FASB issued ASU 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40), “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure,” which will eliminate diversity in practice regarding the timing of derecognition for residential mortgage loans when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. Under ASU 2014-04, physical possession of residential real estate property is achieved when either the creditor obtains legal title to the residential real estate property upon completion of a foreclosure or the borrower conveys all interest in the residential real estate property through completion of a deed in lieu or foreclosure in order to satisfy the loan. Once physical possession has been achieved, the loan is derecognized and the property recorded within other assets at the lower of cost or fair value (less estimated costs to sell). In addition, the guidance requires both interim and annual disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. The additional disclosure requirements are effective for annual reporting periods beginning on or after December 15, 2014, and interim periods within those annual periods with retrospective disclosure necessary for all comparative periods presented. The adoption of this standard did not have any impact on the Company’s consolidated financial statements.In August 2014, the FASB issued ASU 2014-14, Troubled Debt Restructurings by Creditors (Subtopic 310-40), “Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure,” which will eliminate diversity in practice relating to how creditors classify government-guaranteed mortgage loans, including Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA) guaranteed loans, upon foreclosure. Under ASU 2014-14 a mortgage must be derecognized and a separate other receivable recognized upon foreclosure when the loan possesses a non-separable government guarantee that the creditor has both the intent and ability to exercise and for which any amount of the claim determined on the basis of the fair value of the real estate is fixed. Other receivables recognized under this guidance are to be measured based on the amount of the principal and interest expected to be recovered from the guarantor. ASU 2014-14 allows for a modified retrospective or prospective adoption in conjunction with ASU 2014-04 and is effective for annual reporting periods beginning on or after December 15, 2014, and interim periods within those annual periods with early adoption permitted. The Company has adopted this accounting standard; however, ASU 2014-14 did not have a material impact on the Company’s consolidated financial statements.In February 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-02 “Consolidation (Topic 810) – Amendments to the Consolidation Analysis.” ASU 2015-02 includes amendments that are intended to improve targeted areas of consolidation for legal entities including reducing the number of consolidation models from four to two and simplifying the FASB Accounting Standards Codification. ASU 2015-02 is effective for annual and interim periods within those annual periods, beginning after December 15, 2015. The amendments may be applied retrospectively in previously issued financial statements for one or more years with a cumulative effect adjustment to retained earnings as of the beginning of the first year restated. Early adoption is permitted, including adoption in an interim period. The Company is assessing the impact of ASU 2015-02 on its accounting and disclosures.59NOTE C – BUSINESS COMBINATIONThe Company accounts for its acquisitions using the acquisition method. Acquisition accounting requires the total purchase price to be allocated to the estimated fair values of assets acquired and liabilities assumed, including certain intangible assets that must be recognized. Typically, this allocation results in the purchase price exceeding the fair value of net assets acquired, which is recorded as goodwill. Core deposit intangibles are a measure of the value of checking, money market and savings deposits acquired in business combinations accounted for under the acquisition method. Core deposit intangibles and other identified intangibles with finite useful lives are amortized using the straight line method over their estimated useful lives of up to ten years. Loans that the Company acquires in connection with acquisitions are recorded at fair value with no carryover of the related allowance for credit losses. Fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. The excess or deficit of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount or amortizable premium and is recognized into interest income over the remaining life of the loan.The Mortgage ConnectionOn December 14, 2015, the Company completed the acquisition of The Mortgage Connection, a Mississippi corporation, which included two loan production offices located in Madison and Brandon, Mississippi.In connection with the acquisition, the Company recorded $1.5 million of goodwill.The amounts of the acquired identifiable assets and liabilities as of the acquisition date were as follows (dollars in thousands):Purchase price: Cash $ 844 Payable 800 Total purchase price 1,644 Identifiable assets: Intangible 100 Personal property 44 Total assets 144 Liabilities and equity: Net assets acquired $ 144 Goodwill resulting from acquisition $ 1,500 Expenses associated with the acquisition were $13,000 for the three and twelve month periods ended December 31, 2015, respectively. These costs included charges for legal and consulting expenses.60BCB Holding Company, Inc.On March 3, 2014, the Company entered into an Agreement and Plan of Merger (the “Agreement”) with BCB Holding Company, Inc., an Alabama corporation (“BCB”) and parent of Bay Bank, Mobile, Alabama. The Agreement provides that, upon the terms and subject to the conditions set forth in the Agreement, BCB will merge with and into the Company (the “Merger”) and Bay Bank will merge with and into The First, A National Banking Association (“Bank Merger”). Subject to the terms and conditions of the Agreement, which has been approved by the Boards of Directors of the Company and BCB, each outstanding share of BCB common stock, other than shares held by the Company or BCB, or, shares with respect to which the holders thereof have perfected dissenters’ rights, received (i) for the BCB common stock that was outstanding prior to August 1, 2013, $3.60 per share and one non-transferable contingent value right (“CVR”) of the CVR Consideration, and (ii) for the BCB common stock that was issued on August 1, 2013, $2.25 per share in cash. Each CVR is eligible to receive a cash payment equal to up to $0.40, with the exact amount based on the resolution of certain identified BCB loans over a three-year period following the closing of the transaction. Payout of the CVR will be overseen by a special committee of the Company’s Board of Directors. The total consideration to be paid in connection with the acquisition will range between approximately $6.2 million and $6.6 million depending upon the payout of the CVR. An estimated liability of $174,000 has been accrued for the CVR and a payment of $8,000 was made during the second quarter of 2015 leaving an accrual of $166,000.As of the closing on July 1, 2014, the Company and BCB entered into an agreement and plan of merger pursuant to which BCB’s wholly-owned subsidiary, Bay Bank, was merged with and into the Company’s wholly-owned subsidiary, the Bank.In connection with the acquisition, the Company recorded $1.7 million of goodwill and $.2 million of core deposit intangible. The core deposit intangible is being expensed over 10 years.The Company acquired the $40.1 million loan portfolio at a fair value discount of $1.7 million. The discount represents expected credit losses, adjusted for market interest rates and liquidity adjustments.The amounts of the acquired identifiable assets and liabilities as of the acquisition date were as follows(dollars in thousands):Purchase price: Cash and fair value of common stock $ 6,300 Total purchase price 6,300 Identifiable assets: Cash and due from banks 8,307 Investments 23,423 Loans and leases 38,393 Other Real Estate 571 Core deposit intangible 225 Personal and real property 3,670 Deferred tax asset 2,502 Other assets 305 Total assets 77,396 Liabilities and equity: Deposits 59,321 Borrowed funds 13,104 Other liabilities 326 Total liabilities 72,751 Net assets acquired 4,645 Goodwill resulting from acquisition $ 1,655 61The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheet at December 31, 2015, are as follows (dollars in thousands):Outstanding principal balance $ 26,639 Carrying amount 25,332 Loans acquired with deteriorated credit quality are detailed in Note E – Loans.Expenses associated with the acquisition were $29,000 and $508,000 for the three and twelve month periods ended December 31, 2014, respectively. These costs included system conversion and integrating operations charges as well as legal and consulting expenses, which have been expensed as incurred.NOTE D – SECURITIESA summary of the amortized cost and estimated fair value of available-for-sale securities and held-to- maturity securities at December 31, 2015 and 2014, follows: December 31, 2015 Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Estimated
Fair
Value Available-for-sale securities: Obligations of U.S. Government agencies $ 19,479,107 $ 144,408 $ 12,565 $ 19,610,950 Tax-exempt and taxable obligations of states and municipal subdivisions 95,631,123 2,361,599 103,391 97,889,331 Mortgage-backed securities 98,222,658 1,127,562 425,100 98,925,120 Corporate obligations 23,494,670 62,408 1,210,996 22,346,082 Other 1,255,483 - 294,540 960,943 $ 238,083,041 $ 3,695,977 $ 2,046,592 $ 239,732,426 Held-to-maturity securities: Mortgage-backed securities $ 1,092,120 $ 15,712 $ - $ 1,107,832 Taxable obligations of states and municipal subdivisions 6,000,000 1,440,000 - 7,440,000 $ 7,092,120 $ 1,455,712 $ - $ 8,547,832 62 December 31, 2014 Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Estimated
Fair
Value Available-for-sale securities: Obligations of U.S. Government agencies $ 27,225,335 $ 199,851 $ 53,550 $ 27,371,636 Tax-exempt and taxable obligations of states and municipal subdivisions 101,873,361 2,896,657 187,598 104,582,420 Mortgage-backed securities 91,697,199 1,579,218 240,805 93,035,612 Corporate obligations 29,952,502 140,556 1,307,782 28,785,276 Other 1,255,483 - 283,981 971,502 $ 252,003,880 $ 4,816,282 $ 2,073,716 $ 254,746,446 Held-to-maturity securities: Mortgage-backed securities $ 2,192,741 $ 20,875 $ - $ 2,213,616 Taxable obligations of states and municipal subdivisions 6,000,000 1,780,200 - 7,780,200 $ 8,192,741 $ 1,801,075 $ - $ 9,993,816 The scheduled maturities of securities at December 31, 2015, were as follows: Available-for-Sale Held-to-Maturity Amortized
Cost Estimated
Fair
Value Amortized
Cost Estimated
Fair
Value Due less than one year $ 22,350,096 $ 22,429,139 $ - $ - Due after one year through five years 59,279,860 59,825,406 - - Due after five years through ten years 41,007,663 42,484,543 6,000,000 7,440,000 Due after ten years 17,222,764 16,068,218 - - Mortgage-backed securities 98,222,658 98,925,120 1,092,120 1,107,832 $ 238,083,041 $ 239,732,426 $ 7,092,120 $ 8,547,832 Actual maturities can differ from contractual maturities because the obligations may be called or prepaid with or without penalties.No gain or loss was realized from the sale of available-for-sale securities in 2015 and a gain of $237,173 was realized in 2014. No other-than-temporary impairment losses were recognized for the years ended December 31, 2015 and 2014.Securities with a carrying value of $215,726,751 and $191,534,036 at December 31, 2015 and 2014, respectively, were pledged to secure public deposits, repurchase agreements, and for other purposes as required or permitted by law.The details concerning securities classified as available-for-sale with unrealized losses as of December 31, 2015 and 2014, were as follows:63 2015 Losses < 12 Months Losses 12 Months or > Total Fair
Value Gross
Unrealized
Losses Fair
Value Gross
Unrealized
Losses Fair
Value Gross
Unrealized
Losses Obligations of U.S. government agencies $ 4,975,580 $ 12,565 $ - $ - $ 4,975,580 $ 12,565 Tax-exempt and taxable obligations of states and municipal subdivisions 12,762,528 50,055 3,049,129 53,336 15,811,657 103,391 Mortgage-backed securities 36,024,587 370,514 2,507,036 54,586 38,531,623 425,100 Corporate obligations 8,531,765 28,627 3,144,333 1,182,369 11,676,098 1,210,996 Other - - 960,943 294,540 960,943 294,540 $ 62,294,460 $ 461,761 $ 9,661,441 $ 1,584,831 $ 71,955,901 $ 2,046,592 2014 Losses < 12 Months Losses 12 Months or > Total Fair
Value Gross
Unrealized
Losses Fair
Value Gross
Unrealized
Losses Fair
Value Gross
Unrealized
Losses Obligations of U.S. government agencies $ 5,510,325 $ 16,481 $ 3,451,215 $ 37,069 $ 8,961,540 $ 53,550 Tax-exempt and taxable obligations of states and municipal subdivisions 9,191,726 28,694 10,667,122 158,904 19,858,848 187,598 Mortgage-backed securities 156,589 5,207 19,319,269 235,598 19,475,858 240,805 Corporate obligations 6,910,425 32,096 6,580,925 1,275,686 13,491,350 1,307,782 Other - - 971,502 283,981 971,502 283,981 $ 21,769,065 $ 82,478 $ 40,990,033 $ 1,991,238 $ 62,759,098 $ 2,073,716 Approximately 18% of the number of securities in the investment portfolio at December 31, 2015, reflected an unrealized loss. Management is of the opinion the Company has the ability to hold these securities until such time as the value recovers or the securities mature. Management also believes the deterioration in value is attributable to changes in market interest rates and lack of liquidity in the credit markets. We have determined that these securities are not other-than-temporarily impaired based upon anticipated cash flows.NOTE E - LOANSLoans typically provide higher yields than the other types of earning assets, and thus one of the Company's goals is for loans to be the largest category of the Company's earning assets. At December 31, 2015 and December 31, 2014, respectively, loans accounted for 74.0% and 71.3% of earning assets. The Company controls and mitigates the inherent credit and liquidity risks through the composition of its loan portfolio.64The following table shows the composition of the loan portfolio by category: December 31, 2015 December 31, 2014 Amount Percent
of
Total Amount
of
Total (Dollars in thousands) Mortgage loans held for sale $ 3,974 0.5 % $ 2,103 0.3 % Commercial, financial and agricultural 129,197 16.6 106,109 15.0 Real Estate: Mortgage-commercial 253,309 32.6 238,602 33.89 Mortgage-residential 272,180 35.1 256,406 36.3 Construction 99,161 12.8 84,935 12.0 Lease financing receivable 2,650 0.3 - - Consumer and other 16,018 2.1 18,480 2.6 Total loans 776,489 100 % 706,635 100 % Allowance for loan losses (6,747 ) (6,095 ) Net loans $ 769,742 $ 700,540 In the context of this discussion, a "real estate mortgage loan" is defined as any loan, other than a loan for construction purposes, secured by real estate, regardless of the purpose of the loan. The Company follows the common practice of financial institutions in the Company’s market area of obtaining a security interest in real estate whenever possible, in addition to any other available collateral. This collateral is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to increase the magnitude of the real estate loan portfolio component. Generally, the Company limits its loan-to-value ratio to 80%. Management attempts to maintain a conservative philosophy regarding its underwriting guidelines and believes it will reduce the risk elements of its loan portfolio through strategies that diversify the lending mix.Loans held for sale consist of mortgage loans originated by the Bank and sold into the secondary market. Commitments from investors to purchase the loans are obtained upon origination.Activity in the allowance for loan losses for December 31, 2015 and 2014 was as follows:(In thousands) 2015 2014 Balance at beginning of period $ 6,095 $ 5,728 Loans charged-off: Real Estate (534 ) (1,203 ) Installment and Other (126 ) (167 ) Commercial, Financial and Agriculture (183 ) (89 ) Total (843 ) (1,459 ) Recoveries on loans previously charged-off: Real Estate 905 325 Installment and Other 81 68 Commercial, Financial and Agriculture 99 15 Total 1,085 408 Net (Charge-offs) Recoveries 242 (1,051 ) Provision for Loan Losses 410 1,418 Balance at end of period $ 6,747 $ 6,095 65The following tables represent how the allowance for loan losses is allocated to a particular loan type as well as the percentage of the category to total loans at December 31, 2015 and December 31, 2014.Allocation of the Allowance for Loan Losses December 31, 2015 (Dollars in thousands) Amount % of loans
in each
category
to total loans Commercial Non Real Estate $ 895 17.1 % Commercial Real Estate 3,018 58.4 Consumer Real Estate 1,477 21.9 Consumer 141 2.5 Unallocated 1,216 .1 Total $ 6,747 100 % December 31, 2014 (Dollars in thousands) Amount
category
to total loans Commercial Non Real Estate $ 713 15.3 % Commercial Real Estate 3,355 57.9 Consumer Real Estate 1,852 24.2 Consumer 175 2.6 Unallocated - - Total $ 6,095 100 % The following table represents the Company’s impaired loans at December 31, 2015 and December 31, 2014. This table includes performing troubled debt restructurings. December 31, December 31, 2015 2014 (In thousands) Impaired Loans: Impaired loans without a valuation allowance $ 6,020 $ 4,702 Impaired loans with a valuation allowance 4,107 4,858 Total impaired loans $ 10,127 $ 9,560 Allowance for loan losses on impaired loans at period end 957 968 Total nonaccrual loans 7,368 6,056 Past due 90 days or more and still accruing 29 669 Average investment in impaired loans 9,652 7,077 66The following table is a summary of interest recognized and cash-basis interest earned on impaired loans for the years ended December 31, 2015 and December 31, 2014: 2015 2014 Interest income recognized during impairment - 129 Cash-basis interest income recognized 211 256 The gross interest income that would have been recorded in the period that ended if the nonaccrual loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the twelve months for the years ended December 31, 2015 and 2014, was $116,000 and $92,000, respectively. The Company had no loan commitments to borrowers in non-accrual status at December 31, 2015 and 2014.The following tables provide the ending balances in the Company's loans (excluding mortgage loans held for sale) and allowance for loan losses, broken down by portfolio segment as of December 31, 2015 and December 31, 2014. The tables also provide additional detail as to the amount of our loans and allowance that correspond to individual versus collective impairment evaluation. The impairment evaluation corresponds to the Company's systematic methodology for estimating its Allowance for Loan Losses.December 31, 2015 Installment Commercial, Real Estate and
Other Financial and Agriculture Total (In thousands) Loans Individually evaluated $ 9,782 $ 39 $ 306 $ 10,127 Collectively evaluated 610,996 19,591 131,801 762,388 Total $ 620,778 $ 19,630 $ 132,107 $ 772,515 Allowance for Loan Losses Individually evaluated $ 882 $ 25 $ 50 $ 957 Collectively evaluated 3,613 1,332 845 5,790 Total $ 4,495 $ 1,357 $ 895 $ 6,747 December 31, 2014 Installment Commercial, Real Estate And
Other Financial and Agriculture Total (In thousands) Loans Individually evaluated $ 9,282 $ 38 $ 240 $ 9,560 Collectively evaluated 568,952 18,610 107,410 694,972 Total $ 578,234 $ 18,648 $ 107,650 $ 704,532 Allowance for Loan Losses Individually evaluated $ 922 $ 29 $ 17 $ 968 Collectively evaluated 4,285 146 696 5,127 Total $ 5,207 $ 175 $ 713 $ 6,095 67The following tables provide additional detail of impaired loans broken out according to class as of December 31, 2015 and 2014. The recorded investment included in the following table represents customer balances net of any partial charge-offs recognized on the loans, net of any deferred fees and costs. As nearly all of our impaired loans at December 31, 2015 are on nonaccrual status, recorded investment excludes any insignificant amount of accrued interest receivable on loans 90-days or more past due and still accruing. The unpaid balance represents the recorded balance prior to any partial charge-offs.December 31, 2015 Average Interest Recorded Income Recorded Unpaid Related Investment Recognized Investment Balance Allowance YTD YTD (In thousands) Impaired loans with no related allowance: Commercial installment $ - $ - $ - $ 2 $ - Commercial real estate 5,790 5,828 - 5,099 50 Consumer real estate 223 223 - 205 - Consumer installment 7 7 - 8 - Total $ 6,020 $ 6,058 $ - $ 5,314 $ 50 Impaired loans with a related allowance: Commercial installment $ 306 $ 306 $ 50 $ 264 $ 14 Commercial real estate 2,927 2,927 444 2,891 132 Consumer real estate 842 842 438 1,152 15 Consumer installment 32 32 25 31 - Total $ 4,107 $ 4,107 $ 957 $ 4,338 $ 161 Total Impaired Loans: Commercial installment $ 306 $ 306 $ 50 $ 266 $ 14 Commercial real estate 8,717 8,755 444 7,990 182 Consumer real estate 1,065 1,065 438 1,357 15 Consumer installment 39 39 25 39 - Total Impaired Loans $ 10,127 $ 10,165 $ 957 $ 9,652 $ 211 68December 31, 2014 Average Interest Recorded Income Recorded Unpaid Related Investment Recognized Investment Balance Allowance YTD YTD (In thousands) Impaired loans with no related allowance: Commercial installment $ - $ - $ - $ 50 $ - Commercial real estate 4,665 4,665 - 2,654 142 Consumer real estate 27 27 - 179 - Consumer installment 10 10 - 11 - Total $ 4,702 $ 4,702 $ - $ 2,894 $ 142 Impaired loans with a related allowance: Commercial installment $ 240 $ 240 $ 18 $ 189 $ 20 Commercial real estate 2,558 2,558 315 2,415 59 Consumer real estate 2,032 2,032 607 1,546 33 Consumer installment 28 28 28 33 2 Total $ 4,858 $ 4,858 $ 968 $ 4,183 $ 114 Total Impaired Loans: Commercial installment $ 240 $ 240 $ 18 $ 239 $ 20 Commercial real estate 7,223 7,223 315 5,069 201 Consumer real estate 2,059 2,059 607 1,725 33 Consumer installment 38 38 28 44 2 Total Impaired Loans $ 9,560 $ 9,560 $ 968 $ 7,077 $ 256 Loans acquired with deteriorated credit quality are those purchased in the BCB Holding Company, Inc. acquisition (See Note C -Business Combination for further information). These loans were recorded at estimated fair value at the acquisition date with no carryover of the related allowance for loan losses. The acquired loans were segregated as of the acquisition date between those considered to be performing (acquired non-impaired loans) and those with evidence of credit deterioration (acquired impaired loans). Acquired loans are considered impaired if there is evidence of credit deterioration and if it is probable, at acquisition, all contractually required payments will not be collected.The following table presents information regarding the contractually required payments receivable, cash flows expected to be collected and the estimated fair value of loans acquired in the BCB acquisition as of July 1, 2014, the closing date of the transaction:69 July 1, 2014 (In thousands) Commercial,
financial and
agricultural Mortgage-
Commercial Mortgage-
Residential Commercial
and other Total Contractually required payments $ 1,519 $ 29,648 $ 7,933 $ 976 $ 40,076 Cash flows expected to be collected 1,570 37,869 9,697 1,032 50,168 Fair value of loans acquired 1,513 28,875 7,048 957 38,393 Total outstanding acquired impaired loans were $3,039,840 as of December 31, 2015. The outstanding balance of these loans is the undiscounted sum of all amounts, including amounts deemed principal, interest, fees, penalties, and other under the loans, owed at the reporting date, whether or not currently due and whether or not any such amounts have been charged off.Changes in the carrying amount and accretable yield for acquired impaired loans were as follows for the year ended December 31, 2015 (in thousands): Accretable
Yield Carrying
Amount of
Loans Balance at beginning of period $ 1,417 $ 2,063 Accretion (198 ) 198 Payments received, net - (440 ) Balance at end of period $ 1,219 $ 1,821 The following tables provide additional detail of troubled debt restructurings during the twelve months ended December 31, 2015 and 2014. December 31, 2015 Outstanding
Recorded Outstanding
Recorded Interest Investment
Pre-Modification Investment
Post-Modification Number of
Loans Income
Recognized (in thousands except number of loans) Commercial installment $ - $ - - $ - Commercial real estate 499 492 2 10 Consumer real estate 45 40 1 - Consumer installment - - - - Total $ 544 $ 532 3 $ 10 December 31, 2014 Outstanding
Recorded Outstanding
Recorded Interest Investment
Pre-Modification Investment
Post-Modification Number of
Loans Income
Recognized (in thousands except number of loans) Commercial installment $ 239 $ 176 1 $ 15 Commercial real estate 1,345 1,342 7 26 Consumer real estate 94 94 1 1 Consumer installment - - - - Total $ 1,678 $ 1,612 9 $ 42 70The TDRs presented above did increase the allowance for loan losses but resulted in -0- charge-offs for the years ended December 31, 2015 and 2014, respectively.The balance of troubled debt restructurings at December 31, 2015 and 2014, was $6.9 million and $6.8 million, respectively, calculated for regulatory reporting purpose. As of December 31, 2015, the Company had no additional amount committed on any loan classified as troubled debt restructuring.All loans were performing as agreed with modified terms.During the twelve month period ending December 31, 2015 and 2014, the terms of 3 and 9 loans, respectively, were modified as TDRs. The modifications included one of the following or a combination of the following: maturity date extensions, interest only payments, amortizations were extended beyond what would be available on similar type loans, and payment waiver. No interest rate concessions were given on these nor were any of these loans written down. December 31, 2015 Current
Loans Non-Accrual Total Commercial installment $ 206,237 $ - $ - $ 50,221 $ 256,458 Commercial real estate 1,823,217 - - 2,933,287 4,756,504 Consumer real estate 721,110 - - 1,134,816 1,855,926 Consumer installment 7,894 - - 29,435 37,329 Total $ 2,758,458 $ - $ - $ 4,147,759 $ 6,906,217 Allowance for loan losses $ 106,028 $ - $ - $ 197,338 $ 303,366 December 31, 2014 Current
Loans Non-Accrual Total Commercial installment $ 233,340 $ - $ - $ - $ 233,340 Commercial real estate 1,684,755 - - 2,729,170 4,413,925 Consumer real estate 952,162 622,302 - 448,796 2,023,260 Consumer installment 9,983 - - 103,109 113,092 Total $ 2,880,240 $ 622,302 $ - $ 3,281,075 $ 6,783,617 Allowance for loan losses $ 120,220 $ 11,206 $ 102,657 $ - $ 234,083 71The following tables summarize by class our loans classified as past due in excess of 30 days or more in addition to those loans classified as non-accrual: December 31, 2015 (In thousands)
Days Past Due
90 Days or
More and
Still Accruing Non-Accrual Real Estate-construction $ 311 $ - $ 2,956 $ 3,267 $ 99,161 Real Estate-mortgage 3,339 29 2,055 5,423 272,180 Real Estate-nonfarm nonresidential 736 - 2,225 2,961 253,309 Commercial 97 - 100 197 129,197 Lease financing receivable - - - - 2,650 Consumer 70 - 32 102 16,018 Total $ 4,553 $ 29 $ 7,368 $ 11,950 $ 772,515 December 31, 2014 (In thousands)
Days or More
and Still Non-Accrual Real Estate-construction $ 428 $ - $ 2,747 $ 3,175 $ 84,935 Real Estate-mortgage 3,208 208 2,164 5,580 256,406 Real Estate- nonfarm nonresidential 3,408 461 1,102 4,971 238,602 Commercial 29 - 5 34 106,109 Consumer 90 - 38 128 18,480 Total $ 7,163 $ 669 $ 6,056 $ 13,888 $ 704,532 The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company uses the following definitions for risk ratings, which are consistent with the definitions used in supervisory guidance:Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.72Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.As of December 31, 2015 and December 31, 2014, and based on the most recent analysis performed, the risk category of loans by class of loans (excluding mortgage loans held for sale) was as follows:(In thousands)December 31, 2015 Commercial, Real Estate
Commercial Real Estate
Mortgage Installment and
Other Financial and
Agriculture Total Pass $ 434,638 $ 167,394 $ 19,556 $ 132,101 $ 753,689 Special Mention 681 153 - 168 1,002 Substandard 16,655 1,453 75 178 18,361 Doubtful - 327 - - 327 Subtotal 451,974 169,327 19,631 132,447 773,379 Less: Unearned Discount 448 76 - 340 864 Loans, net of unearned discount $ 451,526 $ 169,251 $ 19,631 $ 132,107 $ 772,515 December 31, 2014 Commercial, Real Estate
Commercial Real Estate
Mortgage Installment and
Other Financial and
Agriculture Total Pass $ 388,569 $ 167,827 $ 18,558 $ 107,126 $ 682,080 Special Mention 4,756 191 - 498 5,445 Substandard 14,727 2,567 90 63 17,447 Doubtful - - - - - Subtotal 408,052 170,585 18,648 107,687 704,972 Less: Unearned Discount 320 82 - 38 440 Loans, net of unearned discount $ 407,732 $ 170,503 $ 18,648 $ 107,649 $ 704,532 73NOTE F - PREMISES AND EQUIPMENTPremises and equipment are stated at cost, less accumulated depreciation and amortization as follows: 2015 2014 Premises: Land $ 10,352,314 $ 10,565,633 Buildings and improvements 26,164,412 25,872,002 Equipment 10,927,780 11,663,195 Construction in progress 76,920 188,146 47,521,426 48,288,976 Less accumulated depreciation and amortization 13,898,415 13,479,133 $ 33,623,011 $ 34,809,843 The amounts charged to operating expense for depreciation were $1,645,081 and $1,552,297 in 2015 and 2014, respectively.NOTE G - DEPOSITSThe aggregate amount of time deposits in denominations of $100,000 or more as of December 31, 2015 and 2014, was $105,605,438 and $120,693,807, respectively.At December 31, 2015, the scheduled maturities of time deposits included in interest-bearing deposits were as follows (in thousands):Year Amount 2016 $ 120,771 2017 25,924 2018 12,154 2019 8,408 2020 12,216 Thereafter - $ 179,473 NOTE H - BORROWED FUNDSBorrowed funds consisted of the following: December 31, 2015 2014 Reverse Repurchase Agreement $ 5,000,000 $ 5,000,000 Fed Funds purchased 5,340,000 - FHLB advances 99,981,245 84,450,067 $ 110,321,245 $ 89,450,067 Advances from the FHLB have maturity dates ranging from January 2016 through June 2019. Interest is payable monthly at rates ranging from .31% to 5.47%. Advances due to the FHLB are collateralized by a blanket lien on first mortgage loans in the amount of the outstanding borrowings, FHLB capital stock, and amounts on deposit with the FHLB. At December 31, 2015, FHLB advances available and unused totaled $242,945,692.74Future annual principal repayment requirements on the borrowings from the FHLB at December 31, 2015, were as follows:Year Amount 2016 $ 91,981,245 2017 5,000,000 2018 - 2019 3,000,000 Total $ 99,981,245 Reverse Repurchase Agreements consist of one $5,000,000 agreement. The agreement is secured by securities with a fair value of $5,501,503 at December 31, 2015 and $7,443,951 at December 31, 2014. The maturity date of the remaining agreement is September 26, 2017, with a rate of 3.81%.NOTE I – LEASE OBLIGATIONSThe Company is committed under several long-term operating leases which provide for minimum lease payments. Certain leases contain options for renewal. Total rental expense under these operating leases amounted to $530,000 and $421,000 as of December 31, 2015 and 2014, respectively.The Company is also committed under two long-term capital lease agreements. One capital lease agreement had an outstanding balance of $1,018,000 and $1,154,000 at December 31, 2015 and 2014, respectively (included in other liabilities). This lease has a remaining term of 6 years at December 31, 2015. Assets related to the capital lease are included in premises and equipment and the cost consists of $2.6 million less accumulated depreciation of approximately $1,127,913 and $866,313 at December 31, 2015 and 2014, respectively. The second capital lease agreement had an outstanding balance of $309,000 at December 31, 2015. This lease has a remaining term of 4 years at December 31, 2015. Assets related to the capital lease are included in premises and equipment and the cost consists of $0.3 million less accumulated depreciation of approximately $1,000 at December 31, 2015.Minimum future lease payments for the operating and capital leases at December 31, 2015, were as follows: Operating Leases Capital Leases (In thousands) 2016 503 252 2017 214 275 2018 141 275 2019 141 275 2020 130 191 Thereafter 556 175 Total Minimum Lease Payments $ 1,685 $ 1,443 Less: Amount representing interest (116 ) Present value of minimum lease payments $ 1,327 75NOTE J - REGULATORY MATTERSThe Company and its subsidiary bank are subject to regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its subsidiary bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgment by regulators about components, risk weightings, and other related factors.To ensure capital adequacy, quantitative measures have been established by regulators, and these require the Company and its subsidiary bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined) to risk-weighted assets (as defined), Tier I capital to adjusted total assets (leverage) and common equity Tier 1. Management believes, as of December 31, 2015, that the Company and its subsidiary bank exceeded all capital adequacy requirements.In 2013, the Federal Reserve voted to adopt final capital rules implementing Basel III requirements for U.S. Banking organizations. Under the final rule, minimum requirements increased for both the quantity and quality of capital held by banking organizations. The final rule includes a new minimum ratio of common equity Tier 1 capital (Tier 1 Common) to risk-weighted assets and a Tier 1 Common capital conservation buffer of 2.5% of risk-weighted assets that will apply to all supervised financial institutions. The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets and includes a minimum leverage ratio of 4% for all banking organizations. These new minimum capital ratios are effective on January 1, 2015, and will be fully phased in on January 1, 2019.At December 31, 2015 and 2014, the subsidiary bank was categorized by regulators as well-capitalized under the regulatory framework for prompt corrective action. Under Basel III requirements, a financial institution is considered to be well-capitalized if it has a total risk-based capital ratio of 10% or more, has a Tier I risk-based capital ratio of 8% or more, has a common equity Tier 1 of 6.5%, and has a Tier I leverage capital ratio of 5% or more. There are no conditions or anticipated events that, in the opinion of management, would change the categorization. The actual capital amounts and ratios at December 31, 2015 and 2014, are presented in the following table. No amount was deducted from capital for interest-rate risk exposure. Company Subsidiary (Consolidated) The First Amount Ratio Amount Ratio December 31, 2015 Total risk-based $ 103,403 11.9 % $ 102,911 11.8 % Common equity Tier 1 70,587 8.1 % 96,164 11.0 % Tier I risk-based 96,656 11.1 % 96,164 11.0 % Tier I leverage 96,656 8.7 % 96,164 8.6 % December 31, 2014 Total risk-based $ 95,419 12.3 % $ 94,888 12.2 % Tier I risk-based 89,324 11.5 % 88,793 11.4 % Tier I leverage 89,324 8.4 % 88,793 8.4 % 76The minimum amounts of capital and ratios as established by banking regulators at December 31, 2015 and 2014, were as follows: Company Subsidiary (Consolidated) The First Amount Ratio Amount Ratio December 31, 2015 Total risk-based $ 69,753 8.0 % $ 69,698 8.0 % Common equity Tier 1 39,236 4.5 % 39,205 4.5 % Tier I risk-based 52,315 6.0 % 52,274 6.0 % Tier I leverage 44,661 4.0 % 44,625 4.0 % December 31, 2014 Total risk-based $ 62,272 8.0 % $ 62,208 8.0 % Tier I risk-based 31,136 4.0 % 31,104 4.0 % Tier I leverage 42,363 4.0 % 42,325 4.0 % The Company’s dividends, if any, are expected to be made from dividends received from its subsidiary bank. The OCC limits dividends of a national bank in any calendar year to the net profits of that year combined with the retained net profits for the two preceding years.NOTE K - INCOME TAXESThe components of income tax expense are as follows: Years Ended December 31, 2015 2014 Current: Federal $ 2,484,372 $ 1,757,098 State 473,037 347,382 Deferred 255,638 331,399 $ 3,213,047 $ 2,435,879 The Company's income tax expense differs from the amounts computed by applying the federal income tax statutory rates to income before income taxes. A reconciliation of the differences is as follows: Years Ended December 31, 2015 2014 Amount % Amount % Income taxes at statutory rate $ 4,083,995 34 % $ 3,076,856 34 % Tax-exempt income (831,141 ) (7 )% (863,204 ) (10 )% Nondeductible expenses 161,176 1 % 238,638 3 % State income tax, net of federal tax effect 307,951 3 % 215,803 2 % Tax credits (295,800 ) (2 )% (337,716 ) (4 )% Other, net (213,134 ) (2 )% 105,502 2 % $ 3,213,047 27 % $ 2,435,879 27 % 77The components of deferred income taxes included in the consolidated financial statements were as follows: December 31, 2015 2014 Deferred tax assets: Allowance for loan losses $ 2,516,669 $ 2,273,435 Net operating loss carryover 2,426,903 2,615,552 Other real estate 275,530 357,873 Other 1,194,345 1,200,419 6,413,447 6,447,279 Deferred tax liabilities: Securities accretion (112,050 ) (124,942 ) Premises and equipment (554,103 ) (443,080 ) Unrealized gain on available-for-sale securities (560,791 ) (932,473 ) Core deposit intangible (149,109 ) (238,562 ) Goodwill (929,316 ) (716,188 ) (2,305,369 ) (2,455,245 ) Net deferred tax asset, included in other assets $ 4,108,078 $ 3,992,034 With the acquisition of Wiggins in 2006, Baldwin in 2013, and Bay in 2014, the Company assumed federal tax net operating loss carryovers. These net operating losses are available to the Company through the years 2023, 2033, and 2034, respectively.The Company follows the guidance of ASC Topic 740,Income Taxes,which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As of December 31, 2015, the Company had no uncertain tax positions that it believes should be recognized in the financial statements. The tax years still subject to examination by taxing authorities are years subsequent to 2011.NOTE L - EMPLOYEE BENEFITSThe Company and its subsidiary bank provide a deferred compensation arrangement (401(k) plan) whereby employees contribute a percentage of their compensation. For employee contributions of six percent or less, the Company and its subsidiary bank provide a 50% matching contribution. Contributions totaled $287,055 in 2015 and $255,716 in 2014.The Company sponsors an Employee Stock Ownership Plan (ESOP) for employees who have completed one year of service for the Company and attained age 21. Employees become fully vested after five years of service. Contributions to the plan are at the discretion of the Board of Directors. At December 31, 2015, the ESOP held 5,902 shares of Company common stock and had no debt obligation. All shares held by the plan were considered outstanding for net income per share purposes. Total ESOP expense was $25,506 for 2015 and $26,267 for 2014.During 2014, the Company established a Supplemental Executive Retirement Plan (“SERP”) for three active key executives. Pursuant to the SERP, these officers are entitled to receive 180 equal monthly payments commencing at the later of obtaining age 65 or separation from service. The costs of such benefits, assuming a retirement date at age 65, will be accrued by the Company at such retirement date. During 2015, the Company accrued $88,992 for future benefits payable under the SERP. The SERP is an unfunded plan and is considered a general contractual obligation of the Company.78NOTE M - STOCK PLANSIn 2007, the Company adopted the 2007 Stock Incentive Plan. The 2007 Plan provided for the issuance of up to 315,000 shares of Company Common Stock, $1.00 par value per share. In 2015, the Company adopted an amendment to the 2007 Stock Incentive Plan which provided for the issuance of an additional 300,000 shares of Company Common Stock, $1.00 par value per share, for a total of 615,000 shares. Shares issued under the 2007 Plan may consist in whole or in part of authorized but unissued shares or treasury shares. During the year ended December 31, 2014, 69,627 nonvested restricted stock awards were granted under the Plan. During the year ended December 31, 2015, 69,327 nonvested restricted stock awards were granted under the Plan and no stock awards were forfeited due to separation. During 2015, 6,324 shares were repurchased for payment of taxes. The weighted average grant-date fair value for these shares was $14.06 per share. Compensation costs in the amount of $721,124 was recognized for the year ended December 31, 2015 and $617,779 for the year ended December 31, 2014. Shares of restricted stock granted to employees under this stock plan are subject to restrictions as to the vesting period. The restricted stock award becomes 100% vested on the earliest of 1) the three or five year vesting period provided the Grantee has not incurred a termination of employment prior to that date, 2) the Grantee’s retirement, or 3) the Grantee’s death. During this period, the holder is entitled to full voting rights and dividends, which are held until vested. As of December 31, 2015, there was approximately $1,266,000 of unrecognized compensation cost related to this Plan. The cost is expected to be recognized over the remaining term of the vesting period (approximately 4 years).NOTE N - SUBORDINATED DEBENTURESOn June 30, 2006, the Company issued $4,124,000 of floating rate junior subordinated deferrable interest debentures to The First Bancshares Statutory Trust 2 in which the Company owns all of the common equity. The debentures are the sole asset of the Trust. The Trust issued $4,000,000 of Trust Preferred Securities (TPSs) to investors. The Company’s obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the Trust’s obligations under the preferred securities. The preferred securities were redeemable by the Company at its option. The preferred securities must be redeemed upon maturity of the debentures in 2036. Interest on the preferred securities is the three month London Interbank Offer Rate (LIBOR) plus 1.65% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities. On July 27, 2007, the Company issued $6,186,000 of floating rate junior subordinated deferrable interest debentures to The First Bancshares Statutory Trust 3 in which the Company owns all of the common equity. The debentures are the sole asset of Trust 3. The Trust issued $6,000,000 of Trust Preferred Securities (TPSs) to investors. The Company’s obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the Trust’s obligations under the preferred securities. The preferred securities are redeemable by the Company at its option. The preferred securities must be redeemed upon maturity of the debentures in 2037. Interest on the preferred securities is the three month LIBOR plus 1.40% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities. In accordance with the provisions of ASC Topic 810,Consolidation,the trusts are not included in the consolidated financial statements.79NOTE O - TREASURY STOCKShares held in treasury totaled 26,494 at December 31, 2015, and 2014.NOTE P - RELATED PARTY TRANSACTIONSIn the normal course of business, the Bank makes loans to its directors and executive officers and to companies in which they have a significant ownership interest. In the opinion of management, these loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other parties, are consistent with sound banking practices, and are within applicable regulatory and lending limitations. Such loans amounted to approximately $7,957,000 and $8,442,000 at December 31, 2015 and 2014, respectively. The activity in loans to current directors, executive officers, and their affiliates during the year ended December 31, 2015, is summarized as follows (in thousands):Loans outstanding at beginning of year $ 8,442 New loans 362 Repayments (847 ) Loans outstanding at end of year $ 7,957 NOTE Q - COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS OF CREDIT RISKIn the normal course of business, there are outstanding various commitments and contingent liabilities, such as guaranties, commitments to extend credit, etc., which are not reflected in the accompanying financial statements. The subsidiary bank had outstanding letters of credit of $1,135,000 and $986,000at December 31, 2015 and 2014, respectively, and had made loan commitments of approximately $144,086,000 and $128,086,000 at December 31, 2015 and 2014, respectively.Commitments to extend credit and letters of credit include some exposure to credit loss in the event of nonperformance of the customer. 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. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit policies and procedures for such commitments are the same as those used for lending activities. Because these instruments have fixed maturity dates and because a number expire without being drawn upon, they generally do not present any significant liquidity risk. No significant losses on commitments were incurred during the two years ended December 31, 2015, nor are any significant losses as a result of these transactions anticipated.The primary market area served by the Bank is Forrest, Lamar, Jones, Pearl River, Jackson, Hancock, Stone, and Harrison Counties within South Mississippi, as well as Washington Parish, St. Tammany Parish and East Baton Rouge Parish in Louisiana and Baldwin and Mobile Counties in South Alabama. Management closely monitors its credit concentrations and attempts to diversify the portfolio within its primary market area. As of December 31, 2015, management does not consider there to be any significant credit concentrations within the loan portfolio. Although the Bank’s loan portfolio, as well as existing commitments, reflects the diversity of its primary market area, a substantial portion of a borrower's ability to repay a loan is dependent upon the economic stability of the area.80NOTE R - FAIR VALUES OF ASSETS AND LIABILITIESThe Company follows the guidance of ASC Topic 820,Fair Value Measurements and Disclosures, that establishes a framework for measuring fair value and expands disclosures about fair value measurements.The guidance defines the fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.In accordance with the guidance, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:Level 1:Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.Level 2:Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities.Level 3:Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets.Available-for-Sale SecuritiesThe fair value of available-for-sale securities is determined by various valuation methodologies. Where quoted market prices are available in an active market, securities are classified within Level 1. Level 1 securities include mutual funds. If quoted market prices are not available, then fair values are estimated by using pricing models or quoted prices of securities with similar characteristics. Level 2 securities include U.S. Treasury securities, obligations of U.S. government corporations and agencies, obligations of states and political subdivisions, mortgage-backed securities and collateralized mortgage obligations. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.The following table presents the Company’s available-for-sale securities that are measured at fair value on a recurring basis and the level within the hierarchy in which the fair value measurements fell as of December 31, 2015 and December 31, 2014 (in thousands):81 Fair Value Measurements Using Quoted Prices in
Active Markets
For
Identical Assets Significant
Other
Observable
Inputs Significant
Unobservable
Inputs Fair Value (Level 1) (Level 2) (Level 3) December 31, 2015 Obligations of U.S. Government agencies $ 19,611 $ - $ 19,611 $ - Municipal securities 97,889 - 97,889 - Mortgage-backed securities 98,925 - 98,925 - Corporate obligations 22,346 - 19,789 2,557 Other 961 961 - - Total $ 239,732 $ 961 $ 236,214 $ 2,557 Fair Value Measurements Using Quoted Prices in
Active Markets
For
Identical Assets Significant
Other
Observable
Inputs Significant
Unobservable
Inputs Fair Value (Level 1) (Level 2) (Level 3) December 31, 2014 Obligations of U.S. Government agencies $ 27,372 $ - $ 27,372 $ - Municipal securities 104,582 - 104,582 - Mortgage-backed securities 93,036 - 93,036 - Corporate obligations 28,784 - 25,983 2,801 Other 972 972 - - Total $ 254,746 $ 972 $ 250,973 $ 2,801 82The following is a reconciliation of activity for assets measured at fair value based on significant unobservable (non-market) information.(In thousands) Bank-Issued Trust
Trust Preferred
Securities 2015 2014 Balance of recurring Level 3 assets at January 1 $ 2,801 $ 2,798 Transfers into Level 3 - - Transfers out of Level 3 - - Unrealized income (loss) included in comprehensive income (244 ) 3 Balance of recurring Level 3 assets at December 31 $ 2,557 $ 2,801 The following table presents quantitative information about recurring Level 3 fair value measurements (in thousands):Trust Preferred
Securities Fair Value Valuation Technique Significant
Unobservable Inputs Range of Inputs December 31, 2015 $ 2,557 Discounted cash flow Discount rate 1.08% - 2.77% December 31, 2014 $ 2,801 Discounted cash flow Discount rate .79% - 2.49% Following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a non-recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.Impaired LoansLoans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for estimating fair value include using the fair value of the collateral for collateral dependent loans or, where a loan is determined not to be collateral dependent, using the discounted cash flow method.If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. If the impaired loan is determined not to be collateral dependent, then the discounted cash flow method is used. This method requires the impaired loan to be recorded at the present value of expected future cash flows discounted at the loan’s effective interest rate. The effective interest rate of a loan is the contractual interest rate adjusted for any net deferred loan fees or costs, premiums or discounts existing at origination or acquisition of the loan. Impaired loans are classified within Level 2 of the fair value hierarchy.Other Real Estate OwnedOther real estate owned consists of properties obtained through foreclosure. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Fair value of other real estate owned is based on current independent appraisals. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined the fair value declines subsequent to foreclosure, a valuation allowance is recorded through other income. Operating costs associated with the assets after acquisition are also recorded as non-interest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other income. Other real estate owned measured at fair value on a non-recurring basis at December 31, 2015, amounted to $3,083,000. Other real estate owned is classified within Level 2 of the fair value hierarchy.83The following table presents the fair value measurement of assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fell at December 31, 2015 and December 31, 2014 (in thousands). Fair Value Measurements Using Quoted Prices in
Active Markets
For
Identical Assets Significant
Other
Observable
Inputs Significant
Unobservable
Inputs Fair Value (Level 1) (Level 2) (Level 3) December 31, 2015 Impaired loans $ 10,127 $ - $ 10,127 $ - Other real estate owned 3,083 - 3,083 - December 31, 2014 Impaired loans $ 9,560 $ - $ 9,560 $ - Other real estate owned 4,655 - 4,655 - The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value:Cash and Cash Equivalents– For such short-term instruments, the carrying amount is a reasonable estimate of fair value.Investment in securities available-for-sale and held-to-maturity – The fair value measurement for securities available-for-sale was discussed earlier. The same measurement approach was used for securities held-to-maturity and other securities.Loans – 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.Bank-owned Life Insurance– The fair value of bank-owned life insurance approximates the carrying amount, because upon liquidation of these investments, the Company would receive the cash surrender value which equals the carrying amount.Deposits – The fair values of demand deposits are, as required by ASC Topic 825, equal to the carrying value of such deposits. Demand deposits include noninterest-bearing demand deposits, savings accounts, NOW accounts, and money market demand accounts. The fair value of variable rate term deposits, those repricing within six months or less, approximates the carrying value of these deposits. Discounted cash flows have been used to value fixed rate term deposits and variable rate term deposits repricing after six months. The discount rate used is based on interest rates currently being offered on comparable deposits as to amount and term.84Short-Term Borrowings– The carrying value of any federal funds purchased and other short-term borrowings approximates their fair values.FHLB and Other Borrowings– The fair value of the fixed rate borrowings are estimated using discounted cash flows, based on current incremental borrowing rates for similar types of borrowing arrangements. The carrying amount of any variable rate borrowing approximates its fair value.Subordinated Debentures –The subordinated debentures bear interest at a variable rate and the carrying value approximates the fair value.Off-Balance Sheet Instruments– Fair values of off-balance sheet financial instruments are based on fees charged to enter into similar agreements. However, commitments to extend credit do not represent a significant value until such commitments are funded or closed. Management has determined that these instruments do not have a distinguishable fair value and no fair value has been assigned.As of December 31, 2015 Fair Value Measurements Carrying
Amount Estimated
Fair Value Quoted
Prices
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Financial Instruments: Assets: Cash and cash equivalents $ 41,259 $ 41,259 $ 41,259 $ - $ - Securities available-for-sale 239,732 239,732 961 236,214 2,557 Securities held-to-maturity 7,092 8,548 - 8,548 - Other securities 8,135 8,135 - 8,135 - �� Loans, net 769,742 784,113 - - 784,113 Bank-owned life insurance 14,872 14,872 - 14,872 - Liabilities: Noninterest-bearing deposits $ 189,445 $ 189,445 $ - $ 189,445 $ - Interest-bearing deposits 727,250 726,441 - 726,441 - Subordinated debentures 10,310 10,310 - - 10,310 FHLB and other borrowings 110,321 110,321 - 110,321 - 85As of December 31, 2014 Fair Value Measurements Carrying
Amount Estimated
Fair Value Quoted
Prices
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Financial Instruments: Assets: Cash and cash equivalents $ 44,618 $ 44,618 $ 44,618 $ - $ - Securities available-for-sale 254,746 254,746 972 250,973 2,801 Securities held-to-maturity 8,193 9,994 - 9,994 - Other securities 7,234 7,234 - 7,234 - Loans, net 700,540 715,849 - - 715,849 Bank-owned life insurance 14,463 14,463 - 14,463 - Liabilities: Noninterest-bearing deposits $ 201,362 $ 201,362 $ - $ 201,362 $ - Interest-bearing deposits 691,413 691,036 - 691,036 - Subordinated debentures 10,310 10,310 - - 10,310 FHLB and other borrowings 89,450 89,450 - 89,450 - NOTE S - SENIOR PREFERRED STOCKPursuant to the terms of the letter agreement between the Company and the United States Department of the Treasury (“Treasury”), the Company issued 17,123 CDCI Preferred Shares.The Letter Agreement contains limitations on the payment of dividends on the common stock to no more than 100% of the aggregate per share dividend and distributions for the immediate prior fiscal year (dividends of $0.15 per share were declared and paid 2011 through 2015) and on the Company’s ability to repurchase its common stock in the event of a non-payment of our dividend, and continues to subject the Company to certain of the executive compensation limitations included in the Emergency Economic Stabilization Act of 2008 (EESA), as previously disclosed by the Company. The CDCI Preferred Shares entitle the holder to an annual dividend of 2% for 8 years of the liquidation value of the shares, payable quarterly in arrears.On Wednesday, May 13, 2015, The First Bancshares, Inc. (the “Company”) entered into a Letter Agreement, including Schedule A thereto (the “Letter Agreement”), with the United States Department of the Treasury (“Treasury”), pursuant to which the Company redeemed the Warrant to purchase up to 54,705 shares of the Company’s common stock, no par value per share (the “Common Stock”) issued to Treasury on February 6, 2009 under the Capital Purchase Program. In connection with this redemption, on May 13, 2015, the Company paid Treasury an aggregate redemption price of $302,410.86NOTE T - PARENT COMPANY FINANCIAL INFORMATIONThe balance sheets, statements of income and cash flows for The First Bancshares, Inc. (parent company only) follow.Condensed Balance Sheets December 31, 2015 2014 Assets: Cash and cash equivalents $ 213,621 $ 63,707 Investment in subsidiary bank 112,943,885 105,685,727 Investments in statutory trusts 310,000 310,000 Other 686,409 808,132 $ 114,153,915 $ 106,867,566 Liabilities and Stockholders’ Equity: Subordinated debentures $ 10,310,000 $ 10,310,000 Other 407,825 341,982 Stockholders’ equity 103,436,090 96,215,584 $ 114,153,915 $ 106,867,566 Condensed Statements of Income Years Ended December 31, 2015 2014 Income: Interest and dividends $ 5,573 $ 5,453 Dividend income 1,650,000 5,109,668 Other - 364,719 1,655,573 5,479,840 Expenses: Interest on borrowed funds 185,351 181,330 Legal 295,637 504,130 Other 833,502 752,027 1,314,490 1,437,487 Income before income taxes and equity in undistributed income of subsidiary 341,083 4,042,353 Income tax benefit 487,853 296,388 Income before equity in undistributed income of subsidiary 828,936 4,338,741 Equity in undistributed income of subsidiary 7,969,766 2,274,955 Net income $ 8,798,702 $ 6,613,696 87Condensed Statements of Cash Flows Years Ended December 31, 2015 2014 Cash flows from operating activities: Net income $ 8,798,702 $ 6,613,696 Adjustments to reconcile net income to net cash used in operating activities: Equity in undistributed income of subsidiary (7,969,766 ) (2,274,955 ) Restricted stock expense 721,124 617,779 Gain on sale of assets - (364,719 ) Other, net 151,251 689,740 Net cash provided by operating activities 1,701,311 5,281,541 Cash flows from investing activities: Investment in subsidiary bank - - Outlays for acquisition (35,709 ) (4,034,668 ) Net cash used in investing activities (35,709 ) (4,034,668 ) Cash flows from financing activities: Dividends paid on common stock (778,428 ) (763,488 ) Dividends paid on preferred stock (342,460 ) (342,460 ) Repurchase of restricted stock for payment of taxes (92,390 ) (85,532 ) Repurchase of warrants (302,410 ) - Net cash used in financing activities (1,515,688 ) (1,191,480 ) Net increase in cash and cash equivalents 149,914 55,393 Cash and cash equivalents at beginning of year 63,707 8,314 Cash and cash equivalents at end of year $ 213,621 $ 63,707 88NOTE U - SUMMARY OF QUARTERLY RESULTS OF OPERATIONS AND PER SHARE AMOUNTS (UNAUDITED) Three Months Ended March 31 June 30 Sept. 30 Dec. 31 (In thousands, except per share amounts) 2015 Total interest income $ 9,683 $ 10,022 $ 10,080 $ 10,417 Total interest expense 804 806 793 804 Net interest income 8,879 9,216 9,287 9,613 Provision for loan losses 150 - 250 10 Net interest income after provision for loan losses 8,729 9,216 9,037 9,603 Total non-interest income 1,850 1,854 1,982 1,903 Total non-interest expense 7,818 8,092 7,977 8,275 Income tax expense 732 793 815 873 Net income 2,029 2,185 2,227 2,358 Preferred dividends 85 86 86 85 Net income applicable to common stockholders $ 1,944 $ 2,099 $ 2,141 $ 2,273 Per common share: Net income, basic $ .36 $ .39 $ .40 $ .42 Net income, diluted .36 .39 .39 .42 Cash dividends declared .0375 .0375 .0375 .0375 2014 Total interest income $ 8,447 $ 8,574 $ 9,688 $ 9,662 Total interest expense 623 726 833 791 Net interest income 7,824 7,848 8,855 8,871 Provision for loan losses 358 277 631 152 Net interest income after provision for loan losses 7,466 7,571 8,224 8,719 Total non-interest income 1,672 2,055 2,021 2,055 Total non-interest expense 7,227 7,384 8,071 8,051 Income tax expense 484 629 641 682 Net income 1,427 1,613 1,533 2,041 Preferred dividends and stock accretion 106 86 85 86 Net income applicable to common Stockholders $ 1,321 $ 1,527 $ 1,448 $ 1,955 Per common share: Net income, basic $ .26 $ .30 $ .27 $ .37 Net income, diluted .25 .29 .27 .36 Cash dividends declared .0375 .0375 .0375 .0375 89THE FIRST BANCSHARES, INC.2014 ANNUAL REPORTSELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS(Dollars In Thousands, Except Per Share Data) December 31, 2014 2013 2012 2011 2010 Earnings: Net interest income $ 33,398 $ 28,401 $ 22,194 $ 19,079 $ 16,334 Provision for loan losses 1,418 1,076 1,228 1,468 983 Noninterest income 7,803 7,083 6,324 4,598 3,895 Noninterest expense 30,734 28,165 22,164 18,870 15,843 Net income 6,614 4,639 4,049 2,871 2,549 Net income applicable to common stockholders 6,251 4,215 3,624 2,529 2,233 Per common share data: Basic net income per share $ 1.20 $ .98 $ 1.17 $ .83 $ .74 Diluted net income per share 1.19 .96 1.16 .82 .74 Per share data: Basic net income per share $ 1.27 $ 1.07 $ 1.31 $ .94 $ .84 Diluted net income per share 1.25 1.06 1.29 .93 .84 Selected Year End Balances: Total assets $ 1,093,768 $ 940,890 $ 721,385 $ 681,413 $ 503,045 Securities 270,174 258,023 226,301 221,176 107,136 Loans, net of allowance 700,540 577,574 408,970 383,418 327,956 Deposits 892,775 779,971 596,627 573,394 396,479 Stockholders’ equity 96,216 85,108 65,885 60,425 57,098 MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONSPurposeThe purpose of management's discussion and analysis is to make the reader aware of the significant components, events, and changes in the consolidated financial condition and results of operations of the Company and The First during the year ended December 31, 2014, when compared to the years 2013 and 2012. The Company's consolidated financial statements and related notes should also be considered.Critical Accounting PoliciesIn the preparation of the Company's consolidated financial statements, certain significant amounts are based upon judgment and estimates. The most critical of these is the accounting policy related to the allowance for loan losses. The allowance is based in large measure upon management's evaluation of borrowers' abilities to make loan payments, local and national economic conditions, and other subjective factors. If any of these factors were to deteriorate, management would update its estimates and judgments which may require additional loss provisions.Companies are required to perform periodic reviews of individual securities in their investment portfolios to determine whether decline in the value of a security is other than temporary. A review of other-than-temporary impairment requires companies to make certain judgments regarding the materiality of the decline, its effect on the financial statements and the probability, extent and timing of a valuation recovery and the company’s intent and ability to hold the security. Pursuant to these requirements, Management assesses valuation declines to determine the extent to which such changes are attributable to fundamental factors specific to the issuer, such as financial condition, business prospects or other factors or market-related factors, such as interest rates. Declines in the fair value of securities below their cost that are deemed to be other-than-temporary are recorded in earnings as realized losses.Goodwill is assessed for impairment both annually and when events or circumstances occur that make it more likely than not that impairment has occurred. As part of its testing, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines the fair value of a reporting unit is less than its carrying amount using these qualitative factors, the Company then compares the fair value of goodwill with its carrying amount, and then measures impaired loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. No impairment was indicated when the annual test was performed in 2014.OverviewThe First Bancshares, Inc. (the Company) was incorporated on June 23, 1995, and serves as a bank holding company for The First, A National Banking Association (“The First”), located in Hattiesburg, Mississippi. The First began operations on August 5, 1996, from its main office in the Oak Grove community, which is on the western side of Hattiesburg. The First has 31 locations in South Mississippi, South Alabama and Louisiana. See Note C of Notes to Consolidated Financial Statements for information regarding branch acquisitions. The Company and The First engage in a general commercial and retail banking business characterized by personalized service and local decision-making, emphasizing the banking needs of small to medium-sized businesses, professional concerns, and individuals.The Company’s primary source of revenue is interest income and fees, which it earns by lending and investing the funds which are held on deposit. Because loans generally earn higher rates of interest than investments, the Company seeks to employ as much of its deposit funds as possible in the form of loans to individuals, businesses, and other organizations. To ensure sufficient liquidity, the Company also maintains a portion of its deposits in cash, government securities, deposits with other financial institutions, and overnight loans of excess reserves (known as “Federal Funds Sold”) to correspondent banks. The revenue which the Company earns (prior to deducting its overhead expenses) is essentially a function of the amount of the Company’s loans and deposits, as well as the profit margin (“interest spread”) and fee income which can be generated on these amounts.The Company increased from approximately $940.9 million in total assets, and $780.0 million in deposits at December 31, 2013 to approximately $1.1 billion in total assets, and $892.8 million in deposits at December 31, 2014. Loans net of allowance for loan losses increased from $577.6 million at December 31, 2013 to approximately $701.0 at December 31, 2014. The Company increased from $85.1 million in stockholders’ equity at December 31, 2013 to approximately $96.2 million at December 31, 2014. The First reported net income of $7,385,000 and $5,895,000 for the years ended December 31, 2014 and 2013, respectively. For the years ended December 31, 2014 and 2013, the Company reported consolidated net income applicable to common stockholders of $6,251,000 and $4,215,000, respectively. The following discussion should be read in conjunction with the “Selected Consolidated Financial Data” and the Company's Consolidated Financial Statements and the Notes thereto and the other financial data included elsewhere.SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS(Dollars In Thousands, Except Per Share Data) December 31, 2014 2013 2012 2011 2010 Earnings: Net interest income $ 33,398 $ 28,401 $ 22,194 $ 19,079 $ 16,334 Provision for loan losses 1,418 1,076 1,228 1,468 983 Noninterest income 7,803 7,083 6,324 4,598 3,895 Noninterest expense 30,734 28,165 22,164 18,870 15,843 Net income 6,614 4,639 4,049 2,871 2,549 Net income applicable to common stockholders 6,251 4,215 3,624 2,529 2,233 Per common share data: Basic net income per share $ 1.20 $ .98 $ 1.17 $ .83 $ .74 Diluted net income per share 1.19 .96 1.16 .82 .74 Per share data: Basic net income per share $ 1.27 $ 1.07 $ 1.31 $ .94 $ .84 Diluted net income per share 1.25 1.06 1.29 .93 .84 Selected Year End Balances: Total assets $ 1,093,768 $ 940,890 $ 721,385 $ 681,413 $ 503,045 Securities 270,174 258,023 226,301 221,176 107,136 Loans, net of allowance 700,540 577,574 408,970 383,418 327,956 Deposits 892,775 779,971 596,627 573,394 396,479 Stockholders’ equity 96,216 85,108 65,885 60,425 57,098 Results of OperationsThe following is a summary of the results of operations by The First for the years ended December 31, 2014 and 2013. 2014 2013 (In thousands) Interest income $ 36,365 $ 31,312 Interest expense 2,791 2,731 Net interest income 33,574 28,581 Provision for loan losses 1,418 1,076 Net interest income after provision for loan losses 32,156 27,505 Other income 7,439 7,083 Other expense 29,477 26,578 Income tax expense 2,733 2,115 Net income $ 7,385 $ 5,895 The following reconciles the above table to the amounts reflected in the consolidated financial statements of the Company at December 31, 2014 and 2013: 2014 2013 (In thousands) Net interest income: Net interest income of The First $ 33,574 $ 28,581 Intercompany eliminations (176 ) (180 ) $ 33,398 $ 28,401 Net income applicable to common stockholders: Net income of The First $ 7,385 $ 5,895 Net loss of the Company, excluding intercompany accounts (1,134 ) (1,680 ) $ 6,251 $ 4,215 Consolidated Net IncomeThe Company reported consolidated net income applicable to common stockholders of $6,250,743 for the year ended December 31, 2014, compared to a consolidated net income of $4,215,067 for the year ended December 31, 2013. The increase in income was attributable to an increase in net interest income of $5.0 million or 17.6%, and an increase of $.7 million or 10.2% in other income which were offset by an increase in other expenses of $2.6 million or 9.1%.Consolidated Net Interest IncomeThe largest component of net income for the Company is net interest income, which is the difference between the income earned on assets and interest paid on deposits and borrowings used to support such assets. Net interest income is determined by the rates earned on the Company’s interest-earning assets and the rates paid on its interest-bearing liabilities, the relative amounts of interest-earning assets and interest-bearing liabilities, and the degree of mismatch and the maturity and repricing characteristics of its interest-earning assets and interest-bearing liabilities.Consolidated net interest income was approximately $33,398,000 for the year ended December 31, 2014, as compared to $28,401,000 for the year ended December 31, 2013. This increase was the direct result of increased loan volumes during 2014 as compared to 2013. Average interest-bearing liabilities for the year 2014 were $746,025,000 compared to $728,322,000 for the year 2013. At December 31, 2014, the net interest spread, the difference between the yield on earning assets and the rates paid on interest-bearing liabilities, was 3.50% compared to 3.25% at December 31, 2013. The net interest margin (which is net interest income divided by average earning assets) was 3.58% for the year 2014 compared to 3.31% for the year 2013. Rates paid on average interest-bearing liabilities remained constant at ..40% for the year 2013 and for the year 2014. Interest earned on assets and interest accrued on liabilities is significantly influenced by market factors, specifically interest rates as set by Federal agencies. Average loans comprised 67.8% of average earning assets for the year 2014 compared to 68.0% for the year 2013.Average Balances, Income and Expenses, and Rates. The following tables depict, for the periods indicated, certain information related to the average balance sheet and average yields on assets and average costs of liabilities. Such yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been derived from daily averages.Average Balances, Income and Expenses, and Rates Years Ended December 31, 2014 2013 2012 Average
Balance Income/
Expenses Yield/
Rate Average
Balance Income/
Expenses Yield/
Rate Average
Balance Income/
Expenses Yield/
Rate Assets (Dollars in thousands) Earning Assets Loans (1)(2) $ 632,049 $ 30,276 4.79 % $ 583,200 $ 25,736 4.41 % $ 388,012 $ 21,412 5.52 % Securities 271,247 5,957 2.20 % 248,237 5,419 2.18 % 235,833 4,785 2.03 % Federal funds sold (3) 24,845 53 .21 % 18,564 62 .33 % 19,670 51 .26 % Other 3,827 85 2.22 % 7,404 101 1.36 % 4,845 83 1.71 % Total earning assets 931,968 36,371 3.90 % 857,405 31,318 3.65 % 648,360 26,331 4.06 % Cash and due from banks 30,657 25,447 16,699 Premises and equipment 33,252 30,816 22,633 Other assets 40,428 33,314 32,337 Allowance for loan losses (5,983 ) (5,240 ) (4,457 ) Total assets $ 1,030,322 $ 941,742 $ 715,572 Liabilities Interest-bearing liabilities $ 746,025 $ 2,973 .40 % $ 728,322 $ 2,917 .40 % $ 534,998 $ 4,137 .77 % Demand deposits (1) 184,037 115,909 107,392 Other liabilities 11,990 12,430 10,036 Stockholders’ equity 88,270 85,081 63,146 Total liabilities and stockholders’ equity $ 1,030,322 $ 941,742 $ 715,572 Net interest spread 3.50 % 3.25 % 3.29 % Net yield on interest-earning assets $ 33,398 3.58 % $ 28,401 3.31 % $ 22,194 3.42 % _________________(1)All loans and deposits were made to borrowers in the United States. Includes nonaccrual loans of $6,056, $3,181, and $3,589, respectively, during the periods presented. Loans include held for sale loans.(2)Includes loan fees of $717, $525, and $430 respectively.(3)Includes EBA-MNBB and Federal Reserve – New Orleans.Analysis of Changes in Net Interest Income. The following table presents the consolidated dollar amount of changes in interest income and interest expense attributable to changes in volume and to changes in rate. The combined effect in both volume and rate which cannot be separately identified has been allocated proportionately to the change due to volume and due to rate.10Analysis of Changes in Consolidated Net Interest Income Year Ended December 31, Year Ended December 31, 2014 versus 2013
Increase (decrease) due to 2013 versus 2012
Increase (decrease) due to Volume Rate Net Volume Rate Net (Dollars in thousands) Earning Assets Loans $ 2,154 $ 2,386 $ 4,540 $ 10,774 $ (6,450 ) $ 4,324 Securities 502 36 538 270 374 644 Federal funds sold 21 (30 ) (9 ) (3 ) 13 10 Other short-term investments (49 ) 33 (16 ) 35 (26 ) 9 Total interest income 2,628 2,425 5,053 11,076 (6,089 ) 4,987 Interest-Bearing Liabilities Interest-bearing transaction accounts 88 (31 ) 57 460 (748 ) (288 ) Money market accounts 73 (70 ) 3 123 (154 ) (31 ) Savings deposits 9 13 22 3 (10 ) (7 ) Time deposits 59 62 121 172 (886 ) (714 ) Borrowed funds 1,113 (1,260 ) (147 ) 97 (277 ) (180 ) Total interest expense 1,342 (1,286 ) 56 855 (2,075 ) (1,220 ) Net interest income $ 1,286 $ 3,711 $ 4,997 $ 10,221 $ (4,014 ) $ 6,207 Interest Sensitivity. The Company monitors and manages the pricing and maturity of its assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on its net interest income. A monitoring technique employed by the Company is the measurement of the Company's interest sensitivity "gap," which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time. The Company also performs asset/liability modeling to assess the impact varying interest rates and balance sheet mix assumptions will have on net interest income. Interest rate sensitivity can be managed by repricing assets or liabilities, selling securities available-for-sale, replacing an asset or liability at maturity, or adjusting the interest rate during the life of an asset or liability. Managing the amount of assets and liabilities repricing in the same time interval helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates. The Company evaluates interest sensitivity risk and then formulates guidelines regarding asset generation and repricing, funding sources and pricing, and off-balance sheet commitments in order to decrease interest rate sensitivity risk.The following tables illustrate the Company's consolidated interest rate sensitivity and consolidated cumulative gap position at December 31, 2012, 2013, and 2014. December 31, 2012 Within
Three
Months After Three
Through
Twelve
Months Within
One
Year Greater Than
One Year or
Nonsensitive Total (Dollars in thousands) Assets Earning Assets: Loans $ 72,670 $ 78,168 $ 150,838 $ 262,859 $ 413,697 Securities (2) 11,185 15,504 26,689 199,612 226,301 Funds sold and other 1,064 9,588 10,652 - 10,652 Total earning assets $ 84,919 $ 103,260 $ 188,179 $ 462,471 $ 650,650 Liabilities Interest-bearing liabilities: Interest-bearing deposits: NOW accounts (1) $ - $ 230,588 $ 230,588 $ - $ 230,588 Money market accounts 47,325 - 47,325 - 47,325 Savings deposits (1) - 48,153 48,153 - 48,153 Time deposits 32,624 70,883 103,507 57,429 160,936 Total interest-bearing deposits 79,949 349,624 429,573 57,429 487,002 Borrowed funds (3) 20,000 1,771 21,771 15,000 36,771 Total interest-bearing liabilities 99,949 351,395 451,344 72,429 523,773 Interest-sensitivity gap per period $ (15,030 ) $ (248,135 ) $ (263,165 ) $ 390,042 $ 126,877 Cumulative gap at December 31, 2012 $ (15,030 ) $ (263,165 ) $ (263,165 ) $ 126,877 $ 126,877 Ratio of cumulative gap to total earning assets at December 31, 2012 (2.3 )% (40.4 )% (40.4 )% 19.5 % December 31, 2013 Within
Three
Months After Three
Through
Twelve
Months Within
One
Year Greater Than
One Year or
Nonsensitive Total (Dollars in thousands) Assets Earning Assets: Loans $ 89,314 $ 98,315 $ 187,629 $ 395,673 $ 583,302 Securities (2) 10,114 16,006 26,120 231,903 258,023 Funds sold and other 967 14,205 15,172 - 15,172 Total earning assets $ 100,395 $ 128,526 $ 228,921 $ 627,576 $ 856,497 Liabilities Interest-bearing liabilities: Interest-bearing deposits: NOW accounts (1) $ - $ 240,513 $ 240,513 $ - $ 240,513 Money market accounts 107,564 - 107,564 - 107,564 Savings deposits (1) - 55,113 55,113 - 55,113 Time deposits 46,875 87,475 134,350 68,637 202,987 Total interest-bearing deposits 154,439 383,101 537,540 68,637 606,177 Borrowed funds (3) 37,000 4,000 41,000 11,000 52,000 Total interest-bearing liabilities 191,439 387,101 578,540 79,637 658,177 Interest-sensitivity gap per period $ (91,044 ) $ (258,575 ) $ (349,619 ) $ 547,939 $ 198,320 Cumulative gap at December 31, 2013 $ (91,044 ) $ (349,619 ) $ (349,619 ) $ 198,320 $ 198,320 Ratio of cumulative gap to total earning assets at December 31, 2013 (10.6 )% (40.8 )% (40.8 )% 23.2 % December 31, 2014 Within
Three
Months After Three
Through
Twelve
Months Within
One
Year Greater Than
One Year or
Nonsensitive Total (Dollars in thousands) Assets Earning Assets: Loans $ 99,183 $ 82,644 $ 181,827 $ 524,808 $ 706,635 Securities (2) 14,266 14,880 29,146 241,028 270,174 Funds sold and other 386 13,899 14,285 - 14,285 Total earning assets $ 113,835 $ 111,423 $ 225,258 $ 765,836 $ 991,094 Liabilities Interest-bearing liabilities: Interest-bearing deposits: NOW accounts (1) $ - $ 215,107 $ 215,107 $ 86,614 $ 301,721 Money market accounts 117,018 - 117,018 - 117,018 Savings deposits (1) - 66,615 66,615 - 66,615 Time deposits 53,529 78,581 132,110 73,949 206,059 Total interest-bearing deposits 170,547 360,303 530,850 160,563 691,413 Borrowed funds (3) 40,004 40,464 80,468 8,982 89,450 Total interest-bearing liabilities 210,551 400,767 611,318 169,545 780,863 Interest-sensitivity gap per period $ (96,716 ) $ (289,344 ) $ (386,060 ) $ 596,291 $ 210,231 Cumulative gap at December 31, 2014 $ (96,716 ) $ (386,060 ) $ (386,060 ) $ 210,231 $ 210,231 Ratio of cumulative gap to total earning assets at December 31, 2014 (9.8 )% (38.9 )% (38.9 )% 21.2 % ______________(1)NOW and savings accounts are subject to immediate withdrawal and repricing. These deposits do not tend to immediately react to changes in interest rates and the Company believes these deposits are a stable and predictable funding source. Therefore, these deposits are included in the repricing period that management believes most closely matches the periods in which they are likely to reprice rather than the period in which the funds can be withdrawn contractually.(2)Securities include mortgage backed and other installment paying obligations based upon stated maturity dates.(3)Does not include subordinated debentures of $10,310,000.The Company generally would benefit from increasing market rates of interest when it has an asset-sensitive gap and generally from decreasing market rates of interest when it is liability sensitive. The Company currently is liability sensitive within the one-year time frame. However, the Company's gap analysis is not a precise indicator of its interest sensitivity position. The analysis presents only a static view of the timing of maturities and repricing opportunities, without taking into consideration that changes in interest rates do not affect all assets and liabilities equally. For example, rates paid on a substantial portion of core deposits may change contractually within a relatively short time frame, but those rates are viewed by management as significantly less interest-sensitive than market-based rates such as those paid on non-core deposits. Accordingly, management believes a liability sensitive-position within one year would not be as indicative of the Company’s true interest sensitivity as it would be for an organization which depends to a greater extent on purchased funds to support earning assets. Net interest income is also affected by other significant factors, including changes in the volume and mix of earning assets and interest-bearing liabilities.Provision and Allowance for Loan LossesThe Company has developed policies and procedures for evaluating the overall quality of its credit portfolio and the timely identification of potential problem loans. Management’s judgment as to the adequacy of the allowance is based upon a number of assumptions about future events which it believes to be reasonable, but which may not prove to be accurate. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the loan loss allowance will not be required.The Company’s allowance consists of two parts. The first part is determined in accordance with authoritative guidance issued by the FASB regarding the allowance.The Company’s determination of this part of the allowance is based upon quantitative and qualitative factors. A loan loss history based upon the prior three years is utilized in determining the appropriate allowance. Historical loss factors are determined by criticized and uncriticized loans by loan type. These historical loss factors are applied to the loans by loan type to determine an indicated allowance. The loss factors of peer groups are considered in the determination of the allowance and are used to assist in the establishment of a long-term loss history for areas in which this data is unavailable and incorporated into the qualitative factors to be considered. The historical loss factors may also be modified based upon other qualitative factors including but not limited to local and national economic conditions, trends of delinquent loans, changes in lending policies and underwriting standards, concentrations, and management’s knowledge of the loan portfolio. These factors require judgment upon the part of management and are based upon state and national economic reports received from various institutions and agencies including the Federal Reserve Bank, United States Bureau of Economic Analysis, Bureau of Labor Statistics, meetings with the Company’s loan officers and loan committees, and data and guidance received or obtained from the Company’s regulatory authorities.The second part of the allowance is determined in accordance with guidance issued by the FASB regarding impaired loans. Impaired loans are determined based upon a review by internal loan review and senior loan officers. Impaired loans are loans for which the Bank does not expect to receive contractual interest and/or principal by the due date. A specific allowance is assigned to each loan determined to be impaired based upon the value of the loan’s underlying collateral. Appraisals are used by management to determine the value of the collateral.The sum of the two parts constitutes management’s best estimate of an appropriate allowance for loan losses. When the estimated allowance is determined, it is presented to the Company’s audit committee for review and approval on a quarterly basis.Our allowance for loan losses model is focused on establishing a loss history within the Bank and relying on specific impairment to determine credits that the Bank feels the ultimate repayment source will be liquidation of the subject collateral. Our model takes into account many other factors as well such as local and national economic factors, portfolio trends, non performing asset, charge off, and delinquency trends as well as underwriting standards and the experience of branch management and lending staff. These trends are measured in the following ways:Local Trends: (Updated quarterly usually the month following quarter end)Local Unemployment RateInsurance Issues (Windpool Areas)Bankruptcy Rates (Increasing/Declining)Local Commercial R/E Vacancy RatesEstablished Market/New MarketHurricane ThreatNational Trends: (Updated quarterly usually the month following quarter end)Gross Domestic Product (GDP)Home SalesConsumer Price Index (CPI)Interest Rate Environment (Increasing/Steady/Declining)Single Family Construction StartsInflation RateRetail SalesPortfolio Trends: (Updated monthly as the ALLL is calculated)Second MortgagesSingle Pay LoansNon-Recourse LoansLimited Guaranty LoansLoan to Value ExceptionsSecured by Non-Owner Occupied PropertyRaw Land LoansUnsecured LoansMeasurable Bank Trends: (Updated quarterly)Delinquency TrendsNon-Accrual TrendsNet Charge OffsLoan Volume TrendsNon-Performing AssetsUnderwriting Standards/Lending PoliciesExperience/Depth of Bank LendingManagementOur model takes into account many local and national economic factors as well as portfolio trends. Local and national economic trends are measured quarterly, typically in the month following quarter end to facilitate the release of economic data from the reporting agencies. These factors are allocated a basis point value ranging from -25 to +25 basis points and directly affect the amount reserved for each branch. As of December 31, 2014, most economic indicators both local and national pointed to a weak economy thus most factors were assigned a positive basis point value. This increased the amount of the allowance that was indicated by historical loss factors. Portfolio trends are measured monthly on a per branch basis to determine the percentage of loans in each branch that the Bank has determined as having more risk. Portfolio risk is defined as areas in the Bank’s loan portfolio in which there is additional risk involved in the loan type or some other area in which the Bank has identified as having more risk. Each area is tracked on bank-wide as well as on a branch-wide basis. Branches are analyzed based on the gross percentage of concentrations of the Bank as a whole. Portfolio risk is determined by analyzing concentrations in the areas outlined by determining the percentage of each branch’s total portfolio that is made up of the particular loan type and then comparing that concentration to the Bank as a whole. Branches with concentrations in these areas are graded on a scale from – 25 basis points to + 25 basis points. Second mortgages, single pay loans, loans secured by raw land, unsecured loans and loans secured by non owner occupied property are considered to be of higher risk than those of a secured and amortizing basis. LTV exceptions place the Bank at risk in the event of repossession or foreclosure. Measurable Bank Wide Trends are measured on a quarterly basis as well. This consists of data tracked on a bank wide basis in which we have identified areas of additional risk or the need for additional allocation to the allowance for loan loss. Data is updated quarterly, each area is assigned a basis point value from -25 basis points to + 25 basis points based on how each area measures to the previous time period. Net charge offs, loan volume trends and non performing assets have all trended upwards therefore increasing the need for increased funds reserved for loan losses. Underwriting standards/ lending standards as well as experience/ depth of bank lending management is evaluated on a per branch level. Loans are reviewed for impairment when, in the Bank’s opinion, the ultimate source of repayment will be the liquidation of collateral through foreclosure or repossession. Once identified updated collateral values are obtained on these loans and impairment worksheets are prepared to determine if impairment exists. This method takes into account any expected expenses related to the disposal of the subject collateral. Specific allowances for these loans are done on a per loan basis as each loan is reviewed for impairment. Updated appraisals are ordered on real estate loans and updated valuations are ordered on non real estate loans to determine actual market value. At December 31, 2014, the consolidated allowance for loan losses amounted to approximately $6.1 million, or .86% of outstanding loans or 1.01% of loans excluding those booked at fair value due to business combination. At December 31, 2013, the allowance for loan losses amounted to approximately $5.7 million, which was .98% of outstanding loans. The Company’s provision for loan losses was $1,418,000 for the year ended December 31, 2014, compared to $1,076,000 for the year ended December 31, 2013.A loan is considered impaired when, based on current information and events, 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 payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis. Impaired loans not deemed collateral dependent are analyzed according to the ultimate repayment source, whether that is cash flow from the borrower, guarantor or some other source of repayment. Impaired loans are deemed collateral dependent if in the Bank’s opinion the ultimate source of repayment will be generated from the liquidation of collateral.The Company discontinues accrual of interest on loans when management believes, after considering economic and business conditions and collection efforts, that a borrower’s financial condition is such that the collection of interest is doubtful. Generally, the Company will place a delinquent loan in nonaccrual status when the loan becomes 90 days or more past due. At the time a loan is placed in nonaccrual status, all interest which has been accrued on the loan but remains unpaid is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain.The following tables illustrate the Company’s past due and nonaccrual loans at December 31, 2014 and 2013. December 31, 2014 (In thousands) Past Due 30 to
89 Days Past Due 90 days or
more and still accruing Non-Accrual Real Estate-construction $ 428 $ - $ 2,747 Real Estate-mortgage 3,208 208 2,164 Real Estate-nonfarm nonresidential 3,408 461 1,102 Commercial 29 - 5 Consumer 90 - 38 Total $ 7,163 $ 669 $ 6,056 December 31, 2013 (In thousands) Past Due 30 to
89 Days Past Due 90 days or
more and still accruing Non-Accrual Real Estate-construction $ 478 $ - $ 212 Real Estate-mortgage 4,696 143 2,453 Real Estate-nonfarm nonresidential 252 - 507 Commercial 12 - 9 Consumer 115 16 - Total $ 5,553 $ 159 $ 3,181 Total nonaccrual loans at December 31, 2014, amounted to $6.1 million which was an increase of $2.9 million from the December 31, 2013, amount of $3.2 million. Management believes these relationships were adequately reserved at December 31, 2014.Restructured loans not reported as past due or nonaccrual at December 31, 2014, amounted to $2.9 million.A potential problem loan is one in which management has serious doubts about the borrower’s future performance under the terms of the loan contract. These loans are current as to principal and interest and, accordingly, they are not included in nonperforming asset categories. The level of potential problem loans is one factor used in the determination of the adequacy of the allowance for loan losses. At December 31, 2014 and December 31, 2013, The First had potential problem loans of $20,946,000 and $17,070,000, respectively. This represents an increase of $3,876,000 of which $3,480,000 are acquired loans from Bay Bank.17Consolidated Allowance For Loan Losses(In thousands) Years Ended December 31, 2014 2013 2012 2011 2010 Average loans outstanding $ 632,049 $ 583,200 $ 388,012 $ 354,295 $ 328,950 Loans outstanding at year end $ 706,635 $ 583,302 $ 413,697 $ 387,929 $ 332,573 Total nonaccrual loans $ 6,056 $ 3,181 $ 3,401 $ 5,125 $ 4,212 Beginning balance of allowance $ 5,728 $ 4,727 $ 4,511 $ 4,617 $ 4,762 Loans charged-off (1,459 ) (759 ) (1,190 ) (1,987 ) (1,370 ) Total loans charged-off (1,459 ) (759 ) (1,190 ) (1,987 ) (1,370 ) Total recoveries 408 684 178 413 242 Net loans charged-off (1,051 ) (75 ) (1,012 ) (1,574 ) (1,128 ) Acquisition - - - - - Provision for loan losses 1,418 1,076 1,228 1,468 983 Balance at year end $ 6,095 $ 5,728 $ 4,727 $ 4,511 $ 4,617 Net charge-offs to average loans .17 % .01 % .26 % .44 % .34 % Allowance as percent of total loans .86 % .98 % 1.14 % 1.16 % 1.39 % Nonperforming loans as a percentage of total loans .86 % .55 % .82 % 1.32 % 1.27 % Allowance as a multiple of nonaccrual loans 1.0 X 1.8 X 1.4 X .88 X 1.1 X At December 31, 2014, the components of the allowance for loan losses consisted of the following: Allowance (In thousands) Allocated: Impaired loans $ 968 Graded loans 5,127 $ 6,095 Graded loans are those loans or pools of loans assigned a grade by internal loan review.The following table represents the activity of the allowance for loan losses for the years 2014 and 2013.Analysis of the Allowance for Loan Losses Years Ended December 31, 2014 2013 (Dollars in thousands) Balance at beginning of year $ 5,728 $ 4,727 Charge-offs: Real Estate-construction (47 ) (305 ) Real Estate-mortgage (1,156 ) (152 ) Real Estate-nonfarm nonresidential (- ) (- ) Commercial (89 ) (105 ) Consumer (167 ) (197 ) Total (1,459 ) (759 ) Recoveries: Real Estate-construction 96 133 Real Estate-mortgage 212 393 Real Estate-nonfarm nonresidential 17 74 Commercial 15 18 Consumer 68 66 Total 408 684 Net Charge-offs (1,051 ) (75 ) Provision for Loan Losses 1,418 1,076 Balance at end of year $ 6,095 $ 5,728 The following tables represent how the allowance for loan losses is allocated to a particular loan type as well as the percentage of the category to total loans at December 31, 2014 and 2013.Allocation of the Allowance for Loan Losses December 31, 2014 (Dollars in thousands) Amount % of loans
in each category
to total loans Commercial Non Real Estate $ 713 15.3 % Commercial Real Estate 3,355 57.9 % Consumer Real Estate 1,852 24.2 % Consumer 175 2.6 % Unallocated - - Total $ 6,095 100 % December 31, 2013 (Dollars in thousands) Amount % of loans
in each category
to total loans Commercial Non Real Estate $ 582 14.0 % Commercial Real Estate 3,384 57.2 % Consumer Real Estate 1,427 25.4 % Consumer 173 3.4 % Unallocated 162 - Total $ 5,728 100 % 19Noninterest Income and ExpenseNoninterest Income. The Company’s primary source of noninterest income is service charges on deposit accounts. Other sources of noninterest income include bankcard fees, commissions on check sales, safe deposit box rent, wire transfer fees, official check fees and bank owned life insurance income.Noninterest income increased $720,000 or 10.2% during 2014 to $7,803,000 from $7,083,000 for the year ended December 31, 2013. The deposit activity fees were $4,262,000 for 2014 compared to $3,979,000 for 2013. Other service charges decreased by $24,000 or 1.1% from $2,187,000 for the year ended December 31, 2013, to $2,163,000 for the year ended December 31, 2014. Impairment losses on investment securities were $0 for 2014 and 2013.Noninterest expense increased from $28.2 million for the year ended December 31, 2013, to $30.7 million for the year ended December 31, 2014. The Company experienced slight increases in most expense categories. The largest increase was in salaries and employee benefits, which increased by $2.6 million in 2014 as compared to 2013. These increases were due in part to the addition of the Bay Bank branches and staff and a full year of the Baldwin branches.The following table sets forth the primary components of noninterest expense for the periods indicated:Noninterest Expense Years ended December 31, 2014 2013 2012 (In thousands) Salaries and employee benefits $ 17,462 $ 14,855 $ 12,001 Occupancy 2,805 2,351 1,797 Equipment 1,721 1,568 1,435 Marketing and public relations 445 451 329 Data processing 161 169 85 Supplies and printing 498 455 425 Telephone 616 731 533 Correspondent services 83 74 96 Deposit and other insurance 1,048 834 734 Professional and consulting fees 1,618 2,433 747 Postage 302 303 252 ATM fees 623 575 434 Other 3,352 3,366 3,296 Total $ 30,734 $ 28,165 $ 22,164 Income Tax ExpenseIncome tax expense consists of two components. The first is the current tax expense which represents the expected income tax to be paid to taxing authorities. The Company also recognizes deferred tax for future income/deductible amounts resulting from differences in the financial statement and tax bases of assets and liabilities.20Analysis of Financial ConditionEarning AssetsLoans. Loans typically provide higher yields than the other types of earning assets, and thus one of the Company's goals is for loans to be the largest category of the Company's earning assets. At December 31, 2014 and 2013, respectively, average loans accounted for 67.8% and 68.0% of average earning assets. Management attempts to control and counterbalance the inherent credit and liquidity risks associated with the higher loan yields without sacrificing asset quality to achieve its asset mix goals. Loans averaged $632.0 million during 2014, as compared to $583.2 million during 2013, and $388.0 million during 2012.The following table shows the composition of the loan portfolio by category:Composition of Loan Portfolio December 31, 2014 2013 2012 Amount Percent
Of Total Amount Percent
of Total Amount Percent
of Total (Dollars in thousands) Mortgage loans held for sale $ 2,103 0.3 % $ 3,680 0.6 % $ 5,585 1.4 % Commercial, financial and agricultural 106,109 15.0 % 81,792 14.0 % 53,234 12.9 % Real Estate: Mortgage-commercial 238,602 33.8 % 212,388 36.4 % 142,046 34.3 % Mortgage-residential 256,406 36.3 % 202,343 34.7 % 140,703 34.0 % Construction 84,935 12.0 % 67,287 11.5 % 57,529 13.9 % Consumer and other 18,480 2.6 % 15,812 2.8 % 14,600 3.5 % Total loans 706,635 100 % 583,302 100 % 413,697 100 % Allowance for loan losses (6,095 ) (5,728 ) (4,727 ) Net loans $ 700,540 $ 577,574 $ 408,970 In the context of this discussion, a "real estate mortgage loan" is defined as any loan, other than loans for construction purposes, secured by real estate, regardless of the purpose of the loan. The Company follows the common practice of financial institutions in the Company’s market area of obtaining a security interest in real estate whenever possible, in addition to any other available collateral. This collateral is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to increase the magnitude of the real estate loan portfolio component. Generally, the Company limits its loan-to-value ratio to 80%. Management attempts to maintain a conservative philosophy regarding its underwriting guidelines and believes it will reduce the risk elements of its loan portfolio through strategies that diversify the lending mix.Loans held for sale consist of mortgage loans originated by the Bank and sold into the secondary market. Commitments from investors to purchase the loans are obtained upon origination.The following table sets forth the Company's commercial and construction real estate loans maturing within specified intervals at December 31, 2014.Loan Maturity Schedule and Sensitivity to Changes in Interest Rates December 31, 2014 Type One Year
or Less Over One Year
Through
Five Years Over Five
Years Total (In thousands) Commercial, financial and agricultural $ 47,491 $ 50,706 $ 7,912 $ 106,109 Real estate – construction 49.932 30,942 4,061 84,935 $ 97,423 $ 81,648 $ 11,973 $ 191,044 Loans maturing after one year with: Fixed interest rates $ 72,492 Floating interest rates 21,129 $ 93,621 The information presented in the above table is based on the contractual maturities of the individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon their maturity.Investment Securities.The investment securities portfolio is a significant component of the Company's total earning assets. Total securities averaged $271.2 million in 2014, as compared to $248.2 million in 2013 and $235.8 million in 2012. This represents 29.1%, 29.0%, and 36.4% of the average earning assets for the years ended December 31, 2014, 2013, and 2012, respectively. At December 31, 2014, investment securities were $270.2 million and represented 27.3% of earning assets. The Company attempts to maintain a portfolio of high quality, highly liquid investments with returns competitive with short-term U.S. Treasury or agency obligations. This objective is particularly important as the Company focuses on growing its loan portfolio. The Company primarily invests in securities of U.S. Government agencies, municipals, and corporate obligations with maturities up to five years.The following table summarizes the carrying value of securities for the dates indicated.Securities Portfolio December 31, 2014 2013 2012 (In thousands) Available-for-sale U. S. Government agencies and Mortgage-backed Securities $ 120,407 $ 108,148 $ 98,326 States and municipal subdivisions 104,582 108,079 98,910 Corporate obligations 28,785 26,852 16,187 Mutual finds 972 972 970 Total available-for-sale 254,746 244,051 214,393 Held-to-maturity U.S. Government agencies 2,193 2,438 2,470 States and municipal subdivisions 6,000 6,000 6,000 Total held-to-maturity 8,193 8,438 8,470 Total $ 262,939 $ 252,489 $ 222,863 The following table shows, at carrying value, the scheduled maturities and average yields of securities held at December 31, 2014.Investment Securities Maturity Distribution and Yields (1) December 31, 2014 After One But After Five But (Dollars in thousands) Within One Year Within Five Years Within Ten Years After Ten Years Amount Yield Amount Yield Amount Yield Amount Yield Held-to-maturity: U.S. Government agencies (2) $ - - $ - - $ - - $ - - States and municipal subdivisions - - - - - - 6,000 .93 % Total investment securities held-to-maturity $ - $ - $ - $ 6,000 Available-for-sale: U.S. Government agencies (3) $ 4,367 .71 % $ 19,788 1.06 % $ 3,217 2.77 % $ - - States and municipal subdivisions 10,094 2.86 % 41,678 2.93 % 33,146 4.05 % 19,665 4.87 % Corporate obligations and other 4,543 1.67 % 19,115 2.01 % 3,914 1.59 % 2,184 1.82 % Total investment securities available-for-sale $ 19,004 $ 80,581 $ 40,277 $ 21,849 _______________(1)Investments with a call feature are shown as of the contractual maturity date.(2)Excludes mortgage-backed securities totaling $2.2 million with a yield of 2.63%.(3)Excludes mortgage-backed securities totaling $93.0 million with a yield of 2.34% and mutual funds of $1.0 million.Short-Term Investments.Short-term investments, consisting of Federal Funds Sold, funds in due from banks and interest-bearing deposits with banks, averaged $24.8 million in 2014, $18.6 million in 2013, and $19.7 million in 2012. At December 31, 2014, and December 31, 2013, short-term investments totaled $386,000 and $967,000, respectively. These funds are a primary source of the Company's liquidity and are generally invested in an earning capacity on an overnight basis.DepositsDeposits. Average total deposits increased $160.0 million, or 26.6% in 2013. Average total deposits increased $109.8 million, or 14.3% in 2014. At December 31, 2014, total deposits were $892.8 million, compared to $780.0 million a year earlier, an increase of $112.8 million, or 14.5%.The following table sets forth the deposits of the Company by category for the period indicated. Deposits December 31, (Dollars in thousands) 2014 2013 2012 Percent
of Percent
of Percent
of Amount Deposits Amount Deposits Amount Deposits Noninterest-bearing accounts $ 201,362 22.6 % $ 173,793 22.3 % $ 109,624 18.4 % NOW accounts 301,721 33.8 % 240,514 30.8 % 230,589 38.6 % Money market accounts 117,018 13.1 % 107,564 13.8 % 47,325 7.9 % Savings accounts 66,615 7.5 % 55,113 7.1 % 48,153 8.1 % Time deposits less than $100,000 85,365 9.6 % 86,363 11.1 % 69,115 11.6 % Time deposits of $100,000 or over 120,694 13.4 % 116,624 14.9 % 91,821 15.4 % Total deposits $ 892,775 100 % $ 779,971 100 % $ 596,627 100 % The Company’s loan-to-deposit ratio was 78.9% at December 31, 2014 and 74.3% at December 31, 2013. The loan-to-deposit ratio averaged 71.1% during 2014. Core deposits, which exclude time deposits of $100,000 or more, provide a relatively stable funding source for the Company's loan portfolio and other earning assets. The Company's core deposits were $772.1 million at December 31, 2014 and $663.3 million at December 31, 2013. Management anticipates that a stable base of deposits will be the Company's primary source of funding to meet both its short-term and long-term liquidity needs in the future. The Company has purchased brokered deposits from time to time to help fund loan growth. Brokered deposits and jumbo certificates of deposit generally carry a higher interest rate than traditional core deposits. Further, brokered deposit customers typically do not have loan or other relationships with the Company. The Company has adopted a policy not to permit brokered deposits to represent more than 10% of all of the Company’s deposits.The maturity distribution of the Company's certificates of deposit of $100,000 or more at December 31, 2014, is shown in the following table. The Company did not have any other time deposits of $100,000 or more.Maturities of Certificates of Depositof $100,000 or More After Three Within Three Through After Twelve (In thousands) Months Twelve Months Months Total December 31, 2014 $ 36,356 $ 43,516 $ 40,822 $ 120,694 Borrowed FundsBorrowed funds consist of advances from the Federal Home Loan Bank of Dallas, federal funds purchased and reverse repurchase agreements. At December 31, 2014, advances from the FHLB totaled $84.5 million compared to $47.0 million at December 31, 2013. The advances are collateralized by a blanket lien on the first mortgage loans in the amount of the outstanding borrowings, FHLB capital stock, and amounts on deposit with the FHLB. There were no federal funds purchased at December 31, 2014 and December 31, 2013.Reverse Repurchase Agreements consist of one $5,000,000 agreement. The agreement is secured by securities with a fair value of $7,443,951 at December 31, 2014 and $6,530,592 at December 31, 2013. The maturity date of the remaining agreement is September 26, 2017, with a rate of 3.81%.Subordinated DebenturesIn 2006, the Company issued subordinated debentures of $4,124,000 to The First Bancshares, Inc. Statutory Trust 2 (Trust 2). The Company is the sole owner of the equity of the Trust 2. The Trust 2 issued $4,000,000 of preferred securities to investors. The Company makes interest payments and will make principal payments on the debentures to the Trust 2. These payments will be the source of funds used to retire the preferred securities, which are redeemable at any time beginning in 2011 and thereafter, and mature in 2036. The Company entered into this arrangement to provide funding for expected growth.In 2007, the Company issued subordinated debentures of $6,186,000 to The First Bancshares, Inc. Statutory Trust 3 (Trust 3). The Company is the sole owner of the equity of the Trust 3. The Trust 3 issued $6,000,000 of preferred securities to investors. The Company makes interest payments and will make principal payments on the debentures to the Trust 3. These payments will be the source of funds used to retire the preferred securities, which are redeemable at any time beginning in 2012 and thereafter, and mature in 2037. The Company entered into this arrangement to provide funding for expected growth.CapitalTotal stockholders’ equity as of December 31, 2014, was $96.2 million, an increase of $11.1 million or approximately 13.1%, compared with stockholders' equity of $85.1 million as of December 31, 2013.The Federal Reserve Board and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. Under the risk-based standard, capital is classified into two tiers. Tier 1 capital consists of common stockholders' equity, excluding the unrealized gain (loss) on available-for-sale securities, minus certain intangible assets. Tier 2 capital consists of the general reserve for loan losses, subject to certain limitations. An institution’s total risk-based capital for purposes of its risk-based capital ratio consists of the sum of its Tier 1 and Tier 2 capital. The risk-based regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital.Bank holding companies and banks are also required to maintain capital at a minimum level based on total assets, which is known as the leverage ratio. The minimum requirement for the leverage ratio is 4%. All but the highest rated institutions are required to maintain ratios 100 to 200 basis points above the minimum. The Company and The First exceeded their minimum regulatory capital ratios as of December 31, 2014 and 2013.25The Federal Reserve and the Federal Deposit Insurance Corporation approved final capital rules in July 2013, that substantially amend the existing capital rules for banks. These new rules reflect, in part, certain standards initially adopted by the Basel Committee on Banking Supervision in December 2010 (which standards are commonly referred to as “Basel III”) as well as requirements contemplated by the Dodd-Frank Act.Under the new capital rules, the Company will be required to meet certain minimum capital requirements that differ from current capital requirements. The rules implement a new capital ratio of common equity Tier 1 capital to risk-weighted assets. Common equity Tier 1 capital generally consists of retained earnings and common stock (subject to certain adjustments) as well as accumulated other comprehensive income (“AOCI”), except to the extent that the Company exercises a one-time irrevocable option to exclude certain components of AOCI as of March 31, 2015. The Company will also be required to establish a “conservation buffer,” consisting of a common equity Tier 1 capital amount equal to 2.5% of risk-weighted assets to be phased in by 2019. An institution that does not meet the conservation buffer will be subject to restrictions on certain activities including payment of dividends, stock repurchases, and discretionary bonuses to executive officers.The prompt corrective action rules are modified to include the common equity Tier 1 capital ratio and to increase the Tier 1 capital ratio requirements for the various thresholds. For example, the requirements for the Company to be considered well-capitalized under the rules will be a 5.0% leverage ratio, a 6.5% common equity Tier 1capital ratio, an 8.0% Tier 1 capital ratio, and a 10.0% total capital ratio. To be adequately capitalized, those ratios are 4.0%, 4.5%, 6.0%, and 8.0%, respectively.The rules modify the manner in which certain capital elements are determined. The rules make changes to the methods of calculating the risk-weighting of certain assets, which in turn affects the calculation of the risk-weighted capital ratios. Higher risk weights are assigned to various categories of assets, including commercial real estate loans, credit facilities that finance the acquisition, development or construction of real property, certain exposures or credit that are 90 days past due or are nonaccrual, securitization exposures, and in certain cases mortgage servicing rights and deferred tax assets.The Company is required to comply with the new capital rules on January 1, 2015, with a measurement date of March 31, 2015. The conservation buffer will be phased-in beginning in 2016, and will take full effect on January 1, 2019. Certain calculations under the rules will also have phase-in periods.Analysis of Capital Adequately Well The Company The First Capital Ratios Capitalized Capitalized December 31, December 31, 2014 2013 2014 2013 Leverage 4.0 % 5.0 % 8.4 % 9.0 % 8.4 % 8.9 % Risk-based capital: Tier 1 4.0 % 6.0 % 11.5 % 12.5 % 11.4 % 12.4 % Total 8.0 % 10.0 % 12.3 % 13.4 % 12.2 % 13.3 % Ratios 2014 2013 2012 Return on assets (net income applicable to common stockholders divided by average total assets) .61 % .45 % .51 % Return on equity (net income applicable to common stockholders divided by average equity) 7.1 % 5.0 % 5.7 % Dividend payout ratio (dividends per share divided by net income per common share) 12.6 % 15.6 % 12.9 % Equity to asset ratio (average equity divided by average total assets) 8.6 % 9.0 % 8.8 % Liquidity ManagementLiquidity management involves monitoring the Company's sources and uses of funds in order to meet its day-to-day cash flow requirements while maximizing profits. Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of the investment portfolio is very predictable and subject to a high degree of control at the time investment decisions are made; however, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control. Asset liquidity is provided by cash and assets which are readily marketable, which can be pledged, or which will mature in the near future. Liability liquidity is provided by access to core funding sources, principally the ability to generate customer deposits in the Company’s market area.The Company's Federal Funds Sold position, which includes funds in due from banks and interest-bearing deposits with banks, is typically its primary source of liquidity, averaged $24.8 million during the year ended December 31, 2014 and totaled $14.3 million at December 31, 2014. Also, the Company has available advances from the Federal Home Loan Bank. Advances available are generally based upon the amount of qualified first mortgage loans which can be used for collateral. At December 31, 2014, advances available totaled approximately $228.4 million of which $84.5 million had been drawn, or used for letters of credit.Management regularly reviews the liquidity position of the Company and has implemented internal policies which establish guidelines for sources of asset-based liquidity and limit the total amount of purchased funds used to support the balance sheet and funding from non-core sources.EESA also increased FDIC deposit insurance on most accounts from $100,000 to $250,000. However, with the passage of the Dodd-Frank Act, this increase in the basic coverage limit has been made permanent.Subprime AssetsThe Bank does not engage in subprime lending activities targeted towards borrowers in high risk categories.Accounting MattersInformation on new accounting matters is set forth in Footnote B to the Consolidated Financial Statements included at Item 8 in this report. This information is incorporated herein by reference.Impact of InflationUnlike most industrial companies, the assets and liabilities of financial institutions such as the Company are primarily monetary in nature. Therefore, interest rates have a more significant effect on the Company's performance than do the effects of changes in the general rate of inflation and change in prices. In addition, interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. As discussed previously, management seeks to manage the relationships between interest sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and StockholdersThe First Bancshares, Inc.Hattiesburg, MississippiWe have audited the accompanying consolidated balance sheets of The First Bancshares, Inc., as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income (loss), changes in stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2014. The management of The First Bancshares, Inc. is responsible for these financial statements. 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 audits 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 audits 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of The First Bancshares, Inc., as of December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America./s/ T. E. LOTT & COMPANYColumbus, MississippiMarch 31, 2015THE FIRST BANCSHARES, INC.CONSOLIDATED BALANCE SHEETSDECEMBER 31, 2014 AND 2013 2014 2013 ASSETS Cash and due from banks $ 30,332,502 $ 24,079,590 Interest-bearing deposits with banks 13,899,287 14,205,335 Federal funds sold 386,000 967,000 Total cash and cash equivalents 44,617,789 39,251,925 Held-to-maturity securities (fair value of $9,993,816 in 2014 and $9,624,427 in 2013) 8,192,741 8,438,435 Available-for-sale securities 254,746,446 244,050,671 Other securities 7,234,350 5,533,850 Total securities 270,173,537 258,022,956 Loans held for sale 2,103,351 3,679,521 Loans, net of allowance for loan losses of $6,095,001 in 2014 and $5,727,800 in 2013 698,436,345 573,894,868 Interest receivable 3,659,006 3,291,887 Premises and equipment 34,809,843 32,071,741 Cash surrender value of life insurance 14,463, 207 6,593,403 Goodwill 12,276,040 10,620,814 Other assets 13,228,601 13,462,960 Total assets $ 1,093,767,719 $ 940,890,075 LIABILITIES AND STOCKHOLDERS’ EQUITY Deposits: Noninterest-bearing $ 201,362,468 $ 173,793,894 Interest-bearing 691,413,018 606,177,141 Total deposits 892,775,486 779,971,035 Interest payable 315,844 399,976 Borrowed funds 89,450,067 52,000,000 Subordinated debentures 10,310,000 10,310,000 Other liabilities 4,700,738 13,100,724 Total liabilities 997,552,135 855,781,735 Stockholders’ Equity: Preferred stock, no par value, $1,000 per share liquidation, 10,000,000 shares authorized; 17,123 shares issued and outstanding in 2014 and 2013, respectively 17,123,000 17,102,507 Common stock, par value $1 per share: 10,000,000 shares authorized; 5,342,670 and 5,122,941 shares issued and outstanding in 2014 and 2013, respectively 5,342,670 5,122,941 Additional paid-in capital 44,420,149 42,086,463 Retained earnings 27,975,049 22,508,918 Accumulated other comprehensive income (loss) 1,818,361 (1,248,844 ) Treasury stock, at cost (463,645 ) (463,645 ) Total stockholders’ equity 96,215,584 85,108,340 Total liabilities and stockholders’ equity $ 1,093,767,719 $ 940,890,075 The accompanying notes are an integral part of these statements.30THE FIRST BANCSHARES, INC.CONSOLIDATED STATEMENTS OF INCOMEYEARS ENDED DECEMBER 31, 2014 AND 2013 2014 2013 INTEREST INCOME Interest and fees on loans $ 30,276,477 $ 25,736,169 Interest and dividends on securities: Taxable interest and dividends 3,884,321 3,279,367 Tax-exempt interest 2,071,782 2,140,084 Interest on federal funds sold 52,945 62,244 Interest on deposits in banks 85,257 100,169 Total interest income 36,370,782 31,318,033 INTEREST EXPENSE Interest on time deposits of $100,000 or more 520,373 698,580 Interest on other deposits 1,848,965 1,601,024 Interest on borrowed funds 603,469 617,654 Total interest expense 2,972,807 2,917,258 Net interest income 33,397,975 28,400,775 Provision for loan losses 1,418,260 1,075,983 Net interest income after provision for loan losses 31,979,715 27,324,792 OTHER INCOME Service charges on deposit accounts 4,261,795 3,979,159 Other service charges and fees 2,162,958 2,187,229 Bank owned life insurance income 369,804 152,294 Loss on sale of other real estate (85,256 ) (76,532 ) Other 1,094,167 841,147 Total other income 7,803,468 7,083,297 OTHER EXPENSE Salaries 14,207,216 12,216,098 Employee benefits 3,254,399 2,638,558 Occupancy 2,805,157 2,351,009 Furniture and equipment 1,721,170 1,568,113 Supplies and printing 497,755 455,443 Professional and consulting fees 1,617,828 2,433,111 Marketing and public relations 445,451 451,018 FDIC and OCC assessments 938,378 766,503 Other 5,246,254 5,285,148 Total other expense 30,733,608 28,165,001 THE FIRST BANCSHARES, INC.CONSOLIDATED STATEMENTS OF INCOMEYEARS ENDED DECEMBER 31, 2014 AND 2013Continued: 2014 2013 Income before income taxes 9,049,575 6,243,088 Income taxes 2,435,879 1,603,593 Net income 6,613,696 4,639,495 Preferred dividends and stock accretion 362,953 424,428 Net income applicable to common stockholders $ 6,250,743 $ 4,215,067 Net income per share: Basic $ 1.27 $ 1.07 Diluted 1.25 1.06 Net income applicable to common stockholders: Basic $ 1.20 $ .98 Diluted 1.19 .96 The accompanying notes are an integral part of these statements.THE FIRST BANCSHARES, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEYEARS ENDED DECEMBER 31, 2014 AND 2013 2014 2013 Net income $ 6,613,696 $ 4,639,495 Other comprehensive income: Unrealized gains on securities: Unrealized holding gains (losses) arising during the period 4,804,818 (5,676,942 ) Less reclassification adjustment for gains included in net income (237,173 ) - 4,567,645 (5,676,942 ) Unrealized holding losses on loans held for sale (83,826 ) (55,967 ) Income tax benefit (expense) (1,416,614 ) 1,951,037 Other comprehensive income (loss) 3,067,205 (3,781,872 ) Comprehensive income $ 9,680,901 $ 857,623 The accompanying notes are an integral part of these statements.33THE FIRST BANCSHARES, INC.CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITYYEARS ENDED DECEMBER 31, 2014 AND 2013 Common
Stock Preferred
Stock Stock
Warrants Additional
Paid-in
Capital Retained
Earnings Accum-
ulated
Other
Compre-
hensive
Income (Loss) Treasury
Stock Total Balance, January 1, 2013 $ 3,133,596 $ 17,020,539 $ 283,738 $ 23,427,037 $ 19,951,173 $ 2,533,028 $ (463,645 ) $ 65,885,466 Net income 2013 - - - - 4,639,495 - - 4,639,495 Other comprehensive income (loss) - - - - - (3,781,872 ) - (3,781,872 ) Dividends on preferred stock - - - - (342,460 ) - - (342,460 ) Cash dividend declared, $.15 per common share - - - - (615,781 ) - - (615,781 ) Grant of restricted stock 39,913 - - (39,913 ) - - - - Compensation cost on restricted stock - - - 391,777 - - - 391,777 Preferred stock accretion - 81,968 - - (81,968 ) - - - Repurchase of restricted stock for payment of taxes (1,788 ) - - (24,961 ) - - - (26,749 ) Issuance of 1,951,220 common shares 1,951,220 - - 18,048,785 (1,041,541 ) - - 18,958,464 Balance, December 31, 2013 $ 5,122,941 $ 17,102,507 $ 283,738 $ 41,802,725 $ 22,508,918 $ (1,248,844 ) $ (463,645 ) $ 85,108,340 Net income 2014 - - - - 6,613,696 - - 6,613,696 Other comprehensive income - - - - - 3,067,205 - 3,067,205 THE FIRST BANCSHARES, INC.CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITYYEARS ENDED DECEMBER 31, 2014 AND 2013Continued: Common
Stock Preferred
Stock Stock
Warrants Additional
Paid-in
Capital Retained
Earnings Accum-
ulated
Other
Compre-
hensive
Income (Loss) Treasury
Stock Total Dividends on preferred stock - - - - (342,460 ) - - (342,460 ) Cash dividend declared, $.15 per common share - - - - (784,612 ) - - (784,612 ) Grant of restricted stock 67,627 - - (67,627 ) - - - - Compensation cost on restricted stock - - - 617,779 - - - 617,779 Preferred stock accretion - 20,493 - - (20,493 ) - - - Repurchase of restricted stock for payment of taxes (5,981 ) - - (79,551 ) - - - (85,532 ) Issuance of 158,083 common shares for BCB Holding 158,083 - - 1,863,085 - - - 1,863,085 Balance, December 31, 2014 $ 5,342,670 $ 17,123,000 $ 283,738 $ 44,136,411 $ 27,975,049 $ 1,818,361 $ (463,645 ) $ 96,215,584 The accompanying notes are an integral part of these statements.35THE FIRST BANCSHARES, INC.CONSOLIDATED STATEMENTS OF CASH FLOWSYEARS ENDED DECEMBER 31, 2014 AND 2013 2014 2013 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 6,613,696 $ 4,639,495 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,182,630 1,915,398 FHLB Stock dividends (6,000 ) (4,100 ) Provision for loan losses 1,418,260 1,075,983 Deferred income taxes 331,399 1,707,403 Restricted stock expense 617,779 391,777 Increase in cash value of life insurance (369,804 ) (152,294 ) Amortization and accretion, net 900,913 (107,170 ) Gain on sale of land (110,734 ) - Writedown of bank property - 193,073 Gain on sale of securities (237,174 ) - Loss on sale/writedown of other real estate 395,379 350,023 Changes in: Loans held for sale 1,659,996 2,671,885 Interest receivable (152,307 ) (54,600 ) Other assets 2,643,956 4,412,575 Interest payable (109,218 ) (153,065 ) Other liabilities (8,721,513 ) 1,108,980 Net cash provided by operating activities 7,057,258 17,995,363 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of available-for-sale securities (38,459,683 ) (83,415,975 ) Purchases of other securities (3,296,800 ) (2,780,100 ) Proceeds from maturities and calls of available-for-sale securities 42,723,486 52,237,989 Proceeds from maturities and calls of held-to-maturity securities 246,980 - Proceeds from sales of securities available-for-sale 10,909,239 - Proceeds from redemption of other securities 2,514,485 788,200 Increase in loans (89,190,269 ) (50,100,144 ) Net additions to premises and equipment (988,736 ) (746,724 ) Purchase of bank owned life insurance (7,500,000 ) - Proceeds from sale of land 76,375 - Cash received in excess of cash paid for acquisition 4,272,735 43,150,000 Net cash used in investing activities (78,692,188 ) (40,866,754 ) CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in deposits 53,845,509 (1,971,438 ) Proceeds from borrowed funds 180,000,000 47,000,000 Repayment of borrowed funds (155,653,580 ) (31,770,773 ) Dividends paid on common stock (763,143 ) (600,452 ) Dividends paid on preferred stock (342,460 ) (342,460 ) The accompanying notes are an integral part of these statements.36THE FIRST BANCSHARES, INC.CONSOLIDATED STATEMENTS OF CASH FLOWSYEARS ENDED DECEMBER 31, 2014 AND 2013Continued: 2014 2013 Repurchase of restricted stock for payment of taxes (85,532 ) (26,749 ) Issuance of 1,951,220 common shares, net - 18,958,464 Net cash provided by financing activities 77,000,794 31,246,592 Net increase in cash and cash equivalents 5,365,864 8,375,201 Cash and cash equivalents at beginning of year 39,251,925 30,876,724 Cash and cash equivalents at end of year $ 44,617,789 $ 39,251,925 Supplemental disclosures: Cash paid during the year for: Interest $ 3,056,939 $ 2,729,323 Income taxes 275,075 980,490 Non-cash activities: Transfers of loans to other real estate 2,208,010 2,136,687 Issuance of restricted stock grants 67,627 39,913 Loans originated to facilitate the sale of land 402,982 - The accompanying notes are an integral part of these statements.37THE FIRST BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE A - NATURE OF BUSINESSThe First Bancshares, Inc. (the Company) is a bank holding company whose business is primarily conducted by its wholly-owned subsidiary, The First, A National Banking Association (the Bank). The Bank provides a full range of banking services in its primary market area of South Mississippi, South Alabama, and Louisiana. The Company is regulated by the Federal Reserve Bank. Its subsidiary bank is subject to the regulation of the Office of the Comptroller of the Currency (OCC).NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESThe Company and the Bank follow accounting principles generally accepted in the United States of America including, where applicable, general practices within the banking industry.1.Principles of ConsolidationThe consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated.2.EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the 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 allowance for loan losses and the valuation of deferred tax assets.3.Cash and Due From BanksIncluded in cash and due from banks are legal reserve requirements which must be maintained on an average basis in the form of cash and balances due from the Federal Reserve. The reserve balance varies depending upon the types and amounts of deposits. At December 31, 2014, the required reserve balance on deposit with the Federal Reserve Bank was approximately $4,610,000.4.SecuritiesInvestments in securities are accounted for as follows:Available-for-Sale SecuritiesSecurities classified as available-for-sale are those securities that are intended to be held for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available-for-sale would be based on various factors, including movements in interest rates, liquidity needs, security risk assessments, changes in the mix of assets and liabilities and other similar factors. These securities are carried at their estimated fair value, and the net unrealized gain or loss is reported net of tax, as a component of accumulated other comprehensive income (loss) in stockholders' equity, until realized. Premiums and discounts are recognized in interest income using the interest method. Gains and losses on the sale of available-for-sale securities are determined using the adjusted cost of the specific security sold.Securities to be Held-to-MaturitySecurities classified as held-to-maturity are those securities for which there is a positive intent and ability to hold to maturity. These securities are carried at cost adjusted for amortization of premiums and accretion of discounts, computed by the interest method.Trading Account SecuritiesTrading account securities are those securities which are held for the purpose of selling them at a profit. There were no trading account securities on hand at December 31, 2014 and 2013.Other SecuritiesOther securities are carried at cost and are restricted in marketability. Other securities consist of investments in the Federal Home Loan Bank (FHLB), Federal Reserve Bank and First National Bankers’ Bankshares, Inc. Management reviews for impairment based on the ultimate recoverability of the cost basis.Other-than-Temporary ImpairmentManagement evaluates investment securities for other-than-temporary impairment on a quarterly basis. A decline in the fair value of available-for-sale and held-to-maturity securities below cost that is deemed other-than-temporary is charged to earnings for a decline in value deemed to be credit related and a new cost basis for the security is established. The decline in value attributed to non-credit related factors is recognized in other comprehensive income.5.Loans held for saleThe Bank originates fixed rate single family, residential first mortgage loans on a presold basis. The Bank issues a rate lock commitment to a customer and concurrently “locks in” with a secondary market investor under a best efforts delivery mechanism. Such loans are sold without the servicing retained by the Bank. The terms of the loan are dictated by the secondary investors and are transferred within several weeks of the Bank initially funding the loan. The Bank recognizes certain origination fees and service release fees upon the sale, which are included in other income on loans in the consolidated statements of income. Between the initial funding of the loans by the Bank and the subsequent purchase by the investor, the Bank carries the loans held for sale at the lower of cost or fair value in the aggregate as determined by the outstanding commitments from investors.6.LoansLoans are carried at the principal amount outstanding, net of the allowance for loan losses. Interest income on loans is recognized based on the principal balance outstanding and the stated rate of the loan. Loan origination fees and certain direct origination costs are deferred and recognized as an adjustment of the related loan yield using the interest method.A loan is considered impaired, in accordance with the impairment accounting guidance of Accounting Standards Codification (ASC) Section 310-10-35,Receivables, Subsequent Measurement, when--based upon current events and information--it is probable that the scheduled payments of principal and interest will not be collected in accordance with the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral values, and the probability of collecting scheduled payments of principal and interest when due. Generally, impairment is measured on a loan by loan basis using the fair value of the supporting collateral.Loans are generally placed on a nonaccrual status when principal or interest is past due ninety days or when specifically determined to be impaired. When a loan is placed on nonaccrual status, interest accrued but not received is generally reversed against interest income. If collectibility is in doubt, cash receipts on nonaccrual loans are used to reduce principal rather than recorded in interest income. Past due status is determined based upon contractual terms.7.Allowance for Loan LossesFor financial reporting purposes, the provision for loan losses charged to operations is based upon management's estimation of the amount necessary to maintain the allowance at an adequate level. Allowances for any impaired loans are generally determined based on collateral values. Loans are charged against the allowance for loan losses when management believes the collectibility of the principal is unlikely.Management evaluates the adequacy of the allowance for loan losses on a regular basis. These evaluations are based upon a periodic review of the collectibility considering historical experience, the nature and value of the loan portfolio, underlying collateral values, internal and independent loan reviews, and prevailing economic conditions. In addition, the OCC, as a part of the regulatory examination process, reviews the loan portfolio and the allowance for loan losses and may require changes in the allowance based upon information available at the time of the examination. The allowance consists of two components: allocated and unallocated. The components represent an estimation performed pursuant to either ASC Topic 450,Contingencies, or ASC Subtopic 310-10,Receivables. The allocated component of the allowance reflects expected losses resulting from an analysis developed through specific credit allocations for individual loans, including any impaired loans, and historical loan loss history. The analysis is performed quarterly and loss factors are updated regularly.The unallocated portion of the allowance reflects management’s estimate of probable inherent but undetected losses within the portfolio due to uncertainties in economic conditions, changes in collateral values, unfavorable information about a borrower’s financial condition, and other risk factors that have not yet manifested themselves. In addition, the unallocated allowance includes a component that explicitly accounts for the inherent imprecision in the loan loss analysis.8.Premises and EquipmentPremises and equipment are stated at cost, less accumulated depreciation. The depreciation policy is to provide for depreciation over the estimated useful lives of the assets using the straight-line method. Repairs and maintenance expenditures are charged to operating expenses; major expenditures for renewals and betterments are capitalized and depreciated over their estimated useful lives. Upon retirement, sale, or other disposition of property and equipment, the cost and accumulated depreciation are eliminated from the accounts, and any gains or losses are included in operations.9.Other Real EstateOther real estate, carried in other assets in the consolidated balance sheets, consists of properties acquired through foreclosure and, as held for sale property, is recorded at the lower of the outstanding loan balance or current appraisal less estimated costs to sell. Any write-down to fair value required at the time of foreclosure is charged to the allowance for loan losses. Subsequent gains or losses on other real estate are reported in other operating income or expenses. At December 31, 2014 and 2013, other real estate totaled $4,654,604 and $4,470,249, respectively.10.Goodwill and Other Intangible AssetsGoodwill totaled $12,276,040 and $10,620,814 for the years ended December 31, 2014 and 2013, respectively.Goodwill totaling $1,655,225 acquired during the year ended December 31, 2014, was a result of the acquisition of Bay Bank. Footnote C to these consolidated financial statements provides additional information on the acquisition during 2014.The Company performed the required annual impairment tests of goodwill as of December 1, 2014. The Company’s annual impairment test did not indicate impairment as of the testing date, and subsequent to that date, management is not aware of any events or changes in circumstances since the impairment test that would indicate that goodwill might be impaired.The Company’s acquisition method recognized intangible assets, which are subject to amortization, and included in other assets in the accompanying consolidated balance sheets, include core deposit intangibles, amortized on a straight-line basis, over a 10 year average life. The definite-lived intangible assets had the following carrying values at December 31, 2014 and 2013. 2014 2013 Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Amount Amortization Amount Amount Amortization Amount (Dollars in thousands) Core deposit intangibles $ 4,000 $ (1,486 ) $ 2,514 $ 3,775 $ (1,098 ) $ 2,677 During 2014, the Company recorded $225,000 in core deposit intangible assets related to the deposits acquired in the Bay Bank acquisition.The related amortization expense of business combination related intangible assets is as follows:(dollars in thousands) Amount Aggregate amortization expense for the year ended December 31: 2013 $ 355 2014 387 Estimated amortization expense for the year ending December 31: 2015 $ 400 2016 383 2017 331 2018 331 2019 331 Thereafter 738 $ 2,514 11.Other Assets and Cash Surrender ValueFinancing costs related to the issuance of junior subordinated debentures are being amortized over the life of the instruments and are included in other assets. The Company invests in bank owned life insurance (BOLI). BOLI involves the purchasing of life insurance by the Company on a chosen group of employees. The Company is the owner of the policies and, accordingly, the cash surrender value of the policies is reported as an asset, and increases in cash surrender values are reported as income.12.Stock OptionsThe Company accounts for stock based compensation in accordance with ASC Topic 718,Compensation - Stock Compensation. Compensation cost is recognized for all stock options granted based on the weighted average fair value stock price at the grant date.13.Income TaxesIncome taxes are provided for the tax effects of the transactions reported in the financial statements and consist of taxes currently payable plus deferred taxes related primarily to differences between the bases of assets and liabilities as measured by income tax laws and their bases as reported in the financial statements. The deferred tax assets and liabilities represent the future tax consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.The Company and its subsidiary file consolidated income tax returns. The subsidiary provides for income taxes on a separate return basis and remits to the Company amounts determined to be payable.ASC Topic 740,Income Taxes,provides guidance on financial statement recognition and measurement of tax positions taken, or expected to be taken, in tax returns. ASC Topic 740 requires an evaluation of tax positions to determine if the tax positions will more likely than not be sustainable upon examination by the appropriate taxing authority. The Company at December 31, 2014 and 2013, had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements.14.Advertising CostsAdvertising costs are expensed in the period in which they are incurred. Advertising expense for the years ended December 31, 2014 and 2013, was $394,363 and $419,873, respectively.4215.Statements of Cash FlowsFor purposes of reporting cash flows, cash and cash equivalents include cash, amounts due from banks, interest-bearing deposits with banks and federal funds sold. Generally, federal funds are sold for a one to seven day period.16.Off-Balance Sheet Financial InstrumentsIn the ordinary course of business, the subsidiary bank enters into off-balance sheet financial instruments consisting of commitments to extend credit, credit card lines and standby letters of credit. Such financial instruments are recorded in the financial statements when they are exercised.17.Earnings Applicable to Common StockholdersPer share amounts are presented in accordance with ASC Topic 260,Earnings Per Share. Under ASC Topic 260, two per share amounts are considered and presented, if applicable. Basic per share data is calculated based on the weighted-average number of common shares outstanding during the reporting period. Diluted per share data includes any dilution from potential common stock, such as outstanding stock options.The following table discloses the reconciliation of the numerators and denominators of the basic and diluted computations applicable to common stockholders: For the Year Ended For the Year Ended December 31, 2014 December 31, 2013 Net
Income
(Numerator) Shares
(Denominator) Per Share
Amount Net
Income
(Numerator) Shares
(Denominator) Per Share
Amount Basic per common Share $ 6,250,743 5,227,768 $ 1.20 $ 4,215,067 4,319,485 $ .98 Effect of dilutive shares: Restricted Stock 42,901 53,445 $ 6,250,743 5,270,669 $ 1.19 $ 4,215,067 4,372,930 $ .96 The diluted per share amounts were computed by applying the treasury stock method.18.ReclassificationsCertain reclassifications have been made to the 2013 financial statements to conform with the classi-fications used in 2014. These reclassifications did not impact the Company's consolidated financial condition or results of operations.4319.Accounting PronouncementsIn January 2014, the FASB issued ASU No. 2014-01, Investments—Equity Method and Joint Ventures (Topic 323), “Accounting for Investments in Qualified Affordable Housing Projects,” which permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). For those investments in qualified affordable housing projects not accounted for using the proportional method, the investment should be accounted for as an equity method investment or a cost method investment. The decision to apply the proportional amortization method of accounting is an accounting policy decision that should be applied consistently to all qualifying affordable housing project investments rather than a decision to be applied to individual investments. This amendment should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. ASU 2014-01 is effective for fiscal years beginning on or after December 15, 2014, and interim periods within those annual periods. The Company is evaluating the possible effects of this guidance on its financial statements.In January 2014, the FASB issued ASU 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40), “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure,” which will eliminate diversity in practice regarding the timing of derecognition for residential mortgage loans when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. Under ASU 2014-04, physical possession of residential real estate property is achieved when either the creditor obtains legal title to the residential real estate property upon completion of a foreclosure or the borrower conveys all interest in the residential real estate property through completion of a deed in lieu or foreclosure in order to satisfy the loan. Once physical possession has been achieved, the loan is derecognized and the property recorded within other assets at the lower of cost or fair value (less estimated costs to sell). In addition, the guidance requires both interim and annual disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. The additional disclosure requirements are effective for annual reporting periods beginning on or after December 15, 2014, and interim periods within those annual periods with retrospective disclosure necessary for all comparative periods presented. The adoption of this standard will result in additional disclosures but is not expected to have any impact on the Company’s consolidated financial statements.In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of the ASU is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. The ASU defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The new accounting guidance, which does not apply to financial instruments, is effective on a retrospective basis beginning on January 1, 2017, and early adoption is prohibited. The Company does not expect the new guidance to have a material impact on its consolidated financial position or results of operation.In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860), “Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” The FASB issued ASU 2014-11 to change the accounting for repurchase-to-maturity transactions and linked repurchase financials to secured borrowing accounting, which is consistent with the accounting for other repurchase agreements. The amendments also require two new disclosures. The first disclosure requires an entity to disclose information on transfers accounted for as sales in transactions that are economically similar to repurchase agreements. The second disclosure provides increased transparency about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The new guidance is effective beginning on January 1, 2015. The Company does not expect this guidance to have a material impact on its consolidated financial position.In June 2014, the FASB issued ASU No. 2014-12, Compensation-Stock Compensation (Topic 718), “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” The new guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. The Company's current accounting treatment of performance conditions for employees who are or become retirement eligible prior to the achievement of the performance target is consistent with ASU 2014-12, and as such does not expect the new guidance to have a material effect on the Company’s consolidated financial condition and results of operations. The Company expects to prospectively adopt ASU 2014-12 in the first quarter 2015.In August 2014, the FASB issued ASU 2014-14, Troubled Debt Restructurings by Creditors (Subtopic 310-40), “Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure,” which will eliminate diversity in practice relating to how creditors classify government-guaranteed mortgage loans, including Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA) guaranteed loans, upon foreclosure. Under ASU 2014-14 a mortgage must be derecognized and a separate other receivable recognized upon foreclosure when the loan possesses a non-separable government guarantee that the creditor has both the intent and ability to exercise and for which any amount of the claim determined on the basis of the fair value of the real estate is fixed. Other receivables recognized under this guidance are to be measured based on the amount of the principal and interest expected to be recovered from the guarantor. ASU 2014-14 allows for a modified retrospective or prospective adoption in conjunction with ASU 2014-04 and is effective for annual reporting periods beginning on or after December 15, 2014, and interim periods within those annual periods with early adoption permitted. The Company is currently evaluating which method will be employed and the final impact of the Standard; however, ASU 2014-14 is not expected to have a material impact on the Company’s consolidated financial statements.In January 2015, the FASB issued ASU 2015-01, Income Statement – Extraordinary and Unusual Items (Subtopic 225-20), “Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” Presentation and disclosure requirement for items that are unusual in nature or infrequently occurring will be retained. ASU 2015-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The guidance may be applied prospectively or on a retrospective basis. Early adoption is permitted. Entities that elect prospective application will be required, at transition, to disclose both the nature and amount of an item included in income from continuing operations after adoption that relates to an adjustment of an item previously separately classified and presented as an extraordinary item before adoption, if applicable. The Company does not currently report any extraordinary items on its income statement; therefore adoption of this guidance will not have a material impact on its consolidated financial statements.NOTE C – BUSINESS COMBINATIONThe Company accounts for its acquisitions using the acquisition method. Acquisition accounting requires the total purchase price to be allocated to the estimated fair values of assets acquired and liabilities assumed, including certain intangible assets that must be recognized. Typically, this allocation results in the purchase price exceeding the fair value of net assets acquired, which is recorded as goodwill. Core deposit intangibles are a measure of the value of checking, money market and savings deposits acquired in business combinations accounted for under the acquisition method. Core deposit intangibles and other identified intangibles with finite useful lives are amortized using the straight line method over their estimated useful lives of up to ten years. Loans that the Company acquires in connection with acquisitions are recorded at fair value with no carryover of the related allowance for credit losses. Fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. The excess or deficit of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount or amortizable premium and is recognized into interest income over the remaining life of the loan.First National Bank of Baldwin CountyOn April 30, 2013, the Company completed the acquisition of all of the outstanding shares of First National Bank of Baldwin County, a wholly-owned subsidiary of First Baldwin Bancshares, Inc., an Alabama corporation, which included five (5) branches and (1) loan production office located on the Alabama Iberville Bank in Baldwin County, Alabama.In connection with the acquisition, the Company recorded $1.3 million of goodwill and $.7 million of core deposit intangible. The core deposit intangible will be expensed over 10 years. The Company acquired the $124.2 million loan portfolio at a fair value discount of $.5 million which included a credit mark of $.9 million. The discount represents expected credit losses, adjustments to market interest rates and liquidity adjustments.The amounts of the acquired identifiable assets and liabilities as of the acquisition date were as follows (dollars in thousands):Purchase price: Cash $ 3,300 Total purchase price 3,300 Identifiable assets: Cash and due from banks 46,450 Investments 2,508 Loans and leases 124,165 Other Real Estate 87 Core deposit intangible 680 Personal and real property 10,655 Deferred tax asset 2,969 Other assets 1,034 Total assets 188,548 Liabilities and equity: Deposits 185,771 Other liabilities 736 Total liabilities 186,507 Net assets acquired $ 2,041 Goodwill resulting from acquisition $ 1,259 The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheet at December 31, 2014, are as follows (dollars in thousands):Outstanding principal balance $ 87,453 Carrying amount 87,245 All loans obtained in the acquisition reflect no specific evidence of credit deterioration and very low probability that the Company would be unable to collect all contractually required principal and interest payments.Expenses associated with the acquisition were $30,000 and $1,439,000 for the three and twelve month periods ended December 31, 2013, respectively. These costs included system conversion and integrating operations charges as well as legal and consulting expenses, which have been expensed as incurred.BCB Holding Company, Inc.On March 3, 2014, the Company entered into an Agreement and Plan of Merger (the “Agreement”) with BCB Holding Company, Inc., an Alabama corporation (“BCB”) and parent of Bay Bank, Mobile, Alabama. The Agreement provides that, upon the terms and subject to the conditions set forth in the Agreement, BCB will merge with and into the Company (the “Merger”) and Bay Bank will merge with and into The First, A National Banking Association (“Bank Merger”). Subject to the terms and conditions of the Agreement, which has been approved by the Boards of Directors of the Company and BCB, each outstanding share of BCB common stock, other than shares held by the Company or BCB, or, shares with respect to which the holders thereof have perfected dissenters’ rights, will receive (i) for the BCB common stock that was outstanding prior to August 1, 2013, $3.60 per share which may be received in cash or the Company common stock provided that at least 30% of the aggregate consideration paid to such shareholders is in the Company common stock and one non-transferable contingent value right (“CVR”) of the CVR Consideration, and (ii) for the BCB common stock that was issued on August 1, 2013, $2.25 per share in cash. Each CVR is eligible to receive a cash payment equal to up to $0.40, with the exact amount based on the resolution of certain identified BCB loans over a three-year period following the closing of the transaction. Payout of the CVR will be overseen by a special committee of the Company’s Board of Directors. The Company redeemed in full a note payable by BCB to Alostar Bank, as well as the preferred stock issued under the U.S. Treasury’s Capital Purchase Program. The total consideration to be paid in connection with the acquisition will range between approximately $6.2 million and $6.6 million depending upon the payout of the CVR, as well as the price of the Company common stock on the closing of the transaction, which is subject to a cap and a collar regarding its price. An estimated liability of $174,000 has been accrued for the CVR and reflected in the financials at December 31, 2014.As of the closing on July 1, 2014, the Company and BCB entered into an agreement and plan of merger pursuant to which BCB’s wholly-owned subsidiary, Bay Bank, was merged with and into the Company’s wholly-owned subsidiary, the Bank.In connection with the acquisition, the Company recorded $1.7 million of goodwill and $.2 million of core deposit intangible. The core deposit intangible will be expensed over 10 years.The Company acquired the $40.1 million loan portfolio at a fair value discount of $1.7 million. The discount represents expected credit losses, adjusted to market interest rates and liquidity adjustments.The amounts of the acquired identifiable assets and liabilities as of the acquisition date were as follows(dollars in thousands):Purchase price: Cash and fair value of common stock $ 6,300 Total purchase price 6,300 Identifiable assets: Cash and due from banks 8,307 Investments 23,423 Loans and leases 38,393 Other Real Estate 571 Core deposit intangible 225 Personal and real property 3,670 Deferred tax asset 2,502 Other assets 305 Total assets 77,396 Liabilities and equity: Deposits 59,321 Borrowed funds 13,104 Other liabilities 326 Total liabilities 72,751 Net assets acquired 4,645 Goodwill resulting from acquisition $ 1,655 The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheet at December 31, 2014, are as follows (dollars in thousands):Outstanding principal balance $ 36,671 Carrying amount 35,149 Loans acquired with deteriorated credit quality are detailed in Note E – Loans.The amount of the revenue and earnings included in the Company’s consolidated income statement for the year ended December 31, 2014, reflect only amounts from the acquisition date of July 1, 2014, through December 31, 2014.The following pro forma financial information presents the combined results of operations as if the acquisition had been effective January 1, 2013. These results include the impact of amortizing certain purchase accounting adjustments such as tangible assets, compensation expenses and the impact of the acquisition on income tax expense. There were no material nonrecurring pro forma adjustments directly attributable to the acquisition included within the following pro forma financial information. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the combination constituted a single entity during such periods. Growth opportunities are expected to be achieved in various amounts at various times during the years subsequent to the acquisition and not ratably over, or at the beginning or end of such periods. No adjustments have been reflected in the following pro forma financial information for anticipated growth opportunities. Year Ended December 31, (In thousands) 2014 2013 (Unaudited) Interest income $ 37,572 $ 33,720 Net income 7,177 5,765 Expenses associated with the acquisition were $29,000 and $508,000 for the three and twelve month periods ended December 31, 2014, respectively. These costs included system conversion and integrating operations charges as well as legal and consulting expenses, which have been expensed as incurred.NOTE D – SECURITIESA summary of the amortized cost and estimated fair value of available-for-sale securities and held-to-maturity securities at December 31, 2014 and 2013, follows: December 31, 2014 Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Estimated
Fair
Value Available-for-sale securities: Obligations of U.S. Government agencies $ 27,225,335 $ 199,851 $ 53,550 $ 27,371,636 Tax-exempt and taxable obligations of states and municipal subdivisions 101,873,361 2,896,657 187,598 104,582,420 Mortgage-backed securities 91,697,199 1,579,218 240,805 93,035,612 Corporate obligations 29,952,502 140,556 1,307,782 28,785,276 Other 1,255,483 - 283,981 971,502 $ 252,003,880 $ 4,816,282 $ 2,073,716 $ 254,746,446 Held-to-maturity securities: Mortgage-backed securities $ 2,192,741 $ 20,875 $ - $ 2,213,616 Taxable obligations of states and municipal subdivisions 6,000,000 1,780,200 - 7,780,200 $ 8,192,741 $ 1,801,075 $ - $ 9,993,816 December 31, 2013 Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Estimated
Fair
Value Available-for-sale securities: Obligations of U.S. Government agencies $ 29,963,634 $ 122,764 $ 124,491 $ 29,961,907 Tax-exempt and taxable obligations of states and municipal subdivisions 107,676,085 1,937,586 1,535,036 108,078,635 Mortgage-backed securities 78,770,400 810,370 1,394,067 78,186,703 Corporate obligations 28,210,148 223,776 1,582,001 26,851,923 Other 1,255,483 - 283,980 971,503 $ 245,875,750 $ 3,094,496 $ 4,919,575 $ 244,050,671 Held-to-maturity securities: Mortgage-backed securities $ 2,438,435 $ - $ 74,008 $ 2,364,427 Taxable obligations of states and municipal subdivisions 6,000,000 1,260,000 - 7,260,000 $ 8,438,435 $ 1,260,000 $ 74,008 $ 9,624,427 The scheduled maturities of securities at December 31, 2014, were as follows: Available-for-Sale Held-to-Maturity Amortized
Cost Estimated
Fair
Value Amortized
Cost Estimated
Fair
Value Due less than one year $ 18,914,378 $ 19,004,315 $ - $ - Due after one year through five years 79,825,867 80,580,533 - - Due after five years through ten years 39,340,584 40,277,184 - - Due after ten years 22,225,850 21,848,802 6,000,000 7,780,200 Mortgage-backed securities 91,697,200 93,035,612 2,192,741 2,213,616 $ 252,003,879 $ 254,746,446 $ 8,192,741 $ 9,993,816 Actual maturities can differ from contractual maturities because the obligations may be called or prepaid with or without penalties.$237,173 in gain was realized from the sale of available-for-sale securities in 2014 and no gain or loss in 2013. No other-than-temporary impairment losses were recognized for the years ended 2014 and 2013.Securities with a carrying value of $191,534,036 and $197,611,193 at December 31, 2014 and 2013, respectively, were pledged to secure public deposits, repurchase agreements, and for other purposes as required or permitted by law.The details concerning securities classified as available-for-sale with unrealized losses as of December 31, 2014 and 2013, were as follows: 2014 Losses < 12 Months Losses 12 Months or > Total Fair
Value Gross
Unrealized
Losses Fair
Value Gross
Unrealized
Losses Fair
Value Gross
Unrealized
Losses Obligations of U.S. government agencies $ 5,510,325 $ 16,481 $ 3,451,215 $ 37,069 $ 8,961,540 $ 53,550 Tax-exempt and tax- able obligations of states and municipal subdivisions 9,191,726 28,694 10,667,122 158,904 19,858,848 187,598 Mortgage-backed securities 156,589 5,207 19,319,269 235,598 19,475,858 240,805 Corporate obligations 6,910,425 32,096 6,580,925 1,275,686 13,491,350 1,307,782 Other - - 971,502 283,981 971,502 283,981 $ 21,769,065 $ 82,478 $ 40,990,033 $ 1,991,238 $ 62,759,098 $ 2,073,716 2013 Losses < 12 Months Losses 12 Months or > Total Fair
Value Gross
Unrealized
Losses Fair
Value Gross
Unrealized
Losses Fair
Value Gross
Unrealized
Losses Obligations of U.S. government agencies $ 6,898,945 $ 124,491 $ - $ - $ 6,898,945 $ 124,491 Tax-exempt and tax- able obligations of states and municipal subdivisions 37,725,915 1,523,780 1,297,792 11,256 39,023,707 1,535,036 Mortgage-backed securities 39,540,663 1,394,067 - - 39,540,663 1,394,067 Corporate obligations 10,814,405 174,210 3,386,225 1,407,791 14,200,630 1,582,001 Other - - 971,503 283,980 971,503 283,980 $ 94,979,928 $ 3,216,548 $ 5,655,520 $ 1,703,027 $ 100,635,448 $ 4,919,575 Approximately 22% of the number of securities in the investment portfolio at December 31, 2014, reflected an unrealized loss. Management is of the opinion the Company has the ability to hold these securities until such time as the value recovers or the securities mature. Management also believes the deterioration in value is attributable to changes in market interest rates and lack of liquidity in the credit markets. We have determined that these securities are not other-than-temporarily impaired based upon anticipated cash flows.NOTE E - LOANSLoans typically provide higher yields than the other types of earning assets, and thus one of the Company's goals is for loans to be the largest category of the Company's earning assets. At December 31, 2014 and December 31, 2013, respectively, loans accounted for 71.3% and 68.1% of earning assets. The Company controls and mitigates the inherent credit and liquidity risks through the composition of its loan portfolio.The following table shows the composition of the loan portfolio by category: December 31, 2014 December 31, 2013 Amount Amount (Dollars in thousands) Mortgage loans held for sale $ 2,103 0.3 % $ 3,680 0.6 % Commercial, financial and agricultural 106,109 15.0 81,792 14.0 Real Estate: Mortgage-commercial 238,602 33.8 212,388 36.4 Mortgage-residential 256,406 36.3 202,343 34.7 Construction 84,935 12.0 67,287 11.5 Consumer and other 18,480 2.6 15,812 2.8 Total loans 706,635 100 % 583,302 100 % Allowance for loan losses (6,095 ) (5,728 ) Net loans $ 700,540 $ 577,574 In the context of this discussion, a "real estate mortgage loan" is defined as any loan, other than a loan for construction purposes, secured by real estate, regardless of the purpose of the loan. The Company follows the common practice of financial institutions in the Company’s market area of obtaining a security interest in real estate whenever possible, in addition to any other available collateral. This collateral is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to increase the magnitude of the real estate loan portfolio component. Generally, the Company limits its loan-to-value ratio to 80%. Management attempts to maintain a conservative philosophy regarding its underwriting guidelines and believes it will reduce the risk elements of its loan portfolio through strategies that diversify the lending mix.Loans held for sale consist of mortgage loans originated by the Bank and sold into the secondary market. Commitments from investors to purchase the loans are obtained upon origination.Activity in the allowance for loan losses for December 31, 2014 and 2013 was as follows:(In thousands) 2014 2013 Balance at beginning of period $ 5,728 $ 4,727 Loans charged-off: Real Estate (1,203 ) (457 ) Installment and Other (167 ) (197 ) Commercial, Financial and Agriculture (89 ) (105 ) Total (1,459 ) (759 ) Recoveries on loans previously charged-off: Real Estate 325 600 Installment and Other 68 66 Commercial, Financial and Agriculture 15 18 Total 408 684 Net Charge-offs (1,051 ) (75 ) Provision for Loan Losses 1,418 1,076 Balance at end of period $ 6,095 $ 5,728 The following tables represent how the allowance for loan losses is allocated to a particular loan type as well as the percentage of the category to total loans at December 31, 2014 and December 31, 2013.Allocation of the Allowance for Loan Losses December 31, 2014 (Dollars in thousands) Amount % of loans
in each
category
to total loans Commercial Non Real Estate $ 713 15.3 % Commercial Real Estate 3,355 57.9 Consumer Real Estate 1,852 24.2 Consumer 175 2.6 Unallocated - - Total $ 6,095 100 % December 31, 2013 (Dollars in thousands) Amount % of loans
in each
category
to total loans Commercial Non Real Estate $ 582 14.0 % Commercial Real Estate 3,384 57.2 Consumer Real Estate 1,427 25.4 Consumer 173 3.4 Unallocated 162 - Total $ 5,728 100 % The following table represents the Company’s impaired loans at December 31, 2014 and December 31, 2013. This table includes performing troubled debt restructurings. December 31, December 31, 2014 2013 (In thousands) Impaired Loans: Impaired loans without a valuation allowance $ 4,702 $ 759 Impaired loans with a valuation allowance 4,858 4,071 Total impaired loans $ 9,560 $ 4,830 Allowance for loan losses on impaired loans at period end 968 849 Total nonaccrual loans 6,056 3,181 Past due 90 days or more and still accruing 669 159 Average investment in impaired loans 7,077 4,007 The following table is a summary of interest recognized and cash-basis interest earned on impaired loans for the years ended December 31, 2014 and December 31, 2013: 2014 2013 Interest income recognized during impairment 129 - Cash-basis interest income recognized 256 148 The gross interest income that would have been recorded in the period that ended if the nonaccrual loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the twelve months for the years ended December 31, 2014 and 2013, was $92,000 and $43,000, respectively. The Company had no loan commitments to borrowers in non-accrual status at December 31, 2014 and 2013.The following tables provide the ending balances in the Company's loans (excluding mortgage loans held for sale) and allowance for loan losses, broken down by portfolio segment as of December 31, 2014 and December 31, 2013. The tables also provide additional detail as to the amount of our loans and allowance that correspond to individual versus collective impairment evaluation. The impairment evaluation corresponds to the Company's systematic methodology for estimating its Allowance for Loan Losses.December 31, 2014 Installment Commercial, Real Estate and
Other Financial and
Agriculture Total (In thousands) Loans Individually evaluated $ 9,282 $ 38 $ 240 $ 9,560 Collectively evaluated 568,952 18,610 107,410 694,972 Total $ 578,234 $ 18,648 $ 107,650 $ 704,532 Allowance for Loan Losses Individually evaluated $ 922 $ 29 $ 17 $ 968 Collectively evaluated 4,285 146 696 5,127 Total $ 5,207 $ 175 $ 713 $ 6,095 December 31, 2013 Installment Commercial, Real Estate And
Other Financial and
Agriculture Total (In thousands) Loans Individually evaluated $ 4,709 $ 39 $ 82 $ 4,830 Collectively evaluated 473,832 19,725 81,236 574,793 Total $ 478,541 $ 19,764 $ 81,318 $ 579,623 Allowance for Loan Losses Individually evaluated $ 804 $ 35 $ 10 $ 849 Collectively evaluated 4,007 300 572 4,879 Total $ 4,811 $ 335 $ 582 $ 5,728 The following tables provide additional detail of impaired loans broken out according to class as of December 31, 2014 and 2013. The recorded investment included in the following table represents customer balances net of any partial charge-offs recognized on the loans, net of any deferred fees and costs. As nearly all of our impaired loans at December 31, 2014 are on nonaccrual status, recorded investment excludes any insignificant amount of accrued interest receivable on loans 90-days or more past due and still accruing. The unpaid balance represents the recorded balance prior to any partial charge-offs.December 31, 2014 Average Interest Recorded Income Recorded Unpaid Related Investment Recognized Investment Balance Allowance YTD YTD (In thousands) Impaired loans with no related allowance: Commercial installment $ - $ - $ - $ 50 $ - Commercial real estate 4,665 4,665 - 2,654 142 Consumer real estate 27 27 - 179 - Consumer installment 10 10 - 11 - Total $ 4,702 $ 4,702 $ - $ 2,894 $ 142 Impaired loans with a related allowance: Commercial installment $ 240 $ 240 $ 18 $ 189 $ 20 Commercial real estate 2,558 2,558 315 2,415 59 Consumer real estate 2,032 2,032 607 1,546 33 Consumer installment 28 28 28 33 2 Total $ 4,858 $ 4,858 $ 968 $ 4,183 $ 114 Total Impaired Loans: Commercial installment $ 240 $ 240 $ 18 $ 239 $ 20 Commercial real estate 7,223 7,223 315 5,069 201 Consumer real estate 2,059 2,059 607 1,725 33 Consumer installment 38 38 28 44 2 Total Impaired Loans $ 9,560 $ 9,560 $ 968 $ 7,077 $ 256 December 31, 2013 Average Interest Recorded Income Recorded Unpaid Related Investment Recognized Investment Balance Allowance YTD YTD (In thousands) Impaired loans with no related allowance: Commercial installment $ 3 $ 3 $ - $ 45 $ - Commercial real estate 353 353 - 1,035 8 Consumer real estate 341 399 - 262 9 Consumer installment 4 4 - 5 - Total $ 701 $ 759 $ - $ 1,347 $ 17 Impaired loans with a related allowance: Commercial installment $ 79 $ 79 $ 10 $ 42 $ 6 Commercial real estate 2,685 2,685 400 2,147 100 Consumer real estate 1,202 1,272 404 1,019 21 Consumer installment 35 35 35 36 4 Total $ 4,001 $ 4,071 $ 849 $ 3,244 $ 131 Total Impaired Loans: Commercial installment $ 82 $ 82 $ 10 $ 87 $ 6 Commercial real estate 3,038 3,038 400 3,182 108 Consumer real estate 1,543 1,671 404 1,281 30 Consumer installment 39 39 35 41 4 Total Impaired Loans $ 4,702 $ 4,830 $ 849 $ 4,591 $ 148 Loans acquired with deteriorated credit quality are those purchased in the BCB Holding Company, Inc. acquisition (See Note C -Business Combination for further information). These loans were recorded at estimated fair value at the acquisition date with no carryover of the related allowance for loan losses. The acquired loans were segregated as of the acquisition date between those considered to be performing (acquired non-impaired loans) and those with evidence of credit deterioration (acquired impaired loans). Acquired loans are considered impaired if there is evidence of credit deterioration and if it is probable, at acquisition, all contractually required payments will not be collected.The following table presents information regarding the contractually required payments receivable, cash flows expected to be collected and the estimated fair value of loans acquired in the BCB acquisition as of July 1, 2014, the closing date of the transaction: December 31, 2014 (In thousands) Commercial,
financial and
agricultural Mortgage-
Commercial Mortgage-
Residential Commercial
and other Total Contractually required payments $ 1,519 $ 29,648 $ 7,933 $ 976 $ 40,076 Cash flows expected to be collected 1,570 37,869 9,697 1,032 50,168 Fair value of loans acquired 1,513 28,875 7,048 957 38,393 Total outstanding acquired impaired loans were $3,480,190 as of December 31, 2014. The outstanding balance of these loans is the undiscounted sum of all amounts, including amounts deemed principal, interest, fees, penalties, and other under the loans, owed at the reporting date, whether or not currently due and whether or not any such amounts have been charged off.Changes in the carrying amount and accretable yield for acquired impaired loans were as follows for the year ended December 31, 2014: (in thousands) Accretable
Yield Carrying
Amount of
Loans Balance at beginning of period $ - $ - Additions due to BCB acquisition on July 1, 2014 1,603 2,325 Accretion (186 ) 186 Payments received, net - (448 ) Balance at end of period $ 1,417 $ 2,063 The following tables provide additional detail of troubled debt restructurings during the twelve months ended December 31, 2014 and 2013. December 31, 2014 Outstanding
Recorded Outstanding
Recorded Interest Investment
Pre-Modification Investment
Post-Modification Number of
Loans Income
Recognized (in thousands except number of loans) Commercial installment $ 239 $ 176 1 $ 15 Commercial real estate 1,345 1,342 7 26 Consumer real estate 94 94 1 1 Consumer installment - - - - Total $ 1,678 $ 1,612 9 $ 42 December 31, 2013 Outstanding
Recorded Outstanding
Recorded Interest Investment
Pre-Modification Investment
Post-Modification Number of
Loans Income
Recognized (in thousands except number of loans) Commercial installment $ - $ - - $ - Commercial real estate 858 858 3 53 Consumer real estate 66 65 1 2 Consumer installment - - - - Total $ 924 $ 923 4 $ 55 The TDRs presented above did increase the allowance for loan losses but resulted in -0- charge-offs for the years ended December 31, 2014 and 2013, respectively.The balance of troubled debt restructurings at December 31, 2014 and 2013, was $6.8 million and 2.2 million, respectively, calculated for regulatory reporting purpose. As of December 31, 2014, the Company had no additional amount committed on any loan classified as troubled debt restructuring.All loans were performing as agreed with modified terms.During the twelve month period ending December 31, 2014 and 2013, the terms of 9 and 4 loans, respectively, were modified as TDRs. The modifications included one of the following or a combination of the following: maturity date extensions, interest only payments, amortizations were extended beyond what would be available on similar type loans, and payment waiver. No interest rate concessions were given on these nor were any of these loans written down. December 31, 2014 Current
Loans Past Due
30-89 Past Due 90
days and still
accruing Non-Accrual Total Commercial installment $ 233,340 $ - $ - $ - $ 233,340 Commercial real estate 1,684,755 - - 2,729,170 4,413,925 Consumer real estate 952,162 622,302 - 448,796 2,023,260 Consumer installment 9,983 - - 103,109 113,092 Total $ 2,880,240 $ 622,302 $ - $ 3,281,075 $ 6,783,617 Allowance for loan losses $ 120,220 $ 11,206 $ 102,657 $ - $ 234,083 December 31, 2013 Current
Loans Past Due
30-89 Past Due 90
days and still
accruing Non-Accrual Total Commercial installment $ 72,783 $ - $ - $ - $ 72,783 Commercial real estate 406,931 - - - 406,931 Consumer real estate 1,071,918 58,462 - 422,142 1,552,522 Consumer installment 4,198 35,051 - 135,083 174,332 Total $ 1,555,830 $ 93,513 $ - $ 557,225 $ 2,206,568 Allowance for loan losses $ 62,084 $ 43,254 $ - $ 78,466 $ 183,804 The following tables summarize by class our loans classified as past due in excess of 30 days or more in addition to those loans classified as non-accrual: December 31, 2014 (In thousands) Past Due
30 to 89
Days Past Due
90 Days or
More and
Still Accruing Non-Accrual Total
Past Due and
Non-Accrual Total
Loans Real Estate-construction $ 428 $ - $ 2,747 $ 3,175 $ 84,935 Real Estate-mortgage 3,208 208 2,164 5,580 256,406 Real Estate-nonfarm nonresidential 3,408 461 1,102 4,971 238,602 Commercial 29 - 5 34 106,109 Consumer 90 - 38 128 18,480 Total $ 7,163 $ 669 $ 6,056 $ 13,888 $ 704,532 December 31, 2013 (In thousands) Past Due
30 to 89
Days Past Due 90
Days or More
and Still
Accruing Non-Accrual Total
Past Due and
Non-Accrual Total
Loans Real Estate-construction $ 478 $ - $ 212 $ 690 $ 67,287 Real Estate-mortgage 4,696 143 2,453 7,292 202,343 Real Estate- nonfarm nonresidential 252 - 507 759 212,388 Commercial 12 - 9 21 81,792 Consumer 115 16 - 131 15,813 Total $ 5,553 $ 159 $ 3,181 $ 8,893 $ 579,623 The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company uses the following definitions for risk ratings, which are consistent with the definitions used in supervisory guidance:Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.As of December 31, 2014 and December 31, 2013, and based on the most recent analysis performed, the risk category of loans by class of loans (excluding mortgage loans held for sale) was as follows:(In thousands)December 31, 2014 Commercial, Total Pass $ 388,569 $ 167,827 $ 18,558 $ 107,126 $ 682,080 Special Mention 4,756 191 - 498 5,445 Substandard 14,727 2,567 90 63 17,447 Doubtful - - - - - Subtotal 408,052 170,585 18,648 107,687 704,972 Less: Unearned Discount 320 82 - 38 440 Loans, net of unearned discount $ 407,732 $ 170,503 $ 18,648 $ 107,649 $ 704,532 December 31, 2013 Commercial, Real Estate
Commercial Real Estate
Mortgage Installment and
Other Financial and
Agriculture Total Pass $ 316,573 $ 145,787 $ 19,725 $ 80,087 $ 562,172 Special Mention 4,084 32 - 1,033 5,149 Substandard 10,972 1,426 39 225 12,662 Doubtful - - - - - Subtotal 331,629 147,245 19,764 81,345 579,983 Less: Unearned Discount 236 97 - 27 360 Loans, net of unearned discount $ 331,393 $ 147,148 $ 19,764 $ 81,318 $ 579,623 NOTE F - PREMISES AND EQUIPMENTPremises and equipment are stated at cost, less accumulated depreciation and amortization as follows: 2014 2013 Premises: Land $ 10,565,633 $ 9,891,750 Buildings and improvements 25,872,002 22,966,215 Equipment 11,663,195 9,558,090 Construction in progress 188,146 32,985 48,288,976 42,449,040 Less accumulated depreciation and amortization 13,479,133 10,377,299 $ 34,809,843 $ 32,071,741 The amounts charged to operating expense for depreciation were $1,552,297 and $1,379,748 in 2014 and 2013, respectively.NOTE G - DEPOSITSThe aggregate amount of time deposits in denominations of $100,000 or more as of December 31, 2014 and 2013, was $120,693,807 and $116,623,516, respectively.At December 31, 2014, the scheduled maturities of time deposits included in interest-bearing deposits were as follows (in thousands):Year Amount 2015 $ 132,109 2016 39,029 2017 18,071 2018 7,878 2019 8,972 Thereafter - $ 206,059 61NOTE H - BORROWED FUNDSBorrowed funds consisted of the following: December 31, 2014 2013 Reverse Repurchase Agreement $ 5,000,000 $ 5,000,000 FHLB advances 84,450,067 47,000,000 $ 89,450,067 $ 52,000,000 Advances from the FHLB have maturity dates ranging from January 2015 through June 2019. Interest is payable monthly at rates ranging from 0.16% to 5.47%. Advances due to the FHLB are collateralized by a blanket lien on first mortgage loans in the amount of the outstanding borrowings, FHLB capital stock, and amounts on deposit with the FHLB. At December 31, 2014, FHLB advances available and unused totaled $143,885,000.Future annual principal repayment requirements on the borrowings from the FHLB at December 31, 2014, were as follows:Year Amount 2015 $ 80,468,000 2016 982,067 2017 - 2018 - 2019 3,000,000 Total $ 84,450,067 Reverse Repurchase Agreements consist of one $5,000,000 agreement. The agreement is secured by securities with a fair value of $7,443,951 at December 31, 2014 and $6,530,592 at December 31, 2013. The maturity date of the remaining agreement is September 26, 2017, with a rate of 3.81%.NOTE I – LEASE OBLIGATIONSThe Company is committed under several long-term operating leases which provide for minimum lease payments. Certain leases contain options for renewal. Total rental expense under these operating leases amounted to $421,000 and $249,000 as of December 31, 2014 and 2013, respectively.The Company is also committed under one long-term capital lease agreement. The capital lease agreement had an outstanding balance of $1,154,000 and $1,286,000 at December 31, 2014 and 2013, respectively (included in other liabilities). This lease has a remaining term of 7 years at December 31, 2014. Assets related to the capital lease are included in premises and equipment and the cost consists of $2.6 million less accumulated depreciation of approximately $866,313 and $605,712 at December 31, 2014 and 2013, respectively.Minimum future lease payments for the operating and capital leases at December 31, 2014, were as follows: Operating Leases Capital Lease (In thousands) 2015 $ 481 $ 166 2016 473 168 2017 214 191 2018 141 191 2019 141 191 Thereafter 687 364 Total Minimum Lease Payments $ 2,137 $ 1,271 Less: Amount representing interest (117 ) Present value of minimum lease payments $ 1,154 NOTE J - REGULATORY MATTERSThe Company and its subsidiary bank are subject to regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its subsidiary bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgment by regulators about components, risk weightings, and other related factors.To ensure capital adequacy, quantitative measures have been established by regulators, and these require the Company and its subsidiary bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined) to risk-weighted assets (as defined), and of Tier I capital to adjusted total assets (leverage). Management believes, as of December 31, 2014, that the Company and its subsidiary bank exceeded all capital adequacy requirements.At December 31, 2014 and 2013, the subsidiary bank was categorized by regulators as well-capitalized under the regulatory framework for prompt corrective action. A financial institution is considered to be well-capitalized if it has a total risk-based capital ratio of 10% or more, has a Tier I risk-based capital ratio of 6% or more, and has a Tier I leverage capital ratio of 5% or more. There are no conditions or anticipated events that, in the opinion of management, would change the categorization. The actual capital amounts and ratios at December 31, 2014 and 2013, are presented in the following table. No amount was deducted from capital for interest-rate risk exposure.In 2013, the Federal Reserve voted to adopt final capital rules implementing Basel III requirements for U.S. Banking organizations. Under the final rule, minimum requirements will increase for both the quantity and quality of capital held by banking organizations. The final rule includes a new minimum ratio of common equity Tier 1 capital (Tier 1 Common) to risk-weighted assets and a Tier 1 Common capital conservation buffer of 2.5% of risk-weighted assets that will apply to all supervised financial institutions. The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets and includes a minimum leverage ratio of 4% for all banking organizations. These new minimum capital ratios are effective on January 1, 2015, and will be fully phased in on January 1, 2019. Company Subsidiary (Consolidated) The First Amount Ratio Amount Ratio December 31, 2014 Total risk-based $ 95,419 12.3 % $ 94,888 12.2 % Tier I risk-based 89,324 11.5 % 88,793 11.4 % Tier I leverage 89,324 8.4 % 88,793 8.4 % December 31, 2013 Total risk-based $ 88,503 13.4 % $ 87,707 13.3 % Tier I risk-based 82,755 12.5 % 81,979 12.4 % Tier I leverage 82,755 9.0 % 81,979 8.9 % The minimum amounts of capital and ratios as established by banking regulators at December 31, 2014 and 2013, were as follows: Company Subsidiary (Consolidated) The First Amount Ratio Amount Ratio December 31, 2014 Total risk-based $ 62,272 8.0 % $ 62,208 8.0 % Tier I risk-based 31,136 4.0 % 31,104 4.0 % Tier I leverage 42,363 4.0 % 42,325 4.0 % December 31, 2013 Total risk-based $ 53,029 8.0 % $ 52,935 8.0 % Tier I risk-based 26,514 4.0 % 26,467 4.0 % Tier I leverage 37,002 4.0 % 36,956 4.0 % The Company’s dividends, if any, are expected to be made from dividends received from its subsidiary bank. The OCC limits dividends of a national bank in any calendar year to the net profits of that year combined with the retained net profits for the two preceding years.NOTE K - INCOME TAXESThe components of income tax expense are as follows: Years Ended December 31, 2014 2013 Current: Federal (benefit) $ 1,757,098 $ (88,073 ) State (benefit) 347,382 (15,737 ) Deferred 331,399 1,707,403 $ 2,435,879 $ 1,603,593 The Company's income tax expense differs from the amounts computed by applying the federal income tax statutory rates to income before income taxes. A reconciliation of the differences is as follows: Years Ended December 31, 2014 2013 Amount % Amount % Income taxes at statutory rate $ 3,076,856 34 % $ 2,122,650 34 % Tax-exempt income (863,204 ) (10 )% (797,167 ) (13 )% Nondeductible expenses 238,638 3 % 326,871 5 % State income tax, net of federal tax effect 215,803 2 % (10,386 ) - Tax credits (337,716 ) (4 )% - - Other, net 105,502 2 % (38,375 ) - $ 2,435,879 27 % $ 1,603,593 26 % The components of deferred income taxes included in the consolidated financial statements were as follows: December 31, 2014 2013 Deferred tax assets: Allowance for loan losses $ 2,273,435 $ 1,980,194 Net operating loss carryover 2,615,552 1,313,501 Unrealized loss on available-for-sale securities - 620,527 Other real estate 357,873 445,448 Other 1,200,419 668,313 6,447,279 5,027,983 Deferred tax liabilities: Securities accretion (124,942 ) (97,917 ) Premises and equipment (443,080 ) (684,787 ) Unrealized gain on available-for-sale securities (932,473 ) - Core deposit intangible (238,562 ) (239,364 ) Goodwill (716,188 ) (498,612 ) (2,455,245 ) (1,520,680 ) Net deferred tax asset, included in other assets $ 3,992,034 $ 3,507,303 With the acquisition of Wiggins in 2006, Baldwin in 2013, and Bay in 2014, the Company assumed federal tax net operating loss carryovers. These net operating losses are available to the Company through the years 2023, 2033, and 2034, respectively.The Company follows the guidance of ASC Topic 740,Income Taxes,which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As of December 31, 2014, the Company had no uncertain tax positions that it believes should be recognized in the financial statements. The tax years still subject to examination by taxing authorities are years subsequent to 2010.65NOTE L - EMPLOYEE BENEFITSThe Company and its subsidiary bank provide a deferred compensation arrangement (401(k) plan) whereby employees contribute a percentage of their compensation. For employee contributions of six percent or less, the Company and its subsidiary bank provide a 50% matching contribution. Contributions totaled $255,716 in 2014 and $248,355 in 2013.The Company sponsors an Employee Stock Ownership Plan (ESOP) for employees who have completed one year of service for the Company and attained age 21. Employees become fully vested after five years of service. Contributions to the plan are at the discretion of the Board of Directors. At December 31, 2014, the ESOP held 5,969 shares of Company common stock and had no debt obligation. All shares held by the plan were considered outstanding for net income per share purposes. Total ESOP expense was $26,267 for 2014 and $22,785 for 2013.During 2014, the Company established a Supplemental Executive Retirement Plan (“SERP”) for three active key executives. Pursuant to the SERP, these officers are entitled to receive 180 equal monthly payments commencing at the later of obtaining age 65 or separation from service. The costs of such benefits, assuming a retirement date at age 65, will be accrued by the Company at such retirement date. During 2014, the Company accrued $57,000 for future benefits payable under the SERP. The SERP is an unfunded plan and is considered a general contractual obligation of the Company.NOTE M - STOCK PLANSIn 2007, the Company adopted the 2007 Stock Incentive Plan. The 2007 Plan provides for the issuance of up to 315,000 shares of Company Common Stock, $1.00 par value per share. Shares issued under the 2007 Plan may consist in whole or in part of authorized but unissued shares or treasury shares. Through the year ended December 31, 2009, no shares were issued under this Plan. During the year ended December 31, 2013, 52,653 nonvested restricted stock awards were granted under the Plan. During the year ended December 31, 2014, 69,627 nonvested restricted stock awards were granted under the Plan and 2,000 stock awards were forfeited due to separation. During 2014, 5,981 shares were repurchased for payment of taxes. The weighted average grant-date fair value for these shares was $14.27 per share. Compensation costs in the amount of $617,779 was recognized for the year ended December 31, 2014 and $391,777 for the year ended December 31, 2013. Shares of restricted stock granted to employees under this stock plan are subject to restrictions as to the vesting period. The restricted stock award becomes 100% vested on the earliest of 1) the three or five year vesting period provided the Grantee has not incurred a termination of employment prior to that date, 2) the Grantee’s retirement, or 3) the Grantee’s death. During this period, the holder is entitled to full voting rights and dividends, which are held until vested. As of December 31, 2014, there was approximately $1,012,000 of unrecognized compensation cost related to this Plan. The cost is expected to be recognized over the remaining term of the vesting period (approximately 2 years).NOTE N - SUBORDINATED DEBENTURESOn June 30, 2006, the Company issued $4,124,000 of floating rate junior subordinated deferrable interest debentures to The First Bancshares Statutory Trust 2 in which the Company owns all of the common equity. The debentures are the sole asset of the Trust. The Trust issued $4,000,000 of Trust Preferred Securities (TPSs) to investors. The Company’s obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the Trust’s obligations under the preferred securities. The preferred securities were redeemable by the Company at its option. The preferred securities must be redeemed upon maturity of the debentures in 2036. Interest on the preferred securities is the three month London Interbank Offer Rate (LIBOR) plus 1.65% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities. On July 27, 2007, the Company issued $6,186,000 of floating rate junior subordinated deferrable interest debentures to The First Bancshares Statutory Trust 3 in which the Company owns all of the common equity. The debentures are the sole asset of Trust 3. The Trust issued $6,000,000 of Trust Preferred Securities (TPSs) to investors. The Company’s obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the Trust’s obligations under the preferred securities. The preferred securities are redeemable by the Company at its option. The preferred securities must be redeemed upon maturity of the debentures in 2037. Interest on the preferred securities is the three month LIBOR plus 1.40% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities. In accordance with the provisions of ASC Topic 810,Consolidation,the trusts are not included in the consolidated financial statements.NOTE O - TREASURY STOCKShares held in treasury totaled 26,494 at December 31, 2014, and 2013.NOTE P - RELATED PARTY TRANSACTIONSIn the normal course of business, the Bank makes loans to its directors and executive officers and to companies in which they have a significant ownership interest. In the opinion of management, these loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other parties, are consistent with sound banking practices, and are within applicable regulatory and lending limitations. Such loans amounted to approximately $8,442,000 and $8,977,000 at December 31, 2014 and 2013, respectively. The activity in loans to current directors, executive officers, and their affiliates during the year ended December 31, 2014, is summarized as follows (in thousands):Loans outstanding at beginning of year $ 8,977 New loans 908 Repayments (1,443 ) Loans outstanding at end of year $ 8,442 NOTE Q - COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS OF CREDIT RISKIn the normal course of business, there are outstanding various commitments and contingent liabilities, such as guaranties, commitments to extend credit, etc., which are not reflected in the accompanying financial statements. The subsidiary bank had outstanding letters of credit of $986,000 and $675,000 at December 31, 2014 and 2013, respectively, and had made loan commitments of approximately $128,086,000 and $113,372,000 at December 31, 2014 and 2013, respectively.Commitments to extend credit and letters of credit include some exposure to credit loss in the event of nonperformance of the customer. 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. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit policies and procedures for such commitments are the same as those used for lending activities. Because these instruments have fixed maturity dates and because a number expire without being drawn upon, they generally do not present any significant liquidity risk. No significant losses on commitments were incurred during the two years ended December 31, 2014, nor are any significant losses as a result of these transactions anticipated.The primary market area served by the Bank is Forrest, Lamar, Jones, Pearl River, Jackson, Hancock, Stone, and Harrison Counties within South Mississippi, as well as Washington Parish, St. Tammany Parish and East Baton Rouge Parish in Louisiana and Baldwin and Mobile Counties in South Alabama. Management closely monitors its credit concentrations and attempts to diversify the portfolio within its primary market area. As of December 31, 2014, management does not consider there to be any significant credit concentrations within the loan portfolio. Although the Bank’s loan portfolio, as well as existing commitments, reflects the diversity of its primary market area, a substantial portion of a borrower's ability to repay a loan is dependent upon the economic stability of the area.NOTE R - FAIR VALUES OF ASSETS AND LIABILITIESThe Company follows the guidance of ASC Topic 820,Fair Value Measurements and Disclosures, that establishes a framework for measuring fair value and expands disclosures about fair value measurements.The guidance defines the fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.In accordance with the guidance, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:Level 1:Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.Level 2:Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities.Level 3:Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets.Available-for-Sale SecuritiesThe fair value of available-for-sale securities is determined by various valuation methodologies. Where quoted market prices are available in an active market, securities are classified within Level 1. Level 1 securities include mutual funds. If quoted market prices are not available, then fair values are estimated by using pricing models or quoted prices of securities with similar characteristics. Level 2 securities include U.S. Treasury securities, obligations of U.S. government corporations and agencies, obligations of states and political subdivisions, mortgage-backed securities and collateralized mortgage obligations. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.The following table presents the Company’s available-for-sale securities that are measured at fair value on a recurring basis and the level within the hierarchy in which the fair value measurements fell as of December 31, 2014 and December 31, 2013 (in thousands): Fair Value Measurements Using Quoted Prices in
Active Markets
For
Identical Assets Significant
Other
Observable
Inputs Significant
Unobservable
Inputs Fair Value (Level 1) (Level 2) (Level 3) December 31, 2014 Obligations of U.S. Government agencies $ 27,372 $ - $ 27,372 $ - Municipal securities 104,582 - 104,582 - Mortgage-backed securities 93,036 - 93,036 - Corporate obligations 28,784 - 25,983 2,801 Other 972 972 - - Total $ 254,746 $ 972 $ 250,973 $ 2,801 Fair Value Measurements Using Quoted Prices in
Active Markets
For
Identical Assets Significant
Other
Observable
Inputs Significant
Unobservable
Inputs Fair Value (Level 1) (Level 2) (Level 3) December 31, 2013 Obligations of U.S. Government agencies $ 29,962 $ - $ 29,962 $ - Municipal securities 108,078 - 108,078 - Mortgage-backed securities 78,187 - 78,187 - Corporate obligations 26,852 - 24,054 2,798 Other 972 972 - - Total $ 244,051 $ 972 $ 240,281 $ 2,798 The following is a reconciliation of activity for assets measured at fair value based on significant unobservable (non-market) information.(In thousands) Bank-Issued Trust
Trust Preferred
Securities 2014 2013 Balance of recurring Level 3 assets at January 1 $ 2,798 $ 2,668 Transfers into Level 3 - - Transfers out of Level 3 - - Unrealized income included in comprehensive income 3 130 Balance of recurring Level 3 assets at December 31 $ 2,801 $ 2,798 The following table presents quantitative information about recurring Level 3 fair value measurements (in thousands):Trust Preferred
Securities Fair Value Valuation Technique Significant
Unobservable Inputs Range of Inputs December 31, 2014 $ 2,801 Discounted cash flow Discount rate .79% - 2.49% December 31, 2013 $ 2,798 Discounted cash flow Discount rate .79% - 2.49% Following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a non-recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.Impaired LoansLoans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for estimating fair value include using the fair value of the collateral for collateral dependent loans or, where a loan is determined not to be collateral dependent, using the discounted cash flow method.If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. If the impaired loan is determined not to be collateral dependent, then the discounted cash flow method is used. This method requires the impaired loan to be recorded at the present value of expected future cash flows discounted at the loan’s effective interest rate. The effective interest rate of a loan is the contractual interest rate adjusted for any net deferred loan fees or costs, premiums or discounts existing at origination or acquisition of the loan. Impaired loans are classified within Level 2 of the fair value hierarchy.Other Real Estate OwnedOther real estate owned consists of properties obtained through foreclosure. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Fair value of other real estate owned is based on current independent appraisals. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined the fair value declines subsequent to foreclosure, a valuation allowance is recorded through other income. Operating costs associated with the assets after acquisition are also recorded as non-interest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other income. Other real estate owned measured at fair value on a non-recurring basis at December 31, 2014, amounted to $4.7 million. Other real estate owned is classified within Level 2 of the fair value hierarchy.The following table presents the fair value measurement of assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fell at December 31, 2014 and December 31, 2013 (in thousands). Fair Value Measurements Using Quoted Prices in
Active Markets
For
Identical Assets Significant
Other
Observable
Inputs Significant
Unobservable
Inputs Fair Value (Level 1) (Level 2) (Level 3) December 31, 2014 Impaired loans $ 9,560 $ - $ 9,560 $ - Other real estate owned 4,655 - 4,655 - December 31, 2013 Impaired loans $ 4,830 $ - $ 4,830 $ - Other real estate owned 4,470 - 4,470 - The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value:Cash and Cash Equivalents– For such short-term instruments, the carrying amount is a reasonable estimate of fair value.Investment in securities available-for-sale and held-to-maturity – The fair value measurement for securities available-for-sale was discussed earlier. The same measurement approach was used for securities held-to-maturity and other securities.71Loans– 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.Bank-owned Life Insurance– The fair value of bank-owned life insurance approximates the carrying amount, because upon liquidation of these investments, the Company would receive the cash surrender value which equals the carrying amount.Deposits – The fair values of demand deposits are, as required by ASC Topic 825, equal to the carrying value of such deposits. Demand deposits include noninterest-bearing demand deposits, savings accounts, NOW accounts, and money market demand accounts. The fair value of variable rate term deposits, those repricing within six months or less, approximates the carrying value of these deposits. Discounted cash flows have been used to value fixed rate term deposits and variable rate term deposits repricing after six months. The discount rate used is based on interest rates currently being offered on comparable deposits as to amount and term.Short-Term Borrowings– The carrying value of any federal funds purchased and other short-term borrowings approximates their fair values.FHLB and Other Borrowings– The fair value of the fixed rate borrowings are estimated using discounted cash flows, based on current incremental borrowing rates for similar types of borrowing arrangements. The carrying amount of any variable rate borrowing approximates its fair value.Subordinated Debentures –The subordinated debentures bear interest at a variable rate and the carrying value approximates the fair value.Off-Balance Sheet Instruments– Fair values of off-balance sheet financial instruments are based on fees charged to enter into similar agreements. However, commitments to extend credit do not represent a significant value until such commitments are funded or closed. Management has determined that these instruments do not have a distinguishable fair value and no fair value has been assigned.As of December 31, 2014 Fair Value Measurements Carrying
Amount Estimated
Fair Value Quoted
Prices
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Financial Instruments: Assets: Cash and cash equivalents $ 44,618 $ 44,618 $ 44,618 $ - $ - Securities available-for-sale 254,746 254,746 972 250,973 2,801 Securities held-to-maturity 8,193 9,994 - 9,994 - Other securities 7,234 7,234 - 7,234 - Loans, net 700,540 715,849 - - 715,849 Bank-owned life insurance 14,463 14,463 - 14,463 - Liabilities: Noninterest-bearing deposits $ 201,362 $ 201,362 $ - $ 201,362 $ - Interest-bearing deposits 691,413 691,036 - 691,036 - Subordinated debentures 10,310 10,310 - - 10,310 FHLB and other borrowings 89,450 89,450 - 89,450 - 72As of December 31, 2013 Fair Value Measurements Carrying
Amount Estimated
Fair Value Quoted
Prices
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Financial Instruments: Assets: Cash and cash equivalents $ 39,252 $ 39,252 $ 39,252 $ - $ - Securities available-for-sale 244,051 244,051 972 240,281 2,798 Securities held-to-maturity 8,438 9,624 - 9,624 - Other securities 5,534 5,534 - 5,534 - Loans, net 577,574 590,866 - - 590,866 Bank-owned life insurance 6,593 6,593 - 6,593 - Liabilities: Noninterest-bearing deposits $ 144,624 $ 144,624 $ - $ 144,624 $ - Interest-bearing deposits 635,347 634,907 - 634,907 - Subordinated debentures 10,310 10,310 - - 10,310 FHLB and other borrowings 52,000 52,000 - 52,000 - NOTE S - SENIOR PREFERRED STOCKPursuant to the terms of the letter agreement between the Company and the United States Department of the Treasury (“Treasury”), the Company issued 17,123 CDCI Preferred Shares.The Letter Agreement contains limitations on the payment of dividends on the common stock to no more than 100% of the aggregate per share dividend and distributions for the immediate prior fiscal year (dividends of $0.15 per share were declared and paid 2011 through 2014) and on the Company’s ability to repurchase its common stock in the event of a non-payment of our dividend, and continues to subject the Company to certain of the executive compensation limitations included in the Emergency Economic Stabilization Act of 2008 (EESA), as previously disclosed by the Company. The CDCI Preferred Shares entitle the holder to an annual dividend of 2% for 8 years of the liquidation value of the shares, payable quarterly in arrears.73NOTE T - PARENT COMPANY FINANCIAL INFORMATIONThe balance sheets, statements of income and cash flows for The First Bancshares, Inc. (parent company only) follow.Condensed Balance Sheets December 31, 2014 2013 Assets: Cash and cash equivalents $ 63,707 $ 8,314 Investment in subsidiary bank 105,685,727 94,311,642 Investments in statutory trusts 310,000 310,000 Other securities - 100,000 Premises and equipment - 368,623 Other 808,132 511,742 $ 106,867,566 $ 95,610,321 Liabilities and Stockholders’ Equity: Subordinated debentures $ 10,310,000 $ 10,310,000 Other 341,982 191,981 Stockholders’ equity 96,215,584 85,108,340 $ 106,867,566 $ 95,610,321 Condensed Statements of Income Years Ended December 31, 2014 2013 Income: Interest and dividends $ 5,453 $ 5,610 Dividend income 5,109,668 3,100,000 Other 364,719 - 5,479,840 3,105,610 Expenses: Interest on borrowed funds 181,330 186,581 Legal 504,130 773,163 Other 752,027 810,323 1,437,487 1,770,067 Income before income taxes and equity in undistributed income of subsidiary 4,042,353 1,335,543 Income tax benefit 296,388 511,743 Income before equity in undistributed income of subsidiary 4,338,741 1,847,286 Equity in undistributed income of subsidiary 2,274,955 2,792,209 Net income $ 6,613,696 $ 4,639,495 74Condensed Statements of Cash Flows Years Ended December 31, 2014 2013 Cash flows from operating activities: Net income $ 6,613,696 $ 4,639,495 Adjustments to reconcile net income to net cash used in operating activities: Equity in undistributed income of subsidiary (2,274,955 ) (2,792,209 ) Restricted stock expense 617,779 391,777 Gain on sale of assets (364,719 ) - Other, net 689,740 181,923 Net cash provided by operating activities 5,281,541 2,420,986 Cash flows from investing activities: Investment in subsidiary bank - (20,450,000 ) Outlays for acquisition (4,034,668 ) - Net cash used in investing activities (4,034,668 ) (20,450,000 ) Cash flows from financing activities: Dividends paid on common stock (763,488 ) (600,452 ) Dividends paid on preferred stock (342,460 ) (342,460 ) Repurchase of restricted stock for payment of taxes (85,532 ) (26,749 ) Issuance of 1,951,220 common shares, net - 18,958,464 Net cash provided by (used in) financing activities (1,191,480 ) 17,988,803 Net increase (decrease) in cash and cash equivalents 55,393 (40,211 ) Cash and cash equivalents at beginning of year 8,314 48,525 Cash and cash equivalents at end of year $ 63,707 $ 8,314 75NOTE U - SUMMARY OF QUARTERLY RESULTS OF OPERATIONS AND PER SHARE AMOUNTS (UNAUDITED) Three Months Ended March 31 June 30 Sept. 30 Dec. 31 (In thousands, except per share amounts) 2014 Total interest income $ 8,447 $ 8,574 $ 9,688 $ 9,662 Total interest expense 623 726 833 791 Net interest income 7,824 7,848 8,855 8,871 Provision for loan losses 358 277 631 152 Net interest income after provision for loan losses 7,466 7,571 8,224 8,719 Total non-interest income 1,672 2,055 2,021 2,055 Total non-interest expense 7,227 7,384 8,071 8,051 Income tax expense 484 629 641 682 Net income 1,427 1,613 1,533 2,041 Preferred dividends and stock accretion 106 86 85 86 Net income applicable to common stockholders $ 1,321 $ 1,527 $ 1,448 $ 1,955 Per common share: Net income, basic $ .26 $ .30 $ .27 $ .37 Net income, diluted .25 .29 .27 .36 Cash dividends declared .0375 .0375 .0375 .0375 2013 Total interest income $ 6,650 $ 7,609 $ 8,648 $ 8,411 Total interest expense 759 823 690 645 Net interest income 5,891 6,786 7,958 7,766 Provision for loan losses 311 349 360 59 Net interest income after provision for loan losses 5,580 6,437 7,598 7,707 Total non-interest income 1,930 1,890 1,592 1,671 Total non-interest expense 5,979 7,245 7,630 7,308 Income tax expense 306 270 456 572 Net income 1,225 812 1,104 1,498 Preferred dividends and stock accretion 106 106 106 106 Net income applicable to common Stockholders $ 1,119 $ 706 $ 998 $ 1,392 Per common share: Net income, basic $ .36 $ .18 $ .20 $ .27 Net income, diluted .35 .18 .19 .27 Cash dividends declared .0375 .0375 .0375 .0375 76APPENDIX BQuarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2016SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-QQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIESEXCHANGE ACT OF 1934FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016Commission file number: 000-22507THE FIRST BANCshARES, INC.(Exact name of Registrant as specified in its charter)Mississippi64-0862173(State of Incorporation)(IRS Employer Identification No)6480 U.S. Highway 98 West, Suite A, Hattiesburg, Mississippi 39402(Address of principal executive offices)(Zip Code)(601) 268-8998(Registrant’s telephone number, including area code)Not Applicable(Former name, former address and former fiscal year, if changed since last report)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.YesþNo¨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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).YesþNo¨Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.Large accelerated filer¨Accelerated filerþNon-accelerated filer¨Smaller Reporting Company¨(Do not check if a smaller reporting company)Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes¨NoþIndicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.Common stock, $1.00 par value, 5,454,511 shares outstanding as of September 30, 2016PART I - FINANCIAL INFORMATIONITEM NO. 1- FINANCIAL STATEMENTSTHE FIRST BANCSHARES, INC.CONSOLIDATED BALANCE SHEETS($ In Thousands) (Unaudited) (Audited) September 30, December 31, 2016 2015 ASSETS Cash and due from banks $ 47,945 $ 23,635 Interest-bearing deposits with banks 19,774 17,303 Federal funds sold 2,395 321 Total cash and cash equivalents 70,114 41,259 Securities held-to-maturity, at amortized cost 6,000 7,092 Securities available-for-sale, at fair value 236,168 239,732 Other securities 9,516 8,135 Total securities 251,684 254,959 Loans held for sale 9,437 3,974 Loans 854,366 772,515 Allowance for loan losses (7,481 ) (6,747 ) Loans, net 856,322 769,742 Premises and equipment 33,427 33,623 Interest receivable 4,014 3,953 Cash surrender value of life insurance 21,106 14,872 Goodwill 13,776 13,776 Other real estate owned 4,670 3,083 Other assets 11,525 9,864 TOTAL ASSETS $ 1,266,638 $ 1,145,131 LIABILITIES AND STOCKHOLDERS’ EQUITY LIABILITIES: Deposits: Noninterest-bearing $ 196,786 $ 189,445 Interest-bearing 875,003 727,250 TOTAL DEPOSITS 1,071,789 916,695 Interest payable 275 246 Borrowed funds 68,000 110,321 Subordinated debentures 10,310 10,310 Other liabilities 3,606 4,123 TOTAL LIABILITIES 1,153,980 1,041,695 STOCKHOLDERS’ EQUITY: Preferred stock, no par value, $1,000 per share liquidation, 10,000,000 shares authorized; 17,123 issued and outstanding at September 30, 2016 and December 31, 2015, respectively 17,123 17,123 Common stock, par value $1 per share, 20,000,000 shares authorized and 5,454,511 shares issued at September 30,2016; and 5,403,159 shares issued at December 31, 2015, respectively 5,455 5,403 Additional paid-in capital 44,996 44,650 Retained earnings 42,543 35,625 Accumulated other comprehensive income 3,005 1,099 Treasury stock, at cost, 26,494 shares at September 30, 2016 and at December 31, 2015 (464 ) (464 ) TOTAL STOCKHOLDERS’ EQUITY 112,658 103,436 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 1,266,638 $ 1,145,131 See Notes to Consolidated Financial StatementsTHE FIRST BANCSHARES, INC.CONSOLIDATED STATEMENTS OF INCOME($ In Thousands, except earnings and dividends per share) (Unaudited) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2016 2015 2016 2015 INTEREST INCOME: Interest and fees on loans $ 9,798 $ 8,629 $ 28,146 $ 25,309 Interest and dividends on securities: Taxable interest and dividends 982 1,001 3,110 3,022 Tax exempt interest 464 437 1,398 1,402 Interest on federal funds sold 25 13 82 52 TOTAL INTEREST INCOME 11,269 10,080 32,736 29,785 INTEREST EXPENSE: Interest on deposits 962 646 2,476 1,936 Interest on borrowed funds 240 147 663 467 TOTAL INTEREST EXPENSE 1,202 793 3,139 2,403 NET INTEREST INCOME 10,067 9,287 29,597 27,382 PROVISION FOR LOAN LOSSES 143 250 538 400 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES LOSSES 9,924 9,037 29,059 26,982 OTHER INCOME: Service charges on deposit accounts 1,273 1,348 3,839 3,690 Other service charges and fees 1,826 634 4,703 1,996 TOTAL OTHER INCOME 3,099 1,982 8,542 5,686 OTHER EXPENSES: Salaries and employee benefits 5,645 4,628 16,194 13,867 Occupancy and equipment 1,209 1,137 3,392 3,383 Other 2,562 2,212 7,144 6,637 TOTAL OTHER EXPENSES 9,416 7,977 26,730 23,887 INCOME BEFORE INCOME TAXES 3,607 3,042 10,871 8,781 INCOME TAXES 1,049 815 3,060 2,340 NET INCOME 2,558 2,227 7,811 6,441 PREFERRED STOCK ACCRETION AND DIVIDENDS 86 86 257 257 NET INCOME APPLICABLE TO COMMON STOCKHOLDERS $ 2,472 $ 2,141 $ 7,554 $ 6,184 NET INCOME APPLICABLE TO COMMON STOCKHOLDERS: BASIC $ .46 $ .40 $ 1.39 $ 1.15 DILUTED .45 .39 1.38 1.14 DIVIDENDS PER SHARE – COMMON .0375 .0375 .1125 .1125 See Notes to Consolidated Financial StatementsTHE FIRST BANCSHARES, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME($ In Thousands) (Unaudited) (Unaudited) Three Months
Ended Nine Months
Ended September 30, September 30, 2016 2015 2016 2015 Net income per consolidated statements of income $ 2,558 $ 2,227 $ 7,811 $ 6,441 Other Comprehensive Income: Unrealized holding gains (losses) arising during period on available-for- sale securities 189 1,579 3,016 (431 ) Less reclassified adjustment for gains included in net income (129 ) - (129 ) - Unrealized holding gains (losses) arising during period on available-for- sale securities 60 1,579 2,887 (431 ) Unrealized holding gains (losses) on loans held for sale (85 ) 45 1 6 Income tax benefit(expense) 13 (554 ) (982 ) 144 Other comprehensive income (loss) (12 ) 1,070 1,906 (281 ) Comprehensive Income $ 2,546 $ 3,297 $ 9,717 $ 6,160 See Notes to Consolidated Financial StatementsTHE FIRST BANCSHARES, INC.CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY($ In Thousands, unaudited) Common
Stock Preferred
Stock Stock
Warrants Additional
Paid-in
Capital Retained
Earnings Accumulated
Other
Compre-
hensive
Income(Loss) Treasury
Stock Total Balance, January 1, 2015 $ 5,343 $ 17,123 $ 284 $ 44,137 $ 27,975 $ 1,818 $ (464 ) $ 96,216 Net income - - - - 6,441 - - 6,441 Other compre- hensive income - - - - - (281 ) - (281 ) Dividends on preferred stock - - - - (257 ) - - (257 ) Dividends on common stock, $0.1125 per share - - - - (605 ) - - (605 ) Repurchase of restricted stock for payment of taxes (6 ) - - (86 ) - - - (92 ) Restricted stock grant 69 - - (69 ) - - - - Compensation expense - - - 539 - - - 539 Reversal of 2,514 common shares for BCB Holdings (3 ) - - (33 ) - - - (36 ) Repurchase warrants - - (284 ) (19 ) - - - (303 ) Balance, Sept. 30, 2015 $ 5,403 $ 17,123 $ - $ 44,469 $ 33,554 $ 1,537 $ (464 ) $ 101,622 Balance, January 1, 2016 $ 5,403 $ 17,123 $ - $ 44,650 $ 35,625 $ 1,099 $ (464 ) $ 103,436 Net income - - - - 7,811 - - 7,811 Other compre- hensive income - - - - - 1,906 - 1,906 Dividends on preferred stock - - - - (257 ) - - (257 ) Dividends on common stock, $0.0375 per share - - - - (611 ) - - (611 ) Issuance of preferred shares - - - - (25 ) - - (25 ) Repurchase of restricted stock for payment of taxes (9 ) - - (167 ) - - - (176 ) Restricted stock grant 61 - - (61 ) - - - - Compensation expense - - - 574 - - - 574 Balance, Sept. 30, 2016 $ 5,455 $ 17,123 $ - $ 44,996 $ 42,543 $ 3,005 $ (464 ) $ 112,658 See Notes to Consolidated Financial StatementsTHE FIRST BANCSHARES, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS($ In Thousands) (Unaudited) Nine Months
Ended September 30, 2016 2015 CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME $ 7,811 $ 6,441 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of securities (129 ) - Depreciation, amortization and accretion 2,520 2,416 Provision for loan losses 538 400 Loss on sale/writedown of ORE 111 142 Gain on sale of bank premises - (119 ) Restricted stock expense 573 539 Increase in cash value of life insurance (384 ) (308 ) Federal Home Loan Bank stock dividends (27 ) (7 ) Changes in: Interest receivable (61 ) (150 ) Loans held for sale, net (5,462 ) 1,051 Interest payable 29 (84 ) Other, net (2,882 ) (2,884 ) NET CASH PROVIDED BY OPERATING ACTIVITIES 2,637 7,437 CASH FLOWS FROM INVESTING ACTIVITIES: Maturities, calls and paydowns of available- for-sale and held-to-maturity securities 37,141 35,135 Purchases of available-for-sale securities (30,294 ) (20,329 ) Net (purchases)/sales of other securities (1,433 ) 993 Net increase in loans (84,019 ) (42,179 ) Proceeds from sale of bank premises - 949 Net increase in premises and equipment (1,055 ) (860 ) Purchase of bank-owned life insurance (5,850 ) - NET CASH USED IN INVESTING ACTIVITIES (85,510 ) (26,291 ) CASH FLOWS FROM FINANCING ACTIVITIES: Increase in deposits 155,094 71,205 Net decrease in borrowed funds (42,321 ) (30,464 ) Dividends paid on common stock (587 ) (584 ) Dividends paid on preferred stock (257 ) (257 ) Repurchase of restricted stock for payment of taxes (176 ) (92 ) Issuance of preferred shares (25 ) - Repurchase of shares issued in BCB acquisition - (36 ) Repurchase of warrants - (303 ) NET CASH PROVIDED BY FINANCING ACTIVITIES 111,728 39,469 NET INCREASE IN CASH 28,855 20,615 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 41,259 44,618 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 70,114 $ 65,233 SUPPLEMENTAL DISCLOSURES: CASH PAYMENTS FOR INTEREST 3,110 2,627 CASH PAYMENTS FOR INCOME TAXES 4,277 3,675 LOANS TRANSFERRED TO OTHER REAL ESTATE �� 2,498 506 ISSUANCE OF RESTRICTED STOCK GRANTS 61 69 See Notes to Consolidated Financial StatementsTHE FIRST BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)September 30, 2016NOTE 1 — BASIS OF PRESENTATIONThe accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and with the instructions to Form 10-Q of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2016, are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company's Form 10-K for the year ended December 31, 2015.NOTE 2 — SUMMARY OF ORGANIZATIONThe First Bancshares, Inc., Hattiesburg, Mississippi (the "Company"), was incorporated June 23, 1995, under the laws of the State of Mississippi for the purpose of operating as a bank holding company. The Company’s primary asset is its interest in its wholly-owned subsidiary, The First, A National Banking Association (the “Bank”).At September 30, 2016, the Company had approximately $1.3 billion in assets, $856.3 million in net loans, $1.1 billion in deposits, and $112.7 million in stockholders' equity. For the nine months ended September 30, 2016, the Company reported net income of $7.8 million ($7.6 million applicable to common stockholders).In the first, second, and third quarters of 2016, the Company declared and paid a dividend of $.0375 per common share.NOTE 3 — RECENT ACCOUNTING PRONOUNCEMENTSIn August 2016, the FASB issued ASU No. 2016-15,“Classification of Certain Cash Receipts and Cash Payments." Current GAAP is unclear or does not include specific guidance on how to classify certain transactions in the statement of cash flows. This ASU is intended to reduce diversity in practice in how eight particular transactions are classified in the statement of cash flows. ASU No. 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. Entities will be required to apply the guidance retrospectively. If it is impracticable to apply the guidance retrospectively for an issue, the amendments related to that issue would be applied prospectively. As this guidance only affects the classification within the statement of cash flows, ASU No. 2016-15 is not expected to have a material impact on the Company's Consolidated Financial Statements.In June 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”(ASU 2016-13). ASU 2016-13 requires a new impairment model known as the current expected credit loss (“CECL”) which significantly changes the way impairment of financial instruments is recognized by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of financial instruments. The main provisions of ASU 2016-13 include (1) replacing the “incurred loss” approach under current GAAP with an “expected loss” model for instruments measured at amortized cost, (2) requiring entities to record an allowance for credit losses related to available-for-sale debt securities rather than a direct write-down of the carrying amount of the investments, as is required by the other-than-temporary-impairment model under current GAAP, and (3) a simplified accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019, although early adoption is permitted. The Company is currently assessing the impact of the adoption of ASU 2016-13.In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) NO. 2016-09 “Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting.”ASU 2016-09 requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also allows an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election for forfeitures as they occur. The guidance is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted. The Company is assessing the impact of ASU 2016-09 on its accounting and disclosures.In February 2016 the FASB issued ASU NO. 2016-02 “Leases (Topic 842).”ASU 2016-02 establishes a right of use model that requires a lessee to record a right of use asset and a lease liability for all leases with terms longer than 12 months. Leases will be classified as either finance or operating with classification affecting the pattern of expense recognition in the income statement. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. A lease will be treated as sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn’t convey risks and rewards or control, an operating lease results. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with certain practical expedients available. Early adoption is permitted. The Company is assessing the impact of ASU 2016-02 on its accounting and disclosures.NOTE 4 – BUSINESS COMBINATIONThe Mortgage ConnectionOn December 14, 2015, the Company completed the acquisition of The Mortgage Connection, a Mississippi corporation, which included two loan production offices located in Madison and Brandon, Mississippi.In connection with the acquisition, the Company recorded $1.5 million of goodwill.The amounts of the acquired identifiable assets and liabilities as of the acquisition date were as follows (dollars in thousands):Purchase price: Cash $ 844 Payable 800 Total purchase price 1,644 Identifiable assets: Intangible 100 Personal property 44 Total assets 144 Liabilities and equity - Net assets acquired 144 Goodwill resulting from acquisition $ 1,500 NOTE 5 – PREFERRED STOCK AND WARRANTPursuant to the terms of the letter agreement between the Company and the United States Department of the Treasury (“Treasury”), the Company issued 17,123 CDCI Preferred Shares.The Letter Agreement contains limitations on the payment of dividends on the common stock to no more than 100% of the aggregate per share dividend and distributions for the immediate prior fiscal year (dividends of $0.15 per share were declared and paid in 2011-2015) and on the Company’s ability to repurchase its common stock in the event of a non-payment of our dividend, and continues to subject the Company to certain of the executive compensation limitations included in the Emergency Economic Stabilization Act of 2008 (EESA), as previously disclosed by the Company. The CDCI Preferred Shares entitle the holder to an annual dividend of 2% for 8 years of the liquidation value of the shares, payable quarterly in arrears.Pursuant to the terms of the letter agreement between the Company and the United States Department of the Treasury, the Company redeemed the warrant to purchase up to 54,705 shares of the Company’s common stock. In connection with this redemption, on May 13, 2015, the Company paid Treasury an aggregate redemption price of $302,410.NOTE 6 — EARNINGS APPLICABLE TO COMMON STOCKHOLDERSBasic per share data is calculated based on the weighted-average number of common shares outstanding during the reporting period. Diluted per share data includes any dilution from potential common stock outstanding, such as stock options. For the Three Months Ended September 30, 2016 Net Income Shares Per (Numerator) (Denominator) Share Data Basic per share $ 2,472,000 5,429,349 $ 0.46 Effect of dilutive shares: Restricted stock grants 50,218 Diluted per share $ 2,472,000 5,479,567 $ 0.45 For the Nine Months Ended September 30, 2016 Net Income Shares Per (Numerator) (Denominator) Share Data Basic per share $ 7,554,000 5,425,567 $ 1.39 Effect of dilutive shares: Restricted stock grants 50,218 Diluted per share $ 7,554,000 5,475,785 $ 1.38 For the Three Months Ended September 30, 2015 Net Income Shares Per (Numerator) (Denominator) Share Data Basic per share $ 2,141,000 5,374,790 $ 0.40 Effect of dilutive shares: Restricted stock grants 67,190 Diluted per share $ 2,141,000 5,441,980 $ 0.39 For the Nine Months Ended September 30, 2015 Net Income Shares Per (Numerator) (Denominator) Share Data Basic per share $ 6,184,000 5,369,260 $ 1.15 Effect of dilutive shares: Restricted stock grants 67,190 Diluted per share $ 6,184,000 5,436,450 $ 1.14 The Company granted 61,247 shares of restricted stock in the first quarter of 2016 and -0- shares during the second and third quarters of 2016.NOTE 7 – COMPREHNSIVE INCOMEAs presented in the Consolidated Statements of Comprehensive Income, comprehensive income includes net income and other comprehensive income. The Company’s sources of other comprehensive income are unrealized gains and losses on available-for-sale investment securities and loans held for sale. Gains or losses on investment securities that were realized and reflected in net income of the current period, which had previously been included in other comprehensive income as unrealized holding gains or losses in the period in which they arose, are considered to be reclassification adjustments that are excluded from other comprehensive income in the current period.NOTE 8 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISKThe Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. At September 30, 2016, and December 31, 2015, these financial instruments consisted of the following:($ In Thousands) September 30, 2016 December 31, 2015 Commitments to extend credit $ 194,321 $ 144,086 Standby letters of credit $ 1,964 $ 1,135 NOTE 9 – FAIR VALUE DISCLOSURES AND REPORTING, THE FAIR VALUE OPTION AND FAIR VALUE MEASUREMENTS·FASB’s standards on financial instruments, and on fair value measurements and disclosures, require all entities to disclose in their financial statement footnotes the estimated fair values of financial instruments for which it is practicable to estimate fair values. In addition to disclosure requirements, FASB’s standard on investments requires that our debt securities which are classified as available for sale and our equity securities that have readily determinable fair values be measured and reported at fair value in our statement of financial position. Certain impaired loans are also reported at fair value, as explained in greater detail below, and foreclosed assets are carried at the lower of cost or fair value. FASB’s standard on financial instruments permits companies to report certain other financial assets and liabilities at fair value, but we have not elected the fair value option for any of those financial instruments.·Fair value measurement and disclosure standards also establish a framework for measuring fair values. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the assetfiscal year 2021 Please sign exactly as name(s) appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator, corporate officer, trustee, guardian, or liability, in an orderly transaction between market participants oncustodian, please give full title. Date (mm/dd/yyyy) — Please print date below. Signature 1 — Please keep signature within the measurement date. Further,box. Signature 2 — Please keep signature within the standards establishbox. + 4 2 B V 03FL1B B Authorized Signatures — This section must be completed for your vote to count. Please date and sign below. A Proposals — The Board of Directors recommend a fair value hierarchy that encourages an entity to maximizevote FOR all the use of observable inputsnominees listed and limit the use of unobservable inputs when measuring fair values. The standards describe three levels of inputs that may be used to measure fair values:·Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.·LevelFOR Proposals 2: Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.3. 2021 Annual Meeting Proxy Card·Level 3: Significant unobservable inputsThe 2021 Annual Meeting of Shareholders of The First Bancshares, Inc. will be held on May 20, 2021 at 4:00 P.M. Central Time, virtually via the internet at www.meetingcenter.io/220649698. To access the virtual meeting, you must have the information that reflect a company’s own assumptions aboutis printed in the factors that market participantsshaded bar located on the reverse side of this form. The password for this meeting is — FBMS2021. Important notice regarding the Internet availability of proxy materials for the Annual Meeting of Shareholders. The material is available at: www.investorvote.com/FBMS q IF VOTING BY MAIL, SIGN, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. q + Notice of 2021 Annual Meeting of Shareholders Proxy Solicited by Board of Directors for Annual Meeting — May 20, 2021 M. Ray (Hoppy) Cole, Jr., with the power of substitution, are hereby authorized to represent and vote the shares of the undersigned, with all the powers which the undersigned would likely consider in pricing an asset or liability.Fair value estimates are made at a specific point in time based on relevant market data and information about the financial instruments. The estimates do not reflect any premium or discount that could result from offering the Company’s entire holdingspossess if personally present, at the Annual Meeting of Shareholders of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to realized gains and losses could have a significant effect on fair value estimates but have not been considered in those estimates. Because no active market exists for a significant portion of our financial instruments, fair value disclosures are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. The estimates are subjective and involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly alter the fair values presented. The following methods and assumptions were used by the Company to estimate its financial instrument fair values disclosed at September 30, 2016 and December 31, 2015:·Cash and cash equivalents and fed funds sold: The carrying amount is estimatedFirst Bancshares, Inc. to be fair value.·Securities (available-for-sale and held-to-maturity): Fair values are determinedheld on May 20, 2021 or at any postponement or adjournment thereof. Shares represented by obtaining quoted prices on nationally recognized securities exchanges or by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities by relying on their relationship to other benchmark quoted securities when quoted prices for specific securities are not readily available.·Loans and leases: For variable-rate loans and leases that re-price frequently with no significant change in credit risk or interest rate spread, fair values are based on carrying values. Fair values for other loans and leases are estimated by discounting projected cash flows at interest rates being offered at each reporting date for loans and leases with similar terms, to borrowers of comparable creditworthiness. The carrying amount of accrued interest receivable approximates its fair value.·Loans held for sale: Since loans designatedthis proxy will be voted by the Company as available-for-saleshareholder. If no such directions are typically sold shortly after makingindicated, the decisionProxies will have authority to sell them, realized gains or losses are usually recognized withinvote FOR the same period and fluctuations in fair values are not relevant for reporting purposes. If available-for-sale loans are on our books for an extended period of time, the fair value of those loans is determined using quoted secondary-market prices.·Collateral-dependent impaired loans: Collateral-dependent impaired loans are carried at fair value when it is probable that the Company will be unable to collect all amounts due according to the contractual termselection of the original loan agreementBoard of Directors and FOR items 2 and 3. In their discretion, the loan has been written downProxies are authorized to vote upon such other business as may properly come before the fair valuemeeting. (Items to be voted appear on reverse side) Change of its underlying collateral, net of expected disposition costs where applicable.·Bank-owned life insurance: Fair values are based on net cash surrender policy valuesAddress — Please print new address below. Comments — Please print your comments below. + C Non-Voting Items Proxy — The First Bancshares, Inc. Small steps make an impact. Help the environment by consenting to receive electronic delivery, sign up at each reporting date.·Other securities: Certain investments for which no secondary market exists are carried at cost and the carrying amount for those investments typically approximates their estimated fair value, unless an impairment analysis indicates the need for adjustments.www.investorvote.com/FBMS·Deposits (noninterest-bearing and interest-bearing): Fair values for non-maturity deposits are equal to the amount payable on demand at the reporting date, which is the carrying amount. Fair values for fixed-rate certificates of deposit are estimated using a cash flow analysis, discounted at interest rates being offered at each reporting date by the Bank for certificates with similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value.·FHLB and other borrowings: Current carrying amounts are used as an approximation of fair values for federal funds purchased, overnight advances from the Federal Home Loan Bank (“FHLB”), borrowings under repurchase agreements, and other short-term borrowings maturing within ninety days of the reporting dates. Fair values of other short-term borrowings are estimated by discounting projected cash flows at the Company’s current incremental borrowing rates for similar types of borrowing arrangements.·Long-term borrowings: Fair values are estimated using projected cash flows discounted at the Company’s current incremental borrowing rates for similar types of borrowing arrangements.·Subordinated debentures: Fair values are determined based on the current market value for like instruments of a similar maturity and structure.·Off-Balance Sheet Instruments – Fair values of off-balance sheet financial instruments are based on fees charged to enter into similar agreements. However, commitments to extend credit do not represent a significant value until such commitments are funded or closed. Management has determined that these instruments do not have a distinguishable fair value and no fair value has been assigned.·Estimated fair values for the Company’s financial instruments are as follows, as of the dates noted:As of September 30, 2016($ In Thousands) Fair Value Measurements Carrying
Amount Estimated
Fair
Value Quoted
Prices
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Financial Instruments: Assets: Cash and cash equivalents $ 70,114 $ 70,114 $ 70,114 $ - $ - Securities available-for- sale 236,168 236,168 945 232,813 2,410 Securities held- to-maturity 6,000 7,824 - 7,824 - Other securities 9,516 9,516 - 9,516 - Loans, net 856,322 879,361 - - 879,361 Bank-owned life insurance 21,106 21,106 - 21,106 - Liabilities: Noninterest- bearing deposits $ 196,786 $ 196,786 $ - $ 196,786 $ - Interest-bearing deposits 875,003 874,872 $ - 874,872 - Subordinated debentures 10,310 10,310 - - 10,310 FHLB and other borrowings 68,000 68,000 - 68,000 - As of December 31, 2015($ In Thousands) Fair Value Measurements Carrying
Amount Estimated
Fair
Value Quoted
Prices
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Financial Instruments: Assets: Cash and cash equivalents $ 41,259 $ 41,259 $ 41,259 $ - $ - Securities available-for- sale 239,732 239,732 961 236,214 2,557 Securities held- to-maturity 7,092 8,548 - 8,548 - Other securities 8,135 8,135 - 8,135 - Loans, net 769,742 784,113 - - 784,113 Bank-owned life insurance 14,872 14,872 - 14,872 - Liabilities: Noninterest- bearing deposits $ 189,445 $ 189,445 $ - $ 189,445 $ - Interest-bearing deposits 727,250 726,441 - 726,441 - Subordinated debentures 10,310 10,310 - - 10,310 FHLB and other borrowings 110,321 110,321 - 110,321 - ·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, mortgage products 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 flow. Level 2 securities would include U. S. agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, asset-backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.Assets measured at fair value on a recurring basis are summarized below:September 30, 2016($ In Thousands) Fair Value Measurements Using Quoted Prices
in
Active
Markets
For
Identical
Assets Significant
Other
Observable
Inputs Significant
Unobservable
Inputs Fair Value (Level 1) (Level 2) (Level 3) Obligations of U. S. Government Agencies $ 9,109 $ - $ 9,109 $ - Municipal securities 97,870 - 97,870 - Mortgage-backed securities 108,752 - 108,752 - Corporate obligations 19,492 - 17,082 2,410 Other 945 945 - - Total $ 236,168 $ 945 $ 232,813 $ 2,410 December 31, 2015($ In Thousands) Fair Value Measurements Using Quoted Prices
in
Active
Markets
For
Identical
Assets Significant
Other
Observable
Inputs Significant
Unobservable
Inputs Fair Value (Level 1) (Level 2) (Level 3) Obligations of U. S. Government Agencies $ 19,611 $ - $ 19,611 $ - Municipal securities 97,889 - 97,889 - Mortgage-backed securities 98,925 - 98,925 - Corporate obligations 22,346 - 19,789 2,557 Other 961 961 - - Total $ 239,732 $ 961 $ 236,214 $ 2,557 The following is a reconciliation of activity for assets measured at fair value based on significant unobservable (non-market) information.($ In Thousands) Bank-Issued
Trust Preferred Securities 2016 2015 Balance, January 1 $ 2,557 $ 2,801 Transfers into Level 3 - - Transfers out of Level 3 - - Other-than-temporary impairment loss included in earnings (loss) - - Unrealized loss included in comprehensive income (147 ) (244 ) Balance at September 30, 2016 and December 31, 2015 $ 2,410 $ 2,557 The following table presents quantitative information about recurring Level 3 fair value measurements (in thousands):Trust Preferred
Securities Fair
Value Valuation
Technique Significant
Unobservable
Inputs Range of
Inputs September 30, 2016 $ 2,410 Discounted cash flow Probability of default 1.41% - 3.30% December 31, 2015 $ 2,557 Discounted cash flow Probability of default 1.08% - 2.77% Following is a description of the valuation methodologies used for assets measured at fair value on a non-recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.Impaired LoansLoans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for estimating fair value include using the fair value of the collateral for collateral dependent loans or, where a loan is determined not to be collateral dependent, using the discounted cash flow method.If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. If the impaired loan is determined not to be collateral dependent, then the discounted cash flow method is used. This method requires the impaired loan to be recorded at the present value of expected future cash flows discounted at the loan’s effective interest rate. The effective interest rate of a loan is the contractual interest rate adjusted for any net deferred loan fees or costs, or premium or discount existing at origination or acquisition of the loan. Impaired loans are classified within Level 2 of the fair value hierarchy.Other Real Estate OwnedOther real estate owned acquired through loan foreclosure is initially recorded at fair value less estimated costs to sell, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Due to the subjective nature of establishing the fair value, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined the fair value declines subsequent to foreclosure, a valuation allowance is recorded through non-interest expense. Operating costs associated with the assets are also recorded as non-interest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other non-interest expense. Other real estate owned measured at fair value on a non-recurring basis at September 30, 2016, amounted to $4.7 million. Other real estate owned is classified within Level 2 of the fair value hierarchy.The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fell at September 30, 2016 and December 31, 2015.($ In Thousands)September 30, 2016 Fair Value Measurements Using Quoted
Prices in
Active
Markets
For
Identical
Assets Significant
Other
Observable
Inputs Significant
Unobservable
Inputs Fair Value (Level 1) (Level 2) (Level 3) Impaired loans $ 8,702 $ - $ 8,702 $ - Other real estate owned 4,670 - 4,670 - December 31, 2015 Fair Value Measurements Using Quoted
Prices in
Active
Markets
For
Identical
Assets Significant
Other
Observable
Inputs Significant
Unobservable
Inputs Fair Value (Level 1) (Level 2) (Level 3) Impaired loans $ 10,127 $ - $ 10,127 $ - Other real estate owned 3,083 - 3,083 - NOTE 10 - SECURITIESThe following disclosure of the estimated fair value of financial instruments is made in accordance with authoritative guidance. The estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.A summary of the amortized cost and estimated fair value of available-for-sale securities and held-to-maturity securities at September 30, 2016, follows:($ In Thousands) September 30, 2016 Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Estimated
Fair
Value Available-for-sale securities: Obligations of U.S. Government agencies $ 9,040 $ 69 $ - $ 9,109 Tax-exempt and taxable obligations of states and municipal subdivisions 94,559 3,534 223 97,870 Mortgage-backed securities 106,174 2,593 15 108,752 Corporate obligations 20,604 144 1,256 19,492 Other 1,255 - 310 945 $ 231,632 $ 6,340 $ 1,804 $ 236,168 Held-to-maturity securities: Taxable obligations of states and municipal subdivisions 6,000 1,824 - 7,824 $ 6,000 $ 1,824 $ - $ 7,824 December 31, 2015 Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Estimated
Fair
Value Available-for-sale securities: Obligations of U.S. Government agencies $ 19,479 $ 144 $ 13 $ 19,610 Tax-exempt and taxable obligations of states and municipal subdivisions 95,631 2,362 103 97,890 Mortgage-backed securities 98,223 1,127 425 98,925 Corporate obligations 23,495 62 1,211 22,346 Other 1,255 - 294 961 $ 238,083 $ 3,695 $ 2,046 $ 239,732 Held-to-maturity securities: Mortgage-backed Securities $ 1,092 $ 15 $ - $ 1,107 Taxable obligations of states and municipal subdivisions 6,000 1,440 - 7,440 $ 7,092 $ 1,455 $ - $ 8,547 NOTE 11 – LOANSLoans typically provide higher yields than the other types of earning assets, and, thus, one of the Company's goals is for loans to be the largest category of the Company's earning assets. For the quarters ended September 30, 2016 and December 31, 2015, average loans accounted for 75.2% and 73.3% of average earning assets, respectively. The Company controls and mitigates the inherent credit and liquidity risks through the composition of its loan portfolio.The following tables summarize by class our loans classified as past due in excess of 30 days or more in addition to those loans classified as non-accrual: September 30, 2016 ($ In thousands) Past Due
30 to 89
Days Past Due
90 Days
or More
and Still
Accruing Non-
Accrual Total
Past Due
and
Non-
Accrual Total
Loans Real Estate-construction $ 518 $ - $ 2,788 $ 3,306 $ 104,644 Real Estate-mortgage 1,220 259 1,969 3,448 296,587 Real Estate-non farm non-residential 269 161 934 1,364 307,963 Commercial - - 72 72 121,963 Lease Financing Rec. - - - - 2,211 Obligations of states and subdivisions - - - - 6,861 Consumer 55 - 36 91 14,137 Total $ 2,062 $ 420 $ 5,799 $ 8,281 $ 854,366 December 31, 2015 ($ In Thousands) Past Due
30 to 89
Days Past Due
90 Days
or More
and
Still
Accruing Non-
Accrual Total
Past Due
and
Non-
Accrual Total
Loans Real Estate-construction $ 311 $ - $ 2,956 $ 3,267 $ 99,161 Real Estate-mortgage 3,339 29 2,055 5,423 272,180 Real Estate-non farm non residential 736 - 2,225 2,961 253,309 Commercial 97 - 100 197 129,197 Lease Financing Rec. - - - - 2,650 Obligations of states and subdivisions - - - - 969 Consumer 70 - 32 102 15,049 Total $ 4,553 $ 29 $ 7,368 $ 11,950 $ 772,515 Loans acquired with deteriorated credit quality are those purchased in the BCB Holding Company, Inc. acquisition. These loans were recorded at estimated fair value at the acquisition date with no carryover of the related allowance for loan losses. The acquired loans were segregated as of the acquisition date between those considered to be performing (acquired non-impaired loans) and those with evidence of credit deterioration (acquired impaired loans). Acquired loans are considered impaired if there is evidence of credit deterioration and if it is probable, at acquisition, all contractually required payments will not be collected.The following table presents information regarding the contractually required payments receivable, cash flows expected to be collected and the estimated fair value of loans acquired in the BCB acquisition as of July 1, 2014, the closing date of the transaction: ($ In Thousands) Commercial,
financial
and
agricultural Mortgage-
Commercial Mortgage-
Residential Commercial
and other Total Contractually required payments $ 1,519 $ 29,648 $ 7,933 $ 976 $ 40,076 Cash flows expected to be collected 1,570 37,869 9,697 1,032 50,168 Fair value of loans acquired 1,513 28,875 7,048 957 38,393 Total outstanding acquired impaired loans were $2,601,027 as of September 30, 2016 and $3,039,840 as of December 31, 2015. The outstanding balance of these loans is the undiscounted sum of all amounts, including amounts deemed principal, interest, fees, penalties, and other under the loans, owed at the reporting date, whether or not currently due and whether or not any such amounts have been charged off.Changes in the carrying amount and accretable yield for acquired impaired loans were as follows at September 30, 2016 and December 31, 2015: ($ In Thousands)($ In Thousands) September 30, 2016 December 31, 2015 Accretable
Yield Carrying
Amount of
Loans Accretable
Yield Carrying
Amount of
Loans Balance at beginning of period $ 1,219 $ 1,821 $ 1,417 $ 2,063 Accretion (130 ) 130 (198 ) 198 Payments received, net - (440 ) - (440 ) Balance at end of period $ 1,089 $ 1,511 $ 1,219 $ 1,821 The following tables provide additional detail of impaired loans broken out according to class as of September 30, 2016 and December 31, 2015. The recorded investment included in the following tables represent customer balances net of any partial charge-offs recognized on the loans, net of any deferred fees and costs. As nearly all of our impaired loans at September 30, 2016 are on nonaccrual status, recorded investment excludes any insignificant amount of accrued interest receivable on loans 90-days or more past due and still accruing. The unpaid balance represents the recorded balance prior to any partial charge-offs.September 30, 2016($ In Thousands) Average Interest Recorded Income Recorded Unpaid Related Investment Recognized Investment Balance Allowance YTD YTD ($ In thousands) Impaired loans with no related allowance: Commercial installment $ - $ - $ - $ - $ - Commercial real estate 4,581 4,620 - 4,879 20 Consumer real estate 353 352 - 281 1 Consumer installment 15 15 - 8 - Total $ 4,949 $ 4,987 $ - $ 5,168 $ 21 Impaired loans with a related allowance: Commercial installment $ 227 $ 227 $ 58 $ 267 $ 7 Commercial real estate 2,819 2,819 413 2,858 86 Consumer real estate 679 679 417 778 11 Consumer installment 28 28 22 33 - Total $ 3,753 $ 3,753 $ 910 $ 3,936 $ 104 Total Impaired Loans: Commercial installment $ 227 $ 227 $ 58 $ 267 $ 7 Commercial real estate 7,400 7,439 413 7,737 106 Consumer real estate 1,032 1,031 417 1,059 12 Consumer installment 43 43 22 41 - Total Impaired Loans $ 8,702 $ 8,740 $ 910 $ 9,104 $ 125 As of September 30, 2016, the Company had $1.4 million of foreclosed residential real estate property obtained by physical possession and $.4 million of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings are in process according to local jurisdictions.December 31, 2015($ In Thousands) Average Interest Recorded Income Recorded Unpaid Related Investment Recognized Investment Balance Allowance YTD YTD ($ In thousands) Impaired loans with no related allowance: Commercial installment $ - $ - $ - $ 2 $ - Commercial real estate 5,790 5,828 - 5,099 50 Consumer real estate 223 223 - 205 - Consumer installment 7 7 - 8 - Total $ 6,020 $ 6,058 $ - $ 5,314 $ 50 Impaired loans with a related allowance: Commercial installment $ 306 $ 306 $ 50 $ 264 $ 14 Commercial real estate 2,927 2,927 444 2,891 132 Consumer real estate 842 842 438 1,152 15 Consumer installment 32 32 25 31 - Total $ 4,107 $ 4,107 $ 957 $ 4,338 $ 161 Total Impaired Loans: Commercial installment $ 306 $ 306 $ 50 $ 266 $ 14 Commercial real estate 8,717 8,755 444 7,990 182 Consumer real estate 1,065 1,065 438 1,357 15 Consumer installment 39 39 25 39 - Total Impaired Loans $ 10,127 $ 10,165 $ 957 $ 9,652 $ 211 The following table represents the Company’s impaired loans at September 30, 2016, and December 31, 2015. Sept. 30, December 31, 2016 2015 ($ In Thousands) Impaired Loans: Impaired loans without a valuation allowance $ 4,949 $ 6,020 Impaired loans with a valuation allowance 3,753 4,107 Total impaired loans $ 8,702 $ 10,127 Allowance for loan losses on impaired loans at period end 910 957 Total nonaccrual loans 5,799 7,368 Past due 90 days or more and still accruing 420 29 Average investment in impaired loans 9,104 9,652 The following table is a summary of interest recognized and cash-basis interest earned on impaired loans:($ In Thousands) Three Months
Ended
Sept. 30, 2016 Nine Months
Ended
Sept. 30, 2016 Interest income recognized during impairment $ - $ - Cash-basis interest income recognized 47 125 The gross interest income that would have been recorded in the period that ended if the nonaccrual loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the three months and nine months ended September 30, 2016 was $99,000 and $297,000, respectively, and $123,000 and $322,000, respectively, for the three months and nine months ended September 30, 2015. The Company had no loan commitments to borrowers in non-accrual status at September 30, 2016 and December 31, 2015.The following tables provide detail of troubled debt restructurings (TDRs) at September 30, 2016.For the Three Months Ending September 30, 2016($ In Thousands)OutstandingOutstandingRecordedRecordedInvestmentInterestInvestmentPost-Number ofIncomePre-ModificationModificationLoansRecognizedCommercial installment$-$--$-Commercial real estate----Consumer real estate----Consumer installment----Total$-$--$-For the Nine Months Ending September 30, 2016($ In Thousands) Outstanding Outstanding Recorded Recorded Investment Interest Investment Post- Number of Income Pre-Modification Modification Loans Recognized Commercial installment $ - $ - - $ - Commercial real estate 296 276 1 10 Consumer real estate - - - - Consumer installment - - - - Total $ 296 $ 276 1 $ 10 There were no TDRs modified during the three month period ended September 30, 2016.The balance of troubled debt restructurings (TDRs)was $6.7 million at September 30, 2016 and $6.9 million at December 31, 2015, respectively, calculated for regulatory reporting purposes. There was $243,000 allocated in specific reserves established with respect to these loans as of September 30, 2016. As of September 30, 2016, the company had no additional amount committed on any loan classified as troubled debt restructuring.The following tables set forth the amounts and past due status for the Bank TDRs at September 30, 2016 and December 31, 2015:($ In Thousands) September 30, 2016 Current
Loans Past Due
30-89 Past Due
90 days
and still
accruing Non-
accrual Total Commercial installment $ 155 $ - $ - $ 50 $ 205 Commercial real estate 2,494 - - 3,607 6,101 Consumer real estate 247 - - 126 373 Consumer installment 7 - - 25 32 Total $ 2,903 $ - $ - $ 3,808 $ 6,711 Allowance for loan losses $ 115 $ - $ - $ 128 $ 243 ($ In Thousands) December 31, 2015 Current
Loans Past Due
30-89
and still
accruing Non-
accrual Total Commercial installment $ 206 $ - $ - $ 50 $ 256 Commercial real estate 1,823 - - 2,934 4,757 Consumer real estate 721 - - 1,135 1,856 Consumer installment 8 - - 29 37 Total $ 2,758 $ - $ - $ 4,148 $ 6,906 Allowance for loan losses $ 106 $ - $ - $ 197 $ 303 Internal Risk RatingsThe Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company uses the following definitions for risk ratings, which are consistent with the definitions used in supervisory guidance:Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.As of September 30, 2016 and December 31, 2015, and based on the most recent analysis performed, the risk categories of loans by class of loans (excluding mortgage loans held for sale) were as follows:September 30, 2016($ In Thousands) Commercial,
Estate
and
and Total Pass $ 509,503 $ 174,547 $ 26,114 $ 126,799 $ 836,963 Special Mention 915 241 - 650 1,806 Substandard 14,263 1,517 85 111 15,976 Doubtful - 318 - 41 359 Subtotal 524,681 176,623 26,199 127,601 855,104 Less: Unearned discount 379 63 - 296 738 Loans, net of unearned discount $ 524,302 $ 176,560 $ 26,199 $ 127,305 $ 854,366 December 31, 2015($ In Thousands) Commercial, Real Estate
Commercial Real
Estate
Mortgage Installment
and
Other Financial
and
Agriculture Total Pass $ 434,638 $ 167,394 $ 19,556 $ 132,101 $ 753,689 Special Mention 681 153 - 168 1,002 Substandard 16,655 1,453 75 178 18,361 Doubtful - 327 - - 327 Subtotal 451,974 169,327 19,631 132,447 773,379 Less: Unearned discount 448 76 - 340 864 Loans, net of unearned discount $ 451,526 $ 169,251 $ 19,631 $ 132,107 $ 772,515 Activity in the allowance for loan losses for the period was as follows:($ In Thousands) Three Months Nine Months Ended Ended Sept. 30,
2016 Sept. 30,
2016 Balance at beginning of period $ 7,259 $ 6,747 Loans charged-off: Real Estate (130 ) (286 ) Installment and Other (26 ) (55 ) Commercial, Financial and Agriculture - (6 ) Total (156 ) (347 ) Recoveries on loans previously charged-off: Real Estate 217 408 Installment and Other 15 52 Commercial, Financial and Agriculture 3 83 Total 235 543 Net recoveries 79 196 Provision for Loan Losses 143 538 Balance at end of period $ 7,481 $ 7,481 The following tables represent how the allowance for loan losses is allocated to a particular loan type, as well as the percentage of the category to total loans at September 30, 2016 and December 31, 2015.Allocation of the Allowance for Loan Losses September 30, 2016 ($ In Thousands) Amount % of loans
in each category
to total loans Commercial Non Real Estate $ 920 14.9 % Commercial Real Estate 3,364 61.4 Consumer Real Estate 1,475 20.6 Consumer 133 3.0 Unallocated 1,589 0.1 Total $ 7,481 100 % December 31, 2015 ($ In Thousands) Amount % of loans
in each category
to total loans Commercial Non Real Estate $ 895 17.1 % Commercial Real Estate 3,018 58.4 Consumer Real Estate 1,477 21.9 Consumer 141 2.5 Unallocated 1,216 0.1 Total $ 6,747 100 % The following tables provide the ending balances in the Company's loans (excluding mortgage loans held for sale) and allowance for loan losses, broken down by portfolio segment as of September 30, 2016 and December 31, 2015. The tables also provide additional detail as to the amount of our loans and allowance that correspond to individual versus collective impairment evaluation. The impairment evaluation corresponds to the Company's systematic methodology for estimating its Allowance for Loan Losses.September 30, 2016 Commercial, Installment Financial Real
Estate and
Other and
Agriculture Total ($ In Thousands) Loans Individually evaluated $ 8,432 $ 43 $ 227 $ 8,702 Collectively evaluated 700,286 14,437 130,941 845,664 Total $ 708,718 $ 14,480 $ 131,168 $ 854,366 Allowance for Loan Losses Individually evaluated $ 830 $ 22 $ 58 $ 910 Collectively evaluated 4,009 1,700 862 6,571 Total $ 4,839 $ 1,722 $ 920 $ 7,481 December 31, 2015 Commercial, Installment Financial Real
Estate and
Other and
Agriculture Total (In thousands) Loans Individually evaluated $ 9,782 $ 39 $ 306 $ 10,127 Collectively evaluated 610,996 19,591 131,801 762,388 Total $ 620,778 $ 19,630 $ 132,107 $ 772,515 Allowance for Loan Losses Individually evaluated $ 882 $ 25 $ 50 $ 957 Collectively evaluated 3,613 1,332 845 5,790 Total $ 4,495 $ 1,357 $ 895 $ 6,747 NOTE 12 – SUBSEQUENT EVENTS/OTHERSubsequent events have been evaluated by management through the date the financial statements were issued. The Company has experienced recoveries on a previously charged-off loan of $941,000. In 2015, $722,000 was recovered and a third and final installment of $219,000 is expected during 2016.The First Bancshares, Inc. (the “Company”), which is the holding company of The First, A National Banking Association, (“The First”), entered into a Stock Purchase Agreement (the “Iberville Bank Acquisition Agreement”) with A. Wilbert’s Sons Lumber and Shingle Company (the “Iberville Bank Parent”), the parent company of Iberville Bank (“Iberville Bank”), dated October 12, 2016, under which the Company has agreed to acquire 100% of the common stock of Iberville Bank for a purchase price of $31.1 million in cash (the “Iberville Bank Acquisition”).Separately, the Company and The First entered into an Agreement and Plan of Merger (the “GCCB Merger Agreement,” and together with the Iberville Bank Acquisition Agreement, the “Bank Transaction Agreements”), dated October 12, 2016, pursuant to which it has agreed to acquire Iberville Bank Community Bank (“GCCB”), Pensacola, Florida, in an all-stock transaction (the “GCCB Merger,” and together with the Iberville Bank Acquisition, the “Bank Transactions”). The purchase price for the GCCB Merger of $2.3 million is based on a price of $0.50 per share of GCCB stock and will be paid in the form of Company common stock issued to GCCB shareholders with the number of Company shares issued based on a 30-day average of the Company’s common stock price as of five business days prior to closing.On October 12, 2016 the Company entered into Securities Purchase Agreements with a limited number of institutional and other accredited investors, including certain directors of the Company (collectively the “Purchasers”) to privately place a total of 3,563,380 shares of mandatorily convertible non-cumulative, non-voting, perpetual Preferred Stock, Series E, $1.00 par value (the “Series E Preferred Stock”) at a price of $17.75 per share, for aggregate gross proceeds of $63.25 million (the “Private Offering”).NOTE 13 – RECLASSIFICATIONCertain amounts in the 2015 financial statements have been reclassified for comparative purposes to conform to the current period financial statement presentation.PART I - FINANCIAL INFORMATIONITEM NO. 2MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONFORWARD LOOKING STATEMENTSThis Form 10-Q contains statements regarding the projected performance of The First Bancshares, Inc. and its subsidiary. These statements constitute forward-looking information within the meaning of the Private Securities Litigation Reform Act. Actual results may differ materially from the projections provided in this release since such projections involve significant known and unknown risks and uncertainties. Factors that might cause such differences include, but are not limited to: competitive pressures among financial institutions increasing significantly; economic conditions, either nationally or locally, in areas in which the Company conducts operations being less favorable than expected; and legislation or regulatory changes which adversely affect the ability of the combined Company to conduct business combinations or new operations. The Company disclaims any obligation to update such factors or to publicly announce the results of any revisions to any of the forward-looking statements included herein to reflect future events or developments. Further information on The First Bancshares, Inc. is available in its filings with the Securities and Exchange Commission, available at the SEC’s website,http://www.sec.gov.CRITICAL ACCOUNTING POLICIESThe Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States. The financial information and disclosures contained within those statements are significantly impacted by Management’s estimates and judgments, which are based on historical experience and incorporate various assumptions that are believed to be reasonable under current circumstances. Actual results may differ from those estimates under divergent conditions.Critical accounting policies are those that involve the most complex and subjective decisions and assessments, and have the greatest potential impact on the Company’s stated results of operations. In Management’s opinion, the Company’s critical accounting policies deal with the following areas: the establishment of the allowance for loan and lease losses, as explained in detail in Note 11 to the consolidated financial statements and in the “Provision for Loan and Lease Losses” and “Allowance for Loan and Lease Losses” sections of this discussion and analysis; the valuation of impaired loans and foreclosed assets, as discussed in Note 11 to the consolidated financial statements; income taxes and deferred tax assets and liabilities, especially with regard to the ability of the Company to recover deferred tax assets as discussed in the “Provision for Income Taxes” and “Other Assets” sections of this discussion and analysis; and goodwill and other intangible assets, which are evaluated annually for impairment and for which we have determined that no impairment exists, as discussed in the “Other Assets” section of this discussion and analysis. Critical accounting areas are evaluated on an ongoing basis to ensure that the Company’s financial statements incorporate our most recent expectations with regard to those areas.OVERVIEW OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITIONRESULTS OF OPERATIONS SUMMARYThird quarter 2016 compared to Third quarter 2015The Company had a consolidated net income of $2,558,000 for the three months ended September 30, 2016, compared with consolidated net income of $2,227,000 for the same period last year.Net interest income increased to $10.1 million from $9.3 million for the three months ended September 30, 2016, or an increase of 8.4% as compared to the same period in 2015. Quarterly average earning assets at September 30, 2016, increased $108.3 million, or 10.8% and quarterly average interest-bearing liabilities also increased $109.4 million or 13.4% when compared to September 30, 2015.Noninterest income for the three months ended September 30, 2016, was $3,099,000 compared to $1,982,000 for the same period in 2015, reflecting an increase of $1,117,000 or 56.4%. This increase consisted mainly of increased mortgage income of $1,058,000 resulting from the acquisition of The Mortgage Connection, LLC in December 2015.The provision for loan losses was $143,000 for the three months ended September 30, 2016 compared with $250,000 for the same period in 2015. The allowance for loan losses of $7.5 million at September 30, 2016 (approximately .87% of total loans and 1.06% of loans including valuation accounting adjustments on acquired loans) is considered by management to be adequate to cover losses inherent in the loan portfolio. The level of this allowance is dependent upon a number of factors, including the total amount of past due loans, general economic conditions, and management’s assessment of potential losses. This evaluation is inherently subjective as it requires estimates that are susceptible to significant change. Ultimately, losses may vary from current estimates and future additions to the allowance may be necessary.Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the loan loss allowance will not be required. Management evaluates the adequacy of the allowance for loan losses quarterly and makes provisions for loan losses based on this evaluation.Noninterest expense increased by $1,439,000 or 18.0% for the three months ended September 30, 2016, when compared with the same period in 2015. The largest increase was related to salaries and benefits of $1,017,000 of which $600,000 can be attributed to acquisition of The Mortgage Connection, LLC, as well as additional salaries and benefits related to the banking team in Mobile and the lender in Madison.First Nine Months of 2016 compared to First Nine Months of 2015The Company had a consolidated net income of $7,811,000 for the nine months ended September 30, 2016, compared with consolidated net income of $6,441,000 for the same period last year.Net interest income increased to $29.6 million from $27.4 million for the nine months ended September 30, 2016, or an increase of 8.1% as compared to the same period in 2015. Average earning assets at September 30, 2016, increased $77.6 million, or 7.6% and average interest-bearing liabilities also increased $86.7 million or 10.5% when compared to December 31, 2015.Noninterest income for the nine months ended September 30, 2016, was $8,542,000 compared to $5,686,000 for the same period in 2015, reflecting an increase of $2,856,000 or 50.2%. This increase consists of $2,196,000 of increased mortgage income and increased service charges of $149,000 and a one-time gain on the conversion of our debit card provider of $260,000.The provision for loan losses was $538,000 for the nine months ended September 30, 2016, compared with $400,000 for the same period in 2015. The allowance for loan losses of $7.5 million at September 30, 2016 (approximately .87% of total loans and 1.06% of loans including valuation accounting adjustments on acquired loans) is considered by management to be adequate to cover losses inherent in the loan portfolio. The level of this allowance is dependent upon a number of factors, including the total amount of past due loans, general economic conditions, and management’s assessment of potential losses. This evaluation is inherently subjective as it requires estimates that are susceptible to significant change. Ultimately, losses may vary from current estimates and future additions to the allowance may be necessary.Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the loan loss allowance will not be required. Management evaluates the adequacy of the allowance for loan losses quarterly and makes provisions for loan losses based on this evaluation.Noninterest expense increased by $2.8 million or 11.9% for the nine months ended September 30, 2016, when compared with the same period in 2015. $2.3 million of the increase can be attributed to the salaries and benefits of The Mortgage Connection, LLC that was acquired in the fourth quarter of 2015 and the addition of the team in Mobile and the lender in Madison as well as the executive for Treasury Management.FINANCIAL CONDITIONThe First represents the primary asset of the Company. The First reported total assets of $1.3 billion at September 30, 2016, compared to $1.1 billion at December 31, 2015, an increase of $.2 billion. Loans increased $81.0 million, or 10.5%, during the first nine months of 2016. Deposits at September 30, 2016, totaled $1.1 billion compared to $916.7 million at December 31, 2015. For the nine month period ended September 30, 2016, The First reported net income of $8.7 million compared to $6.4 million for the nine months ended September 30, 2015.NONPERFORMING ASSETS AND RISK ELEMENTSDiversification within the loan portfolio is an important means of reducing inherent lending risks. At September 30, 2016, The First had no concentrations of ten percent or more of total loans in any single industry or any geographical area outside its immediate market areas.At September 30, 2016, The First had loans past due as follows: ($ In Thousands) Past due 30 through 89 days $ 2,062 Past due 90 days or more and still accruing 420 The accrual of interest is discontinued on loans which become ninety days past due (principal and/or interest), unless the loans are adequately secured and in the process of collection. Nonaccrual loans totaled $5.8 million at September 30, 2016, a decrease of $1.6 million from December 31, 2015. Any other real estate owned is carried at fair value, determined by an appraisal, less estimated costs to sell. Other real estate owned totaled $4.7 million at September 30, 2016. A loan is classified as a restructured loan when the following two conditions are present: First, the borrower is experiencing financial difficulty and second, the creditor grants a concession it would not otherwise consider but for the borrower’s financial difficulties. At September 30, 2016, the Bank had $6.7 million in loans that were modified as troubled debt restructurings, of which $2.9 million were performing as agreed with modified terms.EARNINGS PERFORMANCEThe Company earns income from two primary sources. The first is net interest income, which is interest income generated by earning assets less interest expense on deposits and other borrowed money. The second is non-interest income, which primarily consists of customer service charges and fees as well as mortgage income but also comes from non-customer sources such as bank-owned life insurance. The majority of the Company’s non-interest expense is comprised of operating costs that facilitate offering a full range of banking services to our customers.Net interest income AND NET INTEREST MARGINNet interest income increased by $780,000, or 8.4%, for the third quarter of 2016 relative to the third quarter of 2015, and by $2.2 million, or 8.1%, for the first nine months of 2016 compared to the first nine months of 2015. The level of net interest income we recognize in any given period depends on a combination of factors including the average volume and yield for interest-earning assets, the average volume and cost of interest-bearing liabilities, and the mix of products which comprise the Company’s earning assets, deposits, and other interest-bearing liabilities. Net interest income is also impacted by the reversal of interest for loans placed on non-accrual status during the reporting period, and the recovery of interest on loans that had been on non-accrual and were paid off, sold or returned to accrual status.The following tables depict, for the periods indicated, certain information related to the average balance sheet and average yields on assets and average costs of liabilities. Such yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been derived from daily averages.Average Balances, Tax Equivalent Interest and Yields/Rates Three Months Ended Three Months Ended September 30, 2016 September 30, 2015 Tax Tax Avg. Equivalent Yield/ Avg. Equivalent Yield/ ($ In Thousands) Balance interest Rate Balance interest Rate Earning Assets: Taxable securities $ 177,154 $ 965 2.18 % $ 172,478 $ 976 2.26 % Tax exempt securities 77,073 704 3.65 % 74,807 662 3.54 % Total investment securities 254,227 1,669 2.63 % 247,285 1,638 2.65 % Fed funds sold 10,356 25 0.97 % 5,502 13 .95 % Other 11,961 16 0.54 % 20,613 25 0.49 % Loans 836,931 9,798 4.68 % 731,818 8,629 4.72 % Total earning assets 1,113,475 11,508 4.13 % 1,005,218 10,305 4.10 % Other assets 119,559 104,726 Total assets $ 1,233,034 $ 1,109,944 Interest-bearing liabilities: Deposits $ 850,442 $ 962 0.45 % $ 759,939 $ 646 0.34 % Repo 5,000 49 3.92 % 5,000 48 3.84 % Fed funds purchased 1,926 5 1.04 % 661 2 1.21 % FHLB 55,337 106 0.77 % 37,716 50 0.53 % Subordinated debentures 10,310 80 3.10 % 10,310 47 1.82 % Total interest- bearing liabilities 923,015 1,202 0.52 % 813,626 793 0.39 % Other liabilities 198,889 197,150 Stockholders' equity 111,130 99,168 Total liabilities and stockholders’ equity $ 1,233,034 $ 1,109,944 Net interest income (TE) $ 10,306 3.61 % $ 9,512 3.71 % Net interest margin 3.70 % 3.79 % Average Balances, Tax Equivalent Interest and Yields/Rates Nine Months Ended Twelve Months Ended September 30, 2016 December 31, 2015 Tax Tax Avg. Equivalent Yield/ Avg. Equivalent Yield/ ($ In Thousands) Balance Interest Rate Balance Interest Rate Earning Assets: Taxable securities $ 184,313 $ 3,055 2.21 % $ 178,151 $ 3,949 2.22 % Tax-exempt securities 77,385 2,118 3.65 % 78,311 2,810 3.59 % Total investment securities 261,698 5,173 2.64 % 256,462 6,759 2.64 % Federal funds sold 2,377 82 4.60 % 24,582 64 0.26 % Other 23,626 56 0.32 % 7,585 93 1.23 % Loans 808,821 28,146 4.64 % 730,326 34,242 4.69 % Total earning assets $ 1,096,522 $ 33,457 4.07 % $ 1,018,955 $ 41,158 4.04 % Other 116,252 103,237 Total assets $ 1,212,774 $ 1,122,192 Interest-bearing liabilities: Deposits $ 824,065 $ 2,476 0.40 % $ 752,716 $ 2,563 0.34 % Repo 5,000 145 3.87 % 5,000 194 3.88 % Fed funds purchased 1,867 15 1.07 % 698 11 1.58 % FHLB 68,170 342 0.67 % 53,984 256 0.47 % Subordinated Debentures 10,310 162 2.10 % 10,310 185 1.79 % Total interest- bearing liabilities 909,412 3,140 0.46 % 822,708 3,209 0.39 % Other liabilities 196,289 200,878 Stockholders' equity 107,073 98,606 Total liabilities and stockholders’ equity $ 1,212,774 $ 1,122,192 Net interest income (TE) $ 30,317 3.61 % $ 37,949 3.65 % Net interest margin 3.69 % 3.72 % Interest Rate Sensitivity – September 30, 2016 Net Interest
Income@ Risk Market Value of Equity Change in
Interest
Rates % Change
from Base Policy Limit % Change
from Base Policy Limit Up 400 bps 12.7 % -20 % 44.1 % -40.00 % Up 300 bps 9.6 % -15 % 35.8 % -30.00 % Up 200 bps 6.4 % -10 % 25.9 % -20.00 % Up 100 bps 3.0 % -5 % 14.1 % -10.00 % Down 100 bps 2.9 % -5 % 3.9 % -10.00 % Down 200 bps 4.6 % -10 % 0.8 % -20.00 % LIQUIDITY AND CAPITAL RESOURCESLiquidity is adequate with cash and cash equivalents of $70.1 million as of September 30, 2016. In addition, loans and investment securities repricing or maturing within one year or less is approximately $242 million at September 30, 2016. Approximately $194.3 million in loan commitments could fund within the next three months and other commitments, primarily standby letters of credit, totaled $2.0 million at September 30, 2016.There are no known trends or any known commitments or uncertainties that will result in The First’s liquidity increasing or decreasing in a significant way.Total consolidated equity capital at September 30, 2016, was $112.7 million, or approximately 8.9% of total assets. The Company currently has adequate capital positions to meet the minimum capital requirements for all regulatory agencies. The Company’s capital ratios as of September 30, 2016, were as follows:Tier 1 leverage8.53%Tier 1 risk-based10.47%Total risk-based11.23%Common equity Tier 17.81%On June 30, 2006, The Company issued $4,124,000 of floating rate junior subordinated deferrable interest debentures to The First Bancshares Statutory Trust 2 in which the Company owns all of the common equity. The debentures are the sole asset of the Trust. The Trust issued $4,000,000 of Trust Preferred Securities (TPSs) to investors. The Company’s obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the Trust’s obligations under the preferred securities. The preferred securities are redeemable by the Company at its option. The preferred securities must be redeemed upon maturity of the debentures in 2036. Interest on the preferred securities is the three month London Interbank Offer Rate (LIBOR) plus 1.65% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities. On July 27, 2007, The Company issued $6,186,000 of floating rate junior subordinated deferrable interest debentures to The First Bancshares Statutory Trust 3 in which the Company owns all of the common equity. The debentures are the sole asset of Trust 3. The Trust issued $6,000,000 of Trust Preferred Securities (TPSs) to investors. The Company’s obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the Trust’s obligations under the preferred securities. The preferred securities are redeemable by the Company at its option. The preferred securities must be redeemed upon maturity of the debentures in 2037. Interest on the preferred securities is the three month LIBOR plus 1.40% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities. In accordance with the authoritative guidance, the trusts are not included in the consolidated financial statements.PROVISION FOR LOAN AND LEASE LOSSESThe Company has developed policies and procedures for evaluating the overall quality of its credit portfolio and the timely identification of potential problem loans. Management’s judgment as to the adequacy of the allowance is based upon a number of assumptions which it believes to be reasonable, but which may not prove to be accurate, particularly given the Company’s growth and the economy. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the loan loss allowance will not be required.The Company’s allowance consists of two parts. The first part is determined in accordance with authoritative guidance regarding contingencies. The Company’s determination of this part of the allowance is based upon quantitative and qualitative factors. A loan loss history based upon more than 72 months of loss history is utilized in determining the appropriate allowance. Historical loss factors are determined by risk rated loans by loan type. These historical loss factors are applied to the loans by loan type to determine an indicated allowance. The loss factors of peer groups are considered in the determination of the allowance and are used to assist in the establishment of a long-term loss history for areas in which this data is unavailable and incorporated into the qualitative factors to be considered. The historical loss factors may also be modified based upon other qualitative factors including but not limited to local and national economic conditions, trends of delinquent loans, changes in lending policies and underwriting standards, concentrations, and management’s knowledge of the loan portfolio. These factors require judgment upon the part of management and are based upon state and national economic reports received from various institutions and agencies including the Federal Reserve Bank, United States Bureau of Economic Analysis, Bureau of Labor Statistics, meetings with the Company’s loan officers and loan committee, and data and guidance received or obtained from the Company’s regulatory authorities.The second part of the allowance is determined in accordance with authoritative guidance regarding loan impairment. Impaired loans are determined based upon a review by internal loan review and senior management.The sum of the two parts constitutes management’s best estimate of an appropriate allowance for loan losses. When the estimated allowance is determined, it is presented to the Company’s audit committee for review and approval on a quarterly basis.A loan is considered impaired when, based on current information and events, 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 payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.Impairment is measured on a loan by loan basis, and a specific allowance is assigned to each loan determined to be impaired. Impaired loans not deemed collateral dependent are analyzed according to the ultimate repayment source, whether that is cash flow from the borrower, guarantor or some other source of repayment. Impaired loans are deemed collateral dependent if, in the Company’s opinion, the ultimate source of repayment will be generated from the liquidation of collateral.The Company discontinues accrual of interest on loans when management believes, after considering economic and business conditions and collection efforts, that a borrower’s financial condition is such that the collection of interest is doubtful. Generally, the Company will place a delinquent loan in nonaccrual status when the loan becomes 90 days or more past due. At the time a loan is placed in nonaccrual status, all interest which has been accrued on the loan but remains unpaid is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain.NON-INTEREST INCOME AND NON-INTEREST EXPENSEThe following table provides details on the Company’s non-interest income and non-interest expense for the three-month and nine month periods ended September 30, 2016 and 2015:($ In Thousands) Three Months Ended Nine Months Ended EARNINGS STATEMENT 9/30/16 % of
Total 9/30/15 % of
Total 9/30/16 % of
Total 9/30/15 % of
Total Non-interest income: Service charges on deposit accounts $ 606 19.6 % $ 737 37.2 % $ 1,847 21.6 % $ 1,896 33.3 % Mortgage income 1,399 45.1 % 341 17.2 % 3,228 37.8 % 1,032 18.2 % Interchange fee income 666 21.5 % 611 30.8 % 1,991 23.3 % 1,794 31.6 % Gain (loss) on securities, net - - - - 129 1.5 % - - Gain on sale of premises and equipment - - - - - - 110 1.9 % Other charges and fees 428 13.8 % 293 14.8 % 1,347 15.8 % 854 15.0 % Total non-interest income $ 3,099 100 % $ 1,982 100 % $ 8,542 100 % $ 5,686 100 % Non-interest expense: Salaries and employee benefits $ 5,645 60.0 % $ 4,628 58.0 % $ 16,194 60.5 % $ 13,867 58.1 % Occupancy expense 1,209 12.8 % 1,136 14.2 % 3,392 12.7 % 3,382 14.1 % FDIC premiums 254 2.7 % 241 3.0 % 755 2.8 % 723 3.0 % Marketing 76 .8 % 64 .8 % 280 1.1 % 287 1.2 % Amortization of core deposit intangibles 100 1.1 % 100 1.3 % 294 1.1 % 300 1.3 % Other professional services 461 4.9 % 318 4.0 % 1,013 3.8 % 955 4.0 % Other non-interest expense 1,671 17.7 % 1,490 18.7 % 4,802 18.0 % 4,373 18.3 % Total non-interest expense $ 9,416 100 % $ 7,977 100 % $ 26,730 100 % $ 23,887 100 % Noninterest income increased $1.1 million in quarterly comparison mainly consisting of increases in mortgage income of $1.0 million. Third quarter 2016 noninterest expenses increased $1.4 million, or 18.0% as compared to third quarter 2015. The largest increase in noninterest expenses was related to salaries and benefits of $1.0 million of which $0.6 million can be attributed to acquisition of The Mortgage Connection, LLC in December 2015 as well as additional salaries and benefits related to the banking teams in Mobile and Madison along with Treasury Management personnel.Noninterest income increased $2.9 million in year-over-year comparison mainly consisting of increases in mortgage income of $2.2 million. Noninterest expenses increased $2.8 million in year-over-year comparison consisting of increases in salaries and benefits of $2.3 million relating to the acquisition of The Mortgage Connection, LLC as well as salaries and benefits related to the lending teams in Madison and Mobile along with the executive for Treasury Management.PROVISION FOR INCOME TAXESThe Company sets aside a provision for income taxes on a monthly basis. The amount of that provision is determined by first applying the Company’s statutory income tax rates to estimated taxable income, which is pre-tax book income adjusted for permanent differences, and then subtracting available tax credits if applicable. Permanent differences include but are not limited to tax-exempt interest income, BOLI income, and certain book expenses that are not allowed as tax deductions.The Company’s provision for income taxes was $3.1 million as of September 30, 2016 relative to $2.3 million as of September 30, 2015. The higher tax provisioning for the first nine months comparison is the result of an increase in pre-tax income.BALANCE SHEET ANALYSISEARNING ASSETSThe Company’s interest-earning assets are comprised of investments and loans, and the composition, growth characteristics, and credit quality of both are significant determinants of the Company’s financial condition. Investments are analyzed in the section immediately below, while the loan and lease portfolio and other factors affecting earning assets are discussed in the sections following investments.INVESTMENTSThe Company’s investments can at any given time consist of debt securities and marketable equity securities (together, the “investment portfolio”), investments in the time deposits of other banks, surplus interest-earning balances in our Federal Reserve Bank (“FRB”) account, and overnight fed funds sold. Surplus FRB balances and fed funds sold to correspondent banks represent the temporary investment of excess liquidity. The Company’s investments serve several purposes: 1) they provide liquidity to even out cash flows from the loan and deposit activities of customers; 2) they provide a source of pledged assets for securing public deposits, bankruptcy deposits and certain borrowed funds which require collateral; 3) they constitute a large base of assets with maturity and interest rate characteristics that can be changed more readily than the loan portfolio, to better match changes in the deposit base and other funding sources of the Company; 4) they are another interest-earning option for surplus funds when loan demand is light; and 5) they can provide partially tax exempt income. Total securities excluding other securities totaled $242.2 million, or 19.1% of total assets at September 30, 2016, compared to $246.8 million, or 21.6% of total assets at December 31,2015.We had $2.4 million of fed funds sold at September 30, 2016 and $0.3 million of fed funds sold at December 31, 2015; and interest-bearing balances at other banks increased to $19.8 million at September 30, 2016 from $17.3 million at December 31, 2015 primarily due to an increase in our Federal Reserve Bank account. The Company’s investment portfolio remained steady with a total fair value of $244.0 million at September 30, 2016, reflecting a decrease of $4.3 million, or 1.7%, for the first nine months of 2016. The Company carries investments at their fair market values. The Company holds a small amount of “held-to-maturity” investments with a fair market value of $7.8 million at September 30, 2016 as compared to $8.5 million at December 31, 2015. All other investment securities are classified as “available for sale” to allow maximum flexibility with regard to interest rate risk and liquidity management.Refer to table shown in NOTE 10 - SECURITIES for information on the Company’s amortized cost and fair market value of its investment portfolio by investment type.LOAN AND LEASE PORTFOLIOThe Company’s loans and leases, gross of the associated allowance for losses and deferred fees and origination costs, and including loans held for sale, totaled $863.8 million at September 30, 2016, an increase of $87.3 million, or 11.2%, since December 31, 2015. With an increase of $84.5 million in the Real Estate category, the real estate-commercial portfolio had the largest area of growth of $54.7 million. At September 30, 2016, the company had direct energy related loans of $19.4 million, representing 2.3% of the total loan portfolio. A majority of the outstanding are secured by marine assets that operate in the Gulf of Mexico, which are under term contracts to major operators tied primarily to oil and gas production.A distribution of the Company’s loans showing the balance and percentage of loans by type is presented for the noted periods in the table below. The balances shown are before deferred or unamortized loan origination, extension, or commitment fees, and deferred origination costs.The following table shows the composition of the loan portfolio by category:Composition of Loan Portfolio Sept. 30, 2016 December 31, 2015 Amount Percent
of
Total Amount
of
Total ($ In Thousands) Mortgage loans held for sale $ 9,437 1.1 % $ 3,974 0.5 % Commercial, financial and agricultural 121,963 14.1 129,197 16.6 Real Estate: Mortgage-commercial 307,963 35.7 253,309 32.6 Mortgage-residential 296,587 34.3 272,180 35.1 Construction 104,644 12.1 99,161 12.8 Lease financing receivable 2,211 0.3 2,650 0.3 Obligations of states and subdivisions 6,861 0.8 969 0.1 Consumer and other 14,137 1.6 15,049 2.0 Total loans 863,803 100 % 776,489 100 % Allowance for loan losses (7,481 ) (6,747 ) Net loans $ 856,322 $ 769,742 In the context of this discussion, a "real estate mortgage loan" is defined as any loan, other than a loan for construction purposes, secured by real estate, regardless of the purpose of the loan. The Company follows the common practice of financial institutions in the Company’s market area of obtaining a security interest in real estate whenever possible, in addition to any other available collateral. This collateral is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to increase the magnitude of the real estate loan portfolio component. Generally, the Company limits its loan-to-value ratio to 80%. Management attempts to maintain a conservative philosophy regarding its underwriting guidelines and believes it will reduce the risk elements of its loan portfolio through strategies that diversify the lending mix.Loans held for sale consist of mortgage loans originated by the Bank and sold into the secondary market. Commitments from investors to purchase the loans are obtained upon origination.NONPERFORMING ASSETSNonperforming assets are comprised of loans for which the Company is no longer accruing interest, and foreclosed assets including mobile homes and OREO. If the Company grants a concession to a borrower in financial difficulty, the loan falls into the category of a troubled debt restructuring (“TDR”). TDRs may be classified as either nonperforming or performing loans depending on their accrual status. The following table presents comparative data for the Company’s nonperforming assets and performing TDRs as of the dates noted:Nonperforming assets totaled $10.5 million at September 30, 2016, remaining constant compared to $10.5 million at December 31, 2015. The ALLL/total loans ratio was .87% at September 30, 2016 and .87% at December 31, 2015. Including valuation accounting adjustments on acquired loans, the total valuation plus ALLL was 1.06% of loans at September 30, 2016. The ratio of annualized net charge-offs (recoveries) to total loans was (0.04)% for the quarter ended September 30, 2016 compared to (0.04)% for the quarter ended September 30, 2015. As noted in our first quarter 2015 10-Q, the Company had been notified that a recovery of $941,000 was more likely than not expected during 2015. We received the first installment during the second quarter of 2015 which totaled $481,000 and the second installment during the third quarter of 2015 which totaled $241,000. The remaining balance of $219,000 is expected to be received in 2016.Nonperforming Assets and Performing Troubled Debt Restructurings($ In Thousands)NON-ACCRUAL LOANS 09/30/16 12/31/15 09/30/15 Real Estate: 1-4 family residential construction $ - $ - $ 578 Other construction/land 2,788 2,956 2,665 1-4 family residential revolving/open-end 317 327 331 1-4 family residential closed-end 1,652 1,728 1,811 Nonfarm, nonresidential, owner-occupied 598 1,853 2,043 Nonfarm, nonresidential, other nonfarm nonresidential 336 372 382 TOTAL REAL ESTATE 5,691 7,236 7,810 Commercial and industrial 72 100 106 Loans to individuals - other 36 32 33 TOTAL NON-ACCRUAL LOANS 5,799 7,368 7,949 Other real estate owned 4,670 3,083 4,104 TOTAL NON-PERFORMING ASSETS $ 10,469 $ 10,451 $ 12,053 Performing TDRs $ 2,903 $ 2,758 $ 2,883 Total non-performing assets as a % of total loans & leases net of unearned income 1.21 % 1.35 % 1.61 % Total non-accrual loans as a % of total loans & leases net of unearned income 0.67 % 0.95 % 1.06 % ALLOWANCE FOR LOAN AND LEASE LOSSESThe allowance for loan and lease losses, a contra-asset, is established through a provision for loan and lease losses. It is maintained at a level that is considered adequate to absorb probable incurred losses inherent in the remaining loan portfolio. Specifically identifiable and quantifiable losses are immediately charged off against the allowance; recoveries are generally recorded only when sufficient cash payments are received subsequent to the charge off.The table that follows summarizes the activity in the allowance for loan and lease losses for the noted periods:Allowance for Loan and Lease Losses($ In Thousands) 3 months
ended 3 months
ended 9 months
ended 9 months
ended For the
Year
Ended 9/30/16 9/30/15 9/30/16 9/30/15 12/31/15 Balances: Average gross loans & leases outstanding during period: $ 836,931 $ 731,818 $ 808,821 $ 721,325 $ 730,326 Gross Loans & leases outstanding at end of period 863,803 747,646 863,803 747,646 776,489 Allowance for Loan and Lease Losses: Balance at beginning of period 7,259 6,419 6,747 6,095 6,095 Provision charged to expense 143 250 538 400 410 Charge-offs: Real Estate- 1-4 family residential construction - - - - 74 Other construction/land - 50 67 50 88 1-4 family revolving, open-ended - 8 - 8 8 1-4 family closed-end 130 - 219 349 364 Nonfarm, nonresidential, owner-occupied - - - - - Total Real Estate 130 58 286 407 534 Commercial and industrial - 183 6 183 183 Credit cards - - 1 - - Automobile loans 20 5 29 24 31 Loans to individuals - other - - - - - All other loans 6 19 25 63 95 Total 156 265 347 677 843 Recoveries: Real Estate- 1-4 family residential construction - - - - - Other construction/land 108 21 191 40 63 1-4 family revolving, open-ended 3 4 17 8 9 1-4 family closed-end 105 267 194 790 818 Nonfarm, nonresidential, owner-occupied 1 4 6 11 15 Total Real Estate 217 296 408 849 905 Commercial and industrial 3 2 83 11 99 Credit cards 1 1 1 2 2 Automobile loans - - 1 - 1 Loans to individuals - other 5 12 10 13 14 All other loans 9 19 40 41 64 Total 235 330 543 916 1,085 Net loan charge offs (recoveries) (79 ) (65 ) (196 ) (239 ) (242 ) Balance at end of period $ 7,481 $ 6,734 $ 7,481 $ 6,734 $ 6,747 RATIOS Net Charge-offs (recoveries) to average Loans & Leases(annualized) (0.04 )% (0.04 )% (0.03 )% (0.04 )% (0.03 )% Allowance for Loan Losses to gross Loans & Leases at end of period 0.87 % 0.90 % 0.87 % 0.90 % 0.87 % Net Loan Charge-offs (recoveries) to provision for loan losses (55.24 )% (26.0 )% (36.43 )% (59.75 )% (59.02 )% OFF-BALANCE SHEET ARRANGEMENTSThe Company maintains commitments to extend credit in the normal course of business, as long as there are no violations of conditions established in the outstanding contractual arrangements. Unused commitments to extend credit totaled $194.3 million at September 30, 2016 and $144.1 million at December 31, 2015, although it is not likely that all of those commitments will ultimately be drawn down. Unused commitments represented approximately 22.5% of gross loans outstanding at September 30, 2016 and 18.5% at December 31, 2015, with the increase due in part to higher commitments in commercial and industrial loans. The Company also had undrawn letters of credit issued to customers totaling $2.0 million at September 30, 2016 and $1.1 million at December 31, 2015. The effect on the Company’s revenues, expenses, cash flows and liquidity from the unused portion of the commitments to provide credit cannot be reasonably predicted because there is no guarantee that the lines of credit will ever be used. However, the “Liquidity” section in this Form 10-Q outlines resources available to draw upon should we be required to fund a significant portion of unused commitments. For more information regarding the Company’s off-balance sheet arrangements, see NOTE 8 to the financial statements located elsewhere herein.In addition to unused commitments to provide credit, the Company is utilizing a $84 million letter of credit issued by the Federal Home Loan Bank on the Company’s behalf as security for certain deposits as of September 30, 2016. That letter of credit is backed by loans which are pledged to the FHLB by the Company.OTHER ASSETSThe Company’s balance of non-interest earning cash and due from banks was $48.0 million at September 30, 2016 and $23.6 million at December 31, 2015. The balance of cash and due from banks depends on the timing of collection of outstanding cash items (checks), the level of cash maintained on hand at our branches, and our reserve requirement among other things, and is subject to significant fluctuation in the normal course of business. While cash flows are normally predictable within limits, those limits are fairly broad and the Company manages its short-term cash position through the utilization of overnight loans to and borrowings from correspondent banks, including the Federal Reserve Bank and the Federal Home Loan Bank. Should a large “short” overnight position persist for any length of time, the Company typically raises money through focused retail deposit gathering efforts or by adding brokered time deposits. If a “long” position is prevalent, the Company will let brokered deposits or other wholesale borrowings roll off as they mature, or might invest excess liquidity in higher-yielding, longer-term bonds.The Company’s net premises and equipment at September 30, 2016 was $33.4 million and $33.6 million at December 31, 2015; the result being a decrease of $196,000, or 0.6% for the first nine months of 2016. In the second quarter of 2016, the Company purchased $5.9 million in life insurance, thereby creating a balance of $21.1 million at September 30, 2016. Bank-owned life insurance is also discussed above in the “Non-Interest Income and Non-Interest Expense” section. Goodwill did not change during the period, ending the first nine months of 2016 with a balance of $13.8 million, but other intangible assets, namely the Company’s core deposit intangible, decreased by $294,000 due to amortization. The Company’s goodwill and other intangible assets are evaluated annually for potential impairment, and pursuant to that analysis Management has determined that no impairment exists as of September 30, 2016.Other real estate increased $1.6 million, or 51.5% during the first nine months of 2016. Total equity securities increased $1.4 million due primarily to an increase in FHLB stock.DEPOSITS AND INTEREST BEARING LIABILITIESDEPOSITSDeposits are another key balance sheet component impacting the Company’s net interest margin and other profitability metrics. Deposits provide liquidity to fund growth in earning assets, and the Company’s net interest margin is improved to the extent that growth in deposits is concentrated in less volatile and typically less costly non-maturity deposits such as demand deposit accounts, NOW accounts, savings accounts, and money market demand accounts. Information concerning average balances and rates paid by deposit type for the three-month and nine-month periods ended September 30, 2016 and 2015 is included in the Average Balances and Rates tables appearing above, in the section titled “Net Interest Income and Net Interest Margin.” A distribution of the Company’s deposits showing the balance and percentage of total deposits by type is presented for the noted periods in the following table.Deposit Distribution($ In Thousands) Sept. 30, 2016 December 31, 2015 Non-interest bearing demand deposits $ 196,786 $ 189,445 NOW accounts and Other 465,404 373,687 Money Market / Savings 187,228 174,090 Time Deposits of less than $100,000 78,785 73,865 Time Deposits of $100,000 or more 143,586 105,608 Total deposits $ 1,071,789 $ 916,695 Percentage of Total Deposits Non-interest bearing demand deposits 18.4 % 20.7 % NOW accounts and other 43.4 % 40.8 % Money Market / Savings 17.5 % 19.0 % Time Deposits of less than $100,000 7.4 % 8.0 % Time Deposits of $100,000 or more 13.3 % 11.5 % Total 100.00 % 100.00 % OTHER INTEREST-BEARING LIABILITIESThe Company’s non-deposit borrowings may, at any given time, include fed funds purchased from correspondent banks, borrowings from the Federal Home Loan Bank, advances from the Federal Reserve Bank, securities sold under agreement to repurchase, and/or junior subordinated debentures. The Company uses short-term FHLB advances and fed funds purchased on uncommitted lines to support liquidity needs created by seasonal deposit flows, to temporarily satisfy funding needs from increased loan demand, and for other short-term purposes. The FHLB line is committed, but the amount of available credit depends on the level of pledged collateral.Total non-deposit interest-bearing liabilities decreased by $42.3 million, or 35.1%, in the first nine months of 2016, due to a reduction in notes payable to the Federal Home Loan Bank and fed funds purchased. We had no overnight fed funds purchased at September 30, 2016, relative to $5.3 million in fed funds purchased at December 31, 2015. Repurchase agreements remained unchanged for both periods at $5 million. The Company had junior subordinated debentures totaling $10.3 million at September 30, 2016 and December 31, 2015, in the form of long-term borrowings from trust subsidiaries formed specifically to issue trust preferred securities.OTHER NON-INTEREST BEARING LIABILITIESOther liabilities are principally comprised of accrued interest payable and other accrued but unpaid expenses. Other liabilities declined by $517,000, or 12.5%, during the first nine months of 2016, due to the reduction in other accrued but unpaid expenses.liquidity and market RisK MANAGEMENTLIQUIDITYLiquidity management refers to the Company’s ability to maintain cash flows that are adequate to fund operations and meet other obligations and commitments in a timely and cost-effective manner. Detailed cash flow projections are reviewed by Management on a monthly basis, with various scenarios applied to assess our ability to meet liquidity needs under adverse conditions. Liquidity ratios are also calculated and reviewed on a regular basis. While those ratios are merely indicators and are not measures of actual liquidity, they are closely monitored and we are focused on maintaining adequate liquidity resources to draw upon should unexpected needs arise.The Company, on occasion, experiences cash needs as the result of loan growth, deposit outflows, asset purchases or liability repayments. To meet short-term needs, the Company can borrow overnight funds from other financial institutions, draw advances via Federal Home Loan Bank lines of credit, or solicit brokered deposits if deposits are not immediately obtainable from local sources. The net availability on lines of credit from the FHLB totaled $240.6 million at September 30, 2016. Furthermore, funds can be obtained by drawing down the Company’s correspondent bank deposit accounts, or by liquidating unpledged investments or other readily saleable assets. In addition, the Company can raise immediate cash for temporary needs by selling under agreement to repurchase those investments in its portfolio which are not pledged as collateral. As of September 30, 2016, the market value of unpledged debt securities plus pledged securities in excess of current pledging requirements comprised $98.6 million of the Company’s investment balances, compared to $66 million at December 31, 2015. The increase in unpledged debt from September 2016 compared to December 2015 is primarily due to an increase in letters of credit utilized for pledging purposes. Other forms of balance sheet liquidity include but are not necessarily limited to any outstanding fed funds sold and vault cash. The Company has a higher level of actual balance sheet liquidity than might otherwise be the case, since we utilize a letter of credit from the FHLB rather than investment securities for certain pledging requirements. That letter of credit, which is backed by loans that are pledged to the FHLB by the Company, totaled $84.0 million at September 30, 2016. Management is of the opinion that available investments and other potentially liquid assets, along with the standby funding sources it has arranged, are more than sufficient to meet the Company’s current and anticipated short-term liquidity needs.The Company’s liquidity ratio as of September 30, 2016 was 14.46%, as compared to internal policy guidelines of 10% minimum. Other liquidity ratios reviewed include the following along with policy guidelines: Sept. 30, 2016 Policy
Maximum Loans to Deposits (including FHLB advances) 74.69 % 90.00 % In Policy Net Non-core Funding Dependency Ratio 9.91 % 20.00 % In Policy Fed Funds Purchased / Total Assets 0.39 % 10.00 % In Policy FHLB Advances / Total Assets 5.06 % 20.00 % In Policy FRB Advances / Total Assets 0.00 % 10.00 % In Policy Pledged Securities to Total Securities 68.73 % 90.00 % In Policy Continued growth in core deposits and relatively high levels of potentially liquid investments have had a positive impact on our liquidity position in recent periods, but no assurance can be provided that our liquidity will continue at current robust levels.The holding company’s primary uses of funds are ordinary operating expenses and stockholder dividends, and its primary source of funds is dividends from the Bank since the holding company does not conduct regular banking operations. Management anticipates that the Bank will have sufficient earnings to provide dividends to the holding company to meet its funding requirements for the foreseeable future. Both the holding company and the Bank are subject to legal and regulatory limitations on dividend payments, as outlined in Item 5(c) Dividends in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 which was filed with the SEC.INTEREST RATE RISK MANAGEMENTMarket risk arises from changes in interest rates, exchange rates, commodity prices and equity prices. The Company does not engage in the trading of financial instruments, nor does it have exposure to currency exchange rates. Our market risk exposure is primarily that of interest rate risk, and we have established policies and procedures to monitor and limit our earnings and balance sheet exposure to changes in interest rates. The principal objective of interest rate risk management is to manage the financial components of the Company’s balance sheet in a manner that will optimize the risk/reward equation for earnings and capital under a variety of interest rate scenarios.To identify areas of potential exposure to interest rate changes, we utilize commercially available modeling software to perform earnings simulations and calculate the Company’s market value of portfolio equity under varying interest rate scenarios every month. The model imports relevant information for the Company’s financial instruments and incorporates Management’s assumptions on pricing, duration, and optionality for anticipated new volumes. Various rate scenarios consisting of key rate and yield curve projections are then applied in order to calculate the expected effect of a given interest rate change on interest income, interest expense, and the value of the Company’s financial instruments. The rate projections can be shocked (an immediate and parallel change in all base rates, up or down), ramped (an incremental increase or decrease in rates over a specified time period), economic (based on current trends and econometric models) or stable (unchanged from current actual levels).We use seven standard interest rate scenarios in conducting our 12-month net interest income simulations: “static,” upward shocks of 100, 200, 300 and 400 basis points, and downward shocks of 100, and 200 basis points. Pursuant to policy guidelines, we typically attempt to limit the projected decline in net interest income relative to the stable rate scenario to no more than 5% for a 100 basis point (bp) interest rate shock, 10% for a 200 bp shock, 15% for a 300 bp shock, and 20% for a 400 bp shock. As of September 30, 2016 the Company had the following estimated net interest income sensitivity profile, without factoring in any potential negative impact on spreads resulting from competitive pressures or credit quality deterioration:September 30, 2016 Net Interest Income at Risk ($ In Thousands) -200 bp -100 bp STATIC +100 bp +200 bp +300 bp +400 bp Net Interest Income 35,804 36,395 37,348 37,801 38,398 38,933 39,422 Dollar Change -1,544 -953 - 453 1,050 1,585 2,074 NII @ Risk - Sensitivity Y1 -4.13 % -2.55 % - 1.21 % 2.81 % 4.25 % 5.55 % If there were an immediate and sustained downward adjustment of 200 basis points in interest rates, all else being equal, net interest income over the next twelve months would likely be around $1.5 million lower than in a stable interest rate scenario, for a negative variance of 4.13%. The unfavorable variance increases if rates were to drop below 200 basis points, due to the fact that certain deposit rates are already relatively low (on NOW accounts and savings accounts, for example), and will hit a natural floor of close to zero while non-floored variable-rate loan yields continue to drop. This effect is exacerbated by accelerated prepayments on fixed-rate loans and mortgage-backed securities when rates decline, although rate floors on some of our variable-rate loans partially offset other negative pressures. While we view further interest rate reductions as highly unlikely, the potential percentage drop in net interest income exceeds our internal policy guidelines in declining interest rate scenarios and we will continue to monitor our interest rate risk profile and take corrective action as deemed appropriate.Net interest income would likely improve by $1.0 million, or 2.81%, if interest rates were to increase by 200 basis points relative to a stable interest rate scenario, with the favorable variance expanding the higher interest rates rise. The initial increase in rising rate scenarios will be limited to some extent by the fact that some of our variable-rate loans are currently at rate floors, resulting in a re-pricing lag while base rates are increasing to floored levels, but the Company still appears well-positioned to benefit from a material upward shift in the yield curve.The Company’s one year cumulative GAP ratio is approximately 178.94%, which means that there are more assets repricing than liabilities within the first year. The Company is “asset-sensitive.” These results are based on cash flows from assumptions of assets and liabilities that reprice (maturities, likely calls, prepayments, etc.) Typically, the net interest income of asset-sensitive companies should improve with rising rates and decrease with declining rates.In addition to the net interest income simulations shown above, we run stress scenarios modeling the possibility of no balance sheet growth, the potential runoff of “surge” core deposits which flowed into the Company in the most recent economic cycle, and potential unfavorable movement in deposit rates relative to yields on earning assets. Even though net interest income will naturally be lower with no balance sheet growth, the rate-driven variances projected for net interest income in a static growth environment are similar to the changes noted above for our standard projections. When a greater level of non-maturity deposit runoff is assumed or unfavorable deposit rate changes are factored into the model, projected net interest income in declining rate and flat rate scenarios does not change materially relative to standard growth projections. However, the benefit we would otherwise experience in rising rate scenarios is minimized and net interest income remains relatively flat.The economic value (or “fair value”) of financial instruments on the Company’s balance sheet will also vary under the interest rate scenarios previously discussed. The difference between the projected fair value of the Company’s financial assets and the fair value of its financial liabilities is referred to as the economic value of equity (“EVE”), and changes in EVE under different interest rate scenarios are effectively a gauge of the Company’s longer-term exposure to interest rate risk. Fair values for financial instruments are estimated by discounting projected cash flows (principal and interest) at projected replacement interest rates for each account type, while the fair value of non-financial accounts is assumed to equal their book value for all rate scenarios. An economic value simulation is a static measure utilizing balance sheet accounts at a given point in time, and the measurement can change substantially over time as the characteristics of the Company’s balance sheet evolve and interest rate and yield curve assumptions are updated.The change in economic value under different interest rate scenarios depends on the characteristics of each class of financial instrument, including stated interest rates or spreads relative to current or projected market-level interest rates or spreads, the likelihood of principal prepayments, whether contractual interest rates are fixed or floating, and the average remaining time to maturity. As a general rule, fixed-rate financial assets become more valuable in declining rate scenarios and less valuable in rising rate scenarios, while fixed-rate financial liabilities gain in value as interest rates rise and lose value as interest rates decline. The longer the duration of the financial instrument, the greater the impact a rate change will have on its value. In our economic value simulations, estimated prepayments are factored in for financial instruments with stated maturity dates, and decay rates for non-maturity deposits are projected based on historical patterns and Management’s best estimates. The table below shows estimated changes in the Company’s EVE as of September 30, 2016, under different interest rate scenarios relative to a base case of current interest rates: Balance Sheet Shock ($ In Thousands) -200 bp -100 bp STATIC
(Base) +100 bp +200 bp +300 bp +400 bp Market Value of Equity 255,467 243,463 253,332 288,957 318,948 343,996 365,035 Change in EVE from base 2,135 -9,869 35,625 65,616 90,664 111,703 % Change 0.84 % -3.90 % 14.06 % 25.90 % 35.79 % 44.09 % Policy Limits -20.00 % -10.00 % -10.00 % -20.00 % -30.00 % -40.00 % The table shows that our EVE will generally deteriorate in declining rate scenarios, but should benefit from a parallel shift upward in the yield curve. As noted previously, however, Management is of the opinion that the potential for a significant rate decline is low. We also run stress scenarios for EVE to simulate the possibility of higher loan prepayment rates, unfavorable changes in deposit rates, and higher deposit decay rates. Model results are highly sensitive to changes in assumed decay rates for non-maturity deposits, in particular.CAPITAL RESOURCESAt September 30, 2016 the Company had total stockholders’ equity of $112.7 million, comprised of $5.5 million in common stock, $17.1 million in preferred stock, less than one half a million in treasury stock, $45.0 million in surplus, $42.5 million in undivided profits, $3.0 million in accumulated comprehensive income for available for sale securities. Total stockholders’ equity at the end of 2015 was $103.4 million. The increase of $9.2 million, or 8.9%, in stockholders’ equity during the first nine months of 2016 is comprised of capital added via net earnings of $7.8 million, $1.9 million increase in accumulated comprehensive income for available for sale securities, offset by $.9 million in cash dividends paid.The Company uses a variety of measures to evaluate its capital adequacy, including risk-based capital and leverage ratios that are calculated separately for the Company and the Bank. Management reviews these capital measurements on a quarterly basis and takes appropriate action to help ensure that they meet or surpass established internal and external guidelines. As permitted by the regulators for financial institutions that are not deemed to be “advanced approaches” institutions, the Company has elected to opt out of the Basel III requirement to include accumulated other comprehensive income in risk-based capital. The following table sets forth the Company’s and the Bank’s regulatory capital ratios as of the dates indicated.Regulatory Capital RatiosThe First, ANBA September 30,
2016 December 31,
2015 Minimum
Required to be
Well
Capitalized Common Equity Tier 1 Capital Ratio 10.43 % 11.04 % 6.50 % Tier 1 Capital Ratio 10.43 % 11.04 % 8.00 % Total Capital Ratio 11.18 % 11.81 % 10.00 % Tier 1 Leverage Ratio 8.49 % 8.62 % 5.00 % Regulatory Capital RatiosThe First Bancshares, Inc. September 30,
2016 December 31,
2015 Minimum
Required to be
Well
Capitalized Common Equity Tier 1 Capital Ratio* 7.81 % 8.10 % 6.50 % Tier 1 Capital Ratio** 10.47 % 11.09 % 8.00 % Total Capital Ratio 11.23 % 11.86 % 10.00 % Tier 1 Leverage Ratio 8.53 % 8.66 % 5.00 % * The numerator does not include Preferred Stock and Trust Preferred.** The numerator includes Preferred Stock and Trust Preferred.Regulatory capital ratios slightly decreased from December 31, 2015 to September 30, 2016 as asset growth outpaced capital formation. Our capital ratios remain very strong relative to the median for peer financial institutions, and at September 30, 2016 were well above the threshold for the Company and the Bank to be classified as “well capitalized,” the highest rating of the categories defined under the Bank Holding Company Act and the Federal Deposit Insurance Corporation Improvement Act of 1991. We do not foresee any circumstances that would cause the Company or the Bank to be less than well capitalized, although no assurance can be given that this will not occur.PART I - FINANCIAL INFORMATIONITEM NO. 3QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKThe information concerning quantitative and qualitative disclosures about market risk is included in Part I, Item 2 above. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Market Risk Management.”PART I - FINANCIAL INFORMATIONITEM NO. 4CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and ProceduresAs of September 30, 2016, (the “Evaluation Date”), we carried out an evaluation, under the supervision of and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.Changes in Internal ControlsThere have been no changes, significant or otherwise, in our internal controls over financial reporting that occurred during the quarter ended September 30, 2016, that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.PART II – OTHER INFORMATIONITEM 1: LEGAL PROCEEDINGSThe Company is involved in various legal proceedings in the normal course of business. In the opinion of Management, any liability resulting from such proceedings would not have a material adverse effect on the Company’s financial condition or results of operation.ITEM 1A: RISK FACTORSThere are no material changes in the Company’s risk factors since December 31, 2015. For additional information on risk factors, refer to Part I, Item 1A. “Risk Factors” of the Annual Report on Form 10-K of The First Bancshares, Inc., filed with the Securities and Exchange Commission on March 30, 2016.ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSNot applicableITEM 3: DEFAULTS UPON SENIOR SECURITIESNot applicableITEM 4: (REMOVED AND RESERVED)Item 5: Other InformationNot applicableITEM 6: EXHIBITS -(a) ExhibitsExhibit No.Description3.1Amended and Restated Articles of Incorporation of The First Bancshares, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on July 28, 2016.3.2 Amended and Restated Bylaws of The First Bancshares, Inc. effective as of March 17, 2016 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on March 18, 2016.4.1Form of Certificate of Common Stock (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement No. 333-137198 on Form S-1 filed on 9/8/2006.31.1 Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1Certification of principal executive officer pursuant to 18 U. S. C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.32.2Certification of principal financial officer pursuant to 18 U. S. C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct of 2002.101.INSXBRL Instance Document101.SCHXBRL Taxonomy Extension Schema101.CALXBRL Taxonomy Extension Calculation Linkbase101.DEFXBRL Taxonomy Extension Definition Linkbase101.LABXBRL Taxonomy Extension Label Linkbase101.PREXBRL Taxonomy Extension Presentation LinkbaseSIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.THE FIRST BANCSHARES, INC.(Registrant)/s/ M. RAY (HOPPY)COLE, JR.November 9, 2016M. Ray (Hoppy) Cole, Jr.(Date)Chief Executive Officer/s/ DEE DEE LOWERY November 9, 2016Dee Dee Lowery, Executive(Date)Vice President and Chief Financial OfficerExhibit 31.1Certificate pursuant to Rule 13a-14(a) or 15d-14(a) of Securities Exchange Act of 1934 as adopted pursuant to section 302 of Sarbanes-Oxley Act of 2002-Chief Executive OfficerI, M. Ray (Hoppy) Cole, Jr., certify that:1.I have reviewed this quarterly report on Form 10-Q of The 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 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 Rules 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; and5.The registrant's other certifying officer 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:November 9, 2016/s/ M. Ray (Hoppy)Cole, Jr.M. Ray (Hoppy) Cole, Jr.Chief Executive OfficerA signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to The First Bancshares, Inc., and will be retained by The First Bancshares, Inc., and furnished to the Securities and Exchange Commission or its staff upon request.Exhibit 31.2Certificate pursuant to Rule 13a-14(a) or 15d-14(a) of Securities Exchange Act of 1934 as adopted pursuant to section 302 of Sarbanes-Oxley Act of 2002-Principal Accounting and Financial OfficerI, DeeDee Lowery, certify that:1.I have reviewed this quarterly report on Form 10-Q of The 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 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 Rules 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; and5.The registrant's other certifying officer 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:November 9, 2016/s/ Dee Dee LoweryDee Dee Lowery, Executive VicePresident and Chief Financial OfficerA signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to The First Bancshares, Inc., and will be retained by The First Bancshares, Inc., and furnished to the Securities and Exchange Commission or its staff upon request.Exhibit 32.1Certification pursuant to 18 U.S.C., Section 1350as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002In connection with the Quarterly Report on Form 10-Q of The First Bancshares, Inc. (the "Company") for the period ended September 30, 2016, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, M. Ray (Hoppy) Cole, Jr., the Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:1) the Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company./s/ M. Ray (Hoppy) Cole, Jr.Name:M. Ray (Hoppy) Cole, Jr.Title:Chief Executive OfficerDate:November 9, 2016A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to The First Bancshares, Inc., and will be retained by The First Bancshares, Inc., and furnished to the Securities and Exchange Commission or its staff upon request.This certification shall not be deemed filed by the Company for purposes of § 18 of the Securities Exchange Act of 1934, as amended.Exhibit 32.2Certification pursuant to 18 U.S.C., Section 1350as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002In connection with the Quarterly Report on Form 10-Q of The First Bancshares, Inc. (the "Company") for the period ended September 30, 2016, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Dee Dee Lowery, the Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:1) the Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company./s/ Dee Dee LoweryName:Dee Dee LoweryTitle:Executive Vice President and Chief Financial OfficerDate:November 9, 2016A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to The First Bancshares, Inc., and will be retained by The First Bancshares, Inc., and furnished to the Securities and Exchange Commission or its staff upon request.This certification shall not be deemed filed by the Company for purposes of § 18 of the Securities Exchange Act of 1934, as amended.PROXY SOLICITED FOR SPECIAL MEETINGOF SHAREHOLDERS OF THE FIRST BANCSHARES, INC.TO BE HELD ON DECEMBER 29, 2016THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.The undersigned hereby appoints M. Ray “Hoppy” Cole, Jr. as Proxy with the power to appoint his substitute and hereby authorizes him to represent the undersigned, and to vote upon all matters described in the Proxy Statement furnished herewith, subject to any directions indicated herein, with full power to vote all shares of common stock of The First Bancshares, Inc. held of record by the undersigned on November 17, 2016, at the Special Meeting of Shareholders to be held on December 29, 2016 or any adjournment(s) thereof.IF NO DIRECTIONS ARE GIVEN, THE PROXIES WILL VOTE FOR EACH NOMINEE LISTED BELOW AND AT THE DISCRETION OF THE PERSON NAMED ABOVE IN CONNECTION WITH ANY OTHER BUSINESS PROPERLY COMING BEFORE THE MEETING.The Board of Directors recommends you vote FOR Proposals 1 and 2PROPOSAL 1: To approve the issuance of shares of common stock upon the conversion of the Company’s Series E Non-Voting Convertible Preferred Stock into common stock. ¨FOR¨AGAINST¨ABSTAINPROPOSAL 2: To approve the adjournment of the Special Meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the Special Meeting to adopt Proposal 1. ¨FOR¨AGAINST¨ABSTAINSignature:Signature:Dated:__________________________, 2016Votes must be indicated by an (x) in Black or Blue Ink.PLEASE MARK, SIGN, DATE AND RETURN THE PROXY PROMPTLY USING THE ENCLOSED ENVELOPE.