1 SCHEDULE 14A (RULE 14A-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. ) Filed by the Registrant [X] 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-11(c) or 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. [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. (1) Title of each class of securities to which transaction applies: (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): (4) Proposed maximum aggregate value of transaction: (5) Total fee paid: [ ] 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. (1) Amount Previously Paid: (2) Form, Schedule or Registration Statement No.: (3) Filing Party: (4) Date Filed: 2 THE FIRST BANCSHARES, INC. 6480 U.S. HIGHWAY 98 WEST HATTIESBURG, MISSISSIPPI 39402 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 28, 1998 TO OUR SHAREHOLDERS: You are cordially invited to attend the 1998 Annual Meeting of Shareholders (the "Annual Meeting") of The First Bancshares, Inc. (the "Company"), the holding company for The First National Bank of South Mississippi. This letter serves as notice that the Annual Meeting will be held at The First Bancshares, 6480 U.S. Highway 98 West, Hattiesburg, Mississippi 39402 on Tuesday, April 28, 1998, at 5:00 p.m., for the following purposes: 1. To elect three members to the Board of Directors; and 2. To transact such other business as may properly come before the Annual Meeting or any adjournment thereof. Only shareholders of record at the close of business on March 9, 1998 are entitled to notice of, and to vote at, the Annual Meeting and at any continuation or adjournment thereof. In addition to the specific matters to be acted upon, there also will be a report on the operations of the Company, and directors and officers of the Company will be present to respond to your questions. Whether or not you plan to attend the annual meeting, please complete, sign, date and return the accompanying proxy in the enclosed postage-paid envelope as promptly as possible. In accordance with the Mississippi Business Corporation Act, a list of shareholders entitled to vote at the Annual Meeting shall be open to the examination of any shareholder for any purpose germane to the Annual Meeting upon written notice during regular business hours at the Company's offices located at 6480 U.S. Highway 98 West, Hattiesburg, Mississippi 39402, beginning on the date on which notice of the meeting is given, and the list shall be available for inspection at the Annual Meeting by any shareholder that is present. Please use this opportunity to take part in the affairs of the Company by voting on the business to come before this Annual Meeting. We look forward to seeing you at the Annual Meeting. By Order of the Board of Directors, /s/ David E. Johnson ----------------------- David E. Johnson Chief Executive Officer Hattiesburg, Mississippi March 18, 1998 3 THE FIRST BANCSHARES, INC. 6480 U.S. HIGHWAY 98 WEST HATTIESBURG, MISSISSIPPI 39402 PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 28, 1998 This Proxy Statement and the accompanying Notice of Annual Meeting and Proxy Card are being furnished to the shareholders of The First Bancshares, Inc., a Mississippi corporation (the "Company") and the holding company for The First National Bank of South Mississippi, in connection with the solicitation of proxies by the Board of Directors (the "Board") of the Company for use at the 1998 Annual Meeting of Shareholders (the "Annual Meeting"). The Annual Meeting will be held on Tuesday, April 28, 1998, at 5:00 p.m., at The First Bancshares, Inc., 6480 U.S. Highway 98 West, Hattiesburg, Mississippi 39402. VOTING AND REVOCABILITY OF PROXY APPOINTMENTS The Company has fixed March 9, 1998 as the record date (the "Record Date") for determining the shareholders entitled to notice of and to vote at the Meeting. The Company's only class of stock is its Common Stock, par value $1.00 per share (the "Common Stock"). At the close of business on the Record Date, there were outstanding and entitled to vote 721,848 shares of Common Stock of the Company with each share being entitled to one vote. There are no cumulative voting rights. A majority of the outstanding shares of Common Stock represented at the Meeting, in person or by proxy, will constitute a quorum. All proxies will be voted in accordance with the instructions contained in the proxies. If no choice is specified, proxies will be voted "FOR" the election to the Board of Directors of all the nominees listed below under "ELECTION OF DIRECTORS" and, at the proxy holder's discretion, on any other matter that may properly come before the Meeting. Any shareholder may revoke a proxy given pursuant to this solicitation prior to the Meeting by delivering an instrument revoking it or by delivering a duly executed proxy bearing a later date to the Secretary of the Company. A shareholder may elect to attend the Meeting and vote in person even if he or she has a proxy outstanding. Management of the Company is not aware of any other matter to be presented for action at the Meeting other than those mentioned in the Notice of Annual Meeting of Shareholders and referred to in this Proxy Statement. If any other matters come before the Meeting, it is the intention of the persons named in the enclosed Proxy to vote on such matters in accordance with their judgment. SOLICITATION The costs of preparing, assembling and mailing the proxy materials and of reimbursing brokers, nominees, and fiduciaries for the out-of-pocket and clerical expenses of transmitting copies of the proxy materials to the beneficial owners of shares held of record will be borne by the Company. Certain officers and regular employees of the Company or its subsidiaries, without additional compensation, may use their personal efforts, by telephone or otherwise, to obtain proxies in addition to this solicitation by mail. The Company expects to reimburse brokers, banks, custodians and other nominees for their reasonable out-of-pocket expenses in handling proxy materials for beneficial owners of the Common Stock. 4 PROPOSAL NO. 1: ELECTION OF DIRECTORS The Company's Bylaws provides that the Board of Directors shall be divided into three classes with each class to be as nearly equal in number as possible. The Bylaws also provide that the three classes of directors are to have staggered terms, so that the terms of only approximately one-third of the Board members will expire at each annual meeting of shareholders. The current Class I directors are Perry E. Parker, Ted E. Parker, Dennis L. Pierce, and A. L. Smith. The current Class II directors are John Hudson, David E. Johnson, Dawn T. Parker, Andrew D. Stetelman, and Charles T. Ruffin. The current Class III directors are David W. Bomboy, E. Ricky Gibson, and Fred A. McMurry. The current terms of the Class III directors will expire at the Meeting. Each of the three current Class III directors has been nominated for reelection and will stand for election at the Meeting for a three year term. The terms of the Class I directors will expire at the 1999 Annual Shareholders Meeting, and the terms of the Class II directors will expire at the 2000 Annual Shareholders Meeting. It is the intention of the persons named as proxies in the accompanying proxy to vote FOR the election of the nominees identified below to serve for a three-year term, expiring at the 2001 Annual Meeting of Shareholders. If any nominee is unable or fails to accept nomination or election (which is not anticipated), the persons named in the proxy as proxies, unless specifically instructed otherwise in the proxy, will vote for the election in his stead of such other person as the Company's existing Board of Directors may recommend. The directors shall be elected by a plurality of the votes cast at the Meeting. Abstentions and broker non-votes will not be considered to be either affirmative or negative votes. Set forth below is certain information about the nominees, including each nominee's age, position with the Company, and position with the Bank. All of the nominees are nominated as Class III directors and are currently serving as directors of the Company. Each of the directors has been a director of the Company since 1995, with the exception of Charles T. Ruffin, who was elected in 1997. THE BOARD RECOMMENDS A VOTE "FOR" THE ELECTION OF EACH OF THE NOMINATED INDIVIDUALS. David Waldron Bomboy, M.D. 52, is a Class III director, and is nominated for reelection at the meeting, was born in 1946 and is a lifelong resident of Hattiesburg, Mississippi. He graduated 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 nineteen years. A vestry member of the Trinity Episcopal Church, Dr. Bomboy is also a member of the United Way of Southeast Mississippi, the Family Y, the Mississippi State Medical Association, and the American Medical Association. Currently, he is the president of the Physicians Healthcare Network and a member of the executive committee of the Mississippi Orthopedic Society. He is the past president of the Methodist Hospital Medical Staff. E. Ricky Gibson, 41, is a Class III director, and is nominated for reelection at the meeting, is president and owner of N&H Electronic, Inc., a wholesale electronics distributor, since 1988 and Mid South Electronics, a wholesale consumer electronics distributor, since 1993. He is active in the Parkway Heights United Methodist Church. Mr. Gibson attended the University of Southern Mississippi. He was born in Hattiesburg, Mississippi in 1956. 2 5 John Hudson, 56, is a Class II director, was born in 1941 in Purvis, Mississippi and is a lifelong resident of Purvis, Mississippi. Prior to 1992, Mr. Hudson was an appraiser for, and assistant to the southern division manager of, the Louisiana Pacific Corporation in Purvis, Mississippi. He managed five lumber manufacturing mills. From 1992 to 1995, he was the owner and president of R&R Trucking. Mr. Hudson is a councilman and a member of the finance committee of the Purvis Church of God. He also served on the Purvis City Council for eleven years. David E. Johnson, 44, is a Class II director, received a B.S. degree in Agricultural Economics in 1975 and an M.B.A. degree, with emphasis in Finance, in 1977 from Mississippi State University. In 1990, he graduated from the University of Oklahoma Commercial Lending and Graduate School. Mr. Johnson has completed various OMEGA lending courses and has taught a course at the University of Mississippi School of Banking. From 1993 to 1994, he served as chairman of the Southern Mississippi Group of Robert Morris & Associates. From 1987 to 1995, Mr. Johnson was with Sunburst Bank, now merged with Union Planters National Bank, as senior lender for the Hattiesburg branch and later as senior lender and credit administrator for southern Mississippi. He was responsible for approving loans and maintaining the credit quality of a $250 million portfolio of consumer, mortgage, and commercial loans. Currently, he is a member of the First Baptist Church, the Hattiesburg Racquet Club, and the Hattiesburg Rotary Club. He was born in Laurel, Mississippi in 1953. Fred A. McMurry, 33, is a Class III director, and is nominated for reelection at the meeting, has lived in Oak Grove for the past 30 years. Since 1985, he has been the vice president and general manager of Harvard Pest Control, Inc., a family-owned business. In addition, he is vice president of Oak Grove Land Co., Inc., a family-owned property management company. He was born in 1964 in Laurel, Mississippi. Dawn T. Parker, 50, is a Class II director, earned a B.A. degree from Vanderbilt University in 1970. Prior to 1985, Mrs. Parker was the president and general manager of Terra Firma Corporation, a rental and land management company, in Hattiesburg, Mississippi. In addition, she has owned and operated a commercial art and sign company, Creative Services, located in Hattiesburg, and has been a partner in H.P. Cattle Co., located in Sumrall, Mississippi, for the past ten years. She is also president of Clear Run Cattle Co., Inc., a cattle feeding company. Mrs. Parker is a member of the Sumrall United Methodist Church and has served on the Lamar County Education Foundation Board of Directors. She was born in 1948 in Hattiesburg, Mississippi. Perry Edward Parker, 32, is a Class I director, was born in 1965 in Hattiesburg, Mississippi. He graduated from Pearl River Junior College in 1983 and the University of Southern Mississippi in 1985. He graduated from the University of Chicago Graduated School of Business in 1989 with an M.B.A. in Finance. While attending school in Chicago he worked for Goldman Sachs & Company on the Chicago Mercantile Exchange. Mr. Parker became a member of the Exchange in 1990. In 1991, he became a currency option trader for Goldman Sachs & Company. In 1995 he became a currency options trader with Deutsche Bank. He currently resides in London, England. Ted E. Parker, 38, is a Class I director, attended the University of Southern Mississippi and served as a licensed commodity floor broker at the Chicago Mercantile Exchange. He has been in the stocker-grazer cattle business for the past 15 years and is the owner of Highlander Laundry Center. He was selected as Lamar County Young Farmer and Rancher for 1993 and served as a board member 3 6 of Farm Bureau Insurance. He is a member of the National Cattlemen's Association, the Texas Cattle Feeders Association and the Sumrall United Methodist Church. Mr. Parker was born in 1960 in Hattiesburg, Mississippi. Dennis L. Pierce, 41, is a Class I director, is President of Pierce/Foote, Inc. of Baton Rouge, a real estate development company, and the owner and president of PierCon, Inc. of Hattiesburg, a general contracting firm. Through PierCon, Mr. Pierce is responsible for several commercial construction jobs, and he is also involved in numerous commercial ventures. He is the president of Dennis Pierce Inc., which has been very active in homebuilding and the development of the Hattiesburg area. In addition, Mr. Pierce is a deacon of the Lincoln Road Baptist Church; president, director, and national representative of the Hattiesburg Homebuilders Association; and a director of the North Lamar Water Association. Since 1995, he has been a member and broker with the Hattiesburg Board of Realtors. He attended the University of Southern Mississippi. He was born in 1957 in Hattiesburg, Mississippi. Charles T. Ruffin, 46, is a Class II director and the Executive Vice President and Chief Operating Officer of the Bank, was born in 1952 in Laurel, Mississippi. He received a Bachelor of Arts degree from the University of Mississippi in 1974 and a Masters of Business Administration in 1979 from the University of Southern Mississippi. Mr. Ruffin is also a graduate of Louisiana State University's Graduate School of Banking of The South. He began his banking career as management trainee with the First National Bank of Jackson (now Trustmark National Bank) and was later promoted to Assistant Vice President and Manager of Accounts Services. Mr. Ruffin was a Senior Lender and the Senior Operations officer of the People's Bank of the Delta until 1991 when he accepted employment as Senior Credit Officer with The National Bank Commerce of Mississippi at the Aberdeen Banking Center where he remained employed until 1996. Mr. Ruffin has been Executive Vice President and Chief Operating Officer with The First National Bank of South Mississippi since 1996. A.L. "Pud" Smith, 71, is a Class I director, was born in 1929 in Brooklyn, Mississippi. Before attending the University of Southern Mississippi, Mr. Smith was in the military. He entered the petroleum business in 1960, starting with a service station, and today he is owner and manager of A.L. Smith Oil Company, Inc., a wholesale and retail petroleum products company. Mr. Smith's community activities range from being the Mayor of the City of Lumberton, a past president of the Jaycee's, a past president of the Lion's Club, and a member of the Rotary Club (a Paul Harris Fellow). He is an active member of the First Baptist Church where he is a deacon and has been a member of the Finance Committee for 30 years. He serves on the Stone County Economic Development Council. Andrew D. Stetelman, 37, is a Class II director, is the third generation of his family in London and Stetelman Realtors. He graduated from the University of Southern Mississippi in 1983. He has served in many capacities with the national and local Board of Realtors, where he was a past president and the Realtor of the Year in 1992. He presently serves as the chairman of the Hattiesburg Convention Center, is an ambassador for the Area Development Partnership, and is a member of Kiwanis International. Mr. Stetelman was born in 1960 in Hattiesburg, Mississippi. 4 7 COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION The following table shows the cash compensation paid by the Company to the Company's President and Chief Executive Officer for the years ended December 31, 1995 through 1997. No executive officers of the Company or the Bank earned total annual compensation, including salary and bonus, in excess of $100,000 for the fiscal year ended December 31, 1997. SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION(1) ---------------------- Name and Principal Position Year Bonus Other Annual - --------------------------- ---- Salary ----- Compensation ------ ------------ David E. Johnson, President 1997 $89,049 -- $2,000 and Chief Executive Officer 1996 $82,619 -- $1,060 1995 $50,819 -- $2,500 - ----------------------- (1) Executive officers of the Company also receive indirect compensation in the form of certain perquisites and other personal benefits. The amount of such benefits received in the fiscal year by each named executive officer did not exceed 10% of the executive's annual salary and bonus. OPTION EXERCISES AND HOLDINGS The following table sets forth information with respect to Mr. Johnson concerning the exercise of options during the last fiscal year and unexercised options held as of the end of the fiscal year. AGGREGATRED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES Number of Securities Value of Unexercised Underlying In-the-Money Options Unexercised Options at Fiscal Year at Fiscal Year End End(1)($) Shares Acquired (#) Exercisable/ Exercisable/ Name on Exercise (#) Value Realized ($) Unexercisable Unexercisable ---- --------------- ------------------ ------------- ------------- David E. Johnson -0- $-0- 7,218/14,436 $14,436/$28,872 Charles T. Ruffin 0 $0 2,406/4,812 $4,812/$9,624 5 8 (1) There is no active trading market for the Company's Common Stock; therefore, the fair market value of the Common Stock as of December 31, 1997 is not readily discernible. Based on the sale of the Common Stock nearest December 31, 1997 of which the Company is aware, which sale was at $12.00 per share, the Company believes that the fair market value of the Common Stock was approximately $12.00 per share on December 31, 1997. The exercise price for the option is $10.00 per share and thus based on a fair market value of $12.00 per share, all of the options are in-the-money as of December 31, 1997. On March 1997, the Board of Directors adopted a stock option plan under which directors, executive officers and certain other key employees of the Company and the Bank can receive options to purchase shares of the Company's Common Stock, and, as described below, Mr. Johnson has been granted stock options in accordance with the terms of his employment agreement with the Company. See "Employment Agreement." The Stock Option Plan was approved at the 1997 Annual Meeting of Shareholders. EMPLOYMENT AGREEMENT David E. Johnson and the Company entered into an employment agreement pursuant to which Mr. Johnson is the President and Chief Executive Officer of the Company and the President and Chief Executive Officer of the Bank. The agreement provided for a starting salary of $75,000 per annum until the date the subscription proceeds were released from escrow and now provides for $85,000 per annum, to be reviewed by the Board of Directors at least annually and increased at its discretion. Mr. Johnson will be eligible to participate in any management incentive program of the Bank or any long-term equity incentive program and be eligible for grants of stock options, restricted stock, and other awards thereunder. In addition, for the first and second years after the date the Bank opens, he will be eligible to receive a cash bonus in an amount determined by the Board of Directors. In the third year after the Bank opens, Mr. Johnson will receive a cash bonus equal to 10% of the net profits after taxes of the Bank for such year. If the term of the employment agreement is extended, Mr. Johnson will receive a minimum of 5% of the net profits after taxes of the Bank for each of the next three years of the employment agreement. In accordance with the employment agreement, the Company has granted Mr. Johnson an option to purchase 21,655 shares of Common Stock, exercisable at $10.00 per share. The options will vest at the rate of one-third per year for each of the first three years of operations of the Bank, subject to certain performance criteria (subject to accelerated vesting in the event of a change in control of the Company). The options will have a term of ten years. Additionally, Mr. Johnson will participate in the Bank's retirement, welfare and other benefit programs and is entitled to a life insurance policy and reimbursement for automobile expenses, club dues, and travel and business expenses. The initial term of the employment agreement ends on the third anniversary of the Bank's opening date and will be automatically extended for an additional three-year term unless either party serves written notice of its intent not to renew. In the event that the Company does not renew the employment agreement, the Company will pay Mr. Johnson his current monthly base salary for a period of an additional six months. In addition, after a change in control, Mr. Johnson will have the option of (i) automatically extending the term of the employment agreement for three years from the date of the change in control or (ii) receiving, within fifteen days of the change in control, any sums due him thereunder and, in one lump sum payment, severance compensation in an amount equal to three times his then current annual 6 9 base salary. Furthermore, in the event of a change in control, the Company must remove any restrictions on outstanding incentive awards so that all such awards vest immediately. If Mr. Johnson (i) is terminated for cause (other than termination for behavior which is materially disruptive to the orderly conduct of the Company's business operations as determined in the good faith judgment of the Board of Directors), then for the remaining term of the employment agreement, or (ii) resigns for any reason other than following a change in control, then for a period of one year following the date of resignation, Mr. Johnson may not (a) be employed in the banking business as a director, officer, or organizer, or promoter of, or consultant to, or acquire more than a 1% passive investment in, any financial institution within the Territory, (b) solicit customers of the Company or its affiliates for the purpose of providing financial services, or (c) solicit employees of the Company or its affiliates for employment. Under the Employment Agreement, "Territory" means a radius of 25 miles from (i) the main office of the Bank, (ii) any branch office of the Bank, or (iii) any office of the Company. The Company currently maintains a key man life insurance policy on Mr. Johnson in the amount of $1,000,000, with the proceeds payable to the Company. DIRECTOR COMPENSATION The Company or the Bank did not pay directors' fees during the last fiscal year, and does not presently intend to pay directors' fees in the initial years of operation. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires (i) the Company's directors and executive officers and (ii) persons who own more than 10% of a registered class of the Company's equity securities to file with the Securities and Exchange Commission (the "SEC"), within certain specified time periods, reports of ownership and changes in ownership. Such officers, directors, and shareholders are required by SEC regulations to furnish the Company with copies of all such reports that they file. To the Company's knowledge, based solely upon a review of copies of such reports furnished to the Company and representations that no other reports were required with respect to the year ended December 31, 1997, all persons subject to the reporting requirements of Section 16(a) filed the required reports on a timely basis with respect to 1997. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT GENERAL The following table sets forth the number and percentage of outstanding shares of Common Stock beneficially owned at the Record Date by (a) the President and Chief Executive Officer of the Company, (b) each director of the Company, (c) all executive officers and directors of the Company as a group, and (d) each person or entity known to the Company to own more than 5% of the outstanding Common Stock. 7 10 Shares Beneficially Owned ---------------------------------------------- Name Number of Shares(1) Percent(2) ------------------- ---------- David W. Bomboy 28,000 3.88% E. Ricky Gibson(3) 15,500 2.15% John Hudson(4) 38,100 5.28% David E. Johnson(5) 24,942 3.45% Fred A. McMurry 15,000 2.08% Dawn T. Parker(6) 32,100 4.45% Perry Edward Parker 26,250 3.64% Ted E. Parker(7) 11,520 1.60% Dennis L. Pierce 10,000 1.39% Charles T. Ruffin(8) 5,149 0.71% A.L. Smith 10,000 1.39% Andrew D. Stetelman(9) 10,300 1.43% Executive officers and directors as a group 226,861 31.45% (12 persons) - --------------------------------- (1) Information relating to the beneficial ownership of Common Stock is based upon "beneficial ownership" concepts set forth in rules of the Securities Exchange Commission under Section 13(d) of the Securities Exchange Act of 1934. Under these rules a person is deemed to be a "beneficial owner" of a security if that person has or shares "voting power," which includes the power to vote or direct the voting of each security, or "investment power," which includes the power to dispose or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any security of which that person has the right to acquire beneficial ownership within 60 days, including, without limitation, shares of Common Stock subject to currently exercisable options. Under the rules, more than one person may be deemed to be a beneficial owner of the same securities, and a person may be deemed to be a beneficial owner of securities as to which he has no beneficial interest. For instance, beneficial ownership includes spouses, minor children, and other relatives residing in the same household, and trusts, partnerships, corporations or deferred compensation plans which are affiliated with the principal. (2) Percent is calculated by treating shares subject to options held by the named individual for whom the percentage is held by the named individual for whom the percentage is calculated which are exercisable within the next 60 days as if outstanding, but treating shares subject to options held by another stockholder as not outstanding. (3) Includes 500 shares for which the beneficial ownership is attributable to Mr. Gibson as a result of his son's ownership of 250 shares and his daughter's ownership of 250 shares. (4) Includes 4,100 shares for which the beneficial ownership is attributable to Mr. Hudson as a result of his wife's ownership of 1,100 shares and his grandchildren's ownership of a total of 3,000 shares. 8 11 (5) Includes 1,362 shares for which the beneficial ownership is attributable to Mr. Johnson as a result of his wife's ownership of 1,162 shares and his daughters' ownership of 200 shares. Includes currently exercisable options to purchase a total of 7,218 shares of Common Stock. (6) Includes 5,850 shares for which the beneficial ownership is attributable to Mrs. Parker as a result of her children's ownership of 5,850 shares. (7) Includes 1,520 shares for which the beneficial ownership is attributable to Mr. Parker as a result of his wife's ownership of 1,120 shares and his children's ownership of 400 shares. (8) Includes currently exercisable options to purchase a total of 2,406 shares of Common Stock. (9) Includes 300 shares for which the beneficial ownership is attributable to Mr. Stetelman as a result of his children's ownership of 300 shares. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Along with three other bidders: Carter & Mullings, Inc. Mac's Construction, Inc., and Finlo Construction Co., Inc., Dennis Pierce's company, PierCon, Inc., bid on the construction of the Bank's main office. The bid was awarded to PierCon, Inc., which submitted the lowest bid. The Company and the Bank have banking and other transactions in the ordinary course of business with organizers, directors, and officers of the Company and the Bank and their affiliates, including members of their families or corporations, partnerships, or other organizations in which such organizers, officers, or directors have a controlling interest, which the Company believes are on substantially the same terms (including price, or interest rates and collateral) as those prevailing at the time for comparable transactions with unrelated parties. Such transactions are not expected to involve more than the normal risk of collectability nor present other unfavorable features to the Company and the Bank. The Bank is subject to a limit on the aggregate amount it could lend to it and the Company's directors and officers as a group equal to its unimpaired capital and surplus (or, under a regulatory exemption available to banks with less than $100 million in deposits, twice that amount), loans to individual directors and officers must also comply with the Bank's lending policies and statutory lending limits, and directors with a personal interest in any loan application is excluded from the consideration of such loan application. MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS Among other Board committees, the Company has an audit committee, a compensation committee, and a nominating committee. The Company's audit committee is composed of Ted E. Parker, Andrew D. Stetelman, E. Ricky Gibson, and Fred A McMurry and met three times in 1997. The audit committee has the responsibility of reviewing the Company's financial statements, evaluating internal accounting controls, reviewing reports of regulatory authorities, and determining that all audits and examinations required by law are performed. The committee recommends to the Board the appointment of the independent auditors for the next fiscal year, reviews and approves the auditor's audit plans, and reviews with the independent auditors the results of the audit and management's response thereto. The audit committee is responsible for overseeing the entire audit function and appraising the effectiveness of internal and external audit efforts. The audit committee reports its findings to the Board of Directors. 9 12 The Company's compensation committee is responsible for establishing the compensation plans for the Company. Its duties include the development with management of all benefit plans for employees of the Company, the formulation of bonus plans, incentive compensation packages, and medical and other benefit plans. This committee met three times during the year ended December 31, 1997. The compensation committee is composed of John Hudson, David E. Johnson, A.L. Smith, E. Ricky Gibson, and Fred A. McMurry. The Company's nominating committee is responsible for nominating individuals for election to the Company's Board of Directors. Membership on the nominating committee changes annually. In 1997, the nominating committee met one time and consisted of E. Ricky Gibson, Dawn T. Parker, and David E. Johnson. The nominating committee welcomes recommendations made by shareholders of the Company. Any recommendations for the 1999 Annual Shareholders' Meeting should be made in writing addressed to the nominating committee of the Company's Board of Directors. The Board of Directors of the Company held four meetings, and the Board of Directors of the Bank held twelve meetings, during the year ended December 31, 1997. All of the directors of the Company and the Bank attended at least 75% of the aggregate of such board meetings and the meetings of each committee on which they served. OTHER MATTERS The Board knows of no matters other than these referred to in the Notice of the Annual Meeting to be brought before the Annual Meeting. However, if any other matter is properly brought before the Annual Meeting, it is the intention of the persons designated as proxies to vote in accordance with their best judgment on such matters. INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors has selected the accounting firm of T.E. Lott & Company as the Company's independent auditor for the 1998 fiscal year. T.E. Lott & Company served as the independent auditors for the Company for the fiscal years ended December 31, 1995, 1996, and 1997. The Company does not expect a representative from T.E. Lott & Company to be present at the Annual Meeting. SHAREHOLDER PROPOSALS FOR NEXT ANNUAL MEETING OF SHAREHOLDERS Shareholders' proposals intended to be presented at the 1999 Annual Meeting of Shareholders must be received by the Company no later than November 15, 1998 to be presented at the 1999 Annual Meeting of Shareholders or considered for inclusion in the Company's Proxy Statement and form of Proxy for that meeting. ANNUAL REPORTS COPIES OF THE COMPANY'S 1997 ANNUAL REPORT ARE BEING MAILED TO ALL SHAREHOLDERS TOGETHER WITH THIS PROXY STATEMENT. THE COMPANY WILL PROVIDE, WITHOUT CHARGE, TO ANY SHAREHOLDER OF RECORD AS OF MARCH 9, 1998 WHO SO REQUESTS IN WRITING A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1997, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. ANY SUCH REQUESTS SHOULD BE DIRECTED TO: CHARLES T. RUFFIN, THE FIRST BANCSHARES, INC., 6480 U.S. HIGHWAY 98 WEST, HATTIESBURG, MISSISSIPPI 39402. Dated: March 18, 1998 10 13 SHAREHOLDERS ARE URGED TO SPECIFY THEIR CHOICES, DATE, SIGN AND RETURN THE ENCLOSED PROXY IN THE ENCLOSED ENVELOPE, POSTAGE FOR WHICH HAS BEEN PROVIDED. YOUR PROMPT RESPONSE WILL BE APPRECIATED. 11 14 THE FIRST BANCSHARES, INC. 1997 ANNUAL REPORT THE FIRST NATIONAL BANK OF SOUTH MISSISSIPPI 15 CORPORATE PURPOSE CUSTOMERS The First National Bank of South Mississippi customers are our reason for being. They are the constant in every decision that we make. We promise to be responsive to our customers' needs by providing superior financial products and services, which will be offered in combination with the high level of personal attention our customers deserve. SHAREHOLDERS The First National Bank of South Mississippi will strive to maximize the value of our shareholders' investment and will conduct its business in a manner that will instill a sense of pride in our company. EMPLOYEES The First National Bank of South Mississippi will foster a dynamic team environment for our employees that creates opportunities for personal and professional growth. We will respect their opinions, believe in their abilities, support them and recognize their contributions to the success of the company. COMMUNITY The First National Bank of South Mississippi, as a locally-owned and managed financial institution, will be in touch with the communities that we serve, listening and responding to their credit and financial service needs. We will direct the energy and excitement of our team toward being a good friend and neighbor and toward enhancing the quality of life in our communities. 16 TABLE OF CONTENTS Letter to Shareholders ...................................................... 1 Management's Discussion and Analysis......................................... 2 Report of Independent Auditor................................................ 16 Consolidated Financial Statements............................................ 17 Notes to Consolidated Financial Statements................................... 21 Shareholder and Stock Information............................................ 37 Directors and Officers....................................................... 38 17 TO OUR SHAREHOLDERS AND FRIENDS This was an exciting year for THE FIRST. We continue to exceed our own expectations and have positioned the company for an even more exciting and projected profitable 1998. The first full year of operation for our bank was 1997, having opened our doors in August of 1996. We also opened our new main office in January of 1997 and started a mortgage department in April. During 1997, assets increased from $14.2 million to $27.5 million. Loans grew by $13 million and deposits by $13.5 million. Our loss was $263,000 for the first half of the year and we are happy to report a profit for the second half of the year of $1,000. This positions us for a good start in 1998. We had no loan charge-offs in 1997 and, in fact, had no 30-day past due loans at year-end 1997. We plan to continue to market ourselves as your "local" banking alternative. Local decision-making and flexibility have proven thus far to be a real plus with our customers. Merger activities at other institutions have created welcomed opportunities for THE FIRST. We expect these to continue to present themselves in 1998. In 1998, our plans are to open a new branch on Lincoln Road, probably in the fourth quarter of the year. This will be a 3,300 sq. ft. building very closely resembling our main office in Oak Grove. We also plan to unveil internet banking in the second quarter. These additions will make our services more available to our market of Lamar and Forrest County. As always, we appeal to you, our shareholders, to support your bank by taking advantage of our banking services. Dawn T. Parker David E. Johnson Chairman of the Board President and CEO 1 18 MANAGEMENT'S DISCUSSION & ANALYSIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is intended to further explain financial information outlined in the accompanying two year listing of selected financial data. Information contained in this data summary depicts selected totals from the Company's balance sheet and income statement for the past two years. Your attention is also directed to management's letter to shareholders at the beginning of this Annual Report. This letter further explains significant changes that occurred in the Company's operation during the past year. FINANCIAL CONDITION AND RESULTS OF OPERATIONS The First Bancshares, Inc. ("The Company") was organized June 23, 1995 (the "Inception Date"). From the Inception Date through August 2, 1996, the Company's principal activities related to its organization, the conducting of its initial stock offering, and pursuit of approval from the Office of the Comptroller of the Currency ("OCC") for its application to charter its subsidiary bank, The First National Bank of South Mississippi ("THE FIRST"). THE FIRST received it's charter and commenced operations on August 5, 1996. The Company's initial stock offering was closed on August 27, 1996 after 721,848 shares were sold at $10.00 per share generating capital of $7,218,480. At the close of business, December 31, 1997, THE FIRST concluded it first full calendar year of operations. As of year end 1997, the Company's assets totaled $27,532,060. Of this total, $990,261 was Cash and Due From Banks; $1,850,000 was Fed Funds Sold; $4,303,586 Securities comprised primarily of U.S. Gov't Agency and Mortgage Backed; $17,487,426 Loans Net of the Reserve for Loan Losses ($193,565); $2,090,225 Premises and Equipment; $841,861 Interest Receivable; and $162,266 Other Assets. Deposits as of year end 1997 totaled $22,539,143. Of this total, $2,479,084 were non-interest bearing; $4,445,832 were Time Deposits of $100,000 or more; and $15,614,227 were Other Interest Bearing deposits. Interest payable and Other Liabilities of $107,973 comprised the remaining liabilities as of yearend. Shareholder's equity totaled $6,367,704 as of December 31, 1997. Of this amount, $721,848 was Common Stock at $1 par value; $6,451,456 was representative of Additional paid-in capital from the initial stock offering; ($817,650) was representative of accumulated losses from operations to date, of which ($261,992) resulted from 1997 operating losses; and $12,051 was representative of the unrealized gain on "Available for Sale" securities at year end. The net loss per common share through year end 1997 was equal to ($.36). Net interest income, the primary source of earnings for the Company, represents earnings generated from earning assets less the interest expense of funding those assets. During 1997, earning assets grew $12,823,327. Changes in net interest income can be divided into components, the change in average earning assets (volume component) and the change in the net interest margin (rate component). Net Interest Margin (NIM) represents the difference between yields on earning assets and rates paid on interest bearing liabilities. The NIM (tax adjusted) for 1997 was 4.04%. 2 19 The Company's Provision for Loan and Lease Losses is utilized to replenish its Reserve for Loan and Lease Losses on its balance sheet. The reserve is maintained at a level deemed adequate by the Board of Directors after evaluation of credit risk and loan performance trends in the loan portfolio. The reserve amount currently maintained (1.10% of loans net of unearned)is deemed adequate to cover existing exposure within the company's loan portfolio. Non-interest income and non-interest expense reflect the impact of costs associated with beginning operations and growing the deposit base. Non-interest income includes various service charges, fees, and commissions collected by the Company; non-interest expense represents ordinary overhead expenses to include salaries, bonuses, and benefits. LIQUIDITY, ASSET/LIABILITY MANAGEMENT Liquidity may be defined as the ability of the Company to meet cash flow requirements created by decreases in deposits and/or other sources of funds or increases in loan demand. The Company has maintained an asset/liability management policy which focuses upon interest rate risk and rate sensitivity. The primary objective of rate sensitivity management is to maintain interest income growth while reducing exposure to adverse fluctuations in interest rates. The Company utilizes an Asset/Liability Management Committee which evaluates and analyzes the Company's pricing, maturities, growth, and balance sheet mix strategies in an effort to make informed decisions that will increase income and limit interest rate risk. The committee utilizes GAP Analysis generated using Asset Liability Management Software. Utilizing GAP Analysis, the bank desires to maintain a rate sensitivity position which is essentially neutral, with rate sensitive assets being equal to rate sensitive liabilities with repricing opportunities of one year or less. The Company has experienced no problem with liquidity since commencing operations and anticipates that all liquidity requirements will be met comfortably in the foreseeable future. The Company's traditional sources of funds from deposit increases, maturing loans and investments have allowed it to generate sufficient funds for liquidity needs. It is pointed out that the Company's Loan to Deposit ratio is 77.58% with a goal of 70% and a maximum of 80%. CAPITAL Current regulatory requirements call for a basic leverage ratio of 5% for a bank to be considered "well capitalized". At December 31, 1997, the Company maintained a 30.3% leverage ratio which allowed it to significantly exceed the ratio required for a "well capitalized" institution. The regulatory authorities have become increasingly interested in evaluating a financial institutions capital against its assets which have been risk weighted (high risk assets would require a higher capital allotment, lower risk assets a lower capital allotment). In this context, a "well capitalized" bank is required to have a Tier I risk based capital ratio (excludes reserve for loan losses) of 6% and a total risk based capital ratio (includes reserve for loan losses) of 10%. At the end of 1997, the Company had a Tier I ratio of 30.7% and total risk based consolidated capital of 31.7%, once again placing the company well above the consolidated level required for a "well capitalized" institution. The Company's capital position 3 20 exceeds regulatory requirements, even for "well capitalized" institutions. Management considers current capital levels to be entirely sufficient to support the needs of the Company and anticipates no events or conditions that would significantly affect the capital position. IMPACT OF INFLATION AND CHANGING PRICES The consolidated financial statements, and notes thereto, presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Bank's operations. Unlike most industrial companies, nearly all the assets and liabilities of the Bank are monetary in nature. As a result, interest rates have a greater impact on the Bank's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. SUPPLEMENTAL STATISTICAL INFORMATION I. DISTRIBUTION OF ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY; INTEREST AND INTEREST DIFFERENTIAL A. AVERAGE BALANCE SHEETS ( IN THOUSANDS ): ASSETS 1996 1997 CONSOLIDATED CONSOLIDATED CASH AND DUE FROM BANKS $3,313 $ 753 FED FUNDS SOLD AND SECURITIES $3,339 $ 6,373 PURCHASED UNDER AGREEMENTS TO RESELL LOANS, NET OF UNEARNED and RESERVE FOR LOAN LOSSES $1,432 $12,556 DEPOSITS ON LAND $ 52 $ 221 FIXED ASSETS $ 796 $ 1,956 ACCRUED INCOME $ 16 $ 552 OTHER ASSETS $ 188 $ 179 TOTAL ASSETS $9,111 $22,531 LIABILITIES AND STOCKHOLDERS' EQUITY DEPOSITS: NON-INTEREST BEARING $1,152 $ 2,030 INTEREST BEARING $2,402 $13,987 TOTAL DEPOSITS $3,554 $16,017 FED FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE $ 0 $ 0 BORROWED FUNDS $ 0 $ 0 OTHER LIABILITIES $ 25 $ 110 TOTAL LIABILITIES $2,740 $16,128 STOCKHOLDERS' EQUITY $6,371 $ 6,403 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $9,111 $22,531 4 21 B. ANALYSIS OF NET INTEREST EARNINGS The table below shows, for the periods indicated, an analysis of net interest earnings, including the average amount of interest-earning assets and interest-bearing liabilities outstanding during the period, the interest earned or paid on such accounts, the average yields/rates paid and the net yield on interest-earning assets: ($ IN THOUSANDS) USING AVERAGE BALANCES YIELDS YIELDS EARNED EARNED AND AND RATES RATES EARNING ASSETS CONSOLIDATED PAID CONSOLIDATED PAID % 1996 1997 NET LOANS $ 1,432 9.486% $12,692 9.01% INVESTMENTS FED FUNDS SOLD AND SECURITIES PURCHASED AGREEMENTS TO RESELL $ 3,339 5.597% $ 6,373 5.97% TOTALS $ 4,771 6.46% $19,065 7.99% INTEREST-BEARING LIABILITIES INTEREST-BEARING DEPOSITS $ 2,402 5.469% $13,987 5.11% BORROWED FUNDS AND FED FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENT T0 REPURCHASE $ 0 0% $ 0 0% TOTALS $ 2,402 5.469% $13,987 5.11% NET AMOUNTS $ 2,369 .991% $ 5,078 2.88% Net yield on earning assets: (1) Interest and yields on tax-exempt obligations are not on a fully taxable equivalent basis. (2) For the purpose of these computations, non-accruing loans are included in the average loan balances outstanding. 5 22 C. INCREASE (DECREASE) IN INTEREST INCOME AND INTEREST EXPENSE Since The First National Bank of South Mississippi commenced operations on August 5, 1996, comparison of the prior year to 1997 information regarding changes in Interest Income and Interest Expense is a comparison of the five months of operation in 1996 to twelve full months of operation in 1997 and should be viewed accordingly. ($ to the nearest Thousand) INTEREST INCOME 1996 1997 DIFFERENCE INTEREST ON BALANCES DUE FROM $50 $73 $23 BANKS INTEREST INCOME ON U.S. TREAS $223 $280 $57 AND AGENCY SEC. INTEREST ON OBLIGATIONS OF $0 $0 $0 STATES AND POLITICAL SUBDIVISIONS INTEREST ON OTHER SECURITIES $6 $10 $4 INTEREST ON FED FUNDS SOLD $69 $91 $22 INTEREST SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL INTEREST AND FEES ON LOANS $707 $1,144 $437 TOTAL INTEREST INCOME $1,055 $1,599 $544 INTEREST EXPENSE: INTEREST ON CERTIFICATES OF $44 $86 $42 DEPOSIT OF $100,000 OR MORE INTEREST ON OTHER DEPOSITS $425 $628 $203 INTEREST ON FED FUNDS PURCHASED $0 $0 $0 AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS INTEREST ON DEMAND NOTES ISSUED $0 $0 $0 TO THE U.S. TREASURY AND ON OTHER BORROWED MONEY TOTAL INTEREST EXPENSE $470 $714 $244 II. INVESTMENT PORTFOLIO A. The following tables present the book values of securities as of December 31, 1997. All amounts are stated in Thousands. 6 23 SECURITY DESCRIPTION CONSOLIDATED CONSOLIDATED D 1997 1996 U.S. TREASURY $0 $504 U.S. GOV'T AGENCIES AND MORTGAGE BACKED SECURITIES $4,058 $2,635 STATES AND POLITICAL SUBDIVISIONS $0 $0 OTHER $0 $658 TOTAL BOOK VALUE $4,216 $3,797 B. The following table sets forth maturities of investment and mortgage-backed securities (carrying values) at December 31, 1997, and the weighted average yield of such securities. All dollar values are stated in Thousands. 1997 0 - 1 YIELD 1 - 5 YIELD 5 - 10 YIELD SECURITIES YEAR (%) YEARS (%) YEARS (%) U.S. TREASURY $0 0% $500 6.252% $0 0% U.S. GOV'T AGENCIES $0 0% $500 6.063% $0 0% MORTGAGE BACKED $235 5.965% $0 0% $714 6.38 SECURITIES STATES AND POLITICAL $0 0% $0 0% $0 0% SUBDIVISIONS OTHER $0 0% $0 0% $0 0% TOTAL $235 5.965% $1,000 6.157% $714 6.38% GREATER THAN YIELD 10 YRS (%) MORTGAGE BACKED $2,495 6.681 SECURITIES EQUITY SECURITIES $158 6.00% TOTAL $2,653 6.76% NOTE: Interest and yields on tax-exempt obligations are not on a taxable equivalent basis. Average yield on floating rate securities was determined using the current yield. 7 24 C. Investment securities in excess of 10% of stockholders' equity. At December 31, 1997, there were no securities from any issues in excess of 10% of stockholders' equity. III. LOAN PORTFOLIO A. TYPE OF LOANS The amount of loans outstanding by type at the indicated dates are shown in the following table. All dollar amounts are expressed in Thousands. LOAN TYPE DECEMBER 31, DECEMBER 31, 1997 1996 COMMERCIAL, FINANCIAL AND AGRICULTURE $2,740 $4,341 REAL ESTATE - CONSTRUCTION $36 $7,604 REAL ESTATE - MORTGAGE $1,079 $3,314 INSTALLMENT LOANS TO INDIVIDUALS $470 $2,228 OTHER $2 $0 TOTAL LOANS $4,327 $17,487 LESS: UNEARNED INTEREST $0 $0 TOTAL LOANS NET OF UNEARNED INT. $4,327 $17,487 B. MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES. All dollar values are expressed in Thousands as of December 31, 1997. LOAN TYPE WITHIN 1 1 - 5 YEARS 5-10 10-15 OVER MATURING OR REPRICING YEAR YEARS YEARS 15 YEARS COMMERCIAL, FINANCIAL AND $3,702 $639 $0 $0 $0 AGRICULTURAL REAL ESTATE - CONSTRUCTION $5,481 2,123 $0 $0 $0 REAL ESTATE - MORTGAGE $1,744 $1,556 $14 $0 $0 INSTALLMENT LOANS TO $1,280 $940 $8 $0 $0 INDIVIDUALS TOTAL LOANS BY MATURITY OR $12,207 $5,258 $22 $0 $0 EARLIEST REPRICING DATE LOANS INCLUDED IN TOTALS ABOVE WITH: PREDETERMINED INTEREST RATES $0 $0 $0 $0 $0 FLOATING INTEREST RATES $8,973 $0 $0 $0 $0 C. NON-PERFORMING LOANS 1. As of December 31, 1997 there were no loans classified as non-performing in nature. 2. There were no loan concentrations in excess of 10% of total loans at December 31, 1997. 8 25 3. There were no outstanding foreign loans at December 31, 1997. 4. Loans classified for regulatory purposes or for internal credit review purposes that have not been disclosed in the above table do not represent or result from trends or uncertainties that management expects will materially impact the financial condition of the company or its subsidiary banks, or their future operating results, liquidity, or capital resources. 5. As of December 31, 1997, no loans were in non-accruing status and therefore interest income has not been impacted by such activity. 6. Management stringently monitors loans that are classified as non-performing. Non-performing loans include non-accrual loans, loans past due 90 days or more, and loans renegotiated or restructured because of a debtor's financial difficulties. Loans are generally placed on non-accrual status if any of the following events occur: (1) the classification of a loan as non-accrual internally or by regulatory examiners; (2) delinquency on principal for 90 days or more unless management is in the process of collection; (3) a balance remains after repossession of collateral; (4) notification of bankruptcy; or (5) management's judgment that non-accrual is appropriate. D. OTHER INTEREST-BEARING ASSETS There were no other interest-bearing non-performing assets at December 31, 1997. IV. SUMMARY OF LOAN LOSS EXPERIENCE A. An analysis of the loan loss experience for the period ending December 31, 1997 is provided in the following table. All balances are provided in Thousands of dollars. BEGINNING BALANCE DECEMBER 31, 1996 DECEMBER 31, 1997 CHARGE-OFFS: COMMERCIAL, FINANCIAL AND AGRICULTURAL $0 $0 REAL ESTATE $0 $0 INSTALLMENT LOANS AND OTHER $0 $0 TOTAL CHARGE-OFFS $0 $0 RECOVERIES: COMMERCIAL, FINANCIAL AND AGRICULTURAL $0 $0 9 26 REAL ESTATE $0 $0 INSTALLMENT LOANS AND OTHER $0 $0 TOTAL RECOVERIES $0 $0 NET CHARGE-OFFS $0 $0 PROVISION FOR LOAN LOSSES BEGINNING $0 $37 BALANCE PROVISION CHARGED TO OPERATIONS $37 $156 ENDING BALANCE $37 $193 RATIO OF NET CHARGE-OFFS TO AVERAGE $0 0% LOANS OUTSTANDING RATIO OF RESERVE FOR LOAN LOSSES TO .86% 1.10% LOANS OUTSTANDING AT YEAR END B. DETERMINATION OF RESERVE FOR LOAN LOSSES The loan loss reserve is currently based upon the formula established in the bank charter application with the Office of the Comptroller of the Currency. The reserve is based upon 1.10% of net loans for the first year of operation. The bank will build this loan loss reserve based upon this schedule with additional reserves as individual loans are classified internally or by examiners (OLEM 5%, Substandard 10%, Doubtful 15% plus specific reserve for recognized exposure, and Loss 100%) for credit, collateral or repayment weaknesses. C. LOANS AND RISK DESCRIPTIONS REAL ESTATE LOANS Approximately $10.9 million or 62% of the loan portfolio consisted of Real Estate loans at 12/31/97. These loans were extended after a thorough review of all supporting financial and collateral information with a loan to value margin of up to 80%. The Bank believes that these loans represent an acceptable risk. At 12/31/97 the Bank had $4.3 million or approximately 25% of the loan portfolio in Commercial/Financial/Industrial loans. These loans to both businesses and individuals were booked after a thorough credit analysis of the borrower's repayment ability. The credit analysis included the review of financial statements, tax returns, credit bureaus, and supporting collateral. These type loans represent the core of the bank's loan portfolio and represent a conservative vehicle for interest income. D. CONSUMER AND OTHER LOANS At 12/31/97 approximately 12.7% or $2.2 million of the Bank's portfolio consisted of consumer loans. These loans represent an opportunity for the bank to meet the varied 10 27 needs of its customers. These loans allow the Bank to earn a stable rate of interest income and are reserved for borrower's that meet the bank's credit quality standards. V. DEPOSITS A. AVERAGE DEPOSITS ( ALL $ TO THE NEAREST THOUSAND ) 1996 1996 1997 1997 $ RATE $ RATE NON-INTEREST BEARING $250 0% $2,030 0% DEPOSITS INTEREST BEARING $1,565 4.75% $6,754 4.60% DEPOSITS (1) SAVINGS DEPOSITS $25 2.417% $145 2.07% TIME DEPOSITS $402 5.661% $6,894 5.80% TOTAL DEPOSITS $2,248 4.351% $15,459 4.63% (1) INCLUDES MONEY MARKET ACCOUNTS B. OTHER CATEGORIES None C. FOREIGN DEPOSITS None D. TIME CERTIFICATES OF DEPOSIT OF $100,000 OR MORE AND MATURITIES AT DECEMBER 31. TIME CERTIFICATES OF 1996 1997 DEPOSIT OF $100,000 OR MORE 3 MONTHS OR LESS $100 $508 3 - 6 MONTHS $0 $1,620 6 - 12 MONTHS $400 $1,018 OVER 12 MONTHS $200 $1,299 E. FOREIGN OFFICE TIME DEPOSITS OF $100,000 OR MORE Not Applicable 11 28 VI. RETURN ON EQUITY AND ASSETS The following financial ratios are presented for analytical purposes: RATIO DESCRIPTION DECEMBER 31, 1996 DECEMBER 31, 1997 RETURN ON ASSETS (NET INCOME DIVIDED (5.42%) (1.16%) BY AVERAGE TOTAL ASSETS) RETURN ON EQUITY ( NET INCOME DIVIDED (7.75%) (4.09%) BY AVERAGE EQUITY) DIVIDEND PAYOUT RATIO (DIVIDENDS PER 0% 0% SHARE DIVIDED BY NET INCOME PER SHARE) EQUITY TO ASSET RATIO (AVERAGE EQUITY 69.93% 28.42% DIVIDED BY AVERAGE TOTAL ASSETS) VII. SHORT TERM BORROWINGS As of December 31, 1997 there were no short term borrowings. During 1997 the Company and its subsidiaries had no short term borrowings in excess of 30% of stockholders' equity. VIII. CAPITAL ADEQUACY DATA Total capital of the Company as a percentage of total adjusted assets was as follows: ($ THOUSANDS) ($ THOUSANDS) DECEMBER 31, 1996 DECEMBER 31, 1997 TOTAL ASSETS $14,177 $27,534 ALLOWANCE FOR LOAN LOSSES ($37) ($193) TOTAL ADJUSTED ASSETS $14,214 $27,727 TOTAL STOCKHOLDERS' EQUITY (EXCLUDING $6,618 $6,363 UNREALIZED GAIN/LOSS) ALLOWANCE FOR LOAN LOSSES $37 $193 OTHER COMPONENTS OF CAPITAL $0 $0 TOTAL PRIMARY CAPITAL $6,655 $6,556 TOTAL SECONDARY CAPITAL $0 $0 TOTAL CAPITAL $6,655 $6,556 RATIO OF TOTAL CAPITAL TO TOTAL ADJUSTED 46.80% 23.65% ASSETS Tier I and total Capital as a percentage of "risk-weighted" assets at December 31, 1997 were as follows: DECEMBER 31, 1996 DECEMBER 31, 1997 TIER I CAPITAL PERCENTAGE 91.3% 30.7% TOTAL CAPITAL PERCENTAGE 91.8% 31.7% 12 29 The Company's capital ratios exceed the minimum capital requirements at December 31, 1997 and management expects this to continue. IX. INTEREST RATE SENSITIVITY ANALYSIS The following table reflects the year-end position of the Company's interest-earning assets and interest-bearing liabilities which can either reprice or mature within the designated time period. The interest rate sensitivity gaps can vary from day-to-day and are not necessarily a reflection of the future. In addition, certain assets and liabilities within the same designated time period may none the less reprice at different times and at different levels. ($ IN THOUSANDS) DECEMBER 31, 1997 INTEREST SENSITIVE WITHIN (CUMULATIVE) WITHIN WITHIN WITHIN 5 YEARS TOTAL INTEREST 3 MONTHS 12 MONTHS 5 YEARS OR MORE EARNING ASSETS INTEREST EARNING ASSETS: LOANS $ 9,471 $2,736 $5,258 $ 22 $17,487 INVESTMENTS AND $ 0 $1,217 $1,000 $3,209 $ 5,426 MORTGAGE BACKED SECURITIES FED FUNDS SOLD AND $ 1,850 $ 0 $ 0 $ 0 $ 1,850 OTHER TOTALS $11,321 $3,953 $6,258 $3,231 $21,033 INTEREST BEARING LIABILITIES: DEPOSITS AND BORROWED $ 5,287 $9,807 $4,742 $ 178 $20,015 FUNDS SENSITIVITY GAP: DOLLAR AMOUNT $ 6,034 $ 180 $1,696 $4,749 PERCENT OF TOTAL 28.68% .86% 8.06% 22.58% INTEREST EARNING ASSETS The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring rate sensitivity differences ("GAP") between assets and liabilities. An asset or liability is considered to be rate sensitive within a specific time period if it will mature or be subject to repricing within that period of time. The interest rate sensitivity gap is the difference between the amount of interest-earning assets anticipated, based upon certain assumptions, to mature or reprice within that time period. a gap is considered to be positive when the amount of rate sensitive assets maturing or repricing within a period of time exceeds the amount of rate sensitive liabilities maturing within that same time frame. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to adversely affect net interest income. In an environment of rising interest rates, an institution with a positive gap would generally be expected, absent the effects of other factors, to experience a greater increase in the yield of its assets relative to the costs of its liabilities and thus an increase in the institution's net interest income would result whereas an institution with a negative gap could experience the opposite results. 13 30 At December 31, 1997, total interest-earning assets maturing or repricing within one year was greater than interest bearing liabilities maturing or repricing within the same period of time by $180 thousand (cumulative), representing a positive cumulative gap of .86% of earning assets. The Company has a positive gap in all time frames, it is expected that this gap will move toward a more neutral position with the addition of deposits with fixed maturities of a longer duration than seen at the present time. This trend should be particularly noticeable in the 2 - 5 year time frame, since these will be the maturities in which most time deposits will be marketed and in which any change in interest rates will have the greatest impact on earnings. 14 31 THE FIRST BANCSHARES, INC. CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT DECEMBER 31, 1997 AND 1996 15 32 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders The First Bancshares, Inc. Hattiesburg, Mississippi We have audited the accompanying consolidated balance sheets of The First Bancshares, Inc., and subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe 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., and subsidiary as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. T.E. Lott & Company Columbus, Mississippi February 11, 1998 33 THE FIRST BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 ASSETS 1997 1996 ----------- ----------- Cash and due from banks $ 970,262 $ 1,458,586 Federal funds sold 1,870,000 2,311,386 Securities (Note C) 4,303,587 4,216,027 Loans, net of reserve for loan losses of $193,566 in 1997 and $37,148 in 1996 (Note D) 17,293,861 4,290,272 Premises and equipment (Note E) 2,092,225 1,691,760 Interest receivable 188,365 35,576 Other assets 808,338 173,153 ------------ ------------ $ 27,526,638 $ 14,176,760 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing $ 2,479,084 $ 1,566,076 Time, $100,000 or more 2,631,198 400,000 Other interest-bearing 15,948,103 5,540,573 ------------ ------------ Total deposits 21,058,385 7,506,649 Interest payable 94,649 26,646 Other liabilities 5,900 22,936 ------------ ------------ Total liabilities 21,158,934 7,556,231 ------------ ------------ Commitments and contingent liabilities (Note J) Stockholders' Equity (Note F): Common stock, par value $1 per share; 10,000,000 shares authorized; issued and outstanding 721,848 at December 31, 1997 and 1996 721,848 721,848 Preferred stock, par value $1 per share, 10,000,000 shares authorized; no shares issued and outstanding -- -- Additional paid-in capital 6,451,456 6,451,456 Accumulated deficit (817,651) (555,658) Unrealized gain on available-for-sale securities 12,051 2,883 ------------ ------------ Total stockholders' equity 6,367,704 6,620,529 ------------ ------------ $ 27,526,638 $ 14,176,760 ============ ============ The accompanying notes are an integral part of these statements. 17 34 THE FIRST BANCSHARES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1997 AND 1996 1997 1996 INTEREST INCOME ---------- --------- Interest and fees on loans $ 1,141,101 $ 80,035 Interest and dividends on investment securities - taxable 290,247 60,738 Interest on federal funds sold 91,354 119,003 Interest on deposits in banks -- 6,516 Other, preopening -- 183,083 ----------- --------- 1,522,702 449,375 INTEREST EXPENSE Interest on time deposits of $100,000 or more 68,385 7,433 Interest on other deposits 572,762 66,052 Interest on borrowed funds -- 5,909 ----------- --------- 641,147 79,394 ----------- --------- Net interest income 881,555 369,981 Provision for loan losses 156,418 37,148 ----------- --------- Net interest income after provision for loan losses 725,137 332,833 OTHER INCOME Service charges on deposit accounts 67,543 2,136 Other service charges and fees 24,723 2,190 Other (Note E) 123,858 -- ----------- --------- 216,124 4,326 OTHER EXPENSES Salaries 531,754 172,051 Employee benefits 100,538 34,328 Occupancy expense 77,401 13,166 Furniture and equipment expense 122,739 51,942 Marketing and public relations 43,245 21,182 Other 327,577 176,253 Preopening expenses (Note K) -- 223,985 ----------- --------- 1,203,254 692,907 ----------- --------- Net loss $ (261,993) $(355,748) =========== ========= Net loss per common share (Note B-12) $ (.36) (.58) =========== ========= Net loss per common share - assuming dilution (Note B-12) $ (.36) $ (.58) =========== ========= The accompanying notes are an integral part of these statements. 18 35 THE FIRST BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997 AND 1996 Unrealized Gain On Additional Available- Common Paid-in Accumulated For-Sale Stock Capital Deficit Securities Total --------- ----------- ----------- ---------- ----------- Balance, January 1, 1996 $ 10 $ 90 $(199,910) $ -- $ (199,810) Issuance of common stock, net of issuance costs 721,848 6,451,456 -- -- 7,173,304 Net loss for 1996 -- -- (355,748) -- (355,748) Unrealized gain on available- for-sale securities -- -- -- 2,883 2,883 Redemption of organization stock (10) (90) -- -- (100) --------- ----------- --------- ---------- ----------- Balance, December 31, 1996 721,848 6,451,456 (555,658) 2,883 6,620,529 Net loss for 1997 -- -- (261,993) -- (261,993) Net change in unrealized gain on available-for-sale securities, net of tax -- -- -- 9,168 9,168 --------- ----------- --------- ---------- ----------- Balance, December 31, 1997 $ 721,848 $ 6,451,456 $(817,651) $ 12,051 $ 6,367,704 ========= =========== ========= ========== =========== The accompanying notes are an integral part of these statements. 19 36 THE FIRST BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS PERIODS ENDED DECEMBER 31, 1997 AND 1996 1997 1996 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (261,993) $ (355,748) Adjustments to reconcile net income to net cash: Depreciation and amortization 157,333 42,210 Provision for loan losses 156,418 37,148 Amortization and accretion (101,992) (13,285) Increase in interest receivable (152,789) (35,576) Increase in other assets (672,157) (69,791) Increase in interest payable 68,003 26,646 (Decrease) increase in other liabilities (17,036) 12,808 ------------ ------------ Net cash used in operating activities (824,213) (355,588) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchases of available-for-sale securities (6,252,319) (4,949,859) Proceeds from maturities and calls of available-for-sale securities 6,782,920 750,000 Purchase of securities to be held-to-maturity (507,001) -- Increase in loans (13,160,007) (4,327,420) Additions to premises and equipment (520,826) (1,585,625) ------------ ------------ Net cash used in investing activities (13,657,233) (10,112,904) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Increase in deposits 13,551,736 7,506,649 Decrease in borrowed funds -- (441,950) Proceeds from issuance of stock, net -- 7,173,204 ------------ ------------ Net cash provided by financing activities 13,551,736 14,237,903 ------------ ------------ Net increase (decrease) in cash and cash equivalents (929,710) 3,769,411 Cash and cash equivalents at beginning of year 3,769,972 561 ------------ ------------ Cash and cash equivalents at end of year $ 2,840,262 $ 3,769,972 ============ ============ CASH PAID DURING THE YEAR FOR: Interest $ 573,144 $ 52,748 Income taxes -- -- The accompanying notes are an integral part of these statements. 20 37 THE FIRST BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 NOTE A - ORGANIZATION The First Bancshares, Inc. (the Company) was incorporated under the laws of Mississippi on June 23, 1995 (the "Inception Date"), for the purpose of becoming a one-bank holding company. From the Inception Date through August 5, 1996, the Company was a development-stage company and its activities during the period consisted of its organization, the conducting of its initial public stock offering, pursuit of the approval of the Office of the Comptroller of the Currency ("OCC") for its application to charter its subsidiary bank, the First National Bank of South Mississippi (the "Bank"), and the establishing of systems, hiring and training of personnel, and other matters related to the opening of the Bank. The Bank began its operations on August 5, 1996. NOTE B - SUMMARY OF ACCOUNTING POLICIES 1. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany accounts and transactions have been eliminated. 2. NATURE OF OPERATIONS The Company as a bank holding company is regulated by the Federal Reserve Bank. The Bank operates under a national bank charter and provides full banking services. It is subject to the regulation of the OCC. The Bank provides services primarily to Forrest and Lamar Counties of Mississippi. 3. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles 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. ( Continued ) 21 38 THE FIRST BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 NOTE B - SUMMARY OF ACCOUNTING POLICIES (Continued) 4. SECURITIES Investments in securities are classified into three categories and are accounted for as follows: Available-for-Sale Securities Securities 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 in stockholders' equity, net of tax, when applicable, until realized. Gains and losses on the sale of available-for-sale securities are determined using the adjusted cost of the specific security sold. Premiums and discounts are recognized in interest income using the interest method. Securities to be Held-to-Maturity Securities 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 Securities Trading 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, 1997 and 1996. 5. LOANS Loans are carried at the principal amount outstanding, net of the reserve for loan losses. Interest income on loans is recognized based on the principal balance outstanding and the stated rate of the loan. ( Continued ) 22 39 THE FIRST BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 NOTE B - SUMMARY OF ACCOUNTING POLICIES (Continued) 6. RESERVE FOR LOAN LOSSES For financial reporting purposes, the provision for loan losses charged to operations is based upon management's estimations of the amount necessary to maintain the reserve at an adequate level, considering losses charged to the loan portfolio, current economic conditions, credit reviews of the loan portfolio, and other factors warranting consideration. Reserves for any impaired loans are generally determined based on collateral values. Loans are charged against the reserve for loan losses when management believes the collectibility of the principal is unlikely. The reserve is maintained at a level believed adequate by management to absorb potential loan losses. 7. PREMISES AND EQUIPMENT Premises 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. 8. ORGANIZATION COSTS Organization costs consisting of incorporation expenses are included in other assets and are being amortized to expense over a sixty-month period. 9. INCOME TAXES A deferred tax asset or liability is recognized for the future income tax effects attributable to the differences in the tax bases of assets or liabilities and their reported amounts in the financial statements, as well as operating loss and tax credit carryforwards. The deferred tax asset or liability is measured using the enacted tax rate expected to apply to taxable income in the period in which the deferred tax asset or liability is expected to be realized. 10. STATEMENT OF CASH FLOWS For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks and federal funds sold. Generally, federal funds are sold for a one-day period. ( Continued ) 23 40 THE FIRST BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 NOTE B - SUMMARY OF ACCOUNTING POLICIES (Continued) 11. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS In the ordinary course of business, the 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. 12. NET LOSS PER SHARE In February, 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 128, "Earnings Per Share," which is effective for years ending after December 15, 1997. Under Statement No. 128, two per share amounts are to be 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 outstanding, such as exercise of stock options. The following table discloses the reconciliation of the numerators and denominators of the basic and diluted computations: For the Year Ended For the Year Ended December 31, 1997 December 31, 1996 ---------------------------------------------- ------------------------------------------- Net Loss Shares Per Share Net Loss Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Data ----------- ------------- --------- ----------- ------------- --------- Basic per share $(261,993) 721,848 $ (.36) $(355,748) 612,435 $ (.58) ======= ======= Effect of dilutive shares: Stock options -- 8,865 -- -- --------- ------- --------- ------- Diluted per share $(261,993) 730,713 $ (.36) $(355,748) 612,435 $ (.58) ========= ======= ======= ========= ======= ======= The diluted per share amounts were computed by applying the treasury stock method. 24 41 THE FIRST BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 NOTE C - SECURITIES Securities at December 31, 1997 and 1996, consisted of available-for-sale securities with a carrying amount of $3,796,862 and $4,216,027, respectively, and securities held-to-maturity with a carrying amount of $506,725 and $-0-, respectively. The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair value of these securities at December 31, 1997 and 1996, are as follows: 1997 ------------------------------------------------------ Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- Available-for-sale securities: U. S. Treasury securities $ 499,928 $ 3,822 $ -- $ 503,750 Obligations of U. S Government agencies 500,000 -- 310 499,690 Mortgage-backed securities 2,126,525 9,721 1,181 2,135,065 Equity securities 167,950 -- -- 167,950 Other securities 490,407 -- -- 490,407 ---------- ------- ------ ---------- $3,784,810 $13,543 $1,491 $3,796,862 ========== ======= ====== ========== Held-to-maturity securities: Mortgage-backed securities $ 506,725 $ 877 $ -- $ 507,602 ========== ======= ====== ========== 1997 ------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- Available-for-sale securities: Obligations of U. S. Government agencies $3,458,269 $ 3,486 $4,448 $3,457,307 Mortgage-backed securities 596,475 3,845 -- 600,320 Equity securities 158,400 -- -- 158,400 ---------- ------- ------ ---------- $4,213,144 $ 7,331 $4,448 $4,216,027 ========== ======= ====== ========== ( Continued ) 25 42 THE FIRST BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 NOTE C - SECURITIES (Continued) The scheduled maturities of securities at December 31, 1997, are as follows: Estimated Amortized Fair Cost Value ---------- --------- Due in one year or less $ 490,407 490,407 Due after one year through five years 999,928 1,003,440 Mortgage-backed securities and equity securities 2,801,200 2,810,617 ---------- ---------- $4,291,535 $4,304,464 ========== ========== Actual maturities can differ from contractual maturities because the obligations may be called or prepaid with or without penalties. Equity securities consist of stock in the Federal Reserve Bank, the transferability of which is restricted. No gains and losses were realized on available-for-sale securities in 1997 and 1996. Securities with a carrying value of $499,310 and $-0- at December 31, 1997 and 1996, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law. NOTE D - LOANS Loans outstanding include the following types at December 31, 1997 and 1996: (In Thousands) 1997 1996 --------------------------- ------- Commercial, financial, and agricultural $ 5,187 $ 1,106 Real estate - construction 2,031 36 Real estate - mortgage: Commercial 4,166 1,508 Residential 3,698 1,205 Consumer 2,392 470 Other 13 2 -------- ------- 17,487 4,327 Reserve for loan losses (193) (37) -------- ------- $ 17,294 $ 4,290 ======== ======= Activity in the reserve for loan losses included a provision for loan losses charged to operations of $156,418 and $37,148 for the years ended December 31, 1997 and 1996. For the period ended December 31, 1997 and 1996, the Bank had no loans classified as impaired. 26 43 THE FIRST BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 NOTE E - PREMISES AND EQUIPMENT The detail of premises and equipment at December 31, 1997 and 1996, is as follows: 1997 1996 ----------- ----------- Premises: Land $ 453,366 $ 452,121 Buildings and improvements 1,380,205 60,863 Equipment 421,225 342,443 Construction in process -- 878,543 ----------- ----------- 2,254,796 1,733,970 Less accumulated depreciation (162,571) (42,210) ----------- ----------- $ 2,092,225 $ 1,691,760 =========== =========== The amounts charged to operating expense for depreciation were $120,361 and $42,210 in 1997 and 1996, respectively. Included in other income for the year ended December 31, 1997, is a gain of $112,177 from the sale of nonbanking real estate. NOTE F - REGULATORY MATTERS The 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 the 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 the 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, 1997, that the Company and the Bank exceed all capital adequacy requirements. (Continued) 27 44 THE FIRST BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 NOTE F - REGULATORY MATTERS (Continued) At December 31, 1997, the 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 total risk-based capital of 10% or more, has Tier I risk-based 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, 1997 and 1996, are presented in the following table. No amount was deducted from capital for interest-rate risk exposure. ($ In Thousands ) Company (Consolidated) Bank ------------------- -------------------- Amount Ratio Amount Ratio ------ ----- ------ ------ DECEMBER 31, 1997 Total risk-based $6,496 31.7% $5,023 24.5% Tier I risk-based 6,303 30.7% 4,829 23.6% Tier I leverage 6,303 30.3% 4,829 23.2% DECEMBER 31, 1996 Total risk-based $6,655 91.8% $4,842 69.8% Tier I risk-based 6,618 91.3% 4,805 69.1% Tier I leverage 6,618 46.6% 4,805 34.5% The minimum amounts of capital and ratios as established by banking regulators at December 31, 1997 and 1996, are as follows: ($ In Thousands ) Company (Consolidated) Bank ------------------- -------------------- Amount Ratio Amount Ratio ------ ----- ------ ----- DECEMBER 31, 1997 Total risk-based $1,640 8.0% $1,638 8.0% Tier I risk-based 820 4.0% 819 4.0% Tier I leverage 839 4.0% 832 4.0% DECEMBER 31, 1996 Total risk-based $ 580 8.0% $ 556 8.0% Tier I risk-based 290 4.0% 278 4.0% Tier I leverage 569 4.0% 557 4.0% ( Continued ) 28 45 THE FIRST BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 NOTE F - REGULATORY MATTERS (CONTINUED) The Company's dividends, if any, will be made from dividends received from the 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. At December 31, 1997, the Bank had no retained net profits free of the restrictions. NOTE G - INCOME TAXES The Company's accounting and reporting of income taxes is in accordance with FASB Statement No. 109, "Accounting for Income Taxes." At December 31, 1997 and 1996, the Company had a net operating loss carryforward of approximately $817,000 and $555,000, respectively, for financial reporting purposes. The realization of any deferred tax asset by the Company depends upon having sufficient taxable income in the carryforward periods. Under Statement No. 109, deferred tax assets are recognized for future deductible amounts resulting from differences in the financial statements and tax bases of assets, liabilities and operating loss carryforwards. A valuation allowance is then established to reduce the deferred tax asset to an amount that it is "more likely than not" to be realized in the future. The net operating losses during the years ended December 31, 1997 and 1996, generated deferred tax assets of approximately $306,000 and $208,000, respectively, each of which have been fully offset by a valuation allowance of the same amount. For income tax accounting purposes, the Company had a consolidated net operating loss of approximately $360,000 at December 31, 1997. The difference in the loss carryforward for financial and tax reporting purposes is primarily due to the deferral and amortization of pre-opening expenses over a sixty-month period for tax reporting. Carryforwards of net operating losses will expire in the year 2012 if not utilized. 29 46 THE FIRST BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 NOTE H - EMPLOYEE BENEFITS The Company and the Bank have an employment agreement with its President and Chief Executive Officer. The initial term of the agreement is for three years with an extension provision for an additional three year term. It provides for a minimum salary to be reviewed by the Board of Directors annually and increased at its discretion and allows for participation in any management incentive programs, long-term equity incentives, and eligibility for grants of any stock options, restricted stock, and other similar awards. In the first two years of operations of the Bank, bonuses were determined by the Board of Directors. Thereafter, the bonuses will be based upon a percentage of net profits after taxes of the Bank. Initially, the agreement granted an option to purchase up to 3% of the number of shares sold in the stock offering at a price per share equal to the initial offering price. The options vested one-third per year for the first three years of operations of the Bank and were subject to certain performance criteria as established by the Board of Directors. The option to purchase had a term of ten years. The stock option provisions of the agreement were superseded by the stock option plan adopted in 1997. In addition, the agreement provides for additional benefits in the event of termination after a change in control. In 1997, the Company adopted the 1997 Stock Option Plan (the "Plan"). The plan provides for the granting of options to purchase up to 72,185 shares of Company common stock by directors and key employees of the Company and its subsidiary. As of December 31, 1997, all shares had been granted. The options may be exercised at an option price equal to the fair market value of the stock at the grant date. The options may be exercised over ten years. The Company accounts for stock options in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees". In accordance with APB 25, no expense has been recorded in the accompanying consolidated financial statements. If FASB No. 123, "Accounting for Stock-Based Compensation" had been applied, the net loss from operations for the years ended December 31, 1997 and 1996, would have been $300,468 and $367,290, respectively, and the basic net loss per common share would have been $.42 and $.60, respectively. The Bank provides a deferred compensation arrangement (401(k) plan) whereby employees contribute a percentage of their compensation. For employee contributions of three percent or less, the Bank provides a matching contribution. Contributions by the Bank totaled $8,646 in 1997 and $2,017 in 1996. 30 47 THE FIRST BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 NOTE I - RELATED PARTY TRANSACTIONS In the normal course of business, the Bank makes loans to its directors and officers and to companies in which they have a significant ownership interest. 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 persons. Such loans amounted to approximately $1,565,000 and $655,000 at December 31, 1997 and 1996, respectively. In the opinion of management, such loans are consistent with sound banking policies and are within applicable regulatory and lending limitations. The Bank contracted with a company in which a director is a principal to construct a new bank building. Approximately $310,000 in 1997 and $580,000 in 1996 were paid to the company for construction costs. Management of the Company and of the Bank are of the opinion such transactions are consistent with sound business practices. NOTE J - COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS OF CREDIT RISK In 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 Bank had outstanding letters of credit of $82,500 and $50,000 at December 31, 1997 and 1996, and had made loan commitments of approximately $1,882,000 and $785,000 at December 31, 1997 and 1996. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual amount of the instrument. The Bank uses the same credit policies in making commitments and conditional obligations as it does for its lending activities. No significant losses are anticipated as a result of these transactions. The primary market area served by the Bank is Forrest and Lamar Counties within South Mississippi. Management closely monitors its credit concentrations and attempts to diversify the portfolio within its primary market area. As of December 31, 1997, management does not consider there to be any significant credit concentration within the loan portfolio. Although the Bank's loan portfolio, as well as existing commitments, reflect 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. The Bank has Sixteenth Section land leases and contracts for bank premises. The leases have 40 year terms with annual rentals of $20,240 subject to reappraisals every 10 years. 31 48 THE FIRST BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 NOTE K - PREOPENING EXPENSES A summary of the components of pre-opening expenses for the year ended December 31, 1996, is as follows: Salaries and employee benefits $153,736 Professional fees 19,557 Marketing and public relations 9,910 Occupancy costs 22,526 Supplies and postage 7,607 Other 10,649 -------- $223,985 ======== NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS FASB No. 107, "Disclosure about Fair Value of Financial Instruments," requires the Company to disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below. The following information does not purport to represent the aggregate consolidated fair value of the Company. Cash and Cash Equivalents - The carrying amount of these financial instruments (cash and due from banks and federal funds sold) approximate fair value. Investment Securities - Fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans - For certain categories of loans, such as variable rate loans and other lines of credit, the carrying amount, adjusted for credit risk, is a reasonable estimate of fair value as the Company has the ability to reprice the loan as interest rate changes occur. The fair value of other 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. ( Continued ) 32 49 THE FIRST BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) Deposits - The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturities. Commitments to Extend Credit - Management is of the opinion the estimated fair value is not significantly different than the contractual or notational amounts. The carrying amount and estimated fair value of the Company's consolidated financial instruments are as follows: (In Thousands) December 31, 1997 December 31, 1996 --------------------- --------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- -------- -------- -------- Financial Assets: Cash and cash equivalents $ 2,840 $ 2,840 $ 3,770 $ 3,770 ======== ======== ======== ======== Investment securities $ 4,304 $ 4,304 $ 4,216 $ 4,216 ======== ======== ======== ======== Loans $ 17,487 $ 17,466 $ 4,327 $ 4,320 Reserve for loan losses (193) -- (37) -- -------- -------- -------- -------- Net Loans $ 17,294 $ 17,466 $ 4,290 $ 4,320 ======== ======== ======== ======== Financial Liabilities: Deposits: Noninterest-bearing demand $ 2,479 $ 2,479 $ 1,566 $ 1,566 Interest-bearing demand 6,666 6,666 3,912 3,912 Savings 200 200 71 71 Certificates of deposit 11,713 11,719 1,958 1,960 -------- -------- -------- -------- Total Deposits $ 21,058 $ 21,064 $ 7,507 $ 7,509 ======== ======== ======== ======== Statement No. 107 prohibits adjustments for any value derived from the expected retention of deposits for a future time period. That value, often referred to as a core deposit intangible, is neither included in the fair value amounts nor recorded as an intangible asset in the consolidated balance sheets. 33 50 THE FIRST BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 NOTE M - PARENT COMPANY FINANCIAL INFORMATION The balance sheets, statements of operations, and cash flows for The First Bancshares, Inc. (parent only) follow: CONDENSED BALANCE SHEETS December 31, ------------------------ 1997 1996 ---------- ---------- Assets: Cash $ -- $ 461 Interest-bearing deposit with subsidiary bank 1,480,758 1,515,077 Investment in subsidiary bank 4,861,510 4,807,805 Fixed assets -- 332,077 Other 32,861 43,518 ---------- ---------- $6,375,129 $6,698,938 ========== ========== Liabilities: Other $ 7,425 $ 78,410 Stockholders' equity 6,367,704 6,620,528 ---------- ---------- $6,375,129 $6,698,938 ========== ========== CONDENSED STATEMENTS OF OPERATIONS Years Ended December 31, ------------------------ 1997 1996 ---------- ---------- Income: Interest $ 73,435 $ 242,583 Other 8,134 -- ---------- ---------- 81,569 242,583 Expenses: Other 44,034 28,884 ---------- ---------- Income before income taxes and equity in undistributed loss of subsidiary 37,535 213,699 Income taxes 7,188 75,410 ---------- ---------- Income before equity in undistributed loss of subsidiary 30,347 138,289 Equity in undistributed loss of subsidiary (292,340) (494,037) ---------- ---------- Net loss $ (261,993) $ (355,748) ========== ========== ( Continued ) 34 51 THE FIRST BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 NOTE N - PARENT COMPANY FINANCIAL INFORMATION (Continued) CONDENSED STATEMENTS OF CASH FLOWS Years Ended December 31, ------------------------ 1997 1996 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (261,993) $ (355,748) Adjustments to reconcile net loss to net cash and cash equivalents: Equity in undistributed loss of subsidiary 292,340 494,037 Other, net (60,327) 128,126 ---------- ---------- Net cash provided by (used in) operating activities (29,980) 266,415 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in subsidiary -- (5,298,960) Acquisition of fixed assets (4,800) (183,732) ---------- ---------- Net cash used in investing activities (4,800) (5,482,692) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of stock, net -- 7,173,204 Payment of note payable -- (441,950) ---------- ---------- Net cash provided by financing activities -- 6,731,254 ---------- ---------- Net increase (decrease) in cash and cash equivalents (34,780) 1,514,977 Cash and cash equivalents at beginning of period 1,515,538 561 ---------- ---------- Cash and cash equivalents at end of period $1,480,758 $1,515,538 ========== ========== 35 52 SHAREHOLDER INFORMATION - ---------------------------------------------------- ANNUAL MEETING The Annual Meeting of Shareholders will be held at 5:00 p.m., Tuesday, April 28, 1998: The First National Bank of South Mississippi 6480 U. S. Highway 98 West Hattiesburg, Mississippi 39402 All shareholders are invited. FORM 10K/FINANCIAL INFORMATION Copies of The First Bancshares, Inc. Annual Report to the Securities & Exchange Commission, Form 10K, and other information may be obtained from: Charles T. Ruffin The First National Bank of South Mississippi P. O. Box 15549 Hattiesburg, MS 39404-5549 TRANSFER AGENT Registrar and Transfer Company 10 Commerce Drive Cranford, N. J. 07016 1-800-368-5948 INDEPENDENT AUDITOR T. E. Lott & Company A Professional Association Certified Public Accountants Columbus, Mississippi STOCK INFORMATION - ---------------------------------------------------- The First Bancshares, Inc. common stock is not currently listed or traded on any exchange. There is no established public trading market in the common stock and one is not expected to develop in the near future. Transactions in the common stock are negotiated privately and management does not have knowledge of any transactions involving the Company's stock. The Company's articles of incorporation authorize it to issue up to 10,000,000 shares of common stock, par value $1.00 per share (the "Common Stock"), of which 721,848 were sold in the Company's initial public offering and are outstanding as of March 9, 1998. As of December 31, 1997, the Company had 719 shareholders of record. 36 53 DIRECTORS - ---------------------------------------------------- David E. Johnson President and CEO The First Bancshares, Inc. The First National Bank of South Mississippi David Waldron Bomboy Orthopedic Surgeon E. Ricky Gibson President and Owner, N & H Electronics John T. Hudson Past President and Owner, R & R Trucking Fred A. McMurry Vice President and General Manager Havard Pest Control, Inc. Dawn T. Parker H P Cattle Company Chairman of the Board The First Bancshares, Inc. The First National Bank of South MS Perry E. Parker Currency Options Trader, Deutsche Bank, London Ted E. Parker Cattle Farmer Dennis L. Pierce Real Estate Developer A. L. "Pud" Smith Owner, A. L. Smith Oil Co., Inc. Andrew D. Stetelman London and Stetelman Realtors Charles T. Ruffin Executive Vice President and Chief Operating Officer, The First Bancshares, Inc. The First National Bank of South Mississippi 37 54 OFFICERS - ---------------------------------------------------- THE FIRST BANCSHARES, INC. Dawn T. Parker Chairman of the Board David E. Johnson President and Chief Executive Officer Chandra B. Kidd Corporate Secretary THE FIRST NATIONAL BANK OF SOUTH MS Dawn T. Parker Chairman of the Board David E. Johnson President and Chief Executive Officer Charles T. Ruffin Executive Vice President Chief Operating Officer Irvinder "Bandy" Singh Senior Vice President and Senior Lender Jessie M. Laird Assistant Vice President Branch Manager, Purvis, MS Branch Canda R. Smith Assistant Vice President and Mtg Loan Originator John M. Rogers, II Assistant Vice President Operations Chandra B. Kidd Assistant Vice President & Corporate Secretary 38 55 APPENDIX THE FIRST BANCSHARES, INC. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. 6480 U.S. Highway 98 West The undersigned hereby appoints David E. Johnson as Proxy, with the power Hattiesburg, Mississippi 39402 to appoint his substitute, and hereby authorizes him to represent and to vote as designated below all the shares of common stock of The First Bancshares, Inc. held of record by the undersigned on March 18, 1998, at the Annual Meeting of Shareholders to be held on April 28, 1998, or any adjournment thereof. 1. Election of Directors (all nominees are nominated for Class III): [ ]1 FOR all nominees listed below [ ]2 WITHHOLD AUTHORITY (except as marked to the contrary below) to vote for all nominees listed below David Waldron Bomboy, E. Ricky Gibson, and Fred A. McMurry (Instruction: To withhold authority to vote for any individual nominee, write that nominee's name on the space provided below) _____________________________________________________________________ 2. In their discretion, the Proxy is authorized to vote upon such other business as may properly come before the meeting. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED (i) FOR THE ELECTION OF ALL LISTED NOMINEES, (ii) AT THE DISCRETION OF THE PROXY ON ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE THE MEETING. Please sign exactly as name appears below. When shares are held by joint tenants, both should sign. When signing as attorney, as executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by president or other authorized officer. If a partnership, please sign in partnership name by authorized person. DATED: , 1998 --------------------- --------------------------------- Signature Signature if held jointly --------------------------------- Please Print Name Please Print Name PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED ENVELOPE.