FIRST BANCSHARES INC /MS/ - FORM 10-K - EX-13.1 - EXHIBIT 13.1

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10-K - FORM 10-K - FIRST BANCSHARES INC /MS/	v461151_10k.htm
EX-21.1 - EXHIBIT 21.1 - FIRST BANCSHARES INC /MS/	v461151_ex21-1.htm
EX-23.1 - EXHIBIT 23.1 - FIRST BANCSHARES INC /MS/	v461151_ex23-1.htm
EX-99.2 - EXHIBIT 99.2 - FIRST BANCSHARES INC /MS/	v461151_ex99-2.htm
EX-10.9 - EXHIBIT 10.9 - FIRST BANCSHARES INC /MS/	v461151_ex10-9.htm
EX-32.1 - EXHIBIT 32.1 - FIRST BANCSHARES INC /MS/	v461151_ex32-1.htm
EX-99.1 - EXHIBIT 99.1 - FIRST BANCSHARES INC /MS/	v461151_ex99-1.htm
EX-31.1 - EXHIBIT 31.1 - FIRST BANCSHARES INC /MS/	v461151_ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - FIRST BANCSHARES INC /MS/	v461151_ex31-2.htm
EX-10.10 - EXHIBIT 10.10 - FIRST BANCSHARES INC /MS/	v461151_ex10-10.htm
EX-10.11 - EXHIBIT 10.11 - FIRST BANCSHARES INC /MS/	v461151_ex10-11.htm

EXHIBIT 13.1

THE FIRST BANCSHARES, INC.

2016 ANNUAL REPORT

SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS

(Dollars In Thousands, Except Per Share Data)

	December 31,
	2016		2015		2014		2013		2012
Earnings:
Net interest income	$	40,289	$	36,994	$	33,398	$	28,401	$	22,194
Provision for loan losses		625		410		1,418		1,076		1,228

Noninterest income		11,247		7,588		7,803		7,083		6,324
Noninterest expense		36,862		32,161		30,734		28,165		22,164
Net income		10,119		8,799		6,614		4,639		4,049
Net income applicable to common stockholders		9,666		8,456		6,251		4,215		3,624

Per common share data:
Basic net income per share	$	1.78	$	1.57	$	1.20	$	.98	$	1.17
Diluted net income per share		1.57		1.55		1.19		.96		1.16

Per share data:
Basic net income per share	$	1.86	$	1.64	$	1.27	$	1.07	$	1.31
Diluted net income per share		1.64		1.62		1.25		1.06		1.29

Selected Year End Balances:

Total assets	$	1,277,367	$	1,145,131	$	1,093,768	$	940,890	$	721,385
Securities		255,799		254,959		270,174		258,023		226,301
Loans, net of allowance		865,424		769,742		700,540		577,574		408,970
Deposits		1,039,191		916,695		892,775		779,971		596,627
Stockholders’ equity		154,527		103,436		96,216		85,108		65,885

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Purpose

The purpose of management's discussion and analysis is to make the reader aware of the significant components, events, and changes in the consolidated financial condition and results of operations of the Company and The First during the year ended December 31, 2016, when compared to the years 2015 and 2014. The Company's consolidated financial statements and related notes should also be considered.

Critical Accounting Policies

In the preparation of the Company's consolidated financial statements, certain significant amounts are based upon judgment and estimates. The most critical of these is the accounting policy related to the allowance for loan losses. The allowance is based in large measure upon management's evaluation of borrowers' abilities to make loan payments, local and national economic conditions, and other subjective factors. If any of these factors were to deteriorate, management would update its estimates and judgments which may require additional loss provisions.

Companies are required to perform periodic reviews of individual securities in their investment portfolios to determine whether decline in the value of a security is other than temporary. A review of other-than-temporary impairment requires companies to make certain judgments regarding the materiality of the decline, its effect on the financial statements and the probability, extent and timing of a valuation recovery and the company’s intent and ability to hold the security. Pursuant to these requirements, Management assesses valuation declines to determine the extent to which such changes are attributable to fundamental factors specific to the issuer, such as financial condition, business prospects or other factors or market-related factors, such as interest rates. Declines in the fair value of securities below their cost that are deemed to be other-than-temporary are recorded in earnings as realized losses.

Goodwill is assessed for impairment both annually and when events or circumstances occur that make it more likely than not that impairment has occurred. As part of its testing, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines the fair value of a reporting unit is less than its carrying amount using these qualitative factors, the Company then compares the fair value of goodwill with its carrying amount, and then measures impaired loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. Other intangibles are also assessed for impairment, both annually and when events or circumstances occur, that make it more likely than not that impairment has occurred. No impairment was indicated when the annual test was performed in 2016.

Overview

The First Bancshares, Inc. (the Company) was incorporated on June 23, 1995, and serves as a bank holding company for The First, A National Banking Association (“The First”), located in Hattiesburg, Mississippi. The First began operations on August 5, 1996, from its main office in the Oak Grove community, which is on the western side of Hattiesburg. Currently, the First has 48 locations in South Mississippi, South Alabama, Louisiana, and Florida. The Company and The First engage in a general commercial and retail banking business characterized by personalized service and local decision-making, emphasizing the banking needs of small to medium-sized businesses, professional concerns, and individuals.

The Company’s primary source of revenue is interest income and fees, which it earns by lending and investing the funds which are held on deposit. Because loans generally earn higher rates of interest than investments, the Company seeks to employ as much of its deposit funds as possible in the form of loans to individuals, businesses, and other organizations. To ensure sufficient liquidity, the Company also maintains a portion of its deposits in cash, government securities, deposits with other financial institutions, and overnight loans of excess reserves (known as “Federal Funds Sold”) to correspondent banks. The revenue which the Company earns (prior to deducting its overhead expenses) is essentially a function of the amount of the Company’s loans and deposits, as well as the profit margin (“interest spread”) and fee income which can be generated on these amounts.

The Company increased to approximately $1.3 billion in total assets, and $1.0 billion in deposits at December 31, 2016 from approximately $1.1 billion in total assets, and $916.7 million in deposits at December 31, 2015. Loans net of allowance for loan losses increased to $865.4 million at December 31, 2016 from approximately $769.7 million at December 31, 2015. The Company increased to $154.5 million in stockholders’ equity at December 31, 2016 from approximately $103.4 million at December 31, 2015. The First reported net income of $11.6 million, $9.6 million and $7.4 million for the years ended December 31, 2016, 2015, and 2014, respectively. For the years ended December 31, 2016, 2015 and 2014, the Company reported consolidated net income applicable to common stockholders of $9.7 million, $8.5 million and $6.3 million, respectively. The following discussion should be read in conjunction with the “Selected Consolidated Financial Data” and the Company's Consolidated Financial Statements and the Notes thereto and the other financial data included elsewhere.

SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS

(Dollars In Thousands, Except Per Share Data)

	December 31,
	2016		2015		2014		2013		2012
Earnings:
Net interest income	$	40,289	$	36,994	$	33,398	$	28,401	$	22,194
Provision for loan losses		625		410		1,418		1,076		1,228

Noninterest income		11,247		7,588		7,803		7,083		6,324
Noninterest expense		36,862		32,161		30,734		28,165		22,164
Net income		10,119		8,799		6,614		4,639		4,049
Net income applicable to common stockholders		9,666		8,456		6,251		4,215		3,624

Per common share data:
Basic net income per share	$	1.78	$	1.57	$	1.20	$	.98	$	1.17
Diluted net income per share		1.57		1.55		1.19		.96		1.16

Per share data:
Basic net income per share	$	1.86	$	1.64	$	1.27	$	1.07	$	1.31
Diluted net income per share		1.64		1.62		1.25		1.06		1.29

Selected Year End Balances:

Total assets	$	1,277,367	$	1,145,131	$	1,093,768	$	940,890	$	721,385
Securities		255,799		254,959		270,174		258,023		226,301
Loans, net of allowance		865,424		769,742		700,540		577,574		408,970
Deposits		1,039,191		916,695		892,775		779,971		596,627
Stockholders’ equity		154,527		103,436		96,216		85,108		65,885

Results of Operations

The following is a summary of the results of operations by The First for the years ended December 31, 2016, 2015, and 2014.

	2016		2015		2014
	(In thousands)

Interest income	$	44,535	$	40,196	$	36,365
Interest expense		4,094		3,022		2,791
Net interest income		40,441		37,174		33,574

Provision for loan losses		625		410		1,418

Net interest income after provision for loan losses		39,816		36,764		32,156

Other income		10,540		7,589		7,439

Other expense		33,941		31,032		29,477

Income tax expense		4,766		3,701		2,733

Net income	$	11,649	$	9,620	$	7,385

The following reconciles the above table to the amounts reflected in the consolidated financial statements of the Company at December 31, 2016, 2015, and 2014:

	2016			2015			2014
	(In thousands)

Net interest income:
Net interest income of The First	$	40,504		$	37,174		$	33,574
Intercompany eliminations		(215	)		(180	)		(176	)
	$	40,289		$	36,994		$	33,398

Net income applicable to common stockholders:
Net income of The First	$	11,649		$	9,620		$	7,385
Net loss of the Company, excluding intercompany accounts		(1,983	)		(1,164	)		(1,134	)
	$	9,666		$	8,456		$	6,251

Consolidated Net Income

The Company reported consolidated net income applicable to common stockholders of $9,666,382 for the year ended December 31, 2016, compared to a consolidated net income of $8,456,242 for the year ended December 31, 2015, and consolidated net income of $6,250,743 for the year ended December 31, 2014. The increase in income was attributable to an increase in net interest income of $3.3 million or 8.9%, an increase in other income of $3.7 million, or 48.2%, which was partially offset by an increase in other expenses of $4.7 million or 14.6%. Other expenses included charges of $521,000 related to the acquisitions. See Note T of Notes to Consolidated Financial Statements included at Item 8 of this report for more information on how the Company accounts for business combinations.

Consolidated Net Interest Income

The largest component of net income for the Company is net interest income, which is the difference between the income earned on assets and interest paid on deposits and borrowings used to support such assets. Net interest income is determined by the rates earned on the Company’s interest-earning assets and the rates paid on its interest-bearing liabilities, the relative amounts of interest-earning assets and interest-bearing liabilities, and the degree of mismatch and the maturity and repricing characteristics of its interest-earning assets and interest-bearing liabilities.

Consolidated net interest income was approximately $40,289,000 for the year ended December 31, 2016, as compared to $36,994,000 for the year ended December 31, 2015, and $33,398,000 for the year ended December 31, 2014. This increase was the direct result of increased loan volumes during 2016 as compared to 2015 and increased loan volumes during 2015 as compared to 2014. Average interest-bearing liabilities for the year 2016 were $911,037,000 compared to $822,708,000 for the year 2015 and $746,025,000 for the year 2014. At December 31, 2016, the net interest spread, the difference between the yield on earning assets and the rates paid on interest-bearing liabilities, was 3.63% compared to 3.65% at December 31, 2015 and compared to 3.62% at December 31, 2014. The net interest margin (which is net interest income divided by average earning assets) was 3.71% for the year 2016 compared to 3.72% for the year 2015 and compared to 3.70% for the year 2014. Rates paid on average interest-bearing liabilities increased to .47% for the year 2016 compared to .39% for the year 2015 and compared to .40% for the year 2014. Interest earned on assets and interest accrued on liabilities is significantly influenced by market factors, specifically interest rates as set by Federal agencies. Average loans comprised 73.9% of average earnings assets for the year 2016 compared to 71.7% the year 2015 and 67.8% for the year 2014.

Average Balances, Income and Expenses, and Rates. The following tables depict, for the periods indicated, certain information related to the average balance sheet and average yields on assets and average costs of liabilities. Such yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been derived from daily averages.

Average Balances, Income and Expenses, and Rates

			Years Ended December 31,
	2016							2015							2014
	Average Balance		Income/ Expenses		Yield/ Rate			Average Balance		Income/ Expenses		Yield/ Rate			Average Balance		Income/ Expenses		Yield/ Rate
	(Dollars in thousands)
Assets
Earning Assets
Loans (1)(2)	$	820,881	$	38,497		4.69	%	$	730,326	$	34,242		4.69	%	$	632,049	$	30,276		4.79	%
Securities (4)		261,508		6,885		2.63	%		256,462		6,759		2.64	%		271,247		7,024		2.59	%
Federal funds sold (3)		18,806		127		.68	%		24,582		64		.26	%		24,845		53		.21	%
Other		10,029		59		.59	%		7,585		93		1.23	%		3,827		85		2.22	%
Total earning assets		1,111,224		45,568		4.10	%		1,018,955		41,158		4.04	%		931,968		37,438		4.02	%

Other		117,735							103,237							98,354
Total assets	$	1,228,959						$	1,122,192						$	1,030,322

Liabilities
Interest-bearing liabilities	$	911,037	$	4,316		.47	%	$	822,708	$	3,208		.39	%	$	746,025	$	2,973		.40	%
Demand deposits (1)		191,998							196,284							184,037
Other liabilities		5,601							4,594							11,990
Stockholders’ equity		120,323							98,606							88,270
Total liabilities and stockholders’ equity	$	1,228,959						$	1,122,192						$	1,030,322

Net interest spread						3.63	%						3.65	%						3.62	%
Net yield on interest-earning assets			$	41,252		3.71	%			$	37,950		3.72	%			$	34,465		3.70	%

(1)

All loans and deposits were made to borrowers in the United States. Includes nonaccrual loans of $3,265, $7,368, and $6,056, respectively, during the periods presented. (i.e. 2016, 2015 and 2014). Loans include held for sale loans.

(2)

Includes loan fees of $857, $692, and $717, respectively, during the periods presented (i.e. 2016, 2015 and 2014).

(3)

Includes EBA-MNBB and Federal Reserve – New Orleans.

(4)

Tax equivalent yield

Analysis of Changes in Net Interest Income. The following table presents the consolidated dollar amount of changes in interest income and interest expense attributable to changes in volume and to changes in rate. The combined effect in both volume and rate which cannot be separately identified has been allocated proportionately to the change due to volume and due to rate.

Analysis of Changes in Consolidated Net Interest Income

	Year Ended December 31,									Year Ended December 31,
	2016 versus 2015 Increase (decrease) due to									2015 versus 2014 Increase (decrease) due to
	Volume			Rate			Net			Volume			Rate			Net
	(Dollars in thousands)
Earning Assets
Loans	$	3,807		$	448		$	4,255		$	3,826		$	140		$	3,966
Securities		174			(48	)		126			(409	)		144			(265	)
Federal funds sold		(63	)		126			63			19			(8	)		11
Other short-term investments		4			(38	)		(34	)		3			5			8
Total interest income		3,922			488			4,410			3,439			281			3,720
Interest-Bearing Liabilities
Interest-bearing transaction accounts		207			215			422			204			66			270
Money market accounts and savings		(15	)		54			39			6			(24	)		(18	)
Time deposits		108			313			421			(108	)		50			(58	)
Borrowed funds		77			149			226			77			(36	)		41
Total interest expense		377			731			1,108			179			56			235
Net interest income	$	3,545		$	(243	)	$	3,302		$	3,260		$	225		$	3,485

Interest Sensitivity. The Company monitors and manages the pricing and maturity of its assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on its net interest income. A monitoring technique employed by the Company is the measurement of the Company's interest sensitivity "gap," which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time. The Company also performs asset/liability modeling to assess the impact varying interest rates and balance sheet mix assumptions will have on net interest income. Interest rate sensitivity can be managed by repricing assets or liabilities, selling securities available-for-sale, replacing an asset or liability at maturity, or adjusting the interest rate during the life of an asset or liability. Managing the amount of assets and liabilities repricing in the same time interval helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates. The Company evaluates interest sensitivity risk and then formulates guidelines regarding asset generation and repricing, funding sources and pricing, and off-balance sheet commitments in order to decrease interest rate sensitivity risk.

The following tables illustrate the Company's consolidated interest rate sensitivity and consolidated cumulative gap position at December 31, 2016, 2015, and 2014.

	December 31, 2016
	Within Three Months			After Three Through Twelve Months			Within One Year			Greater Than One Year or Nonsensitive			Total
	(Dollars in thousands)
Assets
Earning Assets:
Loans	$	121,391		$	88,433		$	209,824		$	663,110		$	872,934
Securities (2)		10,092			21,376			31,468			224,331			255,799
Funds sold and other		425			29,975			30,400			-			30,400
Total earning assets	$	131,908		$	139,784		$	271,692		$	887,441		$	1,159,133
Liabilities
Interest-bearing liabilities:
Interest-bearing deposits:
NOW accounts(1)	$	-		$	430,903		$	430,903		$	-		$	430,903
Money market accounts		113,253			-			113,253			-			113,253
Savings deposits (1)		-			69,540			69,540			-			69,540
Time deposits		31,273			93,456			124,729			98,288			223,017
Total interest-bearing deposits		144,526			593,899			738,425			98,288			836,713
Borrowed funds (3)		30,000			26,000			56,000			13,000			69,000
Total interest-bearing liabilities		174,526			619,899			794,425			111,288			905,713
Interest-sensitivity gap per period	$	(42,618	)	$	(480,115	)	$	(522,733	)	$	776,153		$	253,420
Cumulative gap at December 31, 2016	$	(42,618	)	$	(522,733	)	$	(522,733	)	$	253,420		$	253,420
Ratio of cumulative gap to total earning assets at December 31, 2016		(3.7	%)		(45.1	%)		(45.1	%)		21.9	%

	December 31, 2015
	Within Three Months			After Three Through Twelve Months			Within One Year			Greater Than One Year or Nonsensitive			Total
	(Dollars in thousands)
Assets
Earning Assets:
Loans	$	101,160		$	76,996		$	178,156		$	598,333		$	776,489
Securities (2)		14,831			18,100			32,931			222,028			254,959
Funds sold and other		321			17,303			17,624			-			17,624
Total earning assets	$	116,312		$	112,399		$	228,711		$	820,361		$	1,049,072
Liabilities
Interest-bearing liabilities:
Interest-bearing deposits:
NOW accounts (1)	$	-		$	373,686		$	373,686		$	-		$	373,686
Money market accounts		105,434			-			105,434			-			105,434
Savings deposits (1)		-			68,657			68,657			-			68,657
Time deposits		37,222			83,549			120,771			58,702			179,473
Total interest-bearing deposits		142,656			525,892			668,548			58,702			727,250
Borrowed funds (3)		81,130			21,191			102,321			8,000			110,321
Total interest-bearing liabilities		223,786			547,083			770,869			66,702			837,571
Interest-sensitivity gap per period	$	(107,474	)	$	(434,684	)	$	(542,158	)	$	753,659		$	211,501
Cumulative gap at December 31, 2015	$	(107,474	)	$	(542,158	)	$	(542,158	)	$	211,501		$	211,501
Ratio of cumulative gap to total earning assets at December 31, 2015		(10.2	%)		(51.7	%)		(51.7	%)		20.2	%

	December 31, 2014
	Within Three Months			After Three Through Twelve Months			Within One Year			Greater Than One Year or Nonsensitive			Total
	(Dollars in thousands)
Assets
Earning Assets:
Loans	$	99,183		$	82,644		$	181,827		$	524,808		$	706,635
Securities (2)		14,266			14,880			29,146			241,028			270,174
Funds sold and other		386			13,899			14,285			-			14,285
Total earning assets	$	113,835		$	111,423		$	225,258		$	765,836		$	991,094
Liabilities
Interest-bearing liabilities:
Interest-bearing deposits:
NOW accounts (1)	$	-		$	301,721		$	301,721		$	-		$	301,721
Money market accounts		117,018			-			117,018			-			117,018
Savings deposits (1)		-			66,615			66,615			-			66,615
Time deposits		53,529			78,581			132,110			73,949			206,059
Total interest-bearing deposits		170,547			446,917			617,464			73,949			691,413
Borrowed funds (3)		40,004			40,464			80,468			8,982			89,450
Total interest-bearing liabilities		210,551			487,381			697,932			82,931			780,863
Interest-sensitivity gap per period	$	(96,716	)	$	(375,958	)	$	(472,674	)	$	682,905		$	210,231
Cumulative gap at December 31, 2014	$	(96,716	)	$	(472,674	)	$	(472,674	)	$	210,231		$	210,231
Ratio of cumulative gap to total earning assets at December 31, 2014		(9.8	%)		(47.7	%)		(47.7	%)		21.2	%

	(1)	NOW and savings accounts are subject to immediate withdrawal and repricing. These deposits do not tend to immediately react to changes in interest rates and the Company believes these deposits are fairly stable. Therefore, these deposits are included in the repricing period that management believes most closely matches the periods in which they are likely to reprice rather than the period in which the funds can be withdrawn contractually.
	(2)	Securities include mortgage backed and other installment paying obligations based upon stated maturity dates.
	(3)	Does not include subordinated debentures of $10,310,000

The Company generally would benefit from increasing market rates of interest when it has an asset-sensitive gap and generally from decreasing market rates of interest when it is liability sensitive. The Company currently is liability sensitive within the one-year time frame. However, the Company's gap analysis is not a precise indicator of its interest sensitivity position. The analysis presents only a static view of the timing of maturities and repricing opportunities, without taking into consideration that changes in interest rates do not affect all assets and liabilities equally. For example, rates paid on a substantial portion of core deposits may change contractually within a relatively short time frame, but those rates are viewed by management as significantly less interest-sensitive than market-based rates such as those paid on non-core deposits. Accordingly, management believes a liability sensitive-position within one year would not be as indicative of the Company’s true interest sensitivity as it would be for an organization which depends to a greater extent on purchased funds to support earning assets. Net interest income is also affected by other significant factors, including changes in the volume and mix of earning assets and interest-bearing liabilities.

The following tables depict, for the periods indicated, certain information related to interest rate sensitivity in net interest income and market value of equity.

December 31, 2016

	Net Interest Income at Risk						Market Value of Equity
Change in Interest Rates	% Change from Base			Policy Limit			% Change from Base			Policy Limit

Up 400 bps		15.4	%		-20	%		22.9	%		-40.00	%
Up 300 bps		11.8	%		-15	%		18.8	%		-30.00	%
Up 200 bps		8.0	%		-10	%		13.7	%		-20.00	%
Up 100 bps		4.0	%		-5	%		7.6	%		-10.00	%
Down 100 bps		-4.8	%		-5	%		-9.5	%		-10.00	%
Down 200 bps		-6.6	%		-10	%		-11.6	%		-20.00	%

December 31, 2015

	Net Interest Income at Risk						Market Value of Equity
Change in Interest Rates	% Change from Base			Policy Limit			% Change from Base			Policy Limit

Up 400 bps		11.2	%		-20	%		34.3	%		-40.00	%
Up 300 bps		8.6	%		-15	%		27.7	%		-30.00	%
Up 200 bps		5.8	%		-10	%		20.0	%		-20.00	%
Up 100 bps		2.9	%		-5	%		10.8	%		-10.00	%
Down 100 bps		-2.7	%		-5	%		-11.5	%		-10.00	%
Down 200 bps		-4.7	%		-10	%		-10.0	%		-20.00	%

December 31, 2014

	Net Interest Income at Risk						Market Value of Equity
Change in Interest Rates	% Change from Base			Policy Limit			% Change from Base			Policy Limit

Up 400 bps		9.9	%		-20	%		-14.9	%		-40.00	%
Up 300 bps		7.4	%		-15	%		-11.2	%		-30.00	%
Up 200 bps		4.8	%		-10	%		-7.7	%		-20.00	%
Up 100 bps		2.1	%		-5	%		-4.1	%		-10.00	%
Down 100 bps		-3.2	%		-5	%		6.5	%		-10.00	%
Down 200 bps		-5.1	%		-10	%		18.7	%		-20.00	%

Provision and Allowance for Loan Losses

The Company has developed policies and procedures for evaluating the overall quality of its credit portfolio and the timely identification of potential problem loans. Management’s judgment as to the adequacy of the allowance is based upon a number of assumptions about future events which it believes to be reasonable, but which may not prove to be accurate. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the loan loss allowance will not be required.

The Company’s allowance consists of two parts. The first part is determined in accordance with authoritative guidance issued by the FASB regarding the allowance. The Company’s determination of this part of the allowance is based upon quantitative and qualitative factors. A loan loss history based upon the prior seven years is utilized in determining the appropriate allowance. Historical loss factors are determined by criticized and uncriticized loans by loan type. These historical loss factors are applied to the loans by loan type to determine an indicated allowance. The loss factors of peer groups are considered in the determination of the allowance and are used to assist in the establishment of a long-term loss history for areas in which this data is unavailable and incorporated into the qualitative factors to be considered. The historical loss factors may also be modified based upon other qualitative factors including but not limited to local and national economic conditions, trends of delinquent loans, changes in lending policies and underwriting standards, concentrations, and management’s knowledge of the loan portfolio. These factors require judgment upon the part of management and are based upon state and national economic reports received from various institutions and agencies including the Federal Reserve Bank, United States Bureau of Economic Analysis, Bureau of Labor Statistics, meetings with the Company’s loan officers and loan committees, and data and guidance received or obtained from the Company’s regulatory authorities.

The second part of the allowance is determined in accordance with guidance issued by the FASB regarding impaired loans. Impaired loans are determined based upon a review by internal loan review and senior loan officers. Impaired loans are loans for which the Bank does not expect to receive contractual interest and/or principal by the due date. A specific allowance is assigned to each loan determined to be impaired based upon the value of the loan’s underlying collateral. Appraisals are used by management to determine the value of the collateral.

The sum of the two parts constitutes management’s best estimate of an appropriate allowance for loan losses. When the estimated allowance is determined, it is presented to the Company’s audit committee for review and approval on a quarterly basis.

Our allowance for loan losses model is focused on establishing a loss history within the Bank and relying on specific impairment to determine credits that the Bank feels the ultimate repayment source will be liquidation of the subject collateral. Our model takes into account many other factors as well such as local and national economic factors, portfolio trends, non performing asset, charge off, and delinquency trends as well as underwriting standards and the experience of branch management and lending staff. These trends are measured in the following ways:

Local Trends: (Updated quarterly usually the month following quarter end)

Local Unemployment Rate

Insurance Issues (Windpool Areas)

Bankruptcy Rates (Increasing/Declining)

Local Commercial R/E Vacancy Rates

Established Market/New Market

Hurricane Threat

National Trends: (Updated quarterly usually the month following quarter end)

Gross Domestic Product (GDP)

Home Sales

Consumer Price Index (CPI)

Interest Rate Environment (Increasing/Steady/Declining)

Single Family Construction Starts

Inflation Rate

Retail Sales

Portfolio Trends: (Updated monthly as the ALLL is calculated)

Second Mortgages

Single Pay Loans

Non-Recourse Loans

Limited Guaranty Loans

Loan to Value Exceptions

Secured by Non-Owner Occupied Property

Raw Land Loans

Unsecured Loans

Measurable Bank Trends: (Updated quarterly)

Delinquency Trends

Non-Accrual Trends

Net Charge Offs

Loan Volume Trends

Non-Performing Assets

Underwriting Standards/Lending Policies

Experience/Depth of Bank Lending

Management

Our model takes into account many local and national economic factors as well as portfolio trends. Local and national economic trends are measured quarterly, typically in the month following quarter end to facilitate the release of economic data from the reporting agencies. These factors are allocated a basis point value ranging from -25 to +25 basis points and directly affect the amount reserved for each branch. As of December 31, 2016, most economic indicators pointed to a stable and improving economy thus most factors were assigned a neutral basis point value. This increased the amount of the allowance that was indicated by historical loss factors. Portfolio trends are measured monthly on a per branch basis to determine the percentage of loans in each branch that the Bank has determined as having more risk. Portfolio risk is defined as areas in the Bank’s loan portfolio in which there is additional risk involved in the loan type or some other area in which the Bank has identified as having more risk. Each area is tracked on bank-wide as well as on a branch-wide basis. Branches are analyzed based on the gross percentage of concentrations of the Bank as a whole. Portfolio risk is determined by analyzing concentrations in the areas outlined by determining the percentage of each branch’s total portfolio that is made up of the particular loan type and then comparing that concentration to the Bank as a whole. Branches with concentrations in these areas are graded on a scale from – 25 basis points to + 25 basis points. Second mortgages, single pay loans, loans secured by raw land, unsecured loans and loans secured by non owner occupied property are considered to be of higher risk than those of a secured and amortizing basis. LTV exceptions place the Bank at risk in the event of repossession or foreclosure.

Measurable Bank Wide Trends are measured on a quarterly basis as well. This consists of data tracked on a bank wide basis in which we have identified areas of additional risk or the need for additional allocation to the allowance for loan loss. Data is updated quarterly, each area is assigned a basis point value from -25 basis points to + 25 basis points based on how each area measures to the previous time period. Net charge offs, loan volume trends and non performing assets have all trended upwards therefore increasing the need for increased funds reserved for loan losses. Underwriting standards/ lending standards as well as experience/ depth of bank lending management is evaluated on a per branch level.

Loans are reviewed for impairment when, in the Bank’s opinion, the ultimate source of repayment will be the liquidation of collateral through foreclosure or repossession. Once identified updated collateral values are obtained on these loans and impairment worksheets are prepared to determine if impairment exists. This method takes into account any expected expenses related to the disposal of the subject collateral. Specific allowances for these loans are done on a per loan basis as each loan is reviewed for impairment. Updated appraisals are ordered on real estate loans and updated valuations are ordered on non real estate loans to determine actual market value.

At December 31, 2016, the consolidated allowance for loan losses amounted to approximately $7.5 million, or .87% of outstanding loans excluding loans held for sale. Including valuation accounting adjustments on acquired loans, the total valuation plus ALLL was 1.00% of loans at December 31, 2016. At December 31, 2015, the allowance for loan losses amounted to approximately $6.7 million, which was .87% of outstanding loans. The Company’s provision for loan losses was $625,000 for the year ended December 31, 2016, and $410,000 for the year ended December 31, 2015, compared to $1,418,000 for the year ended December 31, 2014. During 2016 and 2015, the Company experienced recoveries of $219,000 and $722,000, respectively, on a previously charged off loan of $941,000.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis. Impaired loans not deemed collateral dependent are analyzed according to the ultimate repayment source, whether that is cash flow from the borrower, guarantor or some other source of repayment. Impaired loans are deemed collateral dependent if in the Bank’s opinion the ultimate source of repayment will be generated from the liquidation of collateral.

The Company discontinues accrual of interest on loans when management believes, after considering economic and business conditions and collection efforts, that a borrower’s financial condition is such that the collection of interest is doubtful. Generally, the Company will place a delinquent loan in nonaccrual status when the loan becomes 90 days or more past due. At the time a loan is placed in nonaccrual status, all interest which has been accrued on the loan but remains unpaid is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain.

The following tables illustrate the Company’s past due and nonaccrual loans at December 31, 2016, 2015 and 2014.

	December 31, 2016
	(In thousands)
	Past Due 30 to 89 Days		Past Due 90 days or more and still accruing		Non-Accrual

Real Estate-construction	$	204	$	96	$	658
Real Estate-mortgage		2,745		102		1,662
Real Estate-nonfarm nonresidential		269		-		909
Commercial		9		-		2
Consumer		22		-		33
Total	$	3,249	$	198	$	3,264

	December 31, 2015
	(In thousands)
	Past Due 30 to 89 Days		Past Due 90 days or more and still accruing		Non-Accrual

Real Estate-construction	$	311	$	-	$	2,956
Real Estate-mortgage		3,339		29		2,055
Real Estate-nonfarm nonresidential		736		-		2,225
Commercial		97		-		100
Consumer		70		-		32
Total	$	4,553	$	29	$	7,368

	December 31, 2014
	(In thousands)
	Past Due 30 to 89 Days		Past Due 90 days or more and still accruing		Non-Accrual

Real Estate-construction	$	428	$	-	$	2,747
Real Estate-mortgage		3,208		208		2,164
Real Estate-nonfarm nonresidential		3,408		461		1,102
Commercial		29		-		5
Consumer		90		-		38
Total	$	7,163	$	669	$	6,056

Total nonaccrual loans at December 31, 2016, amounted to $3.3 million, which was a decrease of $4.1 million from the December 31, 2015 amount of $7.4 and a decrease of $2.8 million from the December 31, 2014 amount of $6.1 million. Management believes these relationships were adequately reserved at December 31, 2016. Restructured loans not reported as past due or nonaccrual at December 31, 2016, amounted to $2.8 million.

A potential problem loan is one in which management has serious doubts about the borrower’s future performance under the terms of the loan contract. These loans are current as to principal and interest and, accordingly, they are not included in nonperforming asset categories. The level of potential problem loans is one factor used in the determination of the adequacy of the allowance for loan losses. At December 31, 2016, 2015 and December 31, 2014, The First had potential problem loans of $13,291,000, $17,878,000 and $20,946,000, respectively. The gradual decline is the result of payoffs, foreclosures and continual reduction through payment of criticized and classified loans.

Consolidated Allowance For Loan Losses

(In thousands)

	Years Ended December 31,
	2016			2015			2014			2013			2012

Average loans outstanding	$	820,881		$	730,326		$	632,049		$	583,200		$	388,012
Loans outstanding at year end	$	872,934		$	776,489		$	706,635		$	583,302		$	413,697

Total nonaccrual loans	$	3,264		$	7,368		$	6,056		$	3,181		$	3,401

Beginning balance of allowance	$	6,747		$	6,095		$	5,728		$	4,727		$	4,511
Loans charged-off		(771	)		(843	)		(1,459	)		(759	)		(1,190	)
Total loans charged-off		(771	)		(843	)		(1,459	)		(759	)		(1,190	)
Total recoveries		909			1,085			408			684			178
Net loans (charged-off) recoveries		138			242			(1,051	)		(75	)		(1,012	)
Provision for loan losses		625			410			1,418			1,076			1,228
Balance at year end	$	7,510		$	6,747		$	6,095		$	5,728		$	4,727

Net charge-offs (recoveries) to average loans		(.02	%)		(.03	%)		.17	%		.01	%		.26	%
Allowance as percent of total loans		.86	%		.87	%		.86	%		.98	%		1.14	%
Nonperforming loans as a percentage of total loans		.37	%		.95	%		.86	%		.55	%		.82	%
Allowance as a multiple of nonaccrual loans		2.3	X		.92	X		1.0	X		1.8	X		1.4	X

At December 31, 2016, the components of the allowance for loan losses consisted of the following:

	Allowance
	(In thousands)
Allocated:
Impaired loans	$	682
Graded loans		6,828
	$	7,510

Graded loans are those loans or pools of loans assigned a grade by internal loan review.

The following table represents the activity of the allowance for loan losses for the years 2016, 2015, and 2014.

Analysis of the Allowance for Loan Losses

	Years Ended December 31,
	2016			2015			2014
	(Dollars in thousands)

Balance at beginning of year	$	6,747		$	6,095		$	5,728
Charge-offs:
Real Estate-construction		(274	)		(162	)		(47	)
Real Estate-mortgage		(353	)		(372	)		(1,156	)
Real Estate-nonfarm nonresidential		(-)			(-)			(-)
Commercial		(71	)		(183	)		(89	)
Consumer		(73	)		(126	)		(167	)
Total		(771	)		(843	)		(1,459	)
Recoveries:
Real Estate-construction		229			63			96
Real Estate-mortgage		519			827			212
Real Estate-nonfarm nonresidential		7			15			17
Commercial		84			99			15
Consumer		70			81			68
Total		909			1,085			408
Net (Charge-offs) Recoveries		138			242			(1,051	)
Provision for Loan Losses		625			410			1,418
Balance at end of year	$	7,510		$	6,747		$	6,095

The following tables represent how the allowance for loan losses is allocated to a particular loan type as well as the percentage of the category to total loans at December 31, 2016, 2015 and 2014.

Allocation of the Allowance for Loan Losses

	December 31, 2016
			(Dollars in thousands)
	Amount		% of loans in each category to total loans

Commercial Non Real Estate	$	1,118		15.6	%
Commercial Real Estate		4,071		61.6	%
Consumer Real Estate		1,589		20.3	%
Consumer		155		2.4	%
Unallocated		577		0.1	%
Total	$	7,510		100	%

	December 31, 2015
			(Dollars in thousands)
	Amount		% of loans in each category to total loans

Commercial Non Real Estate	$	895		17.1	%
Commercial Real Estate		3,018		58.4	%
Consumer Real Estate		1,477		21.9	%
Consumer		141		2.5	%
Unallocated		1,216		0.1	%
Total	$	6,747		100	%

	December 31, 2014
			(Dollars in thousands)
	Amount		% of loans in each category to total loans

Commercial Non Real Estate	$	713		15.3	%
Commercial Real Estate		3,355		57.9	%
Consumer Real Estate		1,852		24.2	%
Consumer		175		2.6	%
Unallocated		-		-
Total	$	6,095		100	%

Noninterest Income and Expense

Noninterest Income. The Company’s primary sources of noninterest income are mortgage banking operations as well as service charges on deposit accounts. Other sources of noninterest income include bankcard fees, commissions on check sales, safe deposit box rent, wire transfer fees, official check fees and bank owned life insurance income.

Noninterest income increased $3,658,000 or 48.2% during 2016 to $11,247,000 from $7,589,000 for the year ended December 31, 2015, and decreased $214,000 or 2.8% during 2015 to $7,589,000 from $7,803,000 for the year ended December 31, 2014. The deposit activity fees were $5,126,000 for 2016 compared to $5,014,000 for 2015 and compared to $4,262,000 for 2014. Other service charges increased by $3,243,000 or 209.8% for the year ended 2016 from $1,546,000 for the year ended December 31, 2015 and other service charges decreased $392,000 or 20.2% to $1,546,000 for the year ended December 31, 2015, from $1,938,000 for the year ended December 31, 2014. Mortgage income increased $3.2 million during 2016 due to increased volume from the acquisition of The Mortgage Connection, LLC in December, 2015.

Noninterest expense increased to $36.9 million for the year ended December 31, 2016 from $32.2 million for the year ended December 31, 2015, and increased to $32.2 million for the year ended December 31, 2015, from $30.7 million for the year ended December 31, 2014. The Company experienced slight increases in most expense categories. The largest increase was in salaries and employee benefits, which increased by $3.6 million in 2016 as compared to 2015 and $1.1 million in 2015 as compared to 2014. These increases were due in part to a full year of the addition of the Mortgage Connection and the lending teams in Mobile, AL and Jackson, MS.

The following table sets forth the primary components of noninterest expense for the periods indicated:

Noninterest Expense

	Years ended December 31,
	2016		2015		2014
	(In thousands)

Salaries and employee benefits	$	22,137	$	18,537	$	17,462
Occupancy		3,459		3,422		3,141
Equipment		1,262		1,199		1,541
Marketing and public relations		465		497		445
Data processing		535		150		161
Supplies and printing		287		300		498
Telephone		782		631		616
Correspondent services		109		104		83
Deposit and other insurance		1,020		1,051		1,048
Professional and consulting fees		1,805		1,332		1,618
Postage		396		400		302
ATM expense		883		763		689
Other		3,722		3,775		3,130

Total	$	36,862	$	32,161	$	30,734

Income Tax Expense

Income tax expense consists of two components. The first is the current tax expense which represents the expected income tax to be paid to taxing authorities. The Company also recognizes deferred tax for future income/deductible amounts resulting from differences in the financial statement and tax bases of assets and liabilities and this has had no significant impact on results year over year.

Analysis of Financial Condition

Earning Assets

Loans. Loans typically provide higher yields than the other types of earning assets, and thus one of the Company's goals is for loans to be the largest category of the Company's earning assets. At December 31, 2016, 2015 and 2014, respectively, average loans accounted for 73.9%, 71.7% and 67.8% of average earning assets. Management attempts to control and counterbalance the inherent credit and liquidity risks associated with the higher loan yields without sacrificing asset quality to achieve its asset mix goals. Loans averaged $820.9 million during 2016 and $730.3 million during 2015, as compared to $632.0 million during 2014.

The following table shows the composition of the loan portfolio by category:

Composition of Loan Portfolio

	December 31,
	2016						2015						2014
	Amount			Percent Of Total			Amount			Percent of Total			Amount			Percent of Total
	(Dollars in thousands)

Mortgage loans held for sale	$	5,880			0.6	%	$	3,974			0.5	%	$	2,103			0.3	%
Commercial, financial and agricultural		129,423			14.8	%		129,197			16.6	%		106,109			15.0	%
Real Estate:
Mortgage-commercial		314,359			36.0	%		253,309			32.6	%		238,602			33.8	%
Mortgage-residential		289,640			33.2	%		272,180			35.1	%		256,406			36.3	%
Construction		109,394			12.5	%		99,161			12.8	%		84,935			12.0	%
Lease Financing Receivable		2,204			0.3	%		2,650			0.3	%
Obligations of states and subdivisions		6,698			0.8	%		969			0.1	%		1,990			0.3	%
Consumer and other		15,336			1.8	%		15,049			2.0	%		16,490			2.3	%
Total loans		872,934			100	%		776,489			100	%		706,635			100	%
Allowance for loan losses		(7,510	)					(6,747	)					(6,095	)
Net loans	$	865,424					$	769,742					$	700,540

In the context of this discussion, a "real estate mortgage loan" is defined as any loan, other than loans for construction purposes, secured by real estate, regardless of the purpose of the loan. The Company follows the common practice of financial institutions in the Company’s market area of obtaining a security interest in real estate whenever possible, in addition to any other available collateral. This collateral is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to increase the magnitude of the real estate loan portfolio component. Generally, the Company limits its loan-to-value ratio to 80%. Management attempts to maintain a conservative philosophy regarding its underwriting guidelines and believes it will reduce the risk elements of its loan portfolio through strategies that diversify the lending mix.

Loans held for sale consist of mortgage loans originated by the Bank and sold into the secondary market. Commitments from investors to purchase the loans are obtained upon origination.

The following table sets forth the Company's commercial and construction real estate loans maturing within specified intervals at December 31, 2016.

Loan Maturity Schedule and Sensitivity to Changes in Interest Rates

	December 31, 2016
Type	One Year or Less		Over One Year Through Five Years		Over Five Years		Total
	(In thousands)

Commercial, financial and agricultural	$	34,547	$	79,019	$	15,857	$	129,423
Real estate – construction		60,202		42,655		6,537		109,394

	$	94,749	$	121,674	$	22,394	$	238,817
Loans maturing after one year with:
Fixed interest rates							$	124,573
Floating interest rates								19,495
							$	144,068

The information presented in the above table is based on the contractual maturities of the individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon their maturity.

Investment Securities. The investment securities portfolio is a significant component of the Company's total earning assets. Total securities averaged $261.5 million in 2016, as compared to $256.5 million in 2015, and $271.2 million in 2014. This represents 23.5%, 25.2%, and 29.1% of the average earning assets for the years ended December 31, 2016, 2015 and 2014, respectively. At December 31, 2016, investment securities were $255.8 million and represented 22.1% of earning assets. The Company attempts to maintain a portfolio of high quality, highly liquid investments with returns competitive with short-term U.S. Treasury or agency obligations. This objective is particularly important as the Company focuses on growing its loan portfolio. The Company primarily invests in securities of U.S. Government agencies, municipals, and corporate obligations with maturities up to five years.

The following table summarizes the carrying value of securities for the dates indicated.

Securities Portfolio

	December 31,
	2016		2015		2014
	(In thousands)
Available-for-sale
U. S. Government agencies and Mortgage-backed Securities	$	123,334	$	118,536	$	120,407
States and municipal subdivisions		98,822		97,889		104,582
Corporate obligations		20,110		22,346		28,785
Mutual finds		940		961		972
Total available-for-sale		243,206		239,732		254,746
Held-to-maturity
U.S. Government agencies		-		1,092		2,193
States and municipal subdivisions		6,000		6,000		6,000
Total held-to-maturity		6,000		7,092		8,193
Total	$	249,206	$	246,824	$	262,939

The following table shows, at carrying value, the scheduled maturities and average yields of securities held at December 31, 2016.

Investment Securities Maturity Distribution and Yields (1)

	December 31, 2016
						After One But					After Five But
(Dollars in thousands)	Within One Year					Within Five Years					Within Ten Years					After Ten Years
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Held-to-maturity:
States and municipal subdivisions	$	-		-		$	-		-		$	6,000,000		.93	%	$	-		-
Total investment securities held-to-maturity		-				$	-				$	6,000,000				$	-		-
Available-for-sale:
U.S. Government agencies (2)	$	4,039,195		1.06	%	$	5,005,475		1.37	%	$	-				$	-
States and municipal subdivisions.		13,143,901		2.83	%		39,588,283		3.33	%		35,262,252		3.99	%		10,827,971		4.75	%
Corporate obligations and other		3,033,805		1.84	%		14,835,047		2.02	%		-		-			3,181,083		2.58	%
Total investment securities available-for-sale	$	20,216,901				$	59,428,805				$	35,262,252				$	14,009,054

(1)

Investments with a call feature are shown as of the contractual maturity date.

(2)

Excludes mortgage-backed securities totaling $114.3 million with a yield of 2.23% and mutual funds of $.9 million.

Short-Term Investments. Short-term investments, consisting of Federal Funds Sold, funds in due from banks and interest-bearing deposits with banks, averaged $18.8 million in 2016, $24.6 million in 2015, and $24.8 million in 2014. At December 31, 2016, 2015, and December 31, 2014, short-term investments totaled $425,000, $321,000 and $386,000, respectively. These funds are a primary source of the Company's liquidity and are generally invested in an earning capacity on an overnight basis.

Deposits

Deposits. Average total deposits were $1,021.1 million, an increase of $69.5 million, or 7.3% in 2016. Average total deposits were $951.6 million, an increase of $75.3 million, or 8.6% in 2015, and average total deposits were $876.3 million, an increase of $109.8 million, 14.3% in 2014. At December 31, 2016, total deposits were $1,039.2 billion, compared to $916.7at December 31, 2015, an increase of $122.5 million, or 13.4%, and $892.8 million at December 31, 2014.

The following table sets forth the deposits of the Company by category for the period indicated.

	Deposits
	December 31,
(Dollars in thousands)	2016					2015					2014
			Percent of					Percent of					Percent of
	Amount		Deposits			Amount		Deposits			Amount		Deposits

Noninterest-bearing accounts	$	202,478		19.5	%	$	189,445		20.6	%	$	201,362		22.6	%
NOW accounts		430,903		41.5	%		373,686		40.8	%		301,721		33.8	%
Money market accounts		113,253		10.9	%		105,434		11.5	%		117,018		13.1	%
Savings accounts		69,540		6.7	%		68,657		7.5	%		66,615		7.5	%
Time deposits less than $250,000		162,797		15.6	%		139,687		15.2	%		166,339		18.6	%
Time deposits of $250,000 or over		60,220		5.8	%		39,786		4.4	%		39,720		4.4	%
Total deposits	$	1,039,191		100	%	$	916,695		100	%	$	892,775		100	%

The Company’s loan-to-deposit ratio was 83.4% at December 31, 2016, 84.3% at December 31, 2015 and 78.9% at December 31, 2014. The loan-to-deposit ratio averaged 80.4% during 2016. Core deposits, which exclude time deposits of $250,000 or more, provide a relatively stable funding source for the Company's loan portfolio and other earning assets. The Company's core deposits were $979.0 at December 31, 2016, $882.4 million at December 31, 2015, and $859.0 million at December 31, 2014. Management anticipates that a stable base of deposits will be the Company's primary source of funding to meet both its short-term and long-term liquidity needs in the future. The Company has purchased brokered deposits from time to time to help fund loan growth. Brokered deposits and jumbo certificates of deposit generally carry a higher interest rate than traditional core deposits. Further, brokered deposit customers typically do not have loan or other relationships with the Company. The Company has adopted a policy not to permit brokered deposits to represent more than 10% of all of the Company’s deposits.

The maturity distribution of the Company's certificates of deposit of $250,000 or more at December 31, 2016, is shown in the following table. The Company did not have any other time deposits of $250,000 or more.

Maturities of Certificates of Deposit

of $250,000 or More

			After Three
	Within Three		Through		After Twelve
(In thousands)	Months		Twelve Months		Months		Total

December 31, 2016	$	9,375	$	22,030	$	28,815	$	60,220

Borrowed Funds

Borrowed funds consist of advances from the Federal Home Loan Bank of Dallas, federal funds purchased and reverse repurchase agreements. At December 31, 2016, advances from the FHLB totaled $48.0 compared to $100.0 million at December 31, 2015 and $84.5 million at December 31, 2014. The advances are collateralized by a blanket lien on the first mortgage loans in the amount of the outstanding borrowings, FHLB capital stock, and amounts on deposit with the FHLB. There were $0, $5.3 million and $0 federal funds purchased at December 31, 2016, 2015, and 2014, respectively.

Reverse Repurchase Agreements consist of one $5,000,000 agreement. The agreement is secured by securities with a fair value of $5,470,105 at December 31, 2016, $5,501,503 at December 31, 2015 and $7,443,951 at December 31, 2014. The maturity date of the remaining agreement is September 26, 2017, with a rate of 3.81%.

Subordinated Debentures

In 2006, the Company issued subordinated debentures of $4,124,000 to The First Bancshares, Inc. Statutory Trust 2 (Trust 2). The Company is the sole owner of the equity of the Trust 2. The Trust 2 issued $4,000,000 of preferred securities to investors. The Company makes interest payments and will make principal payments on the debentures to the Trust 2. These payments will be the source of funds used to retire the preferred securities, which are redeemable at any time beginning in 2011 and thereafter, and mature in 2036. The Company entered into this arrangement to provide funding for expected growth.

In 2007, the Company issued subordinated debentures of $6,186,000 to The First Bancshares, Inc. Statutory Trust 3 (Trust 3). The Company is the sole owner of the equity of the Trust 3. The Trust 3 issued $6,000,000 of preferred securities to investors. The Company makes interest payments and will make principal payments on the debentures to the Trust 3. These payments will be the source of funds used to retire the preferred securities, which are redeemable at any time beginning in 2012 and thereafter, and mature in 2037. The Company entered into this arrangement to provide funding for expected growth.

Capital

Total stockholders’ equity as of December 31, 2016 was $154.5 million, an increase of $51.1 million or approximately 49.4% as compared with stockholders’ equity of $103.4 million as of December 31, 2015 and $96.2 million as of December 31, 2014.

The Federal Reserve Board and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 600%. Under the risk-based standard, capital is classified into two tiers. Tier 1 capital consists of common stockholders' equity, excluding the unrealized gain (loss) on available-for-sale securities, minus certain intangible assets. Tier 2 capital consists of the general reserve for loan losses, subject to certain limitations. An institution’s total risk-based capital for purposes of its risk-based capital ratio consists of the sum of its Tier 1 and Tier 2 capital. The risk-based regulatory minimum requirements are 6% for Tier 1 and 8% for total risk-based capital.

Bank holding companies and banks are also required to maintain capital at a minimum level based on total assets, which is known as the leverage ratio. The minimum requirement for the leverage ratio is 4%. All but the highest rated institutions are required to maintain ratios 100 to 200 basis points above the minimum. The Company and The First exceeded their minimum regulatory capital ratios as of December 31, 2016, 2015 and 2014.

The Federal Reserve and the Federal Deposit Insurance Corporation approved final capital rules in July 2013, that substantially amend the existing capital rules for banks. These new rules reflect, in part, certain standards initially adopted by the Basel Committee on Banking Supervision in December 2010 (which standards are commonly referred to as “Basel III”) as well as requirements contemplated by the Dodd-Frank Act.

Under the new capital rules, the Company is required to meet certain minimum capital requirements that differ from past capital requirements. The rules implement a new capital ratio of common equity Tier 1 capital to risk-weighted assets. Common equity Tier 1 capital generally consists of retained earnings and common stock (subject to certain adjustments) as well as accumulated other comprehensive income (“AOCI”), except to the extent that the Company exercised a one-time irrevocable option to exclude certain components of AOCI as of March 31, 2015. The Company will also be required to establish a “conservation buffer,” consisting of a common equity Tier 1 capital amount equal to 2.5% of risk-weighted assets to be phased in by 2019. An institution that does not meet the conservation buffer will be subject to restrictions on certain activities including payment of dividends, stock repurchases, and discretionary bonuses to executive officers.

The prompt corrective action rules are modified to include the common equity Tier 1 capital ratio and to increase the Tier 1 capital ratio requirements for the various thresholds. For example, the requirements for the Company to be considered well-capitalized under the rules will be a 5.0% leverage ratio, a 6.5% common equity Tier 1capital ratio, an 8.0% Tier 1 capital ratio, and a 10.0% total capital ratio. To be adequately capitalized, those ratios are 4.0%, 4.5%, 6.0%, and 8.0%, respectively.

The rules modify the manner in which certain capital elements are determined. The rules make changes to the methods of calculating the risk-weighting of certain assets, which in turn affects the calculation of the risk-weighted capital ratios. Higher risk weights are assigned to various categories of assets, including commercial real estate loans, credit facilities that finance the acquisition, development or construction of real property, certain exposures or credit that are 90 days past due or are nonaccrual, securitization exposures, and in certain cases mortgage servicing rights and deferred tax assets.

The Company was required to comply with the new capital rules on January 1, 2015, with a measurement date of March 31, 2015. The conservation buffer will be phased-in beginning in 2016, and will take full effect on January 1, 2019. Certain calculations under the rules will also have phase-in periods.

Analysis of Capital

	Adequately			Well			The Company									The First
Capital Ratios	Capitalized			Capitalized			December 31,									December 31,
							2016			2015			2014			2016			2015			2014

Leverage		4.0	%		5.0	%		11.9	%		8.7	%		8.4	%		13.1	%		8.6	%		8.4	%
Risk-based capital:
Common equity Tier 1		4.5	%		6.5	%		13.8	%		8.1	%		-			16.2	%		11.0	%		-
Tier 1		6.0	%		8.0	%		14.7	%		11.1	%		11.5	%		16.2	%		11.0	%		11.4	%
Total		8.0	%		10.0	%		15.5	%		11.9	%		12.3	%		17.0	%		11.8	%		12.2	%

Ratios

	2016			2015			2014
Return on assets (net income applicable to common stockholders divided by average total assets)		.79	%		.75	%		.61	%

Return on equity (net income applicable to common stockholders divided by average equity)		8.0	%		8.6	%		7.1	%

Dividend payout ratio (dividends per share divided by net income per common share)		9.6	%		9.7	%		12.6	%

Equity to asset ratio (average equity divided by average total assets)		9.8	%		8.8	%		8.6	%

Liquidity and Market Risk Management

Liquidity management involves monitoring the Company's sources and uses of funds in order to meet its day-to-day cash flow requirements while maximizing profits. Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of the investment portfolio is very predictable and subject to a high degree of control at the time investment decisions are made; however, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control. Asset liquidity is provided by cash and assets which are readily marketable, which can be pledged, or which will mature in the near future. Liability liquidity is provided by access to core funding sources, principally the ability to generate customer deposits in the Company’s market area.

The Company's Federal Funds Sold position, which includes funds in due from banks and interest-bearing deposits with banks, is typically its primary source of liquidity, averaged $28.8 million during the year ended December 31, 2016 and totaled $30.4 million at December 31, 2016. Also, the Company has available advances from the Federal Home Loan Bank. Advances available are generally based upon the amount of qualified first mortgage loans which can be used for collateral. At December 31, 2016, advances available totaled approximately $397.5 million of which $48.0 million had been drawn, or used for letters of credit.

As of December 31, 2016, the market value of unpledged debt securities plus pledged securities in excess of current pledging requirements comprised $100.2 million of the Company’s investment balances, compared to $66 million at December 31, 2015. The increase in unpledged debt from December 2016 compared to December 2015 is primarily due to an increase in unpledged investments and letters of credit utilized for pledging purposes. Other forms of balance sheet liquidity include but are not necessarily limited to any outstanding fed funds sold and vault cash. The Company has a higher level of actual balance sheet liquidity than might otherwise be the case, since we utilize a letter of credit from the FHLB rather than investment securities for certain pledging requirements. That letter of credit, which is backed by loans that are pledged to the FHLB by the Company, totaled $45.5 million at December 31, 2016. Management is of the opinion that available investments and other potentially liquid assets, along with the standby funding sources it has arranged, are more than sufficient to meet the Company’s current and anticipated short-term liquidity needs.

The Company’s liquidity ratio as of December 31, 2016 was 15.3%, as compared to internal policy guidelines of 10% minimum. Other liquidity ratios reviewed include the following along with policy guidelines for the periods indicated:

	December 31, 2016			Policy Maximum
Loans to Deposits (including FHLB advances)		79.1	%		90.0	%	In Policy
Net Non-core Funding Dependency Ratio		8.3	%		20.0	%	In Policy
Fed Funds Purchased / Total Assets		0.4	%		10.0	%	In Policy
FHLB Advances / Total Assets		3.9	%		20.0	%	In Policy
FRB Advances / Total Assets		0.0	%		10.0	%	In Policy
Pledged Securities to Total Securities		66.6	%		90.0	%	In Policy

	December 31, 2015			Policy Maximum
Loans to Deposits (including FHLB advances)		75.4	%		90.0	%	In Policy
Net Non-core Funding Dependency Ratio		13.8	%		30.0	%	In Policy
Fed Funds Purchased / Total Assets		0.9	%		10.0	%	In Policy
FHLB Advances / Total Assets		8.9	%		20.0	%	In Policy
FRB Advances / Total Assets		0.0	%		10.0	%	In Policy
Pledged Securities to Total Securities		84.7	%		90.0	%	In Policy

	December 31, 2014			Policy Maximum
Loans to Deposits (including FHLB advances)		71.6	%		90.0	%	In Policy
Net Non-core Funding Dependency Ratio		10.2	%		30.0	%	In Policy
Fed Funds Purchased / Total Assets		0.5	%		10.0	%	In Policy
FHLB Advances / Total Assets		7.8	%		20.0	%	In Policy
FRB Advances / Total Assets		0.0	%		10.0	%	In Policy
Pledged Securities to Total Securities		71.0	%		90.0	%	In Policy

Continued growth in core deposits and relatively high levels of potentially liquid investments have had a positive impact on our liquidity position in recent periods, but no assurance can be provided that our liquidity will continue at current robust levels.

The holding company’s primary uses of funds are ordinary operating expenses and stockholder dividends, and its primary source of funds is dividends from the Bank since the holding company does not conduct regular banking operations. Management anticipates that the Bank will have sufficient earnings to provide dividends to the holding company to meet its funding requirements for the foreseeable future.

Management regularly reviews the liquidity position of the Company and has implemented internal policies which establish guidelines for sources of asset-based liquidity and limit the total amount of purchased funds used to support the balance sheet and funding from non-core sources.

Interest Rate Risk Management

Market risk arises from changes in interest rates, exchange rates, commodity prices and equity prices. The Company does not engage in the trading of financial instruments, nor does it have exposure to currency exchange rates. Our market risk exposure is primarily that of interest rate risk, and we have established policies and procedures to monitor and limit our earnings and balance sheet exposure to changes in interest rates. The principal objective of interest rate risk management is to manage the financial components of the Company’s balance sheet in a manner that will optimize the risk/reward equation for earnings and capital under a variety of interest rate scenarios.

To identify areas of potential exposure to interest rate changes, we utilize commercially available modeling software to perform earnings simulations and calculate the Company’s market value of portfolio equity under varying interest rate scenarios every month. The model imports relevant information for the Company’s financial instruments and incorporates Management’s assumptions on pricing, duration, and optionality for anticipated new volumes. Various rate scenarios consisting of key rate and yield curve projections are then applied in order to calculate the expected effect of a given interest rate change on interest income, interest expense, and the value of the Company’s financial instruments. The rate projections can be shocked (an immediate and parallel change in all base rates, up or down), ramped (an incremental increase or decrease in rates over a specified time period), economic (based on current trends and econometric models) or stable (unchanged from current actual levels).

We use seven standard interest rate scenarios in conducting our 12-month net interest income simulations: “static,” upward shocks of 100, 200, 300 and 400 basis points, and downward shocks of 100, and 200 basis points. Pursuant to policy guidelines, we typically attempt to limit the projected decline in net interest income relative to the stable rate scenario to no more than 5% for a 100 basis point (bp) interest rate shock, 10% for a 200 bp shock, 15% for a 300 bp shock, and 20% for a 400 bp shock. As of December 31, 2016, the Company had the following estimated net interest income sensitivity profiles, without factoring in any potential negative impact on spreads resulting from competitive pressures or credit quality deterioration:

December 31, 2016	Net Interest Income at Risk
($ In Thousands)	-200 bp			-100 bp			STATIC		+100 bp			+200 bp			+300 bp			+400 bp
Net Interest Income		36,818			37,528			39,430		41,011			42,563			44,066			45,518
Dollar Change		-2,612			-1,902			-		1,581			3,133			4,636			6,088
NII @ Risk - Sensitivity Y1		-6.6	%		-4.8	%		-		4.0	%		8.0	%		11.8	%		15.4	%

If there were an immediate and sustained downward adjustment of 200 basis points in interest rates, all else being equal, net interest income over the next twelve months would likely be approximately $2.6 million lower than in a stable interest rate scenario, for a negative variance of 6.6%. The unfavorable variance increases if rates were to drop below 200 basis points, due to the fact that certain deposit rates are already relatively low (on NOW accounts and savings accounts, for example), and will hit a natural floor of close to zero while non-floored variable-rate loan yields continue to drop. This effect is exacerbated by accelerated prepayments on fixed-rate loans and mortgage-backed securities when rates decline, although rate floors on some of our variable-rate loans partially offset other negative pressures. While we view further interest rate reductions as highly unlikely, the potential percentage drop in net interest income exceeds our internal policy guidelines in declining interest rate scenarios and we will continue to monitor our interest rate risk profile and take corrective action as deemed appropriate.

Net interest income would likely improve by $3.1 million, or 8.0%, if interest rates were to increase by 200 basis points relative to a stable interest rate scenario, with the favorable variance expanding the higher interest rates rise. The initial increase in rising rate scenarios will be limited to some extent by the fact that some of our variable-rate loans are currently at rate floors, resulting in a re-pricing lag while base rates are increasing to floored levels, but the Company still appears well-positioned to benefit from a material upward shift in the yield curve.

The Company’s one year cumulative GAP ratio was approximately 199.4% at December 31, 2016 and 168.3% at December 31, 2015, which means that there are more assets repricing than liabilities within the first year. The Company is “asset-sensitive.” The Company’s one year cumulative GAP ratio was approximately 92.2% at December 31, 2014, which meant that there were more liabilities repricing than assets within the first year. These results are based on cash flows from assumptions of assets and liabilities that reprice (maturities, likely calls, prepayments, etc.) Typically, the net interest income of asset-sensitive companies should improve with rising rates and decrease with declining rates.

In addition to the net interest income simulations shown above, we run stress scenarios modeling the possibility of no balance sheet growth, the potential runoff of “surge” core deposits which flowed into the Company in the most recent economic cycle, and potential unfavorable movement in deposit rates relative to yields on earning assets. Even though net interest income will naturally be lower with no balance sheet growth, the rate-driven variances projected for net interest income in a static growth environment are similar to the changes noted above for our standard projections. When a greater level of non-maturity deposit runoff is assumed or unfavorable deposit rate changes are factored into the model, projected net interest income in declining rate and flat rate scenarios does not change materially relative to standard growth projections. However, the benefit we would otherwise experience in rising rate scenarios is minimized and net interest income remains relatively flat.

The economic value (or “fair value”) of financial instruments on the Company’s balance sheet will also vary under the interest rate scenarios previously discussed. The difference between the projected fair value of the Company’s financial assets and the fair value of its financial liabilities is referred to as the economic value of equity (“EVE”), and changes in EVE under different interest rate scenarios are effectively a gauge of the Company’s longer-term exposure to interest rate risk. Fair values for financial instruments are estimated by discounting projected cash flows (principal and interest) at projected replacement interest rates for each account type, while the fair value of non-financial accounts is assumed to equal their book value for all rate scenarios. An economic value simulation is a static measure utilizing balance sheet accounts at a given point in time, and the measurement can change substantially over time as the characteristics of the Company’s balance sheet evolve and interest rate and yield curve assumptions are updated.

The change in economic value under different interest rate scenarios depends on the characteristics of each class of financial instrument, including stated interest rates or spreads relative to current or projected market-level interest rates or spreads, the likelihood of principal prepayments, whether contractual interest rates are fixed or floating, and the average remaining time to maturity. As a general rule, fixed-rate financial assets become more valuable in declining rate scenarios and less valuable in rising rate scenarios, while fixed-rate financial liabilities gain in value as interest rates rise and lose value as interest rates decline. The longer the duration of the financial instrument, the greater the impact a rate change will have on its value. In our economic value simulations, estimated prepayments are factored in for financial instruments with stated maturity dates, and decay rates for non-maturity deposits are projected based on historical patterns and Management’s best estimates. The table below shows estimated changes in the Company’s EVE as of the periods indicated under different interest rate scenarios relative to a base case of current interest rates:

	December 31, 2016 - Balance Sheet Shock
($ In Thousands)	-200 bp			-100 bp			STATIC (Base)		+100 bp			+200 bp			+300 bp			+400 bp
Market Value of Equity		315,609			323,038			356,983		384,268			406,044			424,054			438,668
Change in EVE from base		-41,374			-33,945					27,285			49,061			67,071			81,685
% Change		-11.6	%		-9.5	%				7.6	%		13.7	%		18.8	%		22.9	%
Policy Limits		-20.00	%		-10.00	%				-10.00	%		-20.00	%		-30.00	%		-40.00	%

	December 31, 2015 - Balance Sheet Shock
($ In Thousands)	-200 bp			-100 bp			STATIC (Base)		+100 bp			+200 bp			+300 bp			+400 bp
Market Value of Equity		241,882			237,988			268,793		297,881			322,658			343,367			360,886
Change in EVE from base		-26,911			-30,805					29,088			53,865			74,574			92,093
% Change		-10.0	%		-11.5	%				10.8	%		20.0	%		27.7	%		34.3	%
Policy Limits		-20.00	%		-10.00	%				-10.00	%		-20.00	%		-30.00	%		-40.00	%

	December 31, 2014 - Balance Sheet Shock
($ In Thousands)	-200 bp			-100 bp			STATIC (Base)		+100 bp			+200 bp			+300 bp			+400 bp
Market Value of Equity		139,508			125,098			117,504		112,711			108,512			104,338			100,046
Change in EVE from base		22,004			7,594					-4,793			-8,992			-13,166			-17,458
% Change		18.7	%		6.5	%				-4.1	%		-7.7	%		-11.2	%		-14.9	%
Policy Limits		-20.00	%		-10.00	%				-10.00	%		-20.00	%		-30.00	%		-40.00	%

The tables show that our EVE will generally deteriorate in declining rate scenarios, but should benefit from a parallel shift upward in the yield curve. As noted previously, however, Management is of the opinion that the potential for a significant rate decline is low. We also run stress scenarios for EVE to simulate the possibility of higher loan prepayment rates, unfavorable changes in deposit rates, and higher deposit decay rates. Model results are highly sensitive to changes in assumed decay rates for non-maturity deposits, in particular.

Subprime Assets

The Bank does not engage in subprime lending activities targeted towards borrowers in high risk categories.

Accounting Matters

Information on new accounting matters is set forth in Footnote B to the Consolidated Financial Statements included at Item 8 in this report. This information is incorporated herein by reference.

Impact of Inflation

Unlike most industrial companies, the assets and liabilities of financial institutions such as the Company are primarily monetary in nature. Therefore, interest rates have a more significant effect on the Company's performance than do the effects of changes in the general rate of inflation and change in prices. In addition, interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. As discussed previously, management seeks to manage the relationships between interest sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.

REPORT OF INDEPENDENT

REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

The First Bancshares, Inc.

Hattiesburg, Mississippi

We have audited the accompanying consolidated balance sheets of The First Bancshares, Inc. and subsidiary (the "Company") as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The First Bancshares, Inc. and subsidiary as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 2017, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

/s/ T. E. Lott & Company

Columbus, Mississippi

March 16, 2017

REPORT OF INDEPENDENT

REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

The First Bancshares, Inc.

Hattiesburg, Mississippi

We have audited the internal control over financial reporting of The First Bancshares, Inc. and subsidiary (the "Company") as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Because management's assessment and our audit were conducted to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), management's assessment and our audit of the Company's internal control over financial reporting included controls over the preparation of the schedules equivalent to the basic financial statements in accordance with the instructions for the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's Board of Directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

To the Board of Directors and Shareholders of

The First Bancshares, Inc.

Page 2

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have not examined and, accordingly, we do not express an opinion or any other form of assurance on management's statement referring to compliance with laws and regulations.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The First Bancshares, Inc. and subsidiary as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016, and our report dated March 16, 2017, expressed an unqualified opinion on those consolidated financial statements.

/s/ T. E. Lott & Company

Columbus, Mississippi

March 16, 2017

THE FIRST BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2016 AND 2015

	2016			2015

ASSETS
Cash and due from banks	$	31,719,187		$	23,634,536
Interest-bearing deposits with banks		29,974,698			17,303,381
Federal funds sold		425,000			321,000
Total cash and cash equivalents		62,118,885			41,258,917
Held-to-maturity securities (fair value of $7,393,828 in 2016 and $8,547,832 in 2015)		6,000,000			7,092,120
Available-for-sale securities		243,205,963			239,732,426
Other securities		6,592,750			8,134,850
Total securities		255,798,713			254,959,396
Loans held for sale		5,879,884			3,973,765
Loans, net of allowance for loan losses of $7,510,314 in 2016 and $6,747,103 in 2015		859,543,789			765,768,073
Interest receivable		4,358,098			3,953,338
Premises and equipment		34,624,352			33,623,011
Cash surrender value of life insurance		21,250,476			14,871,742
Goodwill		13,776,040			13,776,040
Other real estate owned		6,007,621			3,082,694
Other assets		14,009,388			9,863,743
Total assets	$	1,277,367,246		$	1,145,130,719

LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits:
Noninterest-bearing	$	202,478,442		$	189,444,815
Interest-bearing		836,712,820			727,250,297
Total deposits		1,039,191,262			916,695,112
Interest payable		306,080			245,732
Borrowed funds		69,000,000			110,321,245
Subordinated debentures		10,310,000			10,310,000
Other liabilities		4,033,197			4,122,540
Total liabilities		1,122,840,539			1,041,694,629
Stockholders’ Equity:
Preferred stock, no par value, $1,000 per share liquidation, 10,000,000 shares authorized; 0 shares issued and outstanding in 2016 and 17,123 shares issued and outstanding in 2015, respectively.		-			17,123,000
Common stock, par value $1 per share: 20,000,000 shares authorized; 9,017,891 shares issued in 2016; 10,000,0000 shares authorized; 5,403,159 shares issued in 2015		9,017,891			5,403,159
Additional paid-in capital		102,574,159			44,650,274
Retained earnings		44,476,386			35,624,715
Accumulated other comprehensive income (loss)		(1,078,084	)		1,098,587
Treasury stock, at cost		(463,645	)		(463,645	)
Total stockholders’ equity		154,526,707			103,436,090
Total liabilities and stockholders’ equity	$	1,277,367,246		$	1.145,130,719

The accompanying notes are an integral part of these statements.

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2016, 2015, AND 2014

	2016			2015			2014
INTEREST INCOME
Interest and fees on loans	$	38,495,909		$	34,242,067		$	30,276,477
Interest and dividends on securities:
Taxable interest and dividends		4,052,162			3,948,459			3,884,321
Tax-exempt interest		1,869,644			1,854,213			2,071,782
Interest on federal funds sold		126,833			63,841			52,945
Interest on deposits in banks		59,449			93,276			85,257
Total interest income		44,603,997			40,201,856			36,370,782

INTEREST EXPENSE
Interest on time deposits of $100,000 or more		1,117,929			762,119			782,441
Interest on other deposits		2,325,883			1,800,122			1,586,897
Interest on borrowed funds		871,523			645,207			603,469
Total interest expense		4,315,335			3,207,448			2,972,807
Net interest income		40,288,662			36,994,408			33,397,975
Provision for loan losses		625,271			410,069			1,418,260
Net interest income after provision for loan losses		39,663,391			36,584,339			31,979,715

OTHER INCOME
Service charges on deposit accounts		5,125,846			5,013,983			4,261,795
Other service charges and fees		531,162			470,842			485,991
Secondary market mortgage income		4,258,118			1,075,118			1,452,088
Bank owned life insurance income		528,734			408,535			369,804
Gain (Loss) on sale of premises		(51,838	)		133,339			110,734
Securities gains		126,286			-			237,174
Loss on sale of other real estate		(113,755	)		(246,859	)		(85,256	)
Other		842,781			733,574			971,138
Total other income		11,247,334			7,588,532			7,803,468

OTHER EXPENSE
Salaries		17,880,844			15,089,136			14,207,216
Employee benefits		4,255,690			3,447,367			3,254,399
Occupancy		3,459,206			3,422,116			3,140,738
Furniture and equipment		1,261,506			1,198,930			1,540,796
Supplies and printing		286,880			300,022			497,755
Professional and consulting fees		1,805,420			1,331,928			1,617,828
Marketing and public relations		465,344			496,638			445,451
FDIC and OCC assessments		1,019,668			965,642			938,378
ATM expense		882,657			763,248			688.766
Telephone		782,024			631,261			616,160
Other		4,762,460			4,514,834			3,786,121
Total other expense		36,861,699			32,161,122			30,733,608

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2016, 2015, AND 2014

Continued:	2016		2015		2014


Income before income taxes	$	14,049,026	$	12,011,749	$	9,049,575
Income taxes		3,930,339		3,213,047		2,435,879

Net income		10,118,687		8,798,702		6,613,696
Preferred dividends and stock accretion		452,305		342,460		362,953
Net income applicable to common stockholders	$	9,666,382	$	8,456,242	$	6,250,743

Net income per share:
Basic	$	1.86	$	1.64	$	1.27
Diluted		1.64		1.62		1.25
Net income applicable to common stockholders:
Basic	$	1.78	$	1.57	$	1.20
Diluted		1.57		1.55		1.19

The accompanying notes are an integral part of these statements.

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

YEARS ENDED DECEMBER 31, 2016, 2015, AND 2014

	2016			2015			2014

Net income	$	10,118,687		$	8,798,702		$	6,613,696

Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during the period on available-for-sale securities		(3,315,089	)		(1,093,182	)		4,804,819

Less reclassification adjustment for gains included net income		(126,286	)		-			(237,174	)

Unrealized holding gains (losses) arising during the period on available-for-sale securities		(3,441,375	)		(1,093,182	)		4,567,645

Unrealized holding gains (losses) on loans held for sale		(99,283	)		2,753			83,826

Income tax benefit (expense)		1,363,987			370,655			(1,584,266	)

Other comprehensive income (loss)		(2,176,671	)		(719,774	)		3,067,205

Comprehensive income	$	7,942,016		$	8,078,928		$	9,680,901

The accompanying notes are an integral part of these statements.

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 2016, 2015, AND 2014

														Accumulated
														Other
								Additional						Comprehensive
	Common Stock			Preferred Stock		Stock Warrants		Paid-in Capital			Retained Earnings			Income (Loss)			Treasury Stock			Total
Balance, January 1, 2014	$	5,122,941		$	17,102,507	$	283,738	$	41,802,725		$	22,508,918		$	(1,248,844	)	$	(463,645	)	$	85,108,340

Net income 2014		-			-		-		-			6,613,696			-			-			6,613,696
Other comprehensive income		-			-		-		-			-			3,067,205			-			3,067,205
Dividends on preferred stock		-			-		-		-			(342,460	)		-			-			(342,460	)
Cash dividend declared, $.15 per common share		-			-		-		-			(784,612	)		-			-			(784,612	)
Grant of restricted stock		67,627			-		-		(67,627	)		-			-			-			-
Compensation cost on restricted stock		-			-		-		617,779			-			-			-			617,779
Preferred stock accretion		-			20,493		-		-			(20,493	)		-			-			-
Repurchase of restricted stock for payment of taxes		(5,981	)		-		-		(79,551	)		-			-			-			(85,532	)
Issuance of 158,083 common shares for BCB Holding		158,083			-		-		1,863,085			-			-			-			2,021,168

Balance, December 31, 2014	$	5,342,670		$	17,123,000	$	283,738	$	44,136,411		$	27,975,049		$	1,818,361		$	(463,645	)	$	96,215,584

Net income 2015		-			-		-		-			8,798,702			-			-			8,798,702
Other comprehensive loss		-			-		-		-			-			(719,774	)		-			(719,774	)

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 2016, 2015, AND 2014

Continued:															Accumulated
															Other
									Additional						Comprehensive
	Common Stock			Preferred Stock		Stock Warrants			Paid-in Capital			Retained Earnings			Income (Loss)			Treasury Stock			Total

Dividends on preferred stock		-			-		-			-			(342,460	)		-			-			(342,460	)
Cash dividend declared, $.15 per common share		-			-		-			-			(806,576	)		-			-			(806,576	)
Grant of restricted stock		69,327			-		-			(69,327	)		-			-			-			-
Compensation cost on restricted stock		-			-		-			721,124			-			-			-			721,124
Repurchase of restricted stock for payment of taxes		(6,324	)		-		-			(86,066	)		-			-			-			(92,390	)
Adjustment to consideration issued in BCB Holding acquisition		(2,514	)		-		-			(33,196	)		-			-			-			(35,710	)
Repurchase warrants		-			-		(283,738	)		(18,672	)		-			-			-			(302,410	)
Balance, December 31, 2015	$	5,403,159		$	17,123,000	$	-		$	44,650,274		$	35,624,715		$	1,098,587		$	(463,645	)	$	103,436,090

Net income 2016		-			-		-			-			10,118,687			-			-			10,118,687
Other comprehensive loss		-			-		-			-			-			(2,176,671	)		-			(2,176,671	)
Dividends on preferred stock		-			-		-			-			(452,305	)		-			-			(452,305	)

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 2016, 2015, and 2014

Continued:															Accumulated
															Other
									Additional						Comprehensive
	Common Stock			Preferred Stock			Stock Warrants		Paid-in Capital			Retained Earnings			Income (Loss)			Treasury Stock			Total
Cash dividend declared, $.15 per common share		-			-			-		-			(814,711	)		-			-			(814,711	)
Grant of restricted stock		61,247			-			-		(61,247	)		-			-			-			-
Compensation cost on restricted stock		-			-			-		772,311			-			-			-			772,311
Repurchase of restricted stock for payment of taxes		(9,895	)		-			-		(166,217	)		-			-			-			(176,112	)
Repayment of CDCI preferred shares		-			(17,123,000	)		-		1,198,000			-			-			-			(15,925,000	)
Issuance of Preferred Stock, Series E		-			63,249,996			-		-			-			-			-			63,249,996
Conversion of Preferred, Series E to common		3,563,380			(63,249,996	)		-		59,686,616			-			-			-			-
Costs associated with capital raise		-			-			-		(3,505,578	)		-			-			-			(3,505,578	)
Balance, December 31, 2016	$	9,017,891		$	-		$	-	$	102,574,159		$	44,476,386		$	(1,078,084	)	$	(463,645	)	$	154,526,707

The accompanying notes are an integral part of these statements.

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

	2016			2015			2014
CASH FLOWS FROM OPERATINGACTIVITIES
Net income	$	10,118,687		$	8,798,702		$	6,613,696
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,302,163			2,296,985			2,182,630
FHLB Stock dividends		(37,700	)		(8,600	)		(6,000	)
Provision for loan losses		625,271			410,069			1,418,260
Deferred income taxes		(10,352	)		255,638			331,399
Restricted stock expense		772,311			721,124			617,779
Increase in cash value of life insurance		(528,734	)		(408,535	)		(369,804	)
Amortization and accretion, net		629,304			921,853			900,913
Loss/ (Gain) on sale of land/bank premises/ equipment		51,838			(133,339	)		(110,734	)
Securities gains		(126,286	)		-			(237,174	)
Loss on sale/writedown of other real estate		244,466			386,590			395,379
Changes in:
Loans held for sale		(2,005,402	)		(1,867,661	)		1,659,996
Interest receivable		(404,760	)		(294,332	)		(152,307	)
Other assets		(1,992,955	)		135,620			2,643,956
Interest payable		60,348			(70,112	)		(109,218	)
Other liabilities		(121,118	)		(1,406,347	)		(8,721,513	)
Net cash provided by operating activities		9,577,081			9,737,655			7,057,258

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities		(53,403,251	)		(29,571,287	)		(38,459,683	)
Purchases of other securities		(1,433,100	)		(4,079,400	)		(3,296,800	)
Proceeds from maturities and calls of available for-sale securities		45,296,821			42,569,677			42,723,486
Proceeds from maturities and calls of held-to maturity securities		1,094,138			1,099,898			246,980
Proceeds from sales of securities available-for sale		250,000			-			10,909,239
Proceeds from redemption of other securities		3,012,900			3,187,500			2,514,485
Increase in loans		(98,560,749	)		(68,588,377	)		(89,190,269	)
Net additions to premises and equipment		(2,706,842	)		(1,230,531	)		(988,736	)
Purchase of bank owned life insurance		(5,850,000	)		-			(7,500,000	)
Proceeds from sale of land/bank premises		-			949,516			76,375
Cash received (paid) in excess of cash paid for acquisition		-			(843,895	)		4,272,735
Net cash used in investing activities		(112,300,083	)		(56,506,899	)		(78,692,188	)

The accompanying notes are an integral part of these statements.

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

Continued:
	2016			2015			2014
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposits		122,496,150			24,090,591			53,845,509
Proceeds from borrowed funds		252,000,000			194,340,000			180,000,000
Repayment of borrowed funds		(293,321,245	)		(173,468,821	)		(155,653,580	)
Dividends paid on common stock		(782,936	)		(778,428	)		(763,143	)
Dividends paid on preferred stock		(452,305	)		(342,460	)		(342,460	)
Repurchase of shares issued in BCB acquisition		-			(35,710	)		-
Net proceeds from issuance of stock		59,744,418			-			-
Repayment of CDCI Preferred shares		(15,925,000	)		-			-
Repurchase of warrants		-			(302,410	)		-
Repurchase of restricted stock for payment of taxes		(176,112	)		(92,390	)		(85,532	)
Net cash provided by financing activities		123,582,970			43,410,372			77,000,794

Net increase (decrease) in cash and cash equivalents		20,859,968			(3,358,872	)		5,365,864
Cash and cash equivalents at beginning of year		41,258,917			44,617,789			39,251,925
Cash and cash equivalents at end of year	$	62,118,885		$	41,258,917		$	44,617,789

Supplemental disclosures:

Cash paid during the year for:
Interest	$	4,254,987		$	3,448,525		$	3,056,939
Income taxes		4,725,814			4,152,050			275,075

Non-cash activities:
Transfers of loans to other real estate		4,722,529			1,050,342			2,208,010
Issuance of restricted stock grants		61,247			69,327			67,627
Loans originated to facilitate the sale of land		-			-			402,982

The accompanying notes are an integral part of these statements.

THE FIRST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - NATURE OF BUSINESS

The First Bancshares, Inc. (the Company) is a bank holding company whose business is primarily conducted by its wholly-owned subsidiary, The First, A National Banking Association (the Bank). The Bank provides a full range of banking services in its primary market area of South Mississippi, South Alabama, and Louisiana. The Company is regulated by the Federal Reserve Bank. Its subsidiary bank is subject to the regulation of the Office of the Comptroller of the Currency (OCC).

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company and the Bank follow accounting principles generally accepted in the United States of America including, where applicable, general practices within the banking industry.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of deferred tax assets.

Cash and Due From Banks

Included in cash and due from banks are legal reserve requirements which must be maintained on an average basis in the form of cash and balances due from the Federal Reserve. The reserve balance varies depending upon the types and amounts of deposits. At December 31, 2016, the required reserve balance on deposit with the Federal Reserve Bank was approximately $16,704,000.

Securities

Investments in securities 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 net of tax, as a component of accumulated other comprehensive income (loss) in stockholders' equity, until realized. Premiums and discounts are recognized in interest income using the interest method. Gains and losses on the sale of available-for-sale securities are determined using the adjusted cost of the specific security sold.

Securities to be Held-to-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, 2016 and 2015.

Other Securities

Other securities are carried at cost and are restricted in marketability. Other securities consist of investments in the Federal Home Loan Bank (FHLB), Federal Reserve Bank and First National Bankers’ Bankshares, Inc. Management reviews for impairment based on the ultimate recoverability of the cost basis.

Other-than-Temporary Impairment

Management evaluates investment securities for other-than-temporary impairment on a quarterly basis. A decline in the fair value of available-for-sale and held-to-maturity securities below cost that is deemed other-than-temporary is charged to earnings for a decline in value deemed to be credit related and a new cost basis for the security is established. The decline in value attributed to non-credit related factors is recognized in other comprehensive income.

Loans held for sale

The Bank originates fixed rate single family, residential first mortgage loans on a presold basis. The Bank issues a rate lock commitment to a customer and concurrently “locks in” with a secondary market investor under a best efforts delivery mechanism. Such loans are sold without the servicing retained by the Bank. The terms of the loan are dictated by the secondary investors and are transferred within several weeks of the Bank initially funding the loan. The Bank recognizes certain origination fees and service release fees upon the sale, which are included in other income on loans in the consolidated statements of income. Between the initial funding of the loans by the Bank and the subsequent purchase by the investor, the Bank carries the loans held for sale at the lower of cost or fair value in the aggregate as determined by the outstanding commitments from investors.

Loans

Loans are carried at the principal amount outstanding, net of the allowance for loan losses. Interest income on loans is recognized based on the principal balance outstanding and the stated rate of the loan. Loan origination fees and certain direct origination costs are deferred and recognized as an adjustment of the related loan yield using the interest method.

A loan is considered impaired, in accordance with the impairment accounting guidance of Accounting Standards Codification (ASC) Section 310-10-35, Receivables, Subsequent Measurement, when—based upon current events and information—it is probable that the scheduled payments of principal and interest will not be collected in accordance with the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral values, and the probability of collecting scheduled payments of principal and interest when due. Generally, impairment is measured on a loan by loan basis using the fair value of the supporting collateral.

Loans are generally placed on a nonaccrual status when principal or interest is past due ninety days or when specifically determined to be impaired. When a loan is placed on nonaccrual status, interest accrued but not received is generally reversed against interest income. If collectibility is in doubt, cash receipts on nonaccrual loans are used to reduce principal rather than recorded in interest income. Past due status is determined based upon contractual terms.

Allowance for Loan Losses

For financial reporting purposes, the provision for loan losses charged to operations is based upon management's estimation of the amount necessary to maintain the allowance at an adequate level. Allowances for any impaired loans are generally determined based on collateral values. Loans are charged against the allowance for loan losses when management believes the collectibility of the principal is unlikely.

Management evaluates the adequacy of the allowance for loan losses on a regular basis. These evaluations are based upon a periodic review of the collectibility considering historical experience, the nature and value of the loan portfolio, underlying collateral values, internal and independent loan reviews, and prevailing economic conditions. In addition, the OCC, as a part of the regulatory examination process, reviews the loan portfolio and the allowance for loan losses and may require changes in the allowance based upon information available at the time of the examination. The allowance consists of two components: allocated and unallocated. The components represent an estimation performed pursuant to either ASC Topic 450, Contingencies, or ASC Subtopic 310-10, Receivables. The allocated component of the allowance reflects expected losses resulting from an analysis developed through specific credit allocations for individual loans, including any impaired loans, and historical loan loss history. The analysis is performed quarterly and loss factors are updated regularly.

The unallocated portion of the allowance reflects management’s estimate of probable inherent but undetected losses within the portfolio due to uncertainties in economic conditions, changes in collateral values, unfavorable information about a borrower’s financial condition, and other risk factors that have not yet manifested themselves. In addition, the unallocated allowance includes a component that explicitly accounts for the inherent imprecision in the loan loss analysis.

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. Upon retirement, sale, or other disposition of property and equipment, the cost and accumulated depreciation are eliminated from the accounts, and any gains or losses are included in operations.

Other Real Estate

Other real estate, carried in other assets in the consolidated balance sheets, consists of properties acquired through foreclosure and, as held for sale property, is recorded at the lower of the outstanding loan balance or current appraisal less estimated costs to sell. Any write-down to fair value required at the time of foreclosure is charged to the allowance for loan losses. Subsequent gains or losses on other real estate are reported in other operating income or expenses. At December 31, 2016 and 2015, other real estate totaled $6,007,621, and $3,082,694, respectively.

10.

Goodwill and Other Intangible Assets

Goodwill totaled $13,776,040 for the years ended December 31, 2016, and 2015, respectively.

Goodwill totaling $1,500,000 acquired during the year ended December 31, 2015, was a result of the acquisition of The Mortgage Connection. Footnote C to these consolidated financial statements provides additional information on the acquisition during 2015.

The Company performed the required annual impairment tests of goodwill and other intangibles as of December 1, 2016. The Company’s annual impairment test did not indicate impairment as of the testing date, and subsequent to that date, management is not aware of any events or changes in circumstances since the impairment test that would indicate that goodwill and other intangibles might be impaired.

The Company’s acquisition method recognized intangible assets, which are subject to amortization, and included in other assets in the accompanying consolidated balance sheets, include core deposit intangibles, amortized on a straight-line basis, over a 10 year average life. The definite-lived intangible assets had the following carrying values at December 31, 2016 and 2015.

			2016
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
(Dollars in thousands)

Core deposit intangibles	$	4,000	$	(2,268	)	$	1,732

	2015
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
(Dollars in thousands)

Core deposit intangibles	$	4,000	$	(1,885	)	$	2,115

The related amortization expense of business combination related intangible assets is as follows:

(Dollars in thousands)
	Amount
Aggregate amortization expense for the year ended
December 31:

2014	$	387
2015		399
2016		383

Estimated amortization expense for the year ending
December 31:

2017		331
2018		331
2019		331
2020		331
2021		261
Thereafter		147
	$	1,732

11.

Other Assets and Cash Surrender Value

Financing costs related to the issuance of junior subordinated debentures are being amortized over the life of the instruments and are included in other assets. The Company invests in bank owned life insurance (BOLI). BOLI involves the purchasing of life insurance by the Company on a chosen group of employees. The Company is the owner of the policies and, accordingly, the cash surrender value of the policies is reported as an asset, and increases in cash surrender values are reported as income.

12.

Stock Options

The Company accounts for stock based compensation in accordance with ASC Topic 718, Compensation - Stock Compensation. Compensation cost is recognized for all stock options granted based on the weighted average fair value stock price at the grant date.

13.

Income Taxes

Income taxes are provided for the tax effects of the transactions reported in the financial statements and consist of taxes currently payable plus deferred taxes related primarily to differences between the bases of assets and liabilities as measured by income tax laws and their bases as reported in the financial statements. The deferred tax assets and liabilities represent the future tax consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.

The Company and its subsidiary file consolidated income tax returns. The subsidiary provides for income taxes on a separate return basis and remits to the Company amounts determined to be payable.

ASC Topic 740, Income Taxes, provides guidance on financial statement recognition and measurement of tax positions taken, or expected to be taken, in tax returns. ASC Topic 740 requires an evaluation of tax positions to determine if the tax positions will more likely than not be sustainable upon examination by the appropriate taxing authority. The Company, at December 31, 2016 and 2015, had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements.

14.

Advertising Costs

Advertising costs are expensed in the period in which they are incurred. Advertising expense for the years ended December 31, 2016, 2015 and 2014, was $401,751, $437,085 and $394,363, respectively.

15.

Statements of Cash Flows

For purposes of reporting cash flows, cash and cash equivalents include cash, amounts due from banks, interest-bearing deposits with banks and federal funds sold. Generally, federal funds are sold for a one to seven day period.

16.

Off-Balance Sheet Financial Instruments

In the ordinary course of business, the subsidiary bank enters into off-balance sheet financial instruments consisting of commitments to extend credit, credit card lines and standby letters of credit. Such financial instruments are recorded in the financial statements when they are exercised.

17.

Earnings Applicable to Common Stockholders

Per share amounts are presented in accordance with ASC Topic 260, Earnings Per Share. Under ASC Topic 260, two per share amounts are considered and presented, if applicable. Basic per share data is calculated based on the weighted-average number of common shares outstanding during the reporting period. Diluted per share data includes any dilution from potential common stock, such as outstanding stock options.

The following tables disclose the reconciliation of the numerators and denominators of the basic and diluted computations applicable to common stockholders:

For the Year Ended December 31, 2016
	Net Income (Numerator)		Shares (Denominator)		Per Share Amount

Basic per common share	$	9,666,382		5,435,088	$	1.78

Convertible Preferred Dividend		133,627

Effect of dilutive shares:

Convertible Preferred, Series E				742,371
Restricted Stock				81,874
	$	9,800,009		6,259,333	$	1.57

For the Year Ended December 31, 2015
	Net
	Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount

Basic per common Share	$	8,456,242		5,371,111	$	1.57

Effect of dilutive shares:
Restricted Stock				70,939
	$	8,456,242		5,442,050	$	1.55

For the Year Ended December 31, 2014
	Net Income (Numerator)		Shares (Denominator)		Per Share Amount

Basic per common Share	$	6,250,743		5,227,768	$	1.20

Effect of dilutive shares:
Restricted Stock				42,901
	$	6,250,743		5,270,669	$	1.19

The diluted per share amounts were computed by applying the treasury stock method.

18.

Mergers and Acquisitions

Business combinations are accounted for under ASC 805, “Business Combinations”, using the acquisition method of accounting. The acquisition method of accounting requires an acquirer to recognize the assets acquired and the liabilities assumed at the acquisition date measured at their fair values as of that date. To determine the fair values, the Company relies on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. Under the acquisition method of accounting, the Company identifies the acquirer and the closing date and applies applicable recognition principles and conditions. Acquisition-related costs are costs the Company incurs to effect a business combination. Those costs include advisory, legal, accounting, valuation, and other professional or consulting fees. Some other examples of costs to the Company include systems conversion, integration planning consultants and advertising costs. The Company accounts for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities is recognized in accordance with other applicable GAAP. These acquisition-related costs have been and will be included within the Consolidated Statements of Income classified within the noninterest expense caption.

19.

Investment in Limited Partnership

The Company is a limited partner in a partnership that provides low-income housing. The carrying value of the Company’s investment in the limited partnership was $4,058,801 at December 31, 2016 and $885,549 at December 31, 2015, net of amortization, using the proportional method and is reported in other assets on the Consolidated Balance Sheets. (The Company’s maximum exposure to loss is limited to the carrying value of its investment.) The Company received $160,442 in low-income housing tax credits during 2016 and $0 in 2015 and 2014.

20.

Reclassifications

Certain reclassifications have been made to the 2014 and 2015 financial statements to conform with the classifications used in 2016. These reclassifications did not impact the Company's consolidated financial condition or results of operations.

21.

Accounting Pronouncements

In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment.” This ASU removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the amended guidance, a goodwill impairment charge will now be recognized for the amount by which the carrying value of a reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill. This guidance is effective for interim and annual period beginning after December 15, 2019, with early adoption permitted for any impairment tests performed after January 1, 2017. The Company is assessing the impact of ASU 2017-04.

In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments." Current GAAP is unclear or does not include specific guidance on how to classify certain transactions in the statement of cash flows. This ASU is intended to reduce diversity in practice in how eight particular transactions are classified in the statement of cash flows. ASU No. 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. Entities will be required to apply the guidance retrospectively. If it is impracticable to apply the guidance retrospectively for an issue, the amendments related to that issue would be applied prospectively. As this guidance only affects the classification within the statement of cash flows, ASU No. 2016-15 is not expected to have a material impact on the Company's Consolidated Financial Statements.

In June 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 requires a new impairment model known as the current expected credit loss (“CECL”) which significantly changes the way impairment of financial instruments is recognized by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of financial instruments. The main provisions of ASU 2016-13 include (1) replacing the “incurred loss” approach under current GAAP with an “expected loss” model for instruments measured at amortized cost, (2) requiring entities to record an allowance for credit losses related to available-for-sale debt securities rather than a direct write-down of the carrying amount of the investments, as is required by the other-than-temporary-impairment model under current GAAP, and (3) a simplified accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019, although early adoption is permitted. The Company is currently assessing the impact of the adoption of ASU 2016-13.

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09 “Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also allows an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election for forfeitures as they occur. The guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted. The Company is assessing the impact of ASU 2016-09 on its accounting and disclosures.

In February 2016 the FASB issued ASU No. 2016-02 “Leases (Topic 842).” ASU 2016-02 establishes a right of use model that requires a lessee to record a right of use asset and a lease liability for all leases with terms longer than 12 months. Leases will be classified as either finance or operating with classification affecting the pattern of expense recognition in the income statement. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. A lease will be treated as sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn’t convey risks and rewards or control, an operating lease results. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with certain practical expedients available. Early adoption is permitted. The Company is assessing the impact of ASU 2016-02 on its accounting and disclosures.

NOTE C – BUSINESS COMBINATIONS

The Company accounts for its business combinations using the acquisition method. Acquisition accounting requires the total purchase price to be allocated to the estimated fair values of assets acquired and liabilities assumed, including certain intangible assets that must be recognized. Typically, this allocation results in the purchase price exceeding the fair value of net assets acquired, which is recorded as goodwill. Core deposit intangibles are a measure of the value of checking, money market and savings deposits acquired in business combinations accounted for under the acquisition method. Core deposit intangibles and other identified intangibles with finite useful lives are amortized using the straight-line method over their estimated useful lives of up to ten years. Loans that the Company acquires in connection with acquisitions are recorded at fair value with no carryover of the related allowance for credit losses. Fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. The excess or deficit of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount or amortizable premium and is recognized into interest income over the remaining life of the loan.

The Mortgage Connection

On December 14, 2015, the Company completed the acquisition of The Mortgage Connection, a Mississippi corporation, which included two loan production offices located in Madison and Brandon, Mississippi.

In connection with the acquisition, the Company recorded $1.5 million of goodwill.

The amounts of the acquired identifiable assets and liabilities as of the acquisition date were as follows (dollars in thousands):

Purchase price:
Cash	$	844
Payable		800
Total purchase price		1,644
Identifiable assets:
Intangible		100
Personal property		44
Total assets		144
Liabilities and equity		-
Net assets acquired		144
Goodwill resulting from acquisition	$	1,500

Expenses associated with the acquisition were $13,000 for the three and twelve month periods ended December 31, 2015, respectively. These costs included charges for legal and consulting expenses.

NOTE D – SECURITIES

A summary of the amortized cost and estimated fair value of available-for-sale securities and held-to- maturity securities at December 31, 2016 and 2015 follows:

	December 31, 2016

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Available-for-sale securities:
Obligations of U.S. Government agencies	$	9,023,293	$	27,718	$	6,341	$	9,044,670
Tax-exempt and taxable obligations of states and municipal subdivisions		98,327,829		1,677,764		1,183,186		98,822,407
Mortgage-backed securities		114,990,863		602,179		1,304,090		114,288,952
Corporate obligations		21,274,200		66,477		1,230,566		20,110,111
Other		1,255,483		-		315,660		939,823
	$	244,871,668	$	2,374,138	$	4,039,843	$	243,205,963
Held-to-maturity securities:

Taxable obligations of states and municipal subdivisions	$	6,000,000	$	1,393,828	$	-	$	7,393,828

	December 31, 2015

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Available-for-sale securities:
Obligations of U.S. Government agencies	$	19,479,107	$	144,408	$	12,565	$	19,610,950
Tax-exempt and taxable obligations of states and municipal subdivisions		95,631,123		2,361,599		103,391		97,889,331
Mortgage-backed securities		98,222,658		1,127,562		425,100		98,925,120
Corporate obligations		23,494,670		62,408		1,210,996		22,346,082
Other		1,255,483		-		294,540		960,943
	$	238,083,041	$	3,695,977	$	2,046,592	$	239,732,426
Held-to-maturity securities:
Mortgage-backed securities	$	1,092,120	$	15,712	$	-	$	1,107,832
Taxable obligations of states and municipal subdivisions		6,000,000		1,440,000		-		7,440,000
	$	7,092,120	$	1,455,712	$	-	$	8,547,832

The scheduled maturities of securities at December 31, 2016, were as follows:

	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value

Due less than one year	$	20,176,713	$	20,216,901	$	-	$	-
Due after one year through five years		59,218,198		59,428,805		-		-
Due after five years through ten years		34,799,243		35,262,252		6,000,000		7,393,828
Due greater than ten years		15,686,651		14,009,053		-		-
Mortgage-backed securities		114,990,863		114,288,952		-		-
	$	244,871,668	$	243,205,963	$	6,000,000	$	7,393,828

Actual maturities can differ from contractual maturities because the obligations may be called or prepaid with or without penalties.

A gain of $126,286 was realized in 2016. No gain or loss was realized from the sale of available-for-sale securities in 2015 and a gain of $237,174 was recognized in 2014. No other-than-temporary impairment losses were recognized for each of the three years ended December 31, 2016.

Securities with a carrying value of $170,593,273 and $215,726,751 at December 31, 2016 and 2015, respectively, were pledged to secure public deposits, repurchase agreements, and for other purposes as required or permitted by law.

The details concerning securities classified as available-for-sale with unrealized losses as of December 31, 2016 and 2015, were as follows:

	2016
	Losses < 12 Months				Losses 12 Months or >				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Obligations of U.S. government agencies	$	2,989,255	$	6,341	$	-	$	-	$	2,989,255	$	6,341
Tax-exempt and tax-able obligations of states and municipal subdivisions		48,199,634		1,183,186		-		-		48,199,634		1,183,186
Mortgage-backed securities		78,467,029		1,294,942		1,905,698		9,148		80,372,727		1,304,090
Corporate obligations		5,075,850		17,932		2,828,766		1,212,634		7,904,616		1,230,566
Other		-		-		939,823		315,660		939,823		315,660
	$	134,731,768	$	2,502,401	$	5,674,287	$	1,537,442	$	140,406,055	$	4,039,843

	2015
	Losses < 12 Months				Losses 12 Months or >				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Obligations of U.S. government agencies	$	4,975,580	$	12,565	$	-	$	-	$	4,975,580	$	12,565
Tax-exempt and tax- able obligations of states and municipal subdivisions		12,762,528		50,055		3,049,129		53,336		15,811,657		103,391
Mortgage-backed securities		36,024,587		370,514		2,507,036		54,586		38,531,623		425,100
Corporate obligations		8,531,765		28,627		3,144,333		1,182,369		11,676,098		1,210,996
Other		-		-		960,943		294,540		960,943		294,540
	$	62,294,460	$	461,761	$	9,661,441	$	1,584,831	$	71,955,901	$	2,046,592

Approximately 47.4% of the number of securities in the investment portfolio at December 31, 2016, reflected an unrealized loss. Management is of the opinion the Company has the ability to hold these securities until such time as the value recovers or the securities mature. Management also believes the deterioration in value is attributable to changes in market interest rates and lack of liquidity in the credit markets. We have determined that these securities are not other-than-temporarily impaired based upon anticipated cash flows.

NOTE E - LOANS

Loans typically provide higher yields than the other types of earning assets, and thus one of the Company's goals is for loans to be the largest category of the Company's earning assets. At December 31, 2016 and 2015, respectively, loans accounted for 75.3% and 74.0% of earning assets. The Company controls and mitigates the inherent credit and liquidity risks through the composition of its loan portfolio.

The following table shows the composition of the loan portfolio by category:

(Dollars in thousands)	December 31, 2016						December 31, 2015
	Amount			Percent of Total			Amount			Percent of Total

Mortgage loans held for sale	$	5,880			0.6	%	$	3,974			0.5	%
Commercial, financial and agricultural		129,423			14.8			129,197			16.6
Real Estate:
Mortgage-commercial		314,359			36.0			253,309			32.6
Mortgage-residential		289,640			33.2			272,180			35.1
Construction		109,394			12.5			99,161			12.8
Lease financing receivable		2,204			0.3			2,650			0.3
Obligations of states and subdivisions		6,698			0.8			969			0.1
Consumer and other		15,336			1.8			15,049			2.0
Total loans		872,934			100	%		776,489			100	%
Allowance for loan losses		(7,510	)					(6,747	)
Net loans	$	865,424					$	769,742

In the context of this discussion, a "real estate mortgage loan" is defined as any loan, other than a loan for construction purposes, secured by real estate, regardless of the purpose of the loan. The Company follows the common practice of financial institutions in the Company’s market area of obtaining a security interest in real estate whenever possible, in addition to any other available collateral. This collateral is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to increase the magnitude of the real estate loan portfolio component. Generally, the Company limits its loan-to-value ratio to 80%. Management attempts to maintain a conservative philosophy regarding its underwriting guidelines and believes it will reduce the risk elements of its loan portfolio through strategies that diversify the lending mix.

Loans held for sale consist of mortgage loans originated by the Bank and sold into the secondary market. Commitments from investors to purchase the loans are obtained upon origination.

Activity in the allowance for loan losses for December 31, 2016, 2015 and 2014 was as follows:

(In thousands)

	2016			2015			2014

Balance at beginning of period	$	6,747		$	6,095		$	5,728
Loans charged-off:
Real Estate		(627	)		(534	)		(1,203	)
Installment and Other		(73	)		(126	)		(167	)
Commercial, Financial and Agriculture		(71	)		(183	)		(89	)
Total		(771	)		(843	)		(1,459	)
Recoveries on loans previously charged-off:
Real Estate		755			905			325
Installment and Other		70			81			68

Commercial, Financial and Agriculture		84			99			15
Total		909			1,085			408
Net (Charge-offs) Recoveries		138			242			(1,051	)
Provision for Loan Losses		625			410			1,418
Balance at end of period	$	7,510		$	6,747		$	6,095

The following tables represent how the allowance for loan losses is allocated to a particular loan type as well as the percentage of the category to total loans at December 31, 2016 and 2015.

Allocation of the Allowance for Loan Losses

	December 31, 2016
	(Dollars in thousands)
	Amount		% of loans in each category to total loans

Commercial Non Real Estate	$	1,118		15.6	%
Commercial Real Estate		4,071		61.6
Consumer Real Estate		1,589		20.3
Consumer		155		2.4
Unallocated		577		.1
Total	$	7,510		100	%

	December 31, 2015
	(Dollars in thousands)
	Amount		% of loans in each category to total loans

Commercial Non Real Estate	$	895		17.1	%
Commercial Real Estate		3,018		58.4
Consumer Real Estate		1,477		21.9
Consumer		141		2.5
Unallocated		1,216		.1
Total	$	6,747		100	%

The following table represents the Company’s impaired loans at December 31, 2016 and 2015. This table includes performing troubled debt restructurings.

	December 31,		December 31,
	2016		2015
	(In thousands)
Impaired Loans:
Impaired loans without a valuation allowance	$	2,667	$	6,020
Impaired loans with a valuation allowance		3,461		4,107
Total impaired loans	$	6,128	$	10,127
Allowance for loan losses on impaired loans at period end		682		957
Total nonaccrual loans		3,264		7,368

Past due 90 days or more and still accruing		198		29
Average investment in impaired loans		8,509		9,652

The following table is a summary of interest recognized and cash-basis interest earned on impaired loans for the years ended December 31, 2016, 2015 and 2014:

	2016		2015		2014

Interest income recognized during impairment		-		-		129
Cash-basis interest income recognized		188		211		256

The gross interest income that would have been recorded in the period that ended if the nonaccrual loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the twelve months for the years ended December 31, 2016, 2015 and 2014, was $389,000, $437,000 and $321,000, respectively. The Company had no loan commitments to borrowers in non-accrual status at December 31, 2016 and 2015.

The following tables provide the ending balances in the Company's loans (excluding mortgage loans held for sale) and allowance for loan losses, broken down by portfolio segment as of December 31, 2016 and 2015. The tables also provide additional detail as to the amount of our loans and allowance that correspond to individual versus collective impairment evaluation. The impairment evaluation corresponds to the Company's systematic methodology for estimating its Allowance for Loan Losses.

December 31, 2016
			Installment		Commercial,
	Real Estate		and Other		Financial and Agriculture		Total
	(In thousands)
Loans
Individually evaluated	$	5,935	$	40	$	153	$	6,128
Collectively evaluated		704,923		21,317		134,686		860,926
Total	$	710,858	$	21,357	$	134,839	$	867,054

Allowance for Loan Losses
Individually evaluated	$	651	$	21	$	10	$	682
Collectively evaluated		5,009		711		1,108		6,828
Total	$	5,660	$	732	$	1,118	$	7,510

December 31, 2015
			Installment		Commercial,
	Real Estate		and Other		Financial and Agriculture		Total
	(In thousands)
Loans
Individually evaluated	$	9,782	$	39	$	306	$	10,127
Collectively evaluated		610,996		19,591		131,801		762,388
Total	$	620,778	$	19,630	$	132,107	$	772,515

Allowance for Loan Losses
Individually evaluated	$	882	$	25	$	50	$	957
Collectively evaluated		3,613		1,332		845		5,790
Total	$	4,495	$	1,357	$	895	$	6,747

The following tables provide additional detail of impaired loans broken out according to class as of December 31, 2016, 2015 and 2014. The recorded investment included in the following table represents customer balances net of any partial charge-offs recognized on the loans, net of any deferred fees and costs. Recorded investment excludes any insignificant amount of accrued interest receivable on loans 90-days or more past due and still accruing. The unpaid balance represents the recorded balance prior to any partial charge-offs.

December 31, 2016							Average		Interest
							Recorded		Income
	Recorded		Unpaid		Related		Investment		Recognized
	Investment		Balance		Allowance		YTD		YTD
	(In thousands)

Impaired loans with no related allowance:
Commercial installment	$	-	$	-	$	-	$	-	$	-
Commercial real estate		2,324		2,570		-		4,368		37
Consumer real estate		329		329		-		291		1
Consumer installment		14		14		-		9		-
Total	$	2,667	$	2,913	$	-	$	4,668	$	38

Impaired loans with a related allowance:
Commercial installment	$	153	$	153	$	10	$	244	$	9
Commercial real estate		2,726		2,726		343		2,832		127
Consumer real estate		556		669		308		733		14
Consumer installment		26		27		21		32		-
Total	$	3,461	$	3,575	$	682	$	3,841	$	150
Total Impaired Loans:
Commercial installment	$	153	$	153	$	10	$	244	$	9
Commercial real estate		5,050		5,296		343		7,200		164
Consumer real estate		885		998		308		1,024		15
Consumer installment		40		41		21		41		-
Total Impaired Loans	$	6,128	$	6,488	$	682	$	8,509	$	188

December 31, 2015
							Average		Interest
							Recorded		Income
	Recorded		Unpaid		Related		Investment		Recognized
	Investment		Balance		Allowance		YTD		YTD
					(In thousands)
Impaired loans with no related allowance:
Commercial installment	$	-	$	-	$	-	$	2	$	-
Commercial real estate		5,790		5,828		-		5,099		50
Consumer real estate		223		223		-		205		-
Consumer installment		7		7		-		8		-
Total	$	6,020	$	6,058	$	-	$	5,314	$	50

Impaired loans with a related allowance:
Commercial installment	$	306	$	306	$	50	$	264	$	14
Commercial real estate		2,927		2,927		444		2,891		132
Consumer real estate		842		842		438		1,152		15
Consumer installment		32		32		25		31		-
Total	$	4,107	$	4,107	$	957	$	4,338	$	161
Total Impaired Loans:
Commercial installment	$	306	$	306	$	50	$	266	$	14
Commercial real estate		8,717		8,755		444		7,990		182
Consumer real estate		1,065		1,065		438		1,357		15
Consumer installment		39		39		25		39		-
Total Impaired Loans	$	10,127	$	10,165	$	957	$	9,652	$	211

December 31, 2014
							Average		Interest
							Recorded		Income
	Recorded		Unpaid		Related		Investment		Recognized
	Investment		Balance		Allowance		YTD		YTD
					(In thousands)
Impaired loans with no related allowance:
Commercial installment	$	-	$	-	$	-	$	50	$	-
Commercial real estate		4,665		4,665		-		2,654		142
Consumer real estate		27		27		-		179		-
Consumer installment		10		10		-		11		-
Total	$	4,702	$	4,702	$	-	$	2,894	$	142

Impaired loans with a related allowance:
Commercial installment	$	240	$	240	$	18	$	189	$	20
Commercial real estate		2,558		2,558		315		2,415		59
Consumer real estate		2,032		2,032		607		1,546		33
Consumer installment		28		28		28		33		2
Total	$	4,858	$	4,858	$	968	$	4,183	$	114
Total Impaired Loans:
Commercial installment	$	240	$	240	$	18	$	239	$	20
Commercial real estate		7,223		7,223		315		5,069		201
Consumer real estate		2,059		2,059		607		1,725		33
Consumer installment		38		38		28		44		2
Total Impaired Loans	$	9,560	$	9,560	$	968	$	7,077	$	256

Loans acquired with deteriorated credit quality are those purchased in a 2014 acquisition. These loans were recorded at estimated fair value at the acquisition date with no carryover of the related allowance for loan losses. The acquired loans were segregated as of the acquisition date between those considered to be performing (acquired non-impaired loans) and those with evidence of credit deterioration (acquired impaired loans). Acquired loans are considered impaired if there is evidence of credit deterioration and if it is probable, at acquisition, all contractually required payments will not be collected.

The following table presents information regarding the contractually required payments receivable, cash flows expected to be collected and the estimated fair value of loans acquired in the acquisition as of July 1, 2014, the closing date of the transaction:

	July 1, 2014
	(In thousands)
	Commercial, financial and agricultural		Mortgage- Commercial		Mortgage- Residential		Commercial and other		Total
Contractually required payments	$	1,519	$	29,648	$	7,933	$	976	$	40,076
Cash flows expected to be collected		1,570		37,869		9,697		1,032		50,168
Fair value of loans acquired		1,513		28,875		7,048		957		38,393

Total outstanding acquired impaired loans were $2,199,477 as of December 31, 2016. The outstanding balance of these loans is the undiscounted sum of all amounts, including amounts deemed principal, interest, fees, penalties, and other under the loans, owed at the reporting date, whether or not currently due and whether or not any such amounts have been charged off.

Changes in the carrying amount and accretable yield for acquired impaired loans were as follows for the year ended December 31, 2016 (in thousands):

	Accretable Yield			Carrying Amount of Loans
Balance at beginning of period	$	1,219		$	1,821
Accretion		(325	)		325
Payments received, net		-			(841	)
Balance at end of period	$	894		$	1,305

The following tables provide additional detail of troubled debt restructurings (TDRs) during the twelve months ended December 31, 2016, 2015 and 2014.

	December 31, 2016
	Outstanding Recorded		Outstanding Recorded				Interest
	Investment Pre-Modification		Investment Post-Modification		Number of Loans		Income Recognized
	(in thousands except number of loans)

Commercial installment	$	-	$	-		-	$	-
Commercial real estate		296		269		1		13
Consumer real estate		-		-		-		-
Consumer installment		-		-		-		-
Total	$	296	$	269		1	$	13

	December 31, 2015
	Outstanding Recorded		Outstanding Recorded				Interest
	Investment Pre-Modification		Investment Post-Modification		Number of Loans		Income Recognized
	(in thousands except number of loans)

Commercial installment	$	-	$	-		-	$	-
Commercial real estate		499		492		2		10
Consumer real estate		45		40		1		-
Consumer installment		-		-		-		-
Total	$	544	$	532		3	$	10

	December 31, 2014
	Outstanding Recorded		Outstanding Recorded				Interest
	Investment Pre-Modification		Investment Post-Modification		Number of Loans		Income Recognized
	(in thousands except number of loans)

Commercial installment	$	239	$	176		1	$	15
Commercial real estate		1,345		1,342		7		26
Consumer real estate		94		94		1		1
Consumer installment		-		-		-		-
Total	$	1,678	$	1,612		9	$	42

The TDRs presented above did increase the allowance for loan losses and resulted in charge-offs of $208,000, $0 and $0 for the years ended December 31, 2016, 2015 and 2014, respectively.

The balance of troubled debt restructurings at December 31, 2016, 2015 and 2014, was $4.1 million, $6.9 million and $6.8 million, respectively, calculated for regulatory reporting purpose. As of December 31, 2016, the Company had no additional amount committed on any loan classified as troubled debt restructuring.

All loans were performing as agreed with modified terms.

During the twelve month periods ended December 31, 2016, 2015 and 2014, the terms of 1, 3 and 9 loans, respectively, were modified as TDRs. The modifications included one of the following or a combination of the following: maturity date extensions, interest only payments, amortizations were extended beyond what would be available on similar type loans, and payment waiver. No interest rate concessions were given on these nor were any of these loans written down.

	December 31, 2016
	Current Loans		Past Due 30-89		Past Due 90 days and still accruing		Non-Accrual		Total
Commercial installment	$	150,509	$	-	$	-	$	-	$	150,509
Commercial real estate		2,463,484		-		-		1,101,279		3,564,763
Consumer real estate		153,695		89,996		-		122,450		366,141
Consumer installment		5,898		-		-		23,594		29,492
Total	$	2,773,586	$	89,996	$	-	$	1,247,323	$	4,110,905
Allowance for loan losses	$	124,484	$	-	$	-	$	40,165	$	164,649

	December 31, 2015
	Current Loans		Past Due 30-89		Past Due 90 days and still accruing		Non-Accrual		Total

Commercial installment	$	206,237	$	-	$	-	$	50,221	$	256,458
Commercial real estate		1,823,217		-		-		2,933,287		4,756,504
Consumer real estate		721,110		-		-		1,134,816		1,855,926
Consumer installment		7,894		-		-		29,435		37,329
Total	$	2,758,458	$	-	$	-	$	4,147,759	$	6,906,217
Allowance for loan losses	$	106,028	$	-	$	-	$	197,338	$	303,366

	December 31, 2014
	Current Loans		Past Due 30-89		Past Due 90 days and still accruing		Non-Accrual		Total

Commercial installment	$	233,340	$	-	$	-	$	-	$	233,340
Commercial real estate		1,684,755		-		-		2,729,170		4,413,925
Consumer real estate		952,162		622,302		-		448,796		2,023,260
Consumer installment		9,983		-		-		103,109		113,092
Total	$	2,880,240	$	622,302	$	-	$	3,281,075	$	6,783,617
Allowance for loan losses	$	120,220	$	11,206	$	102,657	$	-	$	234,083

The following tables summarize by class our loans classified as past due in excess of 30 days or more in addition to those loans classified as non-accrual:

	December 31, 2016
	(In thousands)
	Past Due 30 to 89 Days		Past Due 90 Days or More and Still Accruing		Non-Accrual		Total Past Due and Non-Accrual		Total Loans

Real Estate-construction	$	204	$	96	$	658	$	958	$	109,394
Real Estate-mortgage		2,745		102		1,662		4,509		289,640
Real Estate-nonfarm nonresidential		269		-		909		1,178		314,359
Commercial		9		-		2		11		129,423
Lease financing receivable		-		-		-		-		2,204
Obligations of states and subdivisions		-		-		-		-		6,698
Consumer		22		-		33		55		15,336
Total	$	3,249	$	198	$	3,264	$	6,711	$	867,054

	December 31, 2015
	(In thousands)
	Past Due 30 to 89 Days		Past Due 90 Days or More and Still Accruing		Non-Accrual		Total Past Due and Non-Accrual		Total Loans

Real Estate-construction	$	311	$	-	$	2,956	$	3,267	$	99,161
Real Estate-mortgage		3,339		29		2,055		5,423		272,180
Real Estate- nonfarm nonresidential		736		-		2,225		2,961		253,309
Commercial		97		-		100		197		129,197
Lease finance receivable		-		-		-		-		2,650
Obligations of states and subdivisions		-		-		-		-		969
Consumer		70		-		32		102		15,049
Total	$	4,553	$	29	$	7,368	$	11,950	$	772,515

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company uses the following definitions for risk ratings, which are consistent with the definitions used in supervisory guidance:

Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

As of December 31, 2016 and 2015 and based on the most recent analysis performed, the risk category of loans by class of loans (excluding mortgage loans held for sale) was as follows:

(In thousands)
December 31, 2016
							Commercial,
	Real Estate Commercial		Real Estate Mortgage		Installment and Other		Financial and Agriculture		Total

Pass	$	522,949	$	174,325	$	21,278	$	134,235	$	852,787
Special Mention		376		237		-		618		1,231
Substandard		11,873		1,336		79		208		13,496
Doubtful		-		200		-		40		240

Subtotal		535,198		176,098		21,357		135,101		867,754
Less:
Unearned Discount		378		60		-		262		700
Loans, net of unearned discount	$	534,820	$	176,038	$	21,357	$	134,839	$	867,054

December 31, 2015

							Commercial,
	Real Estate Commercial		Real Estate Mortgage		Installment and Other		Financial and Agriculture		Total

Pass	$	434,638	$	167,394	$	19,556	$	132,101	$	753,689
Special Mention		681		153		-		168		1,002
Substandard		16,655		1,453		75		178		18,361
Doubtful		-		327		-		-		327
Subtotal		451,974		169,327		19,631		132,447		773,379
Less:
Unearned Discount		448		76		-		340		864
Loans, net of unearned discount	$	451,526	$	169,251	$	19,631	$	132,107	$	772,515

NOTE F - PREMISES AND EQUIPMENT

Premises and equipment are stated at cost, less accumulated depreciation and amortization as follows:

	2016		2015
Premises:
Land	$	10,566,139	$	10,352,314
Buildings and improvements		27,463,504		26,164,412
Equipment		10,436,712		10,927,780
Construction in progress		779,833		76,920
		49,246,188		47,521,426
Less accumulated depreciation and amortization		14,621,836		13,898,415
	$	34,624,352	$	33,623,011

The amounts charged to operating expense for depreciation were $1,653,663, $1,645,081 and $1,552,297 in 2016, 2015 and 2014, respectively.

NOTE G - DEPOSITS

The aggregate amount of time deposits in denominations of $250,000 or more as of December 31, 2016, and as of December 31, 2015, was $60,219,749 and $39,786,088 respectively.

At December 31, 2016, the scheduled maturities of time deposits included in interest-bearing deposits were as follows (in thousands):

Year	Amount

2017	$	124,729
2018		39,609
2019		38,530
2020		11,690
2021		8,459
Thereafter		-
	$	223,017

NOTE H - BORROWED FUNDS

Borrowed funds consisted of the following:

	2016		2015

Reverse Repurchase Agreement	$	5,000,000	$	5,000,000
Fed Funds purchased		-		5,340,000
FHLB advances		48,000,000		99,981,245
First Tennessee Bank		16,000,000		-
	$	69,000,000	$	110,321,245

Advances from the FHLB have maturity dates ranging from January 2017 through June 2019. Interest is payable monthly at rates ranging from .66% to 1.60%. Advances due to the FHLB are collateralized by a blanket lien on first mortgage loans in the amount of the outstanding borrowings, FHLB capital stock, and amounts on deposit with the FHLB. At December 31, 2016, FHLB advances available and unused totaled $349,511,450.

Future annual principal repayment requirements on the borrowings from the FHLB at December 31, 2016, were as follows:

Year	Amount

2017	$	35,000,000
2018		2,500,000
2019		10,500,000
2020		-
Total	$	48,000,000

Reverse Repurchase Agreements consist of one $5,000,000 agreement. The agreement is secured by securities with a fair value of $5,470,105 at December 31, 2016 and $5,501,503 at December 31, 2015. The repurchase date of the agreement is September 26, 2017, and bears an interest rate of 3.81%.

The Company entered into a loan agreement with First Tennessee Bank for a $20 million revolving line of credit. The maturity date is December 5, 2017. The interest rate will be at a rate of 2.50% over the LIBOR Rate. The Company executed a negative pledge agreement to which it agreed not to pledge any capital stock of the Bank so long as any indebtedness is outstanding under the line of credit. The loan agreement includes covenants that require the Company to maintain key financial ratios above or below a stated benchmark level.

NOTE I – LEASE OBLIGATIONS

The Company is committed under several long-term operating leases which provide for minimum lease payments. Certain leases contain options for renewal. Total rental expense under these operating leases amounted to $577,000, $530,000 and $421,000 as of December 31, 2016, 2015 and 2014, respectively.

The Company is also committed under two long-term capital lease agreements. One capital lease agreement had an outstanding balance of $879,000 and $1,018,000 at December 31, 2016 and 2015, respectively (included in other liabilities). This lease has a remaining term of 5 years at December 31, 2016. Assets related to the capital lease are included in premises and the cost consists of $2.6 million less accumulated depreciation of approximately $1,389,513 and $1,127,913 at December 31, 2016 and 2015, respectively. The second capital lease agreement had an outstanding balance of $236,000 at December 31, 2016. This lease has a remaining term of 3 years at December 31, 2016. Assets related to the capital lease are included in premises and the cost consists of $0.3 million less accumulated depreciation of approximately $12,000, and $1,000 at December 31, 2016 and 2015, respectively.

Minimum future lease payments for the operating and capital leases at December 31, 2016, were as follows:

	Operating
	Leases		Capital Leases
	(In thousands)

2017	$	325	$	275
2018		260		275
2019		194		275
2020		130		191
2021		133		175
Thereafter		437		-

Total Minimum Lease Payments	$	1,479	$	1,191

Less: Amount representing interest				(76	)

Present value of minimum lease payments			$	1,115

NOTE J - 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 its subsidiary bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgment by regulators about components, risk weightings, and other related factors.

To ensure capital adequacy, quantitative measures have been established by regulators, and these require the Company and its subsidiary bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined) to risk-weighted assets (as defined), Tier I capital to adjusted total assets (leverage) and common equity Tier 1. Management believes, as of December 31, 2016, that the Company and its subsidiary bank exceeded all capital adequacy requirements.

In 2013, the Federal Reserve voted to adopt final capital rules implementing Basel III requirements for U.S. Banking organizations. Under the final rule, minimum requirements increased for both the quantity and quality of capital held by banking organizations. The final rule includes a new minimum ratio of common equity Tier 1 capital (Tier 1 Common) to risk-weighted assets and a Tier 1 Common capital conservation buffer of 2.5% of risk-weighted assets that will apply to all supervised financial institutions. The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets and includes a minimum leverage ratio of 4% for all banking organizations. These new minimum capital ratios were effective on January 1, 2015, and will be fully phased in on January 1, 2019.

At December 31, 2016 and 2015, the subsidiary bank was categorized by regulators as well-capitalized under the regulatory framework for prompt corrective action. Under Basel III requirements, a financial institution is considered to be well-capitalized if it has a total risk-based capital ratio of 10% or more, has a Tier I risk-based capital ratio of 8% or more, has a common equity Tier 1 of 6.5%, and has a Tier I leverage capital ratio of 5% or more. There are no conditions or anticipated events that, in the opinion of management, would change the categorization. The actual capital amounts and ratios at December 31, 2016 and 2015 are presented in the following table. No amount was deducted from capital for interest-rate risk exposure.

	Company					Subsidiary
	(Consolidated)					The First
	Amount		Ratio			Amount		Ratio
December 31, 2016
Total risk-based	$	157,557		15.5	%	$	172,572		17.0	%
Common equity Tier 1		140,747		13.8	%		165,062		16.2	%
Tier I risk-based		150,047		14.7	%		165,062		16.2	%
Tier I leverage		150,047		11.9	%		165,062		13.1	%
December 31, 2015
Total risk-based	$	103,403		11.9	%	$	102,911		11.8	%
Common equity Tier 1		70,587		8.1	%		96,164		11.0	%
Tier I risk-based		96,656		11.1	%		96,164		11.0	%
Tier I leverage		96,656		8.7	%		96,164		8.6	%

The minimum amounts of capital and ratios as established by banking regulators at December 31, 2016, 2015 and 2014, were as follows:

	Company					Subsidiary
	(Consolidated)					The First
	Amount		Ratio			Amount		Ratio
December 31, 2016
Total risk-based	$	81,504		8.0	%	$	81,391		8.0	%
Common equity Tier 1		45,846		4.5	%		45,782		4.5	%
Tier I risk-based		61,128		6.0	%		61,043		6.0	%
Tier I leverage		50,412		4.0	%		50,364		4.0	%

December 31, 2015
Total risk-based	$	69,753		8.0	%	$	69,698		8.0	%
Common equity Tier 1		39,236		4.5	%		39,205		4.5	%
Tier I risk-based		52,315		6.0	%		52,274		6.0	%
Tier I leverage		44,661		4.0	%		44,625		4.0	%

The Company’s dividends, if any, are expected to be made from dividends received from its subsidiary bank. The OCC limits dividends of a national bank in any calendar year to the net profits of that year combined with the retained net profits for the two preceding years.

NOTE K - INCOME TAXES

The components of income tax expense are as follows:

	Years Ended December 31,
	2016			2015		2014
Current:
Federal	$	3,363,290		$	2,484,372	$	1,757,098
State		577,401			473,037		347,382
Deferred		(10,352	)		255,638		331,399
	$	3,930,339		$	3,213,047	$	2,435,879

The Company's income tax expense differs from the amounts computed by applying the federal income tax statutory rates to income before income taxes. A reconciliation of the differences is as follows:

	Years Ended December 31,
	2016						2015						2014
	Amount			%			Amount			%			Amount			%

Income taxes at statutory rate	$	4,917,159			35	%	$	4,083,995			34	%	$	3,076,856			34	%
Tax-exempt income		(927,506	)		(7	)%		(831,141	)		(7	)%		(863,204	)		(10	)%
Nondeductible expenses		130,609			1	%		161,176			1	%		238,638			3	%
State income tax, net of federal tax effect		375,311			3	%		307,951			3	%		215,803			2	%
Tax credits, net		(308,684	)		(2	)%		(295,800	)		(2	)%		(337,716	)		(4	)%
Other, net		(256,550	)		(2	)%		(213,134	)		(2	)%		105,502			2	%
	$	3,930,339			28	%	$	3,213,047			27	%	$	2,435,879			27	%

The components of deferred income taxes included in the consolidated financial statements were as follows:

	December 31,
	2016			2015
Deferred tax assets:
Allowance for loan losses	$	2,897,479		$	2,516,669
Net operating loss carryover		2,315,140			2,426,903
Other real estate		272,598			275,530
Unrealized loss on available-for-sale securities		642,629			-
Other		1,219,682			1,194,345
		7,347,528			6,413,447

Deferred tax liabilities:
Securities		(115,737	)		(112,050	)
Premises and equipment		(449,136	)		(554,103	)
Unrealized gain on available-for-sale securities		-			(560,791	)
Core deposit intangible		(231,845	)		(149,109	)
Goodwill		(1,228,960	)		(929,316	)
		(2,025,678	)		(2,305,369	)
Net deferred tax asset, included in other assets	$	5,321,850		$	4,108,078

With the acquisition of Wiggins in 2006, Baldwin in 2013, and Bay in 2014, the Company assumed federal tax net operating loss carryovers. These net operating losses are available to the Company and expire as follows:

Years	Amounts
2017-2018	$	1,011,522
2019		350,928
2020-2032		3,865,563
2033		235,743
2034		101,560
	$	5,565,316

The Company follows the guidance of ASC Topic 740, Income Taxes, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As of December 31, 2016, the Company had no uncertain tax positions that it believes should be recognized in the financial statements. The tax years still subject to examination by taxing authorities are years subsequent to 2012. In February 2017, the Company was notified that its federal income tax return for 2014 is to be examined by the Internal Revenue Service.

NOTE L - EMPLOYEE BENEFITS

The Company and its subsidiary bank provide a deferred compensation arrangement (401(k) plan) whereby employees contribute a percentage of their compensation. For employee contributions of six percent or less, the Company and its subsidiary bank provide a 50% matching contribution. Contributions totaled $339,200 in 2016, $287,055 in 2015 and $255,716 in 2014.

The Company sponsors an Employee Stock Ownership Plan (ESOP) for employees who have completed one year of service for the Company and attained age 21. Employees become fully vested after five years of service. Contributions to the plan are at the discretion of the Board of Directors. At December 31, 2016, the ESOP held 5,771 shares of Company common stock and had no debt obligation. All shares held by the plan were considered outstanding for net income per share purposes. Total ESOP expense was $5,346 for 2016, $25,506 for 2015 and $26,267 for 2014.

In 2014, the Company established a Supplemental Executive Retirement Plan (“SERP”) for three active key executives. During 2016, the Company established a SERP for 8 additional active key executives. Pursuant to the SERP, these officers are entitled to receive 180 equal monthly payments commencing at the later of obtaining age 65 or separation from service. The costs of such benefits, assuming a retirement date at age 65, will be accrued by the Company at such retirement date. The Company accrued to expense $194,164 for 2016 and $88,992 for 2015 and $0 for 2014 for future benefits payable under the SERP. The SERP is an unfunded plan and is considered a general contractual obligation of the Company.

NOTE M - STOCK PLANS

In 2007, the Company adopted the 2007 Stock Incentive Plan. The 2007 Plan provided for the issuance of up to 315,000 shares of Company Common Stock, $1.00 par value per share. In 2015, the Company adopted an amendment to the 2007 Stock Incentive Plan which provided for the issuance of an additional 300,000 shares of Company Common Stock, $1.00 par value per share, for a total of 615,000 shares. Shares issued under the 2007 Plan may consist in whole or in part of authorized but unissued shares or treasury shares. During the year ended December 31, 2014, 67,627 nonvested restricted stock awards were granted under the Plan. During the year ended December 31, 2015, 69,327 nonvested restricted stock awards were granted under the Plan. During the year ended December 31, 2016, 61,247 nonvested restricted stock awards were granted under the Plan and no stock awards were forfeited due to separation. During 2016, 9,895 shares were repurchased for payment of taxes. During 2015, 6,324 shares were repurchased and during 2014, 5,981 shares were repurchased for payment of taxes. The weighted average grant-date fair value for these shares was $17.16 per share. Compensation costs in the amount of $772,311 was recognized for the year ended December 31, 2016, $721,124 was recognized for the year ended December 31, 2015 and $617,779 for the year ended December 31, 2014. Shares of restricted stock granted to employees under this stock plan are subject to restrictions as to the vesting period. The restricted stock award becomes 100% vested on the earliest of 1) the three or five year vesting period provided the Grantee has not incurred a termination of employment prior to that date, 2) the Grantee’s retirement, or 3) the Grantee’s death. During this period, the holder is entitled to full voting rights and dividends, which are held until vested. As of December 31, 2016, there was approximately $1,543,897 of unrecognized compensation cost related to this Plan. The cost is expected to be recognized over the remaining term of the vesting period (approximately 4 years).

NOTE N - SUBORDINATED DEBENTURES

On June 30, 2006, the Company issued $4,124,000 of floating rate junior subordinated deferrable interest debentures to The First Bancshares Statutory Trust 2 in which the Company owns all of the common equity. The debentures are the sole asset of the Trust. The Trust issued $4,000,000 of Trust Preferred Securities (TPSs) to investors. The Company’s obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the Trust’s obligations under the preferred securities. The preferred securities were redeemable by the Company at its option. The preferred securities must be redeemed upon maturity of the debentures in 2036. Interest on the preferred securities is the three month London Interbank Offer Rate (LIBOR) plus 1.65% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities. On July 27, 2007, the Company issued $6,186,000 of floating rate junior subordinated deferrable interest debentures to The First Bancshares Statutory Trust 3 in which the Company owns all of the common equity. The debentures are the sole asset of Trust 3. The Trust issued $6,000,000 of Trust Preferred Securities (TPSs) to investors. The Company’s obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the Trust’s obligations under the preferred securities. The preferred securities are redeemable by the Company at its option. The preferred securities must be redeemed upon maturity of the debentures in 2037. Interest on the preferred securities is the three month LIBOR plus 1.40% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities. In accordance with the provisions of ASC Topic 810, Consolidation, the trusts are not included in the consolidated financial statements.

NOTE O - TREASURY STOCK

Shares held in treasury totaled 26,494 at December 31, 2016, 2015, and 2014.

NOTE P - RELATED PARTY TRANSACTIONS

In the normal course of business, the Bank makes loans to its directors and executive officers and to companies in which they have a significant ownership interest. In the opinion of management, these loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other parties, are consistent with sound banking practices, and are within applicable regulatory and lending limitations. Such loans amounted to approximately $15,788,000 and $7,957,000 at December 31, 2016 and 2015, respectively. The activity in loans to current directors, executive officers, and their affiliates during the year ended December 31, 2016, is summarized as follows (in thousands):

Loans outstanding at beginning of year	$	7,957
New loans		9,311
Repayments		(1,480	)
Loans outstanding at end of year	$	15,788

NOTE Q - 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 subsidiary bank had outstanding letters of credit of $1,742,000 and $1,135,000 at December 31, 2016 and 2015, respectively, and had made loan commitments of approximately $220,252,000 and $144,086,000 at December 31, 2016 and 2015, respectively.

Commitments to extend credit and letters of credit include some exposure to credit loss in the event of nonperformance of the customer. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit policies and procedures for such commitments are the same as those used for lending activities. Because these instruments have fixed maturity dates and because a number expire without being drawn upon, they generally do not present any significant liquidity risk. No significant losses on commitments were incurred during the two years ended December 31, 2016, nor are any significant losses as a result of these transactions anticipated.

The primary market areas served by the Bank are Forrest, Lamar, Jones, Pearl River, Jackson, Hancock, Stone, and Harrison Counties within South Mississippi, as well as Washington Parish, St. Tammany Parish and East Baton Rouge Parish in Louisiana and Baldwin and Mobile Counties in South Alabama. Management closely monitors its credit concentrations and attempts to diversify the portfolio within its primary market area. As of December 31, 2016, management does not consider there to be any significant credit concentrations within the loan portfolio. Although the Bank’s loan portfolio, as well as existing commitments, reflects the diversity of its primary market area, a substantial portion of a borrower's ability to repay a loan is dependent upon the economic stability of the area.

NOTE R - FAIR VALUES OF ASSETS AND LIABILITIES

The Company follows the guidance of ASC Topic 820, Fair Value Measurements and Disclosures, that establishes a framework for measuring fair value and expands disclosures about fair value measurements.

The guidance defines the fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

In accordance with the guidance, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

	Level 1:	Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

	Level 2:	Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities.

	Level 3:	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets.

Available-for-Sale Securities

The fair value of available-for-sale securities is determined by various valuation methodologies. Where quoted market prices are available in an active market, securities are classified within Level 1. Level 1 securities include mutual funds. If quoted market prices are not available, then fair values are estimated by using pricing models or quoted prices of securities with similar characteristics. Level 2 securities include U.S. Treasury securities, obligations of U.S. government corporations and agencies, obligations of states and political subdivisions, mortgage-backed securities and collateralized mortgage obligations. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

The following table presents the Company’s available-for-sale securities that are measured at fair value on a recurring basis and the level within the hierarchy in which the fair value measurements fell as of December 31, 2016 and 2015 (in thousands):

			Fair Value Measurements Using
			Quoted Prices in Active Markets For Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)

December 31, 2016

Obligations of U.S.
Government agencies	$	9,045	$	-	$	9,045	$	-
Municipal securities		98,822		-		98,822		-
Mortgage-backed securities		114,289		-		114,289		-
Corporate obligations		20,110		-		17,869		2,241
Other		940		940		-		-
Total	$	243,206	$	940	$	240,025	$	2,241

			Fair Value Measurements Using
			Quoted Prices in Active Markets For Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)

December 31, 2015

Obligations of U.S.
Government agencies	$	19,611	$	-	$	19,611	$	-
Municipal securities		97,889		-		97,889		-
Mortgage-backed securities		98,925		-		98,925		-
Corporate obligations		22,346		-		19,789		2,557
Other		961		961		-		-
Total	$	239,732	$	961	$	236,214	$	2,557

The following is a reconciliation of activity for assets measured at fair value based on significant unobservable (non-market) information.

(In thousands)	Bank-Issued Trust Trust Preferred Securities
	2016			2015			2014
Balance of recurring Level 3 assets at January 1	$	2,557		$	2,801		$	2,798
Transfers into Level 3		-			-			-
Transfers out of Level 3		-			-			-
Unrealized income (loss) included in comprehensive income		(316	)		(244	)		3
Balance of recurring Level 3 assets at December 31	$	2,241		$	2,557		$	2,801

The following table presents quantitative information about recurring Level 3 fair value measurements (in thousands):

Trust Preferred
Securities

Fair Value

Valuation Technique

Significant
Unobservable Inputs

Range of Inputs

December 31, 2016

2,241

Discounted cash flow

Discount rate

1.50% - 3.34%

December 31, 2015

2,557

Discounted cash flow

Discount rate

1.08% - 2.77%

December 31, 2014

2,801

Discounted cash flow

Discount rate

.79% - 2.49%

Following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a non-recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.

Impaired Loans

Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for estimating fair value include using the fair value of the collateral for collateral dependent loans or, where a loan is determined not to be collateral dependent, using the discounted cash flow method.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. If the impaired loan is determined not to be collateral dependent, then the discounted cash flow method is used. This method requires the impaired loan to be recorded at the present value of expected future cash flows discounted at the loan’s effective interest rate. The effective interest rate of a loan is the contractual interest rate adjusted for any net deferred loan fees or costs, premiums or discounts existing at origination or acquisition of the loan. Impaired loans are classified within Level 2 of the fair value hierarchy.

Other Real Estate Owned

Other real estate owned consists of properties obtained through foreclosure. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Fair value of other real estate owned is based on current independent appraisals. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined the fair value declines subsequent to foreclosure, a valuation allowance is recorded through other income. Operating costs associated with the assets after acquisition are also recorded as non-interest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other income. Other real estate owned measured at fair value on a non-recurring basis at December 31, 2016, amounted to $6,007,621. Other real estate owned is classified within Level 2 of the fair value hierarchy.

The following table presents the fair value measurement of assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fell at December 31, 2016 and 2015 (in thousands).

			Fair Value Measurements Using
			Quoted Prices in Active Markets For Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)

December 31, 2016

Impaired loans	$	6,128	$	-	$	6,128	$	-
Other real estate owned		6,007		-		6,007		-

December 31, 2015

Impaired loans	$	10,127	$	-	$	10,127	$	-
Other real estate owned		3,083		-		3,083		-

The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value:

Cash and Cash Equivalents – For such short-term instruments, the carrying amount is a reasonable estimate of fair value.

Investment in securities available-for-sale and held-to-maturity – The fair value measurement for securities available-for-sale was discussed earlier. The same measurement approach was used for securities held-to-maturity and other securities.

Loans – The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Bank-owned Life Insurance – The fair value of bank-owned life insurance approximates the carrying amount, because upon liquidation of these investments, the Company would receive the cash surrender value which equals the carrying amount.

Deposits – The fair values of demand deposits are, as required by ASC Topic 825, equal to the carrying value of such deposits. Demand deposits include noninterest-bearing demand deposits, savings accounts, NOW accounts, and money market demand accounts. The fair value of variable rate term deposits, those repricing within six months or less, approximates the carrying value of these deposits. Discounted cash flows have been used to value fixed rate term deposits and variable rate term deposits repricing after six months. The discount rate used is based on interest rates currently being offered on comparable deposits as to amount and term.

Short-Term Borrowings – The carrying value of any federal funds purchased and other short-term borrowings approximates their fair values.

FHLB and Other Borrowings – The fair value of the fixed rate borrowings are estimated using discounted cash flows, based on current incremental borrowing rates for similar types of borrowing arrangements. The carrying amount of any variable rate borrowing approximates its fair value.

Subordinated Debentures – The subordinated debentures bear interest at a variable rate and the carrying value approximates the fair value.

Off-Balance Sheet Instruments – Fair values of off-balance sheet financial instruments are based on fees charged to enter into similar agreements. However, commitments to extend credit do not represent a significant value until such commitments are funded or closed. Management has determined that these instruments do not have a distinguishable fair value and no fair value has been assigned.

As of December 31, 2016					Fair Value Measurements
(Dollars in thousands)	Carrying Amount		Estimated Fair Value		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Financial Instruments:
Assets:
Cash and cash equivalents	$	62,119	$	62,119	$	62,119	$	-	$	-
Securities available-for-sale		243,206		243,206		940		240,025		2,241
Securities held-to-maturity		6,000		7,394		-		7,394		-
Other securities		6,593		6,593		-		6,593		-
Loans, net		865,424		883,161		-		-		883,161
Bank-owned life insurance		21,250		21,250		-		21,250		-

Liabilities:

Noninterest-bearing deposits	$	202,478	$	202,478	$	-	$	202,478	$	-
Interest-bearing deposits		836,713		835,658		-		835,658		-
Subordinated debentures		10,310		10,310		-		-		10,310
FHLB and other borrowings		69,000		69,000		-		69,000		-

As of December 31, 2015					Fair Value Measurements
	Carrying Amount		Estimated Fair Value		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Instruments:
Assets:
Cash and cash equivalents	$	41,259	$	41,259	$	41,259	$	-	$	-
Securities available-for-sale		239,732		239,732		961		236,214		2,557
Securities held-to-maturity		7,092		8,548		-		8,548		-
Other securities		8,135		8,135		-		8,135		-
Loans, net		769,742		784,113		-		-		784,113
Bank-owned life insurance		14,872		14,872		-		14,872		-

Liabilities:
Noninterest-bearing deposits	$	189,445	$	189,445	$	-	$	189,445	$	-
Interest-bearing deposits		727,250		726,441		-		726,441		-
Subordinated debentures		10,310		10,310		-		-		10,310
FHLB and other borrowings		110,321		110,321		-		110,321		-

NOTE S - PREFERRED STOCK

Pursuant to the terms of a letter agreement between the Company and the United States Department of the Treasury (“Treasury”), the Company issued 17,123 CDCI Preferred Shares.

The Letter Agreement contains limitations on the payment of dividends on the common stock to no more than 100% of the aggregate per share dividend and distributions for the immediate prior fiscal year (dividends were declared and paid in 2011 through 2016) and on the Company’s ability to repurchase its common stock in the event of a non-payment of our dividend, and continues to subject the Company to certain of the executive compensation limitations included in the Emergency Economic Stabilization Act of 2008 (EESA), as previously disclosed by the Company. The CDCI Preferred Shares entitle the holder to an annual dividend of 2% for 8 years of the liquidation value of the shares, payable quarterly in arrears.

On May 13, 2015, The First Bancshares, Inc. (the “Company”) entered into a Letter Agreement, including Schedule A thereto (the “Letter Agreement”), with the United States Department of the Treasury (“Treasury”), pursuant to which the Company redeemed the Warrant to purchase up to 54,705 shares of the Company’s common stock, no par value per share (the “Common Stock”) issued to Treasury on February 6, 2009 under the Capital Purchase Program. In connection with this redemption, on May 13, 2015, the Company paid Treasury an aggregate redemption price of $302,410.

On December 6, 2016, the Company repurchased all 17,123 shares of its CDCI Preferred Shares at fair market value $15,925,000, which equated to a discount of 7% to par, or $1,198,000.

On October 14, 2016, the Company issued 3,563,380 shares of Series E Convertible Preferred Stock at $17.75 per share in a private placement offering and received approximately $59,744,000 in net proceeds after offering expenses of $3,506,000. The net proceeds from this private placement were used to finance the Iberville Bank acquisition and pay related expenses, to support our capital ratios in connection with the Iberville Bank acquisition and Gulf Coast Community Bank acquisition, and for general corporate purposes. See Note T – Subsequent Events. All 3,563,380 shares of the Series E Convertible Preferred Stock were converted into 3,563,380 shares of common stock on December 30, 2016, following shareholder approval. Dividends were declared and paid on the Series E Convertible Preferred Stock.

NOTE T – SUBSEQUENT EVENTS

Acquisitions

Iberville Bank

On January 1, 2017, the Company completed its acquisition of 100% of the common stock of Iberville Bank, Plaquemine, Louisiana from A. Wilbert’s Sons Lumber and Shingle Co. (“Iberville Parent”), and immediately thereafter merged Iberville Bank with and into The First. The Company paid a total of $31.1 million in cash. Approximately $2.5 million of the purchase price is being held in escrow as contingency for flood-related losses in the loan portfolio that may be incurred due to recent flooding in Iberville Bank’s market area. At December 31, 2016, Iberville Bank had $269.4 in total assets, $147.3 million in net loans, $243.6 million in deposits and $22.4 million in stockholders’ equity.

In connection with the acquisition, the Company expects to record approximately $4.2 million of goodwill and $3.2 million of core deposit intangible. The core deposit intangible is to be expensed over 10 years.

The Company acquired the $149.4 million loan portfolio at an estimated fair value discount of $.9 million. The discount represents expected credit losses, adjusted for market interest rates and liquidity adjustments.

Expenses associated with the acquisition were $193,000 for the twelve month period ended December 31, 2016. These costs included charges associated with due diligence as well as legal and consulting expenses, which have been expensed as incurred.

The following unaudited pro-forma financial information for the year ended December 31, 2016, gives effect to the Iberville acquisition as if the acquisition had occurred on January 1, 2016. The pro-forma financial information is not necessarily indicative of the results of operations had the acquisition been effective as of this date.

(Dollars in thousands)

	Pro-Forma
	December 31, 2016
	(unaudited)

Net interest income	$	49,639
Non-interest income		13,461
Total revenue		63,100
Income before income taxes	$	15,171

Supplemental pro-forma earnings for 2016 were adjusted to exclude acquisition costs incurred during 2016.

Gulf Coast Community Bank

Also on January 1, 2017, the Company completed the merger of Gulf Coast Community Bank, Pensacola, Florida, with and into The First. The Company issued to Gulf Coast Community Bank’s shareholders shares of the Company’s common stock which, for purposes of the Gulf Coast acquisition, were valued through averaging the trading price of the Company’s common stock price over a 30 day trading period ending on the fifth business day prior to the closing of the Gulf Coast acquisition. The consideration for the Gulf Coast Acquisition was approximately $2.3 million. As of December 31, 2016, Gulf Coast had total assets of approximately $121.9 million, $88.1 million in net loans and deposits of approximately $111.9 million.

In connection with the acquisition, the Company expects to record approximately $1.7 million of goodwill and $.8 million of core deposit intangible. The core deposit intangible is to be expensed over 10 years.

The Company acquired the $91.0 million loan portfolio at a fair value discount of approximately $2.2 million. The discount represents expected credit losses, adjusted for market interest rates and liquidity adjustments.

Expenses associated with the acquisition were $328,000 for the twelve month period ended December 31, 2016. These costs included charges associated with due diligence, as well as legal and consulting expenses, which have been expensed as incurred.

The acquisition of Gulf Coast Community Bank is not considered significant.

The acquisition of both Iberville Bank and Gulf Coast Community Bank is an effort to expand the Company’s market presence and enhance shareholder value.

NOTE U - PARENT COMPANY FINANCIAL INFORMATION

The balance sheets, statements of income and cash flows for The First Bancshares, Inc. (parent company only) follow.

Condensed Balance Sheets

	December 31,
	2016		2015
Assets:
Cash and cash equivalents	$	69,158	$	213,621
Investment in subsidiary bank		179,541,693		112,943,885
Investments in statutory trusts		310,000		310,000
Other		1,112,514		686,409
	$	181,033,365	$	114,153,915
Liabilities and Stockholders’ Equity:
Subordinated debentures	$	10,310,000	$	10,310,000
Advances from First Tennessee Bank		16,000,000		-
Other		196,658		407,825
Stockholders’ equity		154,526,707		103,436,090
	$	181,033,365	$	114,153,915

Condensed Statements of Income

	Years Ended December 31,
	2016		2015		2014
Income:
Interest and dividends	$	6,680	$	5,573	$	5,453
Dividend income		2,875,000		1,650,000		5,109,668
Other		-		-		364,719
		2,881,680		1,655,573		5,479,840
Expenses:
Interest on borrowed funds		222,152		185,351		181,330
Legal		910,214		295,637		504,130
Other		1,240,863		833,502		752,027
		2,373,229		1,314,490		1,437,487
Income before income taxes and equity in undistributed income of subsidiary		508,451		341,083		4,042,353
Income tax benefit		835,757		487,853		296,388
Income before equity in undistributed income of subsidiary		1,344,208		828,936		4,338,741
Equity in undistributed income of subsidiary		8,774,479		7,969,766		2,274,955

Net income	$	10,118,687	$	8,798,702	$	6,613,696

Condensed Statements of Cash Flows

	Years Ended December 31,
	2016			2015			2014
Cash flows from operating activities:
Net income	$	10,118,687		$	8,798,702		$	6,613,696
Adjustments to reconcile net income to net cash used in operating activities:
Equity in undistributed income of subsidiary		(8,774,479	)		(7,969,766	)		(2,274,955	)
Restricted stock expense		772,311			721,124			617,779
Gain on sale of assets		-			-			(364,719	)
Other, net		(669,047	)		151,251			689,740
Net cash provided by operating activities		1,447,472			1,701,311			5,281,541

Cash flows from investing activities:
Investment in subsidiary bank		(60,000,000	)		-			-
Outlays for acquisitions		-			(35,709	)		(4,034,668	)
Net cash used in investing activities		(60,000,000	)		(35,709	)		(4,034,668	)

Cash flows from financing activities:
Dividends paid on common stock		(782,936	)		(778,428	)		(763,488	)
Dividends paid on preferred stock		(452,305	)		(342,460	)		(342,460	)
Repurchase of restricted stock for payment of taxes		(176,112	)		(92,390	)		(85,532	)
Repurchase of warrants		-			(302,410	)		-
Net proceeds from issuance of 3,563,380 shares		59,744,418			-			-
Repayment of CDCI Preferred Shares		(15,925,000	)		-			-
Proceeds of borrowed funds		16,000,000			-			-
Net cash provided by (used in) financing activities		58,408,065			(1,515,688	)		(1,191,480	)

Net increase (decrease) in cash and cash equivalents		(144,463	)		149,914			55,393
Cash and cash equivalents at beginning of year		213,621			63,707			8,314

Cash and cash equivalents at end of year	$	69,158		$	213,621		$	63,707

NOTE V - OPERATING SEGMENTS

The Company is considered to have three principal business segments in 2016, 2015, and 2014, the Commercial/Retail Bank, the Mortgage Banking Division, and the Holding Company. (Dollars in thousands)

	Year Ended December 31, 2016
	Commercial/		Mortgage
	Retail		Banking			Holding
	Bank		Division			Company			Total

Interest income	$	43,785	$	812		$	7		$	44,604
Interest expense		3,679		414			222			4,315
Net interest income (loss)		40,106		398			(215	)		40,289
Provision (credit) for loan losses		667		(42	)		-			625
Net interest income (loss) after provision for loan losses		39,439		440			(215	)		39,664
Non-interest income		6,989		4,258			-			11,247
Non-interest expense		31,369		3,342			2,151			36,862

Income (loss) before income taxes		15,059		1,356			(2,366	)		14,049
Income tax (benefit) expense		4,386		380			(836	)		3,930
Net income (loss)	$	10,673	$	976		$	(1,530	)	$	10,119

Total Assets	$	1,254,476	$	21,400		$	1,491		$	1,277,367
Net Loans		851,947		13,477			-			865,424

	Year Ended December 31, 2015
	Commercial/		Mortgage
	Retail		Banking		Holding
	Bank		Division		Company			Total

Interest income	$	39,422	$	774	$	6		$	40,202
Interest expense		2,727		296		185			3,208
Net interest income (loss)		36,695		478		(179	)		36,994
Provision for loan losses		410		-		-			410
Net interest income (loss) after provision for loan losses		36,285		478		(179	)		36,584
Non-interest income		6,513		1,075		-			7,588
Non-interest expense		29,786		1,245		1,129			32,160
Income (loss) before income taxes		13,012		308		(1,308	)		12,012
Income tax (benefit) expense		3,618		82		(487	)		3,213
Net income (loss)	$	9,394	$	226	$	(821	)	$	8,799

Total Assets	$	1,123,240	$	20,681	$	1,210		$	1,145,131
Net Loans		755,077		14,665		-			769,742

	Year Ended December 31, 2014
	Commercial/		Mortgage
	Retail		Banking		Holding
	Bank		Division		Company			Total

Interest income	$	35,506	$	860	$	5		$	36,371
Interest expense		2,482		310		181			2,973
Net interest income (loss)		33,024		550		(176	)		33,398
Provision for loan losses		1,401		17		-			1,418
Net interest income (loss) after provision for loan losses		31,623		533		(176	)		31,980
Non-interest income		5,986		1,452		365			7,803
Non-interest expense		28,034		1,443		1,256			30,733
Income (loss) before income taxes		9,575		542		(1,067	)		9,050
Income tax (benefit) expense		2,586		146		(296	)		2,436
Net income (loss)	$	6,989	$	396	$	(771	)	$	6,614

Total Assets	$	1,075,439	$	17,147	$	1,182		$	1,093,768
Net Loans		685,563		14,977		-			700,540

NOTE W - SUMMARY OF QUARTERLY RESULTS OF OPERATIONS AND PER SHARE AMOUNTS (UNAUDITED)

	Three Months Ended
	March 31		June 30		Sept. 30		Dec. 31
	(In thousands, except per share amounts)

2016
Total interest income	$	10,596	$	10,871	$	11,269	$	11,868
Total interest expense		922		1,016		1,202		1,176
Net interest income		9,674		9,855		10,067		10,692
Provision for loan losses		190		204		143		88
Net interest income after provision for loan losses		9,484		9,651		9,924		10,604
Total non-interest income		2,484		2,961		3,099		2,705
Total non-interest expense		8,395		8,921		9,416		10,132
Income tax expense		969		1,042		1,049		870
Net income		2,604		2,649		2,558		2,307
Preferred dividends		85		86		86		195
Net income applicable to common stockholders	$	2,519	$	2,563	$	2,472	$	2,112
Per common share:
Net income, basic	$	.47	$	.47	$	.46	$	.39
Net income, diluted		.46		.47		.45		.26
Cash dividends declared		.0375		.0375		.0375		.0375

2015
Total interest income	$	9,683	$	10,022	$	10,080	$	10,417
Total interest expense		804		806		793		804
Net interest income		8,879		9,216		9,287		9,613
Provision for loan losses		150		-		250		10
Net interest income after provision for loan losses		8,729		9,216		9,037		9,603
Total non-interest income		1,850		1,854		1,982		1,903
Total non-interest expense		7,818		8,092		7,977		8,275
Income tax expense		732		793		815		873
Net income		2,029		2,185		2,227		2,358
Preferred dividends		85		86		86		85
Net income applicable to common stockholders	$	1,944	$	2,099	$	2,141	$	2,273
Per common share:
Net income, basic	$	.36	$	.39	$	.40	$	.42
Net income, diluted		.36		.39		.39		.42
Cash dividends declared		.0375		.0375		.0375		.0375

2014
Total interest income	$	8,447	$	8,574	$	9,688	$	9,662
Total interest expense		623		726		833		791
Net interest income		7,824		7,848		8,855		8,871
Provision for loan losses		358		277		631		152
Net interest income after provision for loan losses		7,466		7,571		8,224		8,719
Total non-interest income		1,672		2,055		2,021		2,055
Total non-interest expense		7,227		7,384		8,071		8,051
Income tax expense		484		629		641		682
Net income		1,427		1,613		1,533		2,041
Preferred dividends and stock accretion		106		86		85		86
Net income applicable to common stockholders	$	1,321	$	1,527	$	1,448	$	1,955
Per common share:
Net income, basic	$	.26	$	.30	$	.27	$	.37
Net income, diluted		.25		.29		.27		.36
Cash dividends declared		.0375		.0375		.0375		.0375

FIRST BANCSHARES INC /MS/ - FORM 10-K - EX-13.1 - EXHIBIT 13.1 - March 16, 2017

Attached files

FIRST BANCSHARES INC /MS/ Reports