U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to ________

Commission file number: 000-22507

THE FIRST BANCshARES, INC.

(Exact name of Registrant as specified in its charter)

Mississippi	64-0862173
(State of Incorporation)	(IRS Employer Identification No)

6480 U.S. Highway 98 West, Suite A, Hattiesburg, Mississippi	39402
(Address of principal executive offices)	(Zip Code)

(601) 268-8998

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes þ                No ¨

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes þ                No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer þ
Non-accelerated filer ¨	Smaller Reporting Company ¨
Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨                No þ

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	FBMS	NASDAQ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock, $1.00 par value, 17,299,975 shares issued and 17,171,894 outstanding as of May 3, 2019.

The First Bancshares, Inc.

Form 10-Q

Quarter Ended March 31, 2019

Index

Part I. Financial Information
Item 1.	Financial Statements	3
	Consolidated Balance Sheets—Unaudited at March 31, 2019	3
	Consolidated Statements of Income—Unaudited	4
	Consolidated Statements of Comprehensive Income—Unaudited	5
	Consolidated Statements of Changes in Stockholders’ Equity—Unaudited	6
	Consolidated Statements of Cash Flows—Unaudited	7
	Notes to Consolidated Financial Statements—Unaudited	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	55
Item 4.	Controls and Procedures	58
Part II. Other Information
Item 1.	Legal Proceedings	58
Item 1A.	Risk Factors	59
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59
Item 3.	Defaults Upon Senior Securities	59
Item 4.	Mine Safety Disclosures	59
Item 5.	Other Information	59
Item 6.	Exhibits	60
Signatures		61

2

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE FIRST BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

($ in thousands)

	(Unaudited)			(Audited)
	March 31,			December 31,
	2019			2018
ASSETS
Cash and due from banks	$	91,538		$	71,356
Interest-bearing deposits with banks		157,038			87,751
Federal funds sold		-			-
Total cash and cash equivalents		248,576			159,107
Securities held-to-maturity, at amortized cost		6,397			6,000
Securities available-for-sale, at fair value		598,796			492,224
Other securities		15,298			16,704
Total securities		620,491			514,928
Loans held for sale		6,238			4,838
Loans		2,335,348			2,060,422
Allowance for loan losses		(11,235	)		(10,065	)
Loans, net		2,330,351			2,055,195
Interest receivable		12,420			10,778
Premises and equipment		94,624			74,783
Cash surrender value of bank-owned life
Insurance		58,405			50,796
Goodwill		119,907			89,750
Other real estate owned		11,588			10,869
Other assets		36,617			37,780
TOTAL ASSETS	$	3,532,979		$	3,003,986
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing	$	655,900		$	570,148
Interest-bearing		2,258,418			1,887,311
TOTAL DEPOSITS		2,914,318			2,457,459
Interest payable		2,028			1,519
Borrowed funds		61,750			85,500
Subordinated debentures		80,561			80,521
Other liabilities		19,975			15,733
TOTAL LIABILITIES		3,078,632			2,640,732
STOCKHOLDERS’ EQUITY:
Common stock, par value $1 per share, 40,000,000 shares authorized; 17,299,225 shares issued at March 31, 2019, and 14,587,092 shares issued at December 31, 2018, respectively		17,299			14,857
Additional paid-in capital		354,792			278,659
Retained earnings		78,594			71,998
Accumulated other comprehensive gain (loss)		4,126			(1,796	)
Treasury stock, at cost, 26,494 shares at March 31, 2019 and at December 31, 2018		(464	)		(464	)
TOTAL STOCKHOLDERS’ EQUITY		454,347			363,254
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	3,532,979		$	3,003,986

See Notes to Consolidated Financial Statements

3

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

($ in thousands, except earnings and dividends per share)

	(Unaudited)
	Three Months Ended
	March 31,
	2019		2018
INTEREST INCOME:
Interest and fees on loans	$	28,804	$	15,985
Interest and dividends on securities:
Taxable interest and dividends		3,591		1,986
Tax exempt interest		758		675
Interest on federal funds sold and interest bearing deposits in other Banks		120		112
TOTAL INTEREST INCOME		33,273		18,758
INTEREST EXPENSE:
Interest on deposits		4,363		1,840
Interest on borrowed funds		1,779		538
TOTAL INTEREST EXPENSE		6,142		2,378
NET INTEREST INCOME		27,131		16,380
PROVISION FOR LOAN LOSSES		1,123		277
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		26,008		16,103
NON-INTEREST INCOME:
Service charges on deposit accounts		1,831		2,067
Other service charges and fees		3,723		1,392
TOTAL NON-INTEREST INCOME		5,554		3,459
NON-INTEREST EXPENSES:
Salaries and employee benefits		10,697		7,789
Occupancy and equipment		2,447		1,293
Acquisition and integration charges		3,179		1,758
Other		5,570		3,757
TOTAL NON-INTEREST EXPENSES		21,893		14,597
INCOME BEFORE INCOME TAXES		9,669		4,965
INCOME TAXES		2,034		1,008
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS	$	7,635	$	3,957
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS:
BASIC	$	0.49	$	0.34
DILUTED		0.48		0.34
DIVIDENDS PER SHARE – COMMON		0.07		0.05

See Notes to Consolidated Financial Statements

4

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

($ in thousands)

	(Unaudited)
	Three Months Ended
	March 31,
	2019			2018
Net income per consolidated statements of income	$	7,635		$	3,957
Other Comprehensive Income:
Unrealized holding gains/ (losses) arising during period on available-for sale securities		7,966			(4,484	)
Reclassification adjustment for (gains)losses included in net income		(38	)		-
Unrealized holding gains/ (losses) arising during period on available- for-sale securities		7,928			(4,484	)
Income tax (expense) benefit		(2,006	)		1,133
Other comprehensive income (loss)		5,922			(3,351	)
Comprehensive Income	$	13,557		$	606

See Notes to Consolidated Financial Statements

5

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

($ in thousands, unaudited)

	Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Compre- hensive Income(Loss)			Treasury Stock			Total
Balance, January 1, 2018	$	11,192		$	158,456		$	53,722		$	(438	)	$	(464	)	$	222,468
Net income		-			-			3,957			-			-			3,957
Other comprehensive income		-			-			-			(3,351	)		-			(3,351	)
Dividends on common stock, $0.05 per share		-			-			(555	)		-			-			(555	)
Issuance of 1,134,010 common shares for Southwest acquisition		1,134			34,871			-			-			-			36,005
Restricted stock grant		52			(52	)		-			-			-			-
Restricted stock grant forfeited		(12	)		12			-			-			-			-
Expenses associated with common stock issuance		-			(237	)		-			-			-			(237	)
Compensation expense		-			252			-			-			-			252
Balance, March 31, 2018	$	12,366		$	193,302		$	57,124		$	(3,789	)	$	(464	)	$	258,539
Balance, January 1, 2019	$	14,857		$	278,659		$	71,998		$	(1,796	)	$	(464	)	$	363,254
Net income		-			-			7,635			-			-			7,635
Other comprehensive income		-			-			-			5,922			-			5,922
Dividends on common stock, $0.07 per share		-			-			(1,039	)		-			-			(1,039	)
Issuance of 2,377,501 common shares for FPB acquisition		2,378			75,842			-			-			-			78,220
Restricted stock grant		66			(66	)		-			-			-			-
Restricted stock grants Forfeited		(2	)		2			-			-			-			-
Compensation expense		-			355			-			-			-			355
Balance, March 31, 2019	$	17,299		$	354,792		$	78,594		$	4,126		$	(464	)	$	454,347

See Notes to Consolidated Financial Statements

6

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands)

	(Unaudited)
	Three Months Ended
	March 31,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME	$	7,635		$	3,957
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion		677			1,201
Provision for loan losses		1,123			277
Loss on sale/writedown of ORE		295			33
Securities (gain)/losses		(38	)		-
Restricted stock expense		355			252
Increase in cash value of life insurance		(297	)		(198	)
Federal Home Loan Bank stock dividends		-			(40	)
Payments on operating leases		(122	)		-
Changes in:
Interest receivable		(283	)		(11	)
Loans held for sale, net		(1,446	)		2,548
Interest payable		434			-
Other, net		(630	)		(10,773	)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		7,703			(2,754	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities, calls and paydowns of available- for-sale and held-to-maturity securities		19,445			12,942
Proceeds from sales of securities available-for-sale		20,291			16,529
Purchases of available-for-sale securities		(46,599	)		(36,849	)
Redemptions of other securities		2,712			551
Net increase in loans		(29,961	)		(21,719	)
Net increase in premises and equipment		(1,548	)		(1,012	)
Proceeds from sale of other real estate owned		385			893
Cash received in excess of cash paid for acquisitions		14,743			20,903
NET CASH USED IN INVESTING ACTIVITIES		(20,532	)		(7,762	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits		144,318			163,797
Net decrease in borrowed funds		(41,000	)		(81,896	)
Dividends paid on common stock		(1,020	)		(548	)
Expenses associated with capital raise		-			(237	)
NET CASH PROVIDED BY FINANCING ACTIVITIES		102,298			81,116
NET INCREASE IN CASH		89,469			70,600
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		159,107			91,921
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	248,576		$	162,521
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest		4,297			2,241
Loans transferred to other real estate		946			473
Issuance of restricted stock grants		66			52
Stock issued in connection with Southwest acquisition		-			36,005
Stock issued in connection with FPB acquisition		78,220			-
Dividends on restricted stock grants		19			7
Right-of-use assets obtained in exchange for operating lease liabilities		3,595			-

See Notes to Consolidated Financial Statements

7

THE FIRST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2019

NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and the instructions to Form 10-Q of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2019, are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company's Form 10-K for the fiscal year ended December 31, 2018.

NOTE 2 — SUMMARY OF ORGANIZATION

The First Bancshares, Inc., Hattiesburg, Mississippi (the "Company"), was incorporated June 23, 1995, under the laws of the State of Mississippi for the purpose of operating as a bank holding company. The Company’s primary asset is its interest in its wholly-owned subsidiary, The First, A National Banking Association (the “Bank” or “The First”).

At March 31, 2019, the Company had approximately $3.533 billion in assets, $2.330 billion in net loans, $2.914 billion in deposits, and $454.3 million in stockholders' equity. For the three months ended March 31, 2019, the Company reported net income of $7.6 million. After tax merger related costs of $2.5 million were expensed during the three months ended March 31, 2019.

On February 26, 2019, the Company paid a cash dividend in the amount of $0.07 per share to shareholders of record as of the close of business on Monday, February 11, 2019.

NOTE 3 — RECENT ACCOUNTING PRONOUNCEMENTS

In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-11 eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. Entities are also allowed to elect for early adoption the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. The revised disclosure requirements will not have a material impact on the Company’s Consolidated Financial Statements.

8

In June 2018, the FASB issued ASU No. 2018-07, Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 has been issued as part of a simplification initiative which will expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees and expands the scope through the amendments to address and improve aspects of the accounting for non-employee share-based payment transactions. The amendments will be effective for interim and annual reporting periods beginning after December 15, 2018. The Company is currently evaluating the provisions of ASU 2018-07 to determine the potential impact the new standard will have on its Consolidated Financial Statements.

In August 2018, the FASB issued ASU No. 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” These amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. The guidance is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted. The Company is currently assessing ASU 2018-15 and the impact the new standard will have on its Consolidated Financial Statements.

In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment.” ASU 2017-04 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 periods beginning after December 15, 2019, with early adoption permitted for any impairment tests performed after January 1, 2017. The Company is currently assessing the impact of ASU 2017-04 on its 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 working with a third party to assess the impact of the adoption of ASU 2016-13 on its Consolidated Financial Statements. While we are currently unable to reasonably estimate the impact of the adoption of ASU 2016-13, we expect that the impact of adoption could be influenced by the composition, characteristics and quality of our loan portfolio as well as the prevailing economic conditions and forecasts as of the adoption date. As part of our implementation process, the working group that is responsible for quarterly allowance for loan and lease losses(“ALLL”) model review and approval, also serves as the Bank’s CECL Implementation Team. These individuals come from various functional areas including Accounting, Credit Administration, Risk Management and Portfolio Management; as well as the CEO. The Bank has engaged the same third party vendor that currently provides ALLL modeling software and support to assist with the development of a CECL model that will be ready for use as of the adoption date. During the development phase of building a model specific to the needs of the Bank, concurrent CECL modeling will be performed to generate a loss projection using the new model for each quarter of 2019. This model estimate will be reviewed and discussed by the Implementation Team after each quarterly run as it does with the current ALLL Model. The Implementation Team will provide direction to management and the third party vendor throughout the implementation process.

9

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 a 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 neither risks and rewards nor control is conveyed, an operating lease results. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with certain practical expedients available. Early adoption is permitted. In July 2018, the FASB issued ASU No. 2018-11, Leases – Targeted Improvements. ASU 2018-11 provides entities with relief from the costs of implementing certain aspects of ASU 2016-02. Under the amendments in ASU 2018-11 entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard and lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments have the same effective date as ASU 2016-02, January 1, 2019. We have elected to apply ASU 2016-02 as of the beginning of the period of adoption (January 1, 2019) and will not restate comparative periods. Our operating leases relate primarily to bank branches. As a result of the adoption of ASC 842 on January 1, 2019, we recorded operating lease right-of-use (“ROU”) assets of $1.8 million and lease liabilities of $1.8 million. ROU assets are adjusted for lease incentives. The adoption of ASC 842 had an immaterial impact on our Consolidated Statements of Income and Consolidated Statements of Cash Flows compared to the prior lease accounting model. The ROU asset and operating lease liability are recorded in premises and equipment and other liabilities, respectively, in the Consolidated Balance Sheets. See Note 12 – Leases for additional information.

NOTE 4 – BUSINESS COMBINATIONS

Acquisitions

FPB Financial Corp.

On March 2, 2019, the Company completed its acquisition of FPB Financial Corp., (“FPB”), and immediately thereafter merged its wholly-owned subsidiary, Florida Parishes Bank, with and into The First. The company paid a total consideration of approximately $78.2 million in stock to the FPB shareholders as consideration in the merger, which included 2,377,501 shares of Company common stock, and approximately $5 thousand in cash.

In connection with the acquisition, preliminarily, the Company recorded approximately $30.3 million of goodwill and $4.8 million of core deposit intangible. Goodwill is not deductible for income taxes. The core deposit intangible will be amortized to expense over 10 years.

10

The Company acquired the $247.8 million loan portfolio at an estimated fair value discount of $3.1 million. The discount represents expected credit losses, adjusted for market interest rates and liquidity adjustments.

Expenses associated with the acquisition were $1.7 million for the three month period ended March 31, 2019. These costs included system conversion and integrating operations charges as well as legal and consulting expenses, which have been expensed as incurred.

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

Purchase price:	$	78,225
Cash and stock		78,225
Total purchase price
Identifiable assets:
Cash and due from banks		14,748
Investments		93,604
Loans		244,665
Bank owned life insurance		7,312
Core deposit intangible		4,793
Personal and real property		17,358
Other assets		1,430
Total assets		383,910
Liabilities and equity:
Deposits		312,453
Borrowed funds		17,250
Other liabilities		6,291
Total liabilities		335,994
Net assets acquired		47,916
Goodwill resulting from acquisition	$	30,309

The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheets as of the date of acquisition and at March 31, 2019, are as follows ($ in thousands):

	March 2, 2019		March 31, 2019
Outstanding principal balance	$	247,774	$	243,555
Carrying amount		244,665		240,555

Purchased credit impaired loans are detailed in Note 10 – Loans.

FMB Financial Corp.

On November 1, 2018, the Company completed its acquisition of FMB Banking Corporation (“FMB”), and immediately thereafter merged its wholly-owned subsidiary, Farmers & Merchants Bank, with and into The First. The Company paid a total consideration of approximately $79.5 million to the former FMB shareholders including 1,763,042 shares of the Company’s common stock and approximately $16.0 million in cash.

In connection with the acquisition, the Company recorded approximately $36.2 million of goodwill and $10.2 million of core deposit intangible. Goodwill is not deductible for income taxes. The core deposit intangible will be amortized to expense over 10 years.

11

The Company acquired FMB’s $325.5 million loan portfolio at an estimated fair value discount of $7.6 million. The discount represents expected credit losses, adjusted for market interest rates and liquidity adjustments.

Expenses associated with the acquisition were $998 thousand for the three month period ended March 31, 2019. These costs included system conversion and integrating operations charges, as well as legal and consulting expenses, which have been expensed as incurred.

The following table summarized the provisional fair values of the assets acquired and liabilities assumed on November 1, 2018 ($ in thousands):

Purchase price:
Cash and stock	$	79,547
Total purchase price		79,547
Identifiable assets:
Cash and due from banks		28,556
Investments		97,331
Loans		317,909
Bank owned life insurance		13,639
Core deposit intangible		10,203
Personal and real property		15,204
Other assets		3,054
Total assets		485,896
Liabilities and equity:
Deposits		431,276
Borrowed funds		5,369
Other liabilities		5,894
Total liabilities		442,539
Net assets acquired		43,357
Goodwill resulting from acquisition	$	36,190

The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheet March 31, 2019, are as follows ($ in thousands):

	November 1, 2018		March 31, 2019
Outstanding principal balance	$	325,509	$	289,230
Carrying amount		317,921		282,388

Purchased credit impaired loans are detailed in Note 10 – Loans.

Sunshine Financial, Inc.

On April 1, 2018, the Company completed its acquisition of Sunshine Financial, Inc., (“Sunshine”), and immediately thereafter merged its wholly-owned subsidiary, Sunshine Community Bank, with and into The First. The Company paid a total consideration of $30.5 million to the Sunshine shareholders as consideration in the merger which included 726,461 shares of Company common stock and $7 million in cash.

In connection with the acquisition, the Company recorded $9.5 million of goodwill and $4.1 million of core deposit intangible. Goodwill is not deductible for income taxes. The core deposit intangible will be amortized to expense over 10 years.

The Company acquired the $173.1 million loan portfolio at an estimated fair value discount of $4.5 million. The discount represents expected credit losses, adjusted for market interest rates and liquidity adjustments.

12

Expenses associated with the acquisition were $227 thousand for the three month period ended March 31, 2019. These costs included system conversion and integrating operations charges as well as legal and consulting expenses, which have been expensed as incurred.

The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheet as of the date of acquisition and at March 31, 2019, are as follows ($ in thousands):

	April 1, 2018		March 31, 2019
Outstanding principal balance	$	173,052	$	157,150
Carrying amount		168,561		153,848

Purchased credit impaired loans are detailed in Note 10 – Loans.

Southwest Banc Shares, Inc.

On March 1, 2018, the Company completed its acquisition of Southwest Banc Shares, Inc., (“Southwest”), and immediately thereafter merged its wholly-owned subsidiary, First Community Bank, with and into The First. The Company paid a total consideration of $60.0 million to the Southwest shareholders as consideration in the merger which included 1,134,010 shares of Company common stock and $24 million in cash.

In connection with the acquisition, the Company recorded $23.9 million of goodwill and $5.8 million of core deposit intangible. Goodwill is not deductible for income taxes. The core deposit intangible will be amortized to expense over 10 years.

The Company acquired the $274.7 million loan portfolio at an estimated fair value discount of $3.5 million. The discount represents expected credit losses, adjusted for market interest rates, and liquidity adjustments.

Expenses associated with the acquisition were $257 thousand for the three months period ended March 31, 2019. These costs included systems conversions and integrating operations charges, as well as legal and consulting expenses, which have been expensed as incurred.

The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheet as of the date of acquisition and at March 31, 2019, are as follows ($ in thousands):

	March 1, 2018		March 31, 2019
Outstanding principal balance	$	274,669	$	185,301
Carrying amount		271,150		183,275

Purchased credit impaired loans are detailed in Note 10 – Loans.

The following unaudited pro-forma financial information for the three months ended March 31, 2019 and March 31, 2018 gives effect to the acquisitions as if the acquisitions had occurred on January 1, 2019 and 2018. The pro-forma financial information is not necessarily indicative of the results of operations had the acquisitions been effective as of this date.

	Pro-Forma		Pro-Forma
($ in thousands)	Three Months Ended March 31, 2019		Three Months Ended March 31, 2018
	(unaudited)		(unaudited)
Net interest income	$	31,006	$	18,603
Non-interest income		5,454		4,038
Total revenue		36,460		22,641
Income before income taxes		16,306		7,869

13

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

Non-credit impaired loans acquired in the acquisitions were accounted for in accordance with ASC 310-20, Receivables-Nonrefundable Fees and Other Costs. Purchased credit impaired loans acquired in the Southwest, Sunshine, FMB and FPB acquisitions were accounted for in accordance with ASC 310-30 Accounting for Purchased Loans with Deteriorated Credit Quality.

NOTE 5 – EARNINGS APPLICABLE TO COMMON STOCKHOLDERS

Basic per share data is calculated based on the weighted-average number of common shares outstanding during the reporting period. Diluted per share data includes any dilution from potential common stock outstanding, such as restricted stock grants. There were no antidilutive common stock equivalents excluded in the calculations.

The following tables disclose the reconciliation of the numerators and denominators of the basic and diluted computations applicable to common stockholders ($ in thousands, expect per share amount):

	For the Three Months Ended
	March 31, 2019
	Net Income		Shares		Per
	(Numerator)		(Denominator)		Share Data
Basic earnings per share	$	7,635		15,646	$	0.49
Effect of dilutive shares:
Restricted stock grants				125
Diluted earnings per share	$	7,635		15,771	$	0.48

	For the Three Months Ended
	March 31, 2018
	Net Income		Shares		Per
	(Numerator)		(Denominator)		Share Data
Basic earnings per share	$	3,957		11,557	$	0.34
Effect of dilutive shares:
Restricted stock grants				96
Diluted earnings per share	$	3,957		11,653	$	0.34

The Company granted 66,132 shares of restricted stock in the first quarter of 2019 and 51,851 shares of restricted stock in the first quarter of 2018.

NOTE 6 – COMPREHENSIVE INCOME

As presented in the Consolidated Statements of Comprehensive Income, comprehensive income includes net income and other comprehensive income. The Company’s sources of other comprehensive income are unrealized gains and losses on available-for-sale debt securities. Gains or losses on debt securities that had previously been included in other comprehensive income as unrealized holding gains or losses in the period in which they arose were realized and reflected in net income of the current period, and as a result are considered to be reclassification adjustments that are excluded from other comprehensive income in the current period.

14

NOTE 7 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. At March 31, 2019, and December 31, 2018, these financial instruments consisted of the following:

($ in thousands)	March 31, 2019				December 31, 2018
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	48,104	$	19,688	$	32,624	$	36,780
Unused lines of credit		129,584		253,318		115,524		131,741
Commercial & similar letters of credit		2,354		8,579		2,357		8,367

Commitments to make loans are generally made for periods of 90 days or less. The fixed rate loan commitments have interest rates ranging from 3.25% to 18.00% and maturities ranging from 1 year to 30 years.

NOTE 8 – FAIR VALUE DISCLOSURES AND REPORTING, THE FAIR VALUE OPTION AND FAIR VALUE MEASUREMENTS

FASB’s standards on financial instruments, and on fair value measurements and disclosures, require all entities to disclose in their financial statement footnotes the estimated fair values of financial instruments for which it is practicable to estimate fair values. In addition to disclosure requirements, FASB’s standard on investments requires that our debt securities which are classified as available-for-sale and our equity securities that have readily determinable fair values be measured and reported at fair value in our Consolidated Financial Statements. Certain impaired loans are also reported at fair value, as explained in greater detail below, and foreclosed assets are carried at the lower of cost or fair value. FASB’s standard on financial instruments permits companies to report certain other financial assets and liabilities at fair value, but we have not elected the fair value option for any of those financial instruments.

Fair value measurement and disclosure standards also establish a framework for measuring fair values. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date. Further, the standards establish a fair value hierarchy that encourages an entity to maximize the use of observable inputs and limit the use of unobservable inputs when measuring fair values. The standards describe three levels of inputs that may be used to measure fair values:

· Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

· Level 2: Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

· Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the factors that market participants would likely consider in pricing an asset or liability.

15

Fair value estimates are made at a specific point in time based on relevant market data and information about the financial instruments. The estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to realized gains and losses could have a significant effect on fair value estimates but have not been considered in those estimates. Because no active market exists for a significant portion of our financial instruments, fair value disclosures are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. The estimates are subjective and involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly alter the fair values presented. The following methods and assumptions were used by the Company to estimate its financial instrument fair values disclosed at March 31, 2019 and December 31, 2018:

· Cash and cash equivalents and fed funds sold: The carrying amount is estimated to be fair value.

· Securities (available-for-sale, held-to-maturity and other): Fair values are determined by obtaining quoted prices on nationally recognized securities exchanges or by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities by relying on their relationship to other benchmark quoted securities when quoted prices for specific securities are not readily available.

· Loans and leases: The fair value of loans was estimated by discounting the expected future cash flows using the current interest rates at which similar loans would be made for the same remaining maturities, in accordance with the exit price notion as defined by FASB ASC 820, Fair Value Measurement ("ASC 820"). Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments and as a result of the adoption of ASU 2016-01, which also included credit risk and other market factors to calculate the exit price fair value in accordance with ASC 820. Starting with the first quarter of 2018, the Company began using an exit price notion when measuring the fair value of its loan portfolio, excluding loans held for sale, for disclosure purposes.

· Loans held for sale: Since loans designated by the Company as available-for-sale are typically sold shortly after making the decision to sell them, realized gains or losses are usually recognized within the same period and fluctuations in fair values are not relevant for reporting purposes. If available-for-sale loans are held on our books for an extended period of time, the fair value of those loans is determined using quoted secondary-market prices.

· Collateral-dependent impaired loans: Collateral-dependent impaired loans are carried at fair value when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the original loan agreement and the loan has been written down to the fair value of its underlying collateral, net of expected disposition costs where applicable.

· Accrued interest receivable: The carrying amount of accrued interest receivable approximates fair value and is classified as level 2 for accrued interest receivable related to investment securities and Level 3 for accrued interest receivable related to loans.

· Deposits (non-interest-bearing and interest-bearing): Fair values for non-maturity deposits are equal to the amount payable on demand at the reporting date, which is the carrying amount. Fair values for fixed-rate certificates of deposit are estimated using a cash flow analysis, discounted at interest rates being offered at each reporting date by the Bank for certificates with similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value.

16

· FHLB and other borrowings: Current carrying amounts are used as an approximation of fair values for federal funds purchased, overnight advances from the Federal Home Loan Bank (“FHLB”), borrowings under repurchase agreements, and other short-term borrowings maturing within ninety days of the reporting dates. Fair values of other short-term borrowings are estimated by discounting projected cash flows at the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

· Long-term borrowings: Fair values are estimated using projected cash flows discounted at the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

· Subordinated debentures: Fair values are determined based on the current market value for like instruments of a similar maturity and structure.

· Accrued interest payable: The carrying amount of accrued interest payable approximates fair value resulting in a Level 2 classification.

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

Estimated fair values for the Company’s financial instruments are as follows, as of the dates noted:

As of March 31, 2019					Fair Value Measurements
($ 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	$	248,576	$	248,576	$	248,576	$	-	$	-
Securities available-for-sale:
Obligations of U.S. Government agencies and sponsored entities		67,346		67,346		-		67,346		-
Municipal securities		163,588		163,588		-		-		163,588
Mortgage-backed securities		359,914		359,914		-		359,914		-
Corporate obligations		7,948		7,948		-		7,516		432
Securities held-to-maturity		6,397		7,628		-		7,628		-
Loans, net		2,330,351		2,303,461		-		-		2,303,461
Accrued interest receivable		12,420		12,420		-		3,082		9,338
Liabilities:
Non-interest- bearing deposits	$	655,900	$	655,900	$	-	$	655,900	$	-
Interest- bearing deposits		2,258,418		2,231,448		-		2,231,448		-
Subordinated debentures		80,561		78,210		-		-		78,210
FHLB and other borrowings		61,750		61,750		-		61,750		-
Accrued interest Payable		2,028		2,028		-		2,028		-

17

As of December 31, 2018					Fair Value Measurements
($ 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	$	159,107	$	159,107	$	159,107	$	-	$	-
Securities available-for-sale		492,224		492,224		-		341,286		150,938
Securities held-to-maturity		6,000		7,028		-		7,028		-
Loans, net		2,055,195		2,020,782		-		-		2,020,782
Accrued interest receivable		10,778		10,778		-		2,673		8,105
Liabilities:
Noninterest-bearing deposits	$	570,148	$	570,148	$	-	$	570,148	$	-
Interest-Bearing deposits		1,887,311		1,855,637		-		1,855,637		-
Subordinated debentures		80,521		76,986		-		-		76,986
FHLB and other borrowings		85,500		85,500		-		85,500		-
Accrued interest payable		1,519		1,519		-		1,519		-

18

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, securities are classified within Level 2 of the valuation hierarchy, and fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities include U. S. agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, asset-backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

Assets measured at fair value on a recurring basis are summarized below:

March 31, 2019

($ 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)
Available-for-sale
Obligations of U.S. Government agencies and sponsored entities	$	67,346	$	-	$	67,346	$	-
Municipal securities		163,588		-		-		163,588
Mortgage-backed securities		359,914		-		359,914		-
Corporate obligations		7,948		-		7,516		432
Total available-for-sale	$	598,796	$	-	$	434,776	$	164,020
December 31, 2018
($ 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)
Available-for-sale
Obligations of U. S. Government agencies and sponsored entities	$	47,342	$	-	$	47,342	$	-
Municipal securities		150,064		-		-		150,064
Mortgage-backed securities		287,470		-		287,470		-
Corporate obligations		7,348		-		6,474		874
Total available-for-sale	$	492,224	$	-	$	341,286	$	150,938

19

The following is a reconciliation of activity for assets measured at fair value based on significant unobservable (non-market) information. There were no transfers into or out of the Level 3 fair value hierarchy for the periods presented below.

($ in thousands)	Bank-Issued Trust Preferred Securities
	2019			2018
Balance, January 1	$	874		$	2,569
Unrealized (loss) gain included in comprehensive income		(442	)		(1,695	)
Balance at March 31, 2019 and December 31, 2018	$	432		$	874

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
March 31, 2019	$	432	Discounted cash flow	Probability of default	3.50% - 4.72%
December 31, 2018	$	874	Discounted cash flow	Probability of default	3.71% - 5.03%

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

Impaired 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. 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. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans. Such adjustments, if any, result in a Level 3 classification of the inputs for determining fair value. The Company generally adjusts the appraisal down by approximately 10 percent to account for selling costs. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment.

Purchased Credit Impaired Loans (“PCI”)

Purchased credit impaired loan valuations utilize third party appraisals and are classified as Level 3 due to the significant judgement involved. Appraisals may include the utilization of unobservable inputs, subjective factors and utilize quantitative data to estimate fair market value. The Company generally adjusts the appraisal down by approximately 10 percent to account for selling costs.

20

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 of the collateral less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals, which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach with data from comparable properties. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments, if any, result in a Level 3 classification of the inputs for determining fair value. In the determination of fair value subsequent to foreclosure, Management also considers other factors or recent developments, such as changes in market conditions from the time of valuation and anticipated sales values considering plans for disposition, which could result in an adjustment to lower the collateral value estimates indicated in the appraisals. The Company generally adjusts the appraisal down by approximately 10 percent to account for selling costs. Periodic revaluations are classified as Level 3 in the fair value hierarchy since assumptions are used that may not be observable in the market. 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 non-interest 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 recorded in other non-interest income. Other real estate measured at fair value on a non-recurring basis at March 31, 2019, amounted to $11.6 million. Other real estate owned is classified within Level 3 of the fair value hierarchy.

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements declined at March 31, 2019 and December 31, 2018.

March 31, 2019

($ 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)
Impaired loans	$	10,129	$	-	$	-	$	10,129
PCI loans		15,710		-		-		15,710
Other real estate owned		11,588		-		-		11,588

21

December 31, 2018

($ 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)
Impaired loans	$	11,276	$	-	$	-	$	11,276
PCI loans		17,652		-		-		17,652
Other real estate owned		10,869		-		-		10,869

NOTE 9 - SECURITIES

The following disclosure of the estimated fair value of financial instruments is made in accordance with authoritative guidance. The estimated fair value amounts have been determined using available market information and valuation methodologies that management believes are appropriate. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

A summary of the amortized cost and estimated fair value of available-for-sale securities and held-to-maturity securities at March 31, 2019 and December 31, 2018, follows:

($ in thousands)

	March 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available-for-sale securities:
Obligations of U.S. Government agencies and sponsored entities	$	66,261	$	1,154	$	69	$	67,346
Tax-exempt and taxable obligations of states and municipal subdivisions		161,739		2,162		313		163,588
Mortgage-backed securities		357,217		3,804		1,107		359,914
Corporate obligations		8,060		5		117		7,948
Total	$	593,277	$	7,125	$	1,606	$	598,796
	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Estimated Fair Value
Held-to-maturity securities:
Taxable obligations of  states and municipal subdivisions	$	6,000	$	1,237	$	-	$	7,237
Mortgage-backed securities		397		-		6		391
Total	$	6,397	$	1,237	$	6	$	7,628

22

	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available-for-sale securities:
Obligations of U.S. Government agencies sponsored entities	$	47,212	$	405	$	275	$	47,342
Tax-exempt and taxable obligations of states and municipal subdivisions		150,215		1,070		1,221		150,064
Mortgage-backed securities		289,745		1,171		3,446		287,470
Corporate obligations		7,518		15		185		7,348
Total	$	494,690	$	2,661	$	5,127	$	492,224
	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Estimated Fair Value
Held-to-maturity securities:
Taxable obligations of  states and municipal subdivisions	$	6,000	$	1,028	$	-	$	7,028

The scheduled maturities of securities at March 31, 2019 and December 31, 2018 were as follows:

	March 31, 2019
	Available-for-Sale				Held-to-Maturity
($ in thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due less than one year	$	23,499	$	23,520	$	-	$	-
Due after one year through five years		73,797		74,337		-		-
Due after five years through ten years		98,829		100,733		6,000		7,237
Due greater than ten years		39,935		40,292		-		-
Mortgage-backed securities		357,217		359,914		397		391
Total	$	593,277	$	598,796	$	6,397	$	7,628

23

	December 31, 2018
	Available-for-Sale				Held-to-Maturity
($ in thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due less than one year	$	19,825	$	19,794	$	-	$	-
Due after one year through five years		64,933		64,925		-		-
Due after five years through ten years		82,455		82,687		6,000		7,028
Due greater than ten years		37,732		37,348		-		-
Mortgage-backed securities		289,745		287,470		-		-
Total	$	494,690	$	492,224	$	6,000	$	7,028

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

The details concerning securities classified as available-for-sale with unrealized losses as of March 31, 2019 and December 31, 2018 were as follows:

	March 31, 2019
	Losses < 12 Months				Losses 12 Months or >				Total
($ in thousands)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Obligations of U.S. government agencies and sponsored entities	$	2,203	$	2	$	7,660	$	67	$	9,863	$	69
Tax-exempt and taxable obligations of state and municipal subdivisions		5,365		13		36,586		300		41,951		313
Mortgage-backed securities		7,404		75		102,827		1,032		110,231		1,107
Corporate obligations		2,492		2		4,451		115		6,943		117
Total	$	17,464	$	92	$	151,524	$	1,514	$	168,988	$	1,606

	December 31, 2018
	Losses < 12 Months				Losses 12 Months or >				Total
($ in thousands)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Obligations of U.S. government agencies and sponsored entities	$	11,034	$	52	$	7,838	$	223	$	18,872	$	275
Tax-exempt and taxable obligations of state and municipal subdivisions		38,200		311		42,102		910		80,302		1,221
Mortgage-backed securities		93,294		843		101,005		2,603		194,299		3,446
Corporate obligations		1,962		40		4,969		145		6,931		185
Total	$	144,490	$	1,246	$	155,914	$	3,881	$	300,404	$	5,127

24

At March 31, 2019 and December 31, 2018, the Company’s securities portfolio consisted of 910 and 427 securities, respectively, that were in an unrealized loss position. The Company reviews its investment portfolio quarterly for indications of other-than-temporary impairment (“OTTI”), with attention given to securities in a continuous loss position of at least ten percent for over twelve months. Management believes that none of the losses on available-for-sale securities noted above constitute an OTTI. The noted losses are considered temporary due to market fluctuations in available interest rates. Management considers the issuers of the securities to be financially sound, the corporate bonds are investment grade, and the collectability of all contractual principal and interest payments is reasonably expected. On January 1, 2018, the Company adopted the new accounting standard for Financial Instruments, which requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with the changes in fair value recognized in net income. The adoption of this guidance resulted in a $348 thousand decrease to retained earnings. No OTTI losses were recognized during the three months ended March 31, 2019 or the year ended December 31, 2018.

NOTE 10 – LOANS

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 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 or PCI:

	March 31, 2019
($ in thousands)	Past Due 30 to 89 Days		Past Due 90 Days or More and Still Accruing		Non- Accrual		PCI		Total Past Due, Non- Accrual and PCI		Total Loans
Real Estate-construction	$	1,220	$	53	$	6	$	2,144	$	3,423	$	348,788
Residential secured loans including multifamily and farmland		3,222		671		955		9,370		14,218		722,611
Real Estate-non-farm non-residential		231		140		9,275		3,465		13,111		857,918
Commercial		726		64		1,043		156		1,989		340,333
Lease financing receivable		-		-		-		-		-		3,060
Obligations of states and subdivisions		-		-		-		-		-		13,734
Consumer		281		15		62		26		384		48,904
Total	$	5,680	$	943	$	11,341	$	15,161	$	33,125	$	2,335,348

25

	December 31, 2018
($ in thousands)	Past Due 30 to 89 Days		Past Due 90 Days or More and Still Accruing		Non- Accrual		PCI		Total Past Due, Non- Accrual and PCI		Total Loans
Real Estate-construction	$	818	$	114	$	8	$	1,830	$	2,770	$	298,718
Residential secured loans including multi- family and farmland		5,528		650		1,411		7,781		15,370		617,804
Real Estate-non farm non-residential		4,319		456		9,179		3,576		17,530		776,880
Commercial		1,650		-		1,024		184		2,858		301,182
Lease financing receivable		-		-		-		-		-		2,891
Obligations of states and subdivisions		-		-		-		-		-		16,941
Installment and other		507		45		46		34		632		46,006
Total	$	12,822	$	1,265	$	11,668	$	13,405	$	39,160	$	2,060,422

We acquired loans with deteriorated credit quality in 2014, 2017, 2018 and 2019. 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 (purchased non-impaired loans) and those with evidence of credit deterioration (purchased credit impaired loans). Acquired loans are considered to be impaired if it is probable, based on current available information, that the Company will be unable to collect all cash flows as expected. If the collection of expected cash flows cannot reasonably be estimated, no interest income will be recognized on these loans.

The following table presents information regarding the contractually required payments receivable, cash flows expected to be collected and the estimated fair value of PCI loans acquired in the FPB acquisition.

	March 2, 2019
($ in thousands)	Commercial, financial and agricultural		Mortgage- Commercial		Mortgage- Residential		Commercial and other		Total
Contractually required payments	$	100	$	1,562	$	3,045	$	8	$	4,715
Cash flows expected to be collected		77		1,317		2,901		-		4,295
Fair value of loans acquired		70		1,224		2,622		1		3,916

Total outstanding purchased credit impaired loans were $21.7 million and the related purchase accounting discount was $4.0 million as of March 31, 2019, and $17.7 million and $3.8 million as of December 31, 2018, respectively. 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. There was no related allowance allocated to the acquired impaired loans.

Changes in the accretable yield for purchased credit impaired loans were as follows at March 31, 2019 and 2018:

	March 31, 2019			March 31, 2018
($ in thousands)	Accretable Yield			Accretable Yield
Balance at beginning of period	$	3,835		$	836
Reclassification from prior years		-			859
Addition		379			49
Accretion		(275	)		(143	)
Transfer from non-accretable		48			120
Payments received, net		-			-
Charge-off		-			(10	)
Balance at end of period	$	3,987		$	1,711

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The following tables provide additional detail of impaired loans broken out according to class as of March 31, 2019 and December 31, 2018. The recorded investment included in the following tables represents customer balances net of any partial charge-offs recognized on the loans, net of any deferred fees and costs. As nearly all of our impaired loans at March 31, 2019 are on nonaccrual status, recorded investment excludes any insignificant amount of accrued interest receivable on loans 90-days or more past due and still accruing. The unpaid balance represents the recorded balance prior to any partial charge-offs.

March 31, 2019
							Average		Interest
							Recorded		Income
	Recorded		Unpaid		Related		Investment		Recognized
($ in thousands)	Investment		Balance		Allowance		YTD		YTD
Impaired loans with no related allowance:
Commercial, financial and agriculture	$	388	$	470	$	-	$	682	$	7
Commercial real estate		11,356		15,538		-		15,902		46
Consumer real estate		7,064		9,099		-		7,386		3
Consumer installment		47		57		-		74		-
Total (1)	$	18,855	$	25,164	$	-	$	24,044	$	56
Impaired loans with a related allowance:
Commercial, financial and agriculture	$	1,568	$	1,568	$	359	$	1,264	$	8
Commercial real estate		7,629		7,629		1,874		6,071		32
Consumer real estate		483		483		76		424		26
Consumer installment		75		75		27		50		-
Total	$	9,755	$	9,755	$	2,336	$	7,809	$	66
Total Impaired Loans:
Commercial, financial and agriculture	$	1,956	$	2,038	$	359	$	1,946	$	15
Commercial real estate		18,985		23,167		1,874		21,973		78
Consumer real estate		7,547		9,582		76		7,810		29
Consumer installment		122		132		27		125		-
Total Impaired Loans	$	28,610	$	34,919	$	2,336	$	31,854	$	122

(1) – The total unpaid balance of impaired loans with no related allowance as of March 31, 2019 includes $21,702 in PCI loans.

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As of March 31, 2019, the Company had $2.1 million of foreclosed residential real estate property obtained by physical possession and $368 thousand of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings are in process according to local jurisdictions.

December 31, 2018							Average		Interest
							Recorded		Income
	Recorded		Unpaid		Related		Investment		Recognized
($ in thousands)	Investment		Balance		Allowance		YTD		YTD
Impaired loans with no related allowance:
Commercial, financial and agriculture	$	894	$	894	$	-	$	379	$	27
Commercial real estate		18,046		19,775		-		7,685		427
Consumer real estate		6,215		6,530		-		4,522		69
Consumer installment		92		92		-		82		3
Total (1)	$	25,247	$	27,291	$	-	$	12,668	$	526
Impaired loans with a related allowance:
Commercial, financial and agriculture	$	960	$	960	$	329	$	968	$	3
Commercial real estate		4,512		4,512		758		2,868		176
Consumer real estate		366		366		66		555		16
Consumer installment		26		26		26		24		-
Total	$	5,864	$	5,864	$	1,179	$	4,415	$	195
Total Impaired Loans:
Commercial, financial and agriculture	$	1,854	$	1,854	$	329	$	1,347	$	30
Commercial real estate		22,558		24,287		758		10,553		603
Consumer real estate		6,581		6,896		66		5,077		85
Consumer installment		118		118		26		106		3
Total Impaired Loans	$	31,111	$	33,155	$	1,179	$	17,083	$	721

(1) – The total unpaid balance of impaired loans with no related allowance as of December 31, 2018 includes $17,652 in PCI loans.

Interest income recognized and cash-basis interest income recognized on impaired loans was approximately $122 thousand and $97 thousand, respectively, for the three months ended March 31, 2019 and 2018. The gross interest income that would have been recorded in the period that ended if the non-accrual loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the three months ended March 31, 2019 and March 31, 2018 and $409 thousand and $86 thousand, respectively. The Company had no loan commitments to borrowers in non-accrual status at March 31, 2019 and December 31, 2018.

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Troubled Debt Restructuring

If the Company grants a concession to a borrower in financial difficulty, the loan is classified as a troubled debt restructuring (“TDR”).

There were 3 and 0 TDRs modified during the three months ended March 31, 2019 and 2018, respectively. The balance of TDRs was $17.0 million at March 31, 2019 and $14.3 million at December 31, 2018. The increase of $2.7 million is attributable to acquired loans. There was $215 thousand allocated in specific reserves established with respect to these loans as of March 31, 2019. As of March 31, 2019, the Company had no additional amount committed on any loan classified as TDR.

The following tables set forth the amounts and past due status for the Company’s TDRs at March 31, 2019 and December 31, 2018:

($ in thousands)

	March 31, 2019
	Current Loans		Past Due 30-89		Past Due 90 days and still accruing		Non- accrual		Total
Commercial, financial and agriculture	$	851	$	-	$	-	$	17	$	868
Commercial real estate		5,696		-		-		5,208		10,904
Residential real estate		1,416		423		-		3,390		5,229
Consumer installment		31		-		-		-		31
Total	$	7,994	$	423	$	-	$	8,615	$	17,032
Allowance for loan losses	$	106	$	11	$	-	$	98	$	215

($ in thousands)

	December 31, 2018
	Current Loans		Past Due 30-89		Past Due 90 days and still accruing		Non- accrual		Total
Commercial, financial and agriculture	$	13	$	646	$	-	$	18	$	676
Commercial real estate		4,827		-		-		5,425		10,252
Residential real estate		442		86		-		2,801		3,329
Consumer installment		25		-		-		13		38
Total	$	5,307	$	732	$	-	$	8,257	$	14,295
Allowance for loan losses	$	80	$	13	$	-	$	110	$	203

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A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There was 1 loan which totaled $10 thousand and 12 loans which totaled $4.3 million that were modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the quarters ending March 31, 2019 and March 31, 2018, respectively.

Internal Risk Ratings

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 institution will sustain some loss if the deficiencies are not corrected.

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

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

As of March 31, 2019 and December 31, 2018, and based on the most recent analysis performed, the risk categories of loans by class of loans (excluding mortgage loans held for sale) were as follows:

March 31, 2019
($ in thousands)	Commercial, Financial and Agriculture		Commercial Real Estate		Consumer Real Estate		Installment and Other		Total
Pass	$	335,338	$	1,467,336	$	437,811	$	33,225	$	2,273,710
Special Mention		792		9,216		2,023		29		12,060
Substandard		3,129		34,351		12,645		474		50,599
Doubtful		14		83		-		-		97
Subtotal		339,273		1,510,986		452,479		33,728		2,336,466
Less:
Unearned discount		-		1,118		-		-		1,118
Loans, net of unearned discount	$	339,273	$	1,509,868	$	452,479	$	33,728	$	2,335,348

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December 31, 2018
($ in thousands)	Commercial, Financial and Agriculture		Commercial Real Estate		Consumer Real Estate		Installment and Other		Total
Pass	$	300,685	$	1,286,151	$	377,028	$	34,127	$	1,997,991
Special Mention		842		12,401		1,962		13		15,218
Substandard		2,640		33,856		10,959		270		47,725
Doubtful		16		85		-		-		101
Subtotal		304,183		1,332,493		389,949		34,410		2,061,035
Less:
Unearned discount		-		613		-		-		613
Loans, net of unearned discount	$	304,183	$	1,331,880	$	389,949	$	34,410	$	2,060,422

Allowance for Loan Losses

Activity in the allowance for loan losses for the period was as follows:

	Three Months			Three Months
	Ended			Ended
($ in thousands)	March 31, 2019			March 31, 2018
Balance at beginning of period	$	10,065		$	8,288
Loans charged-off:
Commercial, Financial and Agriculture		(4	)		-
Real Estate		(42	)		(4	)
Installment and Other		(29	)		(19	)
Total		(75	)		(23	)
Recoveries on loans previously charged-off:
Commercial, Financial and Agriculture		13			8
Real Estate		29			22
Installment and Other		80			87
Total		122			117
Net recovery		47			94
Provision for Loan Losses		1,123			277
Balance at end of period	$	11,235		$	8,659

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 March 31, 2019 and December 31, 2018. 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. See Item 2. – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Allowance for Loan and Lease Losses” for a description of our methodology.

31

March 31, 2019

	Commercial
	Financial		Commercial		Consumer		Installment
($ in thousands)	and Agriculture		Real Estate		Real Estate		and Other		Total
Loans
Individually evaluated	$	1,738	$	8,283	$	799	$	75	$	10,895
Collectively evaluated		337,317		1,529,183		406,632		33,606	$	2,306,738
PCI loans		218		10,702		6,748		47		17,715
Total	$	339,273	$	1,548,168	$	414,179	$	33,728	$	2,335,348
Allowance for Loan Losses
Individually evaluated	$	358	$	1,875	$	76	$	27	$	2,336
Collectively evaluated		1,221		5,396		128		2,154		8,899
Total	$	1,579	$	7,271	$	204	$	2,181	$	11,235

December 31, 2018

	Commercial
	Financial		Commercial		Consumer		Installment
($ in thousands)	and Agriculture		Real Estate		Real Estate		and Other		Total
Loans
Individually evaluated	$	1,657	$	10,932	$	804	$	66	$	13,459
Collectively evaluated		302,329		1,309,322		383,368		34,292		2,029,311
PCI loans		197		11,626		5,777		52		17,652
Total	$	304,183	$	1,331,880	$	389,949	$	34,410	$	2,060,422
Allowance for Loan Losses
Individually evaluated	$	329	$	758	$	66	$	26	$	1,179
Collectively evaluated		1,731		5,303		1,677		175		8,886
Total	$	2,060	$	6,061	$	1,743	$	201	$	10,065

NOTE 11 – REVENUE FROM CONTRACTS WITH CUSTOMERS

On January 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract; (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

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The Company concluded that there was no change to the timing and pattern of revenue recognition for its current revenue streams or the presentation of revenue as gross versus net. No adjustment to retained earnings was required on the adoption date. Because there was no change to the timing and pattern of revenue recognition, there were no material changes to the Company’s processes and internal controls.

All of the Company’s revenue from contracts with customers within the scope of ASC 606 is recognized within noninterest income.  The guidance does not apply to revenue associated with financial instruments, including loans and investment securities that are accounted for under other GAAP, which comprise a significant portion of our revenue stream. A description of the Company’s revenue streams accounted for under ASC 606 is as follows:

Service Charges on Deposit Accounts: The Company earns fees from deposit customers for transaction-based, account maintenance, and overdraft services.  Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed at the point in the time the Company fulfills the customer’s request.  Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation.  Overdraft fees are recognized at the point in time that the overdraft occurs.  Service charges on deposits are withdrawn from the customer’s account balance.

Interchange Income: The Company earns interchange fees from debit and credit card holder transactions conducted through various payment networks.  Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided by the cardholder.

Gains/Losses on Sales of OREO: The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed.  When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether the collectability of the transaction prices is probable.  Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.  In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present.

All of the Company’s revenue from contracts with customers in the scope of ASC 606 is recognized within non-interest income. The following table presents the Company’s sources of non-interest income revenue by operating segments for the three months ended March 31, 2019 and 2018. Items outside the scope of ASC 606 are noted as such.

	Three Months Ended March 31, 2019
	Commercial/			Mortgage
	Retail			Banking		Holding
($ in thousands)	Bank			Division		Company		Total
Non-interest income
Service charges on deposits
Overdraft fees	$	974		$	-	$	-	$	974
Other		857			1		-		858
Interchange income		1,652			-		-		1,652
Investment brokerage fees		9			-		-		9
Net gains (losses) on OREO		(10	)		-		-		(10	)
Net gains on sale of loans (a)		-			-		-		-
Net gains (losses) on sales of of securities (a)		(38	)		-		-		(38	)
Other		956			908		245		2,109
Total non-interest income	$	4,400		$	909	$	245	$	5,554

33

	Three Months Ended March 31, 2018
	Commercial/		Mortgage
	Retail		Banking		Holding
	Bank		Division		Company		Total
Non-interest income
Service charges on deposits
Overdraft fees	$	627	$	1	$	-	$	628
Other		400		1		-		401
Interchange income		1,040		-		-		1,040
Investment brokerage fees		-		-		-		-
Net (losses) gains on OREO		19		-		-		19
Net gains on sale of loans (a)		-		-		-		-
Net gains (losses) on sales of of securities (a)		-		-		-		-
Other		573		798		-		1,371
Total non-interest income	$	2,659	$	800	$	-	$	3,459

(a) Not within scope of ASC 606

NOTE 12 – LEASES

Operating leases in which we are the lessee are recorded as operating lease ROU assets and operating lease liabilities, which are included in premises and equipment and other liabilities, respectively, on our consolidated balance sheets. We do not currently have any significant finance leases in which we are the lessee.

Operating lease ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate at the lease commencement date. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded in net occupancy and equipment expense in the consolidated statements of income and other comprehensive income.

Our leases relate primarily to bank branches with remaining lease terms of generally 1 to 8 years. Certain lease arrangements contain extension options which are not generally considered reasonably certain of exercise and they are not included in the lease term. As of March 31, 2019, operating lease ROU assets and liabilities were $3.6 million and $3.6 million, respectively.

The table below summarizes our net lease costs:

	Three months ended
($ in thousands)	March 31, 2019
Operating lease costs	$	122
Variable lease costs		-
Sublease income		-
Net lease costs	$	122

34

The table below summarizes other information related to our operating leases:

	Three months ended
($ in thousands except for percent and period data)	March 31, 2019
Cash paid for amounts included in the measurement of lease liability
Operating cash flows from operating leases	$	122
Weighted-average remaining lease term – operating leases, in years		6.5
Weighted-average discount rate – operating leases		3.12	%

The table below summarizes the maturity of remaining lease liabilities:

($ in thousands)	March 31, 2019
2019	$	562
2020		715
2021		584
2022		541
2023		513
2024 and thereafter		1,088
Total lease payments		4,003
Less: Interest		(408	)
Present value of lease liabilities	$	3,595

As a result of the adoption of ASC 842, The Company did not restate the prior period unaudited consolidated financial statements and all prior period amounts and disclosures are presented under ASC 840. At December 31, 2018, minimum future lease payments were as follows ($ in thousands):

($ in thousands)	December 31, 2018
2019	$	784
2020		463
2021		347
2022		256
2023		229
2024 and thereafter		197
Total minimum lease payments	$	2,276

NOTE 13 – RECLASSIFICATION

Certain amounts in the 2018 financial statements have been reclassified for comparative purposes to conform to the current period financial statement presentation.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “expects,” “will,” “intends,” “anticipates,” “plans,” “believes,” “seeks,” “estimates” and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements are based on currently available information and are subject to various risks and uncertainties that could cause actual results to differ materially from the Company’s present expectations. Factors that might cause such differences include, but are not limited to: competitive pressures among financial institutions increasing significantly; economic conditions, either nationally or locally, in areas in which the Company conducts operations being less favorable than expected; interest rate risk; legislation or regulatory changes which adversely affect the ability of the consolidated Company to conduct business combinations or new operations; financial success or changing strategies of the Bank’s customers or vendors; actions of government regulators; and the risk that anticipated benefits from the recent acquisitions are not realized in the time frame anticipated or at all as a result of changes in general economic and market conditions or other unexpected factors or events.

Potential risks and uncertainties that could cause our actual results to differ materially from those anticipated in any forward-looking statements include, but are not limited to, the following:

· reduced earnings due to higher credit losses generally and specifically because losses in the sectors of our loan portfolio secured by real estate are greater than expected due to economic factors, including declining real estate values, increasing interest rates, increasing unemployment, or changes in payment behavior or other factors;

· general economic conditions, either nationally or regionally and especially in our primary service area, becoming less favorable than expected resulting in, among other things, a deterioration in credit quality;

· adverse changes in asset quality and resulting credit risk-related losses and expenses;

· ability of borrowers to repay loans, which can be adversely affected by a number of factors, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, natural disasters, and international instability;

· changes in monetary and tax policies, including potential impacts from the Tax Cuts and Jobs Act;

· changes in political conditions or the legislative or regulatory environment;

· the adequacy of the level of our allowance for loan losses and the amount of loan loss provisions required to replenish the allowance in future periods;

· reduced earnings due to higher credit losses because our loans are concentrated by loan type, industry segment, borrower type, or location of the borrower or collateral;

· changes in the interest rate environment which could reduce anticipated or actual margins;

· increased funding costs due to market illiquidity, increased competition for funding, higher interest rates, and increased regulatory requirements with regard to funding;

· results of examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for loan losses through additional loan loss provisions or write-down of our assets;

· the rate of delinquencies and amount of loans charged-off;

· the impact of our efforts to raise capital on our financial position, liquidity, capital, and profitability;

36

· risks and uncertainties relating to not successfully closing and integrating the currently contemplated acquisitions within our currently expected timeframe and other terms;

· significant increases in competition in the banking and financial services industries;

· changes in the securities markets; and

· loss of consumer confidence and economic disruptions resulting from national disasters or terrorist activities;

· our ability to retain our existing customers, including our deposit relationships;

· changes occurring in business conditions and inflation;

· changes in technology;

· changes in deposit flows;

· changes in accounting principles, policies, or guidelines;

· our ability to maintain adequate internal control over financial reporting;

· other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission (“SEC”).

We have based our forward-looking statements on our current expectations about future events. Although we believe that the expectations reflected in and the assumptions underlying our forward-looking statements are reasonable, we cannot guarantee that these expectations will be achieved or the assumptions will be accurate.  The Company disclaims any obligation to update such factors or to publicly announce the results of any revisions to any of the forward-looking statements included herein to reflect future events or developments. Additional information concerning these risks and uncertainties is contained in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2018, and in our future filings with the Securities and Exchange Commission, available at the SEC’s website, http://www.sec.gov.

CRITICAL ACCOUNTING POLICIES

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States. The financial information and disclosures contained within those statements are significantly impacted by Management’s estimates and judgments, which are based on historical experience and incorporate various assumptions that are believed to be reasonable under current circumstances. Actual results may differ from those estimates under divergent conditions.

Critical accounting policies are those that involve the most complex and subjective decisions and assessments, and have the greatest potential impact on the Company’s stated results of operations. In Management’s opinion, the Company’s critical accounting policies deal with the following areas: the establishment of the allowance for loan and lease losses (referred to as the “allowance for loan losses” or the “ALLL”), as explained in detail in Note 10 - Loans to the Consolidated Financial Statements and in the “Allowance for Loan and Lease Losses” sections of this Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations; the valuation of impaired loans and foreclosed assets, as discussed in Note 10 - Loans to the Consolidated Financial Statements; income taxes and deferred tax assets and liabilities, especially with regard to the ability of the Company to recover deferred tax assets as discussed in the “Provision for Income Taxes” and “Other Assets” sections of this Item No. 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations; and goodwill and other intangible assets, which are evaluated annually for impairment, as discussed in the “Other Assets” section of this Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations. Critical accounting policies are evaluated on an ongoing basis to ensure that the Company’s financial statements incorporate our most recent expectations with regard to those areas.

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OVERVIEW OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION

RESULTS OF OPERATIONS SUMMARY

First quarter 2019 compared to first quarter 2018

The Company reported net income available to common shareholders of $7.6 million for the three months ended March 31, 2019, compared with net income available to common shareholders of $4.0 million for the same period last year. For the first quarter of 2019, fully diluted earnings per share were $0.48, compared to $0.34 for the first quarter of 2018.

Operating net earnings for the first quarter of 2019 totaled $9.9 million compared to $5.4 million for the first quarter of 2018, an increase of $4.6 million or 85.2%. Operating net earnings excludes merger-related costs of $2.5 million, net of tax and income in the form of an award from the Community Development Financial Institutions Fund of the U.S. Department of Treasury of $233 thousand, net of tax, for the first quarter of 2019, and excludes merger-related costs of $1.4 million, net of tax for the first quarter of 2018. Operating earnings per share were $0.63 on a fully diluted basis for the first quarter 2019, compared to $0.46 for the same period in 2018. See reconciliation of non-GAAP financial measures provided below.

Net interest income increased to $27.1 million, or 65.6% for the three months ended March 31, 2019, compared to $16.4 million for the same period in 2018. The increase was due to interest income earned on a higher volume of loans as well as increased interest rates. Quarterly average earning assets at March 31, 2019, increased $1.0 billion, or 55.4% and quarterly average interest-bearing liabilities increased $778 thousand or 55.1% when compared to March 31, 2018.

Non-interest income for the three months ended March 31, 2019, was $5.6 million compared to $3.5 million for the same period in 2018, reflecting an increase of $2.1 million or 60.6%. This increase was composed of increases in service charges and interchange fee income of $1.4 million primarily based on the increased deposit base due to the acquisitions. The Company also received a Bank Enterprise Award of $233 thousand from the U.S. Department of the Treasury during the first quarter of 2019 as a result of our designation as a Community Development Financial Institution.

The provision for loan losses was $1.1 million for the three months ended March 31, 2019, compared with $277 thousand for the same period in 2018. The allowance for loan losses of $11.2 million at March 31, 2019 or 0.48% of total loans is based on our methodology and is considered by management to be adequate to cover losses inherent in the loan portfolio. See “Allowance for Loan and Lease Losses” in this Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information on this evaluation.

Non-interest expense was $21.9 million for the three months ended March 31, 2019, an increase of $7.3 million or 50.0%, when compared with the same period in 2018. Excluding the increase in acquisition charges of $1.4 million for first quarter of 2019, non-interest expense increased $5.9 million in the first quarter of 2019, of which $3.8 million was attributable to the operations of Southwest, Sunshine, FMB and FPB, as compared to first quarter of 2018.

FINANCIAL CONDITION

The First represents the primary asset of the Company. The First reported total assets of $3.533 billion at March 31, 2019 compared to $3.004 billion at December 31, 2018, an increase of $529.0 million. Loans increased $274.9 million to $2.335 billion, or 13.3%, during the first three months of 2019. Deposits at March 31, 2019, totaled $2.914 billion compared to $2.457 billion at December 31, 2019. The First acquired loans of $241.6 million, net of fair value marks and deposits of $314.4 million, net of fair value marks as a result of the acquisition of FPB during the first quarter of 2019. See Note 4 – Business Combinations to the Consolidated Financial Statements.

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For the three month period ended March 31, 2019, The First reported net income of $7.6 million compared to $4.0 million for the three months ended March 31, 2018. Merger charges, net of tax, equaled $2.5 million for the first three months of 2019 as compared to $1.4 million for the first three months of 2018.

EARNINGS PERFORMANCE

The Company earns income from two primary sources. The first is net interest income, which is interest income generated by earning assets less interest expense on deposits and other borrowed money. The second is non-interest income, which primarily consists of customer service charges and fees as well as mortgage income but also comes from non-customer sources such as bank-owned life insurance. The majority of the Company’s non-interest expense is comprised of operating costs that facilitate offering a full range of banking services to our customers.

Net interest income AND NET INTEREST MARGIN

Net interest income increased by $10.8 million, or 65.6%, for the first quarter of 2019 relative to the first quarter of 2018. The increase was due to interest income earned in a higher volume of loans as well as increased interest rates. The level of net interest income we recognize in any given period depends on a combination of factors including the average volume and yield for interest-earning assets, the average volume and cost of interest-bearing liabilities, and the mix of products which comprise the Company’s earning assets, deposits, and other interest-bearing liabilities. Net interest income is also impacted by the reversal of interest for loans placed on non-accrual status during the reporting period, and the recovery of interest on loans that had been on non-accrual and were paid off, sold or returned to accrual status.

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

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Average Balances, Tax Equivalent Interest and Yields/Rates

	Three Months Ended							Three Months Ended
	March 31, 2019							March 31, 2018
	Avg.		Tax Equivalent		Yield/			Avg.		Tax Equivalent		Yield/
($ in thousands)	Balance		interest		Rate			Balance		interest		Rate
Earning Assets:
Taxable securities	$	435,576	$	3,581		3.29	%	$	274,595	$	1,986		2.89	%
Tax exempt securities		117,831		1,015		3.45	%		106,161		904		3.41	%
Total investment securities		553,407		4,596		3.32	%		380,756		2,890		3.04	%
Fed funds sold		-		-		-			11,368		35		1.23	%
Interest bearing deposits in other banks		94,778		130		0.55	%		94,321		77		0.33	%
Loans		2,167,495		28,804		5.32	%		1,325,272		15,985		4.82	%
Total earning assets		2,815,680		33,530		4.76	%		1,811,717		18,987		4.19	%
Other assets		366,081							174,433
Total assets	$	3,181,761						$	1,986,150
Interest-bearing liabilities:
Deposits	$	2,024,718	$	4,363		0.86	%	$	1,330,925	$	1,840		0.55	%
Fed funds purchased		150		5		13.33	%		202		1		1.98	%
FHLB and First Tennessee		86,119		541		2.51	%		71,944		459		2.55	%
Subordinated debentures		80,540		1,233		6.12	%		10,310		78		3.03	%
Total interest- bearing liabilities		2,191,527		6,142		1.12	%		1,413,381		2,378		0.67	%
Other liabilities		600,017							342,514
Stockholders’ equity		390,217							230,255
Total liabilities and stockholders’ equity	$	3,181,761						$	1,986,150
Net interest income			$	27,131						$	16,380
Net interest margin						3.85	%						3.62	%
Net interest income (FTE)*			$	27,388		3.64	%			$	16,609		3.52	%
Net interest
Margin (FTE)*						3.89	%						3.67	%

*See reconciliation of Non-GAAP financial measures.

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NON-INTEREST INCOME AND NON-INTEREST EXPENSE

The following table provides details on the Company’s non-interest income and non-interest expense for the three month period ended March 31, 2019 and 2018:

($ in thousands)	Three Months Ended
EARNINGS STATEMENT	3/31/19			% of Total			3/31/18		% of Total
Non-interest income:
Service charges on deposit accounts	$	1,831			32.97	%	$	1,027		29.69	%
Mortgage fee income		909			16.37	%		800		23.10	%
Interchange fee income		1,652			29.74	%		1,040		30.07	%
Gain (loss) on securities, net		38			0.68	%		-		-
Financial
Assistance Award		233			4.20	%		-		-
Other charges and fees		891			16.04	%		592		17.14	%
Total non-interest income	$	5,554			100	%	$	3,459		100	%
Non-interest expense:
Salaries and employee benefits	$	10,697			48.87	%	$	7,789		53.36	%
Occupancy expense		2,442			11.15	%		1,647		8.86	%
FDIC premiums		(52	)		(0.24	)%		367		2.51	%
Marketing		175			0.80			80		0.55	%
Amortization of core deposit intangibles		716			3.27	%		201		1.38	%
Other professional services		920			4.20	%		189		2.66	%
Other non-interest expense		3,816			17.43	%		2,566		18.64	%
Acquisition and integration charges		3,179			14.52	%		1,758		12.04	%
Total non-interest expense	$	21,893			100	%	$	14,597		100	%

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PROVISION FOR INCOME TAXES

The Company sets aside a provision for income taxes on a monthly basis. The amount of the provision is determined by first applying the Company’s statutory income tax rates to estimated taxable income, which is pre-tax book income adjusted for permanent differences, and then subtracting available tax credits if applicable. Permanent differences include but are not limited to tax-exempt interest income, bank-owned life insurance cash surrender value income, and certain book expenses that are not allowed as tax deductions.

The Company’s provision for income taxes was $2.0 million or 21.03% of earnings before income taxes for the first quarter of 2019, compared to $1.0 million or 20.3% of earnings before income taxes for the same period in 2018.

BALANCE SHEET ANALYSIS

EARNING ASSETS

The Company’s interest-earning assets are comprised of investments and loans, and the composition, growth characteristics, and credit quality of both are significant determinants of the Company’s financial condition. Investments are analyzed in the section immediately below, while the loan and lease portfolio and other factors affecting earning assets are discussed in the sections following investments.

INVESTMENTS

The Company’s investments can at any given time consist of debt securities and marketable equity securities (together, the “investment portfolio”), investments in the time deposits of other banks, surplus interest-earning balances in our Federal Reserve Bank (“FRB”) account, and overnight fed funds sold. Surplus FRB balances and fed funds sold to correspondent banks represent the temporary investment of excess liquidity. The Company’s investments serve several purposes: 1) they provide liquidity to even out cash flows from the loan and deposit activities of customers; 2) they provide a source of pledged assets for securing public deposits, bankruptcy deposits and certain borrowed funds which require collateral; 3) they constitute a large base of assets with maturity and interest rate characteristics that can be changed more readily than the loan portfolio, to better match changes in the deposit base and other funding sources of the Company; 4) they are another interest-earning option for surplus funds when loan demand is light; and 5) they can provide partially tax exempt income. Total securities, excluding other securities, totaled $605.2 million, or 17.1% of total assets at March 31, 2019 compared to $498.7 million, or 16.6% of total assets at December 31, 2018.

We had no federal funds sold at March 31, 2019 and December 31, 2018; and interest-bearing balances at other banks increased to $157.0 million at March 31, 2019 from $87.8 million at December 31, 2018. The Company’s investment portfolio increased $105.6 million, or 20.5%, to a total fair market value of $620.5 million at March 31, 2019 compared to December 31, 2018, $93.6 million of which was due to the acquisition of FPB during the first three months of 2019, as well as a increase in the fair market value of $8.0 million. The Company carries investments principally at their fair market values. The Company holds a small amount of “held-to-maturity” investments with a fair market value of $7.6 million at March 31, 2019 as compared to $7.0 million at December 31, 2018. All other investment securities are classified as “available-for-sale” to allow maximum flexibility with regard to interest rate risk and liquidity management.

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Refer to the table shown in Note 9 – Securities to the Consolidated Financial Statements for information on the Company’s amortized cost and fair market value of its investment portfolio by investment type.

LOAN AND LEASE PORTFOLIO

The Company’s gross loans and leases, excluding the associated allowance for loan losses and including loans held for sale, totaled $2.342 billion at March 31, 2019, an increase of $276.3 million, or 13.4%, from December 31, 2018. The acquisition of Florida Parishes Bank accounted for approximately $241.6 million, net of fair value marks, of the increase.

A distribution of the Company’s loans showing the balance and percentage of loans by type is presented for the noted periods in the table below.

The following table shows the composition of the loan portfolio by category ($ in thousands):

Composition of Loan Portfolio

	March 31, 2019						December 31, 2018
	Amount			Percent of Total			Amount			Percent of Total
Loans held for sale	$	6,238			0.3	%	$	4,838			0.3	%
Commercial, financial and agricultural		340,333			14.5	%		301,182			14.6	%
Real Estate:
Mortgage-commercial		857,918			36.6	%		776,880			37.6	%
Mortgage-residential		722,611			30.9	%		617,804			29.9	%
Construction		348,788			14.9	%		298,718			14.5	%
Lease financing receivable		3,060			0.1	%		2,891			0.1	%
Obligations of states and subdivisions		13,734			0.6	%		16,941			0.8	%
Consumer and other		48,904			2.1	%		46,006			2.2	%
Total loans		2,341,586			100	%		2,065,260			100	%
Allowance for loan losses		(11,235	)					(10,065	)
Net loans	$	2,330,351					$	2,055,195

In the context of this discussion, a "real estate residential 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 that the risk elements of its loan portfolio have been reduced 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. Associated servicing rights are not retained. Commitments from investors to purchase the loans are obtained upon origination.

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LOAN CONCENTRATIONS

Diversification within the loan portfolio is an important means of reducing inherent lending risk. At March 31, 2019, The First had no concentrations of ten percent or more of total loans in any single industry or any geographical area outside its immediate market areas, which include Mississippi, Louisiana, Alabama, Florida and Georgia.

NON-PERFORMING ASSETS

At March 31, 2019, The First had loans past due as follows ($ in thousands):

Past due 30 through 89 days	$	5,680
Past due 90 days or more and still accruing		943

Non-performing assets are comprised of loans for which the Company is no longer accruing interest, and foreclosed assets including mobile homes and OREO. Loans are placed on non-accrual status when they become ninety days past due (principal and/or interest), unless the loans are adequately secured and in the process of collection. Non-accrual and PCI loans totaled $26.5 million at March 31, 2019, an increase of $1.4 million from December 31, 2018. This increase is primarily due to acquired PCI loans.

Other real estate owned is carried at fair value, determined by an appraisal, less estimated costs to sell. Other real estate owned totaled $11.6 million at March 31, 2019 as compared to $10.9 million at December 31, 2018.

A loan is classified as a restructured loan when the following two conditions are present: first, the borrower is experiencing financial difficulty and second, the creditor grants a concession it would not otherwise consider but for the borrower’s financial difficulty. At March 31, 2019, the Bank had $17.0 million in loans that were classified as troubled debt restructurings (“TDRs”), of which $8.0 million were performing as agreed with modified terms. At December 31, 2018, the Bank had $14.3 million in loans that were classified as troubled debt restructurings of which $5.3 million were performing as agreed with modified terms. TDRs may be classified as either non-performing or performing loans depending on their accrual status. As of March 31, 2019, $8.6 million in loans categorized as TDRs were classified as non-performing as compared to $8.3 million at December 31, 2018.

The following table, which includes purchased credit impaired loans, presents comparative data for the Company’s non-performing assets and performing TDRs as of the dates noted:

($ in thousands)
NON-ACCRUAL LOANS
Real Estate:		3/31/19			12/31/18
1-4 family residential construction	$	-			-
Other construction/land		2,230			1,918
1-4 family residential revolving/open-end		618			431
1-4 family residential closed-end		9,628			8,680
Nonfarm, nonresidential, owner-occupied		7,244			7,154
Nonfarm, nonresidential, other nonfarm nonresidential		5,496			5,601
TOTAL REAL ESTATE		25,216			23,784
Commercial and industrial		1,188			1,208
Loans to individuals - other		98			81
TOTAL NON-ACCRUAL LOANS		26,502			25,073
Other real estate owned		11,588			10,869
TOTAL NON-PERFORMING ASSETS	$	38,090		$	35,942
Performing TDRs	$	7,994		$	5,307
Total non-performing assets as a % of total loans & leases net of unearned income		1.63	%		1.75	%
Total non-accrual loans as a % of total loans & leases net of unearned income		1.14	%		1.22	%

Non-performing assets totaled $38.1 million at March 31, 2019, compared to $35.9 million at December 31, 2018, an increase of $2.2 million. The ALLL/total loans ratio was 0.48% at March 31, 2019, and 0.49% at December 31, 2018. Total valuation accounting adjustments total $16.1 million on acquired loans. The ratio of annualized net charge-offs (recoveries) to total loans was (0.008%) for the quarter ended March 31, 2019 compared to 0.02% at December 31, 2018.

The following table represents the Company’s impaired loans at March 31, 2019, and December 31, 2018.

	March 31,		December 31,
($ in thousands)	2019		2018
Impaired Loans:
Impaired loans without a valuation allowance (1)	$	18,855	$	25,247
Impaired loans with a valuation allowance		9,755		5,864
Total impaired loans	$	28,610	$	31,111
Allowance for loan losses on impaired loans at period end		2,336		1,179
Total nonaccrual loans (2)		26,502		25,073
Past due 90 days or more and still accruing		943		1,265
Average investment in impaired loans		31,426		16,257

(1) Includes PCI loans of $21,702 and $17,652, for the quarter ended March 31, 2019 and year ended December 31, 2018, respectively.

(2) Includes PCI loans of $15,161 and $13,405, for the quarter ended March 31, 2019 and year ended December 31, 2018, respectively.

ALLOWANCE FOR LOAN AND LEASE 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 for loan losses 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.

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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. The Company uses a loan loss history based upon the prior ten years to determine 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 on 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.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Impairment is measured on a loan by loan basis, and a specific allowance is assigned to each loan determined to be impaired. Impaired loans not deemed collateral dependent are analyzed according to the ultimate repayment source, whether that is cash flow from the borrower, guarantor or some other source of repayment. Impaired loans are deemed collateral dependent if, in the Company’s opinion, the ultimate source of repayment will be generated from the liquidation of collateral.

The Company discontinues accrual of interest on loans when management believes, after considering economic and business conditions and collection efforts, that a borrower’s financial condition is such that the collection of interest is doubtful. Generally, the Company will place a delinquent loan in non-accrual status when the loan becomes 90 days or more past due. At the time a loan is placed in non-accrual 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.

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At March 31, 2019, the consolidated allowance for loan losses was approximately $11.2 million, or 0.48% of outstanding loans excluding loans held for sale. At December 31, 2018, the allowance for loan losses amounted to approximately $10.1 million, which was 0.49% of outstanding loans. The provision for loan losses is a charge to earnings to maintain the allowance for loan losses at a level consistent with management’s assessment of the collectability of the loan portfolio in light of current economic conditions and market trends. It is maintained at a level that management believes is adequate to absorb probable incurred losses inherent in the loan portfolio. Specifically identifiable and quantifiable losses are immediately charged off against the allowance; recoveries are generally recorded only when sufficient cash payments are received subsequent to the charge off. The Company’s provision for loan losses was $1.1 million at March 31, 2019, $2.1 million at December 31, 2018 and $277 thousand at March 31, 2018. The overall allowance for loan losses results from consistent application of our loan loss reserve methodology as described above. At March 31, 2019, management believes the allowance is appropriate and has been derived from consistent application of our methodology. Should any of the factors considered by management in evaluating the appropriateness of the allowance for loan losses change, management’s estimate of inherent losses in the portfolio could also change, which would affect the level of future provisions for loan losses.

The table that follows summarizes the activity in the allowance for loan and lease losses for the noted periods:

Allowance for Loan and Lease Losses
	Three Months Ended			Three Months Ended			For the Year Ended
($ in thousands)	3/31/19			3/31/18			12/31/18
Balances:
Average gross loans & leases  outstanding during period:	$	2,167,495		$	1,325,272		$	1,678,746
Gross Loans & leases outstanding  at end of period		2,341,586			1,519,117			2,065,260
Allowance for Loan and Lease Losses:
Balance at beginning of period	$	10,065		$	8,288		$	8,288
Prior period reclassification - Mortgage Reserve Funding		-			-			(181	)
Beginning balance of allowance restated		10,065			8,288			8,107
Provision charged to expense		1,123			277			2,120
Charge-offs:
Real Estate-
1-4 family residential construction		-			-			-
Other construction/land		-			4			52
1-4 family revolving, open-ended		-			-			7
1-4 family closed-end		42			-			-
Nonfarm, nonresidential, owner-occupied		-			-			170
Total Real Estate		42			4			229
Commercial and industrial		4			-			265
Credit cards		-			-			-
Automobile loans		1			-			5
Loans to individuals - other		28			19			82
All other loans		-			-			-
Total		75			23			581
Recoveries:
Real Estate-
1-4 family residential construction		-			-			-
Other construction/land		6			7			34
1-4 family revolving, open-ended		1			-			27
1-4 family closed-end		19			14			156
Nonfarm, nonresidential,  owner-occupied		4			1			10
Total Real Estate		30			22			227
Commercial and industrial		-			8			44
Credit cards		-			1			1
Automobile loans		13			6			29
Loans to individuals - other		12			11			37
All other loans		55			69			81
Total		122			117			419
Net loan charge offs (recoveries)		(47	)		(94	)		162
Balance at end of period	$	11,235		$	8,659		$	10,065
RATIOS
Net Charge-offs (recoveries) to  average Loans & Leases(annualized)		(0.008	)%		(0.02	)%		0.02	%
Allowance for Loan Losses to gross Loans & Leases at end of  period		0.48	%		0.57	%		0.49	%
Net Loan Charge-offs (recoveries) to provision for loan losses		(4.19	)%		(33.94	)%		7.64	%

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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 March 31, 2019 and December 31, 2018.

Allocation of the Allowance for Loan Losses

	March 31, 2019
($ in thousands)	Amount			% of loans in each category to total loans
Commercial, Financial and Agriculture	$	1,579			14.1	%
Commercial Real Estate		7,271			64.7	%
Consumer Real Estate		204			1.8	%
Installment and Other		2,181			19.4	%
Total	$	11,235			100	%
	December 31, 2018
($ in thousands)	Amount			% of loans in each category to total loans
Commercial, Financial and Agriculture	$	2,060			14.8	%
Commercial Real Estate		6,258			64.6	%
Consumer Real Estate		1,743			18.9	%
Installment and Other		201			1.7	%
Unallocated		(197	)		-
Total	$	10,065			100	%

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OTHER ASSETS

The Company’s balance of non-interest earning cash and due from banks was $91.5 million at March 31, 2019 and $71.4 million at December 31, 2018. The balance of cash and due from banks depends on the timing of collection of outstanding cash items (checks), the level of cash maintained on hand at our branches, and our reserve requirement among other things, and is subject to significant fluctuation in the normal course of business. While cash flows are normally predictable within limits, those limits are fairly broad and the Company manages its short-term cash position through the utilization of overnight loans to and borrowings from correspondent banks, including the Federal Reserve Bank and the Federal Home Loan Bank. Should a large “short” overnight position persists for any length of time, the Company typically raises money through focused retail deposit gathering efforts or by adding brokered time deposits. If a “long” position is prevalent, the Company will let brokered deposits or other wholesale borrowings roll off as they mature, or might invest excess liquidity in higher-yielding, longer-term bonds.

Total equity securities decreased $929 thousand due to an decrease in FHLB stock. The Company’s net premises and equipment at March 31, 2019 was $94.6 million and $74.8 million at December 31, 2018; an increase of $19.8 million, or 26.5% for the first three months of 2019. Included in the acquisition of FPB was $7.3 million in bank-owned life insurance, creating a balance of $58.4 million at March 31, 2019. Bank-owned life insurance is also discussed above under the heading “Non-Interest Income and Non-Interest Expense.” Goodwill increased to $119.9 million at March 31, 2019, an increase of $30.2 million from the first quarter of 2018 as a result of the acquisition FPB. Other intangible assets, consisting primarily of the Company’s core deposit intangible, increased by $4.1 million in the first quarter of 2019, as compared to the prior year quarter due to the acquisition. The Company’s goodwill and other intangible assets are evaluated annually for potential impairment, and pursuant to that analysis management has determined that no impairment exists as of March 31, 2019.

Other real estate owned increased by $719 thousand, or 6.6%, to $11.6 million at March 31, 2019 as compared to December 31, 2018. A majority of the increase is attributable to acquired loans.

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OFF-BALANCE SHEET ARRANGEMENTS

The Company maintains commitments to extend credit in the normal course of business, as long as there are no violations of conditions established in the outstanding contractual arrangements. Unused commitments to extend credit totaled $453.0 million at March 31, 2019 and $316.6 million at December 31, 2018, although it is not likely that all of those commitments will ultimately be drawn down. Unused commitments represented approximately 19.3% of gross loans at March 31, 2019 and 15.3% at December 31, 2018, with the increase due in part to higher commitments in commercial and industrial loans. The Company also had undrawn commercial and similar letters of credit to customers totaling $10.9 million at March 31, 2019 and $10.7 million at December 31, 2018. The effect on the Company’s revenues, expenses, cash flows and liquidity from the unused portion of the commitments to provide credit cannot be reasonably predicted because there is no guarantee that the lines of credit will ever be used. However, the “Liquidity” section in this Form 10-Q outlines resources available to draw upon should we be required to fund a significant portion of unused commitments. For more information regarding the Company’s off-balance sheet arrangements, see Note 7 to the consolidated financial statements.

In addition to unused commitments to provide credit, the Company is utilizing a $5.0 million letter of credit issued by the Federal Home Loan Bank (“FHLB”) on the Company’s behalf as security as of March 31, 2019. That letter of credit is backed by loans which are pledged to the FHLB by the Company.

liquidity and CAPITAL RESOURCES

LIQUIDITY

Liquidity management refers to the Company’s ability to maintain cash flows that are adequate to fund operations and meet other obligations and commitments in a timely and cost-effective manner. Detailed cash flow projections are reviewed by management on a monthly basis, with various scenarios applied to assess our ability to meet liquidity needs under adverse conditions. Liquidity ratios are also calculated and reviewed on a regular basis. While those ratios are merely indicators and are not measures of actual liquidity, they are closely monitored and we are focused on maintaining adequate liquidity resources to draw upon should unexpected needs arise.

The Company, on occasion, experiences cash needs as the result of loan growth, deposit outflows, asset purchases or liability repayments. To meet short-term needs, the Company can borrow overnight funds from other financial institutions, draw advances via FHLB lines of credit, or solicit brokered deposits if deposits are not immediately obtainable from local sources. The net availability on lines of credit from the FHLB totaled $777.2 million at March 31, 2019. Furthermore, funds can be obtained by drawing down the Company’s correspondent bank deposit accounts, or by liquidating unpledged investments or other readily saleable assets. In addition, the Company can raise immediate cash for temporary needs by selling under agreement to repurchase those investments in its portfolio which are not pledged as collateral. As of March 31, 2019, the market value of unpledged debt securities plus pledged securities in excess of current pledging requirements comprised $117.3 million of the Company’s investment balances, compared to $110.8 million at December 31, 2018. The increase in unpledged securities from March 2019 compared to December 2018 is primarily due to an increase in portfolio assets. Other forms of balance sheet liquidity include but are not necessarily limited to any outstanding federal funds sold and vault cash. 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.

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The Company’s liquidity ratio as of March 31, 2019 was 14.2%, as compared to internal liquidity policy guidelines of 10% minimum. Other liquidity ratios reviewed include the following along with policy guidelines:

	March 31, 2019			Policy Maximum			Policy Compliance
Loans to Deposits (including FHLB advances)		77.8	%		90.0	%	In Policy
Net Non-core Funding Dependency Ratio		1.1	%		20.0	%	In Policy
Fed Funds Purchased / Total Assets		0.0	%		10.0	%	In Policy
FHLB Advances / Total Assets		1.8	%		20.0	%	In Policy
FRB Advances / Total Assets		0.0	%		10.0	%	In Policy
Pledged Securities to Total Securities		80.7	%		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 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 Company does not conduct regular banking operations. Management anticipates that the Bank will have sufficient earnings to provide dividends to the Company to meet its funding requirements for the foreseeable future. Both the Company and the Bank are subject to legal and regulatory limitations on dividend payments, as outlined in Item 1. Business – Supervision and Regulation in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

DEPOSITS

Deposits are another key balance sheet component impacting the Company’s net interest margin and other profitability metrics. Deposits provide liquidity to fund growth in earning assets, and the Company’s net interest margin is improved to the extent that growth in deposits is concentrated in less volatile and typically less costly non-maturity deposits such as demand deposit accounts, NOW accounts, savings accounts, and money market demand accounts. Information concerning average balances and rates paid by deposit type for the three-month periods ended March 31, 2019 and 2018 is included in the Average Balances and Rates tables appearing above, under the heading “Net Interest Income and Net Interest Margin.” A distribution of the Company’s deposits showing the balance and percentage of total deposits by type is presented for the noted periods in the following table.

Deposit Distribution
($ in thousands)	March 31, 2019			December 31, 2018
Non-interest bearing demand deposits	$	655,900		$	570,148
NOW accounts and Other		1,062,112			835,434
Money Market accounts		375,529			312,552
Savings accounts		272,254			253,724
Time Deposits of less than $250,000		414,281			384,030
Time Deposits of $250,000 or more		134,242			101,571
Total deposits	$	2,914,318		$	2,457,459
Percentage of Total Deposits
Non-interest bearing demand deposits		22.5	%		23.2	%
NOW accounts and other		36.4	%		34.0	%
Money Market accounts		12.9	%		12.7	%
Savings accounts		9.3	%		10.3	%
Time Deposits of less than $250,000		14.2	%		15.6	%
Time Deposits of $250,000 or more		4.7	%		4.2	%
Total		100	%		100	%

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As of March 31, 2019, cash and cash equivalents were $248.6 million. In addition, loans and investment securities repricing or maturing within one year or less were approximately $508.7 million at March 31, 2019. Approximately $453.0 million in loan commitments could fund within the next three months and other commitments, primarily commercial and similar letters of credit, totaled $10.9 million at March 31, 2019.

OTHER INTEREST-BEARING LIABILITIES

The Company’s non-deposit borrowings may, at any given time, include federal funds purchased from correspondent banks, borrowings from the Federal Home Loan Bank (“FHLB”), advances from the Federal Reserve Bank, securities sold under agreements to repurchase, and/or junior subordinated debentures. The Company uses short-term FHLB advances and fed funds purchased on uncommitted lines to support liquidity needs created by seasonal deposit flows, to temporarily satisfy funding needs from increased loan demand, and for other short-term purposes. The FHLB line is committed, but the amount of available credit depends on the level of pledged collateral.

Total non-deposit interest-bearing liabilities decreased by $23.7 million, or 14.3%, in the first three months of 2019, due in part to a decrease in note payables to the FHLB of $23.8 million. The Company had junior subordinated debentures totaling $80.6 million at March 31, 2019 and $80.5 million December 31, 2018, in the form of long-term borrowings from trust subsidiaries formed specifically to issue trust preferred securities.

OTHER LIABILITIES

Other liabilities are principally comprised of accrued interest payable and other accrued but unpaid expenses. Other liabilities increased by $4.2 million, or 27.0%, during the first three months of 2019, due to the increase in other accrued but unpaid expenses.

CAPITAL

At March 31, 2019 the Company had total stockholders’ equity of $454.3 million, comprised of $17.3 million in common stock, less than $464 thousand in treasury stock, $354.8 million in surplus, $78.6 million in undivided profits and $4.1 million in accumulated comprehensive income (loss) on available-for-sale securities. Total stockholders’ equity at the end of 2018 was $363.3 million. The increase of $91.1 million, or 25.1%, in stockholders’ equity during the first three months of 2019 is comprised of capital added via net earnings of $7.6 million, $5.9 million increase in accumulated comprehensive income for available-for-sale securities, and $78.2 million of common stock issued for the purchase of FPB, offset by $1.0 million in cash dividends paid.

On March 28, 2019, the Company announced that its Board of Directors authorized a share repurchase program to purchase up to an aggregate of $20 million of the Company’s common stock (the “March 2019 program”). This share repurchase program has an expiration date of December 31, 2019. Under the program, the Company may repurchase shares of its common stock periodically in a manner determined by the Company’s management. The actual means and timing of purchase, target number of shares and maximum price or range of prices under the program will be determined by management at its discretion and will depend on a number of factors, including the market price of the Company’s common stock, general market and economic conditions, and applicable legal and regulatory requirements. No shares were purchased under the March 2019 program during the three months ended March 31, 2019.

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The Company uses a variety of measures to evaluate its capital adequacy, including risk-based capital and leverage ratios that are calculated separately for the Company and the Bank. Management reviews these capital measurements on a quarterly basis and takes appropriate action to help ensure that they meet or surpass established internal and external guidelines. As permitted by the regulators for financial institutions that are not deemed to be “advanced approaches” institutions, the Company has elected to opt out of the Basel III requirement to include accumulated other comprehensive income in risk-based capital. The following table sets forth the Company’s and the Bank’s regulatory capital ratios as of the dates indicated.

Regulatory Capital Ratios
The First, A National Banking Association	March 31, 2019			December 31, 2018			Minimum Required to be Well Capitalized
Common Equity Tier 1
Capital Ratio		15.9	%		11.5	%		6.5	%
Tier 1 Capital Ratio		15.9	%		12.2	%		8.0	%
Total Capital Ratio		16.4	%		15.6	%		10.0	%
Tier 1 Leverage Ratio		13.4	%		10.2	%		5.0	%
Regulatory Capital Ratios
The First Bancshares, Inc.	March 31, 2019			December 31, 2018			Minimum Required to be Well Capitalized
Common Equity Tier 1
Capital Ratio*		12.0	%		14.8	%		N/A
Tier 1 Capital Ratio**		12.6	%		14.8	%		N/A
Total Capital Ratio		15.5	%		15.2	%		N/A
Tier 1 Leverage Ratio		10.7	%		12.2	%		N/A

* The numerator does not include Preferred Stock and Trust Preferred.

** The numerator includes Trust Preferred.

Our capital ratios remain very strong relative to the median for peer financial institutions, and at March 31, 2019 were well above the threshold for the Company and the Bank to be classified as “well capitalized,” the highest rating of the categories defined under the Bank Holding Company Act and the Federal Deposit Insurance Corporation Improvement Act of 1991. Basel III rules require a “capital conservation buffer” for both the Company and the Bank. The capital conservation buffer is subject to a three year phase-in period that began January 1, 2016 and was fully phased-in on January 1, 2019 at 2.5%. The required phase-in capital conservation buffer during 2018 was 1.875%. Under this guidance banking institutions with a CETI, Tier 1 Capital Ratio and Total Risk Based Capital above the minimum regulatory adequate capital ratios but below the capital conservation buffer will face constraints on their ability to pay dividends, repurchase equity and pay discretionary bonuses to executive officers, based on the amount of the shortfall. As of March 31, 2019, management believes that each of the Bank and the Company met all capital adequacy requirements to which they are subject. We do not foresee any circumstances that would cause the Company or the Bank to be less than well capitalized, although no assurance can be given that this will not occur.

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Total consolidated equity capital at March 31, 2019, was $454.3 million, or approximately 12.9% of total assets. The Company currently has adequate capital positions to meet the minimum capital requirements for all regulatory agencies.

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 (“Trust 2”) in which the Company owns all of the common equity. The debentures are the sole asset of the Trust. Trust 2 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 Trust 2’s obligations under the preferred securities. The preferred securities are redeemable by the Company at its option. The preferred securities must be redeemed upon maturity of the debentures in 2036. Interest on the preferred securities is the three month London Interbank Offer Rate (LIBOR) plus 1.65% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities.

On July 27, 2007, The Company issued $6,186,000 of floating rate junior subordinated deferrable interest debentures to The First Bancshares Statutory Trust 3 (“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 3’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 2018, the Company acquired FMB’s Capital Trust 1 (“Trust 1”), which consisted of $6.1 million of floating rate junior subordinated deferrable interest debentures in which the Company owns all of the common equity. The debentures are the sole asset of Trust 1. Trust 1 issued $6,000,000 of Trust Preferred Securities 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 1’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 2033. Interest on the preferred securities is the three month LIBOR plus 2.85% 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.

Subordinated Notes

On April 30, 2018, The Company entered into two Subordinated Note Purchase Agreements pursuant to which the Company sold and issued $24 million in aggregate principal amount of 5.875% fixed-to-floating rate subordinated notes due 2028 and $42 million in aggregate principal amount of 6.40% fixed-to-floating rate subordinated notes due 2033 (collectively, the “Notes”).

The Notes are not convertible into or exchangeable for any other securities or assets of the Company or any of its subsidiaries. The Notes are not subject to redemption at the option of the holder. Principal and interest on the Notes are subject to acceleration only in limited circumstances. The Notes are unsecured, subordinated obligations of the Company and rank junior in right to payment to the Company’s current and future senior indebtedness, and each Note is pari passu in right to payment with respect to the other Notes.

The Company intends to use the net proceeds from the sale of the Notes for general corporate purposes, which may include increasing bank level capital ratios to support future growth, repaying an existing line of credit and establishing holding company reserves.

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Reconciliation of Non-GAAP Financial Measures

Our accounting and reporting policies conform to generally accepted accounting principles (“GAAP”) in the United States and prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of our performance. This Quarterly Report on Form 10-Q includes operating net earnings, operating earnings per share, fully tax equivalent (“FTE”) net interest income, net interest margin and tangible book value. The Company believes that the non-GAAP financial measures included in this Quarterly Report on Form 10-Q allow management and investors to understand and compare results in a more consistent manner for the periods presented herein. The tax equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a 25.3% tax rate. Management believes that it is a standard practice in the banking industry to present net interest income and net interest margin on a fully tax equivalent basis, and believes it enhances the comparability of income and expenses arising from taxable and nontaxable sources. Non-GAAP financial measures should be considered supplemental and not a substitute for the Company’s results reported in accordance with GAAP for the periods presented, and other bank holding companies may define or calculate these measures differently. These non-GAAP financial measures should not be considered in isolation and do not purport to be an alternative to net income, earnings per share, net interest income, net interest margin, book value per common share or other GAAP financial measures as a measure of operating performance. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is provided below.

Operating Net Earnings

	Three Months			Three Months
	Ended			Ended
($ in thousands)	March 31, 2019			March 31, 2018
Net income available to common shareholders	$	7,635		$	3,957
Effect of acquisition charges		3,179			1,758
Tax on acquisition charges		(712	)		(355	)
Treasury awards		(233	)		-
Tax on Treasury awards		59			-
Net earnings available to common shareholders, operating	$	9,928		$	5,360

Operating Earnings Per Share

	Three Months			Three Months
	Ended			Ended
($ in thousands)	March 31, 2019			March 31, 2018
Book value per common share	$	26.30		$	20.95
Effect of intangible assets per share		8.51			4.56
Tangible book value per common share	$	17.79		$	16.39
Diluted earnings per share	$	0.48		$	0.34
Effect of acquisition charges		0.21			0.15
Tax on acquisition charges		(0.05	)		(0.03	)
Effect of Treasury Awards		(0.01	)		-
Diluted earnings per share, operating	$	0.63		$	0.46

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Net Interest Income Fully Tax Equivalent

	Three Months			Three Months
	Ended			Ended
($ in thousands)	March 31, 2019			March 31, 2018
Net interest income	$	27,131		$	16,380
Tax exempt investment income		(758	)		(675	)
Taxable investment income		1,015			904
Net interest income fully tax equivalent	$	27,388		$	16,609
Average earning assets	$	2,815,680		$	1,811,717
Net interest margin fully  tax equivalent		3.89	%		3.67	%

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

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).

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The following table shows the estimated changes in net interest income at risk and market value of equity along with policy limits:

	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		8.8	%		-20.0	%		27.7	%		-40.0	%
Up 300 bps		8.5	%		-15.0	%		25.2	%		-30.0	%
Up 200 bps		6.7	%		-10.0	%		20.0	%		-20.0	%
Up 100 bps		3.9	%		-5.0	%		11.8	%		-10.0	%
Down 100 bps		-6.2	%		-5.0	%		-13.8	%		-10.0	%
Down 200 bps		-11.3	%		-10.0	%		-8.9	%		-20.0	%

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 March 31, 2019, the Company had the following estimated net interest income sensitivity profile, without factoring in any potential negative impact on spreads resulting from competitive pressures or credit quality deterioration:

March 31, 2019	Net Interest Income at Risk – Sensitivity Year 1
($ In Thousands)		-200 bp	-100 bp	STATIC	+100 bp	+200 bp	+300 bp	+400 bp
Net Interest Income		105,324	111,318	118,699	123,330	126,653	128,724	129,123
Dollar Change		(13,375)	(7,381)		4,631	7,954	10,025	10,424
NII @ Risk - Sensitivity Y1		-11.3%	-6.2%		3.9%	6.7%	8.5%	8.8%
Policy Limits		-10.0%	-5.0%		-5.0%	-10.0%	-15.0%	-20.0%

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 $13.4 million lower than in a stable interest rate scenario, for a negative variance of 11.3%. 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 would be 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 management believes that further interest rate reductions are 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 $8.0 million, or 6.7%, 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 would expect to benefit from a material upward shift in the yield curve.

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The Company’s one year cumulative GAP ratio is approximately 206.2%, which means that there are more assets repricing than liabilities within the first year. The Company is “asset-sensitive.” These results are based on cash flows from assumptions of assets and liabilities that reprice (maturities, likely calls, prepayments, etc.) Typically, the net interest income of asset-sensitive financial institutions 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 March 31, 2019, under different interest rate scenarios relative to a base case of current interest rates:

	Balance Sheet Shock
($ in thousands)	-200 bp	-100 bp	STATIC (Base)	+100 bp	+200 bp	+300 bp	+400 bp
Market Value of Equity	690,678	653,863	758,420	848,026	909,711	949,218	968,774
Change in EVE
from base	(67,742)	(104,557)		89,605	151,291	190,798	210,354
% Change	-8.9%	-13.8%		11.8%	20.0%	25.2%	27.7%
Policy Limits	-20.0%	-10.0%		-10.0%	-20.0%	-30.0%	-40.0%

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The table shows that our EVE will generally deteriorate in declining rate scenarios, but should benefit from a parallel shift upward in the yield curve. As noted previously, however, Management believes 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.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of March 31, 2019, (the “Evaluation Date”), we carried out an evaluation, under the supervision of and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on the evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that as of the Evaluation Date, our disclosure controls and procedures were not effective due to the material weaknesses disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on March 18, 2019 (the “2018 Form 10-K”).

Changes in Internal Controls

There have been no changes in our internal controls over financial reporting that occurred during the quarter ended March 31, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As disclosed in our 2018 Form 10-K, management implemented the additional controls and procedures described therein starting in the fourth quarter of 2018 in order to remediate the material weaknesses identified, and will continue to take steps as necessary that management and the Audit Committee believe will remediate the control deficiencies. However, the identified control deficiencies that led to the material weaknesses in internal control over financial reporting will not be considered fully addressed until the new and additional controls, processes and procedures described in the 2018 Form 10-K have been in operation for a sufficient period of time to allow the Company’s management to conclude, through testing, that the controls are operating effectively and the material weaknesses have been fully remediated. Management expects the remediation of the material weaknesses will be completed during 2019.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is involved in various legal proceedings in the normal course of business. Management does not believe, based on currently available information, that the outcome of any such proceedings will have a material adverse effect on our financial condition or results of operations.

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ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

Item 5. Other Information

Not applicable

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ITEM 6. EXHIBITS

(a)  Exhibits

Exhibit No.	Description
3.1	Amended and Restated Articles of Incorporation of The First Bancshares, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on July 28, 2016.
3.2	Amendment to the Amended and Restated Articles of Incorporation of The First Bancshares, Inc. (incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report on Form 10-Q filed on August 9, 2018.
3.3	Amended and Restated Bylaws of The First Bancshares, Inc. effective as of March 17, 2016 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on March 18, 2016.
4.1	Form of Certificate of Common Stock (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement No. 333-220491 on Form S-3 filed on September 15, 2017.
10.1	Form of 2019 Stock Incentive Agreement for Restricted Stock Award pursuant to The First Bancshares, Inc. 2007 Stock Incentive Plan.*
31.1	Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2	Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1	Certification of principal executive officer pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
32.2	Certification of principal financial officer pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.DEF	XBRL Taxonomy Extension Definition Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase

* Filed herewith.

** Furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	THE FIRST BANCSHARES, INC.
	(Registrant)
	/s/ M. RAY (HOPPY) COLE, JR.
May 10, 2019	M. Ray (Hoppy) Cole, Jr.
(Date)	Chief Executive Officer
	/s/ DONNA T. (DEE DEE) LOWERY
May 10, 2019	Donna T. (Dee Dee) Lowery, Executive
(Date)	Vice President and Chief Financial Officer

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