Interview with: David E. Johnson, Chairman and CEO - featuring:The First, A National Banking Association, which operates 8 offices with locations in Hattiesburg, Laurel, Purvis, Picayune, Pascagoula and Bay St. Louis, Mississippi.

The First Bancshares, Inc. (FBMS-NASDAQ)

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No one has done what The First Bancshares have been able to do in ten years—grow a $330 million dollar bank from scratch in Mississippi, historically a slower growth area than most of the country

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Financial
Community Banks
(FBMS-NASDAQ)

The First Bancshares, Inc.

6480 US Highway 98 West
Hattiesburg, MS 39404-5549
Phone: 601-268-8998

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David E. Johnson
Chairman and CEO

Interview conducted by:
Lynn Fosse, Senior Editor
CEOCFOinterviews.com
September 28, 2006

BIO:
Biography on David E. Johnson

David E. Johnson, 53, is the Chief Executive Officer and Chairman of the Board of The First Bancshares, Inc. Mr. Johnson, a native of Laurel, Mississippi, received a B.S. degree in Agricultural Economics and an M.B.A. degree, with emphasis in Finance, from Mississippi State University. In 1990, he graduated from the University of Oklahoma Commercial Lending and Graduate School. Mr. Johnson has taught a course at the University of Mississippi School of Banking. Johnson served as chairman of the Southern Mississippi Group of Robert Morris & Associates, then spent nearly a decade with Sunburst Bank, first as senior lender for the Hattiesburg, MS branch, then as senior lender and credit administrator for southern Mississippi.

In addition to leading the de novo bank, Johnson is a Director of the New Orleans Branch of the Atlanta Federal Reserve Bank and is on the Advisory Board for the Business School at the University of Southern Mississippi. He is a National Director of the Independent Community Bankers of America. Active in the community, Johnson has been a director of the Company since 1995 and is also a director of the bank.


Company Profile:
The First Bancshares, Inc. -- the parent company of The First, A National Banking Association -- has assets of $330 million. Founded in 1996, The First operates 8 offices with locations in Hattiesburg, Laurel, Purvis, Picayune, Pascagoula and Bay St. Louis, Mississippi.

CEOCFO: Mr. Johnson, what was your vision when started the company and where are you today?
Mr. Johnson: “When we started the organization over eleven years ago, we noted that we had an MSA for about 250,000 people in the Hattiesburg area, and no bank headquartered there. We saw a business opportunity to grow a bank organically within the Hattiesburg market—to be able to give answers, and be responsive without having to go out of state to get permission to do something. Many of the area’s local banks had been sold, and it was difficult for managers to operate and difficult for customers to be served. We knew we could be more responsive. We had a vision that we could be $50 million in five years, making the venture worthwhile. In five years, however, we were at $150 million in assets. Now we are $330 million in assets. It has been a great run. In Mississippi, which is a slower growth area than most of the country, nobody has done what we have been able to do in ten years, and that is to grow a $330 million dollar bank. We were the hundredth in size when we started out of a hundred in the state, and now we are in the top 25 in size in our state.”

CEOCFO: What are you doing at First Bancshares that has allowed you to be so successful?
Mr. Johnson: “We made decisions to grow with de novo branching, and we have been careful about those decisions; our site selection has awaited selection of key personnel. We have avoided the temptation of many community banks, of going into all the towns in their footprint. Our recent expansion has been in the areas that we felt would yield profitability of a new branch within 12 months, and a branch that—within three to five years—would be above $50 million. Our plan was expedited some by Hurricane Katrina, so some of the areas where the branches are located have experienced tremendous population growth. Our bank went from new branches that were just starting to become profitable to what are now very profitable branches; therefore, this year we have seen a doubling of our profits with these new branches. Within six months, we have made as much as we did a year ago due to the maturing process and some other factors; the hurricane kind of hastened our progress.”

CEOCFO: Has Katrina affected any other part of the bank?
Mr. Johnson: “Initially we were all hurt and all of our branches were closed. The storm happened on a Monday and we were closed Tuesday and Wednesday. We opened some branches on Thursday, Saturday, and Monday after the storm. Within a week we had reopened all of our offices. Our office in Pascagoula took 4 feet of water during the surge, so our great employees there opened outside on the sidewalk. Despite their personal hardship, many Pascagoula employees had lost their own homes, we put in a temporary office there and now we are back full force.

Due to the character of the people that we bank and the character of the people in general in Mississippi, our customers, our employees and everybody rolled up their sleeves and got to work. We did not wait for a government handout. Last year, after the hurricane, we put up some reserves for loan losses; but we have yet to take the first loan loss as a result of the hurricane. We have experienced excellent deposit growth—particularly in core deposits. Therefore, we have ended up with an $80 million dollar increase in deposits year-over-year, and we are at $330 million now in total assets. We have seen money turned over that started out as insurance proceeds and FEMA Checks, etc., and now government grants. All of that money has turned over in profits that are now in contractors’ and suppliers’ accounts. Our local economy is very strong. Hotels, restaurants and many businesses are doing well. It is a credit to the people just going back to work—to what they do best, and we are rapidly rebuilding. Further, beyond just rebuilding what we had, there is new construction, a new interest in our area of the state. There is a lot of outside money coming into the state, new investment in real estate, and it is an exciting place to be, in both the recovery, and the discovery of our area.”

CEOCFO: Do you have to go out and seek the new customers or are they coming to you?
Mr. Johnson: “Our footprint was down already. We had already located in Pascagoula, Picayune and the Hattiesburg area, Purvis, and Laurel. Since the storm, we have opened in Bay St. Louis, which is an area where the worst of the storm came through. Before the storm, we were already planning for Bay St. Louis, and we had already recruited the key banker, so we opened there in March 2006. In looking for business, we have always been proactive going out asking for business. We have also attracted community bankers, and experienced people in the markets we enter. We are recognized as having a high level of experience in construction lending and mortgage lending. We were already successful, and now with the recognition that we have and the knowledge of the builders, realtors, lenders and general public, we are continuing to get more than our share of the new business, deposits, and loan requests, mortgages and construction loans.”

CEOCFO: How much of the business is consumer, how much commercial and would you like to see that change?
Mr. Johnson: “We are real estate lenders. We pride ourselves in start to finish. With us, customers can finance their lot loan, construction loan, and then permanent mortgage. They deal with one person throughout the whole process, rather than shuffling from a construction lender to a mortgage lender. We are heavy in one-to-four family construction, and we are the biggest secondary market lender in our area (where we originate the loans and sell them in secondary market). By doing that, we tie to the customer and we are able to do other retail requests. However, most of our portfolio is real estate and a high percentage of it is properly margined. We have retail credit, but it is in the ten to twelve percent of our loan portfolio. Certainly,  we would like to see that grow over time.”

CEOCFO: Are there new products or services that you are planning to add?
Mr. Johnson: “No. We have a variety, and we see ourselves as doing some things very well. In a book that I love, Good To Great, the author describes a guy who is on the diving board in a diving contest. He is not doing triple flips with back spins. He is doing a swan dive over and over because he does it very well. That is us, it is simple, and we do it well, and we feel we are the best in our market. We will keep doing that and doing it right. We will be handling some wealth-management as we go forward, but our primary focus is doing what we have been doing, and doing it well.”

CEOCFO: Your numbers speak for themselves!
Mr. Johnson: “We are very proud of that. We know we would have gotten there a bit later with these kinds of earnings, but it was hastened some by the hurricane. We still are doing the same thing; we are just getting to do more of it right now. We will be investing some of our future profits into some things we need to do in the back room to facilitate us growing to the next level. We are beefing up on the credit administration side, audit, and compliance as we grow. Eighteen months ago, we were roughly  $212 million in assets, and now we are $330 million. We know we have to spend some of our earnings to go to the next level.”

CEOCFO: Will you tell us about the acquisition of First National Bank of Wiggins, Mississippi?
Mr. Johnson: “We have been flirting with the Stone County market for about three years. Since the storm, we were approached by the bank and looked at it again. We currently have locations in the counties just north of Stone County, and Stone County is one county up from the coastal counties. They are 21 miles from Interstate 10. Since the storm, people are moving from the coast to the acreage above the Gulfport-Biloxi area; they are coming into what is Stone County. We are seeing what we did not see two or three years ago—good growth in that county. Therefore, the acquisition is only about a $45 million asset bite. The bank has had some of the same growth in deposits that we have seen. We are excited about going into Stone County; it is our first purchase and our preliminary analysis is that it will be very profitable for us very quickly.”

CEOCFO: You are also seeing opportunity in the Go zone, will you tell us about that?
Mr. Johnson: “For an example, right now the federal government has allotted to Mississippi homeowners $4 billion in grants for people that were flooded, but not in the flood zone so they did not have flood insurance. That much money is coming into a population of about a million and a half people, and those funds will not only go into their deposit accounts in various banks, but also turn over into personal construction projects, and to the businesses that support those projects. We excel in the residential construction area.

There are also some tax incentives for people to rebuild or build in our area. We are seeing other monies come into the area from outside in order to take advantage of those incentives. The Go Zone will help our company’s profitability because; as we build in Bay St. Louis and look for other opportunities, there will be good tax advantage for us, as well. In addition there is a tax credit for new hires. We are not going to make bad business decisions to get tax reductions or credits but we are going to take advantage of these tax incentives.”

CEOCFO: Are there any other challenges as you move forward and grow more quickly than you anticipated?
Mr. Johnson: “There is always the regulatory end; that is what we are focusing on. You go into a risk-based audit system to look at each of our systems and departments. We look at how to mitigate the risks and build policies and procedures around them. We currently have a good process of review taking place in our organization. It requires expense, but, for our size, we are proud that we have a risk management area. Under that risk-management umbrella comes audit, loan review and compliance. We have more regulations coming down from regulators all the time, so staying on top of that, and protecting the bank from potential lawsuits that could come from that realm, is always a challenge for all banks because all banks are highly regulated. Therefore, that is a challenge that we are addressing head on. When you go through different levels of growth, banks become more highly regulated. We just went through a level where the bank reached $250 million as a national bank, where instead of an 18-month exam cycle; you go through a 12-month exam cycle. It is a challenge because there are other eyes on us, but you have to look at it as an opportunity to do well.”

CEOCFO: On your website, you say you are still a group of friends taking care of business one customer at a time. How do you continue that as you continue to grow and expand?
Mr. Johnson: “That is a challenge, but it is a matter of the people we have in place. As we plan our growth, we study personnel longer than we study site. For example, we wanted to go to Picayune, Mississippi six years ago. However, we did not find the right person to do that for 2 years, so we waited. We want the person who has the intelligence and the ability to grow the market, and you do that, as we say, “one customer at a time.” You have to find the person that is willing to make the commitment and sacrifice, because in our office you are a banker 24 hours a day. It is about community involvement, and being involved in this because you are an owner and entrepreneur, not because it is a job.”

CEOCFO: Why should investors be interested?
Mr. Johnson: “A lot about where we are going is about where we have been. When I came to work with the group and this was just an idea, the first challenge was to raise money, and we had two offerings. Regarding the first offering, an investment made eleven years ago of $5 is now worth $24 at the last trade. While markets have been up, down, and mostly down since we opened, we have returned a good investment. We have outperformed our personal goals and our corporate goals. We see this as still a new venture with new opportunities. We look back to 1969 when one of our competitors Hancock Bank (Hancock Holding Company – NASDAQ: HBHC) on the coast, during the Camille hurricane challenge was an $80 million dollar bank. Almost forty years later they are a $5 to $6 billion bank, and we have all grown since the hurricane. Therefore, we see ourselves on the brink of a new day in south Mississippi. We are not looking to expand outside the state right now; we see a tremendous amount of activity in the next 4 or 5 years of rebuilding and rediscovery of our state and our area of the state. We are excited to be in this position. Our numbers both recently and from our beginning show tremendous trends. We have struck a good balance between both growth and earnings growth, and we will continue to strive for that balance. We know growth is important but also the return for investors is important as well. Just looking at our history, I think we can be equally as excited about our future.”

CEOCFO: Any final thoughts for our readers?
Mr. Johnson: “We are excited about where we are going, and we will try to moderate our growth to meet our internal earnings goals.”


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“We have outperformed our personal goals and our corporate goals. We see this as still a new venture with new opportunities. We look back to 1969 when one of our competitors Hancock Bank (Hancock Holding Company – NASDAQ: HBHC) on the coast, during the Camille hurricane challenge was an $80 million dollar bank. Almost forty years later they are a $5 to $6 billion bank, and we have all grown since the hurricane. Therefore, we see ourselves on the brink of a new day in south Mississippi. We are not looking to expand outside the state right now; we see a tremendous amount of activity in the next 4 or 5 years of rebuilding and rediscovery of our state and our area of the state. We are excited to be in this position. Our numbers both recently and from our beginning show tremendous trends. We have struck a good balance between both growth and earnings growth, and we will continue to strive for that balance. We know growth is important but also the return for investors is important as well. Just looking at our history, I think we can be equally as excited about our future.” - David E. Johnson

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