The First Bancshares, Inc. (FBMS) 10-K/A 2012 FY Annual report (amended)

EXHIBIT 13

THE FIRST BANCSHARES, INC.

2012 ANNUAL REPORT

SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS

(Dollars In Thousands, Except Per Share Data)

	December 31,
	2012		2011		2010		2009		2008
Earnings:
Net interest income	$	22,194	$	19,079	$	16,334	$	14,390	$	16,105
Provision for loan
losses		1,228		1,468		983		1,206		2,205
Noninterest income		6,324		4,598		3,895		4,397		4,631
Noninterest expense		22,164		18,870		15,843		15,323		15,998
Net income		4,049		2,871		2,549		1,743		1,849
Net income applicable
to common
stockholders		3,624		2,529		2,233		1,461		1,849
Per  common share data:
Basic net income per
share	$	1.17	$	.83	$	.74	$	.49	$	.62
Diluted net income per
share		1.16		.82		.74		.49		.61
Per share data:
Basic net income
per share	$	1.31	$	.94	$	.84	$	.58	$	.62
Diluted net income
per share		1.29		.93		.84		.58		.61
Selected Year End
Balances:
Total assets	$	721,385	$	681,413	$	503,045	$	477,552	$	474,824
Securities		226,301		221,176		107,136		114,618		102,303
Loans, net of
allowance		408,970		383,418		327,956		314,033		318,300
Deposits		596,627		573,394		396,479		383,754		378,079
Stockholders’ equity		65,885		60,425		57,098		43,617		36,568

5

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Purpose

The purpose of management's discussion and analysis is to make the reader aware of the significant components, events, and changes in the consolidated financial condition and results of operations of the Company and The First during the year ended December 31, 2012 when compared to the years 2011 and 2010. The Company's consolidated financial statements and related notes should also be considered.

Critical Accounting Policies

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

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

Goodwill is assessed for impairment both annually and when events or circumstances occur that make it more likely than not that impairment has occurred. As part of its testing, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines the fair value of a reporting unit is less than its carrying amount using these qualitative factors, the Company then compares the fair value of goodwill with its carrying amount, and then measures impaired loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. No impairment was indicated when the annual test was performed in 2012.

6

Overview

The First Bancshares, Inc. (the Company) was incorporated on June 23, 1995, and serves as a bank holding company for The First, A National Banking Association (“The First”), located in Hattiesburg, Mississippi. The First began operations on August 5, 1996, from its main office in the Oak Grove community, which is on the western side of Hattiesburg. The First currently operates its main office and two branches in Hattiesburg, one in Laurel, one in Purvis, one in Picayune, one in Pascagoula, one in Bay St. Louis, one in Wiggins and four in Gulfport, one in Biloxi, one in Long Beach, and one in Diamondhead, Mississippi, as well as one branch in Bogalusa, Louisiana. See Note C of Notes to Consolidated Financial Statements for information regarding branch acquisitions. The Company and The First engage in a general commercial and retail banking business characterized by personalized service and local decision-making, emphasizing the banking needs of small to medium-sized businesses, professional concerns, and individuals.

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

The Company increased from approximately $681.4 million in total assets, and $573.4 million in deposits at December 31, 2011 to approximately $721.4 million in total assets, and $596.6 million in deposits at December 31, 2012. Loans net of allowance for loan losses increased from $383.4 million at December 31, 2011 to approximately $409.0 at December 31, 2012. The Company increased from $60.4 million in shareholders’ equity at December 31, 2011 to approximately $65.9 million at December 31, 2012. The First reported net income of $4,597,000 and $3,496,000 for the years ended December 31, 2012, and 2011, respectively. For the years ended December 31, 2012 and 2011, the Company reported consolidated net income applicable to common stockholders of $3,624,000 and $2,529,000, respectively. The following discussion should be read in conjunction with the “Selected Consolidated Financial Data” and the Company's Consolidated Financial Statements and the Notes thereto and the other financial data included elsewhere.

7

SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS

(Dollars In Thousands, Except Per Share Data)

	December 31,
	2012		2011		2010		2009		2008
Earnings:
Net interest income	$	22,194	$	19,079	$	16,334	$	14,390	$	16,105
Provision for loan losses		1,228		1,468		983		1,206		2,205
Noninterest income		6,324		4,598		3,895		4,397		4,631
Noninterest expense		22,164		18,870		15,843		15,323		15,998
Net income		4,049		2,871		2,549		1,743		1,849
Net income applicable to common stockholders		3,624		2,529		2,233		1,461		1,849
Per  common share data:
Basic net income per share	$	1.17	$	.83	$	.74	$	.49	$	.62
Diluted net income per share		1.16		.82		.74		.49		.61
Per share data:
Basic net income per share	$	1.31	$	.94	$	.84	$	.58	$	.62
Diluted net income per share		1.29		.93		.84		.58		.61
Selected Year End Balances:
Total assets	$	721,385	$	681,413	$	503,045	$	477,552	$	474,824
Securities		226,301		221,176		107,136		114,618		102,303
Loans, net of allowance		408,970		383,418		327,956		314,033		318,300
Deposits		596,627		573,394		396,479		383,754		378,079
Stockholders’ equity		65,885		60,425		57,098		43,617		36,568

Results of Operations

The following is a summary of the results of operations by The First for the years ended December 31, 2012 and 2011.

	2012		2011
	(In thousands)
Interest income	$	26,325	$	24,469
Interest expense		3,930		5,208
Net interest income		22,395		19,261
Provision for loan losses		1,228		1,468
Net interest income after provision for loan losses		21,167		17,793
Other income		6,324		4,598
Other expense		21,647		17,736
Income tax expense		1,247		1,159
Net income	$	4,597	$	3,496

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The following reconciles the above table to the amounts reflected in the consolidated financial statements of the Company at December 31, 2012 and 2011:

	2012			2011
	(In thousands)
Net interest income:
Net interest income of The First	$	22,395		$	19,261
Intercompany eliminations		(201	)		(182	)
	$	22,194		$	19,079
Net income applicable to common stockholders:
Net income of  The First	$	4,597		$	3,496
Net loss of the Company, excluding intercompany accounts		(973	)		(967	)
	$	3,624		$	2,529

Consolidated Net Income

The Company reported consolidated net income applicable to common stockholders of approximately $3,624,339 for the year ended December 31, 2012, compared to a consolidated net income of $2,529,000 for the year ended December 31, 2011. The increase in income was attributable to an increase in net interest income of $3.1 million or 16.3%, and an increase of $1.7 or 37.5% in other income which were offset by an increase in other expenses of $3.3 million or 17.5%.

Consolidated Net Interest Income

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

Consolidated net interest income was approximately $22,194,000 for the year ended December 31, 2012, as compared to $19,079,000 for the year ended December 31, 2011. This increase was the direct result of increased loan volumes and decreased rates paid on interest-bearing liabilities during 2012 as compared to 2011. Average interest-bearing liabilities for the year 2012 were $534,998,000 compared to $445,893,000 for the year 2011. At December 31, 2012, the net interest spread, the difference between the yield on earning assets and the rates paid on interest-bearing liabilities, was 3.29% compared to 3.71% at December 31, 2011. The net interest margin (which is net interest income divided by average earning assets) was 3.42% for the year 2012 compared to 3.84% for the year 2011. Rates paid on average interest-bearing liabilities decreased from 1.21% for the year 2011 to .77% for the year 2012. Interest earned on assets and interest accrued on liabilities is significantly influenced by market factors, specifically interest rates as set by Federal agencies. Average loans comprised 59.8% of average earning assets for the year 2012 compared to 71.3% for the year 2011.

9

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

Average Balances, Income and Expenses, and Rates

	Years Ended December 31,
	2012								2011								2010
	Average Balance			Income/ Expenses		Yield/ Rate			Average Balance			Income/ Expenses		Yield/ Rate			Average Balance			Income/ Expenses		Yield/ Rate
	(Dollars in thousands)
Assets
Earning Assets
Loans (1)(2)	$	388,012		$	21,412		5.52	%	$	354,295		$	20,971		5.92	%	$	328,950		$	20,289		6.17	%
Securities		235,833			4,785		2.03	%		134,815			3,360		2.49	%		106,891			3,121		2.92	%
Federal funds sold (3)		19,670			51		.26	%		5,486			72		1.31	%		16,473			21		.13	%
Other		4,845			83		1.71	%		2,530			72		2.85	%		859			22		2.56	%
Total earning assets		648,360			26,331		4.06	%		497,126			24,475		4.92	%		453,173			23,453		5.18	%
Cash and due from banks		16,699								47,632								16,686
Premises and equipment		22,633								17,401								14,490
Other assets		32,337								21,613								18,469
Allowance for loan losses		(4,457	)							(4,340	)							(4,513	)
Total assets	$	715,572							$	579,432							$	498,305
Liabilities
Interest-bearing liabilities	$	534,998		$	4,137		.77	%	$	445,893		$	5,396		1.21	%	$	395,956		$	7,119		1.80	%
Demand deposits (1)		107,392								65,830								49,203
Other liabilities		10,036								18,757								9,434
Shareholders’ equity		63,146								48,952								43,712
Total liabilities and shareholders’ equity	$	715,572							$	579,432							$	498,305
Net interest spread							3.29	%							3.71	%							3.38	%
Net yield on interest-earning assets				$	22,194		3.42	%				$	19,079		3.84	%				$	16,334		3.60	%

____________________

(1) All loans and deposits were made to borrowers in the United States. Includes nonaccrual loans of $3,589, $5,125, and $4,212, respectively, during the periods presented. Loans include held for sale loans.

(2) Includes loan fees of $430, $418, and $400 respectively.

(3) Includes EBA-MNBB and Federal Reserve – New Orleans.

10

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

Analysis of Changes in Consolidated Net Interest Income

	Year Ended December 31,								Year Ended December 31,
	2012 versus 2011 Increase (decrease) due to								2011 versus 2010 Increase (decrease) due to
	Volume		Rate			Net			Volume			Rate			Net
	(Dollars in thousands)
Earning Assets
Loans	$	1,993	$	(1,552	)	$	441		$	1,564		$	(882	)	$	682
Securities		2,518		(1,093	)		1,425			815			(576	)		239
Federal funds sold		186		(207	)		(21	)		(14	)		65			51
Other short-term investments		66		(55	)		11			43			7			50
Total interest income		4,763		(2,907	)		1,856			2,408			(1,386	)		1,022
Interest-Bearing Liabilities
Interest-bearing transaction accounts		361		(785	)		(424	)		395			(1,193	)		(798	)
Money market accounts		116		(185	)		(69	)		152			(206	)		(54	)
Savings deposits		23		(9	)		14			18			(32	)		(14	)
Time deposits		36		(683	)		(647	)		(190	)		(487	)		(677	)
Borrowed funds		542		(675	)		(133	)		(58	)		(122	)		(180	)
Total interest expense		1,078		(2,337	)		(1,259	)		317			(2,040	)		(1,723	)
Net interest income	$	3,685	$	(570	)	$	3,115		$	2,091		$	654		$	2,745

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

11

The following tables illustrate the Company's consolidated interest rate sensitivity and consolidated cumulative gap position at December 31, 2010, 2011, and 2012.

	December 31, 2010
	Within Three Months			After Three Through Twelve Months			Within One Year			Greater Than One Year or Nonsensitive			Total
	(Dollars in thousands)
Assets
Earning Assets:
Loans	$	62,439		$	62,095		$	124,534		$	208,039		$	332,573
Securities (2)		12,011			7,592			19,603			87,533			107,136
Funds sold and other		9,083			12,443			21,526			-			21,526
Total earning assets		83,533			82,130			165,663			295,572			461,235
Liabilities
Interest-bearing liabilities:
Interest-bearing deposits:
NOW accounts(1)	$	-		$	149,551		$	149,551		$	-		$	149,551
Money market accounts		18,853			-			18,853			-			18,853
Savings deposits (1)		-			14,043			14,043			-			14,043
Time deposits		34,437			72,886			107,323			58,398			165,721
Total interest-bearing deposits		53,290			236,480			289,770			58,398			348,168
Borrowed funds (3)		-			3,075			3,075			27,032			30,107
Total interest-bearing liabilities		53,290			239,555			292,845			85,430			378,275
Interest-sensitivity gap per period	$	30,243		$	(157,425	)	$	(127,182	)	$	210,142		$	82,960
Cumulative gap at December 31, 2010	$	30,243		$	(127,182	)	$	(127,182	)	$	82,960		$	82,960
Ratio of cumulative gap to total earning assets at December 31, 2010		6.6	%		(27.6	)%		(27.6	)%		18.0	%

	December 31, 2011
	Within Three Months			After Three Through Twelve Months			Within One Year			Greater Than One Year or Nonsensitive			Total
	(Dollars in thousands)
Assets
Earning Assets:
Loans	$	72,117		$	74,832		$	146,949		$	240,980		$	387,929
Securities (2)		9,987			12,945			22,932			198,244			221,176
Funds sold and other		241			12,788			13,029			-			13,029
Total earning assets		82,345			100,565			182,910			439,224			622,134
Liabilities
Interest-bearing liabilities:
Interest-bearing deposits:
NOW accounts (1)	$	-		$	200,210		$	200,210		$	-		$	200,210
Money market accounts		43,296			-			43,296			-			43,296
Savings deposits (1)		-			45,644			45,644			-			45,644
Time deposits		39,411			87,259			126,670			50,445			177,115
Total interest-bearing deposits		82,707			333,113			415,820			50,445			466,265
Borrowed funds (3)		231			12,990			13,221			13,811			27,032
Total interest-bearing liabilities		82,938			346,103			429,041			64,256			493,297
Interest-sensitivity gap per period	$	(593	)	$	(245,538	)	$	(246,131	)	$	374,968		$	128,837
Cumulative gap at December 31, 2011	$	(593	)	$	(246,131	)	$	(246,131	)	$	128,837		$	128,837
Ratio of cumulative gap to total earning assets at  December 31, 2011		(.09	)%		(39.6	)%		(39.6	)%		20.7	%

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	December 31, 2012
	Within Three Months			After Three Through Twelve Months			Within One Year			Greater Than One Year or Nonsensitive			Total
	(Dollars in thousands)
Assets
Earning Assets:
Loans	$	72,670		$	78,168		$	150,838		$	262,859		$	413,697
Securities (2)		11,185			15,504			26,689			199,612			226,301
Funds sold and other		1,064			9,588			10,652			-			10,652
Total earning assets		84,919		$	103,260		$	188,179		$	462,471		$	650,650
Liabilities
Interest-bearing liabilities:
Interest-bearing deposits:
NOW accounts (1)	$	-		$	230,588		$	230,588		$	-		$	230,588
Money market accounts		47,325			-			47,325			-			47,325
Savings deposits (1)		-			48,153			48,153			-			48,153
Time deposits		32,624			70,883			103,507			57,429			160,936
Total interest-bearing deposits		79,949			349,624			429,573			57,429			487,002
Borrowed funds (3)		20,000			1,771			21,771			15,000			36,771
Total interest-bearing liabilities		99,949			351,395			451,344			72,429			523,773
Interest-sensitivity gap per period	$	(15,030	)	$	(248,135	)	$	(263,165	)	$	390,042		$	126,877
Cumulative gap at December 31, 2012	$	(15,030	)	$	(263,165	)	$	(263,165	)	$	126,877		$	126,877
Ratio of cumulative gap to total earning assets at  December 31, 2012		(2.3	)%		(40.4	)%		(40.4	)%		19.5	%

______________

(1) NOW and savings accounts are subject to immediate withdrawal and repricing. These deposits do not tend to immediately react to changes in interest rates and the Company believes these deposits are a stable and predictable funding source. Therefore, these deposits are included in the repricing period that management believes most closely matches the periods in which they are likely to reprice rather than the period in which the funds can be withdrawn contractually.

(2) Securities include mortgage backed and other installment paying obligations based upon stated maturity dates.

(3) Does not include subordinated debentures of $10,310,000.

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

Provision and Allowance for Loan Losses

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

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

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

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

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

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

Local Unemployment Rate

Insurance issues (Windpool areas)

Bankruptcy Rates (increasing/declining)

Local Commercial R/E Vacancy rates

Established market/new market

Hurricane threat

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

Gross Domestic Product (GDP)

Home Sales

Consumer Price Index (CPI)

Interest Rate Environment (increasing/steady/declining)

Single Family construction starts

Inflation Rate

Retail Sales

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

Second Mortgages

Single Pay Loans

Non-Recourse Loans

Limited Guaranty Loans

Loan to Value Exceptions

Secured by Non-Owner Occupied property

Raw Land Loans

Unsecured Loans

Measurable Bank Trends: (Updated quarterly)

Delinquency Trends

Non-Accrual Trends

Net Charge Offs

Loan Volume Trends

Non-Performing Assets

Underwriting Standards/Lending Policies

Experience/Depth of Bank Lending Management

Our model takes into account many local and national economic factors as well as portfolio trends.  Local and national economic trends are measured quarterly, typically in the month following quarter end to facilitate the release of economic data from the reporting agencies.  These factors are allocated a basis point value ranging from -25 to +25 basis points and directly affect the amount reserved for each branch.  As of December 31, 2012, most economic indicators both local and national pointed to a weak economy thus most factors were assigned a positive basis point value. This increased the amount of the allowance that was indicated by historical loss factors.  Portfolio trends are measured monthly on a per branch basis to determine the percentage of loans in each branch that the Bank has determined as having more risk.  Portfolio risk is defined as areas in the Bank’s loan portfolio in which there is additional risk involved in the loan type or some other area in which the Bank has identified as having more risk.  Each area is tracked on bank-wide as well as on a branch-wide basis.  Branches are analyzed based on the gross percentage of concentrations of the Bank as a whole.  Portfolio risk is determined by analyzing concentrations in the areas outlined by determining the percentage of each branch’s total portfolio that is made up of the particular loan type and then comparing that concentration to the Bank as a whole. Branches with concentrations in these areas are graded on a scale from – 25 basis points to + 25 basis points. Second mortgages, single pay loans, loans secured by raw land, unsecured loans and loans secured by non owner occupied property are considered to be of higher risk than those of a secured and amortizing basis. LTV exceptions place the Bank at risk in the event of repossession or foreclosure. 

15

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

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

At December 31, 2012, the consolidated allowance for loan losses amounted to approximately $4,727,000, or 1.14% of outstanding loans or 1.20% of loans excluding those booked at fair value due to business combination. At December 31, 2011, the allowance for loan losses amounted to approximately $4,511,000, which was 1.16% of outstanding loans. The Company’s provision for loan losses was $1,228,000 for the year ended December 31, 2012, compared to $1,468,000 for the year ended December 31, 2011.

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

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

The following tables illustrate the Company’s past due and nonaccrual loans at December 31, 2012 and 2011.

	December 31, 2012
	(In thousands)
	Past Due 30 to 89 Days		Past Due 90 days or more and still accruing		Non-Accrual
Real Estate-construction	$	990	$	-	$	1,667
Real Estate-mortgage		3,045		147		1,174
Real Estate-non farm nonresidential		389		-		608
Commercial		88		-		135
Consumer		132		11		5
Total	$	4,644	$	158	$	3,589

	December 31, 2011
	(In thousands)
	Past Due 30 to 89 Days		Past Due 90 days or more and still accruing		Non-Accrual
Real Estate-construction	$	70	$	22	$	945
Real Estate-mortgage		2,189		311		984
Real Estate-non farm nonresidential		1,662		144		2,877
Commercial		138		19		246
Consumer		214		-		73
Total	$	4,273	$	496	$	5,125

Total nonaccrual loans at December 31, 2012 amounted to $3.6 million which was a decrease of $1.5 million from the December 31, 2011 amount of $5.1 million. Management believes these relationships were adequately reserved at December 31, 2012.Restructured loans not reported as past due or nonaccrual at December 31, 2012 amounted to $.7 million.

A potential problem loan is one in which management has serious doubts about the borrower’s future performance under the terms of the loan contract. These loans are current as to principal and interest and, accordingly, they are not included in nonperforming asset categories. The level of potential problem loans is one factor used in the determination of the adequacy of the allowance for loan losses. At December 31, 2012 and December 31, 2011, The First had potential problem loans of $19,164,000 and $25,687,000, respectively. This represents a decrease of $6,523,000.

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Consolidated Allowance For Loan Losses

	Years Ended December 31,
	2012			2011			2010			2009			2008
Average loans outstanding	$	388,012		$	354,295		$	328,950		$	320,495		$	349,572
Loans outstanding at year end	$	413,697		$	387,929		$	332,573		$	318,795		$	323,084
Total nonaccrual loans	$	3,589		$	5,125		$	4,212		$	4,367		$	3,340
Beginning balance of allowance	$	4,511		$	4,617		$	4,762		$	4,785		$	4,221
Loans charged-off		(1,190	)		(1,987	)		(1,370	)		(1,396	)		(1,784	)
Total loans charged-off		(1,190	)		(1,987	)		(1,370	)		(1,396	)		(1,784	)
Total recoveries		178			413			242			167			143
Net loans charged-off		(1,012	)		(1,574	)		(1,128	)		(1,229	)		(1,641	)
Acquisition		-			-			-			-			-
Provision for loan losses		1,228			1,468			983			1,206			2,205
Balance at year end	$	4,727		$	4,511		$	4,617		$	4,762		$	4,785
Net charge-offs to average loans		.26	%		.44	%		.34	%		.38	%		.47	%
Allowance as percent of total loans		1.14	%		1.16	%		1.39	%		1.49	%		1.48	%
Nonperforming loans as a percentage of total loans		.87	%		1.32	%		1.27	%		1.37	%		1.03	%
Allowance as a multiple of nonaccrual loans		1.3	X		.88	X		1.1	X		1.1	X		1.4	X

At December 31, 2012, the components of the allowance for loan losses consisted of the following:

	Allowance
	(In thousands)
Allocated:
Impaired loans	$	936
Graded loans		3,791
	$	4,727

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

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The following table represents the activity of the allowance for loan losses for the years 2012 and 2011.

Analysis of the Allowance for Loan Losses

	Years Ended December 31,
	2012			2011
	(Dollars in thousands)
Balance at beginning of  year	$	4,511		$	4,617
Charge-offs:
Real Estate-construction		(102	)		(330	)
Real Estate-mortgage		(559	)		(799	)
Real Estate-nonfarm  nonresidential		(160	)		(440	)
Commercial		(166	)		(321	)
Consumer		(203	)		(97	)
Total		(1,190	)		(1,987	)
Recoveries:
Real Estate-construction		14			-
Real Estate-mortgage		37			96
Real Estate-nonfarm  nonresidential		32			215
Commercial		25			29
Consumer		70			73
Total		178			413
Net Charge-offs		(1,012	)		(1,574	)
Provision for Loan Losses		1,228			1,468
Balance at end of year	$	4,727		$	4,511

The following tables represent how the allowance for loan losses is allocated to a particular loan type as well as the percentage of the category to total loans at December 31, 2012 and 2011.

Allocation of the Allowance for Loan Losses

	December 31, 2012
	(Dollars in thousands)
	Amount		% of loans in each category to total loans
Commercial Non Real Estate	$	420		13.3	%
Commercial Real Estate		3,338		63.7	%
Consumer Real Estate		810		19.0	%
Consumer		151		4.0	%
Unallocated		8		-
Total	$	4,727		100	%

	December 31, 2011
	(Dollars in thousands)
	Amount		% of loans in each category to total loans
Commercial Non Real Estate	$	397		16.3	%
Commercial Real Estate		3,356		63.8	%
Consumer Real Estate		680		15.7	%
Consumer		78		4.2	%
Unallocated		-		-
Total	$	4,511		100	%

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Noninterest Income and Expense

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

Noninterest income experienced an increase of $1,726,000 or 37.5% as compared to $4,598,000 for the year ended December 31, 2011, to $6,324,000 for the year ended December 31, 2012. The deposit activity fees were $3,432,000 for 2012 compared to $2,704,000 for 2011. Other service charges increased by $774,000 or 46.8% from $1,653,000 for the year ended December 31, 2011, to $2,427,000 for the year ended December 31, 2012. Impairment losses on investment securities were $0 for 2012 as compared to $4,000 for 2011.

Noninterest expense increased from $18.9 million for the year ended December 31, 2011 to $22.2 million for the year ended December 31, 2012. The Company experienced slight increases in most expense categories. The largestincrease was in salaries and employee benefits, which increased by $2.3 million in 2012 as compared to 2011. These increases were due in part to the addition of the Whitney branches and associated staff.

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

Noninterest Expense

	Years ended December 31,
	2012		2011		2010
	(In thousands)
Salaries and employee benefits	$	12,001	$	9,679	$	8,693
Occupancy		1,797		1,356		1,052
Equipment		1,435		1,114		976
Marketing and public relations		329		353		312
Data processing		85		46		12
Supplies and printing		425		416		284
Telephone		533		346		271
Correspondent services		96		105		118
Deposit and other insurance		734		865		1,118
Professional and consulting fees		747		1,825		924
Postage		252		236		148
ATM fees		434		310		225
Other		3,296		2,219		1,710
Total	$	22,164	$	18,870	$	15,843

Income Tax Expense

Income tax expense consists of two components. The first is the current tax expense which represents the expected income tax to be paid to taxing authorities. The Company also recognizes deferred tax for future deductible amounts resulting from differences in the financial statement and tax bases of assets and liabilities.

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Analysis of Financial Condition

Earning Assets

Loans. Loans typically provide higher yields than the other types of earning assets, and thus one of the Company's goals is for loans to be the largest category of the Company's earning assets. At December 31, 2012 and 2011, respectively, average loans accounted for 59.8% and 71.3% of average earning assets. Management attempts to control and counterbalance the inherent credit and liquidity risks associated with the higher loan yields without sacrificing asset quality to achieve its asset mix goals. Loans averaged $388.0 million during 2012, as compared to $354.3 million during 2011, and $329.0 million during 2010.

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

Composition of Loan Portfolio

	December 31,
	2012						2011						2010
	Amount			Percent Of Total			Amount			Percent of Total			Amount			Percent of Total
	(Dollars in thousands)
Mortgage loans held for sale	$	5,585			1.4	%	$	2,906			0.7	%	$	2,938			0.9	%
Commercial, financial and agricultural		53,234			12.9	%		48,385			12.5	%		48,427			14.6	%
Real Estate:
Mortgage-commercial		142,046			34.3	%		138,943			35.8	%		109,073			32.8	%
Mortgage-residential		140,703			34.0	%		117,692			30.3	%		102,425			30.8	%
Construction		57,529			13.9	%		63,357			16.3	%		58,962			17.7	%
Consumer and other		14,600			3.5	%		16,645			4.4	%		10,748			3.2	%
Total loans		413,697			100	%		387,928			100	%		332,573			100	%
Allowance for loan losses		(4,727	)					(4,511	)					(4,617	)
Net loans	$	408,970					$	383,417					$	327,956

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

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

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The following table sets forth the Company's commercial and construction real estate loans maturing within specified intervals at December 31, 2012.

Loan Maturity Schedule and Sensitivity to Changes in Interest Rates

	December 31, 2012
Type	One Year or Less		Over One Year Through Five Years		Over Five Years		Total
	(In thousands)
Commercial, financial and agricultural	$	32,544	$	19,858	$	832	$	53,234
Real estate – construction		57,529		-		-		57,529
	$	90,073	$	19,858	$	832	$	110,763
Loans maturing after one year with:
Fixed interest rates							$	19,141
Floating interest rates								1,549
							$	20,690

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

Investment Securities. The investment securities portfolio is a significant component of the Company's total earning assets. Total securities averaged $235.8 million in 2012, as compared to $134.8 million in 2011 and $106.9 million in 2010. This represents 36.4%, 27.1%, and 23.6% of the average earning assets for the years ended December 31, 2012, 2011, and 2010, respectively. At December 31, 2012, investment securities were $226.3 million and represented 34.8% of earning assets. The Company attempts to maintain a portfolio of high quality, highly liquid investments with returns competitive with short-term U.S. Treasury or agency obligations. This objective is particularly important as the Company focuses on growing its loan portfolio. The Company primarily invests in securities of U.S. Government agencies, municipals, and corporate obligations with maturities up to five years.

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

Securities Portfolio

	December 31,
	2012		2011		2010
	(In thousands)
Available-for-sale
U. S. Government agencies	$	98,326	$	103,004	$	41,173
States and municipal subdivisions		98,910		94,258		54,673
Corporate obligations		16,187		14,293		7,702
Mutual finds		970		974		986
Total available-for-sale		214,393		212,529		104,534
Held-to-maturity
U.S. Government agencies		2,470		2		3
States and  municipal subdivisions		6,000		6,000		-
Total held-to-maturity		8,470		6,002		3
Total	$	222,863	$	218,531	$	104,537

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The following table shows, at carrying value, the scheduled maturities and average yields of securities held at December 31, 2012.

Investment Securities Maturity Distribution and Yields (1)

	December 31, 2012
						After One But					After Five But
(Dollars in thousands)	Within One Year					Within Five Years					Within Ten Years					After Ten Years
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Held-to-maturity:
U.S. Government agencies (2)	$	-		-		$	-		-		$	-		-		$	-		-
States and municipal subdivisions		-		-			-		-			-		-			6,000		.93	%
Total investment securities held-to-maturity	$	-				$	-				$	-				$	6,000
Available-for-sale:
U.S. Government agencies (3)	$	4,575		.69	%	$	24,393		.96	%	$	5,266		4.19	%	$	3,095		1.99	%
States and municipal subdivisions.		12,901		2.65	%		41,785		3.08	%		30,038		4.20	%		14,186		5.41	%
Corporate obligations and other		-		-			7,072		3.30	%		3,070		1.91	%		6,045		2.09	%
Total investment securities available-for-sale	$	17,476				$	73,250				$	38,374				$	23,326

_________________

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

(2) Excludes mortgage-backed securities totaling $2.5 million with a yield of 2.63%.

(3) Excludes mortgage-backed securities totaling $62.0 million with a yield of 2.39% and mutual funds of $1.0 million.

Short-Term Investments. Short-term investments, consisting of Federal Funds Sold, funds in due from banks and interest-bearing deposits with banks, averaged $19.7 million in 2012, $5.5 million in 2011, and $16.5 million in 2010. At December 31, 2012, and December 31, 2011, short-term investments totaled $1,064,000 and $241,000, respectively. These funds are a primary source of the Company's liquidity and are generally invested in an earning capacity on an overnight basis.

Deposits

Deposits. Average total deposits increased $68.3 million, or 16.9% in 2011. Average total deposits increased $125.1 million, or 26.3% in 2012. At December 31, 2012, total deposits were $596.6 million, compared to $573.4 million a year earlier, an increase of $23.2 million, or 4.1%.

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

	Deposits
	December 31,
(Dollars in thousands)	2012					2011					2010
			Percent of					Percent of					Percent of
	Amount		Deposits			Amount		Deposits			Amount		Deposits
Noninterest-bearing accounts	$	109,624		18.4	%	$	107,129		18.7	%	$	48,311		12.2	%
NOW accounts		230,589		38.6	%		200,210		34.9	%		149,551		37.7	%
Money market accounts		47,325		7.9	%		43,296		7.6	%		18,853		4.8	%
Savings accounts		48,153		8.1	%		45,644		8.0	%		14,043		3.5	%
Time deposits less than $100,000		69,115		11.6	%		77,569		13.5	%		65,393		16.5	%
Time deposits of $100,000 or over		91,821		15.4	%		99,546		17.3	%		100,328		25.3	%
Total deposits	$	596,627		100	%	$	573,394		100	%	$	396,479		100	%

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The Company’s loan-to-deposit ratio was 68.4% at December 31, 2012 and 67.1% at December 31, 2011. The loan-to-deposit ratio averaged 64.5% during 2012. Core deposits, which exclude time deposits of $100,000 or more, provide a relatively stable funding source for the Company's loan portfolio and other earning assets. The Company's core deposits were $504.8 million at December 31, 2012 and $473.8 million at December 31, 2011. Management anticipates that a stable base of deposits will be the Company's primary source of funding to meet both its short-term and long-term liquidity needs in the future. The Company has purchased brokered deposits from time to time to help fund loan growth. Brokered deposits and jumbo certificates of deposit generally carry a higher interest rate than traditional core deposits. Further, brokered deposit customers typically do not have loan or other relationships with the Company. The Company has adopted a policy not to permit brokered deposits to represent more than 10% of all of the Company’s deposits.

The maturity distribution of the Company's certificates of deposit of $100,000 or more at December 31, 2012, is shown in the following table. The Company did not have any other time deposits of $100,000 or more.

Maturities of Certificates of Deposit

of $100,000 or More

			After Three
	Within Three		Through		After Twelve
(In thousands)	Months		Twelve Months		Months		Total
December 31, 2012	$	19,098	$	40,648	$	32,075	$	91,821

Borrowed Funds

Borrowed funds consists of advances from the Federal Home Loan Bank of Dallas, federal funds purchased and reverse repurchase agreements. At December 31, 2012, advances from the FHLB totaled $31.8 million compared to $12.0 million at December 31, 2011. The advances are collateralized by a blanket lien on the first mortgage loans in the amount of the outstanding borrowings, FHLB capital stock, and amounts on deposit with the FHLB. There were no federal funds purchased at December 31, 2012 and December 31, 2011.

Reverse Repurchase Agreements consist of one $5,000,000 agreement. The agreement is secured by securities with a fair value of $6,421,762 at December 31, 2012 and $19,460,231 at December 31, 2011. The maturity date of the remaining agreement is September 26, 2017 with a rate of 3.81%.

Subordinated Debentures

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

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

Capital

Total shareholders’ equity as of December 31, 2012, was $65.9 million, an increase of $5.5 million or approximately 9.0%, compared with shareholders' equity of $60.4 million as of December 31, 2011.

The Federal Reserve Board and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. Under the risk-based standard, capital is classified into two tiers. Tier 1 capital consists of common shareholders' equity, excluding the unrealized gain (loss) on available-for-sale securities, minus certain intangible assets. Tier 2 capital consists of the general reserve for loan losses, subject to certain limitations. An institution’s total risk-based capital for purposes of its risk-based capital ratio consists of the sum of its Tier 1 and Tier 2 capital. The risk-based regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital.

Bank holding companies and banks are also required to maintain capital at a minimum level based on total assets, which is known as the leverage ratio. The minimum requirement for the leverage ratio is 4%. All but the highest rated institutions are required to maintain ratios 100 to 200 basis points above the minimum. The Company and The First exceeded their minimum regulatory capital ratios as of December 31, 2012 and 2011.

Analysis of Capital

	Adequately			Well			The Company						The First
Capital Ratios	Capitalized			Capitalized			December 31,						December 31,
							2012			2011			2012			2011
Leverage		4.0	%		5.0	%		8.6	%		8.5	%		8.4	%		8.3	%
Risk-based capital:
Tier 1		4.0	%		6.0	%		12.8	%		12.6	%		12.7	%		12.4	%
Total		8.0	%		10.0	%		13.8	%		13.6	%		13.6	%		13.3	%

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Ratios

	2012			2011			2010
Return on assets (net income applicable to common stockholders divided by average total assets)		.51	%		.44	%		.45	%
Return on equity (net income applicable to common stockholders divided by average equity)		5.7	%		5.2	%		5.1	%
Dividend payout ratio (dividends per share divided by net income per common share)		12.9	%		18.3	%		20.3	%
Equity to asset ratio (average equity divided  by average total assets)		8.8	%		8.4	%		8.8	%

Liquidity Management

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

The Company's Federal Funds Sold position, which includes funds in due from banks and interest-bearing deposits with banks, is typically its primary source of liquidity, averaged $19.7 million during the year ended December 31, 2012 and totaled $6.4 million at December 31, 2012. Also, the Company has available advances from the Federal Home Loan Bank. Advances available are generally based upon the amount of qualified first mortgage loans which can be used for collateral. At December 31, 2012, advances available totaled approximately $181.0 million of which $31.8 million had been drawn, or used for letters of credit.

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

EESA also increased FDIC deposit insurance on most accounts from $100,000 to $250,000.  However, with the passage of the Dodd-Frank Act, this increase in the basic coverage limit has been made permanent.

26

Following a systemic risk determination, the FDIC established a Temporary Liquidity Guarantee Program (“TLGP”) on October 14, 2008.  The TLGP included the Transaction Account Guarantee Program (“TAGP”), which provided unlimited deposit insurance coverage through June 30, 2010 for noninterest-bearing transaction accounts (typically business checking accounts) and certain funds swept into noninterest-bearing savings accounts.  Institutions participating in the TAGP pay a 10 basis points fee (annualized) on the balance of each covered account in excess of $250,000, while the extra deposit insurance is in place. The Company is participating in the TAGP.

Subprime Assets

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

Accounting Matters

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

Impact of Inflation

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

27

REPORT OF

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

The First Bancshares, Inc.

Hattiesburg, Mississippi

We have audited the accompanying consolidated balance sheets of The First Bancshares, Inc., as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2012. The management of The First Bancshares, Inc. is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The First Bancshares, Inc., as of December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America.

/s/ T. E. LOTT & COMPANY

Columbus, Mississippi

March 28, 2013

28

THE FIRST BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2012 AND 2011

	2012			2011
ASSETS
Cash and due from banks	$	20,225,123		$	10,152,337
Interest-bearing deposits with banks		9,587,601			12,787,616
Federal funds sold		1,064,000			241,000
Total cash and cash equivalents		30,876,724			23,180,953
Held-to-maturity securities (fair value of  $7,055,499 in 2012 and $6,002,399 in 2011)		8,470,103			6,002,278
Available-for-sale securities		214,392,682			212,528,385
Other securities		3,437,750			2,645,250
Total securities		226,300,535			221,175,913
Loans held for sale		5,585,373			2,906,433
Loans, net of allowance for loan losses of $4,726,618 in 2012 and $4,510,938 in 2011		403,384,642			380,511,384
Interest receivable		2,887,287			2,771,676
Premises and equipment		22,242,838			22,990,441
Cash surrender value of life insurance		6,441,109			6,270,191
Goodwill		9,362,498			9,362,498
Other assets		14,304,274			12,243,758
Total assets	$	721,385,280		$	681,413,247
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	109,624,640		$	107,129,476
Interest-bearing		487,001,945			466,264,701
Total deposits		596,626,585			573,394,177
Interest payable		212,041			307,752
Borrowed funds		36,770,773			27,031,831
Subordinated debentures		10,310,000			10,310,000
Other liabilities		11,580,415			9,944,206
Total liabilities		655,499,814			620,987,966
Stockholders’ Equity:
Preferred stock, no par value, $1,000 per share liquidation, 10,000,000 shares authorized; 17,123 shares issued and outstanding in 2012 and 2011, respectively		17,020,539			16,938,571
Common stock, par value $1 per share: 10,000,000 shares authorized; 3,133,596 and 3,092,566 shares issued and outstanding  in 2012 and 2011, respectively		3,133,596			3,092,566
Additional paid-in capital		23,710,775			23,504,231
Retained earnings		19,951,173			16,791,561
Accumulated other comprehensive income		2,533,028			561,997
Treasury stock, at cost		(463,645	)		(463,645	)
Total stockholders’ equity		65,885,466			60,425,281
Total liabilities and stockholders’ equity	$	721,385,280		$	681,413,247

The accompanying notes are an integral part of these statements.

29

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2012 AND 2011

	2012			2011
INTEREST INCOME
Interest and fees on loans	$	21,412,469		$	20,971,200
Interest and dividends on securities:
Taxable interest and dividends		2,744,643			1,892,623
Tax-exempt interest		2,040,412			1,467,394
Interest on federal funds sold		50,689			72,364
Interest on deposits in banks		82,716			71,134
Total interest income		26,330,929			24,474,715
INTEREST EXPENSE
Interest on time deposits of $100,000 or more		1,050,138			1,443,579
Interest on other deposits		2,016,490			2,757,320
Interest on borrowed funds		1,069,988			1,194,636
Total interest expense		4,136,616			5,395,535
Net interest income		22,194,313			19,079,180
Provision for loan losses		1,228,016			1,468,359
Net interest income after provision for loan losses		20,966,297			17,610,821
OTHER INCOME
Service charges on deposit accounts		3,431,579			2,704,145
Other service charges and fees		2,426,759			1,653,270
Bank owned life insurance income		170,918			186,624
Loss on sale of other real estate		(55,426	)		(78,845	)
Other		349,922			136,781
Impairment loss on securities:
Total other-than-temporary impairment loss		-			(140,355	)
Less:  Portion of loss recognized in other comprehensive income		-			136,077
Net impairment loss recognized in earnings		-			(4,278	)
Total other income		6,323,752			4,597,697
OTHER EXPENSE
Salaries		10,059,380			8,166,475
Employee benefits		1,941,330			1,512,609
Occupancy		1,797,347			1,355,766
Furniture and equipment		1,435,153			1,113,622
Supplies and printing		425,086			415,957
Professional and consulting fees		746,941			1,825,232
Marketing and public relations		329,362			353,145
FDIC and OCC assessments		681,540			811,145
Other		4,747,764			3,316,229
Total other expense		22,163,903			18,870,180

30

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2012 AND 2011

Continued:

	2012		2011
Income before income taxes		5,126,146		3,338,338
Income taxes		1,077,379		466,900
Net income		4,048,767		2,871,438
Preferred dividends and stock accretion		424,428		342,460
Net income applicable to common stockholders	$	3,624,339	$	2,528,978
Net income per share:
Basic	$	1.31	$	.94
Diluted		1.29		.93
Net income applicable to common stockholders:
Basic	$	1.17	$	.83
Diluted		1.16		.82

The accompanying notes are an integral part of these statements.

31

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

YEARS ENDED DECEMBER 31, 2012 AND 2011

	2012			2011
Net income	$	4,048,767		$	2,871,438
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains arising during the period		3,022,776			1,872,162
Plus reclassification adjustment for losses included in net income		-			4,596
		3,022,776			1,876,758
Unrealized holding gains (losses) on loans held for sale		(36,365	)		27,814
Non-credit related impairment loss on investment securities		-			(179,101	)
Income tax benefit (expense)		(1,015,380	)		(586,660	)
Other comprehensive income		1,971,031			1,138,811
Comprehensive income	$	6,019,798		$	4,010,249

The accompanying notes are an integral part of these statements.

32

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 2012 AND 2011

	Common Stock		Preferred Stock		Stock Warrants		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Balance, January 1, 2011	$	3,058,716	$	16,938,571	$	283,738	$	23,135,023		$	14,722,496		$	(576,814	)	$	(463,645	)	$	57,098,085
Net income 2011		-		-		-		-			2,871,438			-			-			2,871,438
Other comprehensive income														1,138,811						1,138,811
Dividends on preferred stock		-		-		-		-			(342,460	)		-			-			(342,460	)
Cash dividend declared, $.15 per common share		-		-		-		-			(459,913	)		-			-			(459,913	)
Grant of restricted stock		33,850		-		-		(33,850	)		-			-			-			-
Compensation cost on restricted stock		-		-		-		119,320			-			-			-			119,320
Balance, December 31, 2011	$	3,092,566	$	16,938,571	$	283,738	$	23,220,493		$	16,791,561		$	561,997		$	(463,645	)	$	60,425,281
Net income 2012		-		-		-		-			4,048,767			-			-			4,048,767
Other comprehensive Income														1,971,031						1,971,031
Dividends on preferred stock		-		-		-		-			(342,460	)		-			-			(342,460	)
Cash dividend declared, $.15 per common share		-		-		-		-			(464,727	)		-			-			(464,727	)
Grant of restricted stock		42,795		-		-		(42,795	)		-			-			-			-
Compensation cost on restricted stock		-		-		-		263,216			-			-			-			263,216

33

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 2012 AND 2011

Continued:

	Common Stock			Preferred Stock		Stock Warrants		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)		Treasury Stock			Total
Preferred stock accretion		-			81,968		-		-			(81,968	)		-		-			-
Repurchase of restricted stock for payment of taxes		(1,765	)		-		-		(13,877	)		-			-		-			(15,642	)
Balance, December 31, 2012	$	3,133,596		$	17,020,539	$	283,738	$	23,427,037		$	19,951,173		$	2,533,028	$	(463,645	)	$	65,885,466

The accompanying notes are an integral part of these statements.

34

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2012 AND 2011

	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	4,048,767		$	2,871,438
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,724,050			1,159,746
FHLB Stock dividends		(3,300	)		(3,700	)
Provision for loan losses		1,228,016			1,468,359
Impairment loss on securities		-			4,278
Loss (Gain) on sale/call of securities		-			318
Deferred income taxes		(136,348	)		163,746
Restricted stock expense		263,216			119,320
Increase in cash value of life insurance		(170,918	)		(186,624	)
Amortization and accretion, net		789,999			213,534
Loss on sale/writedown of other real estate		526,957			394,912
Changes in:
Loans held for sale		(2,716,039	)		59,215
Interest receivable		(115,611	)		(662,192	)
Other assets		3,255,806			2,111,333
Interest payable		(95,711	)		(176,005	)
Other liabilities		1,624,587			(405,181	)
Net cash provided by operating activities		10,223,471			7,132,497
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities		(60,102,101	)		(162,035,574	)
Purchases of other securities		(1,409,300	)		(315,000	)
Purchases of held-to-maturity securities		(2,489,450	)		(6,000,000	)
Proceeds from maturities and calls of available-for-sale securities		59,198,136			48,350,275
Proceeds from sales of securities available-for-sale		-			7,144,270
Proceeds from redemption of other securities		620,100			272,400
Increase in loans		(29,994,973	)		(13,972,402	)
Net additions to premises and equipment		(448,274	)		(1,373,857	)
Net cash received from acquisition		-			116,143,031
Net cash used in investing activities		(34,625,862	)		(11,786,857	)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in deposits		23,170,427			(2,270,888	)
Proceeds from borrowed funds		133,340,000			31,675,000
Repayment of borrowed funds		(123,601,058	)		(34,750,064	)
Dividends paid on common stock		(453,105	)		(452,983	)
Dividends paid on preferred stock		(342,460	)		(342,460	)
Repurchase of restricted stock for payment of taxes		(15,642	)		-
Net cash  provided by (used in) financing activities		32,098,162			(6,141,395	)

The accompanying notes are an integral part of these statements.

35

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2012 AND 2011

Continued:

	2012		2011
Net increase (decrease) in cash and cash equivalents		7,695,771		(10,795,755	)
Cash and cash equivalents at beginning of year		23,180,953		33,976,708
Cash and cash equivalents at end of year	$	30,876,724	$	23,180,953
Supplemental disclosures:
Cash paid during the year for:
Interest	$	4,232,327	$	5,498,702
Income taxes		1,562,850		862,855
Non-cash activities:
Transfers of loans to other real estate		6,198,006		3,128,503
Issuance of restricted stock grants		42,795		33,850

The accompanying notes are an integral part of these statements.

36

THE FIRST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - NATURE OF BUSINESS

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

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

1. Principles of Consolidation

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

2. Estimates

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

3. Cash and Due From Banks

Included in cash and due from banks are legal reserve requirements which must be maintained on an average basis in the form of cash and balances due from the Federal Reserve. The reserve balance varies depending upon the types and amounts of deposits. At December 31, 2012, the required reserve balance on deposit with the Federal Reserve Bank was approximately $4,646,000.

4. Securities

Investments in securities are accounted for as follows:

Available-for-Sale Securities

Securities classified as available-for-sale are those securities that are intended to be held for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available-for-sale would be based on various factors, including movements in interest rates, liquidity needs, security risk assessments, changes in the mix of assets and liabilities and other similar factors. These securities are carried at their estimated fair value, and the net unrealized gain or loss is reported net of tax, as a component of accumulated other comprehensive income (loss) in stockholders' equity, until realized. Premiums and discounts are recognized in interest income using the interest method. Gains and losses on the sale of available-for-sale securities are determined using the adjusted cost of the specific security sold.

37

Securities to be Held-to-Maturity

Securities classified as held-to-maturity are those securities for which there is a positive intent and ability to hold to maturity. These securities are carried at cost adjusted for amortization of premiums and accretion of discounts, computed by the interest method.

Trading Account Securities

Trading account securities are those securities which are held for the purpose of selling them at a profit. There were no trading account securities on hand at December 31, 2012 and 2011.

Other Securities

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

Other-than-Temporary Impairment

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

5. Loans held for sale

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

6. Loans

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

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

38

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

7. Allowance for Loan Losses

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

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

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

8. Premises and Equipment

Premises and equipment are stated at cost, less accumulated depreciation. The depreciation policy is to provide for depreciation over the estimated useful lives of the assets using the straight-line method. Repairs and maintenance expenditures are charged to operating expenses; major expenditures for renewals and betterments are capitalized and depreciated over their estimated useful lives. Upon retirement, sale, or other disposition of property and equipment, the cost and accumulated depreciation are eliminated from the accounts, and any gains or losses are included in operations.

9. Other Real Estate

Other real estate, carried in other assets in the consolidated balance sheets, consists of properties acquired through foreclosure and, as held for sale property, is recorded at the lower of the outstanding loan balance or current appraisal less estimated costs to sell. Any write-down to fair value required at the time of foreclosure is charged to the allowance for loan losses. Subsequent gains or losses on other real estate are reported in other operating income or expenses. At December 31, 2012 and 2011, other real estate totaled $6,782,422 and $4,353,203, respectively.

39

10. Goodwill and Other Intangible Assets

Goodwill totaled $9,362,000 for the years ended December 31, 2012 and 2011.

Goodwill totaling $8,660,000 acquired during the year ended December 31, 2011 was a result of the branch acquisitions from Whitney National Bank and Hancock Bank of Louisiana. Footnote C to these consolidated financial statements provides additional information on the acquisition during 2011.

The Company performed the required annual impairment tests of goodwill as of December 1, 2012. The Company’s annual impairment test did not indicate impairment as of the testing date, and subsequent to that date, management is not aware of any events or changes in circumstances since the impairment test that would indicate that goodwill might be impaired.

The Company’s purchase accounting intangible, assets which are subject to amortization, include core deposit intangibles, amortized on a straight-line basis, over a 10 year average life. The definite-lived intangible assets had the following carrying values at December 31, 2012 and 2011.

	2012							2011
	Gross					Net		Gross					Net
	Carrying		Accumulated			Carrying		Carrying		Accumulated			Carrying
	Amount		Amortization			Amount		Amount		Amortization			Amount
(Dollars in thousands)
Core deposit intangibles	$	3,095	$	(743	)	$	2,352	$	3,095	$	(434	)	$	2,661

During 2011, the Company recorded $2,402,000 in core deposit intangible assets related to the deposits acquired in the Whitney acquisition.

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

(dollars in thousands)
	Amount
Aggregate amortization expense for the year ended December 31:
2011	$	140
2012		309
Estimated amortization expense for the year ending December 31:
2013	$	309
2014		309
2015		309
2016		292
2017		240
Thereafter		893
	$	2,352

40

11. Other Assets and Cash Surrender Value

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

12. Stock Options

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

13. Income Taxes

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

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

ASC Topic 740,Income Taxes,provides guidance on financial statement recognition and measurement of tax positions taken, or expected to be taken, in tax returns. ASC Topic 740 requires an evaluation of tax positions to determine if the tax positions will more likely than not be sustainable upon examination by the appropriate taxing authority. The Company at December 31, 2012 and 2011, had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements.

14. Advertising Costs

Advertising costs are expensed in the period in which they are incurred. Advertising expense for the years ended December 31, 2012 and 2011, was $278,330 and $307,514, respectively.

15. Statements of Cash Flows

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

16. Off-Balance Sheet Financial Instruments

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

41

17. Earnings Applicable to Common Stockholders

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

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

	For the Year Ended						For the Year Ended
	December 31, 2012						December 31, 2011
	Net Income (Numerator)		Shares (Denominator)		Per Share Amount		Net Income (Numerator)		Shares (Denominator)		Per Share Amount
Basic per common share	$	3,624,339		3,101,411	$	1.17	$	2,528,978		3,063,251	$	.83
Effect of dilutive shares:
Restricted Stock				23,856						10,438
	$	3,624,339		3,125,267	$	1.16	$	2,528,978		3,073,689	$	.82

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

18. Reclassifications

Certain reclassifications have been made to the 2011 financial statements to conform with the classi-fications used in 2012. These reclassifications did not impact the Company's consolidated financial condition or results of operations.

19. Accounting Pronouncements

The Company has adopted ASU No. 2011-05, “Presentation of Comprehensive Income.” This guidance (ASC Topic 220,Comprehensive Income) revises the manner in which entities present comprehensive income in their financial statements. It requires entities to report components in either a continuous statement of comprehensive income or in two separate but consecutive statements. The Company chose the latter presentation. The items that must be reported in other comprehensive income did not change.

In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet Disclosures about Offsetting Assets and Liabilities.” The ASU amends ASC Topic 210 by requiring additional improved information to be disclosed regarding financial instruments and derivative instruments that are offset in accordance with the conditions under ASC 210-20-45 or ASC 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. The amendment is effective for annual and interim reporting periods beginning on or after January 1, 2013. The disclosures required by the amendments should be applied retrospectively for all comparative periods presented. In January 2013, the FASB issued ASU No. 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” The ASU clarifies that ordinary trade receivables and receivables are not in the scope of ASU 2011-11. Only derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in the Codification or subject to a master netting arrangement or similar agreement are applicable. The Company does not believe the amendments will have a material impact on the financial statements.

42

In July 2012, the FASB issued ASU No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment.” This revised standard is intended to reduce the cost and complexity of testing indefinite-lived intangible assets other than goodwill for impairment. It allows companies to perform a “qualitative” assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary, similar in approach to the goodwill impairment test. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.

In February 2013, the FASB issued ASU No. 2013-02, “Comprehensive Income – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. These amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U. S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U. S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U. S. GAAP that provide additional details about these amounts. ASU 2013-02 is effective for interim and annual periods beginning after December 15, 2012. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.

NOTE C – BUSINESS COMBINATION

On September 16, 2011 the Company completed the purchase of seven (7) branches located on the Mississippi Gulf Coast and one (1) branch located in Bogalusa, Louisiana from Whitney National Bank and Hancock Bank of Louisiana (the “Whitney branches”). As part of the agreement, the Company purchased loans of $46.8 million and assumed deposit liabilities of $179.3 million, and purchased the related fixed assets and cash of the branches. The Company operates the acquired bank branches under the name The First, A National Banking Association. The acquisition allowed the Company to expand its presence in South Mississippi as well as enter a new market in Louisiana. The Company’s condensed consolidated statements of income include the results of operations of the Whitney branches from the closing date of the acquisition.

In connection with the acquisition, the Company recorded $8.7 million of goodwill and $2.4 million of core deposit intangible. The core deposit intangible of $2.4 million will be expensed over 10 years. The recorded goodwill is deductible for tax purposes. The Company acquired the $46.8 million loan portfolio at a fair value discount of $.7 million. The discount represents expected credit losses, adjustments to market interest rates and liquidity adjustments. The noncredit quality portion of the discount was $.1 million and the credit quality portion of the discount was $.6 million.

43

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

Purchase price
Cash	$	9,100
Total purchase price		9,100
Identifiable assets:
Cash		125,243
Loans, leases and interest receivable		46,118
Core deposit intangible		2,402
Personal and real property		7,481
Other assets		95
Total assets		181,339
Liabilities and equity:
Deposits and interest payable		179,196
Other liabilities		1,703
Total liabilities		180,899
Net assets acquired	$	440
Goodwill resulting from acquisition	$	8,660

The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheet at December 31, 2012 were as follows (dollars in thousands):

Outstanding principal balance	$	19,145
Carrying amount		18,853

All loans obtained in the acquisition of the Whitney branches reflect no specific evidence of credit deterioration and very low probability that the Company would be unable to collect all contractually required principal and interest payments.

NOTE D – SECURITIES

A summary of the amortized cost and estimated fair value of available-for-sale securities and held-to-maturity securities at December 31, 2012 and 2011, follows:

	December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available-for-sale securities:
Obligations of U.S. Government agencies	$	36,148,002	$	231,810	$	20,735	$	36,359,077
Tax-exempt and taxable obligations of states and municipal subdivisions		95,113,063		3,823,242		26,121		98,910,184
Mortgage-backed securities		60,384,181		1,596,672		14,364		61,966,489
Corporate obligations		17,640,092		298,471		1,751,814		16,186,749
Other		1,255,483		-		285,300		970,183
	$	210,540,821	$	5,950,195	$	2,098,334	$	214,392,682
Held-to-maturity securities:
Mortgage-backed securities	$	2,470,103	$	84,796	$	-	$	2,554,899
Taxable obligations of states and municipal subdivisions		6,000,000		-		1,499,400		4,500,600
	$	8,470,103	$	84,796	$	1,499,400	$	7,055,499

44

	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available-for-sale securities:
Obligations of U.S. Government agencies	$	43,474,933	$	216,229	$	17,712	$	43,673,450
Tax-exempt and taxable obligations of states and municipal subdivisions		91,756,084		2,738,898		236,951		94,258,031
Mortgage-backed securities		58,534,125		959,018		163,596		59,329,547
Corporate obligations		16,678,672		26,618		2,412,076		14,293,214
Other		1,255,483		-		281,340		974,143
	$	211,699,297	$	3,940,763	$	3,111,675	$	212,528,385
Held-to-maturity securities:
Mortgage-backed securities
Taxable obligations of states and municipal subdivisions	$	2,278	$	121	$	-	$	2,399
		6,000,000		-		-		6,000,000
	$	6,002,278	$	121	$	-	$	6,002,399

The scheduled maturities of securities at December 31, 2012, were as follows:

	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due less than one year	$	17,393,747	$	17,476,162	$	-	$	-
Due after one year through five years		72,776,427		73,249,911		-		-
Due after five years through ten years		36,660,487		38,374,331		-		-
Due after ten years		23,325,979		23,325,789		6,000,000		4,500,600
Mortgage-backed securities		60,384,181		61,966,489		2,470,103		2,554,899
	$	210,540,821	$	214,392,682	$	8,470,103	$	7,055,499

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

No gain or loss was realized from the sale of available-for-sale securities in 2012. A loss of $318 was realized from the sale or call of available-for-sale securities in 2011. An other-than-temporary impairment loss of $-0- was recognized for the year ended 2012 and $4,278 for the year ended 2011.

45

Securities with a carrying value of $159,725,903 and $135,394,139 at December 31, 2012 and 2011, respectively, were pledged to secure public deposits, repurchase agreements, and for other purposes as required or permitted by law.

The details concerning securities classified as available-for-sale with unrealized losses as of December 31, 2012 and 2011, were as follows:

	2012
	Losses < 12 Months				Losses 12 Months or >				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Obligations of U.S. government agencies	$	5,063,924	$	20,735	$	-	$	-	$	5,063,924	$	20,735
Tax-exempt and tax- able obligations of states and municipal subdivisions		4,556,699		26,000		254,605		121		4,811,304		26,121
Mortgage-backed securities		-		-		236,886		14,364		236,886		14,364
Corporate obligations		978,600		1,764		2,668,168		1,750,050		3,646,768		1,751,814
Other		-		-		970,183		285,300		970,183		285,300
	$	10,599,223	$	48,499	$	4,129,842	$	2,049,835	$	14,729,065	$	2,098,334

	2011
	Losses < 12 Months				Losses 12 Months or >				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Obligations of U.S. government agencies	$	9,142,470	$	17,712	$	-	$	-	$	9,142,470	$	17,712
Tax-exempt and tax- able obligations of states and municipal subdivisions		6,451,142		183,678		598,851		53,273		7,049,993		236,951
Mortgage-backed securities		16,208,868		94,240		236,425		69,356		16,445,293		163,596
Corporate obligations		9,099,728		240,686		2,749,114		2,171,390		11,848,842		2,412,076
Other		-		-		974,143		281,340		974,143		281,340
	$	40,902,208	$	536,316	$	4,558,533	$	2,575,359	$	45,460,741	$	3,111,675

Approximately 9.4% of the number of securities in the investment portfolio at December 31, 2012, reflected an unrealized loss. Management is of the opinion the Company has the ability to hold these securities until such time as the value recovers or the securities mature. Management also believes the deterioration in value is attributable to changes in market interest rates and lack of liquidity in the credit markets. We have determined that these securities are not other-than-temporarily impaired based upon anticipated cash flows.

46

NOTE E - LOANS

Loans typically provide higher yields than the other types of earning assets, and thus one of the Company's goals is for loans to be the largest category of the Company's earning assets. At December 31, 2012 and December 31, 2011, respectively, loans accounted for 63.6% and 62.4% of earning assets. The Company controls and mitigates the inherent credit and liquidity risks through the composition of its loan portfolio.

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

	December 31,  2012						December 31, 2011
	Amount			Percent of Total			Amount			Percent of Total
	(Dollars in thousands)
Mortgage loans held for sale	$	5,585			1.4	%	$	2,906			0.7	%
Commercial, financial and agricultural		53,234			12.9			48,385			12.5
Real Estate:
Mortgage-commercial		142,046			34.3			138,943			35.8
Mortgage-residential		140,703			34.0			117,692			30.3
Construction		57,529			13.9			63,357			16.3
Consumer and other		14,600			3.5			16,645			4.4
Total loans		413,697			100	%		387,928			100	%
Allowance for loan losses		(4,727	)					(4,511	)
Net loans	$	408,970					$	383,417

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

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

47

Activity in the allowance for loan losses for December 31, 2012 and 2011 is as follows:

(In thousands)

	2012			2011
Balance at beginning of period	$	4,511		$	4,617
Loans charged-off:
Real Estate		(821	)		(1,569	)
Installment and Other		(203	)		(97	)
Commercial, Financial and Agriculture		(166	)		(321	)
Total		(1,190	)		(1,987	)
Recoveries on loans previously charged-off:
Real Estate		83			311
Installment and Other		70			73
Commercial, Financial and Agriculture		25			29
Total		178			413
Net Charge-offs		(1,012	)		(1,574	)
Provision for Loan Losses		1,228			1,468
Balance at end of period	$	4,727		$	4,511

The following tables represent how the allowance for loan losses is allocated to a particular loan type as well as the percentage of the category to total loans at December 31, 2012 and December 31, 2011.

Allocation of the Allowance for Loan Losses
	December 31, 2012
	(Dollars in thousands)
	Amount		% of loans in each category  to total loans
Commercial Non Real Estate	$	420		13.3	%
Commercial Real Estate		3,338		63.7
Consumer Real Estate		810		19.0
Consumer		151		4.0
Unallocated		8		-
Total	$	4,727		100	%

	December 31, 2011
	(Dollars in thousands)
	Amount		% of loans in each category to total loans
Commercial Non Real Estate	$	397		16.3	%
Commercial Real Estate		3,356		63.8
Consumer Real Estate		680		15.7
Consumer		78		4.2
Unallocated		-		-
Total	$	4,511		100	%

48

The following table represents the Company’s impaired loans at December 31, 2012 and December 31, 2011. This table excludes performing troubled debt restructurings.

	December 31,		December 31,
	2012		2011
	(In thousands)
Impaired Loans:
Impaired loans without a valuation allowance	$	1,445	$	2,791
Impaired loans with a valuation allowance		2,144		2,334
Total impaired loans	$	3,589	$	5,125
Allowance for loan losses on impaired loans at period End		936		738
Total nonaccrual loans		3,401		5,125
Past due 90 days or more and still accruing		158		496
Average investment in impaired loans		2,979		4,185

The following table is a summary of interest recognized and cash-basis interest earned on impaired loans for the years ended December 31, 2012 and December 31, 2011:

	2012		2011
Average of individually impaired loans during period	$	2,979	$	4,827
Interest income recognized during Impairment		-		-
Cash-basis interest income Recognized		50		287

The gross interest income that would have been recorded in the period that ended if the nonaccrual loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the twelve months for December 31, 2012 and 2011, was $81,000 and $112,000, respectively. The Company had no loan commitments to borrowers in non-accrual status at December 31, 2012 and 2011.

The following tables provide the ending balances in the Company's loans (excluding mortgage loans held for sale) and allowance for loan losses, broken down by portfolio segment as of December 31, 2012 and December 31, 2011. The tables also provide additional detail as to the amount of our loans and allowance that correspond to individual versus collective impairment evaluation. The impairment evaluation corresponds to the Company's systematic methodology for estimating its Allowance for Loan Losses.

December 31,  2012
			Installment		Commercial,
	Real Estate		and Other		Financial and Agriculture		Total
	(In thousands)
Loans
Individually evaluated	$	4,111	$	55	$	221	$	4,387
Collectively evaluated		333,298		16,401		54,025		403,724
Total	$	337,409	$	16,456	$	54,246	$	408,111
Allowance for Loan Losses
Individually evaluated	$	917	$	110	$	76	$	1,103
Collectively evaluated		3,231		49		344		3,624
Total	$	4,148	$	159	$	420	$	4,727

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December 31, 2011
			Installment		Commercial,
	Real Estate		And Other		Financial and Agriculture		Total
	(In thousands)
Loans
Individually evaluated	$	4,841	$	38	$	246	$	5,125
Collectively evaluated		301,271		16,107		62,519		379,897
Total	$	306,112	$	16,145	$	62,765	$	385,022
Allowance for Loan Losses
Individually evaluated	$	662	$	13	$	63	$	738
Collectively evaluated		3,375		64		334		3,773
Total	$	4,037	$	77	$	397	$	4,511

The following tables provide additional detail of impaired loans broken out according to class as of December 31, 2012 and 2011. The recorded investment included in the following table represents customer balances net of any partial charge-offs recognized on the loans, net of any deferred fees and costs. As nearly all of our impaired loans at December 31, 2012 are on nonaccrual status, recorded investment excludes any insignificant amount of accrued interest receivable on loans 90-days or more past due and still accruing. The unpaid balance represents the recorded balance prior to any partial charge-offs.

December 31,  2012
							Average		Interest
							Recorded		Income
	Recorded		Unpaid		Related		Investment		Recognized
	Investment		Balance		Allowance		YTD		YTD
	(In thousands)
Impaired loans with  no related allowance:
Commercial installment	$	15	$	15	$	-	$	46	$	-
Commercial real estate		1,013		1,529		-		1,004		39
Consumer real estate		106		969		-		168		8
Consumer installment		311		311		-		156		1
Total	$	1,445	$	2,824	$	-	$	1,374	$	48
Impaired loans with  a related allowance:
Commercial installment	$	203	$	203	$	73	$	173	$	8
Commercial real estate		1,549		1,549		747		1,546		38
Consumer real estate		44		44		44		72		4
Consumer installment		348		348		72		197		2
Total	$	2,144	$	2,144	$	936	$	1,988	$	52
Total Impaired Loans:
Commercial installment	$	218	$	218	$	73	$	219	$	8
Commercial real estate		2,562		3,078		747		2,550		77
Consumer real estate		150		1,013		44		240		12
Consumer installment		659		659		72		353		3
Total Impaired Loans	$	3,589	$	4,968	$	936	$	3,362	$	100

50

December 31, 2011
							Average		Interest
							Recorded		Income
	Recorded		Unpaid		Related		Investment		Recognized
	Investment		Balance		Allowance		YTD		YTD
	(In thousands)
Impaired loans with  no related allowance:
Commercial installment	$	121	$	121	$	-	$	69	$	5
Commercial real estate		2,420		2,420		-		1,457		85
Consumer real estate		241		241		-		288		3
Consumer installment		9		9		-		11		-
Total	$	2,791	$	2,791	$	-	$	1,825	$	93
Impaired loans with  a related allowance:
Commercial installment	$	125	$	125	$	63	$	128	$	-
Commercial real estate		1,533		1,533		574		1,463		23
Consumer real estate		647		647		88		740		12
Consumer installment		29		29		13		29		6
Total	$	2,334	$	2,334	$	738	$	2,360	$	41
Total Impaired Loans:
Commercial installment	$	246	$	246	$	63	$	197	$	5
Commercial real estate		3,953		3,953		571		2,920		108
Consumer real estate		888		888		91		1,028		15
Consumer installment		38		38		13		40		6
Total Impaired Loans	$	5,125	$	5,125	$	738	$	4,185	$	134

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The following tables provide additional detail of troubled debt restructurings at December 31, 2012.

	Outstanding Recorded		Outstanding Recorded				Interest
	Investment Pre-Modification		Investment  Post-Modification		Number of Loans		Income Recognized
	(in thousands except number of loans)
Commercial installment	$	-	$	-		-	$	-
Commercial real estate		107		104		1		8
Consumer real estate		-		-		-		-
Consumer installment		-		-		-		-
Total	$	107	$	104		1	$	8

The balance of troubled debt restructurings at December 31, 2012 was $2.7 million, calculated for regulatory reporting purpose. Of these amounts, $1.0 million were performing in accordance with the modified terms. The remaining $1.7 million are on non-accrual. There was $51,000 in specific reserves established with respect to these loans as of December 31, 2012. As of December 31, 2012, the Company had no additional amount committed on any loan classified as troubled debt restructuring.

The recorded investment in loans for which the allowance for loan losses was previously measured under a general allowance for loan losses methodology and are now impaired under ASC Section 310-10-35 was $205,000. The allowance for loan losses associated with those loans on the basis of a current evaluation of loss was $51,000. All loans were performing as agreed with modified terms.

During the twelve month period ending December 31, 2012, the terms of 1 loan was modified as a TDR. The modifications included one of the following or a combination of the following: maturity date extensions, interest only payments, amortizations were extended beyond what would be available on similar type loans, and payment waiver. No interest rate concessions were given on these nor were any of these loans written down.

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

	December 31, 2012
	(In thousands)
	Past Due 30 to 89   Days		Past Due  90 Days or More and Still Accruing		Non-Accrual		Total Past Due and Non-Accrual		Total Loans
Real Estate-construction	$	990	$	-	$	1,667	$	2,657	$	57,529
Real Estate-mortgage		3,045		147		986		4,178		140,702
Real Estate-non farm nonresidential		389		-		608		997		142,046
Commercial		88		-		135		223		53,234
Consumer		132		11		5		148		14,600
Total	$	4,644	$	158	$	3,401	$	8,203	$	408,111

52

	December 31, 2011
	(In thousands)
	Past Due 30 to 89 Days		Past Due 90 Days or More and Still Accruing		Non-Accrual		Total Past Due and Non-Accrual		Total Loans
Real Estate-construction	$	70	$	22	$	945	$	1,037	$	63,357
Real Estate-mortgage		2,189		311		984		3,484		117,692
Real Estate-non farm nonresidential		1,662		144		2,877		4,683		138,943
Commercial		138		19		246		403		48,385
Consumer		214		-		73		287		16,645
Total	$	4,273	$	496	$	5,125	$	9,894	$	385,022

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

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

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

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

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

53

As of December 31, 2012 and December 31, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans (excluding mortgage loans held for sale) was as follows:

(In thousands)
December 31, 2012
							Commercial,
	Real Estate Commercial		Real Estate Mortgage		Installment and Other		Financial and Agriculture		Total
Pass	$	241,926	$	76,206	$	16,426	$	53,880	$	388,438
Special Mention		5,653		144		17		-		5,814
Substandard		12,606		1,059		15		320		14,000
Doubtful		-		-		-		60		60
Subtotal		260,185		77,409		16,458		54,260		408,312
Less:
Unearned Discount		91		94		2		14		201
Loans, net of  unearned discount	$	260,094	$	77,315	$	16,456	$	54,246	$	408,111

December 31, 2011
							Commercial,
	Real Estate Commercial		Real Estate Mortgage		Installment and  Other		Financial and Agriculture		Total
Pass	$	223,692	$	57,835	$	16,004	$	60,741	$	358,272
Special Mention		5,169		71		45		3		5,288
Substandard		16,815		2,553		99		1,846		21,313
Doubtful		-		104		-		175		279
Subtotal		245,676		60,563		16,148		62,765		385,152
Less:
Unearned Discount		94		34		-		2		130
Loans, net of  unearned discount	$	245,582	$	60,529	$	16,148	$	62,763	$	385,022

NOTE F - PREMISES AND EQUIPMENT

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

	2012		2011
Premises:
Land	$	7,226,252	$	7,226,252
Buildings and improvements		15,697,160		15,729,044
Equipment		6,954,110		6,344,642
Construction in progress		11,473		227,414
		29,888,995		29,527,352
Less accumulated depreciation and amortization		7,646,157		6,536,911
	$	22,242,838	$	22,990,441

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The amounts charged to operating expense for depreciation were $1,195,877 and $858,342 in 2012 and 2011, respectively.

NOTE G - DEPOSITS

The aggregate amount of time deposits in denominations of $100,000 or more as of December 31, 2012, and 2011 was $91,821,044 and $99,545,812, respectively.

At December 31, 2012, the scheduled maturities of time deposits included in interest-bearing deposits were as follows (in thousands):

Year	Amount
2013	$	103,507
2014		24,349
2015		16,375
2016		6,368
2017		10,326
Thereafter		11
	$	160,936

NOTE H - BORROWED FUNDS

Borrowed funds consisted of the following:

	December 31,
	2012		2011
Reverse Repurchase Agreement	$	5,000,000	$	15,000,000
FHLB advances		31,770,773		12,031,831
	$	36,770,773	$	27,031,831

Advances from the FHLB have maturity dates ranging from January 2013 through June, 2019. Interest is payable monthly at rates ranging from 0.17% to 3.813%. Advances due to the FHLB are collateralized by a blanket lien on first mortgage loans in the amount of the outstanding borrowings, FHLB capital stock, and amounts on deposit with the FHLB. At December 31, 2012, FHLB advances available and unused totaled $149,194,016.

Future annual principal repayment requirements on the borrowings from the FHLB at December 31, 2012, were as follows:

Year	Amount
2013	$	21,770,773
2014		4,000,000
2015		3,000,000
2016		-
2017		-
2018		-
2019		3,000,000
	$	31,770,773

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Reverse Repurchase Agreements consist of one $5,000,000 agreement. The agreement is secured by securities with a fair value of $6,421,762 at December 31, 2012 and $19,460,231 at December 31, 2011. The maturity date of the remaining agreement is September 26, 2017 with a rate of 3.81%.

NOTE I – LEASE OBLIGATIONS

The Company is committed under several long-term operating leases which provide for minimum lease payments. Certain leases contain options for renewal. Total rental expense under these operating leases amounted to $125,000 and $93,000 as of December 31, 2012 and 2011, respectively.

The Company is also committed under one long-term capital lease agreement. The capital lease agreement had an outstanding balance of $1,415,000 and $1,540,000 at December 31, 2012 and 2011, respectively (included in other liabilities). This lease has a remaining term of 9 years at December 31, 2012. Assets related to the capital lease are included in premises and equipment and the cost consists of $2.6 million less accumulated depreciation of approximately $346,110 and $86,500 at December 31, 2012 and 2011, respectively.

Minimum future lease payments for the operating and capital leases at December 31, 2012 were as follows:

	Operating
	Leases		Capital Lease
	(In thousands)
2013	$	118	$	166
2014		122		166
2015		96		166
2016		96		168
2017		77		191
Thereafter		355		745
Total Minimum Lease Payments	$	864		1,602
Less:  Amounts representing interest				(187	)
Present value of minimum lease payments			$	1,415

NOTE J - REGULATORY MATTERS

The Company and its subsidiary bank are subject to regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its subsidiary bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgment by regulators about components, risk weightings, and other related factors.

56

To ensure capital adequacy, quantitative measures have been established by regulators, and these require the Company and its subsidiary bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined) to risk-weighted assets (as defined), and of Tier I capital to adjusted total assets (leverage). Management believes, as of December 31, 2012, that the Company and its subsidiary bank exceeded all capital adequacy requirements.

At December 31, 2012 and 2011, the subsidiary bank was categorized by regulators as well-capitalized under the regulatory framework for prompt corrective action. A financial institution is considered to be well-capitalized if it has a total risk-based capital ratio of 10% or more, has a Tier I risk-based capital ratio of 6% or more, and has a Tier I leverage capital ratio of 5% or more. There are no conditions or anticipated events that, in the opinion of management, would change the categorization. The actual capital amounts and ratios at December 31, 2012 and 2011, are presented in the following table. No amount was deducted from capital for interest-rate risk exposure.

	Company					Subsidiary
	(Consolidated)					The First
	Amount		Ratio			Amount		Ratio
December 31, 2012
Total risk-based	$	66,080		13.8	%	$	65,046		13.6	%
Tier I risk-based		61,353		12.8	%		60,319		12.7	%
Tier I leverage		61,353		8.6	%		60,319		8.4	%
December 31, 2011
Total risk-based	$	62,071		13.6	%	$	60,910		13.3	%
Tier I risk-based		57,560		12.6	%		56,399		12.4	%
Tier I leverage		57,560		8.5	%		56,399		8.3	%

The minimum amounts of capital and ratios as established by banking regulators at December 31, 2012 and 2011, were as follows:

	Company					Subsidiary
	(Consolidated)					The First
	Amount		Ratio			Amount		Ratio
December 31, 2012
Total risk-based	$	38,271		8.0	%	$	38,161		8.0	%
Tier I risk-based		19,135		4.0	%		19,080		4.0	%
Tier I leverage		28,712		4.0	%		28,661		4.0	%
December 31, 2011
Total risk-based	$	36,649		8.0	%	$	36,527		8.0	%
Tier I risk-based		18,324		4.0	%		18,264		4.0	%
Tier I leverage		27,164		4.0	%		27,103		4.0	%

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

NOTE K - INCOME TAXES

The components of income tax expense are as follows:

	Years Ended December 31,
	2012			2011
Current:
Federal	$	1,000,418		$	255,955
State		213,309			47,199
Deferred (benefit)		(136,348	)		163,746
	$	1,077,379		$	466,900

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

	Years Ended December 31,
	2012						2011
	Amount			%			Amount			%
Income taxes at statutory rate	$	1,742,890			34	%	$	1,135,035			34	%
Tax-exempt income		(745,595	)		(15	)%		(559,078	)		(17	)%
Nondeductible expenses		233,006			5	%		92,339			3	%
State income tax, net of federal tax effect		92,156			2	%		52,788			2	%
Tax credits		(295,800	)		(6	)%		(12,325	)		-
Other, net		50,722			1	%		(241,859	)		(8	)%
	$	1,077,379			21	%	$	466,900			14	%

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

	December 31,
	2012			2011
Deferred tax assets:
Allowance for loan losses	$	1,489,546		$	1,330,959
Net operating loss carryover		652,061			729,798
Other		870,831			603,039
		3,012,438			2,663,796
Deferred tax liabilities:
Securities		(89,426	)		(97,744	)
Premises and equipment		(986,689	)		(927,939	)
Unrealized gain on available-for-sale securities		(1,309,633	)		(281,889	)
Core deposit intangible		(58,358	)		(114,072	)
Goodwill		(281,036	)		(63,460	)
		(2,725,142	)		(1,485,104	)
Net deferred tax asset, included in other assets	$	287,296		$	1,178,692

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With the acquisition of Wiggins in 2006, the Company assumed a federal tax net operating loss carryover. This net operating loss is available to the Company through the year 2026.

The Company follows the guidance of ASC Topic 740,Income Taxes,which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As of December 31, 2012, the Company had no uncertain tax positions that it believes should be recognized in the financial statements. The tax years still subject to examination by taxing authorities are years subsequent to 2007.

NOTE L - EMPLOYEE BENEFITS

The Company and its subsidiary bank provide a deferred compensation arrangement (401(k) plan) whereby employees contribute a percentage of their compensation. For employee contributions of six percent or less, the Company and its subsidiary bank provide a 50% matching contribution. Contributions totaled $189,519 in 2012 and $142,584 in 2011.

The Company sponsors an Employee Stock Ownership Plan (ESOP) for employees who have completed one year of service for the Company and attained age 21. Employees become fully vested after five years of service. Contributions to the plan are at the discretion of the Board of Directors. At December 31, 2012, the ESOP held 6,038 shares of Company common stock and had no debt obligation. All shares held by the plan were considered outstanding for net income per share purposes. Total ESOP expense was $22,785 for 2012 and $16,339 for 2011.

NOTE M - STOCK PLANS

In 2007, the Company adopted the 2007 Stock Incentive Plan.  The 2007 Plan provides for the issuance of up to 315,000 shares of Company Common Stock, $1.00 par value per share.  Shares issued under the 2007 Plan may consist in whole or in part of authorized but unissued shares or treasury shares.  Through the year ended December 31, 2009, no shares were issued under this Plan. During the year ended December 31, 2011, 33,850 nonvested restricted stock awards were granted under the Plan. During the year ended December 31, 2012, 42,795 nonvested restricted stock awards were granted under the Plan. During 2012, 1,765 shares were repurchased for payment of taxes. The weighted average grant-date fair value for these shares was $9.45 per share. Compensation costs in the amount of $263,216 was recognized for the year ended December 31, 2012 and $119,320 for the year ended December 31, 2011. Shares of restricted stock granted to employees under this stock plan are subject to restrictions as to the vesting period. The restricted stock award becomes 100% vested on the earliest of 1) the three year vesting period provided the Grantee has not incurred a termination of employment prior to that date, 2) the Grantee’s retirement, or 3) the Grantee’s death. During this period, the holder is entitled to full voting rights and dividends. As of December 31, 2012, there was approximately $416,000 of unrecognized compensation cost related to this Plan. The cost is expected to be recognized over the remaining term of the vesting period (approximately 2 years).

59

NOTE N - SUBORDINATED DEBENTURES

On June 30, 2006, the Company issued $4,124,000 of floating rate junior subordinated deferrable interest debentures to The First Bancshares Statutory Trust 2 in which the Company owns all of the common equity. The debentures are the sole asset of the Trust. The Trust issued $4,000,000 of Trust Preferred Securities (TPSs) to investors. The Company’s obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the Trust’s obligations under the preferred securities. The preferred securities were redeemable by the Company in 2011, or earlier in the event the deduction of related interest for federal income taxes is prohibited, treatment as Tier I capital is no longer permitted, or certain other contingencies arise. The preferred securities must be redeemed upon maturity of the debentures in 2036. Interest on the preferred securities is the three month London Interbank Offer Rate (LIBOR) plus 1.65% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities. On July 27, 2007, the Company issued $6,186,000 of floating rate junior subordinated deferrable interest debentures to The First Bancshares Statutory Trust 3 in which the Company owns all of the common equity. The debentures are the sole asset of Trust 3. The Trust issued $6,000,000 of Trust Preferred Securities (TPSs) to investors. The Company’s obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the Trust’s obligations under the preferred securities. The preferred securities are redeemable by the Company in 2012, or earlier in the event the deduction of related interest for federal income taxes is prohibited, treatment as Tier 1 capital is no longer permitted, or certain other contingencies arise. The preferred securities must be redeemed upon maturity of the debentures in 2037. Interest on the preferred securities is the three month LIBOR plus 1.40% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities. In accordance with the provisions of ASC Topic 810,Consolidation,the trusts are not included in the consolidated financial statements.

NOTE O - TREASURY STOCK

Shares held in treasury totaled 26,494 at December 31, 2012, and 2011.

NOTE P - RELATED PARTY TRANSACTIONS

In the normal course of business, the Bank makes loans to its directors and executive officers and to companies in which they have a significant ownership interest. In the opinion of management, these loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other parties, are consistent with sound banking practices, and are within applicable regulatory and lending limitations. Such loans amounted to approximately $9,683,000 and $12,955,000 at December 31, 2012 and 2011, respectively. The activity in loans to current directors, executive officers, and their affiliates during the year ended December 31, 2012, is summarized as follows (in thousands):

Loans outstanding at beginning of year	$	12,955
New loans		702
Repayments		(3,974	)
Loans outstanding at end of year	$	9,683

NOTE Q - COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS OF CREDIT RISK

In the normal course of business, there are outstanding various commitments and contingent liabilities, such as guaranties, commitments to extend credit, etc., which are not reflected in the accompanying financial statements. The subsidiary bank had outstanding letters of credit of $574,000 and $387,000 at December 31, 2012 and 2011, respectively, and had made loan commitments of approximately $63,583,000 and $59,035,000 at December 31, 2012 and 2011, respectively.

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Commitments to extend credit and letters of credit include some exposure to credit loss in the event of nonperformance of the customer. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit policies and procedures for such commitments are the same as those used for lending activities. Because these instruments have fixed maturity dates and because a number expire without being drawn upon, they generally do not present any significant liquidity risk. No significant losses on commitments were incurred during the two years ended December 31, 2012, nor are any significant losses as a result of these transactions anticipated.

The primary market area served by the Bank is Forrest, Lamar, Jones, Pearl River, Jackson, Hancock, Stone, and Harrison Counties within South Mississippi as well as Washington Parish in Louisiana. Management closely monitors its credit concentrations and attempts to diversify the portfolio within its primary market area. As of December 31, 2012, management does not consider there to be any significant credit concentrations within the loan portfolio. Although the Bank’s loan portfolio, as well as existing commitments, reflects the diversity of its primary market area, a substantial portion of a borrower's ability to repay a loan is dependent upon the economic stability of the area.

NOTE R - FAIR VALUES OF ASSETS AND LIABILITIES

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

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

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

Level 1:	Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2:	Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities.
Level 3:	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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

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Available-for-Sale Securities

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

The following table presents the Company’s available-for-sale securities that are measured at fair value on a recurring basis and the level within the hierarchy in which the fair value measurements fell as of December 31, 2012 and December 31, 2011 (in thousands):

			Fair Value Measurements Using
			Quoted Prices in Active Markets For Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2012
Obligations of U.S. Government agencies	$	36,359	$	-	$	36,359	$	-
Municipal securities		98,910		-		98,910		-
Mortgage-backed securities		61,967		-		61,967		-
Corporate obligations		16,187		-		13,519		2,668
Other		970		970		-		-
Total	$	214,393	$	970	$	210,755	$	2,668

			Fair Value Measurements Using
			Quoted Prices in Active Markets For Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2011
Obligations of U.S. Government agencies	$	43,673	$	-	$	43,673	$	-
Municipal securities		94,258		-		94,258		-
Mortgage-backed securities		59,330		-		59,330		-
Corporate obligations		14,293		-		12,041		2,252
Other		974		974		-		-
Total	$	212,528	$	974	$	209,302	$	2,252

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

(In thousands)	Bank-Issued Trust Preferred Securities
Balance, December 31, 2011	$	2,252
Transfers into Level 3		-
Transfers out of Level 3		-
Unrealized income included in comprehensive income		416
Balance, December 31, 2012	$	2,668

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

Impaired Loans

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

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

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Other Real Estate Owned

Other real estate owned consists of properties obtained through foreclosure. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Fair value of other real estate owned is based on current independent appraisals. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined the fair value declines subsequent to foreclosure, a valuation allowance is recorded through other income. Operating costs associated with the assets after acquisition are also recorded as non-interest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other income. Other real estate owned measured at fair value on a non-recurring basis at December 31, 2012, amounted to $6.8 million. Other real estate owned is classified within Level 2 of the fair value hierarchy.

The following table presents the fair value measurement of assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fell at December 31, 2012 and December 31, 2011 (in thousands).

			Fair Value Measurements Using
			Quoted Prices in Active Markets For Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2012
Impaired loans	$	3,589	$	-	$	3,589	$	-
Other real estate owned		6,782		-		6,782		-
December 31, 2011
Impaired loans	$	5,125	$	-	$	5,125	$	-
Other real estate owned		4,353		-		4,353		-

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

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

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

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

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

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

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

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

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

	As of December 31, 2012				As of December 31, 2011
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(In thousands)
Financial Instruments:
Assets:
Cash and cash equivalents	$	30,877	$	30,877	$	23,181	$	23,181
Securities available-for-sale		214,393		214,393		212,528		212,528
Securities held-to-maturity		8,470		7,055		6,002		6,002
Other securities		3,438		3,438		2,645		2,645
Loans, net		408,970		422,029		383,418		396,905
Liabilities:
Noninterest-bearing deposits	$	109,625	$	109,625	$	107,129	$	107,129
Interest-bearing deposits		487,002		487,599		466,265		467,198
Subordinated debentures		10,310		10,310		10,310		10,310
FHLB and other borrowings		36,771		36,771		27,032		27,032

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NOTE S - SENIOR PREFERRED STOCK

On February 6, 2009, as part of the U.S. Department of Treasury’s (“Treasury”) Capital Purchase Program (“CPP”), the Company received a $5.0 million equity investment by issuing 5 thousand shares of Series A, no par value preferred stock to the Treasury pursuant to a Letter Agreement and Securities Purchase Agreement that was previously disclosed by the Company. The Company also issued a warrant to the Treasury allowing it to purchase 54,705 shares of the Company’s common stock at an exercise price of $13.71. The warrant can be exercised immediately and has a term of 10 years.

The non-voting Series A preferred shares issued, with a liquidation preference of $1 thousand per share, will pay a cumulative cash dividend quarterly at 5% per annum during the first five years the preferred shares are outstanding, resetting to 9% thereafter if not redeemed. The CPP also includes certain restrictions on dividend payments of the Company’s lower ranking equity and the ability to purchase its outstanding common shares.

The Company allocated the proceeds received from the Treasury, net of transaction costs, on a pro rata basis to the Series A preferred stock and the warrant based on their relative fair values. The Company assigned $.3 million and $4.7 million to the warrant and the Series A preferred stock, respectively. The resulting discount on the Series A preferred stock is being accreted up to the $5.0 million liquidation amount at the time of the exchange discussed in the following paragraph.

On September 29, 2010, and pursuant to the terms of the letter agreement between the Company and the United States Department of the Treasury (“Treasury”), the Company closed a transaction whereby Treasury exchanged its 5,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series UST, (The “CPP Preferred Shares”) for 5,000 shares of a new series of preferred stock designated Fixed Rate Cumulative Perpetual Preferred Stock, Series CD (the “CDCI Preferred Shares”). On the same day, and pursuant to the terms of the letter agreement between the Company and Treasury, the Company issued an additional 12,123 CDCI Preferred Shares to Treasury for a purchase price of $12,123,000. As a result of the CDCI Transactions, the Company is no longer participating in the TARP Capital Purchase Program being administered by Treasury and is now participating in Treasury’s TARP Community Development Capital Initiative (the “CDCI”). The terms of the CDCI Transactions are more fully set forth in the Exchange Letter Agreement and the Purchase Letter Agreement.

The Letter Agreement, pursuant to which the Preferred Shares were exchanged, contains limitations on the payment of dividends on the common stock to no more than 100% of the aggregate per share dividend and distributions for the immediate prior fiscal year (dividends of $0.15 per share were declared and paid in 2010, 2011, and 2012) and on the Company’s ability to repurchase its common stock, and continues to subject the Company to certain of the executive compensation limitations included in the Emergency Economic Stabilization Act of 2008 (EESA), as previously disclosed by the Company.

The most significant difference in terms between the CDCI Preferred Shares and the CPP Preferred Shares is the dividend rate applicable to each. The CPP Preferred Shares entitled the holder to an annual dividend of 5% of the liquidation value of the shares, payable quarterly in arrears; by contrast, the CDCI Preferred Shares entitle the holder to an annual dividend of 2% of the liquidation value of the shares, payable quarterly in arrears. Other differences in terms between the CDCI Preferred Shares and the CPP Preferred Shares, include, without limitation, the restrictions on common stock dividends and on redemption of common stock and other securities exist. The terms of the CDCI Preferred Shares are more fully set forth in the Articles of Amendment creating the CDCI Preferred Shares, which Articles of Amendment were filed with the Mississippi Secretary of State on September 27, 2010.

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As a condition to participation in the CDCI, the Company was required to obtain certification as a Community Development Financial Institution (a “CDFI”) from Treasury’s Community Development Financial Fund. On September 28, 2010, the Company was notified that its application for CDFI certification had been approved. In order to become certified and maintain its certification as a CDFI, the Company is required to meet the CDFI eligibility requirements set forth in 12 C.F.R. 1805.201(b).

NOTE T - SUBSEQUENT EVENTS

On January 31, 2013, The First Bancshares, Inc. a Mississippi corporation (“The First”) entered into an Acquisition Agreement (the “Agreement”) with First Baldwin Bancshares, Inc., an Alabama corporation (“Baldwin”). The Agreement provides that, upon the terms and subject to the conditions set forth in the Agreement, The First will acquire all of the outstanding shares (the “Acquisition”) of Baldwin’s wholly-owned subsidiary, First National Bank of Baldwin County, a national banking association (“FNB”). Subject to the terms and conditions of the Agreement, which has been approved by the Boards of Directors of The First and Baldwin, Baldwin intends to file a voluntary bankruptcy petition under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court (“Bankruptcy Court”) and seek Bankruptcy Court approval of the Agreement and the Acquisition through a Chapter 11 plan. Upon approval by the Bankruptcy Court and consummation of the Acquisition, all outstanding FNB common stock will be sold to The First for cash consideration not to exceed $3,300,000 (the “Purchase Price”). Each outstanding share of FNB common stock will remain outstanding and be unaffected by the Acquisition.

On March 22, 2013, The First Bancshares, Inc. announced the successful completion of a private placement of Series D Nonvoting Convertible Preferred Stock, $1 par value. The Company raised $20 million in new capital through a private placement of 1,951,220 shares of its Series D Nonvoting Convertible Preferred Stock at a price of $10.25 per share.

NOTE U - PARENT COMPANY FINANCIAL INFORMATION

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

Condensed Balance Sheets

	December 31,
	2012		2011
Assets:
Cash and cash equivalents	$	48,525	$	6,391
Investment in subsidiary bank		74,851,305		69,263,750
Investments in statutory trusts		310,000		310,000
Other securities		100,000		100,000
Premises and equipment		368,623		368,623
Other		599,192		741,012
	$	76,277,645	$	70,789,776
Liabilities and Stockholders’ Equity:
Subordinated debentures	$	10,310,000	$	10,310,000
Other		82,179		54,495
Stockholders’ equity		65,885,466		60,425,281
	$	76,277,645	$	70,789,776

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Condensed Statements of Income

	Years Ended December 31,
	2012		2011
Income:
Interest and dividends	$	6,212	$	5,626
Dividend income		980,000		530,000
Other		-		-
		986,212		535,626
Expenses:
Interest on borrowed funds		206,594		187,117
Legal		112,203		820,935
Other		404,447		313,754
		723,244		1,321,806
Income (loss) before income taxes and equity in undistributed income of subsidiary		262,968		(786,180	)
Income tax benefit		169,274		691,846
Income (loss) before equity in undistributed income of subsidiary		432,242		(94,334	)
Equity in undistributed income of subsidiary		3,616,525		2,965,772
Net income	$	4,048,767	$	2,871,438

Condensed Statements of Cash Flows

	Years Ended December 31,
	2012			2011
Cash flows from operating activities:
Net income	$	4,048,767		$	2,871,438
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in undistributed income of subsidiary		(3,616,525	)		(2,965,772	)
Restricted stock expense		263,216			119,320
Other, net		157,883			(542,585	)
Net cash provided by (used in) operating activities		853,341			(517,599	)
Cash flows from investing activities:
Investment in subsidiary bank		-			(10,500,000	)
Net cash used in investing activities		-			(10,500,000	)
Cash flows from financing activities:
Dividends paid on common stock		(453,105	)		(452,983	)
Dividends paid on preferred stock		(342,460	)		(342,460	)
Repurchase of restricted stock for payment of taxes		(15,642	)		-
Net cash used in financing activities		(811,207	)		(795,443	)
Net  increase (decrease) in cash and cash equivalents		42,134			(11,813,042	)
Cash and cash equivalents at beginning of year		6,391			11,819,433
Cash and cash equivalents at end of year	$	48,525		$	6,391

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

	Three Months Ended
	March 31			June 30			Sept. 30		Dec. 31
	(In thousands, except per share amounts)
2012
Total interest income	$	6,666		$	6,609		$	6,459	$	6,597
Total interest expense		1,181			1,101			1,028		827
Net interest income		5,485			5,508			5,431		5,770
Provision for loan losses		152			221			371		484
Net interest income after provision for loan losses		5,333			5,287			5,060		5,286
Total non-interest income		1,475			1,510			1,518		1,821
Total non-interest expense		5,522			5,414			5,437		5,791
Income tax expense		315			346			269		148
Net income		971			1,037			872		1,168
Preferred dividends and stock accretion		106			106			106		106
Net income applicable to common stockholders	$	865		$	931		$	766	$	1,062
Per common share:
Net income, basic	$	.28		$	.30		$	.25	$	.34
Net income, diluted		.28			.30			.24		.34
Cash dividends declared		.0375			.0375			.0375		.0375
2011
Total interest income	$	5,733		$	5,941		$	5,999	$	6,802
Total interest expense		1,482			1,430			1,267		1,217
Net interest income		4,251			4,511			4,732		5,585
Provision for loan losses		348			305			230		585
Net interest income after provision for loan losses		3,903			4,206			4,502		5,000
Total non-interest income		915			1,024			1,088		1,570
Total non-interest expense		4,524			4,293			4,479		5,574
Income tax expense		(207	)		267			365		42
Net income		501			670			746		954
Preferred dividends and stock accretion		86			85			86		85
Net income applicable to common stockholders	$	415		$	585	��	$	660	$	869
Per common share:
Net income, basic	$	.14		$	.19		$	.22	$	.28
Net income, diluted		.14			.19			.21		.28
Cash dividends declared		.0375			.0375			.0375		.0375

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CORPORATE INFORMATION

ANNUAL MEETING

The Annual Meeting of Shareholders will be held on Thursday, May 23, 2013 at the principal offices of The First, A National Banking Association, located at 6480 U.S. Highway 98 West, Hattiesburg, MS 39402. All Shareholders are invited.

STOCK TRANSFER AGENT	INDEPENDENT AUDITOR
Registrar and Transfer Company	T. E. Lott & Company
10 Commerce Blvd.	A Professional Association
Cranford, NJ  07016	Certified Public Accountants
1-800-368-5948	Columbus, Mississippi

FINANCIAL INFORMATION

Copies of the form 10-K Annual Report to the Securities and Exchange Commission, including financial statements and financial statement schedules, are available without charge upon request at:

The First Bancshares, Inc.

6480 U.S. Highway 98 West (39402)

P. O. Box 15549

Hattiesburg, MS 39404-5549

The Form 10-K Annual Report to the Securities and Exchange Commission, including financial statements and financial statement schedules, serves as the alternative annual disclosure statement pursuant to 12 CFR §350.0.

STOCK INFORMATION

The Company’s articles of incorporation authorize it to issue up to 10,000,000 shares of Common Stock. As of March 21, 2013, the Company had 3,142,235 shares outstanding, held by shareholders of record.

The Common Stock of the Company is traded on the NASDAQ Global Market under the symbol FBMS.

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