EXHIBIT 13

THE FIRST BANCSHARES, INC.

2013 ANNUAL REPORT

SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS

(Dollars In Thousands, Except Per Share Data)

	December 31,
	2013		2012		2011		2010		2009
Earnings:
Net interest income	$	28,401	$	22,194	$	19,079	$	16,334	$	14,390
Provision for loan losses		1,076		1,228		1,468		983		1,206
Noninterest income		7,083		6,324		4,598		3,895		4,397
Noninterest expense		28,165		22,164		18,870		15,843		15,323
Net income		4,639		4,049		2,871		2,549		1,743
Net income applicable to common Stockholders		4,215		3,624		2,529		2,233		1,461
Per  common share data:
Basic net income per Share	$	.98	$	1.17	$	.83	$	.74	$	.49
Diluted net income per Share		.96		1.16		.82		.74		.49
Per share data:
Basic net income per share	$	1.07	$	1.31	$	.94	$	.84	$	.58
Diluted net income per share		1.06		1.29		.93		.84		.58
Selected Year End
Balances:
Total assets	$	940,890	$	721,385	$	681,413	$	503,045	$	477,552
Securities		258,023		226,301		221,176		107,136		114,618
Loans, net of allowance		577,574		408,970		383,418		327,956		314,033
Deposits		779,971		596,627		573,394		396,479		383,754
Stockholders’ equity		85,108		65,885		60,425		57,098		43,617

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, 2013 when compared to the years 2012 and 2011. 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 2013.

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 has 25 locations in South Mississippi, South Alabama and 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.

6

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 $721.4 million in total assets, and $596.6 million in deposits at December 31, 2012 to approximately $940.9 million in total assets, and $780.0 million in deposits at December 31, 2013. Loans net of allowance for loan losses increased from $409.0 million at December 31, 2012 to approximately $577.6 at December 31, 2013. The Company increased from $65.9 million in shareholders’ equity at December 31, 2012 to approximately $85.1 million at December 31, 2013. The First reported net income of $5,892,000 and $4,597,000 for the years ended December 31, 2013, and 2012, respectively. For the years ended December 31, 2013 and 2012, the Company reported consolidated net income applicable to common stockholders of $4,215,000 and $3,624,000, 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,
	2013		2012		2011		2010		2009
Earnings:
Net interest income	$	28,401	$	22,194	$	19,079	$	16,334	$	14,390
Provision for loan losses		1,076		1,228		1,468		983		1,206
Noninterest income		7,083		6,324		4,598		3,895		4,397
Noninterest expense		28,165		22,164		18,870		15,843		15,323
Net income		4,639		4,049		2,871		2,549		1,743
Net income applicable to common Stockholders		4,215		3,624		2,529		2,233		1,461
Per  common share data:
Basic net income per Share	$	.98	$	1.17	$	.83	$	.74	$	.49
Diluted net income per Share		.96		1.16		.82		.74		.49
Per share data:
Basic net income per share	$	1.07	$	1.31	$	.94	$	.84	$	.58
Diluted net income per share		1.06		1.29		.93		.84		.58
Selected Year End Balances:
Total assets	$	940,890	$	721,385	$	681,413	$	503,045	$	477,552
Securities		258,023		226,301		221,176		107,136		114,618
Loans, net of allowance		577,574		408,970		383,418		327,956		314,033
Deposits		779,971		596,627		573,394		396,479		383,754
Stockholders’ equity		85,108		65,885		60,425		57,098		43,617

Results of Operations

The following is a summary of the results of operations by The First for the years ended December 31, 2013 and 2012.

	2013		2012
	(In thousands)
Interest income	$	31,312	$	26,325
Interest expense		2,731		3,930
Net interest income		28,581		22,395
Provision for loan losses		1,076		1,228
Net interest income after provision for loan losses		27,505		21,167
Other income		7,083		6,324
Other expense		26,578		21,647
Income tax expense		2,115		1,247
Net income	$	5,895	$	4,597

8

The following reconciles the above table to the amounts reflected in the consolidated financial statements of the Company at December 31, 2013 and 2012:

	2013			2012
	(In thousands)
Net interest income:
Net interest income of The First	$	28,581		$	22,395
Intercompany eliminations		(180	)		(201	)
	$	28,401		$	22,194
Net income applicable to common stockholders:
Net income of  The First	$	5,892		$	4,597
Net loss of the Company, excluding intercompany accounts		(1,677	)		(973	)
	$	4,215		$	3,624

Consolidated Net Income

The Company reported consolidated net income applicable to common stockholders of approximately $4,215,067 for the year ended December 31, 2013, compared to a consolidated net income of $3,624,339 for the year ended December 31, 2012. The increase in income was attributable to an increase in net interest income of $6.2 million or 28.0%, and an increase of $.8 million or 12.0% in other income which were offset by an increase in other expenses of $6.0 million or 27.1%.

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 $28,401,000 for the year ended December 31, 2013, as compared to $22,194,000 for the year ended December 31, 2012. This increase was the direct result of increased loan volumes and decreased rates paid on interest-bearing liabilities during 2013 as compared to 2012. Average interest-bearing liabilities for the year 2013 were $728,322,000 compared to $534,998,000 for the year 2012. At December 31, 2013, the net interest spread, the difference between the yield on earning assets and the rates paid on interest-bearing liabilities, was 3.25% compared to 3.29% at December 31, 2012. The net interest margin (which is net interest income divided by average earning assets) was 3.31% for the year 2013 compared to 3.42% for the year 2012. Rates paid on average interest-bearing liabilities decreased from .77% for the year 2012 to .40% for the year 2013. 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 68.0% of average earning assets for the year 2013 compared to 59.8% for the year 2012.

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,
	2013								2012								2011
	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)	$	583,200		$	25,736		4.41	%	$	388,012		$	21,412		5.52	%	$	354,295		$	20,971		5.92	%
Securities		248,237			5,419		2.18	%		235,833			4,785		2.03	%		134,815			3,360		2.49	%
Federal funds sold (3)		18,564			62		.33	%		19,670			51		.26	%		5,486			72		1.31	%
Other		7,404			101		1.36	%		4,845			83		1.71	%		2,530			72		2.85	%
Total earning assets		857,405			31,318		3.65	%		648,360			26,331		4.06	%		497,126			24,475		4.92	%
Cash and due from banks		25,447								16,699								47,632
Premises and equipment		30,816								22,633								17,401
Other assets		33,314								32,337								21,613
Allowance for loan losses		(5,240	)							(4,457	)							(4,340	)
Total assets	$	941,742							$	715,572							$	579,432
Liabilities
Interest-bearing liabilities	$	728,322		$	2,917		.40	%	$	534,998		$	4,137		.77	%	$	445,893		$	5,396		1.21	%
Demand deposits (1)		115,909								107,392								65,830
Other liabilities		12,430								10,036								18,757
Shareholders’ equity		85,081								63,146								48,952
Total liabilities and shareholders’ equity	$	941,742							$	715,572							$	579,432
Net interest spread							3.25	%							3.29	%							3.71	%
Net yield on interest-earning assets				$	28,401		3.31	%				$	22,194		3.42	%				$	19,079		3.84	%

(1) All loans and deposits were made to borrowers in the United States. Includes nonaccrual loans of $3,181, $3,589, and $5,125, respectively, during the periods presented. Loans include held for sale loans.

(2) Includes loan fees of $525, $430, and $418 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,
	2013 versus 2012 Increase (decrease) due to									2012 versus 2011 Increase (decrease) due to
	Volume			Rate			Net			Volume		Rate			Net
	(Dollars in thousands)
Earning Assets
Loans	$	10,774		$	(6,450	)	$	4,324		$	1,993	$	(1,552	)	$	441
Securities		270			374			644			2,518		(1,093	)		1,425
Federal funds sold		(3	)		13			10			186		(207	)		(21	)
Other short-term investments		35			(26	)		9			66		(55	)		11
Total interest income		11,076			(6,089	)		4,987			4,763		(2,907	)		1,856
Interest-Bearing Liabilities
Interest-bearing transaction accounts		460			(748	)		(288	)		361		(785	)		(424	)
Money market accounts		123			(154	)		(31	)		116		(185	)		(69	)
Savings deposits		3			(10	)		(7	)		23		(9	)		14
Time deposits		172			(886	)		(714	)		36		(683	)		(647	)
Borrowed funds		97			(277	)		(180	)		542		(675	)		(133	)
Total interest expense		855			(2,075	)		(1,220	)		1,078		(2,337	)		(1,259	)
Net interest income	$	10,221		$	(4,014	)	$	6,207		$	3,685	$	(570	)	$	3,115

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, 2011, 2012, and 2013.

	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	%

	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	%

12

	December 31, 2013
	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	$	89,314		$	98,315		$	187,629		$	395,673		$	583,302
Securities (2)		10,114			16,006			26,120			231,903			258,023
Funds sold and other		967			14,205			15,172			-			15,172
Total earning assets	$	100,395		$	128,526		$	228,921		$	627,576		$	856,497
Liabilities
Interest-bearing liabilities:
Interest-bearing deposits:
NOW accounts (1)	$	-		$	240,513		$	240,513		$	-		$	240,513
Money market accounts		107,564			-			107,564			-			107,564
Savings deposits (1)		-			55,113			55,113			-			55,113
Time deposits		46,875			87,475			134,350			68,637			202,987
Total interest-bearing deposits		154,439			383,101			537,540			68,637			606,177
Borrowed funds (3)		37,000			4,000			41,000			11,000			52,000
Total interest-bearing liabilities		191,439			387,101			578,540			79,637			658,177
Interest-sensitivity gap per period	$	(91,044	)	$	(258,575	)	$	(349,619	)	$	547,939		$	198,320
Cumulative gap at December 31, 2013	$	(91,044	)	$	(349,619	)	$	(349,619	)	$	198,320		$	198,320
Ratio of cumulative gap to total earning assets at  December 31, 2013		(10.6	)%		(40.8	)%		(40.8	)%		23.2	%

(1) NOW and savings accounts are subject to immediate withdrawal and repricing. These deposits do not tend to immediately react to changes in interest rates and the Company believes these deposits are 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.

13

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

14

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, 2013, 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 obtained on these loans and impairment worksheets are prepared to determine if impairment exists.  This method takes into account any expected expenses related to the disposal of the subject collateral.  Specific allowances for these loans are done on a per loan basis as each loan is reviewed for impairment.  Updated appraisals are ordered on real estate loans and updated valuations are ordered on non real estate loans to determine actual market value. 

At December 31, 2013, the consolidated allowance for loan losses amounted to approximately $5.7 million, or .98% of outstanding loans or 1.21% of loans excluding those booked at fair value due to business combination. At December 31, 2012, the allowance for loan losses amounted to approximately $4.7 million, which was 1.14% of outstanding loans. The Company’s provision for loan losses was $1,076,000 for the year ended December 31, 2013, compared to $1,228,000 for the year ended December 31, 2012.

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.

16

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, 2013 and 2012.

	December 31, 2013
	(In thousands)
	Past Due 30 to 89 Days		Past Due 90 days or  more and still accruing		Non-Accrual
Real Estate-construction	$	478	$	-	$	212
Real Estate-mortgage		4,696		143		2,453
Real Estate-non farm nonresidential		252		-		507
Commercial		12		-		9
Consumer		115		16		-
Total	$	5,553	$	159	$	3,181

	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

Total nonaccrual loans at December 31, 2013 amounted to $3.2 million which was a decrease of $.2 million from the December 31, 2012 amount of $3.4 million. Management believes these relationships were adequately reserved at December 31, 2013. Restructured loans not reported as past due or nonaccrual at December 31, 2013 amounted to $1.6 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, 2013 and December 31, 2012, The First had potential problem loans of $17,070,000 and $19,164,000, respectively. This represents a decrease of $2,094,000.

17

Consolidated Allowance For Loan Losses

	Years Ended December 31,
	2013			2012			2011			2010			2009
Average loans outstanding	$	583,200		$	388,012		$	354,295		$	328,950		$	320,495
Loans outstanding at year end	$	583,302		$	413,697		$	387,929		$	332,573		$	318,795
Total nonaccrual loans	$	3,181		$	3,401		$	5,125		$	4,212		$	4,367
Beginning balance of allowance	$	4,727		$	4,511		$	4,617		$	4,762		$	4,785
Loans charged-off		(759	)		(1,190	)		(1,987	)		(1,370	)		(1,396	)
Total loans charged-off		(759	)		(1,190	)		(1,987	)		(1,370	)		(1,396	)
Total recoveries		684			178			413			242			167
Net loans charged-off		(75	)		(1,012	)		(1,574	)		(1,128	)		(1,229	)
Acquisition		-			-			-			-			-
Provision for loan losses		1,076			1,228			1,468			983			1,206
Balance at year end	$	5,728		$	4,727		$	4,511		$	4,617		$	4,762
Net charge-offs to average loans		.01	%		.26	%		.44	%		.34	%		.38	%
Allowance as percent of total loans		.98	%		1.14	%		1.16	%		1.39	%		1.49	%
Nonperforming loans as a percentage of total loans		.55	%		.82	%		1.32	%		1.27	%		1.37	%
Allowance as a multiple of nonaccrual loans		1.8	X		1.4	X		.88	X		1.1	X		1.1	X

At December 31, 2013, the components of the allowance for loan losses consisted of the following:

	Allowance
	(In thousands)
Allocated:
Impaired loans	$	849
Graded loans		4,879
	$	5,728

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

18

The following table represents the activity of the allowance for loan losses for the years 2013 and 2012.

Analysis of the Allowance for Loan Losses

	Years Ended December 31,
	2013			2012
	(Dollars in thousands)
Balance at beginning of year	$	4,727		$	4,511
Charge-offs:
Real Estate-construction		(305	)		(102	)
Real Estate-mortgage		(152	)		(559	)
Real Estate-nonfarm nonresidential		(-	)		(160	)
Commercial		(105	)		(166	)
Consumer		(197	)		(203	)
Total		(759	)		(1,190	)
Recoveries:
Real Estate-construction		133			14
Real Estate-mortgage		393			37
Real Estate-nonfarm nonresidential		74			32
Commercial		18			25
Consumer		66			70
Total		684			178
Net Charge-offs		(75	)		(1,012	)
Provision for Loan Losses		1,076			1,228
Balance at end of year	$	5,728		$	4,727

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, 2013 and 2012.

Allocation of the Allowance for Loan Losses

	December 31, 2013
	(Dollars in thousands)
	Amount		% of loans in each category to total loans
Commercial Non Real Estate	$	582		14.0	%
Commercial Real Estate		3,384		57.2	%
Consumer Real Estate		1,427		25.4	%
Consumer		173		3.4	%
Unallocated		162		-
Total	$	5,278		100	%

	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	%

19

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 increased $760,000 or 12.0% during 2013 to $7,083,000 from $6,324,000 for the year ended December 31, 2012. The deposit activity fees were $3,979,000 for 2013 compared to $3,432,000 for 2012. Other service charges decreased by $240,000 or 9.9% from $2,427,000 for the year ended December 31, 2012, to $2,187,000 for the year ended December 31, 2013. Impairment losses on investment securities were $0 for 2013 as compared to $0 for 2012.

Noninterest expense increased from $22.2 million for the year ended December 31, 2012 to $28.2 million for the year ended December 31, 2013. The Company experienced slight increases in most expense categories. The largestincrease was in salaries and employee benefits, which increased by $2.9 million in 2013 as compared to 2012. These increases were due in part to the addition of the Baldwin County branches and staff.

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

Noninterest Expense

	Years ended December 31,
	2013		2012		2011
	(In thousands)
Salaries and employee benefits	$	14,855	$	12,001	$	9,679
Occupancy		2,351		1,797		1,356
Equipment		1,568		1,435		1,114
Marketing and public relations		451		329		353
Data processing		169		85		46
Supplies and printing		455		425		416
Telephone		731		533		346
Correspondent services		74		96		105
Deposit and other insurance		834		734		865
Professional and consulting fees		2,433		747		1,825
Postage		303		252		236
ATM fees		575		434		310
Other		3,366		3,296		2,219
Total	$	28,165	$	22,164	$	18,870

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.

20

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, 2013 and 2012, respectively, average loans accounted for 68.0% and 59.8% of average earning assets. Management attempts to control and counterbalance the inherent credit and liquidity risks associated with the higher loan yields without sacrificing asset quality to achieve its asset mix goals. Loans averaged $583.2 million during 2013, as compared to $388.0 million during 2012, and $354.3 million during 2011.

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

Composition of Loan Portfolio

	December 31,
	2013						2012						2011
				Percent						Percent						Percent
	Amount			Of Total			Amount			of Total			Amount			of Total
	(Dollars in thousands)
Mortgage loans held for sale	$	3,680			0.6	%	$	5,585			1.4	%	$	2,906			0.7	%
Commercial, financial and agricultural		81,792			14.0	%		53,234			12.9	%		48,385			12.5	%
Real Estate:
Mortgage-commercial		212,388			36.4	%		142,046			34.3	%		138,943			35.8	%
Mortgage-residential		202,343			34.7	%		140,703			34.0	%		117,692			30.3	%
Construction		67,287			11.5	%		57,529			13.9	%		63,357			16.3	%
Consumer and other		15,812			2.8	%		14,600			3.5	%		16,645			4.4	%
Total loans		583,302			100	%		413,697			100	%		387,928			100	%
Allowance for loan losses		(5,728	)					(4,727	)					(4,511	)
Net loans	$	577,574					$	408,970					$	383,417

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.

21

The following table sets forth the Company's commercial and construction real estate loans maturing within specified intervals at December 31, 2013.

Loan Maturity Schedule and Sensitivity to Changes in Interest Rates

	December 31, 2013
Type	One Year or Less		Over One Year Through Five Years		Over Five Years		Total
	(In thousands)
Commercial, financial and agricultural	$	49,237	$	27,785	$	4,770	$	81,792
Real estate – construction		42,242		25,045		-		67,287
	$	91,479	$	52,830	$	4,770	$	149,079
Loans maturing after one year with:							$	43,826
Fixed interest rates								13,774
Floating interest rates							$	57,600

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 $248.2 million in 2013, as compared to $235.8 million in 2012 and $134.8 million in 2011. This represents 29.0%, 36.4%, and 27.1% of the average earning assets for the years ended December 31, 2013, 2012, and 2011, respectively. At December 31, 2013, investment securities were $258.0 million and represented 30.1% of earning assets. The Company attempts to maintain a portfolio of high quality, highly liquid investments with returns competitive with short-term U.S. Treasury or agency obligations. This objective is particularly important as the Company focuses on growing its loan portfolio. The Company primarily invests in securities of U.S. Government agencies, municipals, and corporate obligations with maturities up to five years.

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

Securities Portfolio

	December 31,
	2013		2012		2011
	(In thousands)
Available-for-sale
U. S. Government agencies	$	108,148	$	98,326	$	103,004
States and municipal subdivisions		108,079		98,910		94,258
Corporate obligations		26,852		16,187		14,293
Mutual finds		972		970		974
Total available-for-sale		244,051		214,393		212,529
Held-to-maturity
U.S. Government agencies		2,438		2,470		2
States and municipal subdivisions		6,000		6,000		6,000
Total held-to-maturity		8,438		8,470		6,002
Total	$	252,489	$	222,863	$	218,531

22

The following table shows, at carrying value, the scheduled maturities and average yields of securities held at December 31, 2013.

Investment Securities Maturity Distribution and Yields (1)

	December 31, 2013
						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)	$	3,566		.98	%	$	25,919		1.11	%	$	477		1.00	%	$	-		-
States and municipal subdivisions		12,662		2.70	%		44,060		2.88	%		30,738		4.05	%		20,619		4.83	%
Corporate obligations and other		2,035		1.50	%		11,368		1.92	%		7,686		2.71	%		6,734		1.76	%
Total investment securities available-for-sale	$	18,263				$	81,347				$	38,901				$	27,353

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

(2) Excludes mortgage-backed securities totaling $2.4 million with a yield of 2.63%.

(3) Excludes mortgage-backed securities totaling $78.2 million with a yield of 2.27% 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 $18.6 million in 2013, $19.7 million in 2012, and $5.5 million in 2011. At December 31, 2013, and December 31, 2012, short-term investments totaled $967,000 and $1,064,000, 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 $125.1 million, or 26.3% in 2012. Average total deposits increased $160.0 million, or 26.6% in 2013. At December 31, 2013, total deposits were $780.0 million, compared to $596.6 million a year earlier, an increase of $183.3 million, or 30.7%.

23

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

Deposits

	December 31,
(Dollars in thousands)	2013					2012					2011
			Percent of					Percent of					Percent of
	Amount		Deposits			Amount		Deposits			Amount		Deposits
Noninterest-bearing accounts	$	173,793		22.3	%	$	109,624		18.4	%	$	107,129		18.7	%
NOW accounts		240,514		30.8	%		230,589		38.6	%		200,210		34.9	%
Money market accounts		107,564		13.8	%		47,325		7.9	%		43,296		7.6	%
Savings accounts		55,113		7.1	%		48,153		8.1	%		45,644		8.0	%
Time deposits less than $100,000		86,363		11.1	%		69,115		11.6	%		77,569		13.5	%
Time deposits of $100,000 or over		116,624		14.9	%		91,821		15.4	%		99,546		17.3	%
Total deposits	$	779,971		100	%	$	596,627		100	%	$	573,394		100	%

The Company’s loan-to-deposit ratio was 74.3% at December 31, 2013 and 68.4% at December 31, 2012. The loan-to-deposit ratio averaged 76.6% during 2013. 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 $663.3 million at December 31, 2013 and $504.8 million at December 31, 2012. 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, 2013, 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, 2013	$	28,701	$	49,487	$	38,436	$	116,624

Borrowed Funds

Borrowed funds consist of advances from the Federal Home Loan Bank of Dallas, federal funds purchased and reverse repurchase agreements. At December 31, 2013, advances from the FHLB totaled $47.0 million compared to $31.8 million at December 31, 2012. 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, 2013 and December 31, 2012.

24

Reverse Repurchase Agreements consist of one $5,000,000 agreement. The agreement is secured by securities with a fair value of $6,530,592 at December 31, 2013 and $6,421,762 at December 31, 2012. The maturity date of the remaining agreement is September 26, 2017 with a rate of 3.81%.

Subordinated Debentures

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

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

Capital

Total shareholders’ equity as of December 31, 2013, was $85.1 million, an increase of $19.2 million or approximately 29.2%, compared with shareholders' equity of $65.9 million as of December 31, 2012.

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, 2013 and 2012.

25

Analysis of Capital

	Adequately			Well			The Company						The First
Capital Ratios	Capitalized			Capitalized			December 31,						December 31,
							2013			2012			2013			2012
Leverage		4.0	%		5.0	%		9.0	%		8.6	%		8.9	%		8.4	%
Risk-based capital:
Tier 1		4.0	%		6.0	%		12.5	%		12.8	%		12.4	%		12.7	%
Total		8.0	%		10.0	%		13.4	%		13.8	%		13.3	%		13.6	%

Ratios

	2013			2012			2011
Return on assets (net income applicable to common stockholders divided by average total assets)		.45	%		.51	%		.44	%
Return on equity (net income applicable to common stockholders divided by average equity)		5.0	%		5.7	%		5.2	%
Dividend payout ratio (dividends per share divided by net income per common share)		15.6	%		12.9	%		18.3	%
Equity to asset ratio (average equity divided by average total assets)		9.0	%		8.8	%		8.4	%

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 $18.6 million during the year ended December 31, 2013 and totaled $10.9 million at December 31, 2013. 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, 2013, advances available totaled approximately $181.8 million of which $47.0 million had been drawn, or used for letters of credit.

26

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.

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, 2013 and 2012, and the related consolidated statements of income, comprehensive income (loss), changes in stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2013. 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, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

	/s/ T. E. LOTT & COMPANY
Columbus, Mississippi
March 31, 2014

28

THE FIRST BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2013 AND 2012

	2013			2012
ASSETS
Cash and due from banks	$	24,079,590		$	20,225,123
Interest-bearing deposits with banks		14,205,335			9,587,601
Federal funds sold		967,000			1,064,000
Total cash and cash equivalents		39,251,925			30,876,724
Held-to-maturity securities (fair value of  $9,624,427 in 2013 and $7,055,499 in 2012)		8,438,435			8,470,103
Available-for-sale securities		244,050,671			214,392,682
Other securities		5,533,850			3,437,750
Total securities		258,022,956			226,300,535
Loans held for sale		3,679,521			5,585,373
Loans, net of allowance for loan losses of $5,727,800 in 2013 and $4,726,618 in 2012		573,894,868			403,384,642
Interest receivable		3,291,887			2,887,287
Premises and equipment		32,071,741			22,242,838
Cash surrender value of life insurance		6,593,403			6,441,109
Goodwill		10,620,814			9,362,498
Other assets		13,462,960			14,304,274
Total assets	$	940,890,075		$	721,385,280
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	173,793,894		$	109,624,640
Interest-bearing		606,177,141			487,001,945
Total deposits		779,971,035			596,626,585
Interest payable		399,976			212,041
Borrowed funds		52,000,000			36,770,773
Subordinated debentures		10,310,000			10,310,000
Other liabilities		13,100,724			11,580,415
Total liabilities		855,781,735			655,499,814
Stockholders’ Equity:
Preferred stock, no par value, $1,000 per share liquidation, 10,000,000 shares authorized; 17,123 shares issued and outstanding in 2013 and 2012, respectively		17,102,507			17,020,539
Common stock, par value $1 per share: 10,000,000 shares authorized; 5,122,941 and 3,133,596 shares issued and outstanding  in 2013 and 2012, respectively		5,122,941			3,133,596
Additional paid-in capital		42,086,463			23,710,775
Retained earnings		22,508,918			19,951,173
Accumulated other comprehensive income (loss)		(1,248,844	)		2,533,028
Treasury stock, at cost		(463,645	)		(463,645	)
Total stockholders’ equity		85,108,340			65,885,466
Total liabilities and stockholders’ equity	$	940,890,075		$	721,385,280

The accompanying notes are an integral part of these statements.

29

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2013 AND 2012

	2013			2012
INTEREST INCOME
Interest and fees on loans	$	25,736,169		$	21,412,469
Interest and dividends on securities:
Taxable interest and dividends		3,279,367			2,744,643
Tax-exempt interest		2,140,084			2,040,412
Interest on federal funds sold		62,244			50,689
Interest on deposits in banks		100,169			82,716
Total interest income		31,318,033			26,330,929
INTEREST EXPENSE
Interest on time deposits of $100,000 or more		698,580			1,050,138
Interest on other deposits		1,601,024			2,016,490
Interest on borrowed funds		617,654			1,069,988
Total interest expense		2,917,258			4,136,616
Net interest income		28,400,775			22,194,313
Provision for loan losses		1,075,983			1,228,016
Net interest income after provision for loan losses		27,324,792			20,966,297
OTHER INCOME
Service charges on deposit accounts		3,979,159			3,431,579
Other service charges and fees		2,187,229			2,426,759
Bank owned life insurance income		152,294			170,918
Loss on sale of other real estate		(76,532	)		(55,426	)
Other		841,147			349,922
Total other income		7,083,297			6,323,752
OTHER EXPENSE
Salaries		12,216,098			10,059,380
Employee benefits		2,638,558			1,941,330
Occupancy		2,351,009			1,797,347
Furniture and equipment		1,568,113			1,435,153
Supplies and printing		455,443			425,086
Professional and consulting fees		2,433,111			746,941
Marketing and public relations		451,018			329,362
FDIC and OCC assessments		766,503			681,540
Other		5,285,148			4,747,764
Total other expense		28,165,001			22,163,903

30

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2013 AND 2012

Continued:	2013		2012
Income before income taxes		6,243,088		5,126,146
Income taxes		1,603,593		1,077,379
Net income		4,639,495		4,048,767
Preferred dividends and stock accretion		424,428		424,428
Net income applicable to common stockholders	$	4,215,067	$	3,624,339
Net income per share:
Basic	$	1.07	$	1.31
Diluted		1.06		1.29
Net income applicable to common stockholders:
Basic	$	.98	$	1.17
Diluted		.96		1.16

The accompanying notes are an integral part of these statements.

31

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

YEARS ENDED DECEMBER 31, 2013 AND 2012

	2013			2012
Net income	$	4,639,495		$	4,048,767
Other comprehensive income (loss):
Unrealized gains on securities:
Unrealized holding gains (losses) arising during the period		(5,676,942	)		3,022,776
Plus reclassification adjustment for losses included in net income		-			-
		(5,676,942	)		3,022,776
Unrealized holding losses on loans held for sale		(55,967	)		(36,365	)
Income tax benefit (expense)		1,951,037			(1,015,380	)
Other comprehensive income (loss)		(3,781,872	)		1,971,031
Comprehensive income	$	857,623		$	6,019,798

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, 2013 AND 2012

	Common Stock			Preferred Stock		Stock Warrants		Additional Paid-in Capital			Retained Earnings			Accum- ulated Other Compre- hensive Income (Loss)			Treasury Stock			Total
Balance, January 1, 2012	$	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
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
Net income 2013		-			-		-		-			4,639,495			-			-			4,639,495
Other comprehensive income		-			-		-		-			-			(3,781,872	)		-			(3,781,872	)
Dividends on preferred stock		-			-		-		-			(342,460	)		-			-			(342,460	)
Cash dividend declared, $.15 per common share		-			-		-		-			(615,781	)		-			-			(615,781	)

33

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 2013 AND 2012

Continued:	Common Stock			Preferred Stock		Stock Warrants		Additional Paid-in Capital			Retained Earnings			Accum- ulated Other Compre- hensive Income (Loss)			Treasury Stock			Total
Grant of restricted stock		39,913			-		-		(39,913	)		-			-			-			-
Compensation cost on restricted stock		-			-		-		391,777			-			-			-			391,777
Preferred stock accretion		-			81,968		-		-			(81,968	)		-			-			-
Repurchase of restricted stock for payment of taxes		(1,788	)		-		-		(24,961	)		-			-			-			(26,749	)
Issuance of 1,951,220 common shares		1,951,220			-		-		18,048,785			(1,041,541	)		-			-			18,958,464
Balance, December 31, 2013	$	5,122,941		$	17,102,507	$	283,738	$	41,802,725		$	22,508,918		$	(1,248,844	)	$	(463,645	)	$	85,108,340

The accompanying notes are an integral part of these statements.

34

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2013 AND 2012

	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	4,639,495		$	4,048,767
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,915,398			1,724,050
FHLB Stock dividends		(4,100	)		(3,300	)
Provision for loan losses		1,075,983			1,228,016
Deferred income taxes		1,707,403			(136,348	)
Restricted stock expense		391,777			263,216
Increase in cash value of life insurance		(152,294	)		(170,918	)
Amortization and accretion, net		(107,170	)		789,999
Writedown of bank property		193,073			-
Loss on sale/writedown of other real estate		350,023			526,957
Changes in:
Loans held for sale		2,671,885			(2,716,039	)
Interest receivable		(54,600	)		(115,611	)
Other assets		4,412,575			3,255,806
Interest payable		(153,065	)		(95,711	)
Other liabilities		1,108,980			1,624,587
Net cash provided by operating activities		17,995,363			10,223,471
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities		(83,415,975	)		(60,102,101	)
Purchases of other securities		(2,780,100	)		(1,409,300	)
Purchases of held-to-maturity securities		-			(2,489,450	)
Proceeds from maturities and calls of available-for-sale securities		52,237,989			59,198,136
Proceeds from redemption of other securities		788,200			620,100
Increase in loans		(50,100,144	)		(29,994,973	)
Net additions to premises and equipment		(746,724	)		(448,274	)
Cash received in excess of cash paid for acquisition		43,150,000			-
Net cash used in investing activities		(40,866,754	)		(34,625,862	)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in deposits		(1,971,438	)		23,170,427
Proceeds from borrowed funds		47,000,000			133,340,000
Repayment of borrowed funds		(31,770,773	)		(123,601,058	)
Dividends paid on common stock		(600,452	)		(453,105	)
Dividends paid on preferred stock		(342,460	)		(342,460	)
Repurchase of restricted stock for payment of taxes		(26,749	)		(15,642	)
Issuance of 1,951,220 common shares, net		18,958,464			-
Net cash provided by financing activities		31,246,592			32,098,162

The accompanying notes are an integral part of these statements.

35

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2013 AND 2012

Continued:	2013		2012
Net increase in cash and cash equivalents		8,375,201		7,695,771
Cash and cash equivalents at beginning of year		30,876,724		23,180,953
Cash and cash equivalents at end of year	$	39,251,925	$	30,876,724
Supplemental disclosures:
Cash paid during the year for:
Interest	$	2,729,323	$	4,232,327
Income taxes		980,490		1,562,850
Non-cash activities:
Transfers of loans to other real estate		2,136,687		6,198,006
Issuance of restricted stock grants		39,913		42,795

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, South Alabama, 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, 2013, the required reserve balance on deposit with the Federal Reserve Bank was approximately $8,706,000.

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, 2013 and 2012.

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.

38

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

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

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.

39

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, 2013 and 2012, other real estate totaled $4,470,249 and $6,782,422, respectively.

10. Goodwill and Other Intangible Assets

Goodwill totaled $10,620,814 and $9,362,498 for the years ended December 31, 2013 and 2012, respectively.

Goodwill totaling $1,258,316 acquired during the year ended December 31, 2013 was a result of the acquisition of First National Bank of Baldwin County. Footnote C to these consolidated financial statements provides additional information on the acquisition during 2013.

The Company performed the required annual impairment tests of goodwill as of December 1, 2013. 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 acquisition method recognized intangible assets, which are subject to amortization, and included in other assets in the accompanying consolidated balance sheets, include core deposit intangibles, amortized on a straight-line basis, over a 10 year average life. The definite-lived intangible assets had the following carrying values at December 31, 2013 and 2012.

	2013							2012
	Gross					Net		Gross					Net
	Carrying		Accumulated			Carrying		Carrying		Accumulated			Carrying
	Amount		Amortization			Amount		Amount		Amortization			Amount
(Dollars in thousands)
Core deposit intangibles	$	3,775	$	(1,098	)	$	2,677	$	3,095	$	(743	)	$	2,352

During 2013, the Company recorded $679,970 in core deposit intangible assets related to the deposits acquired in the Baldwin acquisition.

40

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

(dollars in thousands)
	Amount
Aggregate amortization expense for the year ended December 31:
2012	$	309
2013		355
Estimated amortization expense for the year ending December 31:
2014	$	377
2015		377
2016		360
2017		308
2018		308
Thereafter		947
	$	2,677

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, 2013 and 2012, 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, 2013 and 2012, was $419,873 and $278,330, respectively.

41

15. Statements of Cash Flows

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

16. Off-Balance Sheet Financial Instruments

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

17. Earnings Applicable to Common Stockholders

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

The following 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, 2013						December 31, 2012
	Net Income (Numerator)		Shares (Denominator)		Per Share Amount		Net Income (Numerator)		Shares (Denominator)		Per Share Amount
Basic per common share	$	4,215,067		4,319,485	$	.98	$	3,624,339		3,101,411	$	1.17
Effect of dilutive shares:
Restricted Stock				53,445						23,856
	$	4,215,067		4,372,930	$	.96	$	3,624,339		3,125,267	$	1.16

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

18. Reclassifications

Certain reclassifications have been made to the 2012 financial statements to conform with the classi-fications used in 2013. These reclassifications did not impact the Company's consolidated financial condition or results of operations.

42

19. Accounting Pronouncements

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 amendments did not have a material impact on the 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 was effective for interim and annual periods beginning after December 15, 2012. The Company adopted this standard on January 1, 2013. The effect of adopting this guidance increased the disclosures surrounding reclassification items, if any, out of accumulated other comprehensive income.

In February 2013, the FASB issued ASU No. 2013-04, “Liabilities – Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date.” The ASU requires entities to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. The measurement is the sum of both the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. Required disclosures include a description of the joint-and-several arrangement and the total outstanding amount of the obligation for all joint parties. ASU 2013-04 is effective for interim and annual periods beginning on or after December 15, 2013. The ASU should be applied retrospectively to obligations existing at the beginning of an entity’s fiscal year of adoption. Early adoption is permitted. The Company is currently evaluating the possible effects of this guidance on its financial statement disclosures.

In July 2013, the FASB issued ASU No. 2013-11, “Income Taxes – Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” The ASU requires an entity to present a unrecognized tax benefit, or a portion thereof, in the financial statements as a reduction to a deferred tax asset for an NOL carryforward, a similar tax loss, or a tax credit carryforward, except when the entity does not intend to use the deferred tax asset, or the item is not available as of the reporting date. ASU 2013-11 is effective for interim and annual periods beginning after December 15, 2013. Early adoption and retrospective application is permitted. The Company is currently evaluating the possible effects of this guidance on its financial statements.

43

NOTE C – BUSINESS COMBINATION

On April 30, 2013, the Company completed the acquisition of all of the outstanding shares of First National Bank of Baldwin County, a wholly-owned subsidiary of First Baldwin Bancshares, Inc., an Alabama corporation, which included five (5) branches and (1) loan production office located on the Alabama Gulf Coast in Baldwin County, Alabama.

In connection with the acquisition, the Company recorded $1.3 million of goodwill and $.7 million of core deposit intangible. The core deposit intangible will be expensed over 10 years. The Company acquired the $124.2 million loan portfolio at a fair value discount of $.5 million. The discount represents expected credit losses, adjustments to market interest rates and liquidity adjustments.

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

Purchase price:
Cash	$	3,300
Total purchase price		3,300
Identifiable assets:
Cash and due from banks		46,450
Investments		2,508
Loans and leases		124,165
Other Real Estate		87
Core deposit intangible		680
Personal and real property		10,655
Deferred tax asset		2,969
Other assets		1,034
Total assets		188,548
Liabilities and equity:
Deposits		185,771
Other liabilities		736
Total liabilities		186,507
Net assets acquired		2,041
Goodwill resulting from acquisition	$	1,259

The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheet at December 31, 2013, are as follows (dollars in thousands):

Outstanding principal balance	$	108,639
Carrying amount		108,441

44

All loans obtained in the acquisition 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.

The amount of the revenue and earnings included in the Company’s consolidated income statement for the year ended December 31, 2013, reflect only amounts from the acquisition date of April 30, 2013, through December 31, 2013. Historical financial information related to each loan and deposit acquired was impractical to determine due to retrospective application requiring significant estimates of amounts that cannot be independently substantiated. Further, we believe it is impossible to distinguish objectively information about those estimates that provides evidence of circumstances that existed on the dates at which those amounts would be recognized and measured under retrospective application.

Expenses associated with the acquisition were $30,000 and $1,439,000 for the three and twelve month periods ended December 31, 2013, respectively. These costs included system conversion and integrating operations charges as well as legal and consulting expenses, which have been expensed as incurred.

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, 2013 and 2012, follows:

	December 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available-for-sale securities:
Obligations of U.S. Government Agencies	$	29,963,634	$	122,764	$	124,491	$	29,961,907
Tax-exempt and taxable obligations of states and municipal subdivisions		107,676,085		1,937,586		1,535,036		108,078,635
Mortgage-backed securities		78,770,400		810,370		1,394,067		78,186,703
Corporate obligations		28,210,148		223,776		1,582,001		26,851,923
Other		1,255,483		-		283,980		971,503
	$	245,875,750	$	3,094,496	$	4,919,575	$	244,050,671
Held-to-maturity securities:
Mortgage-backed securities	$	2,438,435	$	-	$	74,008	$	2,364,427
Taxable obligations of states and municipal subdivisions		6,000,000		1,260,000		-		7,260,000
	$	8,438,435	$	1,260,000	$	74,008	$	9,624,427

45

	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

The scheduled maturities of securities at December 31, 2013, were as follows:

	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due less than one year	$	18,172,801	$	18,263,173	$	-	$	-
Due after one year through five years		80,376,374		81,347,356		-		-
Due after five years through ten years		38,986,734		38,900,600		-		-
Due after ten years		29,569,441		27,352,839		6,000,000		7,260,000
Mortgage-backed securities		78,770,400		78,186,703		2,438,435		2,364,427
	$	245,875,750	$	244,050,671	$	8,438,435	$	9,624,427

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 2013 or in 2012. No other-than-temporary impairment losses were recognized for the years ended 2013 and 2012.

Securities with a carrying value of $197,611,193 and $159,725,903 at December 31, 2013 and 2012, 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, 2013 and 2012, were as follows:

46

	2013
	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	$	6,898,945	$	124,491	$	-	$	-	$	6,898,945	$	124,491
Tax-exempt and tax- able obligations of states and municipal subdivisions		37,725,915		1,523,780		1,297,792		11,256		39,023,707		1,535,036
Mortgage-backed securities		39,540,663		1,394,067		-		-		39,540,663		1,394,067
Corporate obligations		10,814,405		174,210		3,386,225		1,407,791		14,200,630		1,582,001
Other		-		-		971,503		283,980		971,503		283,980
	$	94,979,928	$	3,216,548	$	5,655,520	$	1,703,027	$	100,635,448	$	4,919,575

	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

Approximately 38% of the number of securities in the investment portfolio at December 31, 2013, reflected an unrealized loss. Management is of the opinion the Company has the ability to hold these securities until such time as the value recovers or the securities mature. Management also believes the deterioration in value is attributable to changes in market interest rates and lack of liquidity in the credit markets. We have determined that these securities are not other-than-temporarily impaired based upon anticipated cash flows.

NOTE E - LOANS

Loans typically provide higher yields than the other types of earning assets, and thus one of the Company's goals is for loans to be the largest category of the Company's earning assets. At December 31, 2013 and December 31, 2012, respectively, loans accounted for 68.1% and 63.6% of earning assets. The Company controls and mitigates the inherent credit and liquidity risks through the composition of its loan portfolio.

47

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

	December 31,  2013						December 31, 2012
	Amount			Percent of Total			Amount			Percent of Total
	(Dollars in thousands)
Mortgage loans held for sale	$	3,680			0.6	%	$	5,585			1.4	%
Commercial, financial and agricultural		81,792			14.0			53,234			12.9
Real Estate:
Mortgage-commercial		212,388			36.4			142,046			34.3
Mortgage-residential		202,343			34.7			140,703			34.0
Construction		67,287			11.5			57,529			13.9
Consumer and other		15,812			2.8			14,600			3.5
Total loans		583,302			100	%		413,697			100	%
Allowance for loan losses		(5,728	)					(4,727	)
Net loans	$	577,574					$	408,970

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

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

Activity in the allowance for loan losses for December 31, 2013 and 2012 is as follows:

(In thousands)

	2013			2012
Balance at beginning of period	$	4,727		$	4,511
Loans charged-off:
Real Estate		(457	)		(821	)
Installment and Other		(197	)		(203	)
Commercial, Financial and Agriculture		(105	)		(166	)
Total		(759	)		(1,190	)
Recoveries on loans previously charged-off:
Real Estate		600			83
Installment and Other		66			70
Commercial, Financial and Agriculture		18			25
Total		684			178
Net Charge-offs		(75	)		(1,012	)
Provision for Loan Losses		1,076			1,228
Balance at end of period	$	5,728		$	4,727

48

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, 2013 and December 31, 2012.

Allocation of the Allowance for Loan Losses

	December 31, 2013
	(Dollars in thousands)
	Amount		% of loans in each category to total loans
Commercial Non Real Estate	$	582		14.0	%
Commercial Real Estate		3,384		57.2
Consumer Real Estate		1,427		25.4
Consumer		173		3.4
Unallocated		162		-
Total	$	5,728		100	%

	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	%

The following table represents the Company’s impaired loans at December 31, 2013 and December 31, 2012. This table excludes performing troubled debt restructurings.

	December 31,		December 31,
	2013		2012
	(In thousands)
Impaired Loans:
Impaired loans without a valuation allowance	$	759	$	1,445
Impaired loans with a valuation allowance		4,071		2,144
Total impaired loans	$	4,830	$	3,589
Allowance for loan losses on impaired loans at period End		849		936
Total nonaccrual loans		3,181		3,401
Past due 90 days or more and still accruing		159		158
Average investment in impaired loans		4,007		2,979

49

The following table is a summary of interest recognized and cash-basis interest earned on impaired loans for the years ended December 31, 2013 and December 31, 2012:

	2013		2012
Average of individually impaired loans during period	$	3,811	$	2,979
Interest income recognized during Impairment		-		-
Cash-basis interest income Recognized		148		50

The gross interest income that would have been recorded in the period that ended if the nonaccrual loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the twelve months for the years ended December 31, 2013 and 2012, was $43,000 and $81,000, respectively. The Company had no loan commitments to borrowers in non-accrual status at December 31, 2013 and 2012.

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, 2013 and December 31, 2012. 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, 2013

			Installment		Commercial,
			and		Financial and
	Real Estate		Other		Agriculture		Total
	(In thousands)
Loans
Individually evaluated	$	4,709	$	39	$	82	$	4,830
Collectively evaluated		473,832		19,725		81,236		574,793
Total	$	478,541	$	19,764	$	81,318	$	579,623
Allowance for Loan Losses
Individually evaluated	$	804	$	35	$	10	$	849
Collectively evaluated		4,007		300		572		4,879
Total	$	4,811	$	335	$	582	$	5,728

50

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

The following tables provide additional detail of impaired loans broken out according to class as of December 31, 2013 and 2012. 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, 2013 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, 2013
							Average		Interest
							Recorded		Income
	Recorded		Unpaid		Related		Investment		Recognized
	Investment		Balance		Allowance		YTD		YTD
	(In thousands)
Impaired loans with  no related allowance:
Commercial installment	$	3	$	3	$	-	$	45	$	-
Commercial real estate		353		353		-		1,035		8
Consumer real estate		341		399		-		262		9
Consumer installment		4		4		-		5		-
Total	$	701	$	759	$	-	$	1,347	$	17
Impaired loans with  a related allowance:
Commercial installment	$	79	$	79	$	10	$	42	$	6
Commercial real estate		2,685		2,685		400		2,147		100
Consumer real estate		1,202		1,272		404		1,019		21
Consumer installment		35		35		35		36		4
Total	$	4,001	$	4,071	$	849	$	3,244	$	131
Total Impaired Loans:
Commercial installment	$	82	$	82	$	10	$	87	$	6
Commercial real estate		3,038		3,038		400		3,182		108
Consumer real estate		1,543		1,671		404		1,281		30
Consumer installment		39		39		35		41		4
Total Impaired Loans	$	4,702	$	4,830	$	849	$	4,591	$	148

51

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

52

The following tables provide additional detail of troubled debt restructurings at December 31, 2013.

	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		858		858		3		53
Consumer real estate		66		65		1		2
Consumer installment		-		-		-		-
Total	$	924	$	923		4	$	55

The balance of troubled debt restructurings at December 31, 2013 was $2.2 million, calculated for regulatory reporting purpose. Of these amounts, $1.6 million were performing in accordance with the modified terms. The remaining $.6 million are on non-accrual. There was $80,000 in specific reserves established with respect to these loans as of December 31, 2013. As of December 31, 2013, 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 $1,305,000. The allowance for loan losses associated with those loans on the basis of a current evaluation of loss was $80,000. All loans were performing as agreed with modified terms.

During the twelve month period ending December 31, 2013, the terms of 4 loans were modified as a TDRs. The modifications included one of the following or a combination of the following: maturity date extensions, interest only payments, amortizations were extended beyond what would be available on similar type loans, and payment waiver. No interest rate concessions were given on these nor were any of these loans written down.

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, 2013
	(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	$	478	$	-	$	212	$	690	$	67,287
Real Estate-mortgage		4,696		143		2,453		7,292		202,343
Real Estate-non farm nonresidential		252		-		507		759		212,388
Commercial		12		-		9		21		81,792
Consumer		115		16		-		131		15,813
Total	$	5,553	$	159	$	3,181	$	8,893	$	579,623

53

	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

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

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

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

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

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

As of December 31, 2013 and December 31, 2012, 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:

54

(In thousands)
December 31, 2013
							Commercial,
	Real Estate Commercial		Real Estate Mortgage		Installment and Other		Financial and Agriculture		Total
Pass	$	316,573	$	145,787	$	19,725	$	80,087	$	562,172
Special Mention		4,084		32		-		1,033		5,149
Substandard		10,972		1,426		39		225		12,662
Doubtful		-		-		-		-		-
Subtotal		331,629		147,245		19,764		81,345		579,983
Less:
Unearned Discount		236		97		-		27		360
Loans, net of unearned discount	$	331,393	$	147,148	$	19,764	$	81,318	$	579,623

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

NOTE F - PREMISES AND EQUIPMENT

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

	2013		2012
Premises:
Land	$	9,891,750	$	7,226,252
Buildings and improvements		22,966,215		15,697,160
Equipment		9,558,090		6,954,110
Construction in progress		32,985		11,473
		42,449,040		29,888,995
Less accumulated depreciation and amortization		10,377,299		7,646,157
	$	32,071,741	$	22,242,838

55

The amounts charged to operating expense for depreciation were $1,379,748 and $1,195,877 in 2013 and 2012, respectively.

NOTE G - DEPOSITS

The aggregate amount of time deposits in denominations of $100,000 or more as of December 31, 2013 and 2012 was $116,623,516 and $91,821,044, respectively.

At December 31, 2013, the scheduled maturities of time deposits included in interest-bearing deposits were as follows (in thousands):

Year	Amount
2014	$	134,350
2015		34,571
2016		12,972
2017		13,373
2018		7,721
Thereafter		-
	$	202,987

NOTE H - BORROWED FUNDS

Borrowed funds consisted of the following:

	December 31,
	2013		2012
Reverse Repurchase Agreement	$	5,000,000	$	5,000,000
FHLB advances		47,000,000		31,770,773
	$	52,000,000	$	36,770,773

Advances from the FHLB have maturity dates ranging from January 2014 through June, 2019. Interest is payable monthly at rates ranging from 0.13% to 2.22%. 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, 2013, FHLB advances available and unused totaled $134,844,839.

Future annual principal repayment requirements on the borrowings from the FHLB at December 31, 2013, were as follows:

Year	Amount
2014	$	41,000,000
2015		3,000,000
2016		-
2017		-
2018		-
2019		3,000,000
	$	47,000,000

56

Reverse Repurchase Agreements consist of one $5,000,000 agreement. The agreement is secured by securities with a fair value of $6,530,592 at December 31, 2013 and $6,421,762 at December 31, 2012. 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 $249,000 and $125,000 as of December 31, 2013 and 2012, respectively.

The Company is also committed under one long-term capital lease agreement. The capital lease agreement had an outstanding balance of $1,286,000 and $1,415,000 at December 31, 2013 and 2012, respectively (included in other liabilities). This lease has a remaining term of 8 years at December 31, 2013. 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 $605,712 and $346,110 at December 31, 2013 and 2012, respectively.

Minimum future lease payments for the operating and capital leases at December 31, 2013 were as follows:

	Operating
	Leases		Capital Lease
	(In thousands)
2014	$	265	$	166
2015		236		166
2016		229		168
2017		167		191
2018		126		191
Thereafter		816		557
Total Minimum Lease Payments	$	1,839	$	1,439
Less: Amounts representing interest				(153	)
Present value of minimum lease payments			$	1,286

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.

57

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, 2013, that the Company and its subsidiary bank exceeded all capital adequacy requirements.

At December 31, 2013 and 2012, 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, 2013 and 2012, 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, 2013
Total risk-based	$	88,503		13.4	%	$	87,707		13.3	%
Tier I risk-based		82,755		12.5	%		81,979		12.4	%
Tier I leverage		82,755		9.0	%		81,979		8.9	%
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	%

The minimum amounts of capital and ratios as established by banking regulators at December 31, 2013 and 2012, were as follows:

	Company					Subsidiary
	(Consolidated)					The First
	Amount		Ratio			Amount		Ratio
December 31, 2013
Total risk-based	$	53,029		8.0	%	$	52,935		8.0	%
Tier I risk-based		26,514		4.0	%		26,467		4.0	%
Tier I leverage		37,002		4.0	%		36,956		4.0	%
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	%

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.

58

NOTE K - INCOME TAXES

The components of income tax expense are as follows:

	Years Ended December 31,
	2013			2012
Current:
Federal (benefit)	$	(88,073	)	$	1,000,418
State (benefit)		(15,737	)		213,309
Deferred (benefit)		1,707,403			(136,348	)
	$	1,603,593		$	1,077,379

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,
	2013						2012
	Amount			%			Amount			%
Income taxes at statutory rate	$	2,122,650			34	%	$	1,742,890			34	%
Tax-exempt income		(797,167	)		(13	)%		(745,595	)		(15	)%
Nondeductible expenses		326,871			5	%		233,006			5	%
State income tax, net of federal tax effect		(10,386	)		-			92,156			2	%
Tax credits		-			-			(295,800	)		(6	)%
Other, net		(38,375	)		-			50,722			1	%
	$	1,603,593			26	%	$	1,077,379			21	%

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

	December 31,
	2013			2012
Deferred tax assets:
Allowance for loan losses	$	1,980,194		$	1,489,546
Net operating loss carryover		1,313,501			652,061
Unrealized loss on available-for-sale securities		620,527			-
Other		1,113,761			870,831
		5,027,983			3,012,438
Deferred tax liabilities:
Securities		(97,917	)		(89,426	)
Premises and equipment		(684,787	)		(986,689	)
Unrealized gain on available-for-sale securities		-			(1,309,633	)
Core deposit intangible		(239,364	)		(58,358	)
Goodwill		(498,612	)		(281,036	)
		(1,520,680	)		(2,725,142	)
Net deferred tax asset, included in other assets	$	3,507,303		$	287,296

59

With the acquisition of Wiggins in 2006 and Baldwin in 2013, the Company assumed federal tax net operating loss carryovers. These net operating losses are available to the Company through the year 2023 and 2033, respectively.

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, 2013, 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 2008.

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 $248,355 in 2013 and $189,519 in 2012.

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, 2013, the ESOP held 6,022 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 2013 and $20,310 for 2012.

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, 2012, 42,785 nonvested restricted stock awards were granted under the Plan. During the year ended December 31, 2013, 52,653 nonvested restricted stock awards were granted under the Plan and 12,740 stock awards were forfeited due to separation. During 2013, 1,788 shares were repurchased for payment of taxes. The weighted average grant-date fair value for these shares was $11.57 per share. Compensation costs in the amount of $391,777 was recognized for the year ended December 31, 2013 and $263,216 for the year ended December 31, 2012. 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, 2013, there was approximately $632,000 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).

60

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, 2013, and 2012.

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 $8,977,000 and $9,683,000 at December 31, 2013 and 2012, respectively. The activity in loans to current directors, executive officers, and their affiliates during the year ended December 31, 2013, is summarized as follows (in thousands):

Loans outstanding at beginning of year	$	9,683
New loans		576
Repayments		(1,282	)
Loans outstanding at end of year	$	8,977

61

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 $675,000 and $574,000 at December 31, 2013 and 2012, respectively, and had made loan commitments of approximately $113,372,000 and $63,583,000 at December 31, 2013 and 2012, respectively.

Commitments to extend credit and letters of credit include some exposure to credit loss in the event of nonperformance of the customer. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit policies and procedures for such commitments are the same as those used for lending activities. Because these instruments have fixed maturity dates and because a number expire without being drawn upon, they generally do not present any significant liquidity risk. No significant losses on commitments were incurred during the two years ended December 31, 2013, 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 and St. Tammany Parish in Louisiana and Baldwin County in South Alabama. Management closely monitors its credit concentrations and attempts to diversify the portfolio within its primary market area. As of December 31, 2013, 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.

62

Level 2:

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

Level 3:

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

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

Available-for-Sale Securities

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

The following table presents the Company’s available-for-sale securities that are measured at fair value on a recurring basis and the level within the hierarchy in which the fair value measurements fell as of December 31, 2013 and December 31, 2012 (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, 2013
Obligations of U.S. Government agencies	$	29,962	$	-	$	29,962	$	-
Municipal securities		108,078		-		108,078		-
Mortgage-backed securities		78,187		-		78,187		-
Corporate obligations		26,852		-		24,054		2,798
Other		972		972		-		-
Total	$	244,051	$	972	$	240,281	$	2,798

63

			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

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

(In thousands)	Bank-Issued Trust Trust Preferred Securities
	2013		2012
Balance of recurring Level 3 assets at January 1	$	2,668	$	2,252
Transfers into Level 3		-		-
Transfers out of Level 3		-		-
Unrealized income included in comprehensive income		130		416
Balance of recurring Level 3 assets at December 31	$	2,798	$	2,668

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

Trust Preferred Securities	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range of Inputs
December 31, 2013	$	2,798	Discounted cash flow	Probability of default		0 – 100%
December 31, 2012		2,668	Discounted cash flow	Probability of default		0 – 100%

64

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

Impaired Loans

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

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

Other Real Estate Owned

Other real estate owned consists of properties obtained through foreclosure. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Fair value of other real estate owned is based on current independent appraisals. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined the fair value declines subsequent to foreclosure, a valuation allowance is recorded through other income. Operating costs associated with the assets after acquisition are also recorded as non-interest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other income. Other real estate owned measured at fair value on a non-recurring basis at December 31, 2013, amounted to $4.5 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, 2013 and December 31, 2012 (in thousands).

65

			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, 2013
Impaired loans	$	4,830	$	-	$	4,830	$	-
Other real estate owned		4,470		-		4,470		-
December 31, 2012
Impaired loans	$	3,589	$	-	$	3,589	$	-
Other real estate owned		6,782		-		6,782		-

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

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

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

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

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

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

66

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, 2013					Fair Value Measurements
	Carrying Amount		Estimated Fair Value		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Instruments:
Assets:
Cash and cash equivalents	$	39,252	$	39,252	$	39,252	$	-	$	-
Securities available-for-sale		244,051		244,051		972		240,281		2,798
Securities held-to-maturity		8,438		9,624		-		9,624		-
Other securities		5,534		5,534		-		5,534		-
Loans, net		577,574		590,866		-		-		590,866
Bank-owned life insurance		6,593		6,593		-		6,593		-
Liabilities:
Noninterest-bearing deposits	$	144,624	$	144,624	$	-	$	144,624	$	-
Interest-bearing deposits		635,347		634,907		-		634,907		-
Subordinated debentures		10,310		10,310		-		-		10,310
FHLB and other borrowings		52,000		52,000		-		52,000		-

67

As of December 31, 2012					Fair Value Measurements
	Carrying Amount		Estimated Fair Value		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Instruments:
Assets:
Cash and cash equivalents	$	30,877	$	30,877	$	30,877	$	-	$	-
Securities available-for-sale		214,393		214,393		970		210,755		2,668
Securities held-to-maturity		8,470		7,055		-		7,055		-
Other securities		3,438		3,438		-		3,438		-
Loans, net		408,970		422,029		-		-		422,029
Bank-owned life insurance		6,441		6,441		-		6,441		-
Liabilities:
Noninterest-bearing deposits	$	109,625	$	109,625	$	-	$	109,625	$	-
Interest-bearing deposits		487,002		487,599		-		487,599		-
Subordinated debentures		10,310		10,310		-		-		10,310
FHLB and other borrowings		36,771		36,771		-		36,771		-

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.

68

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.

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).

69

NOTE T - SUBSEQUENT EVENTS

On March 3, 2014, The First Bancshares, Inc. a Mississippi corporation (“The First”) entered into an Agreement and Plan of Merger (the “Agreement”) with BCB Holding Company, Inc. an Alabama corporation (“BCB”) and parent of Bay Bank, Mobile, Alabama. The Agreement provides that, upon the terms and subject to the conditions set forth in the Agreement, BCB will merge with and into The First (the “Merger”) and Bay Bank will merge with and into The First, A National Banking Association (“Bank Merger”). Subject to the terms and conditions of the Agreement, which has been approved by the Boards of Directors of The First and BCB, each outstanding share of BCB common stock, other than shares held by The First or BCB, or, shares with respect to which the holders thereof have perfected dissenters’ rights, will receive (i) for the BCB common stock that was outstanding prior to August 1, 2013, $3.60 per share which may be received in cash or The First common stock provided that at least 30% of the aggregate consideration paid to such shareholders is in FBMS common stock and one non-transferable contingent value right (“CVR”) of the CVR Consideration, and (ii) for the BCB common stock that was issued on August 1, 2013, $2.25 per share in cash. Each CVR is eligible to receive a cash payment equal to up to $0.40, with the exact amount based on the resolution of certain identified BCB loans over a three-year period following the closing of the transaction. Payout of the CVR will be overseen by a special committee of the FBMS Board of Directors. FBMS will also either assume or redeem in full a note payable by BCB to Alostar Bank as well as the preferred stock issued under the U.S. Treasury’s Capital Purchase Program. The total consideration to be paid in connection with the acquisition will range between approximately $6,239,890 and $6,611,762 depending upon the payout of the CVR as well as the price of the FBMS common stock on the closing of the transaction, which is subject to a cap and a collar regarding its price.

The transaction is expected to close in the second quarter of 2014.

Concurrently, The First and BCB will enter into an agreement and plan of merger pursuant to which BCB’s wholly-owned subsidiary, Bay Bank, will be merged with and into The First’s wholly-owned subsidiary, The First, A National Banking Association.

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,
	2013		2012
Assets:
Cash and cash equivalents	$	8,314	$	48,525
Investment in subsidiary bank		94,311,642		74,851,305
Investments in statutory trusts		310,000		310,000
Other securities		100,000		100,000
Premises and equipment		368,623		368,623
Other		511,742		599,192
	$	95,610,321	$	76,277,645
Liabilities and Stockholders’ Equity:
Subordinated debentures		10,310,000		10,310,000
Other		191,981		82,179
Stockholders’ equity		85,108,340		65,885,466
	$	95,610,321	$	76,277,645

70

Condensed Statements of Income

	Years Ended December 31,
	2013		2012
Income:
Interest and dividends	$	5,610	$	6,212
Dividend income		3,100,000		980,000
Other		-		-
		3,105,610		986,212
Expenses:
Interest on borrowed funds		186,581		206,594
Legal		773,163		112,203
Other		810,323		404,447
		1,770,067		723,244
Income before income taxes and equity in undistributed income of subsidiary		1,335,543		262,968
Income tax benefit		511,743		169,274
Income before equity in undistributed income of subsidiary		1,847,286		432,242
Equity in undistributed income of subsidiary		2,792,209		3,616,525
Net income	$	4,639,495	$	4,048,767

Condensed Statements of Cash Flows

	Years Ended December 31,
	2013			2012
Cash flows from operating activities:
Net income	$	4,639,495		$	4,048,767
Adjustments to reconcile net income to net cash used in operating activities:
Equity in undistributed income of subsidiary		(2,792,209	)		(3,616,525	)
Restricted stock expense		391,777			263,216
Other, net		181,923			157,883
Net cash provided by operating activities		2,420,986			853,341
Cash flows from investing activities:
Investment in subsidiary bank		(20,450,000	)		-
Net cash used in investing activities		(20,450,000	)		-
Cash flows from financing activities:
Dividends paid on common stock		(600,452	)		(453,105	)
Dividends paid on preferred stock		(342,460	)		(342,460	)
Repurchase of restricted stock for payment of taxes		(26,749	)		(15,642	)
Issuance of 1,951,220 common shares, net		18,958,464			-
Net cash provided by (used in) financing activities		17,988,803			(811,207	)
Net  increase (decrease) in cash and cash equivalents		(40,211	)		42,134
Cash and cash equivalents at beginning of year		48,525			6,391
Cash and cash equivalents at end of year	$	8,314		$	48,525

71

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)
2013
Total interest income	$	6,650	$	7,609	$	8,648	$	8,411
Total interest expense		759		823		690		645
Net interest income		5,891		6,786		7,958		7,766
Provision for loan losses		311		349		360		59
Net interest income after provision for loan losses		5,580		6,437		7,598		7,707
Total non-interest income		1,930		1,890		1,592		1,671
Total non-interest expense		5,979		7,245		7,630		7,308
Income tax expense		306		270		456		572
Net income		1,225		812		1,104		1,498
Preferred dividends and stock accretion		106		106		106		106
Net income applicable to common Stockholders	$	1,119	$	706	$	998	$	1,392
Per common share:
Net income, basic	$	.36	$	.18	$	.20	$	.27
Net income, diluted		.35		.18		.19		.27
Cash dividends declared		.0375		.0375		.0375		.0375
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

72