EXHIBIT 13

THE FIRST BANCSHARES, INC.

2011 ANNUAL REPORT

The First Bancshares, Inc.

Selected Financial Data

(Dollars In Thousands, Except Per Share Data)

	December 31,
	2011		2010		2009		2008		2007
Earnings:
Net interest income	$	19,079	$	16,334	$	14,390	$	16,105	$	16,870
Provision for loan losses		1,468		983		1,206		2,205		1,321
Noninterest income		4,598		3,895		4,397		4,631		4,575
Noninterest expense		18,870		15,843		15,323		15,998		14,823
Net income		2,871		2,549		1,743		1,849		3,823
Net income applicable to common stockholders		2,529		2,233		1,461		1,849		3,823
Per common share data:
Basic net income per share	$	.83	$	.74	$	.49	$	.62	$	1.28
Diluted net income per share		.82		.74		.49		.61		1.25
Per share data:
Basic net income per share	$	.94	$	.84	$	.58	$	.62	$	1.28
Diluted net income per share		.93		.84		.58		.61		1.25
Selected Year End Balances:
Total assets	$	681,413	$	503,045	$	477,552	$	474,824	$	496,056
Securities		221,176		107,136		114,618		102,303		87,052
Loans, net of allowance		383,418		327,956		314,033		318,300		367,002
Deposits		573,394		396,479		383,754		378,079		386,168
Stockholders’ equity		60,425		57,098		43,617		36,568		36,281

1

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 its subsidiary during the year ended December 31, 2011 when compared to the years 2010 and 2009. 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 2011.

Overview

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

2

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 $503.0 million in total assets, and $396.5 million in deposits at December 31, 2010 to approximately $681.4 million in total assets, and $573.4 million in deposits at December 31, 2011. Loans net of allowance for loan losses increased from $328.0 million at December 31, 2010 to approximately $383.4 at December 31, 2011. The Company increased from $57.1 million in shareholders’ equity at December 31, 2010 to approximately $60.4 million at December 31, 2011. The First reported net income of $3,496,000 and $3,016,000 for the years ended December 31, 2011, and 2010, respectively. For the years ended December 31, 2011 and 2010, the Company reported consolidated net income applicable to common stockholders of $2,529,000 and $2,233,000, 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.

SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS

(Dollars In Thousands, Except Per Share Data)

	December 31,
	2011		2010		2009		2008		2007
Earnings:
Net interest income	$	19,079	$	16,334	$	14,390	$	16,105	$	16,870
Provision for loan losses		1,468		983		1,206		2,205		1,321
Noninterest income		4,598		3,895		4,397		4,631		4,575
Noninterest expense		18,870		15,843		15,323		15,998		14,823
Net income		2,871		2,549		1,743		1,849		3,823
Net income applicable to common stockholders		2,529		2,233		1,461		1,849		3,823
Per  common share data:
Basic net income per share	$	.83	$	.74	$	.49	$	.62	$	1.28
Diluted net income per share		.82		.74		.49		.61		1.25
Per share data:
Basic net income per share	$	.94	$	.84	$	.58	$	.62	$	1.28
Diluted net income per share		.93		.84		.58		.61		1.25
Selected Year End Balances:
Total assets	$	681,413	$	503,045	$	477,552	$	474,824	$	496,056
Securities		221,176		107,136		114,618		102,303		87,052
Loans, net of allowance		383,418		327,956		314,033		318,300		367,002
Deposits		573,394		396,479		383,754		378,079		386,168
Stockholders’ equity		60,425		57,098		43,617		36,568		36,281

3

Results of Operations

The following is a summary of the results of operations by The First for the years ended December 31, 2011 and 2010.

	2011		2010
	(In thousands)
Interest income	$	24,469	$	23,453
Interest expense		5,208		6,933
Net interest income		19,261		16,520
Provision for loan losses		1,468		983
Net interest income after provision for loan losses		17,793		15,537
Other income		4,598		3,894
Other expense		17,736		15,405
Income tax expense		1,159		1,010
Net income	$	3,496	$	3,016

4

The following reconciles the above table to the amounts reflected in the consolidated financial statements of the Company at December 31, 2011 and 2010:

	2011			2010
	(In thousands)
Net interest income:
Net interest income of subsidiary bank	$	19,261		$	16,520
Intercompany eliminations		(182	)		(186	)
	$	19,079		$	16,334
Net income:
Net income of subsidiary bank	$	3,496		$	3,016
Net loss of the Company, excluding intercompany accounts		(967	)		(783	)
	$	2,529		$	2,233

Consolidated Net Income

The Company reported consolidated net income applicable to common stockholders of approximately $2,529,000 for the year ended December 31, 2011, compared to a consolidated net income of $2,233,000 for the year ended December 31, 2010. The increase in income was attributable to an increase in net interest income of $2.7 million or 16.8%, and an increase of $702,000 or 18.0% in other income which were offset by an increase in other expenses of $3.0 million or 19.1%.

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 $19,079,000 for the year ended December 31, 2011, as compared to $16,334,000 for the year ended December 31, 2010. This increase was the direct result of increased loan volumes and decreased rates paid on interest-bearing liabilities during 2011 as compared to 2010. Average interest-bearing liabilities for the year 2011 were $445,893,000 compared to $395,956,000 for the year 2010. At December 31, 2011, the net interest spread, the difference between the yield on earning assets and the rates paid on interest-bearing liabilities, was 3.71% compared to 3.38% at December 31, 2010. The net interest margin (which is net interest income divided by average earning assets) was 3.84% for the year 2011 compared to 3.60% for the year 2010. Rates paid on average interest-bearing liabilities decreased from 1.80% for the year 2010 to 1.21% for the year 2011. 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 71.3% of average earning assets for the year 2011 compared to 72.6% for the year 2010.

5

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,
	2011								2010								2009
	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)	$	354,295		$	20,971		5.92	%	$	328,950		$	20,289		6.17	%	$	320,495		$	20,674		6.45	%
Securities		134,815			3,360		2.49	%		106,891			3,121		2.92	%		109,422			3,861		3.53	%
Federal funds sold		5,486			72		1.31	%		16,473			21		.13	%		17,331			28		.16	%
Other		2,530			72		2.85	%		859			22		2.56	%		1,991			66		3.31	%
Total earning assets		497,126			24,475		4.92	%		453,173			23,453		5.18	%		449,239			24,629		5.48	%
Cash and due from banks		47,632								16,686								9,172
Premises and equipment		17,401								14,490								14,675
Other assets		21,613								18,469								13,620
Allowance for loan losses		(4,340	)							(4,513	)							(5,064	)
Total assets	$	579,432							$	498,305							$	481,642
Liabilities
Interest-bearing liabilities	$	445,893		$	5,396		1.21	%	$	395,956		$	7,119		1.80	%	$	384,744		$	10,239		2.66	%
Demand deposits (1)		65,830								49,203								48,855
Other liabilities		18,757								9,434								6,366
Shareholders’ equity		48,952								43,712								41,677
Total liabilities and shareholders’ equity	$	579,432							$	498,305							$	481,642
Net interest spread							3.71	%							3.38	%							2.82	%
Net yield on interest-earning assets				$	19,079		3.84	%				$	16,334		3.60	%				$	14,390		3.20	%

(1) All loans and deposits were made to borrowers in the United States. Includes nonaccrual loans of $5,125, $4,212, and $4,367, respectively, during the periods presented. Loans include held for sale loans.

(2) Includes loan fees of $418, $400, and $477, respectively.

6

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,
	2011 versus 2010 Increase (decrease) due to									2010 versus 2009 Increase (decrease) due to
	Volume			Rate			Net			Volume			Rate			Net
	(Dollars in thousands)
Earning Assets
Loans	$	1,564		$	(882	)	$	682		$	545		$	(930	)	$	(385	)
Securities		815			(576	)		239			(89	)		(651	)		(740	)
Federal funds sold		(14	)		65			51			(2	)		(5	)		(7	)
Other short-term investments		43			7			50			(37	)		(7	)		(44	)
Total interest income		2,408			(1,386	)		1,022			417			(1,593	)		(1,176	)
Interest-Bearing Liabilities
Interest-bearing transaction accounts		395			(1,193	)		(798	)		992			(1,369	)		(377	)
Money market accounts		152			(206	)		(54	)		(50	)		(31	)		(81	)
Savings deposits		18			(32	)		(14	)		(5	)		(8	)		(13	)
Time deposits		(190	)		(487	)		(677	)		(671	)		(1,590	)		(2,261	)
Borrowed funds		(58	)		(122	)		(180	)		(172	)		(216	)		(388	)
Total interest expense		317			(2,040	)		(1,723	)		94			(3,214	)		(3,120	)
Net interest income	$	2,091		$	654		$	2,745		$	323		$	1,621		$	1,944

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.

7

The following tables illustrate the Company's consolidated interest rate sensitivity and consolidated cumulative gap position at December 31, 2009, 2010, and 2011.

	December 31, 2009
	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	$	63,217		$	55,419		$	118,636		$	200,159		$	318,795
Securities (2)		12,099			15,059			27,158			87,460			114,618
Funds sold and other		7,575			296			7,871			-			7,871
Total earning assets		82,891			70,774			153,665			287,619			441,284
Liabilities
Interest-bearing liabilities:
Interest-bearing deposits:
NOW accounts (1)	$	-		$	122,363		$	122,363		$	-		$	122,363
Money market accounts		25,110			-			25,110			-			25,110
Savings deposits (1)		-			15,712			15,712			-			15,712
Time deposits		59,192			95,291			154,483			17,559			172,042
Total interest-bearing deposits		84,302			233,366			317,668			17,559			335,227
Borrowed funds (3)		26			10,404			10,430			21,607			32,037
Total interest-bearing liabilities		84,328			243,770			328,098			39,166			367,264
Interest-sensitivity gap per period	$	(1,437	)	$	(172,996	)	$	(174,433	)	$	248,453		$	74,020
Cumulative gap at December 31, 2009	$	(1,437	)	$	(174,433	)	$	(174,433	)	$	74,020		$	74,020
Ratio of cumulative gap to total earning assets at December 31, 2009		(.3	)%		(39.5	)%		(39.5	)%		16.8	%

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

8

	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	%

(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.

9

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 four years is utilized in determining the appropriate allowance. Historical loss factors are determined by graded and ungraded 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

10

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, 2011, 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. 

11

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

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

At December 31, 2011, the consolidated allowance for loan losses amounted to approximately $4,511,000, or 1.16% of outstanding loans or 1.31% of loans excluding those booked at fair value due to business combination. At December 31, 2010, the allowance for loan losses amounted to approximately $4,617,000, which was 1.39% of outstanding loans. The Company’s provision for loan losses was $1,468,000 for the year ended December 31, 2011, compared to $983,000 for the year ended December 31, 2010.

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.

12

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, 2011 and 2010.

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

	December 31, 2010
	(In thousands)
	Past Due 30 to 89 Days		Past Due 90 days or more and still accruing		Non-Accrual
Real Estate-construction	$	593	$	1	$	1,433
Real Estate-mortgage		3,673		153		893
Real Estate-non farm nonresidential		438		737		1,452
Commercial		740		144		386
Consumer		262		36		48
Total	$	5,706	$	1,071	$	4,212

Total nonaccrual loans at December 31, 2011 amounted to $5.1 million which was an increase of $.9 million over the December 31, 2010 amount of $4.2 million. Management believes these relationships were adequately reserved at December 31, 2011. Restructured loans not reported as past due or nonaccrual at December 31, 2011 amounted to $4.2 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, 2011 and December 31, 2010, the subsidiary bank had potential problem loans of $25,687,000 and $30,300,000, respectively. This represents a decrease of $4,613,000.

13

Consolidated Allowance For Loan Losses

	Years Ended December 31,
	2011			2010			2009			2008			2007
Average loans outstanding	$	354,295		$	328,950		$	320,495		$	349,572		$	338,368
Loans outstanding at year end	$	387,929		$	332,573		$	318,795		$	323,084		$	371,223
Total nonaccrual loans	$	5,125		$	4,212		$	4,367		$	3,340		$	2,429
Beginning balance of allowance	$	4,617		$	4,762		$	4,785		$	4,221		$	3,793
Loans charged-off		(1,987	)		(1,370	)		(1,396	)		(1,784	)		(950	)
Total loans charged-off		(1,987	)		(1,370	)		(1,396	)		(1,784	)		(950	)
Total recoveries		413			242			167			143			57
Net loans charged-off		(1,574	)		(1,128	)		(1,229	)		(1,641	)		(893	)
Acquisition		-			-			-			-			-
Provision for loan losses		1,468			983			1,206			2,205			1,321
Balance at year end	$	4,511		$	4,617		$	4,762		$	4,785		$	4,221
Net charge-offs to average loans		.44	%		.34	%		.38	%		.47	%		.26	%
Allowance as percent of total loans		1.16	%		1.39	%		1.49	%		1.48	%		1.14	%
Nonperforming loans as a percentage of total loans		1.32	%		1.27	%		1.37	%		1.03	%		.65	%
Allowance as a multiple of nonaccrual loans		.88	X		1.1	X		1.1	X		1.4	X		1.7	X

At December 31, 2011, the components of the allowance for loan losses consisted of the following:

	Allowance
	(In thousands)
Allocated:
Impaired loans	$	738
Graded loans		3,773
	$	4,511

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

14

The following table represents the activity of the allowance for loan losses for the years 2011 and 2010.

Analysis of the Allowance for Loan Losses
	Years Ended December 31,
	2011			2010
	(Dollars in thousands)
Balance at beginning of  year	$	4,617		$	4,762
Charge-offs:
Real Estate-construction		(330	)		(312	)
Real Estate-mortgage		(799	)		(460	)
Real Estate-nonfarm  nonresidential		(440	)		(43	)
Commercial		(321	)		(367	)
Consumer		(97	)		(188	)
Total		(1,987	)		(1,370	)
Recoveries:
Real Estate-construction		-			14
Real Estate-mortgage		96			51
Real Estate-nonfarm  nonresidential		215			-
Commercial		29			71
Consumer		73			106
Total		413			242
Net Charge-offs		(1,574	)		(1,128	)
Provision for Loan Losses		1,468			983
Balance at end of year	$	4,511		$	4,617

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, 2011 and 2010.

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

	December 31, 2010
	(Dollars in thousands)
	Amount		% of loans in each category to total loans
Commercial Non Real Estate	$	757		15.9	%
Commercial Real Estate		2,817		62.2	%
Consumer Real Estate		902		18.0	%
Consumer		140		2.9	%
Unallocated		1		1.0	%
Total	$	4,617		100	%

15

Noninterest Income and Expense

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

Noninterest income experienced an increase of $703,000 or 18.0% as compared to $3,895,000 for the year ended December 31, 2010, to $4,598,000 for the year ended December 31, 2011. The deposit activity fees were $2,704,000 for 2011 compared to $2,374,000 for 2010. Other service charges decreased by $44,000 or 2.6% from $1,697,000 for the year ended December 31, 2010, to $1,653,000 for the year ended December 31, 2011. Impairment losses on investment securities were $4,000 for 2011 as compared to $472,000 for 2010.

Noninterest expense increased from $15.8 million for the year ended December 31, 2010 to $18.9 million for the year ended December 31, 2011. The Company experienced slight increases in most expense categories. The largestincrease was in salaries and employee benefits, which increased by $986,000 in 2011 as compared to 2010. These increases were due in part to the addition of the Whitney branches and associated staff.

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

Noninterest Expense
	Years ended December 31,
	2011		2010		2009
	(In thousands)
Salaries and employee benefits	$	9,679	$	8,693	$	8,401
Occupancy		1,356		1,052		1,071
Equipment		1,114		976		900
Marketing and public relations		353		312		329
Data processing		46		12		30
Supplies and printing		416		284		278
Telephone		346		271		249
Correspondent services		105		118		110
Deposit and other insurance		865		1,118		1,019
Professional and consulting fees		1,825		924		830
Postage		236		148		173
ATM fees		310		225		217
Other		2,219		1,710		1,716
Total	$	18,870	$	15,843	$	15,323

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.

16

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, 2011 and 2010, respectively, average loans accounted for 71% and 73% of 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 $354.3 million during 2011, as compared to $329.0 million during 2010, and $320.5 million during 2009.

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

Composition of Loan Portfolio
	December 31,
	2011						2010						2009
	Amount			Percent Of Total			Amount			Percent of Total			Amount			Percent of Total
	(Dollars in thousands)
Mortgage loans held for sale	$	2,906			0.7	%	$	2,938			0.9	%	$	3,692			1.2	%
Commercial, financial and agricultural		48,385			12.5	%		48,427			14.6	%		43,229			13.6	%
Real Estate:
Mortgage-commercial		138,943			35.8	%		109,073			32.8	%		87,492			27.4	%
Mortgage-residential		117,692			30.3	%		102,425			30.8	%		102,738			32.2	%
Construction		63,357			16.3	%		58,962			17.7	%		68,695			21.5	%
Consumer and other		16,645			4.4	%		10,748			3.2	%		12,949			4.1	%
Total loans		387,928			100	%		332,573			100	%		318,795			100	%
Allowance for loan losses		(4,511	)					(4,617	)					(4,762	)
Net loans	$	383,417					$	327,956					$	314,033

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.

17

The following table sets forth the Company's commercial and construction real estate loans maturing within specified intervals at December 31, 2011.

Loan Maturity Schedule and Sensitivity to Changes in Interest Rates
	December 31, 2011
Type	One Year or Less		Over One Year Through Five Years		Over Five Years		Total
	(In thousands)
Commercial, financial and agricultural	$	27,955	$	18,042	$	2,388	$	48,385
Real estate – construction		63,357		-		-		63,357
	$	91,312	$	18,042	$	2,388	$	111,742
Loans maturing after one year with:							$	17,731
Fixed interest rates								2,699
Floating interest rates							$	20,430

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 $134.8 million in 2011, as compared to $106.9 million in 2010 and $109.4 million in 2009. This represents 27.1%, 23.6%, and 24.4% of the average earning assets for the years ended December 31, 2011, 2010, and 2009, respectively. At December 31, 2011, investment securities were $221.2 million and represented 35.6% 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 book value of securities for the dates indicated.

Securities Portfolio

	December 31,
	2011		2010		2009
	(In thousands)
Available-for-sale
U. S. Government agencies	$	103,004	$	41,173	$	59,519
States and municipal subdivisions		94,258		54,673		41,982
Corporate obligations		14,293		7,702		9,772
Mutual finds		974		986		958
Total available-for-sale		212,529		104,534		112,231
Held-to-maturity
U.S. Government agencies		2		3		3
States and municipal subdivisions		6,000		-		-
Total held-to-maturity		6,002		3		3
Total	$	218,531	$	104,537	$	112,234

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The following table shows, at carrying value, the scheduled maturities and average yields of securities held at December 31, 2011.

Investment Securities Maturity Distribution and Yields (1)

	December 31, 2011
						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		.67	%
Total investment securities held-to-maturity	$	-				$	-				$	-				$	6,000
Available-for-sale:
U.S. Government agencies (3)		2,003		.59	%		33,818		1.06	%		7,852		3.60	%		-		-
States and municipal subdivisions		10,132		3.03	%		39,305		3.06	%		30,485		4.18	%		14,336		5.28	%
Corporate obligations and other		1,847		5.07	%		10,225		1.96	%		-		-			2,221		1.89	%
Total investment securities available-for-sale	$	13,982				$	83,348				$	38,337				$	16,557

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

(2) Excludes mortgage-backed securities totaling $2 thousand with a yield of 2.34%.

(3) Excludes mortgage-backed securities totaling $59.3 million with a yield of 2.59% and mutual funds of $1.0 million.

Short-Term Investments. Short-term investments, consisting of Federal Funds Sold, averaged $5.5 million in 2011, $16.5 million in 2010, and $17.9 million in 2009. At December 31, 2011, and December 31, 2010, short-term investments totaled $241,000 and $9,083,000, 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 $18.0 million, or 4.6% in 2010. Average total deposits increased $68.3 million, or 16.9% in 2011. At December 31, 2011, total deposits were $573.4 million, compared to $396.5 million a year earlier, an increase of $176.9 million, or 44.6%.

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

	Deposits
	December 31,
(Dollars in thousands)	2011					2010					2009
			Percent of					Percent of					Percent of
	Amount		Deposits			Amount		Deposits			Amount		Deposits
Noninterest-bearing accounts	$	107,129		18.7	%	$	48,311		12.2	%	$	48,527		12.6	%
NOW accounts		200,210		34.9	%		149,551		37.7	%		122,363		31.9	%
Money market accounts		43,296		7.6	%		18,853		4.8	%		25,110		6.5	%
Savings accounts		45,644		8.0	%		14,043		3.5	%		15,712		4.1	%
Time deposits less than $100,000		77,569		13.5	%		65,393		16.5	%		82,116		21.4	%
Time deposits of $100,000 or over		99,546		17.3	%		100,328		25.3	%		89,926		23.5	%
Total deposits	$	573,394		100	%	$	396,479		100	%	$	383,754		100	%

19

The Company’s loan-to-deposit ratio was 67% at December 31, 2011 and 83% at December 31, 2010. The loan-to-deposit ratio averaged 75.1% during 2011. 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 $473.8 million at December 31, 2011 and $296.2 million at December 31, 2010. 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, 2011, 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, 2011	$	21,853	$	52,094	$	25,599	$	99,546

Borrowed Funds

Borrowed funds consists of advances from the Federal Home Loan Bank of Dallas, federal funds purchased and reverse repurchase agreements. At December 31, 2011, advances from the FHLB totaled $12.0 million compared to $15.1 million at December 31, 2010. 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, 2011 and December 31, 2010.

Reverse Repurchase Agreements consist of three $5,000,000 agreements. These agreements are secured by securities with a fair value of $19,460,231 at December 31, 2011 and $18,193,000 at December 31, 2010. The maturity dates are from August 22, 2012 through September 26, 2017, with rates between 3.81% and 4.51%.

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.

20

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, 2011, was $60.4 million, an increase of $3.3 million or approximately 5.8%, compared with shareholders' equity of $57.1 million as of December 31, 2010.

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 subsidiary bank exceeded their minimum regulatory capital ratios as of December 31, 2011 and 2010.

Analysis of Capital

	Adequately			Well			The Company						Subsidiary Bank
Capital Ratios	Capitalized			Capitalized			December 31,						December 31,
							2011			2010			2011			2010
Leverage		4.0	%		5.0	%		8.5	%		13.1	%		8.3	%		10.7	%
Risk-based capital:
Tier 1		4.0	%		6.0	%		12.6	%		18.4	%		12.4	%		15.0	%
Total		8.0	%		10.0	%		13.6	%		19.6	%		13.3	%		16.2	%

21

Ratios
	2011			2010			2009
Return on assets (net income applicable to common stockholders divided by average total assets)		.44	%		.45	%		.30	%
Return on equity (net income applicable to common stockholders divided by average equity)		5.2	%		5.1	%		3.5	%
Dividend payout ratio (dividends per share divided by net income per common share)		18.3	%		20.3	%		-
Equity to asset ratio (average equity divided  by average total assets)		8.4	%		8.8	%		8.7	%

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 is typically its primary source of liquidity, averaged $5.5 million during the year ended December 31, 2011 and totaled $241,000 at December 31, 2011. 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, 2011, advances available totaled approximately $160.3 million of which $12.0 million had been drawn, or used for letters of credit.

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

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

22

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

The Company elected to participate in the Treasury TLG Program that provides an FDIC guarantee for all senior unsecured debt, with stated maturities in excess of 30 days, issued between October 14, 2008 and June 30, 2009. The guarantees will expire no later than June 30, 2012. The Company did not issue any debt under this program.

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.

23

THE FIRST BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2011 AND 2010

	2011			2010
ASSETS
Cash and due from banks	$	10,152,337		$	12,450,296
Interest-bearing deposits with banks		12,787,616			12,443,412
Federal funds sold		241,000			9,083,000
Total cash and cash equivalents		23,180,953			33,976,708
Held-to-maturity securities (fair value of  $6,002,399 in 2011 and $2,763 in 2010)		6,002,278			2,640
Available-for-sale securities		212,528,385			104,534,242
Other securities		2,645,250			2,598,950
Total securities		221,175,913			107,135,832
Loans held for sale		2,906,433			2,937,834
Loans, net of allowance for loan losses of $4,510,938 in 2011 and $4,617,080 in 2010		380,511,384			325,017,844
Interest receivable		2,771,676			2,022,851
Premises and equipment		22,990,441			14,993,926
Cash surrender value of life insurance		6,270,191			6,083,567
Goodwill		9,362,498			702,213
Other assets		12,243,758			10,174,000
Total assets	$	681,413,247		$	503,044,775
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	107,129,476		$	48,312,231
Interest-bearing		466,264,701			348,167,188
Total deposits		573,394,177			396,479,419
Interest payable		307,752			410,919
Borrowed funds		27,031,831			30,106,895
Subordinated debentures		10,310,000			10,310,000
Other liabilities		9,944,206			8,639,457
Total liabilities		620,987,966			445,946,690
Stockholders’ Equity:
Preferred stock, no par value, $1,000 per share liquidation, 10,000,000 shares authorized; 17,123 shares issued and outstanding in 2011 and 2010, respectively		16,938,571			16,938,571
Common stock, par value $1 per share: 10,000,000 shares authorized; 3,092,566 and 3,058,716 shares issued and outstanding  in 2011 and 2010, respectively		3,092,566			3,058,716
Additional paid-in capital		23,504,231			23,418,761
Retained earnings		16,791,561			14,722,496
Accumulated other comprehensive income (loss)		561,997			(576,814	)
Treasury stock, at cost		(463,645	)		(463,645	)
Total stockholders’ equity		60,425,281			57,098,085
Total liabilities and stockholders’ equity	$	681,413,247		$	503,044,775

The accompanying notes are an integral part of these statements.

24

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2011 AND 2010

	2011			2010
INTEREST INCOME
Interest and fees on loans	$	20,971,200		$	20,289,150
Interest and dividends on securities:
Taxable interest and dividends		1,892,623			1,891,322
Tax-exempt interest		1,467,394			1,230,024
Interest on federal funds sold		72,364			21,339
Interest on deposits in banks		71,134			21,577
Total interest income		24,474,715			23,453,412
INTEREST EXPENSE
Interest on time deposits of $100,000 or more		1,443,579			1,814,201
Interest on other deposits		2,757,320			3,930,024
Interest on borrowed funds		1,194,636			1,375,067
Total interest expense		5,395,535			7,119,292
Net interest income		19,079,180			16,334,120
Provision for loan losses		1,468,359			982,663
Net interest income after provision for loan losses		17,610,821			15,351,457
OTHER INCOME
Service charges on deposit accounts		2,704,145			2,373,684
Other service charges and fees		1,653,270			1,697,123
Bank owned life insurance income		186,624			226,493
Loss on sale of other real estate		(78,845	)		(20,075	)
Other		136,781			89,949
Impairment loss on securities:
Total other-than-temporary impairment loss		(140,355	)		(1,713,525	)
Less:  Portion of loss recognized in other comprehensive income		136,077			1,241,714
Net impairment loss recognized in earnings		(4,278	)		(471,811	)
Total other income		4,597,697			3,895,363
OTHER EXPENSE
Salaries		8,166,475			7,268,974
Employee benefits		1,512,609			1,423,630
Occupancy		1,355,766			1,051,537
Furniture and equipment		1,113,622			975,791
Supplies and printing		415,957			284,352
Professional and consulting fees		1,825,232			923,626
Marketing and public relations		353,145			311,533
FDIC and OCC assessments		811,145			1,066,963
Other		3,316,229			2,536,472
Total other expense		18,870,180			15,842,878

25

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2011 AND 2010

Continued:	2011		2010
Income before income taxes		3,338,338		3,403,942
Income taxes		466,900		855,198
Net income		2,871,438		2,548,744
Preferred dividends and stock accretion		342,460		316,190
Net income applicable to common stockholders	$	2,528,978	$	2,232,554
Net income per share:
Basic	$	.94	$	.84
Diluted		.93		.84
Net income applicable to common stockholders:
Basic	$	.83	$	.74
Diluted		.82		.74

The accompanying notes are an integral part of these statements.

26

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 2011 AND 2010

	Compre- hensive Income			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, 2010				$	3,046,363	$	4,773,010	$	283,738	$	23,134,766	$	12,943,540		$	(101,106	)	$	(463,645	)	$	43,616,666
Comprehensive
Income:
Net income 2010	$	2,548,744			—		—		—		—		2,548,744			—			—			2,548,744
Non-credit related impairment loss on investment securities, net of tax		(819,528	)		—		—		—		—		—			(819,528	)		—			(819,528	)
Net change in unrealized gain on available- for-sale securities, net of tax		335,313			—		—		—		—		—			335,313			—			335,313
Net change in unrealized loss on loans held for sale, net of tax		8,507			—		—		—		—		—			8,507			—			8,507
Comprehensive Income	$	2,073,036
Issuance of preferred stock					—		12,123,000		—		—		—			—			—			12,123,000
Accretion of preferred stock discount					—		42,561		—		—		(42,561	)		—			—			—
Dividends on preferred stock					—		—		—		—		(273,629	)		—			—			(273,629	)

27

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 2011 AND 2010

Continued:	Compre- hensive Income			Common Stock		Preferred Stock		Stock Warrants		Additional Paid-in Capital			Retained  Earnings			Accum- ulated Other Compre- hensive Income (Loss)			Treasury Stock			Total
Cash dividend declared, $.15 per common share					—		—		—		—			(453,598	)		—			—			(453,598	)
Grant of restricted Stock					12,353		—		—		(12,353	)		—			—			—			—
Compensation cost on restricted stock					—		—		—		12,610			—			—			—			12,610
Balance, December 31, 2010				$	3,058,716	$	16,938,571	$	283,738	$	23,135,023		$	14,722,496		$	(576,814	)	$	(463,645	)	$	57,098,085
Comprehensive
Income:
Net income 2011	$	2,871,438		$	—	$	—	$	—	$	—		$	2,871,438		$	—		$	—		$	2,871,438
Non-credit related impairment loss on investment securities, net of tax		(118,206	)		—		—		—		—			—			(118,206	)		—			(118,206	)
Net change in unrealized gain on available- for-sale securities, net of tax		1,238,660			—		—		—		—			—			1,238,660			—			1,238,660
Net change in unrealized loss on loans held for sale, net of tax		18,357			—		—		—		—			—			18,357			—			18,357

28

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 2011 AND 2010

Continued:	Compre- hensive Income		Common Stock		Preferred Stock		Stock Warrants		Additional Paid-in Capital			Retained Earnings			Accum- ulated Other Compre- hensive Income (Loss)		Treasury Stock			Total
Comprehensive Income	$	4,010,249
Dividends on preferred stock				—		—		—		—			(342,460	)		—		—			(342,460	)
Cash dividend declared, $.15 per common share				—		—		—		—			(459,913	)		—		—			(459,913	)
Grant of restricted stock				33,850		—		—		(33,850	)		—			—		—			—
Compensation cost on restricted stock				—		—		—		119,320			—			—		—			119,320
Balance, December 31, 2011			$	3,092,566	$	16,938,571	$	283,738	$	23,220,493		$	16,791,561		$	561,997	$	(463,645	)	$	60,425,281

The accompanying notes are an integral part of these statements.

29

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2011 AND 2010

	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	2,871,438		$	2,548,744
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,159,746			869,736
FHLB Stock dividends		(3,700	)		(4,100	)
Provision for loan losses		1,468,359			982,663
Impairment loss on securities		4,278			471,811
Loss (Gain) on sale/call of securities		318			(50,715	)
Deferred income taxes		163,746			(84,605	)
Restricted stock expense		119,320			12,610
Increase in cash value of life insurance		(186,624	)		(226,493	)
Amortization and accretion, net		213,534			271,206
Loss on sale/writedown of other real estate		394,912			351,392
Changes in:
Loans held for sale		59,215			767,370
Interest receivable		(662,192	)		295,356
Other assets		2,111,333			2,640,435
Interest payable		(176,005	)		(261,436	)
Other liabilities		(405,181	)		1,464,758
Net cash provided by operating activities		7,132,497			10,048,732
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities		(162,035,574	)		(51,246,717	)
Purchases of other securities		(315,000	)		(595,500	)
Purchase of held-to-maturity securities		(6,000,000	)		—
Proceeds from maturities and calls of available-for-sale securities		48,350,275			56,508,885
Proceeds from sales of securities available-for-sale		7,144,270			1,009,000
Proceeds from redemption of other securities		272,400			384,300
Increase in loans		(13,972,402	)		(18,956,156	)
Net additions to premises and equipment		(1,373,857	)		(1,370,243	)
Net cash received from acquisition		116,143,031			—
Net cash used in investing activities		(11,786,857	)		(14,266,431	)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in deposits		(2,270,888	)		12,725,515
Proceeds from borrowed funds		31,675,000			8,500,000
Repayment of borrowed funds		(34,750,064	)		(10,430,187	)
Dividends paid on common stock		(452,983	)		(452,980	)
Dividends paid on preferred stock		(342,460	)		(261,814	)
Proceeds from issuance of preferred stock and warrant		—			12,123,000
Net cash  provided by (used in) financing activities		(6,141,395	)		22,203,534

The accompanying notes are an integral part of these statements.

30

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2011 AND 2010

Continued:	2011			2010
Net increase (decrease) in cash and cash equivalents		(10,795,755	)		17,985,835
Cash and cash equivalents at beginning of year		33,976,708			15,990,873
Cash and cash equivalents at end of year	$	23,180,953		$	33,976,708
Supplemental disclosures:
Cash paid during the year for:
Interest	$	5,498,702		$	7,380,728
Income taxes		862,855			1,366,854
Non-cash activities:
Transfers of loans to other real estate		3,128,503			3,296,143
Issuance of restricted stock grants		33,850			12,353

The accompanying notes are an integral part of these statements.

31

THE FIRST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - NATURE OF BUSINESS

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

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

1. Principles of Consolidation

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

2. Estimates

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

3. Cash and Due From Banks

Included in cash and due from banks are legal reserve requirements which must be maintained on an average basis in the form of cash and balances due from the Federal Reserve. The reserve balance varies depending upon the types and amounts of deposits. At December 31, 2011, the required reserve balance on deposit with the Federal Reserve Bank was approximately $4,122,000.

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 in stockholders' equity, net of tax, 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.

32

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, 2011 and 2010.

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 Company originates fixed rate single family, residential first mortgage loans on a presold basis. The Company 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 Company. The terms of the loan are dictated by the secondary investors and are transferred within several weeks of the Company initially funding the loan. The Company 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 Company and the subsequent purchase by the investor, the Company carries the loans held for sale at the lower of cost or fair value in the aggregate as determined by the outstanding commitments from investors.

6. Loans

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

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

33

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. The allocated component of the allowance reflects expected losses resulting from an analysis developed through specific credit allocations for individual loans, including any impaired loans, and historical loan loss history. The analysis is performed quarterly and loss factors are updated regularly.

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

8. Premises and Equipment

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

9. Other Real Estate

Other real estate, carried in other assets in the consolidated balance sheets, consists of properties acquired through foreclosure and, as held for sale property, is recorded at the lower of the outstanding loan balance or current appraisal less estimated costs to sell. Any write-down to fair value required at the time of foreclosure is charged to the allowance for loan losses. Subsequent gains or losses on other real estate are reported in other operating income or expenses. At December 31, 2011 and 2010, other real estate totaled $4,353,203 and $3,995,017, respectively.

34

10. Goodwill and Other Intangible Assets

Changes to the carrying amount of goodwill for the years ended December 31, 2011 and 2010 are provided in the following table.

(Dollars in thousands)	Amount
Balance, December 31, 2010	$	702
Goodwill acquired during the year		8,660
Balance, December 31, 2011	$	9,362

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

The Company performed the required annual impairment tests of goodwill as of December 1, 2011. The company’s annual impairment test did not indicate impairment as of the testing date, and subsequent to that date, management is not aware of any events or changes in circumstances since the impairment test that would indicate that goodwill might be impaired.

The Company’s purchase accounting intangible, assets which are subject to amortization, include core deposit intangibles, amortized on a straight line, over a 10 year average life. The definite-lived intangible assets had the following carrying values at December 31, 2011 and 2010.

	2011							2010
	Gross					Net		Gross					Net
	Carrying		Accumulated			Carrying		Carrying		Accumulated			Carrying
	Amount		Amortization			Amount		Amount		Amortization			Amount
(Dollars in thousands)
Core deposit intangibles	$	3,095	$	(434	)	$	2,661	$	693	$	(294	)	$	399

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

The related amortization expense of purchase accounting intangible assets is a follows:

(dollars in thousands)
	Amount
Aggregate amortization expense for the year ended  December 31:
2010	$	69
2011		140
Estimated amortization expense for the year ending December 31:
2012	$	309
2013		309
2014		309
2015		309
2016		292
Thereafter		1,133
	$	2,661

35

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, 2011 and 2010, 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, 2011 and 2010, was $307,514 and $261,727, respectively.

15. Statements of Cash Flows

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

16. Off-Balance Sheet Financial Instruments

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

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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, 2011						December 31, 2010
	Net Income (Numerator)		Shares (Denominator)		Per Share Amount		Net Income (Numerator)		Shares (Denominator)		Per Share Amount
Basic per common Share	$	2,528,978		3,063,251	$	.83	$	2,232,554		3,019,869	$	.74
Effect of dilutive shares:
Restricted Stock				10,438						2,058
	$	2,528,978		3,073,689	$	.82	$	2,232,554		3,021,927	$	.74

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

18. Reclassifications

Certain reclassifications have been made to the 2010 financial statements to conform with the classifications used in 2011. These reclassifications did not impact the Company's consolidated financial condition or results of operations.

19. Accounting Pronouncements

In December 2010, the FASB issued ASU No. 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations.” This guidance provides clarification regarding the acquisition date that should be used for reporting the pro forma financial information disclosures required by Topic 805 when comparative financial statements are presented. The amendments in ASU 2010-29 specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. ASU 2010-29 was effective for the Company prospectively for business combinations occurring after December 15, 2010. See the business combination disclosures in Note C.

37

In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-02 “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.” This updated guidance (ASC Topic 310, Receivables) is designed to assist creditors with determining whether or not a restructuring constitutes a troubled debt restructuring. In particular, additional guidance has been added to help creditors determine whether a concession has been granted and whether a debtor is experiencing financial difficulties. Both of these conditions are required to be met for a restructuring to constitute a troubled debt restructuring. The amendments in the update were effective for the first interim period beginning on or after June 15, 2011, and should be applied retroactively to the beginning of the annual period of adoption. The amendment did not have a material impact on the Company’s financial statements.

In April 2011, the FASB issued ASU No. 2011-03, “Reconsideration of Effective Control of Repurchase Agreements.” This guidance (ASC Topic 860, Transfers and Servicing) eliminates a requirement for entities to consider whether a transferor has the ability to repurchase the financial assets in a repurchase agreement. This requirement was previously used to determine whether the transferor maintained effective control. The change could lead to more conclusions that a repo arrangement should be accounted for as a secured borrowing rather than as a sale. ASU 2011-03 is effective for the first interim period beginning on or after December 15, 2011. The Company does not expect the guidance will have a material impact on the financial statements.

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” This ASU is the result of joint efforts by the FASB and the International Accounting Standards Board (“IASB”) to develop a single, converged fair value framework on how (not when) to measure fair value and what disclosures about fair value measurements are required. This ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (ASC Topic 820, Fair Value Measurement). It does expand existing disclosure requirements for fair value measurements and eliminates unnecessary wording differences between U.S. GAAP and IFRS. ASU 2011-04 is effective for interim periods beginning after December 15, 2011. The Company does not expect the guidance will have a material impact on the financial statements and is evaluating the effect on the financial statement disclosures.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.” This guidance (ASC Topic 220, Comprehensive Income) revises the manner in which entities present comprehensive income in their financial statements. It requires entities to report components in either a continuous statement of comprehensive income or in two separate but consecutive statements. The items that must be reported in other comprehensive income do not change. ASU 2011-05 is effective for fiscal years and interim periods beginning after December 15, 2011. The Company believes the adoption will impact only the presentation of the financial statements.

In September 2011, FASB issued ASU No. 2011-08, Intangibles – Goodwill and other (Topic 350): Testing Goodwill for Impairment, which simplifies how companies test goodwill for impairment by permitting an entity to assess 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. The ASU allows the results of the assessment to become a basis for determining whether it is necessary to perform the two-step goodwill impairment testing required by ASC Topic 350. The “more-likely-than-not” threshold is defined in the ASU as a likelihood of more than 50 percent. Under the amendments of this ASU, the Company is not required to calculate the fair value of a reporting unit unless the Company determines that it is more likely than not that its fair value is less than its carrying amount.

38

The ASU is effective beginning with the Company’s first quarter of 2012, with early adoption permitted. The Company adopted the provisions of the ASU in the current year. The adoption of the ASU had an effect on how the Company performs its test for impairment of goodwill, but the adoption of this ASU did not have an effect on the Company’s operating results, financial position, or liquidity for the year ended December 31, 2011. For additional information on goodwill impairment testing, see Note B, item 10 to these consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (ASC Topic 210) 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 amendments are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The disclosures required by the amendments should be applied retrospectively for all comparative periods presented. The Company does not believe the amendments will have a material impact on the financial statements.

NOTE C – BUSINESS COMBINATION

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

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

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

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

39

Interest income of $693,000 was recorded on loans acquired in the Whitney branch acquisition. The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheet at December 31, 2011 were as follows (dollars in thousands):

Outstanding principal balance	$	39,426
Carrying amount		38,830

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

The following unaudited pro forma financial information presents the combined results of operations as if the acquisition had been effective January 1, 2010. These results include the impact of amortizing certain purchase accounting adjustments such as intangible assets, compensation expenses and the impact of the acquisition on income tax expense. There were no material nonrecurring pro forma adjustments directly attributable to the acquisition included within the following pro forma financial information. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the combination constituted a single entity during such periods. Growth opportunities are expected to be achieved in various amounts at various times during the years subsequent to the acquisition and not ratably over, or at the beginning or end of such periods. No adjustments have been reflected in the following pro forma financial information for anticipated growth opportunities.

	Year Ended December 31,
(In thousands)	2011		2010
	(Unaudited)
Interest income	$	28,860	$	27,838
Net income		3,328		3,032

Acquisition-related expenses associated with the acquisition of the Whitney branches were $651,000 for the twelve month period ended December 31, 2011, which are included in other expenses of the income statement. Such costs included principally system conversion and integrating operations charges which have been expensed as incurred.

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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, 2011 and 2010, follows:

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

	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available-for-sale securities:
Obligations of U.S. Government agencies	$	22,886,882	$	169,384	$	201,664	$	22,854,602
Tax-exempt and taxable obligations of states and municipal subdivisions		53,895,368		998,689		221,155		54,672,902
Mortgage-backed securities		17,638,563		727,725		47,866		18,318,422
Corporate obligations		9,726,518		12,163		2,036,387		7,702,294
Other		1,255,483		—		269,461		986,022
	$	105,402,814	$	1,907,961	$	2,776,533	$	104,534,242
Held-to-maturity securities:
Mortgage-backed securities	$	2,640	$	123	$	—	$	2,763

41

The scheduled maturities of securities at December 31, 2011, were as follows:

	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due less than one year	$	13,843,453	$	13,982,424	$	—	$	—
Due after one year through five years		82,483,139		83,348,189		—		—
Due after five years through ten years		38,170,849		38,337,082		—		—
Due after ten years		18,667,731		17,531,143		6,000,000		6,000,000
Mortgage-backed securities		58,534,125		59,329,547		2,278		2,399
	$	211,699,297	$	212,528,385	$	6,002,278	$	6,002,399

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

A loss of $318 was realized from the sale of available-for-sale securities in 2011. A gain of $50,715 was realized from the sale or call of available-for-sale securities in 2010. An other-than-temporary impairment loss of $4,278 was recognized for the year ended 2011 and $471,811 for the year ended 2010.

Securities with a carrying value of $135,394,139 and $63,692,752 at December 31, 2011 and 2010, 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, 2011 and 2010, were as follows:

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

42

	2010
	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	$	13,340,460	$	201,664	$	—	$	—	$	13,340,460	$	201,664
Tax-exempt and tax- able obligations of states and municipal subdivisions		9,144,237		204,952		257,160		16,203		9,401,397		221,155
Mortgage-backed securities		1,708,389		3,331		310,610		44,535		2,018,999		47,866
Corporate obligations		—		—		3,199,650		2,036,387		3,199,650		2,036,387
Other		—		—		986,022		269,461		986,022		269,461
	$	24,193,086	$	409,947	$	4,753,442	$	2,366,586	$	28,946,528	$	2,776,533

Approximately 17.5% of the number of securities in the investment portfolio at December 31, 2011, 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, 2011 and December 31, 2010, respectively, loans accounted for 62.4% and 72.1% of earning assets. The Company controls and mitigates the inherent credit and liquidity risks through the composition of its loan portfolio.

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

	December 31,  2011						December 31, 2010
	Amount			Percent of  Total			Amount			Percent of  Total
	(Dollars in thousands)
Mortgage loans held for sale	$	2,906			0.7	%	$	2,938			0.9	%
Commercial, financial and agricultural		48,385			12.5			48,427			14.6
Real Estate:
Mortgage-commercial		138,943			35.8			109,073			32.8
Mortgage-residential		117,692			30.3			102,425			30.8
Construction		63,357			16.3			58,962			17.7
Consumer and other		16,645			4.4			10,748			3.2
Total loans		387,928			100	%		332,573			100	%
Allowance for loan losses		(4,511	)					(4,617	)
Net loans	$	383,417					$	327,956

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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, 2011 and 2010 is as follows:

(In thousands)

	2011			2010
Balance at beginning of period	$	4,617		$	4,762
Loans charged-off:
Real Estate		(1,569	)		(815	)
Installment and Other		(97	)		(188	)
Commercial, Financial and Agriculture		(321	)		(367	)
Total		(1,987	)		(1,370	)
Recoveries on loans previously charged-off:
Real Estate		311			65
Installment and Other		73			106
Commercial, Financial and Agriculture		29			71
Total		413			242
Net Charge-offs		(1,574	)		(1,128	)
Provision for Loan Losses		1,468			983
Balance at end of period	$	4,511		$	4,617

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, 2011 and December 31, 2010.

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Allocation of the Allowance for Loan Losses

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

	December 31, 2010
	(Dollars in thousands)
	Amount		% of loans in each category to total loans
Commercial Non Real Estate	$	757		15.9	%
Commercial Real Estate		2,817		62.2
Consumer Real Estate		902		18.0
Consumer		140		2.9
Unallocated		1		1.0
Total	$	4,185		100	%

The following table represents the Company’s impaired loans at December 31, 2011 and December 31, 2010. This table excludes performing troubled debt restructurings.

	December 31,		December 31,
	2011		2010
	(In thousands)
Impaired Loans:
Impaired loans without a valuation allowance	$	2,791	$	2,406
Impaired loans with a valuation allowance		2,334		2,123
Total impaired loans	$	5,125	$	4,529
Allowance for loan losses on impaired loans at period end		738		738
Total nonaccrual loans		5,125		4,212
Past due 90 days or more and still accruing		496		1,071
Average investment in impaired loans		4,185		14,486

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The following table is a summary of interest recognized and cash-basis interest earned on impaired loans for December 31, 2011 and December 31, 2010:

	2011		2010
Average of individually impaired loans during period	$	4,827	$	4,286
Interest income recognized during impairment		-		-
Cash-basis interest income recognized		287		158

The gross interest income that would have been recorded in the period that ended if the nonaccrual loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the twelve months for December 31, 2011 and 2010, was $112,000 and $96,000, respectively. The Company had no loan commitments to borrowers in non-accrual status at December 31, 2011 and 2010.

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, 2011 and December 31, 2010. 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, 2011

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

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December 31, 2010

			Installment		Commercial,
	Real Estate		And Other		Financial and Agriculture		Total
	(In thousands)
Loans
Individually evaluated	$	4,091	$	48	$	390	$	4,529
Collectively evaluated		266,504		9,083		49,519		325,106
Total	$	270,595	$	9,131	$	49,909	$	329,635
Allowance for Loan Losses
Individually evaluated	$	464	$	10	$	264	$	738
Collectively evaluated		3,254		132		493		3,879
Total	$	3,718	$	142	$	757	$	4,617

The following tables provide additional detail of impaired loans broken out according to class as of December 31, 2011 and 2010. 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, 2011 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, 2011

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

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December 31, 2010

							Average		Interest
							Recorded		Income
	Recorded		Unpaid		Related		Investment		Recognized
	Investment		Balance		Allowance		YTD		YTD
	(In thousands)
Impaired loans with no related allowance:
Commercial installment	$	12	$	12	$	-	$	387	$	1
Commercial real estate		2,230		2,230		-		7,884		72
Consumer real estate		147		149		-		2,185		8
Consumer installment		15		15		-		183		1
Total	$	2,404	$	2,406	$	-	$	10,639	$	82
Impaired loans with a related allowance:
Commercial installment	$	113	$	377	$	264	$	481	$	17
Commercial real estate		966		1,370		401		2,421		89
Consumer real estate		280		343		63		796		20
Consumer installment		23		33		10		149		-
Total	$	1,382	$	2,123	$	738	$	3,847	$	126
Total Impaired Loans:
Commercial installment	$	125	$	389	$	264	$	868	$	18
Commercial real estate		3,196		3,600		401		10,305		161
Consumer real estate		427		492		63		2,981		28
Consumer installment		38		48		10		332		1
Total Impaired Loans	$	3,786	$	4,529	$	738	$	14,486	$	208

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The following tables provide additional detail of troubled debt restructurings at December 31, 2011.

	Outstanding Recorded		Outstanding Recorded				Interest
	Investment Pre-Modification		Investment Post-Modification		Number of Loans		Income Recognized
	(in thousands except number of loans)
Commercial installment	$	14	$	10		1	$	1
Commercial real estate		1,214		1,842		3		86
Consumer real estate		2,970		3,112		2		193
Consumer installment		22		18		2		1
Total	$	4,220	$	4,982		8	$	281

The balance of troubled debt restructurings at December 31, 2011 was $4.9 million, calculated for regulatory reporting purpose. Of these amounts, $4.2 million were performing in accordance with the modified terms. The remaining $.7 million are on non-accrual. There was no allocation in specific reserves established with respect to these loans as of December 31, 2011. As of December 31, 2011, 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 Section 310-10-35 was $4,201,000. The allowance for loan losses associated with those loans on the basis of a current evaluation of loss was $-. All loans were performing as agreed with modified terms.

During the twelve month period ending December 31, 2011, the terms of 8 loans were modified as TDRs. The modifications included one of the following or a combination of the following: maturity date extensions, interest only payments, amortizations were extended beyond what would be available on similar type loans, and payment waiver. No interest rate concessions were given on these nor were any of these loans written down.

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

49

	December 31, 2010
	(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	$	593	$	1	$	1,433	$	2,027	$	58,962
Real Estate-mortgage		3,673		153		893		4,719		102,426
Real Estate-non farm nonresidential		438		737		1,452		2,627		109,073
Commercial		740		144		386		1,270		48,427
Consumer		262		36		48		346		10,747
Total	$	5,706	$	1,071	$	4,212	$	10,989	$	329,635

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

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

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

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

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

As of December 31, 2011 and December 31, 2010, 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:

50

(In thousands)

December 31, 2011

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

December 31, 2010

							Commercial,
	Real Estate Commercial		Real Estate Mortgage		Installment and Other		Financial and Agriculture		Total
Pass	$	187,657	$	53,776	$	8,764	$	47,500	$	297,697
Special Mention		5,154		125		70		14		5,363
Substandard		17,820		6,130		297		2,215		26,462
Doubtful		-		-		-		180		180
Subtotal		210,631		60,031		9,131		49,909		329,702
Less:
Unearned Discount		67		-		-		-		67
Loans, net of unearned discount	$	210,564	$	60,031	$	9,131	$	49,909	$	329,635

NOTE F - PREMISES AND EQUIPMENT

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

	2011		2010
Premises:
Land	$	7,226,252	$	4,970,959
Buildings and improvements		15,729,044		9,881,906
Equipment		6,344,642		4,504,541
Construction in progress		227,414		1,329,262
		29,527,352		20,686,668
Less accumulated depreciation and amortization		6,536,911		5,692,742
	$	22,990,441	$	14,993,926

The amounts charged to operating expense for depreciation were $858,342 and $655,608 in 2011 and 2010, respectively.

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NOTE G - DEPOSITS

The aggregate amount of time deposits in denominations of $100,000 or more as of December 31, 2011, and 2010 was $99,545,812 and $100,328,380, respectively.

At December 31, 2011, the scheduled maturities of time deposits included in interest-bearing deposits were as follows (in thousands):

Year		Amount
	2012	$	126,670
	2013		26,759
	2014		6,064
	2015		11,398
	2016		6,224
		$	177,115

NOTE H - BORROWED FUNDS

Borrowed funds consisted of the following:

	December 31,
	2011		2010
Reverse Repurchase Agreement	$	15,000,000	$	15,000,000
FHLB advances		12,031,831		15,106,895
	$	27,031,831	$	30,106,895

Advances from the FHLB have maturity dates ranging from January 2012 through August 2015. Interest is payable monthly at rates ranging from 1.296% to 3.813%. Advances due to the FHLB are collateralized by a blanket lien on first mortgage loans in the amount of the outstanding borrowings, FHLB capital stock, and amounts on deposit with the FHLB. At December 31, 2011, FHLB advances available and unused totaled $148,307,622.

Future annual principal repayment requirements on the borrowings from the FHLB at December 31, 2011, were as follows:

Year		Amount
	2012	$	3,261,058
	2013		1,770,773
	2014		4,000,000
	2015		3,000,000
		$	12,031,831

Reverse Repurchase Agreements consisted of three $5,000,000 agreements. The agreements are secured by securities with a fair value of $19,460,231 at December 31, 2011 and $18,193,100 at December 31, 2010. The maturity dates are from August 22, 2012 through September 26, 2017, with rates between 3.81% and 4.51%.

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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 $93,000 and $126,000 as of December 31, 2011 and 2010, respectively.

The Company is also committed under one long-term capital lease agreement. The capital lease agreement had an outstanding balance of $1,540,000 and $- at December 31, 2011 and 2010, respectively (included in other liabilities). This lease has a remaining term of 10 years at December 31, 2011. 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 $86,500 and $- at December 31, 2011 and 2010, respectively.

Minimum future lease payments for the operating and capital leases at December 31, 2011 were as follows:

	Operating
	Leases		Capital Lease
	(In thousands)
2012	$	79	$	166
2013		80		166
2014		83		166
2015		83		166
2016		83		168
Thereafter		104		936
Total Minimum Lease Payments	$	512		1,768
Less: Amounts representing interest				(228	)
Present value of minimum lease payments			$	1,540

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.

53

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, 2011, that the Company and its subsidiary bank exceeded all capital adequacy requirements.

At December 31, 2011 and 2010, 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, 2011 and 2010, 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, 2011
Total risk-based	$	62,071		13.6	%	$	60,910		13.3	%
Tier I risk-based		57,560		12.6	%		56,399		12.4	%
Tier I leverage		57,560		8.5	%		56,399		8.3	%
December 31, 2010
Total risk-based	$	70,818		19.6	%	$	58,368		16.2	%
Tier I risk-based		66,307		18.4	%		53,867		15.0	%
Tier I leverage		66,307		13.1	%		53,867		10.7	%

The minimum amounts of capital and ratios as established by banking regulators at December 31, 2011 and 2010, were as follows:

	Company					Subsidiary
	(Consolidated)					The First
	Amount		Ratio			Amount		Ratio
December 31, 2011
Total risk-based	$	36,649		8.0	%	$	36,527		8.0	%
Tier I risk-based		18,324		4.0	%		18,264		4.0	%
Tier I leverage		27,164		4.0	%		27,103		4.0	%
December 31, 2010
Total risk-based	$	28,860		8.0	%	$	28,798		8.0	%
Tier I risk-based		14,430		4.0	%		14,399		4.0	%
Tier I leverage		20,249		4.0	%		20,212		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.

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NOTE K - COMPREHENSIVE INCOME

The Company and its subsidiary bank report comprehensive income as required by ASC Topic 220, Comprehensive Income. In accordance with this guidance, unrealized gains and losses on securities available-for-sale are included in accumulated other comprehensive income (loss).

In the calculation of comprehensive income, certain reclassification adjustments are made to avoid double counting amounts that are displayed as part of net income for a period that also had been displayed as part of accumulated other comprehensive income. The disclosure of the reclassification amounts is as follows:

	Years Ended December 31,
	2011			2010
Unrealized holdings gains (losses) on available-for-  sale securities and loans held for sale	$	1,720,875		$	(1,141,866	)
Reclassification adjustment for net losses   realized in income		4,596			421,096
Net unrealized gains (losses)		1,725,471			(720,770	)
Tax effect		(586,660	)		245,062
Net unrealized gains (losses), net of tax	$	1,138,811		$	(475,708	)

NOTE L - INCOME TAXES

The components of income tax expense are as follows:

	Years Ended December 31,
	2011		2010
Current:
Federal	$	255,955	$	832,607
State		47,199		107,196
Deferred (benefit)		163,746		(84,605	)
	$	466,900	$	855,198

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,
	2011						2010
	Amount			%			Amount			%
Income taxes at statutory rate	$	1,135,035			34	%	$	1,157,340			34	%
Tax-exempt income		(559,078	)		(17	)%		(492,985	)		(15	)%
Nondeductible expenses		92,339			3	%		127,413			4	%
State income tax, net of federal  tax effect		52,788			2	%		69,140			2	%
Tax credits		(12,325	)		-			-			-
Other, net		(241,859	)		(8	)%		(5,710	)		-
	$	466,900			14	%	$	855,198			25	%

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

	December 31,
	2011			2010
Deferred tax assets:
Allowance for loan losses	$	1,330,959		$	1,331,481
Unrealized loss on available-for-sale securities		-			295,315
Net operating loss carryover		729,798			807,535
Other		603,039			448,375
		2,663,796			2,882,706
Deferred tax liabilities:
Securities		(97,744	)		(113,808	)
Premises and equipment		(927,939	)		(700,625	)
Unrealized gain on available-for-sale securities		(281,889	)		-
Core deposit intangible		(114,072	)		(148,631	)
Goodwill		(63,460	)		-
		(1,485,104	)		(963,064	)
Net deferred tax asset, included in other assets	$	1,178,692		$	1,919,642

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

The Company adopted the provisions of the 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 a result of the implementation of ASC Topic 740, the Company did not identify any 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 2006.

NOTE M - 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 $142,584 in 2011 and $127,922 in 2010.

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, 2011, the ESOP held 6,040 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 $16,339 for 2011 and $17,177 for 2010.

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NOTE N - 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, 2010, 12,353 nonvested restricted stock awards were granted under the Plan. During the year ended December 31, 2011, 33,850 nonvested restricted stock awards were granted under the Plan. The weighted average grant-date fair value for these shares was $8.27 per share. Compensation costs in the amount of $119,320, was recognized for the year ended December 31, 2011 and $12,610 for the year ended December 31, 2010. 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, 2011, there was approximately $250,314 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).

NOTE O - 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 P - TREASURY STOCK

Shares held in treasury totaled 26,494 at December 31, 2011, and 2010.

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NOTE Q - 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 $12,955,000 and $14,580,000 at December 31, 2011 and 2010, respectively. The activity in loans to current directors, executive officers, and their affiliates during the year ended December 31, 2011, is summarized as follows (in thousands):

Loans outstanding at beginning of year	$	14,580
New loans		1,422
Repayments		(3,047	)
Loans outstanding at end of year	$	12,955

NOTE R - 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 $799,000 and $960,000

at December 31, 2011 and 2010, respectively, and had made loan commitments of approximately $59,035,000 and $52,083,000 at December 31, 2011 and 2010, 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, 2011, nor are any significant losses as a result of these transactions anticipated.

The primary market area served by the Bank is Forrest, Lamar, Jones, Pearl River, Jackson, Hancock, Stone, and Harrison Counties within South Mississippi as well as Washington Parish in Louisiana. Management closely monitors its credit concentrations and attempts to diversify the portfolio within its primary market area. As of December 31, 2011, 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.

On October 8, 2007, The First Bancshares, Inc. (the “Company”) and its subsidiary, The First, A National Banking Association (the “Bank”) were formally named as defendants and served with a First Amended Complaint in litigation styled Nick D. Welch v. Oak Grove Land Company, Inc., Fred McMurry, David E. Johnson, J. Douglas Seidenburg, The First, A National Banking Association, The First Bancshares, Inc., and John Does 1 through 10. The Plaintiff seeks damages from all the defendants, including $2,957,385, annual dividends for the year 2006 in the amount of $.30 per share, punitive damages and attorneys’ fees and costs. The Company and the Bank both denied any liability to Welch.

On March 7, 2011 an Agreed Order of Dismissal was entered in the litigation as previously disclosed by the Company on Form 8-K filed on March 8, 2011.

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NOTE S - 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. This guidance has been applied prospectively as of the beginning of the period.

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

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

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

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

Available-for-Sale Securities

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

The following table presents the Company’s assets that are measured at fair value on a recurring basis and the level within the hierarchy in which the fair value measurements fall as of December 31, 2011 and December 31, 2010 (in thousands):

59

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

			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, 2010
Obligations of U.S.
Government agencies	$	22,855	$	-	$	22,855	$	-
Municipal securities		54,673		-		54,673		-
Mortgage-backed securities		18,318		-		18,318		-
Corporate obligations		7,702		-		5,083		2,619
Other		986		986		-		-
Total	$	104,534	$	986	$	100,929	$	2,619

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

(In thousands)	Bank- Issued Trust Preferred Securities
Balance, December 31, 2010	$	2,619
Transfers into Level 3		-
Transfers out of Level 3		-
Other-than-temporary impairment loss included in earnings		(4	)
Unrealized loss included in comprehensive income		(363	)
Balance, December 31, 2011	$	2,252

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 discount 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 non-interest expense. 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 non-interest expense. Other real estate owned measured at fair value on a non-recurring basis at December 31, 2011, amounted to $4.4 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, 2011 and December 31, 2010 (in thousands).

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

December 31, 2010
Impaired loans	$	4,529	$	-	$	4,529	$	-
Other real estate owned		3,995		-		3,995		-

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

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

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

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

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

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

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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				As of
	December 31, 2011				December 31, 2010
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(In thousands)
Financial Instruments:
Assets:
Cash and cash equivalents	$	23,181	$	23,181	$	33,977	$	33,977
Securities available-for-sale		212,528		212,528		104,534		104,534
Securities held-to-maturity		6,002		6,002		3		3
Other securities		2,645		2,645		2,599		2,599
Loans, net		383,418		396,905		327,956		339,927
Liabilities:
Noninterest-bearing deposits	$	107,129	$	107,129	$	48,312	$	48,312
Interest-bearing deposits		466,265		467,198		348,167		349,565
Subordinated debentures		10,310		10,310		10,310		10,310
FHLB and other borrowings		27,032		27,032		30,107		30,107

NOTE T - 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.

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

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

The Letter Agreement, pursuant to which the Preferred Shares were exchanged, contains limitations on the payment of dividends on the common stock to no more than 100% of the aggregate per share dividend and distributions for the immediate prior fiscal year (dividends of $0.15 per share were declared and paid in 2010) 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).

NOTE U - SUBSEQUENT EVENTS

Management has evaluated the effect of subsequent events on these financial statements through the date the financial statements were issued.

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NOTE V - 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,
	2011		2010
Assets:
Cash and cash equivalents	$	6,391	$	11,819,433
Investment in subsidiary bank		69,263,750		54,659,166
Investments in statutory trusts		310,000		310,000
Other securities		100,000		100,000
Premises and equipment		368,623		368,623
Other		741,012		204,364
	$	70,789,776	$	67,461,586
Liabilities and Stockholders’ Equity:
Subordinated debentures	$	10,310,000	$	10,310,000
Other		54,495		53,501
Stockholders’ equity		60,425,281		57,098,085
	$	70,789,776	$	67,461,586

Condensed Statements of Income

	Years Ended December 31,
	2011			2010
Income:
Interest and dividends	$	5,626		$	799
Dividend income		530,000			650,000
Other		-			1,500
		535,626			652,299
Expenses:
Interest on borrowed funds		187,117			187,160
Legal		820,935			303,003
Other		313,754			135,028
		1,321,806			625,191
Income (loss) before income taxes and equity in undistributed income of subsidiary		(786,180	)		27,108
Income tax benefit		691,846			155,197
Income (loss) before equity in undistributed income of subsidiary		(94,334	)		182,305
Equity in undistributed income of subsidiary		2,965,772			2,366,439
Net income	$	2,871,438		$	2,548,744

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Condensed Statements of Cash Flows

	Years Ended December 31,
	2011			2010
Cash flows from operating activities:
Net income	$	2,871,438		$	2,548,744
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in undistributed income of subsidiary		(2,965,772	)		(2,366,439	)
Restricted stock expense		119,320			12,610
Other, net		(542,585	)		(68,920	)
Net cash provided by (used in) operating activities		(517,599	)		125,995
Cash flows from investing activities:
Investment in subsidiary bank		(10,500,000	)		-
Net cash used in investing activities		(10,500,000	)		-
Cash flows from financing activities:
Dividends paid on common stock		(452,983	)		(452,980	)
Dividends paid on preferred stock		(342,460	)		(261,814	)
Exercise of stock options		-			-
Proceeds from issuance of preferred stock and warrant		-			12,123,000
Net cash provided by (used in) financing activities		(795,443	)		11,408,206
Net increase (decrease) in cash and cash equivalents		(11,813,042	)		11,534,201
Cash and cash equivalents at beginning of year		11,819,433			285,232
Cash and cash equivalents at end of year	$	6,391		$	11,819,433

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

	Three Months Ended
	March 31			June 30		Sept. 30		Dec. 31
	(In thousands, except per share amounts)
2011
Total interest income	$	5,733		$	5,941	$	5,999	$	6,802
Total interest expense		1,482			1,430		1,267		1,217
Net interest income		4,251			4,511		4,732		5,585
Provision for loan losses		348			305		230		585
Net interest income after provision for loan losses		3,903			4,206		4,502		5,000
Total non-interest income		915			1,024		1,088		1,570
Total non-interest expense		4,524			4,293		4,479		5,574
Income tax expense		(207	)		267		365		42
Net income		501			670		746		954
Preferred dividends and stock accretion		86			85		86		85
Net income applicable to common stockholders	$	415		$	585	$	660	$	869
Per common share:
Net income, basic	$	.14		$	.19	$	.22	$	.28
Net income, diluted		.14			.19		.21		.28
Cash dividends declared		.0375			.0375		.0375		.0375
2010
Total interest income	$	5,884		$	5,944	$	5,849	$	5,776
Total interest expense		2,094			1,865		1,623		1,537
Net interest income		3,790			4,079		4,226		4,239
Provision for loan losses		165			217		372		229
Net interest income after provision for loan losses		3,625			3,862		3,854		4,010
Total non-interest income		841			986		1,054		1,014
Total non-interest expense		3,698			3,895		4,025		4,224
Income tax expense		232			304		261		58
Net income		536			649		622		742
Preferred dividends and stock accretion		76			77		75		88
Net income applicable to common stockholders	$	460		$	572	$	547	$	654
Per common share:
Net income, basic	$	.15		$	.19	$	.18	$	.22
Net income, diluted		.15			.19		.18		.22
Cash dividends declared		.075			.025		.05		-

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