EXHIBIT 13



THE FIRST BANCSHARES,
INC.

2012 ANNUAL REPORT







SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS

(Dollars In Thousands, Except Per Share
Data)



|                        |  | December 31, |        
|----------------------- |  | ------------ | -------
|                        |  | 2012         |        
|Earnings:               |  |              |        
|Net interest income     |  | $            | 22,194 
|Provision for loan      |  |              |        
|losses                  |  |              | 1,228  
|                        |  |              |        
|Noninterest income      |  |              | 6,324  
|Noninterest expense     |  |              | 22,164 
|Net income              |  |              | 4,049  
|Net income applicable   |  |              |        
|to common               |  |              |        
|stockholders            |  |              | 3,624  
|                        |  |              |        
|Per  common share data: |  |              |        
|Basic net income per    |  |              |        
|share                   |  | $            | 1.17   
|                        |  |              |        
|Diluted net income per  |  |              |        
|share                   |  |              | 1.16   
|Per share data:         |  |              |        
|Basic net income        |  |              |        
|per share               |  | $            | 1.31   
|Diluted net income      |  |              |        
|per share               |  |              | 1.29   
|                        |  |              |        
|Selected Year End       |  |              |        
|Balances:               |  |              |        
|                        |  |              |        
|Total assets            |  | $            | 721,385
|Securities              |  |              | 226,301
|Loans, net of           |  |              |        
|allowance               |  |              | 408,970
|Deposits                |  |              | 596,627
|Stockholders’ equity    |  |              | 65,885 



5









MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS



Purpose



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



Critical Accounting Policies



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



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



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



6







Overview



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



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



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



7







SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS

(Dollars In Thousands, Except Per Share
Data)



|                                             |  | December 31, |        
|-------------------------------------------- |  | ------------ | -------
|                                             |  | 2012         |        
|Earnings:                                    |  |              |        
|Net interest income                          |  | $            | 22,194 
|Provision for loan losses                    |  |              | 1,228  
|                                             |  |              |        
|Noninterest income                           |  |              | 6,324  
|Noninterest expense                          |  |              | 22,164 
|Net income                                   |  |              | 4,049  
|Net income applicable to common stockholders |  |              | 3,624  
|                                             |  |              |        
|Per  common share data:                      |  |              |        
|Basic net income per share                   |  | $            | 1.17   
|                                             |  |              |        
|Diluted net income per share                 |  |              | 1.16   
|Per share data:                              |  |              |        
|Basic net income per share                   |  | $            | 1.31   
|Diluted net income per share                 |  |              | 1.29   
|                                             |  |              |        
|Selected Year End Balances:                  |  |              |        
|                                             |  |              |        
|Total assets                                 |  | $            | 721,385
|Securities                                   |  |              | 226,301
|Loans, net of allowance                      |  |              | 408,970
|Deposits                                     |  |              | 596,627
|Stockholders’ equity                         |  |              | 65,885 



Results of Operations



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



|                                                    |  | 2012           |        |  | 2011 |  
|--------------------------------------------------- |  | -------------- | ------ |  | ---- | -
|                                                    |  | (In thousands) |       
|                                                    |  |                |        |  |      |  
|Interest income                                     |  | $              | 26,325 |  |      | $
|Interest expense                                    |  |                | 3,930  |  |      |  
|Net interest income                                 |  |                | 22,395 |  |      |  
|                                                    |  |                |        |  |      |  
|Provision for loan losses                           |  |                | 1,228  |  |      |  
|                                                    |  |                |        |  |      |  
|Net interest income after provision for loan losses |  |                | 21,167 |  |      |  
|                                                    |  |                |        |  |      |  
|Other income                                        |  |                | 6,324  |  |      |  
|                                                    |  |                |        |  |      |  
|Other expense                                       |  |                | 21,647 |  |      |  
|                                                    |  |                |        |  |      |  
|Income tax expense                                  |  |                | 1,247  |  |      |  
|                                                    |  |                |        |  |      |  
|Net income                                          |  | $              | 4,597  |  |      | $



8







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



|                                                         |  | 2012           |        |   | 2011 |  
|-------------------------------------------------------- |  | -------------- | ------ | - | ---- | -
|                                                         |  | (In thousands) |       
|                                                         |  |                |        |   |      |  
|Net interest income:                                     |  |                |        |   |      |  
|Net interest income of The First                         |  | $              | 22,395 |   |      | $
|Intercompany eliminations                                |  |                | (201   | ) |      |  
|                                                         |  | $              | 22,194 |   |      | $
|                                                         |  |                |        |   |      |  
|Net income applicable to common stockholders:            |  |                |        |   |      |  
|Net income of  The First                                 |  | $              | 4,597  |   |      | $
|Net loss of the Company, excluding intercompany accounts |  |                | (973   | ) |      |  
|                                                         |  | $              | 3,624  |   |      | $



Consolidated Net Income



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



Consolidated Net
Interest Income



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



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



9







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



Average Balances, Income and Expenses,
and Rates



|                                           |  | Years Ended December 31, |        
|------------------------------------------ |  | ------------------------ | -------
|                                           |  | 2012                     |        
|                                           |  | Average 
Balance         |        
|                                           |  | (Dollars in thousands)   |        
|Assets                                     |  |                          |        
|Earning Assets                             |  |                          |        
|Loans (1)(2)                               |  | $                        | 388,012
|Securities                                 |  |                          | 235,833
|Federal funds sold (3)                     |  |                          | 19,670 
|Other                                      |  |                          | 4,845  
|Total earning assets                       |  |                          | 648,360
|                                           |  |                          |        
|Cash and due from banks                    |  |                          | 16,699 
|Premises and equipment                     |  |                          | 22,633 
|Other assets                               |  |                          | 32,337 
|Allowance for loan losses                  |  |                          | (4,457 
|Total assets                               |  | $                        | 715,572
|                                           |  |                          |        
|Liabilities                                |  |                          |        
|Interest-bearing liabilities               |  | $                        | 534,998
|Demand deposits (1)                        |  |                          | 107,392
|Other liabilities                          |  |                          | 10,036 
|Shareholders’ equity                       |  |                          | 63,146 
|Total liabilities and shareholders’ equity |  | $                        | 715,572
|                                           |  |                          |        
|Net interest spread                        |  |                          |        
|Net yield on interest-earning assets       |  |                          |        

____________________

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

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

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



10







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



Analysis of Changes in Consolidated Net
Interest Income



|                                      |  | Year Ended December 31,                     |       |  | Year Ended December 31,                     |  
|------------------------------------- |  | ------------------------------------------- | ----- |  | ------------------------------------------- | -
|                                      |  | 2012 versus 2011 Increase (decrease) due to |       |  | 2011 versus 2010 Increase (decrease) due to |  
|                                      |  | Volume                                      |       |  | Rate                                        |  
|                                      |  | (Dollars in thousands)                      |      
|Earning Assets                        |  |                                             |       |  |                                             |  
|Loans                                 |  | $                                           | 1,993 |  |                                             | $
|Securities                            |  |                                             | 2,518 |  |                                             |  
|Federal funds sold                    |  |                                             | 186   |  |                                             |  
|Other short-term investments          |  |                                             | 66    |  |                                             |  
|Total interest income                 |  |                                             | 4,763 |  |                                             |  
|Interest-Bearing Liabilities          |  |                                             |       |  |                                             |  
|Interest-bearing transaction accounts |  |                                             | 361   |  |                                             |  
|Money market accounts                 |  |                                             | 116   |  |                                             |  
|Savings deposits                      |  |                                             | 23    |  |                                             |  
|Time deposits                         |  |                                             | 36    |  |                                             |  
|Borrowed funds                        |  |                                             | 542   |  |                                             |  
|Total interest expense                |  |                                             | 1,078 |  |                                             |  
|Net interest income                   |  | $                                           | 3,685 |  |                                             | $



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



11







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



|                                                                     |  | December 31, 2010      |       
|-------------------------------------------------------------------- |  | ---------------------- | ------
|                                                                     |  | Within Three Months    |       
|                                                                     |  | (Dollars in thousands) |       
|Assets                                                               |  |                        |       
|Earning Assets:                                                      |  |                        |       
|Loans                                                                |  | $                      | 62,439
|Securities (2)                                                       |  |                        | 12,011
|Funds sold and other                                                 |  |                        | 9,083 
|Total earning assets                                                 |  |                        | 83,533
|Liabilities                                                          |  |                        |       
|Interest-bearing liabilities:                                        |  |                        |       
|Interest-bearing deposits:                                           |  |                        |       
|NOW accounts(1)                                                      |  | $                      | -     
|Money market accounts                                                |  |                        | 18,853
|Savings deposits (1)                                                 |  |                        | -     
|Time deposits                                                        |  |                        | 34,437
|Total interest-bearing deposits                                      |  |                        | 53,290
|Borrowed funds (3)                                                   |  |                        | -     
|Total interest-bearing liabilities                                   |  |                        | 53,290
|Interest-sensitivity gap per period                                  |  | $                      | 30,243
|Cumulative gap at December 31, 2010                                  |  | $                      | 30,243
|Ratio of cumulative gap to total earning assets at December 31, 2010 |  |                        | 6.6   



|                                                                      |  | December 31, 2011      |       
|--------------------------------------------------------------------- |  | ---------------------- | ------
|                                                                      |  | Within Three Months    |       
|                                                                      |  | (Dollars in thousands) |       
|Assets                                                                |  |                        |       
|Earning Assets:                                                       |  |                        |       
|Loans                                                                 |  | $                      | 72,117
|Securities (2)                                                        |  |                        | 9,987 
|Funds sold and other                                                  |  |                        | 241   
|Total earning assets                                                  |  |                        | 82,345
|Liabilities                                                           |  |                        |       
|Interest-bearing liabilities:                                         |  |                        |       
|Interest-bearing deposits:                                            |  |                        |       
|NOW accounts (1)                                                      |  | $                      | -     
|Money market accounts                                                 |  |                        | 43,296
|Savings deposits (1)                                                  |  |                        | -     
|Time deposits                                                         |  |                        | 39,411
|Total interest-bearing deposits                                       |  |                        | 82,707
|Borrowed funds (3)                                                    |  |                        | 231   
|Total interest-bearing liabilities                                    |  |                        | 82,938
|Interest-sensitivity gap per period                                   |  | $                      | (593  
|Cumulative gap at December 31, 2011                                   |  | $                      | (593  
|Ratio of cumulative gap to total earning assets at  December 31, 2011 |  |                        | (.09  



12







|                                                                      |  | December 31, 2012      |        
|--------------------------------------------------------------------- |  | ---------------------- | -------
|                                                                      |  | Within Three Months    |        
|                                                                      |  | (Dollars in thousands) |        
|Assets                                                                |  |                        |        
|Earning Assets:                                                       |  |                        |        
|Loans                                                                 |  | $                      | 72,670 
|Securities (2)                                                        |  |                        | 11,185 
|Funds sold and other                                                  |  |                        | 1,064  
|Total earning assets                                                  |  |                        | 84,919 
|Liabilities                                                           |  |                        |        
|Interest-bearing liabilities:                                         |  |                        |        
|Interest-bearing deposits:                                            |  |                        |        
|NOW accounts (1)                                                      |  | $                      | -      
|Money market accounts                                                 |  |                        | 47,325 
|Savings deposits (1)                                                  |  |                        | -      
|Time deposits                                                         |  |                        | 32,624 
|Total interest-bearing deposits                                       |  |                        | 79,949 
|Borrowed funds (3)                                                    |  |                        | 20,000 
|Total interest-bearing liabilities                                    |  |                        | 99,949 
|Interest-sensitivity gap per period                                   |  | $                      | (15,030
|Cumulative gap at December 31, 2012                                   |  | $                      | (15,030
|Ratio of cumulative gap to total earning assets at  December 31, 2012 |  |                        | (2.3   



______________



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

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

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



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



Provision and Allowance for Loan Losses



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



13







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



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



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



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



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



|Local Unemployment Rate                
|---------------------------------------
|Insurance issues (Windpool areas)      
|Bankruptcy Rates (increasing/declining)
|Local Commercial R/E Vacancy rates     
|Established market/new market          
|Hurricane threat                       



14







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

|Gross Domestic Product (GDP)                           
|-------------------------------------------------------
|Home Sales                                             
|Consumer Price Index (CPI)                             
|Interest Rate Environment (increasing/steady/declining)
|Single Family construction starts                      
|Inflation Rate                                         
|Retail Sales                                           



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

|Second Mortgages                      
|--------------------------------------
|Single Pay Loans                      
|Non-Recourse Loans                    
|Limited Guaranty Loans                
|Loan to Value Exceptions              
|Secured by Non-Owner Occupied property
|Raw Land Loans                        
|Unsecured Loans                       



Measurable Bank Trends: (Updated
quarterly)

|Delinquency Trends                         
|-------------------------------------------
|Non-Accrual Trends                         
|Net Charge Offs                            
|Loan Volume Trends                         
|Non-Performing Assets                      
|Underwriting Standards/Lending Policies    
|Experience/Depth of Bank Lending Management
|                                           

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



15







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



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



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



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



16







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



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



|                                    |  | December 31, 2012     |      
|----------------------------------- |  | --------------------- | -----
|                                    |  | (In thousands)        |      
|                                    |  | Past Due 30 to89 Days |      
|                                    |  |                       |      
|Real Estate-construction            |  | $                     | 990  
|Real Estate-mortgage                |  |                       | 3,045
|Real Estate-non farm nonresidential |  |                       | 389  
|Commercial                          |  |                       | 88   
|Consumer                            |  |                       | 132  
|Total                               |  | $                     | 4,644



|                                    |  | December 31, 2011     |      
|----------------------------------- |  | --------------------- | -----
|                                    |  | (In thousands)        |      
|                                    |  | Past Due 30 to89 Days |      
|                                    |  |                       |      
|Real Estate-construction            |  | $                     | 70   
|Real Estate-mortgage                |  |                       | 2,189
|Real Estate-non farm nonresidential |  |                       | 1,662
|Commercial                          |  |                       | 138  
|Consumer                            |  |                       | 214  
|Total                               |  | $                     | 4,273



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



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



17







Consolidated Allowance For Loan Losses

|                                                   |  | Years Ended December 31, |        
|-------------------------------------------------- |  | ------------------------ | -------
|                                                   |  | 2012                     |        
|                                                   |  |                          |        
|Average loans outstanding                          |  | $                        | 388,012
|Loans outstanding at year end                      |  | $                        | 413,697
|                                                   |  |                          |        
|Total nonaccrual loans                             |  | $                        | 3,589  
|                                                   |  |                          |        
|Beginning balance of allowance                     |  | $                        | 4,511  
|Loans charged-off                                  |  |                          | (1,190 
|Total loans charged-off                            |  |                          | (1,190 
|Total recoveries                                   |  |                          | 178    
|Net loans charged-off                              |  |                          | (1,012 
|Acquisition                                        |  |                          | -      
|Provision for loan losses                          |  |                          | 1,228  
|Balance at year end                                |  | $                        | 4,727  
|                                                   |  |                          |        
|Net charge-offs to average loans                   |  |                          | .26    
|Allowance as percent of total loans                |  |                          | 1.14   
|Nonperforming loans as a percentage of total loans |  |                          | .87    
|Allowance as a multiple of nonaccrual loans        |  |                          | 1.3    



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



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



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



18







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



Analysis of the Allowance for Loan Losses



|                                    |  | Years Ended December 31, |       
|----------------------------------- |  | ------------------------ | ------
|                                    |  | 2012                     |       
|                                    |  | (Dollars in thousands)   |       
|                                    |  |                          |       
|Balance at beginning of  year       |  | $                        | 4,511 
|Charge-offs:                        |  |                          |       
|Real Estate-construction            |  |                          | (102  
|Real Estate-mortgage                |  |                          | (559  
|Real Estate-nonfarm  nonresidential |  |                          | (160  
|Commercial                          |  |                          | (166  
|Consumer                            |  |                          | (203  
|Total                               |  |                          | (1,190
|Recoveries:                         |  |                          |       
|Real Estate-construction            |  |                          | 14    
|Real Estate-mortgage                |  |                          | 37    
|Real Estate-nonfarm  nonresidential |  |                          | 32    
|Commercial                          |  |                          | 25    
|Consumer                            |  |                          | 70    
|Total                               |  |                          | 178   
|Net Charge-offs                     |  |                          | (1,012
|Provision for Loan Losses           |  |                          | 1,228 
|Balance at end of year              |  | $                        | 4,727 



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



Allocation of the Allowance for Loan
Losses



|                           |  | December 31, 2012      |      
|-------------------------- |  | ---------------------- | -----
|                           |  | (Dollars in thousands) |      
|                           |  | Amount                 |      
|                           |  |                        |      
|Commercial Non Real Estate |  | $                      | 420  
|Commercial Real Estate     |  |                        | 3,338
|Consumer Real Estate       |  |                        | 810  
|Consumer                   |  |                        | 151  
|Unallocated                |  |                        | 8    
|Total                      |  | $                      | 4,727



|                           |  | December 31, 2011      |      
|-------------------------- |  | ---------------------- | -----
|                           |  | (Dollars in thousands) |      
|                           |  | Amount                 |      
|                           |  |                        |      
|Commercial Non Real Estate |  | $                      | 397  
|Commercial Real Estate     |  |                        | 3,356
|Consumer Real Estate       |  |                        | 680  
|Consumer                   |  |                        | 78   
|Unallocated                |  |                        | -    
|Total                      |  | $                      | 4,511



19







Noninterest Income and Expense



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



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



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



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



Noninterest Expense



|                                 |  | Years ended December 31, |       
|-------------------------------- |  | ------------------------ | ------
|                                 |  | 2012                     |       
|                                 |  | (In thousands)           |       
|                                 |  |                          |       
|Salaries and employee benefits   |  | $                        | 12,001
|Occupancy                        |  |                          | 1,797 
|Equipment                        |  |                          | 1,435 
|Marketing and public relations   |  |                          | 329   
|Data processing                  |  |                          | 85    
|Supplies and printing            |  |                          | 425   
|Telephone                        |  |                          | 533   
|Correspondent services           |  |                          | 96    
|Deposit and other insurance      |  |                          | 734   
|Professional and consulting fees |  |                          | 747   
|Postage                          |  |                          | 252   
|ATM fees                         |  |                          | 434   
|Other                            |  |                          | 3,296 
|                                 |  |                          |       
|Total                            |  | $                        | 22,164
|                                 |  |                          |       



Income Tax Expense



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



20







Analysis of Financial Condition



Earning Assets



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



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



Composition of Loan Portfolio



|                                       |  | December 31,           |        
|-------------------------------------- |  | ---------------------- | -------
|                                       |  | 2012                   |        
|                                       |  | Amount                 |        
|                                       |  | (Dollars in thousands) |        
|Mortgage loans held for sale           |  | $                      | 5,585  
|Commercial, financial and agricultural |  |                        | 53,234 
|Real Estate:                           |  |                        |        
|Mortgage-commercial                    |  |                        | 142,046
|Mortgage-residential                   |  |                        | 140,703
|Construction                           |  |                        | 57,529 
|Consumer and other                     |  |                        | 14,600 
|Total loans                            |  |                        | 413,697
|Allowance for loan losses              |  |                        | (4,727 
|Net loans                              |  | $                      | 408,970



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



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



21







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



Loan Maturity Schedule and Sensitivity
to Changes in Interest Rates



|                                       |  | December 31, 2012                                                                                                                                                                                                                                                                                                                             |       
|-------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------
|Type                                   |  | One
                                                                                                         Year or
                                                                                                                                                                                                                    Less |       
|                                       |  | (In thousands)                                                                                                                                                                                                                                                                                                                                |       
|                                       |  |                                                                                                                                                                                                                                                                                                                                               |       
|Commercial, financial and agricultural |  | $                                                                                                                                                                                                                                                                                                                                             | 32,544
|Real estate – construction             |  |                                                                                                                                                                                                                                                                                                                                               | 57,529
|                                       |  | $                                                                                                                                                                                                                                                                                                                                             | 90,073
|                                       |  |                                                                                                                                                                                                                                                                                                                                               |       
|Loans maturing after one year with:    |  |                                                                                                                                                                                                                                                                                                                                               |       
|Fixed interest rates                   |  |                                                                                                                                                                                                                                                                                                                                               |       
|Floating interest rates                |  |                                                                                                                                                                                                                                                                                                                                               |       
|                                       |  |                                                                                                                                                                                                                                                                                                                                               |       



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



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



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



Securities Portfolio



|                                   |  | December 31,   |        
|---------------------------------- |  | -------------- | -------
|                                   |  | 2012           |        
|                                   |  | (In thousands) |        
|Available-for-sale                 |  |                |        
|U. S. Government agencies          |  | $              | 98,326 
|States and municipal subdivisions  |  |                | 98,910 
|Corporate obligations              |  |                | 16,187 
|Mutual finds                       |  |                | 970    
|Total available-for-sale           |  |                | 214,393
|Held-to-maturity                   |  |                |        
|U.S. Government agencies           |  |                | 2,470  
|States and  municipal subdivisions |  |                | 6,000  
|Total held-to-maturity             |  |                | 8,470  
|Total                              |  | $              | 222,863



22







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



Investment Securities Maturity Distribution
and Yields (1)



|                                                   |  | December 31, 2012 |       
|-------------------------------------------------- |  | ----------------- | ------
|                                                   |  |                   |       
|(Dollars in thousands)                             |  | Within One Year   |       
|                                                   |  | Amount            |       
|Held-to-maturity:                                  |  |                   |       
|U.S. Government agencies
    (2)                   |  | $                 | -     
|States
    and municipal subdivisions              |  |                   | -     
|Total
    investment securities held-to-maturity   |  | $                 | -     
|Available-for-sale:                                |  |                   |       
|U.S. Government agencies
    (3)                   |  | $                 | 4,575 
|States and municipal
    subdivisions.             |  |                   | 12,901
|Corporate
    obligations and other                |  |                   | -     
|Total
    investment securities available-for-sale |  | $                 | 17,476

_________________

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

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

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



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



Deposits



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



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





|                                  |  | Deposits     |        
|--------------------------------- |  | ------------ | -------
|                                  |  |              |        
|                                  |  | December 31, |        
|(Dollars in thousands)            |  | 2012         |        
|                                  |  |              |        
|                                  |  | Amount       |        
|                                  |  |              |        
|Noninterest-bearing accounts      |  | $            | 109,624
|NOW accounts                      |  |              | 230,589
|Money market accounts             |  |              | 47,325 
|Savings accounts                  |  |              | 48,153 
|Time deposits less than $100,000  |  |              | 69,115 
|Time deposits of $100,000 or over |  |              | 91,821 
|Total deposits                    |  | $            | 596,627



23







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



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



Maturities of Certificates of Deposit

of $100,000 or More



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



Borrowed Funds



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



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



Subordinated Debentures



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



24







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



Capital



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



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



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



Analysis of Capital



|                    |  | Adequately  |     |   | Well        |  |      | The Company  |  |  | The First    |  
|------------------- |  | ----------- | --- | - | ----------- |  | ---- | ------------ |  |  | ------------ | -
|Capital Ratios      |  | Capitalized |     |   | Capitalized |  |      | December 31, |  |  | December 31, |  
|                    |  |             |     |   |             |  |      | 2012         |  |  | 2011         |  
|                    |  |             |     |   |             |  |      |              |  |  |              |  
|Leverage            |  |             | 4.0 | % |             |  | 5.0  | %            |  |  | 8.6          | %
|Risk-based capital: |  |             |     |   |             |  |      |              |  |  |              |  
|Tier 1              |  |             | 4.0 | % |             |  | 6.0  | %            |  |  | 12.8         | %
|Total               |  |             | 8.0 | % |             |  | 10.0 | %            |  |  | 13.8         | %



25







Ratios



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



Liquidity Management



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



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



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



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



26







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



Subprime Assets



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



Accounting Matters



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



Impact of Inflation



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





27











REPORT OF

INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM





To the Board of Directors and Stockholders

The First Bancshares, Inc.

Hattiesburg, Mississippi





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



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



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





/s/ T. E. LOTT &
COMPANY







Columbus, Mississippi

March 28, 2013









28







THE FIRST BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2012 AND 2011



|                                                                                                                                                               |  | 2012 |             |   | 2011 |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | -
|ASSETS                                                                                                                                                         |  |      |             |   |      |  
|                                                                                                                                                               |  |      |             |   |      |  
|Cash and due from banks                                                                                                                                        |  | $    | 20,225,123  |   |      | $
|Interest-bearing deposits with banks                                                                                                                           |  |      | 9,587,601   |   |      |  
|Federal funds sold                                                                                                                                             |  |      | 1,064,000   |   |      |  
|Total cash and cash equivalents                                                                                                                                |  |      | 30,876,724  |   |      |  
|Held-to-maturity securities (fair value of  $7,055,499 in 2012 and $6,002,399 in 2011)                                                                         |  |      | 8,470,103   |   |      |  
|Available-for-sale securities                                                                                                                                  |  |      | 214,392,682 |   |      |  
|Other securities                                                                                                                                               |  |      | 3,437,750   |   |      |  
|Total securities                                                                                                                                               |  |      | 226,300,535 |   |      |  
|Loans held for sale                                                                                                                                            |  |      | 5,585,373   |   |      |  
|Loans, net of allowance for loan losses of $4,726,618 in 2012 and $4,510,938 in 2011                                                                           |  |      | 403,384,642 |   |      |  
|Interest receivable                                                                                                                                            |  |      | 2,887,287   |   |      |  
|Premises and equipment                                                                                                                                         |  |      | 22,242,838  |   |      |  
|Cash surrender value of life insurance                                                                                                                         |  |      | 6,441,109   |   |      |  
|Goodwill                                                                                                                                                       |  |      | 9,362,498   |   |      |  
|Other assets                                                                                                                                                   |  |      | 14,304,274  |   |      |  
|Total assets                                                                                                                                                   |  | $    | 721,385,280 |   |      | $
|                                                                                                                                                               |  |      |             |   |      |  
|LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                           |  |      |             |   |      |  
|                                                                                                                                                               |  |      |             |   |      |  
|Deposits:                                                                                                                                                      |  |      |             |   |      |  
|Noninterest-bearing                                                                                                                                            |  | $    | 109,624,640 |   |      | $
|Interest-bearing                                                                                                                                               |  |      | 487,001,945 |   |      |  
|Total deposits                                                                                                                                                 |  |      | 596,626,585 |   |      |  
|Interest payable                                                                                                                                               |  |      | 212,041     |   |      |  
|Borrowed funds                                                                                                                                                 |  |      | 36,770,773  |   |      |  
|Subordinated debentures                                                                                                                                        |  |      | 10,310,000  |   |      |  
|Other liabilities                                                                                                                                              |  |      | 11,580,415  |   |      |  
|Total liabilities                                                                                                                                              |  |      | 655,499,814 |   |      |  
|Stockholders’ Equity:                                                                                                                                          |  |      |             |   |      |  
|Preferred stock, no par value, $1,000 per share liquidation, 10,000,000 shares authorized; 17,123 shares issued and outstanding in 2012 and 2011, respectively |  |      | 17,020,539  |   |      |  
|Common stock, par value $1 per share: 10,000,000 shares authorized; 3,133,596 and 3,092,566 shares issued and outstanding  in 2012 and 2011, respectively      |  |      | 3,133,596   |   |      |  
|Additional paid-in capital                                                                                                                                     |  |      | 23,710,775  |   |      |  
|Retained earnings                                                                                                                                              |  |      | 19,951,173  |   |      |  
|Accumulated other comprehensive income                                                                                                                         |  |      | 2,533,028   |   |      |  
|Treasury stock, at cost                                                                                                                                        |  |      | (463,645    | ) |      |  
|Total stockholders’ equity                                                                                                                                     |  |      | 65,885,466  |   |      |  
|Total liabilities and stockholders’ equity                                                                                                                     |  | $    | 721,385,280 |   |      | $



The accompanying notes are an integral part
of these statements.



29







THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2012 AND 2011



|                                                                |  | 2012 |            |   | 2011 |  
|--------------------------------------------------------------- |  | ---- | ---------- | - | ---- | -
|INTEREST INCOME                                                 |  |      |            |   |      |  
|Interest and fees on loans                                      |  | $    | 21,412,469 |   |      | $
|Interest and dividends on securities:                           |  |      |            |   |      |  
|Taxable interest and dividends                                  |  |      | 2,744,643  |   |      |  
|Tax-exempt interest                                             |  |      | 2,040,412  |   |      |  
|Interest on federal funds sold                                  |  |      | 50,689     |   |      |  
|Interest on deposits in banks                                   |  |      | 82,716     |   |      |  
|Total interest income                                           |  |      | 26,330,929 |   |      |  
|                                                                |  |      |            |   |      |  
|INTEREST EXPENSE                                                |  |      |            |   |      |  
|Interest on time deposits of $100,000 or more                   |  |      | 1,050,138  |   |      |  
|Interest on other deposits                                      |  |      | 2,016,490  |   |      |  
|Interest on borrowed funds                                      |  |      | 1,069,988  |   |      |  
|Total interest expense                                          |  |      | 4,136,616  |   |      |  
|Net interest income                                             |  |      | 22,194,313 |   |      |  
|Provision for loan losses                                       |  |      | 1,228,016  |   |      |  
|Net interest income after provision for loan losses             |  |      | 20,966,297 |   |      |  
|                                                                |  |      |            |   |      |  
|OTHER INCOME                                                    |  |      |            |   |      |  
|Service charges on deposit accounts                             |  |      | 3,431,579  |   |      |  
|Other service charges and fees                                  |  |      | 2,426,759  |   |      |  
|Bank owned life insurance income                                |  |      | 170,918    |   |      |  
|Loss on sale of other real estate                               |  |      | (55,426    | ) |      |  
|Other                                                           |  |      | 349,922    |   |      |  
|Impairment loss on securities:                                  |  |      |            |   |      |  
|Total other-than-temporary impairment loss                      |  |      | -          |   |      |  
|Less:  Portion of loss recognized in other comprehensive income |  |      | -          |   |      |  
|Net impairment loss recognized in earnings                      |  |      | -          |   |      |  
|Total other income                                              |  |      | 6,323,752  |   |      |  
|                                                                |  |      |            |   |      |  
|OTHER EXPENSE                                                   |  |      |            |   |      |  
|Salaries                                                        |  |      | 10,059,380 |   |      |  
|Employee benefits                                               |  |      | 1,941,330  |   |      |  
|Occupancy                                                       |  |      | 1,797,347  |   |      |  
|Furniture and equipment                                         |  |      | 1,435,153  |   |      |  
|Supplies and printing                                           |  |      | 425,086    |   |      |  
|Professional and consulting fees                                |  |      | 746,941    |   |      |  
|Marketing and public relations                                  |  |      | 329,362    |   |      |  
|FDIC and OCC assessments                                        |  |      | 681,540    |   |      |  
|Other                                                           |  |      | 4,747,764  |   |      |  
|Total other expense                                             |  |      | 22,163,903 |   |      |  



30







THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2012 AND 2011





Continued:



|                                              |  | 2012 |           |  | 2011 |  
|--------------------------------------------- |  | ---- | --------- |  | ---- | -
|                                              |  |      |           |  |      |  
|Income before income taxes                    |  |      | 5,126,146 |  |      |  
|Income taxes                                  |  |      | 1,077,379 |  |      |  
|                                              |  |      |           |  |      |  
|Net income                                    |  |      | 4,048,767 |  |      |  
|Preferred dividends and stock accretion       |  |      | 424,428   |  |      |  
|Net income applicable to common stockholders  |  | $    | 3,624,339 |  |      | $
|                                              |  |      |           |  |      |  
|Net income per share:                         |  |      |           |  |      |  
|Basic                                         |  | $    | 1.31      |  |      | $
|Diluted                                       |  |      | 1.29      |  |      |  
|Net income applicable to common stockholders: |  |      |           |  |      |  
|Basic                                         |  | $    | 1.17      |  |      | $
|Diluted                                       |  |      | 1.16      |  |      |  



The accompanying notes are an integral part
of these statements.



31







THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME

YEARS ENDED DECEMBER 31, 2012 AND 2011



|                                                                   |  | 2012 |            |   | 2011 |  
|------------------------------------------------------------------ |  | ---- | ---------- | - | ---- | -
|                                                                   |  |      |            |   |      |  
|Net income                                                         |  | $    | 4,048,767  |   |      | $
|                                                                   |  |      |            |   |      |  
|Other comprehensive income:                                        |  |      |            |   |      |  
|Unrealized gains on securities:                                    |  |      |            |   |      |  
|Unrealized holding gains arising during the period                 |  |      | 3,022,776  |   |      |  
|Plus reclassification adjustment for losses included in net income |  |      | -          |   |      |  
|                                                                   |  |      | 3,022,776  |   |      |  
|                                                                   |  |      |            |   |      |  
|Unrealized holding gains (losses) on loans held for sale           |  |      | (36,365    | ) |      |  
|                                                                   |  |      |            |   |      |  
|Non-credit related impairment loss on investment securities        |  |      | -          |   |      |  
|                                                                   |  |      |            |   |      |  
|Income tax benefit (expense)                                       |  |      | (1,015,380 | ) |      |  
|                                                                   |  |      |            |   |      |  
|Other comprehensive income                                         |  |      | 1,971,031  |   |      |  
|                                                                   |  |      |            |   |      |  
|Comprehensive income                                               |  | $    | 6,019,798  |   |      | $



The accompanying notes are an integral part
of these statements.



32







THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 2012 AND 2011



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



33







THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 2012 AND 2011



Continued:



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



The accompanying notes are an integral part
of these statements.



34









THE FIRST
BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2012 AND 2011



|                                                                                  |  | 2012 |              |   | 2011 |  
|--------------------------------------------------------------------------------- |  | ---- | ------------ | - | ---- | -
|CASH FLOWS FROM OPERATING ACTIVITIES                                              |  |      |              |   |      |  
|Net income                                                                        |  | $    | 4,048,767    |   |      | $
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |              |   |      |  
|Depreciation and amortization                                                     |  |      | 1,724,050    |   |      |  
|FHLB Stock dividends                                                              |  |      | (3,300       | ) |      |  
|Provision for loan losses                                                         |  |      | 1,228,016    |   |      |  
|Impairment loss on securities                                                     |  |      | -            |   |      |  
|Loss (Gain) on sale/call of securities                                            |  |      | -            |   |      |  
|Deferred income taxes                                                             |  |      | (136,348     | ) |      |  
|Restricted stock expense                                                          |  |      | 263,216      |   |      |  
|Increase in cash value of life insurance                                          |  |      | (170,918     | ) |      |  
|Amortization and accretion, net                                                   |  |      | 789,999      |   |      |  
|Loss on sale/writedown of other real estate                                       |  |      | 526,957      |   |      |  
|Changes in:                                                                       |  |      |              |   |      |  
|Loans held for sale                                                               |  |      | (2,716,039   | ) |      |  
|Interest receivable                                                               |  |      | (115,611     | ) |      |  
|Other assets                                                                      |  |      | 3,255,806    |   |      |  
|Interest payable                                                                  |  |      | (95,711      | ) |      |  
|Other liabilities                                                                 |  |      | 1,624,587    |   |      |  
|Net cash provided by operating activities                                         |  |      | 10,223,471   |   |      |  
|                                                                                  |  |      |              |   |      |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                              |  |      |              |   |      |  
|Purchases of available-for-sale securities                                        |  |      | (60,102,101  | ) |      |  
|Purchases of other securities                                                     |  |      | (1,409,300   | ) |      |  
|Purchases of held-to-maturity securities                                          |  |      | (2,489,450   | ) |      |  
|Proceeds from maturities and calls of available-for-sale securities               |  |      | 59,198,136   |   |      |  
|Proceeds from sales of securities available-for-sale                              |  |      | -            |   |      |  
|Proceeds from redemption of other securities                                      |  |      | 620,100      |   |      |  
|Increase in loans                                                                 |  |      | (29,994,973  | ) |      |  
|Net additions to premises and equipment                                           |  |      | (448,274     | ) |      |  
|Net cash received from acquisition                                                |  |      | -            |   |      |  
|Net cash used in investing activities                                             |  |      | (34,625,862  | ) |      |  
|                                                                                  |  |      |              |   |      |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                              |  |      |              |   |      |  
|Increase (decrease) in deposits                                                   |  |      | 23,170,427   |   |      |  
|Proceeds from borrowed funds                                                      |  |      | 133,340,000  |   |      |  
|Repayment of borrowed funds                                                       |  |      | (123,601,058 | ) |      |  
|Dividends paid on common stock                                                    |  |      | (453,105     | ) |      |  
|Dividends paid on preferred stock                                                 |  |      | (342,460     | ) |      |  
|Repurchase of restricted stock for payment of taxes                               |  |      | (15,642      | ) |      |  
|Net cash  provided by (used in) financing activities                              |  |      | 32,098,162   |   |      |  



The accompanying notes are an integral part
of these statements.

35







THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2012 AND 2011



Continued:



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



The accompanying notes are an integral part
of these statements.



36







THE FIRST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE A - NATURE OF BUSINESS



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



NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES



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



| | 1. | Principles of Consolidation
| | -- | ---------------------------



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



| | 2. | Estimates
| | -- | ---------



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



| | 3. | Cash and Due From Banks
| | -- | -----------------------



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



| | 4. | Securities
| | -- | ----------



Investments in securities are
accounted for as follows:



Available-for-Sale
Securities



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



37







Securities to be
Held-to-Maturity



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



Trading Account
Securities



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



Other Securities



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



Other-than-Temporary Impairment



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



| | 5. | Loans held for sale
| | -- | -------------------



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



| | 6. | Loans
| | -- | -----



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



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



38







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



| | 7. | Allowance for Loan Losses
| | -- | -------------------------



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



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



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



| | 8. | Premises and Equipment
| | -- | ----------------------



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



| | 9. | Other Real Estate
| | -- | -----------------



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



39







| | 10. | Goodwill and Other Intangible Assets
| | --- | ------------------------------------



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



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



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



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



|                         |  | 2012     |       |  | 2011         |  
|------------------------ |  | -------- | ----- |  | ------------ | -
|                         |  | Gross    |       |  |              |  
|                         |  | Carrying |       |  | Accumulated  |  
|                         |  | Amount   |       |  | Amortization |  
|(Dollars in thousands)   |  |          |       |  |              |  
|                         |  |          |       |  |              |  
|Core deposit intangibles |  | $        | 3,095 |  |              | $



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



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



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



40







| | 11. | Other Assets and Cash Surrender Value
| | --- | -------------------------------------



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



| | 12. | Stock Options
| | --- | -------------



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



| | 13. | Income Taxes
| | --- | ------------



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



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



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



| | 14. | Advertising Costs
| | --- | -----------------



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



| | 15. | Statements of Cash Flows
| | --- | ------------------------



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



| | 16. | Off-Balance Sheet Financial Instruments
| | --- | ---------------------------------------



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



41







| | 17. | Earnings Applicable to Common Stockholders
| | --- | ------------------------------------------



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



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



|                           |  | For the Year Ended     |           |  | For the Year Ended   | 
|-------------------------- |  | ---------------------- | --------- |  | -------------------- | 
|                           |  | December 31, 2012      |           |  | December 31, 2011    | 
|                           |  | Net Income (Numerator) |           |  | Shares (Denominator) | 
|Basic per common share     |  | $                      | 3,624,339 |  |                      | 
|                           |  |                        |           |  |                      | 
|Effect of dilutive shares: |  |                        |           |  |                      | 
|Restricted Stock           |  |                        |           |  |                      | 
|                           |  | $                      | 3,624,339 |  |                      | 



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



| | 18. | Reclassifications
| | --- | -----------------



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



| | 19. | Accounting Pronouncements
| | --- | -------------------------



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



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



42







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



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



NOTE C – BUSINESS COMBINATION



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



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



43



















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



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



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



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



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



NOTE D – SECURITIES



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



|                                                                        |  | December 31, 2012 |            
|----------------------------------------------------------------------- |  | ----------------- | -----------
|                                                                        |  | AmortizedCost     |            
|Available-for-sale securities:                                          |  |                   |            
|Obligations of U.S. Government agencies                                 |  | $                 | 36,148,002 
|Tax-exempt and taxable obligations of states and municipal subdivisions |  |                   | 95,113,063 
|Mortgage-backed securities                                              |  |                   | 60,384,181 
|Corporate obligations                                                   |  |                   | 17,640,092 
|Other                                                                   |  |                   | 1,255,483  
|                                                                        |  | $                 | 210,540,821
|Held-to-maturity securities:                                            |  |                   |            
|Mortgage-backed securities                                              |  | $                 | 2,470,103  
|Taxable obligations of states and municipal subdivisions                |  |                   | 6,000,000  
|                                                                        |  | $                 | 8,470,103  



44







|                                                                        |  | December 31, 2011 |            
|----------------------------------------------------------------------- |  | ----------------- | -----------
|                                                                        |  | AmortizedCost     |            
|Available-for-sale securities:                                          |  |                   |            
|Obligations of U.S. Government agencies                                 |  | $                 | 43,474,933 
|Tax-exempt and taxable obligations of states and municipal subdivisions |  |                   | 91,756,084 
|Mortgage-backed securities                                              |  |                   | 58,534,125 
|Corporate obligations                                                   |  |                   | 16,678,672 
|Other                                                                   |  |                   | 1,255,483  
|                                                                        |  | $                 | 211,699,297
|Held-to-maturity securities:                                            |  |                   |            
|Mortgage-backed securities                                              |  |                   |            
|Taxable obligations of states and municipal subdivisions                |  | $                 | 2,278      
|                                                                        |  |                   | 6,000,000  
|                                                                        |  | $                 | 6,002,278  



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



|                                       |  | Available-for-Sale |             |  | Held-to-Maturity     |  
|-------------------------------------- |  | ------------------ | ----------- |  | -------------------- | -
|                                       |  | Amortized Cost     |             |  | Estimated Fair Value |  
|                                       |  |                    |             |  |                      |  
|Due less than one year                 |  | $                  | 17,393,747  |  |                      | $
|Due after one year through five years  |  |                    | 72,776,427  |  |                      |  
|Due after five years through ten years |  |                    | 36,660,487  |  |                      |  
|Due after ten years                    |  |                    | 23,325,979  |  |                      |  
|Mortgage-backed securities             |  |                    | 60,384,181  |  |                      |  
|                                       |  | $                  | 210,540,821 |  |                      | $



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



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



45







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



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



|                                                                          |  | 2012               |           
|------------------------------------------------------------------------- |  | ------------------ | ----------
|                                                                          |  | Losses < 12 Months |           
|                                                                          |  | Fair Value         |           
|Obligations of U.S. government agencies                                   |  | $                  | 5,063,924 
|Tax-exempt and tax- able obligations of states and municipal subdivisions |  |                    | 4,556,699 
|Mortgage-backed securities                                                |  |                    | -         
|Corporate obligations                                                     |  |                    | 978,600   
|Other                                                                     |  |                    | -         
|                                                                          |  | $                  | 10,599,223



|                                                                          |  | 2011               |           
|------------------------------------------------------------------------- |  | ------------------ | ----------
|                                                                          |  | Losses < 12 Months |           
|                                                                          |  | Fair Value         |           
|Obligations of U.S. government agencies                                   |  | $                  | 9,142,470 
|Tax-exempt and tax- able obligations of states and municipal subdivisions |  |                    | 6,451,142 
|Mortgage-backed securities                                                |  |                    | 16,208,868
|Corporate obligations                                                     |  |                    | 9,099,728 
|Other                                                                     |  |                    | -         
|                                                                          |  | $                  | 40,902,208



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



46







NOTE E - LOANS



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



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



|                                       |  | December 31,  2012     |         |   | December 31, 2011                                                                               | 
|-------------------------------------- |  | ---------------------- | ------- | - | ----------------------------------------------------------------------------------------------- | 
|                                       |  | Amount                 |         |   | Percent
                                                                               of Total | 
|                                       |  | (Dollars in thousands) |        
|                                       |  |                        |        
|Mortgage loans held for sale           |  | $                      | 5,585   |   |                                                                                                 | 
|Commercial, financial and agricultural |  |                        | 53,234  |   |                                                                                                 | 
|Real Estate:                           |  |                        |         |   |                                                                                                 | 
|Mortgage-commercial                    |  |                        | 142,046 |   |                                                                                                 | 
|Mortgage-residential                   |  |                        | 140,703 |   |                                                                                                 | 
|Construction                           |  |                        | 57,529  |   |                                                                                                 | 
|Consumer and other                     |  |                        | 14,600  |   |                                                                                                 | 
|Total loans                            |  |                        | 413,697 |   |                                                                                                 | 
|Allowance for loan losses              |  |                        | (4,727  | ) |                                                                                                 | 
|Net loans                              |  | $                      | 408,970 |   |                                                                                                 | 



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



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



47







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



(In thousands)



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



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



|Allocation of the Allowance for Loan Losses
|-------------------------------------------
|                                           
|                                           
|                                           
|                                           
|                                           
|Commercial Non Real Estate                 
|Commercial Real Estate                     
|Consumer Real Estate                       
|Consumer                                   
|Unallocated                                
|Total                                      



|                           |  | December 31, 2011      |      
|-------------------------- |  | ---------------------- | -----
|                           |  | (Dollars in thousands) |      
|                           |  | Amount                 |      
|                           |  |                        |      
|Commercial Non Real Estate |  | $                      | 397  
|Commercial Real Estate     |  |                        | 3,356
|Consumer Real Estate       |  |                        | 680  
|Consumer                   |  |                        | 78   
|Unallocated                |  |                        | -    
|Total                      |  | $                      | 4,511



48







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



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



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



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



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



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



|December 31,  2012        |  |                |        
|------------------------- |  | -------------- | -------
|                          |  |                |        
|                          |  |                |        
|                          |  | Real Estate    |        
|                          |  | (In thousands) |        
|Loans                     |  |                |        
|Individually evaluated    |  | $              | 4,111  
|Collectively evaluated    |  |                | 333,298
|Total                     |  | $              | 337,409
|                          |  |                |        
|Allowance for Loan Losses |  |                |        
|Individually evaluated    |  | $              | 917    
|Collectively evaluated    |  |                | 3,231  
|Total                     |  | $              | 4,148  



49







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



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



|December 31,  2012                         |  |                |       |  |         |   |       |           |  |   |            | 
|------------------------------------------ |  | -------------- | ----- |  | ------- | - | ----- | --------- |  | - | ---------- | 
|                                           |  |                |       |  |         |   |       |           |  |   |            | 
|                                           |  |                |       |  |         |   |       |           |  |   | Average    | 
|                                           |  |                |       |  |         |   |       |           |  |   | Recorded   | 
|                                           |  | Recorded       |       |  | Unpaid  |   |       | Related   |  |   | Investment | 
|                                           |  | Investment     |       |  | Balance |   |       | Allowance |  |   | YTD        | 
|                                           |  | (In thousands) |      
|Impaired loans with  no related allowance: |  |                |       |  |         |   |       |           |  |   |            | 
|Commercial installment                     |  | $              | 15    |  |         | $ | 15    |           |  | $ | -          | 
|Commercial real estate                     |  |                | 1,013 |  |         |   | 1,529 |           |  |   | -          | 
|Consumer real estate                       |  |                | 106   |  |         |   | 969   |           |  |   | -          | 
|Consumer installment                       |  |                | 311   |  |         |   | 311   |           |  |   | -          | 
|Total                                      |  | $              | 1,445 |  |         | $ | 2,824 |           |  | $ | -          | 
|                                           |  |                |       |  |         |   |       |           |  |   |            | 
|Impaired loans with  a related allowance:  |  |                |       |  |         |   |       |           |  |   |            | 
|Commercial installment                     |  | $              | 203   |  |         | $ | 203   |           |  | $ | 73         | 
|Commercial real estate                     |  |                | 1,549 |  |         |   | 1,549 |           |  |   | 747        | 
|Consumer real estate                       |  |                | 44    |  |         |   | 44    |           |  |   | 44         | 
|Consumer installment                       |  |                | 348   |  |         |   | 348   |           |  |   | 72         | 
|Total                                      |  | $              | 2,144 |  |         | $ | 2,144 |           |  | $ | 936        | 
|                                           |  |                |       |  |         |   |       |           |  |   |            | 
|Total Impaired Loans:                      |  |                |       |  |         |   |       |           |  |   |            | 
|Commercial installment                     |  | $              | 218   |  |         | $ | 218   |           |  | $ | 73         | 
|Commercial real estate                     |  |                | 2,562 |  |         |   | 3,078 |           |  |   | 747        | 
|Consumer real estate                       |  |                | 150   |  |         |   | 1,013 |           |  |   | 44         | 
|Consumer installment                       |  |                | 659   |  |         |   | 659   |           |  |   | 72         | 
|Total Impaired Loans                       |  | $              | 3,589 |  |         | $ | 4,968 |           |  | $ | 936        | 



50







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



51







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



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



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



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



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



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



|                                    |  | December 31, 2012            |      
|----------------------------------- |  | ---------------------------- | -----
|                                    |  | (In thousands)               |      
|                                    |  | Past Due 30 to 89 
     Days |      
|                                    |  |                              |      
|Real Estate-construction            |  | $                            | 990  
|Real Estate-mortgage                |  |                              | 3,045
|Real Estate-non farm nonresidential |  |                              | 389  
|Commercial                          |  |                              | 88   
|Consumer                            |  |                              | 132  
|Total                               |  | $                            | 4,644



52







|                                    |  | December 31, 2011      |      
|----------------------------------- |  | ---------------------- | -----
|                                    |  | (In thousands)         |      
|                                    |  | Past Due 30 to 89 Days |      
|                                    |  |                        |      
|Real Estate-construction            |  | $                      | 70   
|Real Estate-mortgage                |  |                        | 2,189
|Real Estate-non farm nonresidential |  |                        | 1,662
|Commercial                          |  |                        | 138  
|Consumer                            |  |                        | 214  
|Total                               |  | $                      | 4,273



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



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



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



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



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



53







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



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



|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
|Special Mention                  |  |                        | 5,169   |  |                      |   | 71     |                        |  |   | 45                        |  |  |       | 3     
|Substandard                      |  |                        | 16,815  |  |                      |   | 2,553  |                        |  |   | 99                        |  |  |       | 1,846 
|Doubtful                         |  |                        | -       |  |                      |   | 104    |                        |  |   | -                         |  |  |       | 175   
|Subtotal                         |  |                        | 245,676 |  |                      |   | 60,563 |                        |  |   | 16,148                    |  |  |       | 62,765
|Less:                            |  |                        |         |  |                      |   |        |                        |  |   |                           |  |  |       |       
|Unearned Discount                |  |                        | 94      |  |                      |   | 34     |                        |  |   | -                         |  |  |       | 2     
|                                 |  |                        |         |  |                      |   |        |                        |  |   |                           |  |  |       |       
|Loans, net of  unearned discount |  | $                      | 245,582 |  |                      | $ | 60,529 |                        |  | $ | 16,148                    |  |  | $     | 62,763



NOTE F - PREMISES AND EQUIPMENT



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



|                                               |  | 2012 |            |  | 2011 |  
|---------------------------------------------- |  | ---- | ---------- |  | ---- | -
|                                               |  |      |            |  |      |  
|Premises:                                      |  |      |            |  |      |  
|Land                                           |  | $    | 7,226,252  |  |      | $
|Buildings and improvements                     |  |      | 15,697,160 |  |      |  
|Equipment                                      |  |      | 6,954,110  |  |      |  
|Construction in progress                       |  |      | 11,473     |  |      |  
|                                               |  |      | 29,888,995 |  |      |  
|Less accumulated depreciation and amortization |  |      | 7,646,157  |  |      |  
|                                               |  | $    | 22,242,838 |  |      | $



54







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



NOTE G - DEPOSITS



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



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



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



NOTE H - BORROWED FUNDS



Borrowed funds consisted of the
following:



|                             |  | December 31, |           
|---------------------------- |  | ------------ | ----------
|                             |  | 2012         |           
|                             |  |              |           
|Reverse Repurchase Agreement |  | $            | 5,000,000 
|FHLB advances                |  |              | 31,770,773
|                             |  | $            | 36,770,773



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



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



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



55







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



NOTE I – LEASE OBLIGATIONS



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



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



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



|                                        |  | Operating      |     |  |               |  
|--------------------------------------- |  | -------------- | --- |  | ------------- | -
|                                        |  | Leases         |     |  | Capital Lease |  
|                                        |  | (In thousands) |    
|                                        |  |                |     |  |               |  
|2013                                    |  | $              | 118 |  |               | $
|2014                                    |  |                | 122 |  |               |  
|2015                                    |  |                | 96  |  |               |  
|2016                                    |  |                | 96  |  |               |  
|2017                                    |  |                | 77  |  |               |  
|Thereafter                              |  |                | 355 |  |               |  
|                                        |  |                |     |  |               |  
|Total Minimum Lease Payments            |  | $              | 864 |  |               |  
|                                        |  |                |     |  |               |  
|Less:  Amounts representing interest    |  |                |     |  |               |  
|                                        |  |                |     |  |               |  
|Present value of minimum lease payments |  |                |     |  |               | $



NOTE J - REGULATORY MATTERS



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



56







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



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



|                  |  | Company        |        |  | Subsidiary | 
|----------------- |  | -------------- | ------ |  | ---------- | 
|                  |  | (Consolidated) |        |  | The First  | 
|                  |  | Amount         |        |  | Ratio      | 
|December 31, 2012 |  |                |        |  |            | 
|Total risk-based  |  | $              | 66,080 |  |            | 
|Tier I risk-based |  |                | 61,353 |  |            | 
|Tier I leverage   |  |                | 61,353 |  |            | 
|                  |  |                |        |  |            | 
|December 31, 2011 |  |                |        |  |            | 
|Total risk-based  |  | $              | 62,071 |  |            | 
|Tier I risk-based |  |                | 57,560 |  |            | 
|Tier I leverage   |  |                | 57,560 |  |            | 



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



|                  |  | Company        |        |  | Subsidiary | 
|----------------- |  | -------------- | ------ |  | ---------- | 
|                  |  | (Consolidated) |        |  | The First  | 
|                  |  | Amount         |        |  | Ratio      | 
|December 31, 2012 |  |                |        |  |            | 
|Total risk-based  |  | $              | 38,271 |  |            | 
|Tier I risk-based |  |                | 19,135 |  |            | 
|Tier I leverage   |  |                | 28,712 |  |            | 
|                  |  |                |        |  |            | 
|December 31, 2011 |  |                |        |  |            | 
|Total risk-based  |  | $              | 36,649 |  |            | 
|Tier I risk-based |  |                | 18,324 |  |            | 
|Tier I leverage   |  |                | 27,164 |  |            | 



57







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



NOTE K - INCOME TAXES



The components of income tax
expense are as follows:



|                   |  | Years Ended December 31, |          
|------------------ |  | ------------------------ | ---------
|                   |  | 2012                     |          
|Current:           |  |                          |          
|Federal            |  | $                        | 1,000,418
|State              |  |                          | 213,309  
|Deferred (benefit) |  |                          | (136,348 
|                   |  | $                        | 1,077,379



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



|                                            |  | Years Ended December 31, |          
|------------------------------------------- |  | ------------------------ | ---------
|                                            |  | 2012                     |          
|                                            |  | Amount                   |          
|                                            |  |                          |          
|Income taxes at statutory rate              |  | $                        | 1,742,890
|Tax-exempt income                           |  |                          | (745,595 
|Nondeductible expenses                      |  |                          | 233,006  
|State income tax, net of federal tax effect |  |                          | 92,156   
|Tax credits                                 |  |                          | (295,800 
|Other, net                                  |  |                          | 50,722   
|                                            |  | $                        | 1,077,379



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



|                                                 |  | December 31, |           
|------------------------------------------------ |  | ------------ | ----------
|                                                 |  | 2012         |           
|Deferred tax assets:                             |  |              |           
|Allowance for loan losses                        |  | $            | 1,489,546 
|Net operating loss carryover                     |  |              | 652,061   
|Other                                            |  |              | 870,831   
|                                                 |  |              | 3,012,438 
|Deferred tax liabilities:                        |  |              |           
|Securities                                       |  |              | (89,426   
|Premises and equipment                           |  |              | (986,689  
|Unrealized gain on available-for-sale securities |  |              | (1,309,633
|Core deposit intangible                          |  |              | (58,358   
|Goodwill                                         |  |              | (281,036  
|                                                 |  |              |           
|                                                 |  |              | (2,725,142
|                                                 |  |              |           
|Net deferred tax asset, included in other assets |  | $            | 287,296   



58









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



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



NOTE L - EMPLOYEE BENEFITS



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



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



NOTE M - STOCK PLANS



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



59







NOTE N - SUBORDINATED DEBENTURES



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



NOTE O - TREASURY STOCK



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



NOTE P - RELATED PARTY TRANSACTIONS



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



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



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



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



60







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



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



NOTE R - FAIR VALUES OF ASSETS AND
LIABILITIES



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



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



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



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



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



61







Available-for-Sale Securities



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



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



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



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



62







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



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



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



Impaired Loans



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



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



63







Other Real
Estate Owned



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



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



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



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



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



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



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



64







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



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



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



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



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



|                              |  | As
                                                                               of December
                                                                                                                                                                                31,
                                                                                                                                                                                2012 |         |  | As
                                                                               of December
                                                                                                                                                                                31,
                                                                                                                                                                                2011 |  
|----------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -
|                              |  | Carrying Amount                                                                                                                                                                                                                                                                                                                                                                                                                                                        |         |  | Estimated Fair
                                                                                                                                                                                    Value                                                                                                                                                                                                                                                               |  
|                              |  | (In thousands)                                                                                                                                                                                                                                                                                                                                                                                                                                                         |        
|Financial Instruments:        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  
|Assets:                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  
|Cash and cash equivalents     |  | $                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | 30,877  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | $
|Securities available-for-sale |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 214,393 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  
|Securities held-to-maturity   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 8,470   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  
|Other securities              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 3,438   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  
|Loans, net                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 408,970 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  
|                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  
|Liabilities:                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  
|Noninterest-bearing deposits  |  | $                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | 109,625 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | $
|Interest-bearing deposits     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 487,002 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  
|Subordinated debentures       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 10,310  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  
|FHLB and other borrowings     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 36,771  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  



65







NOTE S - SENIOR PREFERRED STOCK



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



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



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



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



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



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



66







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



NOTE T - SUBSEQUENT EVENTS



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



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



NOTE U - PARENT COMPANY FINANCIAL
INFORMATION



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



Condensed Balance Sheets



|                                      |  | December 31, |           
|------------------------------------- |  | ------------ | ----------
|                                      |  | 2012         |           
|Assets:                               |  |              |           
|Cash and cash equivalents             |  | $            | 48,525    
|Investment in subsidiary bank         |  |              | 74,851,305
|Investments in statutory trusts       |  |              | 310,000   
|Other securities                      |  |              | 100,000   
|Premises and equipment                |  |              | 368,623   
|Other                                 |  |              | 599,192   
|                                      |  | $            | 76,277,645
|Liabilities and Stockholders’ Equity: |  |              |           
|Subordinated debentures               |  | $            | 10,310,000
|Other                                 |  |              | 82,179    
|Stockholders’ equity                  |  |              | 65,885,466
|                                      |  | $            | 76,277,645



67







Condensed Statements of Income



|                                                                                   |  | Years Ended December 31, |          
|---------------------------------------------------------------------------------- |  | ------------------------ | ---------
|                                                                                   |  | 2012                     |          
|Income:                                                                            |  |                          |          
|Interest and dividends                                                             |  | $                        | 6,212    
|Dividend income                                                                    |  |                          | 980,000  
|Other                                                                              |  |                          | -        
|                                                                                   |  |                          | 986,212  
|Expenses:                                                                          |  |                          |          
|Interest on borrowed funds                                                         |  |                          | 206,594  
|Legal                                                                              |  |                          | 112,203  
|Other                                                                              |  |                          | 404,447  
|                                                                                   |  |                          | 723,244  
|Income (loss) before income taxes and equity in undistributed income of subsidiary |  |                          | 262,968  
|Income tax benefit                                                                 |  |                          | 169,274  
|Income (loss) before equity in undistributed income of subsidiary                  |  |                          | 432,242  
|Equity in undistributed income of subsidiary                                       |  |                          | 3,616,525
|                                                                                   |  |                          |          
|Net income                                                                         |  | $                        | 4,048,767



Condensed Statements of Cash Flows



|                                                                                            |  | Years Ended December 31, |           
|------------------------------------------------------------------------------------------- |  | ------------------------ | ----------
|                                                                                            |  | 2012                     |           
|Cash flows from operating activities:                                                       |  |                          |           
|Net income                                                                                  |  | $                        | 4,048,767 
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |                          |           
|Equity in undistributed income of subsidiary                                                |  |                          | (3,616,525
|Restricted stock expense                                                                    |  |                          | 263,216   
|Other, net                                                                                  |  |                          | 157,883   
|Net cash provided by (used in) operating activities                                         |  |                          | 853,341   
|                                                                                            |  |                          |           
|Cash flows from investing activities:                                                       |  |                          |           
|Investment in subsidiary bank                                                               |  |                          | -         
|Net cash used in investing activities                                                       |  |                          | -         
|                                                                                            |  |                          |           
|Cash flows from financing activities:                                                       |  |                          |           
|Dividends paid on common stock                                                              |  |                          | (453,105  
|Dividends paid on preferred stock                                                           |  |                          | (342,460  
|Repurchase of restricted stock for payment of taxes                                         |  |                          | (15,642   
|Net cash used in financing activities                                                       |  |                          | (811,207  
|                                                                                            |  |                          |           
|Net  increase (decrease) in cash and cash equivalents                                       |  |                          | 42,134    
|Cash and cash equivalents at beginning of year                                              |  |                          | 6,391     
|                                                                                            |  |                          |           
|Cash and cash equivalents at end of year                                                    |  | $                        | 48,525    



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



|                                                    |  | Three Months Ended                       |      
|--------------------------------------------------- |  | ---------------------------------------- | -----
|                                                    |  | March 31                                 |      
|                                                    |  | (In thousands, except per share amounts) |      
|                                                    |  |                                          |      
|2012                                                |  |                                          |      
|Total interest income                               |  | $                                        | 6,666
|Total interest expense                              |  |                                          | 1,181
|Net interest income                                 |  |                                          | 5,485
|Provision for loan losses                           |  |                                          | 152  
|Net interest income after provision for loan losses |  |                                          | 5,333
|Total non-interest income                           |  |                                          | 1,475
|Total non-interest expense                          |  |                                          | 5,522
|Income tax expense                                  |  |                                          | 315  
|Net income                                          |  |                                          | 971  
|Preferred dividends and stock accretion             |  |                                          | 106  
|Net income applicable to common stockholders        |  | $                                        | 865  
|Per common share:                                   |  |                                          |      
|Net income, basic                                   |  | $                                        | .28  
|Net income, diluted                                 |  |                                          | .28  
|Cash dividends declared                             |  |                                          | .0375
|                                                    |  |                                          |      
|2011                                                |  |                                          |      
|Total interest income                               |  | $                                        | 5,733
|Total interest expense                              |  |                                          | 1,482
|Net interest income                                 |  |                                          | 4,251
|Provision for loan losses                           |  |                                          | 348  
|Net interest income after provision for loan losses |  |                                          | 3,903
|Total non-interest income                           |  |                                          | 915  
|Total non-interest expense                          |  |                                          | 4,524
|Income tax expense                                  |  |                                          | (207 
|Net income                                          |  |                                          | 501  
|Preferred dividends and stock accretion             |  |                                          | 86   
|Net income applicable to common stockholders        |  | $                                        | 415  
|Per common share:                                   |  |                                          |      
|Net income, basic                                   |  | $                                        | .14  
|Net income, diluted                                 |  |                                          | .14  
|Cash dividends declared                             |  |                                          | .0375



69











CORPORATE INFORMATION



ANNUAL MEETING



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



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



FINANCIAL INFORMATION



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



The First Bancshares, Inc.

6480 U.S. Highway 98 West (39402)

P. O. Box 15549

Hattiesburg, MS 39404-5549



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



STOCK INFORMATION



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



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





70