Purpose

The purpose of managements
discussion and analysis is to make the reader aware of the significant components, events,
and changes in the consolidated financial condition and results of operations of the
Company and its subsidiaries during the year ended December 31, 2006. 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.

Overview

The Company was incorporated on June
23, 1995, and serves as a financial 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 Company organized another bank, the First National
Bank of the Pine Belt (Pine Belt) which was formed in Laurel, Mississippi, and
began operations on January 19, 1999. In January, 2004, The First and Pine Belt merged
into one bank. 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, and one in Wiggins, Mississippi. The Company and its subsidiary bank engages in
a general commercial and retail banking business characterized by personalized service and
local decision-making, emphasizing the banking needs of small to medium-sized businesses,
professional concerns, and individuals. The First is a wholly-owned subsidiary bank of the
Company.

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 grew from approximately
$294.4 million in total assets, $200.3 million in loans, $241.9 million in deposits, and
$18.5 million in shareholders equity at December 31, 2005 to approximately $417.8
million in total assets, $287.9 million in loans, $351.7 million in deposits, and $32.4
million in shareholders equity at December 31, 2006. The First reported net income
of $3,697,000 and $2,138,000 for the years ended December 31, 2006, and 2005,
respectively. For the years ended December 31, 2006 and 2005, the Company reported
consolidated net income of $3,315,000 and $1,909,000, 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.

The following table demonstrates the
Companys growth during each calendar year.

`SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
                                   (Dollars In Thousands, Except Per Share Data)

                                                                       December 31,
                                   --------------------------------------------------------------------------------------
                                        2006             2005              2004              2003             2002
                                   ---------------- ---------------- ----------------- ----------------- ----------------
Earnings:
   Net interest income                   $  14,383        $  10,150         $   7,815         $   7,309        $   6,136
   Provision for loan
     Losses                                    800              921               672               468              369

   Noninterest income                        2,239            1,682             1,963             1,772            1,690
   Noninterest expense                      11,138            8,138             7,228             7,134            6,180
   Net income                                3,315            1,909             1,243             1,007              864

Per share data:
   Basic net income per Share            $    1.35         $    .81          $    .53          $    .43         $    .37
   Diluted net income per Share               1.27              .77               .51               .41              .36

Selected Year End
  Balances:
     Total assets                        $ 417,769        $ 294,390         $ 212,396         $ 164,941        $ 157,427
     Securities                             91,810           50,660            28,522            31,445           25,895
     Loans, net of Allowance               284,082          197,943           162,716           114,076          106,541
     Deposits                              351,722          241,949           156,830           121,698          118,121
     Stockholders' equity                   32,365           18,478            16,740            15,651           14,923`

---

Results of Operations

The following is a summary of the
results of operations by the subsidiary bank for the years ended December 31, 2006 and
2005.

`2006                2005
                                                          ---------------------------------------
                                                                      (In thousands)

Interest income                                                   $   23,736            $ 15,676

Interest expense                                                       8,671               5,163
                                                                  ----------           ---------
    Net interest income                                               15,065              10,513

Provision for loan losses                                                800                 921
                                                                  ----------           ---------
Net interest income after
  provision for loan losses                                           14,265               9,592
                                                                  ----------           ---------

Other income                                                           2,005               1,619

Other expense                                                         10,844               8,037

Income tax expense                                                     1,729               1,036
                                                                  ----------           ---------

    Net income                                                    $    3,697            $  2,138
                                                                  ==========           =========`

The following reconciles the above
table to the amounts reflected in the consolidated financial statements of the Company at
December 31, 2006 and 2005:

`2006                2005
                                                          ---------------------------------------
                                                                      (In thousands)

Net interest income:
    Net income of subsidiary bank                                 $   15,065          $   10,513
    Intercompany eliminations                                           (682)               (363)
                                                                  ----------          ----------
                                                                  $   14,383          $   10,150

Net income:
    Net income of subsidiary bank                                 $    3,697          $    2,138
    Net loss of the Company, excluding
       Intercompany accounts                                            (382)               (229)
                                                                  ----------          ----------
                                                                  $    3,315          $    1,909
                                                                  ==========          ==========`

---

Consolidated Net Income

The Company reported consolidated net
income of $3,315,000 for the year ended December 31, 2006, compared to a consolidated net
income of $1,909,000 for the year ended December 31, 2005. This was the result of an
increase in interest income of $8,067,000 due to the continued growth of earning assets.
The increase in income was partially offset by a net increase in noninterest expense of
$3,000,000, which was the result of anticipated staff additions and other operating costs
related to the growth of the subsidiary bank and the opening of the new location in Bay
St. Louis, along with the acquisition of the First National Bank of Wiggins.

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
$14,383,000 for the year ended December 31, 2006, as compared to $10,150,000 for the year
ended December 31, 2005. This increase was the direct result of an increase in average
earning assets for the year 2006 to $315,217,000 compared to $231,565,000 for the year
2005. This increase in earning assets was funded by an increase in deposits and by Federal
Home Loan Bank (FHLB) borrowings. Deposits at December 31, 2006, totaled $351,722,000
compared to $241,949,000 at December 31, 2005. Average interest-bearing liabilities for
the year 2006 were $262,165,000 compared to $195,382,000 for the year 2005. At December
31, 2006, the net interest spread, the difference between the yield on earning assets and
the rates paid on interest-bearing liabilities, was 3.96% compared to 3.94% at December
31, 2005. The net interest margin (which is net interest income divided by average earning
assets) was 4.56% for the year 2006 compared to 4.38% for the year 2005. Rates paid on
average interest-bearing liabilities increased from 2.84% for the year 2005 to 3.58% for
the year 2006. 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 75.4% of average earning assets for the year 2006
compared to 81.7% for the year 2005.

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,
                                ---------------------------------------------------------------------------------------------------
                                              2006                              2005                              2004
                                --------------------------------- --------------------------------- -------------------------------
                                Average     Income/     Yield/     Average    Income/     Yield/     Average    Income/     Yield/
                                 Balance    Expenses     Rate      Balance    Expenses     Rate      Balance    Expenses     Rate
                                --------------------------------- --------------------------------- -------------------------------
Assets                                                                 (Dollars in thousands)
Earning Assets
      Loans (1)(2)               $237,578     $19,976      8.41%   $189,187     $14,097      7.45%   $140,052     $10,143    7.24%
                                   65,795       3,195      4.86%     30,985       1,170      3.78%     24,740         814    3.29%
Securities
      Federal funds sold           11,000         545      4.95%     10,564         388      3.67%      2,942          39    1.33%
      Other                                                5.21%                             4.46%                           2.30%
                                      844          44                   829          37                   740          17
                                 --------     -------              --------     -------              --------     -------
      Total earning assets        315,217      23,760      7.54%    231,565      15,692      6.78%    168,474      11,013    6.54%
                                 --------     -------              --------     -------              --------     -------

    Cash and due from banks        10,352                             8,380                             5,498
      Premises and equipment        8,561                             8,478                             8,382
      Other assets                  9,158                             6,507                             5,442
      Allowance for loan
         losses                   (2,848)                           (2,017)                           (1,356)
                                 --------                          --------                          --------
      Total assets               $340,440                          $252,913                          $186,440
                                 ========                          ========                          ========

Liabilities
    Interest-bearing
      liabilities                $262,165     $ 9,377      3.58%   $195,382     $ 5,543      2.84%   $141,599     $ 3,198    2.26%
                                 --------     -------              --------     -------              --------     -------
    Demand deposits (1)            55,639                            38,766                            27,957
    Other liabilities               2,282                             1,487                               681
    Shareholders' equity           20,354                            17,278                            16,203
                                 --------                          --------                          --------
    Total liabilities and
     shareholders' equity        $340,440                          $252,913                          $186,440
                                 ========                          ========                          ========

    Net interest spread                                    3.96%                             3.94%                           4.28%
    Net yield on interest-earning
      Assets                                  $14,383      4.56%                $10,149      4.38%                $ 7,815    4.64%
                                              -------                           -------                           -------

____________________
(1)  All loans and deposits were made to borrowers in the United States.  The Company had no significant
     nonaccrual loans
     during the periods presented.  Loans include held for sale loans.
(2)  Includes loan fees of $976, $755, and $891  respectively.`

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,
                                          -----------------------------   ----------------------------
                                                2006 versus 2005               2005 versus 2004
                                           Increase (decrease) due to     Increase (decrease) due to
                                          -----------------------------   ----------------------------
                                           Volume    Rate       Net       Volume     Rate      Net
                                          --------- -------- ----------   -------- --------- ---------
                                                            (Dollars in thousands)
Earning Assets
   Loans............................       $ 3,605  $ 2,274   $  5,879    $ 3,557  $    397   $ 3,954
   Securities.......................         1,316      709      2,025        205       151       356
   Federal funds sold ..............            16      141        157        247       102       349
   Other short-term investments ...              1        6          7          2        18        20
                                          --------- -------- ----------   -------- --------- ---------
     Total interest income ........          4,938    3,130      8,068      4,011       668     4,679
                                          --------- -------- ----------   -------- --------- ---------

Interest-Bearing Liabilities
      Interest-bearing transaction
      accounts......................           507       44        551         56       223       279
   Money market accounts............            51      224        275        155       175       330
   Savings deposits.................           129       80        209         36        88       124
   Time deposits....................         1,300    1,224      2,524        680       585     1,265
   Borrowed funds...................           118      156        274         35       312       347
                                          --------- -------- ----------   -------- --------- ---------
   Total interest expense...........         2,105    1,728      3,833        962     1,383     2,345
                                          --------- -------- ----------   -------- --------- ---------
   Net interest income..............       $ 2,833  $ 1,402   $  4,235    $ 3,049  $  (715)  $  2,334
                                          ========= ======== ==========   ======== ========= =========`

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.

---

The following tables illustrate the
Companys consolidated interest rate sensitivity and consolidated cumulative gap
position at December 31, 2004, 2005, and 2006.

`December 31, 2004
                                           ---------------------------------------------------------------------
                                                             After Three
                                                  Within       Through      Within    Greater Than
                                                   Three       Twelve         One      One Year or
                                                  Months       Months        Year     Nonsensitive     Total
                                           ---------------------------------------------------------------------
                                                                   (Dollars in thousands)
Assets
   Earning Assets:
      Loans..............................        $  69,419    $  23,899   $   93,318     $ 71,056     $ 164,374
      Securities (2).....................            6,042        3,968       10,010       18,362        28,372
      Funds sold and other...............            1,267          302        1,569          -           1,569
                                                ----------    ---------   ----------     --------    ----------
        Total earning assets.............           76,728       28,169      104,897       89,418       194,315
                                                ----------    ---------   ----------     --------    ----------

Liabilities
   Interest-bearing liabilities:
   Interest-bearing deposits:
          NOW accounts (1)...............         $      -    $  26,100     $ 26,100      $     -     $  26,100
      Money market accounts..............           28,757            -       28,757            -        28,757
      Savings deposits (1) ..............                -        7,129        7,129            -         7,129
      Time deposits......................           14,082       24,790       38,872       25,607        64,479
                                                ----------   ----------   ----------     --------    ----------
         Total interest-bearing deposits.           42,839       58,019      100,858       25,607       126,465
                                                ----------   ----------   ----------     --------    ----------

   Borrowed funds........................            6,355        5,213       11,568       19,283        30,851
                                                ----------   ----------   ----------     --------    ----------
   Total interest-bearing liabilities               49,194       63,232      112,426       44,890       157,316
                                                ----------   ----------   ----------     --------    ----------
   Interest-sensitivity gap per period...        $  27,534   $ (35,063)    $ (7,529)     $ 44,528      $ 36,999
                                                ==========   ==========   ==========     ========    ==========
   Cumulative gap at December 31, 2004...        $  27,534   $  (7,529)    $ (7,529)     $ 36,999      $ 36,999
                                                ==========   ==========   ==========     ========    ==========

   Ratio of cumulative gap to total
      earning assets at  December 31, 2004          14.17%      (3.87%)      (3.87%)       19.04%


                                                                   December 31, 2005
                                          ---------------------------------------------------------------------
                                                             After Three
                                                  Within       Through      Within    Greater Than
                                                   Three       Twelve         One      One Year or
                                                  Months       Months        Year     Nonsensitive     Total
                                           ---------------------------------------------------------------------
                                                                  (Dollars in thousands)
Assets
   Earning Assets:
      Loans..............................        $  81,679     $ 29,211    $ 110,890    $  89,419   $  200,309
      Securities (2).....................            9,110        5,650       14,760       35,750       50,510
      Funds sold and other...............           16,639          105       16,744            -       16,744
                                                ----------   ----------   ----------     --------    ----------
        Total earning assets.............          107,428       34,966      142,394      125,169      267,563
                                                ----------   ----------   ----------     --------    ----------
Liabilities
   Interest-bearing liabilities:
   Interest-bearing deposits:
      NOW accounts (1)...................         $      -    $  29,160    $  29,160      $     -    $  29,160
      Money market accounts..............           33,122            -       33,122            -       33,122
      Savings deposits (1) ..............                -       17,786       17,786            -       17,786
      Time deposits......................           11,832       74,169       86,001       26,295      112,296
                                                ----------   ----------   ----------     --------    ----------
         Total interest-bearing deposits.           44,954      121,115      166,069       26,295      192,364
                                                ----------   ----------   ----------     --------    ----------

   Borrowed funds........................                -        3,999        3,999       21,466       25,465
                                                ----------   ----------   ----------     --------    ----------
   Total interest-bearing liabilities               44,954      125,114      170,068       47,761      217,829
                                                ----------   ----------   ----------     --------    ----------
   Interest-sensitivity gap per period...        $  62,474   $ (90,148)   $ (27,674)    $  77,408    $  49,734
                                                ==========   ==========   ==========     ========    ==========
   Cumulative gap at December 31, 2005...        $  62,474   $ (27,674)   $ (27,674)    $  49,734    $  49,734
                                                ==========   ==========   ==========     ========    ==========
   Ratio of cumulative gap to total earning
      assets at December 31, 2005 .......            23.3%      (10.3%)      (10.3%)        18.6%`

---

`December 31, 2006
                                          ---------------------------------------------------------------------
                                                             After Three
                                                  Within       Through      Within    Greater Than
                                                   Three       Twelve         One      One Year or
                                                  Months       Months        Year     Nonsensitive     Total
                                           ---------------------------------------------------------------------
                                                                  (Dollars in thousands)
Assets
   Earning Assets:
      Loans..............................        $  99,026   $   46,459   $  145,485   $  142,390   $  287,875
      Securities (2).....................            6,203        9,954       16,157       75,653       91,810
      Funds sold and other...............            9,225          219        9,444            -        9,444
                                                ----------   ----------  -----------  -----------   -----------
        Total earning assets.............          114,454       56,632      171,086      218,043      389,129
                                                ----------   ----------  -----------  -----------   -----------
Liabilities
   Interest-bearing liabilities
   Interest-bearing deposits
      NOW accounts (1)...................         $      -   $   61,673   $   61,673     $      -   $   61,673
      Money market accounts..............           35,592            -       35,592            -       35,592
      Savings deposits (1) ..............                -       20,621       20,621            -       20,621
      Time deposits......................           22,242      122,933      145,175       30,009      175,184
                                                ----------   ----------  -----------  -----------   -----------
         Total interest-bearing deposits.           57,834      205,227      263,061       30,009      293,070

   Borrowed funds (3)....................              750        4,153        4,903       15,924       20,827
                                                ----------   ----------  -----------  -----------   -----------
   Total interest-bearing liabilities....           58,584      209,380      267,964       45,933      313,897
                                                ----------   ----------  -----------  -----------   -----------
   Interest-sensitivity gap per period...        $  55,870   $(152,748)  $  (96,878)   $  172,010    $  75,132
                                                ==========   ==========  ===========  ===========   ===========
   Cumulative gap at December 31, 2006...        $  55,870  $  (96,878)  $  (96,878)    $  75,132    $  75,132
                                                ==========   ==========  ===========  ===========   ===========
   Ratio of cumulative gap to total earning
      assets at December 31, 2006 .......            14.4%      (24.9%)      (24.9%)        19.3%

______________
(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 $11,341,000.`

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,  particularly  given the Company's  short  operating  history and rapid growth.
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.

Additions to the  allowance  for loan losses,  which are reported as the  provision for loan
losses on the
Company's  consolidated  statements of income,  are made  periodically  to maintain the allowance at an appropriate
level based on  management's  analysis of the potential risk in the loan portfolio.  The allowance  consists of two
components:  allocated and unallocated.  The allocated portion of the allowance is based upon specific  allocations
to specific  loans,  including  impaired  loans,  and upon historical loan loss experience of the bank and its peer
group ratios.  Because the  subsidiary  bank was recently  formed and has not yet  established a reliable long term
loss  experience,  management has elected to consider the loss  experience of the bank's peer groups in determining
an appropriate allowance based upon internal loan grades.

In August 2005, the bank's  service area was impacted by Hurricane  Katrina.  In a significant
portion of
the service area, the damage can best be described as moderate;  however,  in our Pascagoula,  Mississippi,  branch
location,  the damage can be described as severe.  The impact of damage caused by Hurricane  Katrina on the quality
of the bank's loan  portfolio  and the  related  loan loss  exposure is  extremely  difficult  to estimate  and the
situation  has created an  uncertainty  in this regard.  The  uncertainty  arises out of a number of  circumstances
over which the bank has no control  and,  at present,  an  inability  to  reasonably  estimate an effect.  The more
significant  uncertainties  are:  possible  damage to or  destruction  of  assets  providing  collateral  to loans;
continuing  unresolved  issues with  insurance  companies  claiming no liability  for damage to insured  properties
because of flooding, which is not covered under conventional  residential and building policies;  unknown number of
business and  individual  bank  borrowers  impacted by business  interruptions  and related  unemployment;  and the
unknown number of business  borrowers that have lost, at least  temporarily,  a majority of their customer base. In
addition,  government  officials and banking  regulators  have requested the Bank to extend or renew loans directly
impacted by the Hurricane  that might have  otherwise  been  considered  past due. As a result of this matter,  the
bank has  increased its  allowance  for loan losses over that which would have  resulted  from  utilization  of its
historical  methodology by $152,347.  The ultimate  resolution of this matter may have a significant  impact on the
financial  statements  of the period in which the matters are resolved,  however,  as of March 15, 2007, no loss or
increased delinquency can be attributed to loans affected by Hurricane Katrina.

The unallocated  component reflects  management's  estimate of the probable inherent but
undetected losses
within the portfolio due to  uncertainties  about economic  conditions,  changes in collateral  values and borrower
financial  condition,  expansion  into new  markets,  as well as other risk  factors  that have not yet  manifested
themselves.

The amount of the provision is a function of the level of loans  outstanding,  the level of
nonperforming
loans,  historical loan loss experience,  the amount of loan losses actually charged against the allowance during a
given period, and current and anticipated economic conditions.

---

At December  31, 2006 the  consolidated  allowance  for loan losses  amounted to
$3,793,000,  or 1.32% of
outstanding  loans.  At December 31, 2005, the allowance for loan losses  amounted to  $2,367,000,  which was 1.18%
of  outstanding  loans at December  31, 2005.  The  Company's  provision  for loan losses was $800,000 for the year
ended  December 31, 2006,  compared to $921,000 for the year ended  December 31, 2005. In each year,  the provision
was made based on management's assessment of general loan loss risk and asset quality.

A loan is considered  impaired  when,  based on current  information  and events,  it is
probable that the
Corporation  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
generally  using the fair value of the  collateral  if the loan is collateral  dependent.  At December 31, 2006 and
2005, loans considered impaired were the same as nonaccrual loans as described in the following paragraph.

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 Company had nonaccrual  loans of $1,789,000 and $283,000
and no  restructured or other  nonperforming  loans at December 31,  2006 and 2005,  respectively.  At December 31,
2006 the  Company  had  loans in the  principal  amount  of  $3,035,000  delinquent  30 to 89  days,  and  loans of
approximately  $118,000  that were  delinquent  90 days or more and  still  accruing.  At  December 31,  2005,  the
Company had loans in the principal  amount of $1,046,000  delinquent by 30 to 89 days,  and loans of  approximately
$331,000 that were delinquent by 90 days and still accruing.

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  assets  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, 2006 and
December 31, 2005, the subsidiary  bank had potential  problem loans of $7,691,231  and  $3,592,717,  respectively.
This represents an increase of $4,098,514 of which $2,879,834 is attributable to two specific loan relationships.

---

`Consolidated Allowance For Loan Losses


                                                                                  Years Ended December 31,
                                                             ----------------------------------------------------------------------
                                                                  2006         2005         2004         2003         2002
                                                             -------------  ------------  ------------  -----------  --------------

Average loans outstanding........................               $ 237,578    $ 189,187     $140,052      $  112,468    $ 103,069
                                                             =============  ============  ============  ===========  ==============
Loans outstanding at period end..................               $ 287,875    $ 200,310     $164,374      $  115,242      107,662
                                                             =============  ============  ============  ===========  ==============
Total nonperforming loans........................                   1,789          283          361             197          274
                                                             =============  ============  ============  ===========  ==============
Beginning balance of allowance...................                   2,367        1,659        1,166           1,228        1,060

Loans charged-off................................                   (186)        (303)        (291)           (603)        (243)
                                                             -------------  ------------  ------------  -----------  --------------
Total loans charged-off..........................                   (186)        (303)        (291)           (603)        (243)
                                                             -------------  ------------  ------------  -----------  --------------
Total recoveries.................................                     107           90          112              73           42
                                                             -------------  ------------  ------------  -----------  --------------
Net loans charged-off............................                    (79)        (213)        (179)           (530)        (201)

Acquisition......................................                     705            -            -               -            -

Provision for loan losses........................                     800          921          672             468          369
                                                             -------------  ------------  ------------  -----------  --------------
Balance at period end............................               $   3,793    $   2,367     $  1,659      $    1,166    $   1,228
                                                             =============  ============  ============  ===========  ==============
Net charge-offs to average loans.................                    .03%         .11%         .13%            .47%         .20%
Allowance as percent of total loans..............                   1.32%        1.18%        1.01%           1.01%        1.14%
Nonperforming loans as a percentage of total loans                   .62%         .14%         .22%            .17%         .25%
Allowance as a multiple of nonperforming loans...                    2.1X         8.4X         4.6X            5.9X         4.8X


At December 31, 2006, the components of the allowance for loan losses consisted of the


                                                                  Allowance
                                                                (In thousands)
Allocated:
   Impaired loans                                                $      75
   Graded loans                                                        949
Unallocated                                                          2,769
                                                                 ----------
                                                                 $   3,793
                                                                 ==========`

---

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

Noninterest Income and
Expense

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

Noninterest income increased by
$557,000 or 33.1% from $1,682,000 for the year ended December 31, 2005, to $2,239,000 for
the year ended December 31, 2006. The activity fees were $1,318,000 for 2006 compared to
$1,130,000 for 2005. A gain on sale of a parcel of land for $224,000 is also reflected in
the increase.

Noninterest expense increased from
$8.1 million for the year ended December 31, 2005 to $11.1 million for the year ended
December 31, 2006. The Company experienced increases in most expense categories, which
reflects the continued growth of the Company. The largest increase was in salary and
employee benefits, which increased by $1.8 million in 2006 as compared to 2005. This
increase included normal merit increases in salaries as well as the employment of
additional employees throughout 2006, as well as staffing a new location and the
acquisition of the First National Bank of Wiggins.

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

Noninterest Expense

`Years ended December 31,
                                                                         --------------------------------
                                                                             2006       2005       2004
                                                                         ---------   ---------   --------
                                                                                  (In thousands)

Salaries and employee benefits....................................         $ 6,613    $ 4,816    $ 4,085
Occupancy.........................................................             746        585        531
Equipment.........................................................             858        768        690
Marketing and public relations....................................             320        207        176
Data processing...................................................             199        150        153
Supplies and printing.............................................             311        194        170
Telephone.........................................................             114         66         73
Correspondent services............................................             102         72        115
Deposit and other insurance.......................................             144        149        161
Professional and consulting fees..................................             407        287        298
Postage...........................................................             128        108        102
ATM fees..........................................................             110         77        109
Other.............................................................           1,086        659        565
                                                                         ---------   ---------   --------

     Total........................................................        $ 11,138    $ 8,138    $ 7,228
                                                                         =========   =========   ========`

---

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.

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, 2006 and 2005,
respectively, loans accounted for 74% and 75% of earning assets. Management
attempts to control and counterbalance the inherent credit and liquidity risks
associated with the higher loan yields without sacrificing asset quality to
achieve its asset mix goals. Loans averaged $237.6 million during 2006, as
compared to $189.2 million during 2005, and $140 million during 2004, reflecting
the substantial growth of the Company during the period.

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

`Composition of Loan Portfolio

                                                                              December 31,
                                                  ----------------------------------------------------------------------
                                                           2006                    2005                   2004
                                                  -----------------------  --------------------- -----------------------
                                                                Percent                  Percent               Percent
                                                     Amount    of Total       Amount    of Total     Amount    of Total
                                                   ----------  -----------  ---------- ----------- ---------  ----------
                                                                         (Dollars in thousands)

   Mortgage loans held for sale...................     $3,945       1.4%       $ 3,319       1.7%    $ 3,073       1.9%
   Commercial, financial and agricultural ........     36,258      12.6%        30,576      15.3%     23,248      14.2%
   Real Estate:
      Mortgage-commercial.........................     63,698      22.2%        48,335      24.1%     36,695      22.3%
      Mortgage-residential........................     94,840      32.9%        68,148      34.0%     61,869      37.6%
      Construction................................     69,420      24.1%        37,660      18.8%     28,842      17.5%
   Consumer and other.............................     19,714       6.8%        12,271       6.1%     10,648       6.5%
                                                   ----------  -----------  ---------- ----------- ---------  ----------
   Total loans....................................    287,875       100%       200,309     100.0%    164,375     100.0%
                                                               ===========             ===========            ==========
   Allowance for loan losses......................    (3,793)                  (2,367)               (1,659)
                                                   ----------               ----------             ---------
   Net loans......................................   $284,082                $ 197,942             $ 162,716
                                                   ==========               ==========             =========`

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%. Due to
the short term the loan portfolio has existed, the current portfolio may not be indicative
of the ongoing portfolio mix. 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 to
sell the loans are obtained upon origination.

The following table sets forth the
Companys commercial and construction real estate loans maturing within specified
intervals at December 31, 2006.

---

`Loan Maturity Schedule and Sensitivity to Changes in Interest Rates

                                                                December 31, 2006
                                              -------------------------------------------------------
                                                             Over One Year
                                                 One Year       Through       Over Five
                     Type                        or Less       Five Years       Years       Total
--------------------------------------------- -------------  ---------------  ------------ -----------
                                                              (Dollars in thousands)

Commercial, financial and agricultural......        $ 15,453        $ 18,767      $ 1,964   $ 36,184
Real estate - construction..................          69,420               -            -     69,420
                                                ------------      ----------    ---------  ----------
                                                    $ 84,873        $ 18,767      $ 1,964   $105,604
                                                ============      ==========    =========  ==========

Loans maturing after one year with:
Fixed interest rates........................                                                 $13,893
Floating interest rates.....................                                                   6,838
                                                                                            ---------
                                                                                             $20,731
                                                                                            =========`

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 $65.8 million in 2006, as compared to $31.0 million in
2005 and $24.7 million in 2004. This represents 20.9%, 13.4%, and 14.7% of the average
earning assets for the years ended December 31, 2006, 2005, and 2004, respectively. At
December 31, 2006, investment securities were $91.8 million and represented 23.6% of
earning assets. The Company attempts to maintain a portfolio of high quality, highly
liquid investments with returns competitive with short term U.S. Treasury or agency
obligations. This objective is particularly important as the Company continues to grow its
loan portfolio. The Company primarily invests in securities of U.S. Government agencies,
municipals, and corporate obligations with maturities up to five years.

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

`Securities Portfolio

                                                                December 31,
                                                   ---------------------------------------
                                                       2006          2005         2004
                                                               (In thousands)
Available-for-sale
    U. S. Government agencies.................        $ 69,453       $ 39,904    $ 16,565
    States and municipal subdivisions.........          15,474          5,879       7,280
    Corporate obligations.....................           3,448          2,760       2,506
    Mutual finds .............................           1,105              -           -
                                                    ----------    -----------    ----------
      Total available-for-sale................          89,480         48,543      26,351
                                                    ----------    -----------    ----------
Held-to-maturity
    U.S. Government agencies..................              13             14          14
                                                    ----------    -----------    ----------
Total.........................................        $ 89,493       $ 48,557    $ 26,365
                                                    ==========    ===========    ==========`

---

The following table shows, at
carrying value, the scheduled maturities and average yields of securities held at December
31, 2006.

`Investment Securities Maturity Distribution and Yields (1)

                                                                        December 31, 2006
                                      ---------------------------------------------------------------------------------------
                                                               After One But         After Five But
                                        Within One Year      Within Five Years      Within Ten Years      After Ten Years
                                      --------------------- --------------------- --------------------- ---------------------
                                       Amount      Yield     Amount      Yield     Amount      Yield     Amount      Yield
                                      ---------   --------- ---------  ---------- ---------  ---------- ---------  ----------
Held-to-maturity:
   U.S. Government agencies (2).....   $      -          -   $      -          -    $     -         -    $     -          -
Available-for-sale:

   U.S. Government agencies (3).....    $10,950      4.38%    $27,793      4.91%    $ 6,879      5.32%          -          -
   States and municipal subdivisions      1,134      3.03%      4,070      3.44%      6,973      3.86%      3,297      4.37%
   Corporate obligations............          -          -          -          -          -          -      3,448      6.86%
                                       ---------             ---------            ----------             ----------

Total investment securities
   available-for-sale...............    $12,084               $31,863               $13,852               $ 6,745
                                       =========             =========            ==========             ==========

____________________

(1)  Investments with a call feature are shown as of the contractual maturity date.
(2)  Excludes mortgage-backed securities with a yield of 7.22%.
(3)  Excludes mortgage-backed securities totaling $23.8 million with a yield of 5.21% and
       mutual funds of $1.1 million.`

Short-Term Investments. Short-term
investments, consisting of Federal Funds sold, averaged $11.0 million in 2006, $10.6
million in 2005, and $2.9 million in 2004. At December 31, 2006, and December 31, 2005,
short-term investments totaled $8,772 and $15,785, 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 $63.6 million, or 47.2% in 2005.
Average total
deposits increased $84.9 million, or 42.8% in 2006. At December 31, 2006, total
deposits were $351.7 million, compared to $241.9 million a year earlier, an
increase of 45.4%.

---

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

`Deposits


                                                               December 31,
                                     --------------------- ---------------------- ---------------------
                                             2006                  2005                   2004
                                     --------------------- ---------------------- ---------------------
                                                Percent                 Percent              Percent
                                                   of                     of                   of
                                      Amount    Deposits    Amount     Deposits    Amount    Deposits
                                     ---------  ---------  ---------  ----------  ---------- ----------

Noninterest-bearing accounts.......    $58,652      16.7%    $49,585       20.5%    $30,365      19.4%
NOW accounts.......................     61,673      17.5%     29,160       12.0%     26,100      16.6%
Money market accounts..............     35,592      10.1%     33,122       13.7%     28,757      18.3%
Savings accounts...................     20,621       5.9%     17,786        7.4%      7,129       4.6%
Time deposits less than $100,000...     92,364      26.3%     61,907       25.6%     34,710      22.1%
Time deposits of $100,000 or over..     82,820      23.5%     50,389       20.8%     29,769      19.0%
                                     ---------  ---------  ---------  ----------  ---------- ----------
    Total deposits.................   $351,722       100%   $241,949        100%   $156,830     100.0%
                                     =========  =========  =========  ==========  ========== ==========`

The Companys loan-to-deposit ratio
was 80.7% at December 31, 2006 and 81.4% at December 31, 2005. The loan-to-deposit ratio
averaged 81.0% during 2006. 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 $268.9 million at December 31,
2006 and $191.6 million at December 31, 2005. 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, 2006, 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
                                             Months       Twelve Months       Months            Total
                                         ---------------- --------------- ---------------- ----------------

December 31, 2006.....................      $ 11,004         $ 57,877        $ 13,939         $ 82,820`

Borrowed Funds

Borrowed funds consist primarily of
advances from the Federal Home Loan Bank of Dallas and federal funds purchased. At
December 31, 2006, advances from the FHLB totaled $20.8 million compared to $25.5 million
at December 31, 2005. 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. No federal funds purchased were outstanding at December
31, 2006 or December 31, 2005.

Subordinated Debentures

In 2002, the Company issued
subordinated debentures of $7,217,000 to The First Bancshares Statutory Trust I (the
Trust). The Company is the sole owner of the equity of the Trust. The Trust issued
$7,000,000 of preferred securities to investors. The Company makes interest payments and
will make principal payments on the debentures to the Trust. These payments will be the
source of funds used to retire the preferred securities, which are redeemable at any time
beginning in 2007 and mature in 2032. The Company entered into this arrangement to provide
funding for expected growth.

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 mature in 2036. The Company entered into this arrangement to provide
funding for expected growth.

---

Capital

Total shareholders equity as of
December 31, 2006, was $32.4 million, an increase of $13.9 million or approximately 75.2%,
compared with shareholders equity of $18.5 million as of December 31, 2005. $8.2
million of this increase is attributable to a public offering that closed in November,
2006. The Company sold 365,000 shares at a price of $22.50 per share.

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 3%. All but the
highest rated institutions are required to maintain ratios 100 to 200 basis points above
the minimum. The Company and the subsidiary bank exceeded their minimum regulatory capital
ratios as of December 31, 2006 and 2005.

`Analysis of Capital


                                      Adequately      Well             The Company                   The First
Capital Ratios                        Capitalized  Capitalized         December 31,                 December 31,
--------------                        ------------ -----------    -----------------------      -----------------------
                                                                     2006        2005             2006        2005
                                                                  ----------- -----------      ----------- -----------

Leverage.........................            4.0%        5.0%          10.3%        8.0%             7.9%        7.8%
Risk-based capital:
   Tier 1........................            4.0%        6.0%          13.7%       12.0%            10.6%       10.8%
   Total.........................            8.0%       10.0%          15.0%       12.4%            11.9%       11.9%




                                           Ratios

                                                            2006         2005          2004
                                                            ----         ----          ----
Return on assets (net income divided by
         average total assets)                               .97%         .75%          .67%

Return on equity (net income divided by
         average equity)                                    16.3%        11.0%          7.7%

Dividend payout ratio (dividends per
         share divided by net income per
            share)                                          11.9%        12.3%         14.2%

Equity to asset ratio (average equity
         divided  by average total assets)                   6.0%         6.8%          8.7%`

---

Liquidity Management

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

The Companys Federal Funds sold
position, which is typically its primary source of liquidity, averaged $11.0 million
during the year ended December 31, 2006 and totaled $8,772,000 at December 31, 2006. 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, 2006, advances available totaled approximately $88.5 million
of which $20.8 million had been drawn.

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.

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.

---

`REPORT OF
                                        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Audit Committee of 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., and subsidiary as of December
31, 2006 and 2005, and the related  consolidated  statements of income,  changes in stockholders'  equity,  and cash flows for
the years then ended.  These financial  statements are the responsibility of the Company'  management.  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.  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., and  subsidiary as of  December 31,  2006 and 2005, and the  consolidated
results  of their  operations  and their cash  flows for the years  then  ended,  in  conformity  with  accounting  principles
generally accepted in the United States of America.


                                                     /S/ T. E. LOTT & COMPANY

Columbus, Mississippi
March 28, 2007`

---

`THE FIRST BANCSHARES, INC.
                                                  CONSOLIDATED BALANCE SHEETS
                                                   DECEMBER 31, 2006 AND 2005

       ASSETS                                                                                2006                 2005
                                                                                      -------------------- --------------------

Cash and due from banks                                                                      $  9,743,065         $ 12,144,142
Interest-bearing deposits with banks                                                              672,137              958,790
Federal funds sold                                                                              8,772,000           15,785,000
                                                                                      -------------------- --------------------
    Total cash and cash equivalents                                                            19,187,202           28,887,932
Held-to-maturity securities (fair value of  $13,539 in
    2006 and $13,967 in 2005)                                                                      13,363               13,808
Available-for-sale securities                                                                  89,480,015           48,543,078
Other securities                                                                                2,316,500            2,102,700
                                                                                      -------------------- --------------------
    Total securities                                                                           91,809,878           50,659,586
Loans held for sale                                                                             3,944,818            3,318,993
Loans, net of allowance for loan losses of $3,792,937
    in 2006 and $2,366,773 in 2005                                                            280,137,343          194,623,514
Interest receivable                                                                             2,905,133            1,714,535
Premises and equipment                                                                          9,953,178            8,330,506
Cash surrender value of life insurance                                                          5,247,889            5,054,161
Goodwill                                                                                          782,420                    -
Other assets                                                                                    3,800,942            1,800,588
                                                                                      -------------------- --------------------
Total assets                                                                                $ 417,768,803        $ 294,389,815
                                                                                      ==================== ====================

       LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:
    Noninterest-bearing                                                                      $ 58,651,631         $ 49,584,666
    Interest-bearing                                                                          293,070,049          192,364,456
       Total deposits                                                                         351,721,680          241,949,122
Interest payable                                                                                1,021,194              452,469
Borrowed funds                                                                                 20,827,427           25,465,272
Subordinated debentures                                                                        11,341,000            7,217,000
Other liabilities                                                                                 492,697              828,352
                                                                                      -------------------- --------------------
       Total liabilities                                                                      385,403,998          275,912,215
                                                                                      -------------------- --------------------
Stockholders' Equity:
    Preferred stock, par value $1 per share, 10,000,000
       shares authorized; no shares issued and outstanding                                              -                    -
    Common stock, par value $1 per share: 10,000,000 shares
       authorized; 2,884,902 and 1,213,844 shares issued
       in 2006 and 2005, respectively                                                           2,884,902            1,213,844
    Additional paid-in capital                                                                 22,344,734           13,220,940
    Retained earnings                                                                           7,629,275            4,694,292
    Accumulated other comprehensive loss                                                         (30,461)            (187,831)
    Treasury stock, at cost                                                                     (463,645)            (463,645)
                                                                                      -------------------- --------------------
       Total stockholders' equity                                                              32,364,805           18,477,600
                                                                                      -------------------- --------------------
Total liabilities and stockholders' equity                                                  $ 417,768,803         $294,389,815
                                                                                      ==================== ====================

                         The accompanying notes are an integral part of these statements.`

---

`THE FIRST BANCSHARES, INC.
                                               CONSOLIDATED STATEMENTS OF INCOME
                                             YEARS ENDED DECEMBER 31, 2006 AND 2005

INTEREST INCOME                                                                                2006                 2005
                                                                                      -------------------- --------------------
    Interest and fees on loans                                                              $  19,976,374        $  14,097,048
    Interest and dividends on securities
       Taxable interest and dividends                                                           2,932,262              987,487
       Tax-exempt interest                                                                        262,469              183,141
    Interest on federal funds sold                                                                544,880              387,518
    Interest on deposits in banks                                                                  43,557               37,269
                                                                                      -------------------- --------------------
    Total interest income                                                                      23,759,542           15,692,463
                                                                                      -------------------- --------------------

INTEREST EXPENSE
    Interest on time deposits of $100,000 or more                                               1,830,773              898,990
    Interest on other deposits                                                                  5,755,611            3,127,870
    Interest on borrowed funds                                                                  1,789,894            1,515,792
                                                                                      -------------------- --------------------
       Total interest expense                                                                   9,376,278            5,542,652
                                                                                      -------------------- --------------------
    Net interest income                                                                        14,383,264           10,149,811
    Provision for loan losses                                                                     800,361              920,737
                                                                                      -------------------- --------------------
       Net interest income after provision for loan losses                                     13,582,903            9,229,074
                                                                                      -------------------- --------------------

OTHER INCOME
    Service charges on deposit accounts                                                         1,318,244            1,129,889
    Other service charges and fees                                                                490,421              385,315
    Bank owned life insurance income                                                              194,078              134,564
    Other gains                                                                                   224,315               59,748
    Loss on other real estate                                                                    (39,993)              (7,065)
    Gain (Loss) on fixed assets                                                                     2,645             (58,462)
    Other                                                                                          49,484               38,159
                                                                                      -------------------- --------------------
       Total other income                                                                       2,239,194            1,682,148
                                                                                      -------------------- --------------------

OTHER EXPENSE
    Salaries                                                                                    5,507,187            3,967,191
    Employee benefits                                                                           1,105,907              848,476
    Occupancy                                                                                     745,981              584,621
    Furniture and equipment                                                                       858,205              767,778
    Supplies and printing                                                                         311,111              193,500
    Professional and consulting fees                                                              407,004              287,428
    Marketing and public relations                                                                319,786              207,391
    Data processing                                                                               198,798              150,123
    Other                                                                                       1,684,278            1,131,717
                                                                                      -------------------- --------------------
       Total other expense                                                                     11,138,257            8,138,225
                                                                                      -------------------- --------------------

Income before income taxes                                                                      4,683,840            2,772,997
Income taxes                                                                                    1,368,826              863,803
                                                                                      -------------------- --------------------

Net income                                                                                   $  3,315,014         $  1,909,194
                                                                                      ==================== ====================
Net income per common share:
    Basic                                                                                    $       1.35         $        .81
    Diluted                                                                                          1.27                  .77


                         The accompanying notes are an integral part of these statements.`

---

`THE FIRST BANCSHARES, INC.
                            CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                      YEARS ENDED DECEMBER 31, 2006 AND 2005

                                                                                          Accumulated
                                                                                             Other
                             Compre-                      Additional                        Compre-
                             hensive        Common          Paid-in        Retained         hensive        Treasury
                              Income         Stock          Capital        Earnings          Loss           Stock          Total
                           ------------ --------------- --------------- --------------- --------------- -------------- ------------
Balance,
  January 1, 2005                          $ 1,194,940     $12,985,939    $3,018,788       $   3,579     $(463,645)    $ 16,739,601
Comprehensive
income:
    Net income 2005          $1,909,194              -               -     1,909,194               -              -       1,909,194
    Net change in
      unrealized gain
      (loss) on
      Available-for-
      sale securities,
      net of tax              (191,410)              -               -             -       (191,410)              -       (191,410)
                           ------------
Comprehensive
  Income                     $1,717,784
                           ============
Exercise of stock
  Options                                       18,904         235,001             -               -              -         253,905
Cash dividend
  declared, $.10
  per share                           -              -               -     (233,690)               -              -       (233,690)
                           ------------ --------------- --------------- --------------- --------------- -------------- ------------
Balance,
  December 31, 2005                          1,213,844      13,220,940     4,694,292       (187,831)      (463,645)      18,477,600
                                        --------------- --------------- --------------- --------------- -------------- ------------

Comprehensive
  income:
    Net income 2006          $3,315,014              -               -     3,315,014               -              -       3,315,014
    Net change in
      unrealized gain
      (loss) on
      Available-for-
      sale securities,
      net of tax                157,370              -               -             -         157,370              -         157,370
                           ------------
Comprehensive
  Income                     $3,472,384
                           ============
Stock Sale                                     365,000       7,820,355             -               -              -       8,185,355
2 for 1 stock split                          1,187,600     (1,187,600)             -               -              -               -
Exercise of stock
  Options                                        9,277          58,011             -               -              -          67,288
Adoption of SFAS
  123R                                                           9,211             -               -              -           9,211
Stock issued in
  Acquisition                                  109,181       2,423,817             -               -              -       2,532,998
Cash dividend
  declared, $.16
  per share                                          -               -     (380,031)               -              -       (380,031)
                                        --------------- --------------- --------------- --------------- -------------- ------------
Balance,
  December 31, 2006                      $   2,884,902    $ 22,344,734   $ 7,629,275      $ (30,461)    $ (463,645)    $ 32,364,805
                                        =============== =============== =============== =============== ============== ============





                         The accompanying notes are an integral part of these statements.`

---

`THE FIRST BANCSHARES, INC.
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                          YEARS ENDED DECEMBER 31, 2006 AND 2005

                                                                                             2006                 2005
                                                                                      -------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                                               $  3,315,014         $  1,909,194
    Adjustments to reconcile net income to net cash:
       Depreciation and amortization                                                              676,074              626,287
       SFAS 123 expense                                                                             9,211                    -
       FHLB Stock dividends                                                                      (72,800)             (51,700)
       Loss on disposal of assets                                                                       -               63,113
       Provision for loan losses                                                                  800,361              920,737
       Deferred income taxes                                                                       20,186              229,453
       Increase in cash value of life insurance                                                 (193,728)            (134,564)
       Securities, amortization and accretion, net                                                127,940               43,941
       Other gains                                                                              (224,315)             (59,748)
       Loss on other real estate                                                                   39,993                7,065
       Changes in:
          Loans held for sale                                                                   (625,825)            (246,137)
          Interest receivable                                                                   (782,616)            (626,433)
          Other assets                                                                          (510,874)            (793,160)
          Interest payable                                                                        455,273              261,420
          Other liabilities                                                                     (425,738)              129,379
                                                                                      -------------------- --------------------
    Net cash provided by operating activities                                                   2,608,156            2,278,847
                                                                                      -------------------- --------------------

CASH FLOWS FROM INVESTING ACTIVITIES
    Cash received in excess of cash paid for acquisition                                        1,833,291                    -
    Purchases of available-for-sale securities                                               (47,441,689)         (32,178,300)
    Purchases of other securities                                                               (444,350)            (301,100)
    Proceeds from maturities and calls of available-for-sale securities                        28,102,155            8,653,164
    Proceeds from sales of securities available-for-sale                                        2,457,620            1,000,000
    Proceeds from redemption of other securities                                                  303,350              406,400
    Proceeds from sale of lease/land                                                              532,755              134,977
    Proceeds from sale of other real estate                                                       492,670               50,625
    Increase in loans                                                                        (69,404,210)         (36,101,865)
    Investment in bank owned life insurance                                                             -          (1,600,000)
    Additions to premises and equipment                                                       (1,672,841)            (354,854)
                                                                                      -------------------- --------------------
    Net cash used in investing activities                                                    (85,241,249)         (60,290,953)
                                                                                      -------------------- --------------------

CASH FLOWS FROM FINANCING ACTIVITIES
    Increase in deposits                                                                       65,573,596           85,119,496
    Proceeds from borrowed funds                                                               10,000,000           19,901,100
    Repayment of borrowed funds                                                              (14,637,845)         (25,286,461)
    Exercise of stock options                                                                      67,288              253,905
    Dividends paid on common stock                                                              (380,031)            (233,690)
    Issuance of subordinated debentures                                                         4,124,000                    -
    Issuance of common stock                                                                    8,185,355                    -
                                                                                      -------------------- --------------------
    Net cash provided by financing activities                                                  72,932,363           79,754,350
                                                                                      -------------------- --------------------

                         The accompanying notes are an integral part of these statements.`

---

`THE FIRST BANCSHARES, INC.
                                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                                      YEARS ENDED DECEMBER 31, 2006 AND 2005


Net increase (decrease) in cash and cash equivalents                                          (9,700,730)           21,742,244
Cash and cash equivalents at beginning of year                                                 28,887,932            7,145,688
                                                                                          ----------------      ---------------
Cash and cash equivalents at end of year                                                     $ 19,187,202         $ 28,887,932
                                                                                          ================      ===============

Cash paid during the year for:
    Interest                                                                                 $  8,807,553         $  5,281,232
    Income taxes                                                                                2,457,655            1,051,417

Non-cash activities:
    Transfers of loans to other real estate                                                       739,030              193,560
    Issuance of stock in acquisition                                                            2,532,998                    -
















                               The accompanying notes are an integral part of these statements.`

---

NOTE A  NATURE OF
BUSINESS

The First Bancshares, Inc. (the
Company) is a financial holding company whose business is primarily conducted by its
wholly-owned subsidiary, The First, A National Banking Association. The bank provides a
full range of banking services in its primary market area of South Mississippi. The
Company, as a financial holding 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
ACCOUNTING POLICIES

The Company and its subsidiary 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, 2006, the required reserve balance on
deposit with the Federal Reserve Bank was approximately $25,000.

4.     Securities

Investments in securities are
accounted for as follows:

Available-for-Sale
Securities

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

Gains and losses on the sale of
available-for-sale securities are determined using the adjusted cost of the specific
security sold.

---

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, 2006 and 2005.

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.

5.    
Loans held for sale

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

6.     Loans

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

A loan is considered impaired when,
based upon current events and information, it is probable that the scheduled payments of
principal or interest will not be collected in accordance with the contractual terms of
the loan agreement. Factors considered by management in determining impairment include
payment status, collateral values, and the probability of collecting scheduled payments of
principal and interest when due. Generally, impairment is measured on a loan by loan basis
using the fair value of the supporting collateral.

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

---

7.     Allowance for Loan
Losses

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

Management evaluates the adequacy of
the allowance for loan losses on a regular basis. These evaluations are based upon a
periodic review of the collectibility considering historical experience, the nature and
value of the loan portfolio, underlying collateral values, internal and independent loan.
reviews, and prevailing economic conditions. In addition, the OCC, as a part of the
regulatory examination process, reviews the loan portfolio and the allowance for loan
losses and may require changes in the allowance based upon information available at the
time of the examination. The allowance consists of two components: allocated and
unallocated. The components represent an estimation done pursuant to either Financial
Accounting Standards Board (FASB) Statement No. 5, Accounting for Contingencies, or FASB
Statement No. 114, Accounting by Creditors for Impairment of a Loan. 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.

In August 2005, Hurricane Katrina
struck the Mississippi Gulf Coast causing significant damage. In determining the allowance
for loan losses, factors resulting from the Hurricane based upon communications with
borrowers, collateral inspections and various risk characteristics were considered. These
factors are based upon managements estimates and judgments utilizing information
available as of the date of the consolidated financial statements and, accordingly, actual
results could differ.

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 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, 2006 and 2005, other real estate
totaled $557,089 and $310,728, respectively.

10.     Goodwill and
Intangible Assets

The following table summarizes the
changes in goodwill and core deposit intangible asset for the year ended December 31,
2006.

`Core deposit
(Dollars in thousands)                                                  Goodwill              intangible
                                                          ----------------------- -----------------------

Balance, January 1, 2006                                                    $  0                    $  0
Additions                                                                    782                     693
Amortization                                                                   -                    (17)
                                                                        --------                --------
Balance, December 31, 2006                                                  $782                    $676
                                                                        ========                ========`

Acquired goodwill and core deposit
intangible are related to the acquisition of First National Bank of Wiggins.

The following table presents the
forecasted core deposit intangible asset amortization expense for 2007 through 2011.

`(Dollars in thousands)                          Full year
                                                 expected
Year                                           amortization
----                                           ------------
2007                                               $ 69
2008                                               $ 69
2009                                               $ 69
2010                                               $ 69
2011                                               $ 69`

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 are reported as an asset, and increases in cash
surrender values are reported as income.

12.     Stock Options

Prior to January 1, 2006, the
Companys stock option plans were accounted for under the recognition and measurement
provisions of APB Opinion No. 25 (Opinion 25), Accounting for Stock Issued to Employees,
and related Interpretations, as permitted by FASB Statement No. 123, Accounting for
Stock-Based Compensation (as amended by SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure) (collectively SFAS 123). No stock-based employee
compensation cost was recognized in the Companys consolidated statements of earnings
through December 31, 2005, as all options granted under the plans had an exercise price
equal to the market value of the underlying common stock on the date of the grant.
Effective January 1, 2006, the Company adopted the fair value recognition provisions of
FASB Statement No. 123 (R), Share-Based Payment (SFAS 123R), using the
modified-prospective-transition method. Under that transition method, compensation cost
recognized in 2006 includes: (a) compensation cost for all share-based payments granted
prior to, but not yet vested as of January 1, 2006, based on the grant fair value
calculated in accordance with the original provisions of SFAS 123, and (b) compensation
cost for all share-based payments granted subsequent to December 31, 2005, based on the
grant-date fair value estimated in accordance with the provisions of SFAS 123R. As of
December 31, 2006, only 5,283 stock options were not fully vested and no stock options
were granted during the twelve months ended December 31, 2006.

---

As a result of adopting SFAS 123R on
January 1, 2006, the Companys earnings before income taxes for the twelve months
ended December 31, 2005 are not materially different than if the Company had continued to
account for share-based compensation under Opinion 25. As of December 31, 2006, the
Company had 5,283 stock options not fully vested and there was $4,013 of total
unrecognized compensation cost related to these non-vested options.

The following table illustrates the
effect on net income and income per share if the Company had applied the fair value
recognition provisions of SFAS 123 to options granted under the Companys stock
option plan for the twelve months ended December 31, 2005. For purposes of this pro forma
disclosure, the value of the options is estimated using the Black-Scholes option-pricing
model and is being amortized to expense over the options vesting periods.

`Year ended
                                                                                  December 31, 2005
                                                                                  ------------------
                     Net income, as reported                                             $1,909,194
                     Deduct:  Total stock-based employee
                         compensation expense determined
                         under fair value based method
                         for all awards, net of related
                         tax effects                                                          8,368

                                                                                         ----------
                     Pro forma net income                                                $1,900,826
                                                                                         ==========
                     Earnings per share:
                         Basic - as reported                                               $    .81
                         Basic - pro forma                                                      .80

                         Diluted - as reported                                                  .77
                         Diluted - pro forma                                                    .77`

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.

14.     Advertising Costs

Advertising costs are expensed in the
period in which they are incurred. Advertising expense for the years ended December 31,
2006 and 2005, was approximately $263,644 and $149,340, 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.

17.     Per Share Amounts

Per share amounts are presented in
accordance with FASB Statement No. 128, Earnings Per Share. Under Statement No. 128, 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
outstanding, such as exercise of stock options.

The following table discloses the
reconciliation of the numerators and denominators of the basic and diluted computations:

`For the Year Ended                                       For the Year Ended
                                       December 31, 2006                                        December 31, 2005
                           --------------------------------------------------   -------------------------------------------------
                                Net                                                  Net
                               Income            Shares          Per Share         Income              Shares         Per Share
                            (Numerator)       (Denominator)        Amount        (Numerator)       (Denominator)        Amount
                           ---------------   -----------------  -------------   ----------------  -----------------  ------------
Basic per share                $3,315,014            2,450,988       $  1.35        $ 1,909,194           2,358,308        $  .81
                                                                =============                                        ============
Effect of dilutive
    Shares:
        Stock options                                  158,156                                              130,582
                                             -----------------                                    -----------------

Diluted per share              $3,315,014            2,609,144       $  1.27        $ 1,909,194           2,488,890        $  .77
                           ===============   ================= ==============   ================  =================   ===========`

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

---

18.     Reclassifications

Certain reclassifications have been
made to the 2005 financial statements to conform with the classifications used in 2006.
These reclassifications did not impact the Companys consolidated financial condition
or results of operations.

19.     Accounting
Pronouncements

In September 2006, the Financial
Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements. This
statement defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair value
measurements. This statement applies under other accounting pronouncements that require or
permit fair value measurements. This statement will be effective for financial statements
issued for the year ending December 31, 2008. Management is currently evaluating the
impact of this statement on the Company.

NOTE C  ACQUISITION

On October 1, 2006, the Company
completed a merger transaction in which it acquired First National Bank of Wiggins
(Wiggins), headquartered in Wiggins, Mississippi. This acquisition was
consistent with the Companys strategy of expanding its operations and market share
in Mississippi. The results of operations of Wiggins have been included in the
Companys consolidated financial statements since the acquisition date.

The aggregate purchase price for the
acquisition was $5.0 million which included cash of $2.1 million, direct merger costs of
$.4 million, and approximately 109,000 shares of common stock with an aggregate fair value
of $2.5 million. The aggregate value of the common stock was calculated for this purpose
using a $23.20 per share value based on the closing price of First Bancshares stock on the
acquisition announcement date.

The transaction was accounted for
under the purchase method of accounting, with Wiggins assets and liabilities being
recorded at their estimated fair values. Wiggins allowance for loan losses was
recorded at the carrying value and contained no specific reserves. The purchase price in
excess of the net fair value of the assets and liabilities acquired was recorded as
goodwill. The amount of goodwill recorded was $.8 million. The goodwill will not be tax
deductible for federal income tax purposes.

The following table summarizes the
preliminary estimated fair value of assets and liabilities purchased at the date of
acquisition.

`(Dollars in thousands)
            ----------------------
                Assets acquired:
                     Cash and cash equivalents                                                                $  4,268
                     Investment securities                                                                      24,025
                     Loans, net                                                                                 17,649
                     Premises and equipment, net                                                                   832
                     Core deposit intangible                                                                       693
                     Goodwill                                                                                      782
                     Other assets, net                                                                           1,121
                                                                                                            ----------
                           Total assets acquired                                                              $ 49,370
                                                                                                            ==========
                Liabilities assumed:
                     Deposits                                                                                 $ 44,199
                     Other liabilities                                                                             203
                                                                                                            ----------
                           Total liabilities assumed                                                          $ 44,402
                                                                                                            ----------
                           Net assets purchased                                                               $  4,968
                                                                                                            ==========`

---

The Company is amortizing the
resulting core deposit intangible of $693,000 using the straight-line method over ten
years. In periods subsequent to the acquisition date for up to one year, certain assets
and liabilities may be adjusted as part of the allocation of the purchase price as
preliminary estimates are finalized.

The following unaudited summary
information presents the consolidated results of operations of the Company on a pro forma
basis for the years ended December 31, 2006 and 2005 as if the First National Bank of
Wiggins had been acquired on January 1, 2006 and 2005, respectively.

`Year Ended December 31,
                                              -----------------------------------
                                                    2006              2005
                                              ----------------- -----------------

Interest income                                      $  25,888         $  18,240
Interest expense                                        10,180             6,604
    Net income                                           2,721             1,666

Net income per share:
    Basic                                             $   1.07          $   0.65
    Diluted                                               1.01              0.62`

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, 2006 and 2005, follows:

                                                                                  December 31, 2006
                                                        -----------------------------------------------------------------------

                                                                               Gross             Gross           Estimated
                                                           Amortized         Unrealized        Unrealized           Fair
                                                              Cost             Gains             Losses            Value
                                                        ----------------- ----------------- ----------------- -----------------
   Available-for-sale securities:
      Obligations of U.S. Government
         Agencies                                            $45,766,878         $  53,137         $ 198,001       $45,622,014
      Tax-exempt and taxable
         obligations of states and
         municipal subdivisions                               15,393,960           132,295            52,420        15,473,835
       Mortgage-backed securities                             23,809,129            88,553            66,127        23,831,555
       Corporate obligations                                   3,451,390               490             4,072         3,447,808
       Arm Fund                                                1,104,803                 -                 -         1,104,803
                                                        ----------------- ----------------- ----------------- -----------------
                                                             $89,526,160        $  274,475         $ 320,620       $89,480,015
                                                        ================= ================= ================= =================
   Held-to-maturity securities:
       Mortgage-backed securities                              $  13,363          $    176           $     -         $  13,539


                                                                                  December 31, 2005
                                                        -----------------------------------------------------------------------

                                                                                Gross             Gross          Estimated
                                                           Amortized         Unrealized        Unrealized           Fair
                                                              Cost              Gains            Losses            Value
                                                        ----------------- ----------------- ----------------- -----------------
   Available-for-sale securities:
      Obligations of U.S. Government
         Agencies                                            $32,030,191          $   5,699        $ 239,639       $31,796,251
      Tax-exempt and taxable
         obligations of states and
         municipal subdivisions                                5,844,353             82,114           47,043         5,879,424
       Mortgage-backed securities                              8,194,035              6,226           92,858         8,107,403
       Corporate obligations                                   2,759,092                908                -         2,760,000
                                                        ----------------- ----------------- ----------------- -----------------
                                                             $48,827,671         $   94,947        $ 379,540       $48,543,078
                                                        ================= ================= ================= =================
   Held-to-maturity securities:
       Mortgage-backed securities                            $    13,808         $      159        $       -       $    13,967
                                                        ================= ================= ================= =================`

---

`The scheduled maturities of securities at December 31, 2006, are as follows:

                                                                Available-for-Sale                    Held-to-Maturity
                                                       -------------------------------------- ----------------------------------
                                                                               Estimated                           Estimated
                                                           Amortized             Fair            Amortized           Fair
                                                              Cost               Value              Cost             Value
                                                       ------------------- ------------------ ----------------- ----------------

      Due less than one year                                 $ 11,971,035        $11,947,740           $     -          $     -
      Due after one year through five years                    31,976,445         31,863,407                 -                -
      Due after five years through ten years                   12,665,354         12,668,879                 -                -
      Due after ten years                                       9,104,197          9,168,434                 -                -
      Mortgage-backed securities                               23,809,129        $23,831,555            13,363           13,539
                                                       ------------------- ------------------ ----------------- ----------------
                                                             $ 89,526,160        $89,480,015         $  13,363        $  13,539
                                                       =================== ================== ================= ================

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

No gains or losses were realized on available-for-sale securities in 2006 or 2005.

Securities with a carrying value of $39,773,897  and  $11,221,000 at December 31, 2006 and 2005,  respectively,
were pledged to secure public deposits 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, 2006 and 2005, were as follows:

                                                                          2006
                                 ------------------------------- -------------------------------- -------------------------------
                                       Losses < 12 Months             Losses 12 Months or >                   Total
                                 ------------------------------- -------------------------------- -------------------------------
                                                     Gross                            Gross                           Gross
                                      Fair         Unrealized         Fair         Unrealized          Fair         Unrealized
                                     Value           Losses          Value           Losses           Value           Losses
                                 --------------- --------------- --------------- ---------------- --------------- ---------------
Obligations of U.S.
   Government agencies              $12,516,448       $  35,403     $13,356,106        $ 162,598     $25,872,554       $ 198,001
Tax-exempt and tax-
     able obligations of
     states and municipal
     subdivisions                     4,801,648          25,135       2,122,409           27,285       6,924,057          52,420
Mortgage-backed
     Securities                       4,097,314          11,463       3,299,976           54,664       7,397,290          66,127
Corporate obligations                 1,303,272           4,072               -                -       1,303,272           4,072
                                 --------------- --------------- --------------- ---------------- --------------- ---------------
                                    $22,718,682       $  76,073     $18,778,491        $ 244,547     $41,497,173       $ 320,620
                                 =============== =============== =============== ================ =============== ===============`

---

`2005
                                 ------------------------------- -------------------------------- -------------------------------
                                       Losses < 12 Months             Losses 12 Months or >                   Total
                                 ------------------------------- -------------------------------- -------------------------------
                                                     Gross                            Gross                           Gross
                                      Fair         Unrealized         Fair         Unrealized          Fair         Unrealized
                                     Value           Losses          Value           Losses           Value           Losses
                                 --------------- --------------- --------------- ---------------- --------------- ---------------
Obligations of U.S.
   Government agencies              $22,124,908       $ 164,105      $5,179,618        $  75,534     $27,304,526       $ 239,639
Tax-exempt and tax-
     able obligations of
     states and municipal
     subdivisions                     1,616,839          19,078       1,519,399           27,966       3,136,238          47,044
Mortgage-backed
     Securities                       4,148,550          56,071       1,756,360           36,786       5,904,910          92,857
                                 --------------- --------------- --------------- ---------------- --------------- ---------------
                                    $27,890,297       $ 239,254      $8,455,377        $ 140,286     $36,345,674       $ 379,540
                                 =============== =============== =============== ================ =============== ===============`

Approximately 52% of the number of
securities in the investment portfolio at December 31, 2006 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 not to the
credit quality of the issuer.

NOTE E  LOANS

Loans outstanding included the
following types at December 31, 2006 and 2005:

`2006               2005
                                                                                           ----------------- ------------------
                                                                                                     (In thousands)

      Commercial, financial and agricultural                                                      $  36,258          $  30,576
      Real estate - construction                                                                     69,420             37,660
      Real estate - mortgage                                                                        158,538            116,484
      Installment loans to individuals                                                               19,525             12,145
      Overdrafts                                                                                        189                126
                                                                                           ----------------- ------------------
                                                                                                    283,930            196,991
      Allowance for loan losses                                                                     (3,793)            (2,367)
                                                                                           ----------------- ------------------
                                                                                                 $  280,137         $  194,624
                                                                                           ================= ==================

    Transactions in the allowance for loan losses for the years ended December 31, 2006 and 2005, were as follows:

                                                                                                 2006                2005
                                                                                          ------------------ ------------------

      Balance at beginning of year                                                              $ 2,366,773        $ 1,658,527

      Additions:
          First National Bank of Wiggins acquisition                                                704,707                  -
          Provision for loan losses charged to operations                                           800,361            920,737
          Recoveries                                                                                107,386             89,978
                                                                                          ------------------ ------------------
                                                                                                  3,979,227          2,669,242
      Deductions:
          Loans charged off                                                                         186,290            302,469
                                                                                          ------------------ ------------------
      Balance at end of year                                                                    $ 3,792,937        $ 2,366,773
                                                                                          ================== ==================`

---

During the years 2006 and 2005 and as
of December 31, 2006 and 2005, no significant loans were classified as impaired.

At December 31, 2006 and 2005, the
Company had nonaccrual loans and loans past due 90 days or more as follows:

`2006                 2005
                                                                                         ------------------- ------------------
                                                                                                    (In thousands)

      Nonaccrual loans                                                                        $  1,789            $   283
      Past due 90 days or more and still accruing                                                  118                331`

NOTE F  PREMISES
AND EQUIPMENT

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

`2006                 2005
                                                                                         ------------------- ------------------

      Premises:
          Land                                                                                   $3,205,280         $2,431,604
          Buildings and improvements                                                              6,462,212          5,640,164
      Equipment                                                                                   4,287,101          3,669,932
      Construction in progress                                                                       18,529             11,893
                                                                                         ------------------- ------------------
                                                                                                 13,973,122         11,753,593
      Less accumulated depreciation and amortization                                            (4,019,944)        (3,423,087)
                                                                                         ------------------- ------------------

                                                                                                 $9,953,178         $8,330,506
                                                                                         =================== ==================`

The amounts charged to operating
expense for depreciation were $573,471 and $556,455 in 2006 and 2005, respectively.

NOTE G  DEPOSITS

The aggregate amount of time deposits
in denominations of $100,000 or more for 2006 and 2005 was $82,820,395 and $50,388,588,
respectively.

At December 31, 2006, the scheduled
maturities of time deposits included in interest-bearing deposits were as follows (in
thousands):

`Year                    Amount
                                                        ----                    ------
                                                        2007                  $ 68,881,140
                                                        2008                     8,645,762
                                                        2009                     2,226,993
                                                        2010                     2,033,665
                                                        2011                     1,032,835
                                                                              ------------
                                                                              $ 82,820,395
                                                                              ============`

---

NOTE H  BORROWED
FUNDS

Borrowed funds consisted of the
following:

`December 31,
                                                                                         --------------------------------------
                                                                                                2006                 2005
                                                                                         ------------------- ------------------

      FHLB advances                                                                             $20,827,427        $25,465,272
                                                                                                ===========        ===========`

Advances from the FHLB have maturity
dates ranging from March, 2007, through June, 2013. Interest is payable monthly at rates
ranging from 2.651% to 5.920%. 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, 2006, FHLB advances available
and unused totaled $67.7 million.

Future annual principal repayment
requirements on the borrowings from the FHLB at December 31, 2006, are as follows:

`Year                               Amount
                                                 ----                               ------

                                                 2007                           $ 4,903,071
                                                 2008                             3,342,236
                                                 2009                             4,545,036
                                                 2010                             7,530,288
                                                 2011                                36,140
                                            Thereafter                              470,656
                                                                                -----------
                                                                                $20,827,427
                                                                                ===========`

NOTE I  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.

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, 2006, that the Company and its subsidiary bank exceed all capital adequacy
requirements.

At December 31, 2006 and 2005, 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,
2006 and 2005, are presented in the following table. No amount was deducted from capital
for interest-rate risk exposure.

---

`Company                             Subsidiary
                                                         (Consolidated)                             The First
                                            ------------------------------------ ----------------------------------
                                                    Amount               Ratio          Amount              Ratio
                                                    ------               -----          ------              -----
      December 31, 2006
          Total risk-based                           $45,627              15.0%          $36,027             11.9%
          Tier I risk-based                           41,834              13.7%           32,234             10.6%
          Tier I leverage                             41,834              10.3%           32,234              7.9%

      December 31, 2005
          Total risk-based                           $25,666              12.4%          $24,728             11.9%
          Tier I risk-based                           24,887              12.0%           22,361             10.8%
          Tier I leverage                             24,887               8.0%           22,361              7.8%

    The minimum  amounts of capital and ratios as established by banking  regulators at December 31, 2006 and 2005,
    are as follows:

                                                               Company                             Subsidiary
                                                         (Consolidated)                             The First
                                            ------------------------------------ ----------------------------------
                                                    Amount                Ratio          Amount              Ratio
                                                    ------                -----          ------              -----
      December 31, 2006
          Total risk-based                           $24,473               8.0%          $24,372              8.0%
          Tier I risk-based                           12,236               4.0%           12,185              4.0%
          Tier I leverage                             16,287               4.0%           16,237              4.0%

      December 31, 2005
          Total risk-based                           $16,612               8.0%          $16,588              8.0%
          Tier I risk-based                            8,306               4.0%            8,294              4.0%
          Tier I leverage                             12,504               4.0%           11,496              4.0%`

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

NOTE J 
COMPREHENSIVE INCOME

The Company and its subsidiary bank
report comprehensive income as required by FASB Statement No. 130, Reporting Comprehensive
Income. In accordance with this statement, unrealized gains and losses on securities
available-for-sale are included in other comprehensive income.

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

---

`Years Ended December 31,
                                                                                         --------------------------------------
                                                                                                  2006               2005
                                                                                         ------------------- ------------------

      Unrealized holdings gains (losses) on available-for-
          sale securities                                                                          $238,439         $(290,015)
      Reclassification adjustment for (gains) losses
          realized in income                                                                             -                  -
                                                                                         ------------------- ------------------
      Net unrealized gains (losses)                                                                 238,439          (290,015)
      Tax effect                                                                                   (81,069)             98,605
                                                                                         ------------------- ------------------
      Net-of-tax amount                                                                            $157,370         $(191,410)
                                                                                         =================== ==================`

NOTE K  INCOME TAXES

The components of income tax expense
are as follows:

`December 31,
                                                                                         --------------------------------------
                                                                                                  2006               2005
                                                                                         ------------------- ------------------

      Current:
          Federal                                                                                $1,243,198          $ 958,287
          State                                                                                     145,814            134,969
      Deferred                                                                                      (20,186)          (229,453)
                                                                                         ------------------- ------------------

                                                                                                 $1,368,826          $ 863,803
                                                                                         =================== ==================`

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,
                                                        -----------------------------------------------------------------------
                                                                            2006                                     2005
                                                        ------------------------------------ ----------------------------------
                                                                Amount                  %            Amount                %
                                                        ------------------     ------------- -----------------  ---------------

              Income taxes at statutory rate                 $ 1,592,506                34%        $ 942,819               34%
              Tax-exempt income                                (155,459)               (3)%        (107,996)              (4)%
              State income tax, net of federal
                  tax effect                                      96,237                 2%           89,080                3%
              Tax credits                                      (121,414)               (3)%         (43,502)              (2)%
              Other, net                                        (43,044)               (1)%         (16,598)                 -
                                                        ------------------     ------------- -----------------  ---------------
                                                             $ 1,368,826                29%        $ 863,803               31%
                                                        ==================     ============= =================  ===============`

---

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

                                                                                                     December 31,
                                                                                         --------------------------------------
                                                                                                  2006               2005
                                                                                         ------------------- ------------------
      Deferred tax assets:
          Allowance for loan losses                                                               $ 916,228          $ 734,157
          Unrealized loss on available-for-sale securities                                           15,690             96,762
          Wiggins' NOL carryover                                                                    990,688                  -
          Other                                                                                      21,292              3,414
                                                                                         ------------------- ------------------
                                                                                                  1,943,898            834,333
                                                                                         ------------------- ------------------

      Deferred tax liabilities:
          Securities                                                                               (92,719)           (53,180)
          Premises and equipment                                                                  (726,417)          (467,325)
          Core deposit intangible                                                                 (252,027)                 -
                                                                                         ------------------- ------------------
                                                                                                (1,071,163)          (520,505)
                                                                                         ------------------- ------------------
      Net deferred tax asset                                                                      $ 872,735           $313,828
                                                                                         =================== ==================`

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 three percent or less, the
Company and its subsidiary bank provide a matching contribution. Contributions totaled
$90,148 in 2006 and $67,227 in 2005.

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,
2006, the ESOP held 3,777 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 $85,000 and $0 for 2006 and 2005, respectively.

The Company and its subsidiary bank
have employment agreements with certain executive officers. These agreements contain
provisions concerning salaries, bonuses, incentive programs, and benefits related to a
change in control.

NOTE M  STOCK PLANS

In 1997, the Company adopted the 1997
Stock Option Plan (1997 Plan) which provides for the granting of options to purchase up to
144,370 shares of Company common stock by directors and key employees of the Company and
its subsidiary. Options granted under the 1997 Plan were exercisable at December 31, 1999,
and expire ten years after the grant date. As of December 31, 2006, 105,134 shares had not
been exercised or forfeited. All options expire and are void unless exercised on or before
March 18, 2007. The options are exercisable at not less than the market value of the
Companys stock at the grant date. Accordingly, no compensation cost has been
recognized.

On May 27, 1999, the Companys
shareholders approved the 1999 Stock Incentive Plan (1999 Plan). The 1999 Plan provides
for the granting of options to purchase up to 213,376 shares of the Companys common
stock by the Companys and its subsidiarys directors, key employees, and
management. Under the 1999 Plan, the Company may grant either incentive stock options or
nonqualified stock options. Options granted to directors and employees vest in equal
amounts over three years. Stock options granted to management vest based on annual
performance goals or after nine years and eleven months, if still employed. At December
31, 2006, 213,356 options had been granted, and 66,905 had been exercised or forfeited.
All options expire and are void unless exercised on or before April 15, 2009. The options
are exercisable at not less than the market value of the Companys stock at the grant
date.

---

A summary of the status of the stock
option plans as of December 31, 2006 and 2005, and changes during the years ending on
those dates is presented below:

`December 31,
                                                        -----------------------------------------------------------------------
                                                                            2006                                     2005
                                                        ------------------------------------ ----------------------------------
                                                                              Weighted                            Weighted
                                                                               Average                            Average
                                                                              Exercise                            Exercise
                                                             Shares             Price            Shares            Price
                                                        -----------------  ----------------- ----------------  ----------------

   Options outstanding at beginning of year                      261,112             $    7          294,990            $    7
   Options granted                                                     0                               7,930            $   13
   Options exercised                                             (9,527)             $    7         (37,808)            $    7
   Options forfeited                                                   0                             (4,000)            $    9
                                                        -----------------                    ----------------
   Options outstanding at end of year                            251,585             $    7          261,112            $    7
                                                        =================                    ================
   Options exercisable at end of year                            246,302             $    7          253,182            $    7
                                                        =================                    ================

    The following table summarizes information about stock options at December 31, 2006:


                                                                              Remaining
          Exercise Price                       Number                        Contractual                       Number
                                             Outstanding                    Life in Years                    Exercisable
         ----------------                  ---------------                ----------------                 ---------------
                $5                             105,134                           .3                            105,134
          $7.50 - $8.75                        138,688                          2.3                            138,688
              $12.50                             7,763                          2.3                              2,480`

NOTE N - SUBORDINATED DEBENTURES

The Company  issued  $7,217,000  of floating rate junior  subordinated  deferrable
interest  debentures to The
First  Bancshares  Statutory  Trust 1, a  Connecticut  business  trust,  in which the  Company  owns all of the
common equity.  The debentures  are the sole asset of Trust 1. The Trust issued  $7,000,000 of Trust  Preferred
Securities (TPSs) to investors.  The Company's  obligations under the debentures and related  documents,  taken
together,  constitute a fully and unconditional  guarantee by the Company of the Trust's  obligations under the
preferred  securities.  The preferred securities are redeemable by the Company in 2007, 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 2032.  Interest on the preferred  securities is the three month London  Interbank
Offer  Rate  (LIBOR)  plus  3.6% and is  payable  quarterly.  The  terms  of the  subordinated  debentures  are
identical to those of the preferred  securities.  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 Trust 2. 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 are 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  LIBOR plus 1.65% and is  payable  quarterly.  The terms of the  subordinated  debentures  are
identical to those of the preferred  securities.  In December 2003, the Company  adopted the provisions of FASB
Interpretations  No 46R (FIN 46R),  Consolidation of Variable Interest  Entities,  An Interpretation of ARB No.
51.  The adoption of FIN 46R required the Company to deconsolidate the subsidiary.

---

NOTE O - TREASURY STOCK

Shares held in treasury totaled 26,494 at December 31, 2006, and 2005.

NOTE P - RELATED PARTY TRANSACTIONS

In the normal course of business,  the subsidiary  bank makes loans to their  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  $7,046,000
and  $8,093,000  at  December  31, 2006 and 2005,  respectively.  The  activity in loans to current  directors,
executive  officers,  and their  affiliates  during the year ended  December 31, 2006, is summarized as follows
(in thousands):

`Loans outstanding at beginning of year                           $ 8,093
           New loans                                                          1,524
           Repayments                                                        (2,571)
                                                                          ----------
           Loans outstanding at end of year                                 $ 7,046
                                                                          ==========`

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 $1,679,000 and
$1,446,000 at December 31, 2006 and 2005, respectively, and had made loan commitments of
approximately $57,114,000 and $33,364,000 at December 31, 2006 and 2005, respectively.

Commitments to extend credit and
letters of credit include some exposure to credit loss in the event of nonperformance of
the customer. Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Standby letters of
credit are conditional commitments issued by the Bank to guarantee the performance of a
customer to a third party. The credit policies and procedures for such commitments are the
same as those used for lending activities. Because these instruments have fixed maturity
dates and because a number expire without being drawn upon, they generally do not present
any significant liquidity risk. No significant losses on commitments were incurred during
the two years ended December 31, 2006, nor are any significant losses as a result of these
transactions anticipated.

---

The primary market area served by the
subsidiary bank is Forrest, Lamar, Jones, Pearl River, Jackson, Hancock and Stone Counties
within South Mississippi. Management closely monitors its credit concentrations and
attempts to diversify the portfolio within its primary market area. As of December 31,
2006, 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.

The Company has five leases for
facilities. The first lease expires May 31, 2008. Monthly lease payments are $2,392. The
second lease requires monthly payments of $1,954 through December, 2006 with escalation to
$2,043 through the lease expiration in June, 2007. Three one-year renewals options are
included in the lease terms. Renewal rates will be based on the increase in the Consumer
Price Index. The third lease requires monthly payments of $752 through December, 2006 with
escalation to $786 through the lease expiration in June, 2007. Three one-year renewals
options are included in the lease terms. Renewal rates will be based on the increase in
the Consumer Price Index. The fourth lease expires in December, 2009. Monthly lease
payments are $1,293. Lease payments increase 3% every twelve month period. The fifth lease
expires in June, 2008. Monthly lease payments are $6,045. The lease allows two six month
options to renew. Three of the five leases are to related parties. Rent expense for 2006
to the related parties amounted to $79,750.00.

Rental expense for premises and
equipment for the years ended December 31, 2006 and 2005 was approximately $177,000 and
$136,000, respectively.

The Company and its subsidiary bank
are subject to claims and lawsuits which arise primarily in the ordinary course of
business. It is the opinion of management that the disposition or ultimate resolution of
such claims and lawsuits will not have a material adverse effect on the consolidated
financial position of the Company.

NOTE R  DISCLOSURE
ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS

The following disclosure of the
estimated fair value of financial instruments is made in accordance with FASB Statement
No. 107, Disclosures About Fair Value of Financial Instruments. The estimated fair value
amounts have been determined using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required to interpret market
data to develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that could be realized in a current market
exchange. The use of different market assumptions and/or estimation methodologies may have
a material effect on the estimated fair value amounts.

The following methods and assumptions
were used to estimate the fair value of each class of financial instruments 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.

Securities  For securities held
as investments, fair value equals market price, if available. If a quoted market price is
not available, fair value is estimated using quoted market prices for similar securities.

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

Deposits  The fair values of
demand deposits are, as required by Statement No. 107, 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 borrowings approximates their fair values.

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.

`For the Year Ended            For the Year Ended
                                                                         December 31, 2006             December 31, 2005
                                                                  -----------------------------  -----------------------------
                                                                     Carrying       Estimated      Carrying        Estimated
                                                                      Amount       Fair Value       Amount        Fair Value
                                                                  --------------  -------------  --------------  -------------
                                                                                         (In thousands)
        Financial Instruments:
            Assets:
                Cash and cash equivalents                              19,187         19,187       $ 28,888         $ 28,888
                Securities available-for-sale                          89,480         89,480         48,543           48,543
                Securities held-to-maturity                                13             14             14               14
                Other securities                                        2,317          2,317          2,103            2,103
                Loans                                                 284,082        289,282        197,943          194,380

            Liabilities:
                Noninterest-bearing
                   Deposits                                            58,652         58,652         49,585           49,585
                Interest-bearing deposits                             293,070        293,132        192,364          192,364
                Subordinated debentures                                11,341         11,341          7,217            7,217
                FHLB and other borrowings                              20,827         20,827         25,465           25,465`

NOTE S  STOCK SPLIT

On February 22, 2006, the
Companys board of directors declared a two-for-one stock split effected in the form
of a 100% stock dividend. The record date for the shareholders entitled to receive the
additional shares was March 1, 2006. The stock split resulted in the issuance of
approximately 1,187,600 shares of common stock and was accounted for by the transfer of
approximately $1,187,600 from additional paid-in capital to common stock. All per share
amounts have been changed to reflect the stock split.

---

NOTE T  EQUITY
OFFERING

On November 21, 2006, the Company
closed on a public offering of its common stock. As a result of this offering, 365,000
shares were sold at a price of $22.50 per share, with net proceeds of approximately $8.2
million. Some of these proceeds were used to fund the acquisition of the First National
Bank of Wiggins and the remainder will be used for general corporate purposes.

NOTE U  PARENT
COMPANY FINANCIAL INFORMATION

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

`Condensed Balance Sheets

                                                                                                     December 31,
                                                                                         --------------------------------------
                                                                                                  2006               2005
                                                                                         ------------------- ------------------
      Assets:
          Cash and cash equivalents                                                             $ 8,693,312       $  1,796,768
          Investment in subsidiary bank                                                          33,775,619         22,172,888
          Investment in statutory trust                                                             341,000            217,000
          Other securities                                                                          100,000            150,000
          Premises and equipment                                                                    368,623            677,063
          Other                                                                                     453,435            680,881
                                                                                         ------------------- ------------------
                                                                                               $ 43,731,989       $ 25,694,600
                                                                                         =================== ==================
      Liabilities and Stockholders' Equity:
          Subordinated debentures                                                                11,341,000          7,217,000
          Other                                                                                      26,184                  -
          Stockholders' equity                                                                   32,364,805         18,477,600
                                                                                         ------------------- ------------------
                                                                                               $ 43,731,989       $ 25,694,600



                                          Condensed Statements of Income

                                                                                                     December 31,
                                                                                         --------------------------------------
                                                                                                  2006               2005
                                                                                         ------------------- ------------------
      Income:
          Interest and dividends                                                                 $  102,106        $   141,000
          Gain on sale of land                                                                      224,315             59,748
          Other                                                                                      10,191              3,847
                                                                                         ------------------- ------------------
                                                                                                    336,612            204,595
      Expenses:
          Interest on borrowed funds                                                                783,657            502,649
          Other                                                                                     294,955            102,823
                                                                                         ------------------- ------------------
                                                                                                  1,078,612            605,472
      Loss before income taxes and equity in undistributed income of
          Subsidiary                                                                              (742,000)          (400,877)
      Income tax benefit                                                                          (360,435)          (171,813)
                                                                                         ------------------- ------------------
      Loss before equity in undistributed income of subsidiary                                    (381,565)          (229,064)
      Equity in undistributed income of subsidiary                                                3,696,579          2,138,258
                                                                                         ------------------- ------------------

      Net income                                                                                 $3,315,014        $ 1,909,194
                                                                                         =================== ==================`

---

`Condensed Statements of Cash Flows

                                                                                                     Years Ended
                                                                                                     December 31,
                                                                                         --------------------------------------
                                                                                                  2006               2005
                                                                                         ------------------- ------------------
      Cash flows from operating activities:
          Net income                                                                            $ 3,315,014        $ 1,909,194
          Adjustments to reconcile net income to net cash and cash
              equivalents:
                 Equity in undistributed income of subsidiary                                   (3,696,579)        (2,138,258)
                 Gain on sale of land                                                             (224,315)           (59,748)
                 Other, net                                                                         253,630          (222,460)
                                                                                         ------------------- ------------------
                    Net cash used in operating activities                                         (352,250)          (511,272)
                                                                                         ------------------- ------------------

      Cash flows from investing activities:
          Investment in subsidiary bank                                                         (7,748,781)        (2,000,000)
          Other, net                                                                               (74,000)          (188,074)
          Proceeds from sale of lease and land                                                      532,755            134,977
                                                                                         ------------------- ------------------
                Net cash used in investing activities                                           (7,290,026)        (2,053,097)
                                                                                         ------------------- ------------------

      Cash flows from financing activities:
          Dividends paid on common stock                                                          (380,032)          (233,690)
          Issuance of subordinated debentures                                                     4,124,000                  -
          Exercise of stock options                                                                  76,498            253,905
          Issuance of common stock                                                               10,718,354                  -
                                                                                         ------------------- ------------------
                Net cash provided by financing activities                                        14,538,820             20,215
                                                                                         ------------------- ------------------
      Net increase (decrease) in cash and cash equivalents                                        6,896,544        (2,544,154)

      Cash and cash equivalents at beginning of year                                              1,796,768          4,340,922
                                                                                         ------------------- ------------------

      Cash and cash equivalents at end of year                                                   $8,693,312      $ 1,796,768
                                                                                         =================== ==================`

---

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

`Three Months Ended
                                                                        March 31        June 30        Sept. 30        Dec. 31
                                                                        --------        -------        --------        -------
                                                                            (In thousands, except per share amounts)

        2006
        Total interest income                                            $ 4,843        $ 5,548         $ 6,079        $ 7,289
        Total interest expense                                             1,802          2,014           2,382          3,178
                                                                        --------        -------        --------        -------
            Net interest income                                            3,041          3,534           3,697          4,111
        Provision for loan losses                                             84            209             289            218
                                                                        --------        -------        --------        -------
            Net interest income after provision for
                loan losses                                                2,957          3,325           3,408          3,893
        Total non-interest income                                            447            676             509            607
        Total non-interest expense                                         2,308          2,662           2,864          3,304
        Income tax expense                                                   337            351             322            359
                                                                        --------        -------        --------        -------

        Net income                                                        $  759         $  988          $  731         $  837
                                                                        ========        =======        ========        =======

        Per share:
            Net income                                                    $  .32         $  .42          $  .31         $  .30
            Net income, diluted                                              .30            .39             .29            .29
            Cash dividends declared                                          .16              -               -              -

        2005
        Total interest income                                            $ 3,302        $ 3,718         $ 4,101        $ 4,571
        Total interest expense                                             1,073          1,274           1,493          1,703
                                                                        --------        -------        --------        -------
            Net interest income                                            2,229          2,444           2,608          2,868
        Provision for loan losses                                            204            233             313            170
                                                                        --------        -------        --------        -------
            Net interest income after provision for
                Loan losses                                                2,025          2,211           2,295          2,698
        Total non-interest income                                            459            433             368            422
        Total non-interest expense                                         1,937          1,900           2,055          2,246
        Income tax expense                                                   182            250             203            229
                                                                        --------        -------        --------        -------

        Net income                                                        $  365         $  494          $  405         $  645
                                                                        ========        =======        ========        =======

        Per share:
            Net income                                                    $  .16         $  .21          $  .17         $  .27
            Net income, diluted                                              .15            .20             .16            .26
            Cash dividends declared                                          .10              -               -              -`