The First Bancshares - 10-Q quarterly report FY2014 Q1

U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

x	QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED: March 31, 2014

——————

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 33-94288

———————

THE FIRST BANCSHARES, INC.

————————————

(EXACT NAME OF ISSUER AS SPECIFIED IN ITS CHARTER)

MISSISSIPPI		64-0862173
(STATE OF INCORPORATION)		(I.R.S. EMPLOYER IDENTIFICATION NO.)

6480 U.S. HIGHWAY 98 WEST
HATTIESBURG, MISSISSIPPI		39402
(ADDRESS OF PRINCIPAL		(ZIP CODE)
EXECUTIVE OFFICES)

	(601) 268-8998
	(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)

NONE

(FORMER NAME, ADDRESS AND FISCAL YEAR, IF CHANGED SINCE LAST REPORT)

INDICATE BY CHECK MARK WHETHER THE ISSUER: (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.

YES x

NO ¨

INDIATE BY CHECK MARK WHETHER THE REGISTRANT HAS SUBMITTED ELECTRONICALLY AND POSTED ON ITS CORPORATE WEB SITE, IF ANY, EVERY INTERACTIVE DATA FILE REQUIRED TO BE SUBMITTED AND POSTED PURSUANT TO RULE 405 OF REGULATION S-T (§232.405 OF THIS CHAPTER) DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT HE REGISTRANT WAS REQUIRED TO SUBMIT AND POST SUCH FILES).

YES x

NO ¨

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN ACCELERATED FILER, A NON-ACCELERATED FILER, OR A SMALLER REPORTING COMPANY. SEE THE DEFINITIONS OF “LARGE ACCELERATED FILER,” “ACCELERATED FILER,” “NON-ACCELERATED FILER” AND “SMALLER REPORTING COMPANY” IN RULE 12B-2 OF THE EXCHANGE ACT.

LARGE ACCELERATED FILER	¨	ACCELERATED FILER	¨
NON-ACCELERATED FILER	x	SMALLER REPORTING COMPANY	¨

ON March 31, 2014, 5,149,280 SHARES OF THE ISSUER'S COMMON STOCK, PAR VALUE $1.00 PER SHARE WERE ISSUED AND OUTSTANDING.

TRANSITIONAL DISCLOSURE FORMAT (CHECK ONE):

YES ¨

NO x

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT):

YES ¨

NO x

PART I - FINANCIAL INFORMATION

ITEM NO. 1. FINANCIAL STATEMENTS

THE FIRST BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

($ amounts in thousands)

		(Unaudited)
		March 31,		December 31,
		2014		2013
ASSETS

Cash and due from banks	$	28,514	$	24,080
Interest-bearing deposits with banks		31,203		14,205
Federal funds sold		22,261		967

Total cash and cash equivalents		81,978		39,252

Securities held-to-maturity, at amortized cost		8,429		8,438
Securities available-for-sale, at fair value		236,460		244,051
Other securities		6,148		5,534

Total securities		251,037		258,023

Loans held for sale		2,586		3,680
Loans		590,947		579,623
Allowance for loan losses		(5,811)		(5,728)

Loans, net		587,722		577,575

Premises and equipment		31,416		32,072
Interest receivable		3,431		3,292
Cash surrender value of life insurance		9,182		6,593
Goodwill		10,621		10,621
Other assets		7,959		8,992
Other real estate owned		5,221		4,470

TOTAL ASSETS	$	988,567	$	940,890

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES:
Deposits:
Noninterest-bearing	$	179,334	$	173,794
Interest-bearing		684,247		606,177

TOTAL DEPOSITS		863,581		779,971

Interest payable		351		400
Borrowed funds		15,000		52,000
Subordinated debentures		10,310		10,310
Other liabilities		11,829		13,101

TOTAL LIABILITIES		901,071		855,782

STOCKHOLDERS’ EQUITY:
Preferred stock, no par value, $1,000 per share liquidation, 10,000,000 shares authorized; 17,123 issued and outstanding at March 31, 2014 and December 31, 2013, respectively		17,123		17,103
Common stock, par value $1 per share, 10,000,000 shares authorized; 5,175,774 shares issued at March 31, 2014 and 5,122,941 at December 31, 2013, respectively		5,176		5,123
Additional paid-in capital		42,107		42,086
Retained earnings		23,637		22,509
Accumulated other comprehensive income (loss)		(83)		(1,249)
Treasury stock, at cost, 26,494 shares at March 31, 2014 and at December 31, 2013		(464)		(464)

TOTAL STOCKHOLDERS’ EQUITY		87,496		85,108

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	988,567	$	940,890

	2

	3

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

($ amounts in thousands, except earnings and dividends per share)

	(Unaudited)
	Three Months Ended
	March 31,

	2014		2013

INTEREST INCOME:
Interest and fees on loans	$	7,004	$	5,231
Interest and dividends on securities:
Taxable interest and dividends		903		903
Tax exempt interest		529		504
Interest on federal funds sold		11		12

TOTAL INTEREST INCOME		8,447		6,650

INTEREST EXPENSE:
Interest on deposits		466		618
Interest on borrowed funds		157		141

TOTAL INTEREST EXPENSE		623		759

NET INTEREST INCOME		7,824		5,891

PROVISION FOR LOAN LOSSES		358		311

NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		7,466		5,580

OTHER INCOME:
Service charges on deposit accounts		984		844
Other service charges and fees		688		1,086
TOTAL OTHER INCOME		1,672		1,930

OTHER EXPENSES:
Salaries and employee benefits		4,097		3,183
Occupancy and equipment		1,220		956
Other		1,910		1,840

TOTAL OTHER EXPENSES		7,227		5,979

INCOME BEFORE INCOME TAXES		1,911		1,531

INCOME TAXES		484		306

NET INCOME		1,427		1,225

PREFERRED STOCK ACCRETION AND DIVIDENDS		106		106

NET INCOME APPLICABLE TO COMMON STOCKHOLDERS	$	1,321	$	1,119

NET INCOME APPLICABLE TO COMMON STOCKHOLDERS:
BASIC	$	..26	$	..36
DILUTED		..25		..35
DIVIDENDS PER SHARE – COMMON		..0375		..0375

	4

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

($ amounts in thousands)

	(Unaudited)
	Three Months Ended
	March 31,
	2014		2013

Net income per consolidated statements of income	$	1,427	$	1,225
Other comprehensive income:
Unrealized holding gains arising during the period on available-for-sale securities		1,749		105
Unrealized holding gains on loans held for sale		45		20
Income tax expense		(628)		(43)
Other Comprehensive Income		1,166		82

Comprehensive Income	$	2,593	$	1,307

	5

THE FIRST BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

($ in thousands)
											Accumulated
											Other
							Additional				Compre-
	Common		Preferred		Stock		Paid-in		Retained		hensive		Treasury
	Stock		Stock		Warrants		Capital		Earnings		Income (Loss)		Stock		Total
Balance, January 1, 2013	$	3,134	$	17,021	$	284	$	23,427	$	19,951	$	2,533	$	(464)	$	65,886
Net income		-		-		-		-		1,225		-		-		1,225
Other comprehensive income		-		-		-		-		-		82		-		82
Accretion and dividends on preferred Stock		-		20		-		-		(106)		-		-		(86)
Dividends on common stock, $0.0375 per Share		-		-		-		-		(116)		-		-		(116)
Issuance of 1,951,220 preferred Shares		-		20,000		-		-		-		-		-		20,000
Restricted stock grant		35		-		-		(35)		-		-		-		-
Compensation expense		-		-		-		77		-		-		-		77
Balance, March 31, 2013	$	3,169	$	37,041	$	284	$	23,469	$	20,954	$	2,615	$	(464)	$	87,068

Balance, January 1, 2014	$	5,123	$	17,103	$	284	$	41,802	$	22,509	$	(1,249)	$	(464)	$	85,108
Net income		-		-		-		-		1,427		-		-		1,427
Other comprehensive income		-		-		-		-		-		1,166		-		1,166
Accretion and dividends on preferred Stock		-		20		-		-		(106)		-		-		(86)
Dividends on common stock, $0.0375 per share		-		-		-		-		(193)		-		-		(193)
Repurchase of restricted stock for payment of taxes		(4)		-		-		(60)		-		-		-		(64)
Restricted stock grant		57		-		-		(57)		-		-		-		-
Compensation expense		-		-		-		138		-		-		-		138
Balance, March 31, 2014	$	5,176	$	17,123	$	284	$	41,823	$	23,637	$	(83)	$	(464)	$	87,496

	6

THE FIRST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ Amounts in Thousands)

	(Unaudited)
	Three Months Ended
	March 31,
	2014		2013
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME	$	1,427	$	1,225
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion		523		421
Provision for loan losses		358		311
Loss on sale/writedown of ORE		149		10
Restricted stock expense		138		77
Increase in cash value of life insurance		(39)		(41)
Federal Home Loan Bank stock dividends		-		(1)
Changes in:
Interest receivable		(139)		(49)
Loans held for sale, net		1,140		1,889
Interest payable		(49)		(14)
Other, net		(48)		1,805
NET CASH PROVIDED BY OPERATING ACTIVITIES		3,460		5,633

CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities and calls of securities available-for-sale		9,615		18,278
Purchases of securities available-for-sale and held-to-maturity		(1,008)		(16,135)
Net redemptions (purchases) of other securities		(614)		382
Net increase in loans		(12,898)		(13,719)
Purchase of bank owned life insurance		(2,550)		-
Net (increase) decrease in premises and equipment		279		(306)
NET CASH USED IN INVESTING ACTIVITIES		(7,176)		(11,500)

CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits		83,781		66,652
Net decrease in borrowed funds		(37,000)		(20,011)
Dividends paid on common stock		(189)		(113)
Dividends paid on preferred stock		(86)		(86)
Repurchase of restricted stock for payment of taxes		(64)		-
Issuance of 1,951,220 common shares, net		-		20,000

NET CASH PROVIDED BY FINANCING ACTIVITIES		46,442		66,442

NET INCREASE IN CASH		42,726		60,575
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		39,252		30,877
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	81,978	$	91,452

SUPPLEMENTAL DISCLOSURES:

CASH PAYMENTS FOR INTEREST		672		773
CASH PAYMENTS FOR INCOME TAXES		275		189
LOANS TRANSFERRED TO OTHER REAL ESTATE		1,297		96
ISSUANCE OF RESTRICTED STOCK GRANTS		57		35

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THE FIRST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE A — BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and with the instructions to Form 10-Q of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2014, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company's Form 10-K for the year ended December 31, 2013.

NOTE B — SUMMARY OF ORGANIZATION

The First Bancshares, Inc., Hattiesburg, Mississippi (the "Company"), was incorporated June 23, 1995, under the laws of the State of Mississippi for the purpose of operating as a bank holding company. The Company’s primary asset is its interest in its wholly-owned subsidiary, The First, A National Banking Association (the “Bank”).

At March 31, 2014, the Company had approximately $988.6 million in assets, $587.7 million in net loans, $863.6 million in deposits, and $87.5 million in stockholders' equity. For the three months ended March 31, 2014, the Company reported net income of $1.4 million ($1.3 million applicable to common stockholders).

In the first quarter of 2014, the Company declared and paid a dividend of $.0375 per common share.

	8

NOTE C – BUSINESS COMBINATION

BCB Holding Company, Inc.

On March 3, 2014, the Company entered into an Agreement and Plan of Merger (the “Agreement”) with BCB Holding Company, Inc. an Alabama corporation (“BCB”) and parent of Bay Bank, Mobile, Alabama. The Agreement provides that, upon the terms and subject to the conditions set forth in the Agreement, BCB will merge with and into the Company (the “Merger”) and Bay Bank will merge with and into The First, A National Banking Association (“Bank Merger”). Subject to the terms and conditions of the Agreement, which has been approved by the Boards of Directors of the Company and BCB, each outstanding share of BCB common stock, other than shares held by the Company or BCB, or, shares with respect to which the holders thereof have perfected dissenters’ rights, will receive (i) for the BCB common stock that was outstanding prior to August 1, 2013, $3.60 per share which may be received in cash or the Company common stock provided that at least 30% of the aggregate consideration paid to such shareholders is in the Company common stock and one non-transferable contingent value right (“CVR”) of the CVR Consideration, and (ii) for the BCB common stock that was issued on August 1, 2013, $2.25 per share in cash. Each CVR is eligible to receive a cash payment equal to up to $0.40, with the exact amount based on the resolution of certain identified BCB loans over a three-year period following the closing of the transaction. Payout of the CVR will be overseen by a special committee of the Company’s Board of Directors. The Company will also either assume or redeem in full a note payable by BCB to Alostar Bank as well as the preferred stock issued under the U.S. Treasury’s Capital Purchase Program. The total consideration to be paid in connection with the acquisition will range between approximately $6.2 million and $6.6 million depending upon the payout of the CVR as well as the price of the Company common stock on the closing of the transaction, which is subject to a cap and a collar regarding its price.

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

Concurrently, the Company and BCB will enter into an agreement and plan of merger pursuant to which BCB’s wholly-owned subsidiary, Bay Bank, will be merged with and into the Company’s wholly-owned subsidiary, the Bank.

First Baldwin Bancshares, Inc.

The Company entered into an Acquisition Agreement dated January 31, 2013, as amended (the “Agreement”) with First Baldwin Bancshares, Inc., an Alabama corporation (“Baldwin”). The Agreement provided that, based upon the terms and subject to the conditions set forth in the Agreement, the Company would acquire all of the outstanding shares (the “Acquisition”) of Baldwin’s wholly-owned subsidiary, First National Bank of Baldwin County, A National Banking Association (“FNB”). Subject to the terms and conditions of the Agreement, as amended, which was approved by both the Company’s Board of Directors and the Board of Directors of Baldwin, on February 21, 2013, Baldwin filed a voluntary bankruptcy petition under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Alabama (“Bankruptcy Court”) and sought Bankruptcy Court approval of the Agreement and the Acquisition through a Chapter 11 plan. Upon approval by the Bankruptcy Court and consummation of the Acquisition, all outstanding FNB common stock was sold to the Company for cash consideration of $3,300,000 (the “Purchase Price”). Each outstanding share of FNB common stock remains outstanding and was unaffected by the Acquisition.

	9

As of the closing on April 30, 2013, FNB became a wholly-owned subsidiary of the Company and subsequently was merged with and into the Bank.

In connection with the acquisition, the Company recorded $1.3 million of goodwill and $.7 million of core deposit intangible. The core deposit will be expensed over 10 years.

The Company acquired the $124.2 million loan portfolio at a fair value discount of $.5 million. The discount represents expected credit losses, adjustments to market interest rates and liquidity adjustments.

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

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

The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheet at March 31, 2014, are as follows (dollars in thousands):

Outstanding principal balance		$	103,618
Carrying amount		$	103,418

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

	10

NOTE D – PREFERRED STOCK AND WARRANT

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

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

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

The Letter Agreement, pursuant to which the Preferred Shares were exchanged, contains limitations on the payment of dividends on the common stock to no more than 100% of the aggregate per share dividend and distributions for the immediate prior fiscal year (dividends of $0.15 per share were declared and paid in 2011, 2012, and 2013) and on the Company’s ability to repurchase its common stock, and continues to subject the Company to certain of the executive compensation limitations included in the Emergency Economic Stabilization Act of 2008 (EESA), as previously disclosed by the Company.

The most significant difference in terms between the CDCI Preferred Shares and the CPP Preferred Shares is the dividend rate applicable to each. The CPP Preferred Shares entitled the holder to an annual dividend of 5% increasing to 9% after 5 years of the liquidation value of the shares, payable quarterly in arrears; by contrast, the CDCI Preferred Shares entitle the holder to an annual dividend of 2% for 8 years of the liquidation value of the shares, payable quarterly in arrears. Other differences in terms between the CDCI Preferred Shares and the CPP Preferred Shares, including, without limitation, the restrictions on common stock dividends and on redemption of common stock and other securities exist. The terms of the CDCI Preferred Shares are more fully set forth in the Articles of Amendment creating the CDCI Preferred Shares, which Articles of Amendment were filed with the Mississippi Secretary of State on September 27, 2010.

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

	11

On March 22, 2013, the Company raised $20,000,005 in a private placement of 1,951,220 shares of newly authorized Series D Nonvoting Convertible Preferred Stock (“Convertible Preferred Stock”) at a purchase price of $10.25 per share. The terms of the Convertible Preferred Stock provided for mandatory conversion into the Company’s common stock upon approval, which occurred at the annual meeting, May 23, 2013. The Company paid $921,487.43 in fees to its financial advisors who acted as placement agents in the private placement.

The Company used the net proceeds from the private placement to increase its equity capital and for general corporate purposes, which includes, among other things, support for organic and acquisition-based growth. The private placement was exempt from Securities and Exchange Commission registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder.

Upon conversion of the Convertible Preferred Stock, the Company issued 1,951,220 shares of common stock. On March 31, 2014, the Company had 5,149,280 shares of common stock outstanding, excluding treasury shares.

NOTE E — EARNINGS APPLICABLE TO COMMON STOCKHOLDERS

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 stock options.

	For the Three Months Ended
	March 31, 2014
	Net Income		Shares	Per
	(Numerator)		(Denominator)	Share Data

Basic per share	$	1,321,000	5,140,500	$	..26

Effect of dilutive shares:
Restricted stock grants			49,429

Diluted per share	$	1,321,000	5,189,929	$	..25

	For the Three Months Ended
	March 31, 2013
	Net Income		Shares	Per
	(Numerator)		(Denominator)	Share Data

Basic per share	$	1,119,000	3,117,480	$	..36

Effect of dilutive shares:
Restricted stock grants			39,360

Diluted per share	$	1,119,000	3,156,840	$	..35

The Company granted 57,327 shares of restricted stock in the first quarter of 2014, 35,133 shares of restricted stock in the first quarter of 2013, and 15,500 shares of restricted stock in the third quarter of 2013.

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NOTE F — FAIR VALUE OF ASSETS AND LIABILITIES

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

Level 1:	Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2:	Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities

Level 3:	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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

Available-for-Sale Securities

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

The following table presents the Company’s assets that are measured at fair value on a recurring basis and the level within the hierarchy in which the fair value measurements fell as of March 31, 2014 and December 31, 2013 (in thousands):

March 31, 2014

(Dollars in thousands)			Fair Value Measurements Using
			Quoted Prices
			in
			Active
			Markets		Significant
			For		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)

Obligations of U. S. Government Agencies	$	25,381	$	-	$	25,381	$	-
Municipal securities		106,228		-		106,228		-
Mortgage-backed securities		76,973		-		76,973		-
Corporate obligations		26,908		-		23,980		2,928
Other		970		970		-		-
Total	$	236,460	$	970	$	232,562	$	2,928

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December 31, 2013

			Fair Value Measurements Using
			Quoted Prices
			in
			Active
			Markets		Significant
			For		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)

Obligations of U. S. Government Agencies	$	29,962	$	-	$	29,962	$	-
Municipal securities		108,078		-		108,078		-
Mortgage-backed securities		78,187		-		78,187		-
Corporate obligations		26,852		-		24,054		2,798
Other		972		972		-		-
Total	$	244,051	$	972	$	240,281	$	2,798

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

	Bank-Issued
	Trust
	Preferred
(Dollars in thousands)	Securities
	2014		2013
Balance, January 1	$	2,798	$	2,668
Transfers into Level 3		-		-
Transfers out of Level 3		-		-
Other-than-temporary impairment loss included in earnings		-		-
Unrealized gain included in comprehensive income		130		130
Balance at March 31, 2014 and December 31, 2013	$	2,928	$	2,798

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

Trust Preferred Securities	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range of Inputs

March 31, 2014	$	2,928	Discounted cash flow	Probability of default	0 – 100	%

December 31, 2013		2,798	Discounted cash flow	Probability of default	0 – 100	%

	14

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

Impaired Loans

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

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

Other Real Estate Owned

Other real estate owned acquired through loan foreclosure is initially recorded at fair value less estimated costs to sell, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Due to the subjective nature of establishing the fair value, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined the fair value declines subsequent to foreclosure, a valuation allowance is recorded through non-interest expense. Operating costs associated with the assets are also recorded as non-interest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other non-interest expense. Other real estate owned measured at fair value on a non-recurring basis at March 31, 2014, amounted to $5.2 million. Other real estate owned is classified within Level 2 of the fair value hierarchy.

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fell at March 31, 2014 and December 31, 2013.

($ in thousands)

March 31, 2014

Fair Value Measurements Using

Quoted
Prices in

Active

Markets

Significant

For

Other

Significant

Identical

Observable

Unobservable

Assets

Inputs

Fair Value

(Level 1)

(Level 2)

(Level 3)

Impaired loans

4,142

Other real estate owned

5,221

	15

December 31, 2013

Fair Value Measurements Using

Quoted
Prices in

Active

Markets

Significant

For

Other

Significant

Identical

Observable

Unobservable

Assets

Inputs

Fair Value

(Level 1)

(Level 2)

(Level 3)

Impaired loans

4,830

Other real estate owned

4,470

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

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

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

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

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

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

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

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

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

	16

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

As of March 31, 2014					Fair Value Measurements
							Significant
							Other		Significant
			Estimated		Quoted		Observable		Unobservable
	Carrying		Fair		Prices		Inputs		Inputs
	Amount		Value		(Level 1)		(Level 2)		(Level 3)

Financial Instruments:
Assets:
Cash and cash equivalents	$	81,978	$	81,978	$	81,978	$	-	$	-
Securities available-for-sale		236,460		236,460		970		232,562		2,928
Securities held-to-maturity		8,429		9,774		-		9,774		-
Other securities		6,148		6,148		-		6,148		-
Loans, net		587,722		601,141		-		-		601,141
Bank-owned life insurance		9,182		9,182		-		9,182		-

Liabilities:
Noninterest-bearing deposits	$	179,394	$	179,334	$	-	$	179,334	$	-
Interest-bearing deposits		684,247		683,631		-		683,631		-
Subordinated debentures		10,310		10,310		-		-		10,310
FHLB and other borrowings		15,000		15,000		-		15,000		-

As of December 31, 2013					Fair Value Measurements
							Significant
							Other		Significant
			Estimated		Quoted		Observable		Unobservable
	Carrying		Fair		Prices		Inputs		Inputs
	Amount		Value		(Level 1)		(Level 2)		(Level 3)

Financial Instruments:
Assets:
Cash and cash equivalents	$	39,252	$	39,252	$	39,252	$	-	$	-
Securities available-for-sale		244,051		244,051		972		240,281		2,798
Securities held-to-maturity		8,438		9,624		-		9,624		-
Other securities		5,534		5,534		-		5,534		-
Loans, net		577,575		590,866		-		-		590,866
Bank-owned life insurance		6,593		6,593		-		6,593		-

Liabilities:
Noninterest-bearing deposits	$	173,794	$	173,794	$	-	$	173,794	$	-
Interest-bearing deposits		606,177		605,737		-		605,737		-
Subordinated debentures		10,310		10,310		-		-		10,310
FHLB and other borrowings		52,000		52,000		-		52,000		-

NOTE G — 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 March 31, 2014 and December 31, 2013, average loans accounted for 67.7% and 67.1% of average earning assets, respectively. The Company controls and mitigates the inherent credit and liquidity risks through the composition of its loan portfolio.

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

	17

Composition of Loan Portfolio

	March 31, 2014				December 31, 2013
	Amount		Percent of Total		Amount		Percent of Total

	(Dollars in thousands)
Mortgage loans held for sale	$	2,586	0.4	%	$	3,680	0.6	%
Commercial, financial and agricultural		84,898	14.3			81,792	14.0
Real Estate:
Mortgage-commercial		198,984	33.5			202,343	34.7
Mortgage-residential		218,901	36.9			212,388	36.4
Construction		73,523	12.4			67,287	11.5
Consumer and other		14,641	2.5			15,813	2.8
Total loans		593,533	100	%		583,303	100	%
Allowance for loan losses		(5,811)				(5,728)
Net loans	$	587,722			$	577,575

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

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

Activity in the allowance for loan losses for the period was as follows:

(In thousands)

	Three Months
	Ended
	March 31, 2014

Balance at beginning of period	$	5,728
Loans charged-off:
Real Estate		300
Installment and Other		43
Commercial, Financial and Agriculture		-
Total		(343)
Recoveries on loans previously charged-off:
Real Estate		43
Installment and Other		21
Commercial, Financial and Agriculture		4
Total		68
Net charge-offs		(275)
Provision for Loan Losses		358
Balance at end of period	$	5,811

The following tables represent how the allowance for loan losses is allocated to a particular loan type, as well as the percentage of the category to total loans at March 31, 2014 and December 31, 2013.

	18

Allocation of the Allowance for Loan Losses

	March 31, 2014
		(Dollars in thousands)
		Amount	% of loans in each category to total loans

Commercial Non Real Estate	$	548	14.2	%
Commercial Real Estate		3,308	56.5
Consumer Real Estate		1,778	25.6
Consumer		175	3.7
Unallocated		2	-
Total	$	5,811	100	%

	December 31, 2013
	(Dollars in thousands)
	Amount		% of loans in each category to total loans

Commercial Non Real Estate	$	582	14.0	%
Commercial Real Estate		3,384	57.2
Consumer Real Estate		1,427	25.4
Consumer		173	3.4
Unallocated		162	-
Total	$	5,728	100	%

The following table represents the Company’s impaired loans at March 31, 2014, and December 31, 2013.

	March 31,		December 31,
	2014		2013
	(In thousands)
Impaired Loans:
Impaired loans without a valuation allowance	$	605	$	759
Impaired loans with a valuation allowance		3,537		4,071
Total impaired loans	$	4,142	$	4,830
Allowance for loan losses on impaired loans at period end		1,025		849

Total nonaccrual loans		2,267		3,181

Past due 90 days or more and still accruing		443		159
Average investment in impaired loans		4,486		4,007

The following table is a summary of interest recognized and cash-basis interest earned on impaired loans:

	Three Months Ended March 31, 2014

Average of individually impaired loans during period	$	4,486
Interest income recognized during impairment		-
Cash-basis interest income recognized		40

	19

The gross interest income that would have been recorded in the period that ended if the nonaccrual loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the three months ended March 31, 2014, was $33,000. The Company had no loan commitments to borrowers in non-accrual status at March 31, 2014 and December 31,2013.

The following tables provide the ending balances in the Company's loans (excluding mortgage loans held for sale) and allowance for loan losses, broken down by portfolio segment as of March 31, 2014 and December 31, 2013. The tables also provide additional detail as to the amount of our loans and allowance that correspond to individual versus collective impairment evaluation. The impairment evaluation corresponds to the Company's systematic methodology for estimating its Allowance for Loan Losses.

March 31, 2014

					Commercial,
			Installment		Financial
	Real		and		and
	Estate		Other		Agriculture		Total
	(In thousands)
Loans
Individually evaluated	$	3,778	$	47	$	317	$	4,142
Collectively evaluated		481,203		21,830		83,772		586,805
Total	$	484,981	$	21,877	$	84,089	$	590,947

Allowance for Loan Losses
Individually evaluated	$	983	$	33	$	9	$	1,025
Collectively evaluated		4,103		144		539		4,786
Total	$	5,086	$	177	$	548	$	5,811

December 31, 2013

					Commercial,
			Installment		Financial
	Real		and		and
	Estate		Other		Agriculture		Total
	(In thousands)
Loans
Individually evaluated	$	4,709	$	39	$	82	$	4,830
Collectively evaluated		473,832		19,725		81,236		574,793
Total	$	478,541	$	19,764	$	81,318	$	579,623

Allowance for Loan Losses
Individually evaluated	$	804	$	35	$	10	$	849
Collectively evaluated		4,007		300		572		4,879
Total	$	4,811	$	335	$	582	$	5,728

	20

The following tables provide additional detail of impaired loans broken out according to class as of March 31, 2014 and December 31, 2013. The recorded investment included in the following table represents customer balances net of any partial charge-offs recognized on the loans, net of any deferred fees and costs. As nearly all of our impaired loans at March 31, 2014, are on nonaccrual status, recorded investment excludes any insignificant amount of accrued interest receivable on loans 90-days or more past due and still accruing. The unpaid balance represents the recorded balance prior to any partial charge-offs.

March 31, 2014

							Average		Interest
							Recorded		Income
	Recorded		Unpaid		Related		Investment		Recognized
	Investment		Balance		Allowance		YTD		YTD

	(In thousands)
Impaired loans with no related allowance:
Commercial installment	$	242	$	242	$	-	$	123	$	5
Commercial real estate		312		370		-		332		1
Consumer real estate		41		41		-		220		4
Consumer installment		10		10		-		7		1
Total	$	605	$	663	$	-	$	682	$	11

Impaired loans with a related allowance:
Commercial installment	$	76	$	76	$	9	$	77	$	1
Commercial real estate		1,896		1,966		303		2,291		28
Consumer real estate		1,529		1,529		680		1,400		-
Consumer installment		36		36		33		36		-
Total	$	3,537	$	3,607	$	1,025	$	3,804	$	29

Total Impaired Loans:
Commercial installment	$	318	$	318	$	9	$	200	$	6
Commercial real estate		2,208		2,336		303		2,623		29
Consumer real estate		1,570		1,570		680		1,620		4
Consumer installment		46		46		33		43		1
Total Impaired Loans	$	4,142	$	4,270	$	1,025	$	4,486	$	40

	21

December 31, 2013

							Average		Interest
							Recorded		Income
	Recorded		Unpaid		Related		Investment		Recognized
	Investment		Balance		Allowance		YTD		YTD
	(In thousands)

Impaired loans with
no related allowance:
Commercial installment	$	3	$	3	$	-	$	45	$	-
Commercial real estate		353		353		-		1,035		8
Consumer real estate		341		399		-		262		9
Consumer installment		4		4		-		5		-
Total	$	701	$	759	$	-	$	1,347	$	17

Impaired loans with
a related allowance:
Commercial installment	$	79	$	79	$	10	$	42	$	6
Commercial real estate		2,685		2,685		400		2,147		100
Consumer real estate		1,202		1,272		404		1,019		21
Consumer installment		35		35		35		36		4
Total	$	4,001	$	4,071	$	849	$	3,244	$	131

Total Impaired Loans:
Commercial installment	$	82	$	82	$	10	$	87	$	6
Commercial real estate		3,038		3,038		400		3,182		108
Consumer real estate		1,543		1,671		404		1,281		30
Consumer installment		39		39		35		41		4
Total Impaired Loans	$	4,702	$	4,830	$	849	$	4,591	$	148

The following tables provide additional detail of troubled debt restructurings at March 31, 2014.

For the Three Months Ending March 31, 2014

			Outstanding
	Outstanding		Recorded
	Recorded		Investment			Interest
	Investment		Post-		Number of	Income
	Pre-Modification		Modification		Loans	Recognized

Commercial installment	$	239	$	239	1	$	5
Commercial real estate		-		-	-		-
Consumer real estate		-		-	-		-
Consumer installment		-		-	-		-
Total	$	239	$	239	1	$	5

	22

The recorded investment in receivables for which the allowance for credit losses was previously measured under a general allowance for credit losses methodology and are now impaired under Section 310-10-35 was $.2 million. The allowance for credit losses associated with those receivables on the basis of a current evaluation of loss was $0. All loans were performing as agreed with modified terms.

During the three month period ending March 31, 2014, there was 1 loan modified as TDR, and is considered non-performing.

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

	March 31, 2014
	(In thousands)
			Past Due				Total
			90 Days				Past Due
	Past Due		or More				and
	30 to 89		and Still		Non-		Non-		Total
	Days		Accruing		Accrual		Accrual		Loans

Real Estate-construction	$	684	$	37	$	19	$	740	$	73,523
Real Estate-mortgage		2,821		406		1,733		4,960		218,901
Real Estate-non farm non residential		851		-		497		1,348		198,984
Commercial		14		-		8		22		84,898
Consumer		48		-		10		58		14,641
Total	$	4,418	$	443	$	2,267	$	7,128	$	590,947

	December 31, 2013
	(In thousands)
			Past Due
			90 Days				Total
	Past Due		or More				Past Due
	30 to 89		and Still		Non-		and Non-		Total
	Days		Accruing		Accrual		Accrual		Loans

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

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

	23

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

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

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

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

As of March 31, 2014 and December 31, 2013, and based on the most recent analysis performed, the risk category of loans by class of loans (excluding mortgage loans held for sale) was as follows:

($ in thousands)
March 31, 2014

							Commercial,
	Real Estate Commercial		Real Estate Mortgage		Installment and Other		Financial and Agriculture		Total

Pass	$	322,113	$	149,263	$	21,809	$	83,484	$	576,669
Special Mention		1,358		31		-		411		1,800
Substandard		10,746		1,776		68		216		12,806
Doubtful		-		-		-		-		-
Subtotal		334,217		151,070		21,877		84,111		591,275
Less:
Unearned discount		208		98		-		22		328
Loans, net of unearned discount	$	334,009	$	150,972	$	21,877	$	84,089	$	590,947

	24

December 31, 2013

							Commercial,
	Real Estate Commercial		Real Estate Mortgage		Installment and Other		Financial and Agriculture		Total

Pass	$	316,573	$	145,787	$	19,725	$	80,087	$	562,172
Special Mention		4,084		32		-		1,033		5,149
Substandard		10,972		1,426		39		225		12,662
Doubtful		-		-		-		-		-
Subtotal		331,629		147,245		19,764		81,345		579,983
Less:
Unearned discount		236		97		-		27		360
Loans, net of unearned discount	$	331,393	$	147,148	$	19,764	$	81,318	$	579,623

NOTE H — SECURITIES

The following disclosure of the estimated fair value of financial instruments is made in accordance with authoritative guidance. 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.

A summary of the amortized cost and estimated fair value of available-for-sale securities and held-to-maturity securities at March 31, 2014, follows:

($ in thousands)

	March 31, 2014
			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value

Available-for-sale securities:
Obligations of U.S. Government Agencies	$	25,380	$	97	$	96	$	25,381
Tax-exempt and taxable obligations of states and municipal subdivisions		104,882		2,312		966		106,228
Mortgage-backed securities		77,111		872		1,010		76,973
Corporate obligations		27,934		224		1,250		26,908
Other		1,255		-		285		970
Total	$	236,562	$	3,505	$	3,607	$	236,460
Held-to-maturity securities:
Mortgage-backed securities	$	2,429	$	-	$	57	$	2,372
Taxable obligations of states and municipal subdivisions		6,000		1,402		-		7,402
Total	$	8,429	$	1,402	$	57	$	9,774

	25

NOTE I — 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 which it believes to be reasonable, but which may not prove to be accurate, particularly given the Company’s growth and the economy. 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.

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

The second part of the allowance is determined in accordance with authoritative guidance regarding loan impairment. Impaired loans are determined based upon a review by internal loan review and senior loan officers.

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

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Impairment is measured on a loan by loan basis, and a specific allowance is assigned to each loan determined to be impaired. Impaired loans not deemed collateral dependent are analyzed according to the ultimate repayment source, whether that is cash flow from the borrower, guarantor or some other source of repayment. Impaired loans are deemed collateral dependent if, in the Company’s opinion, the ultimate source of repayment will be generated from the liquidation of collateral.

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

NOTE J – SUBSEQUENT EVENTS

Subsequent events have been evaluated by management through the date the financial statements were issued.

NOTE K – RECLASSIFICATION

Certain amounts in the 2013 financial statements have been reclassified for comparative purposes to conform to the current period financial statement presentation.

ITEM NO. 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FINANCIAL CONDITION

The following discussion contains "forward-looking statements" relating to, without limitation, future economic performance, plans and objectives of management for future operations, and projections of revenues and other financial items that are based on the beliefs of the Company's management, as well as assumptions made by and information currently available to the Company's management. The words "expect," "estimate," "anticipate," and "believe," as well as similar expressions, are intended to identify forward-looking statements. The Company's actual results may differ materially from the results discussed in the forward-looking statements, and the Company's operating performance each quarter is subject to various risks and uncertainties that are discussed in detail in the Company's filings with the Securities and Exchange Commission, including the "Risk Factors" section in the Company's most recently filed Form 10-K.

The First represents the primary asset of the Company. The First reported total assets of $987.7 million at March 31, 2014, compared to $941.0 million at December 31, 2013. Loans increased $10.2 million, or 1.8%, during the first three months of 2014. Deposits at March 31, 2014, totaled $863.6 million compared to $780 million at December 31, 2013. For the three month period ended March 31, 2014, The First reported net income of $1.6 million compared to $1.6 million for the three months ended March 31, 2013.

NONPERFORMING ASSETS AND RISK ELEMENTS. Diversification within the loan portfolio is an important means of reducing inherent lending risks. At March 31, 2014, The First had no concentrations of ten percent or more of total loans in any single industry or any geographical area outside its immediate market areas.

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At March 31, 2014, The First had loans past due as follows:

		($ In Thousands)

Past due 30 through 89 days	$	4,418
Past due 90 days or more and still accruing		443

The accrual of interest is discontinued on loans which become ninety days past due (principal and/or interest), unless the loans are adequately secured and in the process of collection. Nonaccrual loans totaled $2.3 million at March 31, 2014, a decrease of $.9 million from December 31, 2013. Any other real estate owned is carried at fair value, determined by an appraisal, less estimated costs to sell. Other real estate owned totaled $5.2 million at March 31, 2014. A loan is classified as a restructured loan when the following two conditions are present: First, the borrower is experiencing financial difficulty and second, the creditor grants a concession it would not otherwise consider but for the borrower’s financial difficulties. At March 31, 2014, the Bank had $2.4 million in loans that were modified as troubled debt restructurings, of which $1.7 million were performing as agreed with modified terms.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is adequate with cash and cash equivalents of $82.0 million as of March 31,2014. In addition, loans and investment securities repricing or maturing within one year or less exceeded $209.6 million at March 31, 2014. Approximately $120.1 million in loan commitments could fund within the next six months and other commitments, primarily standby letters of credit, totaled .7 million at March 31, 2014.

There are no known trends or any known commitments or uncertainties that will result in The First’s liquidity increasing or decreasing in a significant way.

Total consolidated equity capital at March 31, 2014, was $87.5 million, or approximately 8.9% of total assets. The Company currently has adequate capital positions to meet the minimum capital requirements for all regulatory agencies. The Company’s capital ratios as of March 31, 2014, were as follows:

Tier 1 leverage	8.84	%
Tier 1 risk-based	12.57	%
Total risk-based	13.44	%

On June 30, 2006, The Company issued $4,124,000 of floating rate junior subordinated deferrable interest debentures to The First Bancshares Statutory Trust 2 in which the Company owns all of the common equity. The debentures are the sole asset of the Trust. The Trust issued $4,000,000 of Trust Preferred Securities (TPSs) to investors. The Company’s obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the Trust’s obligations under the preferred securities. The preferred securities are redeemable by the Company at its option. The preferred securities must be redeemed upon maturity of the debentures in 2036. Interest on the preferred securities is the three month London Interbank Offer Rate (LIBOR) plus 1.65% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities. On July 27, 2007, The Company issued $6,186,000 of floating rate junior subordinated deferrable interest debentures to The First Bancshares Statutory Trust 3 in which the Company owns all of the common equity. The debentures are the sole asset of Trust 3. The Trust issued $6,000,000 of Trust Preferred Securities (TPSs) to investors. The Company’s obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the Trust’s obligations under the preferred securities. The preferred securities are redeemable by the Company in 2013 or later, at its option. The preferred securities must be redeemed upon maturity of the debentures in 2037. Interest on the preferred securities is the three month LIBOR plus 1.40% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities. In accordance with the authoritative guidance, the trusts are not included in the consolidated financial statements.

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RESULTS OF OPERATIONS

The Company had a consolidated net income of $1,427,000 for the three months ended March 31, 2014, compared with consolidated net income of $1,225,000 for the same period last year.

Net interest income increased to $7.8 million from $5.9 million for the three months ended March 31, 2014, or an increase of 32.8% as compared to the same period in 2013. Average earning assets through March 31, 2014, increased $208.3 million, or 31.5% and average interest-bearing liabilities also increased $143.4 million or 25.7% when compared to March 31, 2013.

Noninterest income for the three months ended March 31, 2014, was $1,672,000 compared to $1,930,000 for the same period in 2013, reflecting a decrease of $258,000 or 13.4%. The decrease for the quarter ended March 31, 2014, as compared to the first quarter of 2013 is attributed to an award in the amount of $415,000 granted to our Company in the first quarter of 2013 by the CDFI.

The provision for loan losses was $358,000 for the three months ended March 31, 2014, compared with $311,000 for the same period in 2013. The allowance for loan losses of $5.8 million at March 31, 2014 (approximately .98% of total loans and 1.20% of loans excluding those booked at fair value due to the business combination) is considered by management to be adequate to cover losses inherent in the loan portfolio. The level of this allowance is dependent upon a number of factors, including the total amount of past due loans, general economic conditions, and management’s assessment of potential losses. This evaluation is inherently subjective as it requires estimates that are susceptible to significant change. Ultimately, losses may vary from current estimates and future additions to the allowance may be necessary.

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. Management evaluates the adequacy of the allowance for loan losses quarterly and makes provisions for loan losses based on this evaluation.

Noninterest expense increased by $1,248,000 or 20.9% for the three months ended March 31, 2014, when compared with the same period in 2013. This increase is primarily related to increases in operating costs as well as acquisition costs associated with the acquisition of First National Bank of Baldwin County. One-time acquisition costs, mainly related to Bay Bank, expensed during the first quarter of 2014 amounted to $91,000 and one-time acquisition costs, related to Baldwin County, expensed during the first quarter of 2013 amounted to $341,000.

Net non-interest expense related to non-recurring items amounted to $91,000 during the first quarter of 2014 compared to net non-interest income of $74,000 during the first quarter of 2013, reflecting a total difference of $165,000 between the first quarters.

ITEM NO. 3. CONTROLS AND PROCEDURES

As of March 31, 2014, (the “Evaluation Date”), we carried out an evaluation, under the supervision of and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.

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There have been no changes, significant or otherwise, in our internal controls over financial reporting that occurred during the quarter ended March 31, 2014, that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.

ITEM NO. 4. RECENT ACCOUNTING PRONOUNCEMENTS

In January 2014, the FASB issued ASU 2014-04, “Receivables – Troubled Debt Restructurings by Creditors”, which will eliminate diversity in practice regarding the timing of derecognition for residential mortgage loans when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. Under ASU 2014-04, physical possession of residential real estate property is achieved when either the creditor obtains legal title to the residential real estate property upon completion of a foreclosure or the borrower conveys all interest in the residential real estate property through completion of a deed in lieu or foreclosure in order to satisfy the loan. Once physical possession has been achieved, the loan is derecognized and the property recorded within other assets at the lower of cost or fair value (less estimated costs to sell). In addition, the guidance requires both interim and annual disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. The additional disclosure requirements are effective for annual reporting periods beginning on or after December 15, 2014, and interim periods within those annual periods with retrospective disclosure necessary for all comparative periods presented. The adoption of this standard will result in additional disclosures but is not expected to have any impact on the Company’s financial statements or results of operations.

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PART II — OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

None

ITEM 1A.

RISK FACTORS

There are no material changes in the Company’s risk factors since December 31, 2013. Please refer to the Annual Report on Form 10-K of The First Bancshares, Inc., filed with the Securities and Exchange Commission on March 31, 2014.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITY AND USE OF PROCEEDS

On March 20, 2013, The First Bancshares, Inc., a Mississippi corporation (the "Company") entered into Securities Purchase Agreements with a limited number of institutional and other accredited investors, including certain directors and executive officers of the Company (collectively, the "Purchasers') to sell a total of 1,951,220 shares of mandatorily convertible non-cumulative, non-voting, perpetual Preferred Stock, Series D, $1.00 par value (the "Series D Preferred Stock") at a price of $10.25 per share, for an aggregate gross purchase price of $20,000,005 (the "Private Placement"). The Private Placement closed on March 22, 2013, after the Company issued an aggregate of 1,951,220 shares of Series D Preferred Stock against receipt of $20,000,005 in cash from the Purchasers. The Private Placement was not registered under the Securities Act of 1933, as amended (the "Act"), in reliance on Section 4(2) of the Act and Rule 506 of Regulation D promulgated thereunder.

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The Series D Preferred Stock automatically converted into a like number of shares of the Company's common stock after the Company received shareholder approval of such conversion at a meeting of shareholders held on May 23, 2013. Upon conversion of the Series D Preferred Stock, each share of Series D Preferred Stock was automatically converted into one share of the Company’s common stock par value of one U.S. dollar ($1.00) per share (“Common Stock”). The holders of record of Series D Preferred Stock were entitled to receive as, when, and if declared by the Company’s board of directors, dividends on each share of Series D Preferred Stock equal to the per share amount paid on a share of Common Stock (the “Preferred Dividend”), and no dividends were payable on the Common Stock or any other class or series of capital stock ranking with respect to dividends pari passu with the Common Stock unless a Preferred Dividend was payable at the same time on the Series D Preferred Stock; provided, however, in the event the shareholders of the Company did not approve the conversion of the Series D Preferred Stock to Common Stock within six (6) months of issuance, the holders of record of Series D Preferred Stock would have been entitled to receive as, when, and if declared by the board of directors of the Company, dividends on each share of Series D Preferred Stock equal to six (6) percent of liquidation value per annum or $0.62 per share (the “Fixed Preferred Dividend”) and no dividends would have been payable on the Common Stock or any other class or series of capital stock ranking with respect to dividends pari passu with the Common Stock unless a Preferred Dividend was payable at the time on the Series D Preferred Stock. Such Fixed Preferred Dividends would have been payable semi-annually in arrears on June 30 and December 31, beginning on December 31, 2013, until the shareholders of the Company approved the conversion of the Series D Preferred Shares into the Common Stock. The Series D Preferred Stock was not redeemable by the Company or by the holders. Complete details concerning the Series D Preferred Stock are contained in the Certificate of Designation filed with the Mississippi Secretary of State on March 20, 2013, a copy of which was attached as Exhibit 4.1 to the Form 8-K filed by the Company on March 25, 2013 and incorporated herein by reference.

In accordance with Section 4.11 of the Securities Purchase Agreement, the Company called a meeting of the Company shareholders to vote on proposals to approve the conversion of shares of Series D Preferred Stock into shares of Common Stock for purposes of compliance with NASDAQ Stock Market Rule 5635. The board of directors of the Company unanimously recommended shareholder approval of this proposal.

Also on March 20, 2013, pursuant to the Securities Purchase Agreements, the Company entered into a Registration Rights Agreement with each of the Purchasers. Pursuant to the Registration Rights Agreement, the Company filed a registration statement with the Securities and Exchange Commission to register for resale the Common Stock to be issued upon conversion of the Series D Preferred Stock, within 90 calendar days after the closing of the Private Placement, and to used commercially reasonable efforts to cause such registration statement to be declared effective upon the earlier of (i) the 120th calendar day following March 22, 2013 (or the 150th calendar day following March 22, 2013 in the event that such registration statement is subject to review by the Securities and Exchange Commission) and (ii) the 5th trading day (as defined in the Registration Rights Agreement) after the date the Company is notified (orally or in writing, whichever is earlier) by the Securities and Exchange Commission that such registration statement will not be “reviewed” or will not be subject to further review. Failure to meet these deadlines and certain other events could have resulted in the Company's payment of liquidated damages to the holders of the rights, monthly in the amount of 0.5% of the aggregate purchase price of each holder of the converted Common Stock.

Copies of the form of Securities Purchase Agreements and the form of Registration Rights Agreements were attached to the Company’s Form 8-K filed on March 25, 2013 as Exhibits 10.1 and 10.2, respectively, and are incorporated herein by reference. The foregoing descriptions of the Securities Purchase Agreements, the Registration Rights Agreements and the Certificate of Designation do not purport to be complete and are qualified in their entirety by reference to the full text of the Securities Purchase Agreements, the Registration Rights Agreements and the Certificate of Designation filed as exhibits to this report.

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Pursuant to shareholder approval obtained at the Annual Meeting held on May 23, 2013, the Series D Nonvoting Convertible Preferred Stock has been converted to common stock.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

Not Applicable

ITEM 4.

REMOVED AND RESERVED

ITEM 5.

OTHER INFORMATION

Not Applicable

ITEM 6. EXHIBITS

(a) Exhibits

Exhibit No.

_________

	2.1		Agreement and Plan of merger, dated as of March 2, 2014, between The First Bancshares, Inc. and BCB Holding Company, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on 3-7-2014)

	2.1		Acquisition Agreement, dated as of January 31, 2013, between The First Bancshares, Inc. and First Baldwin Bancshares, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on 2-1-13) and First Amendment to Acquisition Agreement, dated as of March 15, 2013, between First Bancshares, Inc. and First Baldwin Bancshares, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on 3-20-13)

	3.1		Articles of Amendment and Certificate of Designation, Preferences and Rights of Series D Nonvoting Convertible Preferred Stock dated as of March 18,2013(incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on 3-21-13).

	3.2		Restated Articles of Incorporation dated as of March 21, 2013 (incorporated by reference to Exhibit 3.2 of the Company’s Form 8-K filed on 3-21-13).

	4.1		Certificate of Designation of Series D Nonvoting Convertible Preferred Stock, as filed with the Mississippi Secretary of State on March 20, 2013 (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed on March 25, 2013).

	33

	10.1		Form of Securities Purchase Agreement between the Company and each of the Purchasers, dated as of March 20, 2013 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on March 25, 2013)

	10.2		Form of Registration Rights Agreement between the Company and each of the Purchasers, dated as of March 20, 2013 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on March 25, 2013)

	31.1		Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2		Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32.1		Certification of principal executive officer pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	32.2		Certification of principal financial officer pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	101.INS**		XBRL Instance Document

	101.SCH**		XBRL Taxonomy Extension Schema

	101.CAL**		XBRL Taxonomy Extension Calculation Linkbase

	101.DEF**		XBRL Taxonomy Extension Definition Linkbase

	101.LAB**		XBRL Taxonomy Extension Label Linkbase

	101.PRE**		XBRL Taxonomy Extension Presentation Linkbase

______________

**Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Act of 1934 and otherwise are not subject to liability.

(b)

The Company filed three reports on Form 8-K during the quarter ended March 31, 2014

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	THE FIRST BANCSHARES, INC.
	(Registrant)

	/s/	M. RAY (HOPPY)COLE, JR.
May 9, 2014		M. Ray (Hoppy) Cole, Jr.
(Date)		Chief Executive Officer

	/s/	DEEDEE LOWERY
May 9, 2014		DeeDee Lowery, Executive
(Date)		Vice President and Chief
		Financial Officer

	35

The First Bancshares - 10-Q quarterly report FY2014 Q1

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