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 10-K.

The First represents the primary asset of the Company. The First reported total assets of $488.0 million at September 30, 2008, compared to $494.6 million at December 31, 2007. Loans decreased $34.9 million, or 9.4%, during the first nine months of 2008. Deposits at September 30, 2008, totaled $392.3 million compared to $387.1 million at December 31, 2007. For the nine month period ended September 30, 2008, The First reported net income of $1.9 million compared to $3.2 million for the nine months ended September 30, 2007.

In response to the financial crises affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, on October 3, 2008, the Emergency Economic Stabilization Act of 2008, or EESA, was signed into law. Pursuant to the EESA, the U.S. Treasury will have the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets.

On October 14, 2008, it was announced that the Department of the Treasury will purchase equity stakes in a wide variety of banks and thrifts. Under this program, known as the Troubled Asset Relief Program Capital Purchase Program, or TARP, from the $700 billion authorized by the EESA, the Treasury will make $250 billion of capital available to U.S. financial institutions in the form of preferred stock. In conjunction with the purchase of preferred stock, participating financial institutions will be required to adopt the Treasury's standards for executive compensation and corporate governance for the period during which the Treasury holds equity issued under the TARP.

It is not clear at this time what impact the EESA, the TARP, the Temporary Liquidity Guarantee Program, other liquidity and funding initiatives of the Federal Reserve and other agencies that have been previously announced, and any additional programs that may be initiated in the future will have on the financial markets and the other difficulties described above, including the extreme levels of volatility and limited credit availability currently being experienced, or on the U.S. banking and financial industries and the broader U.S. and global economies. Further adverse events could have an adverse impact on our consolidated financial statements, results of operations and liquidity.

The First Bancshares, Inc. is in the process of fully analyzing the benefits and costs of participating in the Program in order to make a final determination as to whether or to what extent we would participate in the Program.

NONPERFORMING ASSETS AND RISK ELEMENTS

Diversification within the loan portfolio is an important means of reducing inherent lending risks. At September 30, 2008, 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.

At September 30, 2008, The First had loans past due as follows:

($ In Thousands)
Past due 30 through 89 days $ 6,875 Past due 90 days or more and still accruing 604

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 $3,309,000 at September 30, 2008. Any other real estate owned is carried at the lower of cost or fair value, determined by an appraisal. Other real estate owned totaled $1,555,000 at September 30, 2008. A loan is classified as a restructured loan when the interest rate is materially reduced or the term is extended beyond the original maturity date because of the inability of the borrower to service the debt under the original terms. The First had $4.3 million in restructured loans at September 30, 2008 of which $1.6 million is included in nonaccrual loans.

Liquidity is adequate with cash and cash equivalents of $31.5 million as of September 30, 2008. In addition, loans and investment securities repricing or maturing within one year or less exceeded $170.8 million at September 30, 2008. Approximately $41.0 million in loan commitments are expected to be funded within the next six months and other commitments, primarily standby letters of credit, totaled $.8 million at September 30, 2008.

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

Total consolidated equity capital at September 30, 2008, is $36.0 million, or approximately 7.4% of total assets. The Company currently has adequate capital positions to meet the minimum capital requirements for all regulatory agencies. The capital ratios as of September 30, 2008, were as follows:

                            Tier 1 leverage      9.36 %
                            Tier 1 risk-based   12.36 %
                            Total risk-based    13.59 %

The Company issued $7,217,000 of floating rate junior subordinated deferrable interest debentures to The First Bancshares Statutory Trust I, a Connecticut business trust, in which the Company owns all of the common equity. The debentures are the sole asset of the Trust. 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 full and unconditional guarantee by the Company of the Trust's obligations under the preferred securities. These debentures were called on March 26, 2007. 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 in 2011, or earlier in the event the deduction of related interest for federal income taxes is prohibited, treatment as Tier 1 capital is no longer permitted, or certain other contingencies arise. The preferred securities must be redeemed upon maturity of the debentures in 2036. Interest on the preferred securities is the three month London Interbank Offer Rate (LIBOR) plus 1.65% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities. On July 27, 2007, The Company issued $6,186,000 of floating rate junior subordinated deferrable interest debentures to The First Bancshares Statutory Trust 3 in which the Company owns all of the common equity. The debentures are the sole asset of Trust 3. The Trust issued $6,000,000 of Trust Preferred Securities (TPSs) to investors. The Company's obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the Trust's obligations under the preferred securities. The preferred securities are redeemable by the Company in 2012, or earlier in the event the deduction of related interest for federal income taxes is prohibited, treatment as Tier 1 capital is no longer permitted, or certain other contingencies arise. The preferred securities must be redeemed upon maturity of the debentures in 2037. Interest on the preferred securities is the three month LIBOR plus 1.40% and is payable quarterly. The terms of the subordinated debentures are identical to those of the preferred securities. In accordance with the provisions of FASB Interpretation No. 46R (FIN 46R), "Consolidation of Variable Interest Entities, An Interpretation of ARB No. 51," the trusts are not included in the consolidated financial statements.

The Company had a consolidated net income of $335,000 for the three months ended September 30, 2008, compared with consolidated net income of $1,293,000 for the same period last year.

Net interest income decreased to $4.5 million from $4.9 million for the three months ended September 30, 2008, or a decrease of 8.8% as compared to the same period in 2007. Earning assets through September 30, 2008, decreased $23.4 million, or 4.9% and interest-bearing liabilities increased $18.7 million or 4.5% when compared to June 30, 2008.

Non interest income for the three months ended September 30, 2008, was $795,000 compared to $966,000 for the same period in 2007, reflecting a decrease of $171,000 or 17.7%. Included in noninterest income is service charges on deposit accounts, which for the three months ended September 30, 2008, totaled $591,000 compared to $484,000 for the same period in 2007.

The provision for loan losses was $721,000 for the three months in 2008 compared with $316,000 for the same period in 2007. This increase reflects the local and national economic trends and the potential effects on the portfolio.

Non interest expense increased by $302,000 or 8.0% for the three months ended September 30, 2008, when compared with the same period in 2007. The increase is primarily due to the continued growth and the related services being offered.

RESULTS OF OPERATIONS-YEAR TO DATE

The Company had a consolidated net income of $1,464,000 for the nine months ended September 30, 2008, compared with consolidated net income of $3,116,000 for the same period last year.

Net interest income decreased to $13,533,000 from $13,707,000 for the first nine months ended September 30, 2008, or a decrease of 1.3% as compared to the same period in 2007. Earning assets through September 30, 2008, decreased $9.4 million or 2.0% and interest-bearing liabilities increased $2.7 million or .7% when compared to September 30, 2007.

The provision for loan losses was $1,721,000 in the first nine months of 2008 compared with $966,000 for the same period in 2007. The allowance for loan losses of $4.5 million at September 30, 2008 (approximately 1.4% of loans) 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 expenses increased by $1.4 million or 12.8% for the nine months ended September 30, 2008, when compared with the same period in 2007. Costs related to the opening of our temporary location in Gulfport, MS attributed to the increase as well as overlapping expenses related to the moving of our administrative and operations personnel to owned space from leased spaces.