Summary of FIRST BANCSHARES INC /MO/

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

General

First Bancshares, Inc. (the "Company") is a unitary savings and loan holding company whose primary assets are First Home Savings Bank and SCMG, Inc. The Company was incorporated on September 30, 1993, for the purpose of acquiring all of the capital stock of First Home Savings Bank in connection with the Bank's conversion from a state-charted mutual to a state-chartered stock form of ownership. The transaction was completed on December 22, 1993.

On March 31, 2009, the Company had total assets of $243.3 million, net loans receivable of $140.3 million, total deposits of $182.1 million and stockholders' equity of $24.8 million. The Company's common shares trade on The Nasdaq Global Market of The NASDAQ Stock Market LLC under the symbol "FBSI."

The following discussion focuses on the consolidated financial condition of the Company and its subsidiaries, at March 31, 2009, compared to June 30, 2008, and the consolidated results of operations for the three-month and nine-month periods ended March 31, 2009, compared to the three-month and nine-month periods ended March 31, 2008, respectively. This discussion should be read in conjunction with the Company's consolidated financial statements, and notes thereto, for the year ended June 30, 2008.

Recent Developments and Corporate Overview

The continuing decline of the economy from 2008 into 2009 has created significant challenges for financial institutions such as First Home Savings Bank. Dramatic declines in the housing market, marked by falling home prices and increasing levels of mortgage foreclosures, have resulted in significant write-downs of asset values by many financial institutions, including government-sponsored entities and major commercial and investment banks. In addition, many lenders and institutional investors have reduced, and in some cases, ceased to provide funding to borrowers, including other financial institutions, as a result of concern about the stability of the financial markets and the strength of counterparties.

In response to the crises affecting the U.S. banking system and financial markets and attempts to bolster the distressed economy and improve consumer confidence in the financial system, on October 3, 2008, the U.S. Congress passed, and the President signed into law, the Emergency Economic Stabilization Act of 2008 ("EESA"). The EESA authorizes the U.S. Treasury Department to purchase from financial institutions and their holding companies up to $700 billion in mortgage loans, mortgage-related securities and certain other financial instruments, including debt and equity securities issued by financial institutions and their holding companies in a troubled asset relief program ("TARP"). The purpose of TARP is to restore confidence and stability to the U.S. banking system and to encourage financial institutions to increase their lending to customers and to each other. Under the TARP Capital Purchase Program ("CPP"), the Treasury may purchase debt or equity securities from participating institutions. The TARP also allows direct purchases or guarantees of troubled assets of financial institutions. Participants in the CPP are subject to executive compensation limits and are encouraged to expand their lending and mortgage loan modifications. First Bancshares elected not to participate in TARP.

EESA also increased FDIC deposit insurance on most accounts from $100,000 to $250,000. This increase expires at the end of 2009 and is not covered by deposit insurance premiums paid by the banking industry.

Following a systemic risk determination, the FDIC established a Temporary Liquidity Guarantee Program ("TLGP") on October 14, 2008. The TLGP includes the Transaction Account Guarantee Program, which provides unlimited deposit insurance coverage through December 31, 2009 for noninterest-bearing transaction accounts (typically business checking accounts) and certain funds swept into noninterest-bearing savings accounts ("TAGP"). Institutions participating in the TAGP pay a 10 basis points fee (annualized) on the balance of each covered account in excess of $250,000, while the extra deposit insurance is in place. The TLGP also includes the Debt Guarantee Program ("DGP"), under which the FDIC guarantees certain senior unsecured debt of FDIC-insured institutions and their holding companies. The unsecured debt must be issued on or after October 14, 2008 and not later than June 30, 2009, and the guarantee is effective through the earlier of the maturity date or June 30,

2012. The DGP coverage limit is generally 125% of the eligible entity's eligible debt outstanding on September 30, 2008 and scheduled to mature on or before June 30, 2009 or, for certain insured institutions, 2% of their liabilities as of September 30, 2008. Depending on the term of the debt maturity, the nonrefundable DGP fee ranges from 50 to 100 basis points (annualized) for covered debt outstanding until the earlier of maturity or June 30, 2012. The TAGP and DGP are in effect for all eligible entities, unless the entity opted out on or before December 5, 2008. First Bancshares and First Home Savings Bank did not opt out of the TAGP; however, since neither the Company nor First Home Savings Bank has unsecured senior debt, we did elect to opt out of the DGP. The TLGP has been amended to allow participants to seek approval of applications to issue guaranteed convertible debt.

On February 17, 2009, President Obama signed The American Recovery and Reinvestment Act of 2009 ("ARRA") into law. The ARRA is intended to revive the US economy by creating millions of new jobs and stemming home foreclosures. For financial institutions that have received or will receive financial assistance under TARP or related programs, the ARRA significantly rewrites the original executive compensation and corporate governance provisions of Section 111 of the EESA. Among the most important changes instituted by the ARRA are new limits on the ability of TARP recipients to pay incentive compensation to up to 20 of the next most highly-compensated employees in addition to the "senior executive officers," a restriction on termination of employment payments to senior executive officers and the five next most highly-compensated employees and a requirement that TARP recipients implement "say on pay" shareholder votes. Further legislation is anticipated to be passed with respect to the economic recovery. However, the executive compensation limitations contained in the ARRA will not have an effect on First Bancshares, since it elected not to participate in TARP.

The Administration also announced in February 2009 its Financial Stability Plan ("FSP") and Homeowners Affordability and Stability Plan ("HASP"). Many details of these plans have not been finalized. The FSP is administrated by the U.S. Treasury and includes the following four key elements: (1) the development of a public/private investment fund essentially structured as a government sponsored enterprise with the mission to purchase troubled assets from banks with an initial capitalization from government funds; (2) the continuation of the Capital Assistance Program with the Treasury purchasing additional bank capital available only for banks that have undergone a new stress test given by their regulator; (3) an expansion of the Federal Reserve's term asset-backed liquidity facility to support the purchase of up to $1 trillion in AAA-rated asset-backed securities backed by consumer, student and small business loans and possibly other types of loans; and (4) the establishment of a mortgage loan modification program with $5.0 billion in federal funds further detailed in the HASP.

The HASP is a voluntary program developed to help seven to nine million families restructure their mortgages to avoid foreclosure with $275 billion in government funding commitments. The plan also develops guidance for loan modifications nationwide. However, it is mandatory for recipients of FSP financial assistance. HASP provides programs and funding for eligible refinancing of loans owned or guaranteed by Fannie Mae or Freddie Mac, along with incentives to lenders, mortgage servicers, and borrowers to modify mortgages of "responsible" homeowners who are at risk of defaulting on their mortgage. The goals of HASP are to assist in the prevention of home foreclosures and to help stabilize falling home prices.

These programs are not expected to have any direct impact on First Bancshares since it has determined not participate in TARP and these related programs. First Bancshares will benefit from these programs if they help stabilize the national banking system and aid in the recovery in the housing market.

In February 2009, the FDIC issued new deposit premium regulations providing for increases or premiums, higher premiums for institutions with secured debt (including FHLB advances and brokered deposits) and a special assessment in the second quarter of 2009 to replenish the fund. Under these new deposit insurance premium regulations, the FDIC assesses deposit insurance premiums on all FDIC-insured institutions quarterly based on annualized rates for four risk categories. Each institution is assigned to one of four risk categories based on capital, supervisory ratings and other factors. Well capitalized institutions that are financially sound with only a few minor weaknesses are assigned to Risk Category I. Risk Categories II, III and IV present progressively greater risks to the DIF. Under FDICs risk-adjustments range from 12 to 16 basis points for Risk Category I, and are 22 basis points for Initial base assessment rates are subject to adjustments based on an institutions unsecured

debt, secured liabilities and brokered deposits, such that the total base assessment rate after adjustments range from 7 to 24 basis points for Risk Category I, 17 to 34 basis points Risk Category II, 27 to 58 basis points for Risk Category III, and 40 to 77.5 basis points for Risk Category IV. The rule also includes authority for the FDIC to increase or decrease total base assessment rates in the future by as much as three basis points without a formal rulemaking proceeding.

In addition to the regular quarterly assessments, as a result of the losses and projected losses attributed to failed institutions, the FDIC has adopted a rule imposing on every insured institution a special assessment equal to 20 basis points of its assessment base as of June 30, 2009 to be collected on September 30, 2009. The FDIC has indicated that if, its borrowing authority from the United States Treasury is increased, it would reduce the special assessment to 10 basis points. There is legislation pending to increase that borrowing authority from $30 billion to $100 billion (and up to $500 billion under special circumstances). The FDIC also proposed that it could increase assessment rates in the future without formal rulemaking.

The preceding is a summary of recently enacted laws and regulations that could materially impact our results of operations or financial condition. This discussion is qualified in its entirety by reference to such laws and regulations and should be read in conjunction with "Regulation of First Home" discussion contained in our 2008 Annual Report on Form 10-K.

The Bank continues to operate under a Memorandum of Understanding (the "MOU") with the Office of Thrift Supervision (the "OTS"). The MOU was entered into during the December 31, 2006 quarter. The MOU resulted from issues noted during the examination of the Bank conducted by the OTS, the report on which was dated in July 2006, and included deficiencies in lending policies and procedures, recent operating losses, and the need to revise both the business plan and the budget to enhance profitability. The corrective actions required to be taken by the Bank under the MOU include, among others: (1) developing procedures concerning ongoing credit administration and monitoring; (2) continuing to identify, track and correct credit and collateral documentation exceptions and loan policy exceptions; (3) preparing and submitting to the Bank's Board of Directors an accurate and complete loan-to-one borrower report; (4) preparing and updating, where appropriate, a workout plan for each classified asset over $250,000; (5) adopting a revised loan loss allowance policy; (6) amending the Bank's appraisal policy to require written review of all appraisals prior to final loan approval; (7) adopting a revised loan policy that provides for underwriting guidelines, loan documentation, and credit administration procedures for unsecured loans; (8) either request the consent of the FDIC for the Bank's subsidiary, FYBAR Service Corporation, to hold real estate for investment or approve a plan for divestiture of such investment by June 30, 2007; (9) implementing corrective actions with respect to the previously conducted independent information technology audit; and (10) preparing, adopting and submitting to the OTS a comprehensive three year business plan and budget. The Company believes that the Bank has satisfactorily addressed all of the issues raised by the MOU. During July 2007, the OTS performed an on-site review of the progress made on resolving the issues discussed in the MOU. The Bank did not receive a formal report from the OTS on the results of this review.

In light of the current challenging operating environment, along with our elevated level of non-performing assets, delinquencies, and adversely classified assets, we may be subject to increased regulatory scrutiny, regulatory restrictions, and further enforcement actions. Such enforcement actions could place limitations on our business and adversely affect our ability to implement our business plans. Even though we remain well-capitalized in terms of our capital ratios, the regulatory agencies have the authority to restrict our operations to those consistent with adequately capitalized institutions. For example, if the regulatory agencies were to implement such a restriction, we would likely have limitations on our lending activities and requirements to reduce our level of non-performing assets and be limited in our ability to utilize brokered funds, of which the Bank currently has none. In addition, the regulatory agencies have the power to limit the rates paid by the Bank to attract retail deposits in its local markets. In addition, we may be required to provide notice to the OTS regarding any additions or changes to directors or senior executive officers and we would not be able to pay certain severance and other forms of compensation without regulatory approval. Further, we may be required to reduce our levels of classified or non-performing assets within specified time frames. These time frames might not necessarily result in maximizing the price which might otherwise be received for the properties. In addition, if such restrictions were also imposed upon other institutions which operate in the Bank's markets, multiple institutions disposing of properties at the

same time could further diminish the potential proceeds received from the sale of these properties. If any of these or similar restrictions are placed on us, it would limit the resources currently available as a well-capitalized institution.

Since the end of fiscal 2008, the Company and the Bank have had changes in senior management. On September 23, 2008, as was noted in the Company's Annual Report to the SEC on Form 10-K, filed on September 26, 2008, Adrian C. Rushing, the Bank's Chief Operating Officer, resigned his position to pursue another opportunity. The Bank reviewed the position description for the Chief Operating Officer, and decided to reassign several functions and responsibilities to other officers. The position of Operations Manager was created to manage the remaining functions and responsibilities. The position was filled from within the Bank in November 2008.

On October 28, 2008, Daniel P. Katzfey, President and Chief Executive Officer of both the Company and the Bank, and a director of both the Company and the Bank, resigned his positions.

The Company appointed Thomas M. Sutherland, Chairman of the Company's and Bank's Boards of Directors, to serve as the Interim Chief Executive Officer of the Company and the Bank. Mr. Sutherland has served as Chairman of the Board of the Company's and Bank's Boards of Directors since 2005. In addition, the Company appointed Lannie E. Crawford, a Senior Vice President of the Bank, to serve as Interim President of the Company and the Bank. Mr. Crawford joined the Bank in November 2007 and has more than 30 years of experience with financial institutions. The interim appointments of Mr. Sutherland as Chief Executive Officer of the Company and the Bank, and of Mr. Crawford as President of the Company and the Bank, were made permanent at the organizational meeting of the board of the Company and a special board meeting of the Bank on November 6, 2008.

R.J. Breidenthal was selected to fill the vacancy created on the Boards of Directors of Company and the Bank by Mr. Katzfey's resignation. Mr. Breidenthal served as an advisory director of the Company and the Bank from December 2006 to November 2008. Mr. Breidenthal serves on the Bank's Loan Committee. Mr. Breidenthal is the first cousin of Thomas M. Sutherland, the Chairman of the Board and Chief Executive Officer of the Company and the Bank.

During the months of November and December 2008, in light of a continually worsening economy and the departure of several loan officers, the Bank conducted an in depth review and analysis of its loan portfolio primarily focusing on its commercial real estate, multi-family, development and commercial business loans. As a result of this review, the Bank added 65 loans with principal balances totaling $12.6 million to either the classified asset list or the internal watch list. Additionally, 33 loans which had appeared on either the classified asset list or the internal watch list at the end of November 2008 were downgraded. During the quarter ended December 31, 2008, based on this loan analysis and in light of the economic conditions, the Bank recorded a provision for loan losses of $4.4 million.

During the quarter ended March 31, 2009, the Bank continued its internal review and analysis of the loan portfolio, which contributed to an additional provision for loan losses of $643,000 during the quarter.

At its December 19, 2008 meeting, the Board of Directors, following extensive discussions over several months, determined that it was in the best interest of both the Bank and the Company to cash out the Bank Owned Life Insurance ("BOLI") owned by the Bank. This decision resulted in an additional tax provision of $562,000. However, the benefits from the transaction in the form of additional liquidity provided by the proceeds, the elimination of a non-cash flowing asset and a reduction in the Company's exposure to the increased risk that has been a significant factor in the marketplace over the last several months, more than offset the cost. As of March 31, 2009, the Company had received the cash proceeds from two of the three insurance companies that had issued policies under the BOLI plan. The remaining BOLI funds will be received no later than the end of calendar 2009.

Financial Condition

As of March 31, 2009, First Bancshares, Inc. had assets of $243.3 million, compared to $249.2 million at June 30. 2008. The decrease in total assets of $5.9 million, or 2.4%, was the result of a decrease of $26.7 million in loans receivable, net and a decrease of $4.0 million, or 65.1%, in BOLI. This decrease was partially offset by increases in investments, including certificates of deposit, real estate owned, cash and cash equivalents and deferred tax assets, which totaled $7.5 million, $1.0 million, $15.3 million, and $1.4 million, respectively. Deposits decreased $12.5 million, and Federal Home Loan Bank of Des Moines advances increased by $7.0 million. At March 31, 2009, there was a total of $969,000 in loans originated for sale which were not yet funded by the purchasers. The decrease in deposits was partially offset by an increase of $1.3 million in retail repurchase agreements.

Loans receivable, net totaled $140.3 million at March 31, 2009, a decrease of $26.7 million, or 16.0%, from $167.0 million at June 30. 2008. The decrease in loans is, in part, the result of decreased originations because of the current uncertainty in the economy, both local and national. These problems have affected many sectors of the economy and have created concerns for individuals and businesses. Housing sales, both new and existing, consumer confidence and other indicators of economic health in our market area have decreased over the last few months. The decrease in net loans is also due in part to the large increase in the allowance for loan losses during the nine months ended March 31, 2009.

The Company's deposits decreased by $12.5 million, or 6.4%, from $194.6 million as of June 30, 2008 to $182.1 million as of March 31, 2009. The decrease is the result of a number of factors, including depositors seeking higher yields available through non-bank entities and, in some cases, the need to use savings for living expenses due to loss of employment. The balance of the Company's retail repurchase agreements, first introduced during fiscal 2007, increased by $1.3 million, or 27.3%, from $4.6 million at June 30, 2008 to $5.9 million at March 31, 2009.

As of March 31, 2009 the Company's stockholders' equity totaled $24.8 million, compared to $27.1 million as of June 30, 2008. The decrease of $2.3 million was due to the net loss of $3.0 million during the first nine months of the fiscal year which was partially offset by a positive change in the mark-to-market adjustment, net of taxes, of $860,000 on the Company's available for sale securities portfolio. In addition, there was a $25,000 increase resulting from the accounting treatment of stock based compensation. There was a special dividend of $0.10 per share on common stock, which totaled $155,000, paid during the period. The Company's previously announced stock repurchase program expired on December 31, 2008. No shares of common stock were purchased under the program, and there is currently no stock repurchase plan in place.

Non-performing Assets and Allowance for Loan Losses

Generally, when a loan becomes delinquent 90 days or more, or when the collection of principal or interest becomes doubtful, the Company will place the loan on non-accrual status and, as a result of this action, previously accrued interest income on the loan is reversed against current income. The loan will remain on non-accrual status until the loan has been brought current or until other circumstances occur that provide adequate assurance of full repayment of interest and principal.

Non-performing assets increased from $3.9 million, or 1.6% of total assets, at June 30, 2008 to $8.1 million, or 3.3% of total assets at March 31, 2009. The Bank's non-performing assets consist of non-accrual loans, past due loans over 90 days, impaired loans not past due or past due less than 60 days, real estate owned and other repossessed assets. The increase in non-performing assets consisted of an increase of $3.4 million in non-accrual loans and an increase of $1.0 million in real estate owned and an increase of $43,000 in other repossessed assets. These increases were partially offset by a decrease of $282,000 in loans 90 days or more delinquent and still accruing interest, the increase in non-accrual loans consisted of increases of $465,000 in non-accrual residential mortgages, $2.9 million in non-accrual land loans, $140,000 in non-accrual second mortgages, $1.2 million in non-accrual commercial business loans and $12,000 in non-accrual consumer loans. These increases were partially offset by a decrease of $1.3 million in non-accrual commercial real estate loans. There were three loans totaling $360,000 past due 90 days or more and still accruing interest at June 30, 2008. All three became non-

accrual loans during the nine months ended March 31, 2009. At March 31, 2009, loans 90 days past due and still accruing consisted of two residential mortgage loans totaling $77,000. Almost all of the loans that became non-accrual or 90 days or more delinquent and still accruing as of March 31, 2009, were loans that had been on the Company's list of watch credits at June 30, 2008, September 30, 2008 or December 31, 2008. The increase in non-performing assets is a result of two factors. First was the current economic crisis which has had an adverse impact on individuals and businesses in the Company's primary market areas, where very nearly all of the Company's problem loans are located. Second, there were issues with the Bank's underwriting of some of the loans that were originated prior to May 2008. Since May 2008 the Bank has required that all loan originations, renewals and modifications to be approved by the Directors' Loan Committee. As discussed below, management believes the allowance for loan losses as of March 31, 2009, was adequate to absorb the known and inherent risks of loss in the loan portfolio at that date.

As of June 30, 2008, there were 11 foreclosed properties held for sale totaling $1.2 million. During the nine months ended March 31, 2009 nine properties with a book value of $446,000 were sold resulting in a net loss of $67,000. In addition, during the nine month period there were provisions for losses on real estate owned totaling $62,000 for losses on real estate owned. Nineteen properties totaling $1.5 million were foreclosed and added to real estate owned during the nine months ended March 31, 2009. Real estate owned also increased as the result of $60,000 in costs needed to complete construction on one property. At March 31, 2009, there were 21 foreclosed properties held for sale totaling $2.2 million. There were also repossessed assets totaling $43,000 at March 31, 2009.

Classified assets. Federal regulations provide for the classification of loans and other assets as "substandard", "doubtful" or "loss", based on the level of weakness determined to be inherent in the collection of the principal and interest. When loans are classified as either substandard or doubtful, the Company may establish general allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem loans. When assets are classified as loss, the Company is required either to establish a specific allowance for loan losses equal to 100% of that portion of the loan so classified, or to charge-off such amount. The Company's determination as to the classification of its loans and the amount of its allowances for loan losses are subject to review by its regulatory authorities, which may require the establishment of additional general or specific allowances for loan losses.

On the basis of management's review of its loans and other assets, at March 31, 2009, the Company had classified $6.0 million of its assets as substandard, $4.9 million as doubtful and $1.4 million as loss. This compares to classifications at June 30, 2008 of $5.1 million substandard, $718,000 doubtful and none as loss. The increase in classified loans to $12.3 million at March 31, 2009 from $5.8 million at June 30, 2008 was the result of an in-depth review and analysis of the Bank's loan portfolio brought about by a continually worsening economy, management changes and the departure of several loan officers. The review was begun in the quarter ended December 31, 2008 and continued throughout the quarter ended March 31, 2009. The review focused primarily on commercial real estate, multi-family, development and commercial business loans.

As a result of this review, during the quarter ended December 31, 2008, the Bank added 65 loans with principal balances totaling $12.6 million to either the . . .