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:   September 30, 2010




OR




o
            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
                EXECUTIVE
      OFFICES)
              
              (ZIP
      CODE)
 
 (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 o





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




LARGE
      ACCELERATED FILER o
              
              ACCELERATED
      FILER o
              
              NON-ACCELERATED
      FILER x




ON
September 30, 2010, 3,019,869 SHARES OF THE ISSUER'S COMMON STOCK, PAR VALUE
$1.00 PER SHARE, WERE ISSUED AND OUTSTANDING.





TRANSITIONAL
DISCLOSURE FORMAT (CHECK ONE):





YES
o NO x




INDICATE
BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE
12B-2 OF THE EXCHANGE ACT): YES o NO x









PART I -
FINANCIAL INFORMATION





ITEM NO.
1. FINANCIAL STATEMENTS





THE FIRST
BANCSHARES, INC.





CONSOLIDATED
BALANCE SHEETS





($
      amounts in thousands)
            
            (Unaudited)September
      30,
            
            
            December
      31,ASSETS
            
            2010
            
            
            2009Cash
      and due from banks
            
            $
            8,415
            
            
            $
            8,120Interest-bearing
      deposits with banks
            
            
            20,235
            
            
            
            296Federal
      funds sold
            
            
            11,557
            
            
            
            7,575Total
      cash and cash equivalents
            
            
            40,207
            
            
            
            15,991Securities
      held-to-maturity, at amortized cost
            
            
            3
            
            
            
            3Securities
      available-for-sale, at fair value
            
            
            94,554
            
            
            
            112,231Other
      securities
            
            
            2,063
            
            
            
            2,384Total
      securities
            
            
            96,620
            
            
            
            114,618Loans
      held for sale
            
            
            6,283
            
            
            
            3,692Loans
            
            
            329,794
            
            
            
            315,103Allowance
      for loan losses
            
            
            (4,565
            )
            
            
            (4,762
            )Loans,
      net
            
            
            331,512
            
            
            
            314,033Premises
      and equipment
            
            
            14,621
            
            
            
            14,279Interest
      receivable
            
            
            1,870
            
            
            
            2,318Cash
      surrender value of life insurance
            
            
            6,035
            
            
            
            5,857Goodwill
            
            
            702
            
            
            
            702Other
      assets
            
            
            13,182
            
            
            
            9,754$
            504,749
            
            
            $
            477,552LIABILITIES
      AND STOCKHOLDERS’ EQUITYLIABILITIES:Deposits:Noninterest-bearing
            
            $
            47,686
            
            
            $
            48,527Interest-bearing
            
            
            349,980
            
            
            
            335,227TOTAL
      DEPOSITS
            
            
            397,666
            
            
            
            383,754Interest
      payable
            
            
            415
            
            
            
            672Borrowed
      funds
            
            
            30,625
            
            
            
            32,037Subordinated
      debentures
            
            
            10,310
            
            
            
            10,310Other
      liabilities
            
            
            8,573
            
            
            
            7,163TOTAL
      LIABILITIES
            
            
            447,589
            
            
            
            433,936STOCKHOLDERS’
      EQUITY:Preferred
      stock, no par value, $1,000 per share liquidation, 10,000,000 shares
      authorized; 17,123 shares issued and outstanding at September 30, 2010 and
      5,000 shares issued and outstanding at December 31, 2009
            
            
            16,939
            
            
            
            4,773Common
      stock, $1 par value authorized 10,000,000 shares; 3,046,363 shares issued
      at September 30, 2010 and at December 31, 2009
            
            
            3,046
            
            
            
            3,046Additional
      paid-in capital
            
            
            23,424
            
            
            
            23,418Retained
      earnings
            
            
            14,069
            
            
            
            12,944Accumulated
      other comprehensive income (loss)
            
            
            146
            
            
            
            (101
            )Treasury
      stock, at cost, 26,494 shares at September 30, 2010 and at December 31,
      2009
            
            
            (464
            )
            
            
            (464
            )TOTAL
      STOCKHOLDERS' EQUITY
            
            
            57,160
            
            
            
            43,616$
            504,749
            
            
            $
            477,552




1




THE FIRST
BANCSHARES, INC.





CONSOLIDATED
STATEMENTS OF INCOME





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




(Unaudited)
              Three
      Months Ended
              September
      30,
            
            
            (Unaudited)
              Nine
      Months Ended
              September
      30,2010
            
            
            2009
            
            
            2010
            
            
            2009INTEREST
      INCOME:Interest
      and fees on loans
            
            $
            5,105
            
            
            $
            5,141
            
            
            $
            15,234
            
            
            $
            15,489Interest
      and dividends on securities:Taxable
      interest and dividends
            
            
            426
            
            
            
            695
            
            
            
            1,512
            
            
            
            2,246Tax
      exempt interest
            
            
            312
            
            
            
            256
            
            
            
            909
            
            
            
            697Interest
      on federal funds sold
            
            
            6
            
            
            
            12
            
            
            
            22
            
            
            
            81TOTAL
      INTEREST INCOME
            
            
            5,849
            
            
            
            6,104
            
            
            
            17,677
            
            
            
            18,513INTEREST
      EXPENSE:Interest
      on deposits
            
            
            1,289
            
            
            
            2,085
            
            
            
            4,512
            
            
            
            6,547Interest
      on borrowed funds
            
            
            334
            
            
            
            408
            
            
            
            1,070
            
            
            
            1,392TOTAL
      INTEREST EXPENSE
            
            
            1,623
            
            
            
            2,493
            
            
            
            5,582
            
            
            
            7,939NET
      INTEREST INCOME
            
            
            4,226
            
            
            
            3,611
            
            
            
            12,095
            
            
            
            10,574PROVISION
      FOR LOAN LOSSES
            
            
            372
            
            
            
            (36
            )
            
            
            754
            
            
            
            1,056NET
      INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
            
            
            3,854
            
            
            
            3,647
            
            
            
            11,341
            
            
            
            9,518OTHER
      INCOME:Service
      charges on deposit accounts
            
            
            600
            
            
            
            640
            
            
            
            1,786
            
            
            
            1,845Other
      service charges and fees
            
            
            654
            
            
            
            505
            
            
            
            1,393
            
            
            
            1,524Gain
      on sale of investment securities
            
            
            -
            
            
            
            -
            
            
            
            51
            
            
            
            -Impairment
      loss on securities:Total
      other-than-temporary impairment loss
            
            
            (282
            )
            
            
            (866
            )
            
            
            (565
            )
            
            
            (1,084
            )Less:
      Portion of loss recognized in other comprehensive income
            
            
            82
            
            
            
            852
            
            
            
            216
            
            
            
            999Net
      impairment loss recognized in earnings
            
            
            (200
            )
            
            
            (14
            )
            
            
            (349
            )
            
            
            (85
            )TOTAL
      OTHER INCOME
            
            
            1,054
            
            
            
            1,131
            
            
            
            2,881
            
            
            
            3,284OTHER
      EXPENSES:Salaries
      and employee benefits
            
            
            2,235
            
            
            
            2,140
            
            
            
            6,507
            
            
            
            6,355Occupancy
      and equipment
            
            
            392
            
            
            
            500
            
            
            
            1,458
            
            
            
            1,491Other
            
            
            1,398
            
            
            
            1,067
            
            
            
            3,653
            
            
            
            3,409TOTAL
      OTHER EXPENSES
            
            
            4,025
            
            
            
            3,707
            
            
            
            11,618
            
            
            
            11,255INCOME
      BEFORE INCOME TAXES
            
            
            883
            
            
            
            1,071
            
            
            
            2,604
            
            
            
            1,547INCOME
      TAXES
            
            
            261
            
            
            
            301
            
            
            
            797
            
            
            
            405NET
      INCOME
            
            
            622
            
            
            
            770
            
            
            
            1,807
            
            
            
            1,142PREFERRED
      DIVIDENDS
            
            
            61
            
            
            
            63
            
            
            
            186
            
            
            
            163PREFERRED
      STOCK ACCRETION
            
            
            14
            
            
            
            14
            
            
            
            42
            
            
            
            42NET
      INCOME APPLICABLE TO COMMON STOCKHOLDERS
            
            $
            547
            
            
            $
            693
            
            
            $
            1,579
            
            
            $
            937NET
      INCOME APPLICABLE TO COMMON STOCKHOLDERS:BASIC
            
            $
            .18
            
            
            $
            .23
            
            
            $
            .52
            
            
            $
            .31DILUTED
            
            
            .18
            
            
            
            .23
            
            
            
            .52
            
            
            
            .31DIVIDENDS
      PER SHARE - COMMON
            
            
            .05
            
            
            
            -
            
            
            
            .15
            
            
            
            -




2




THE FIRST
BANCSHARES, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY




Common
                Stock
              
              
              Preferred
                Stock
              
              
              Additional
                Paid-in
                Capital
              
              
              Retained
                Earnings
              
              
              Accumulated
                Other
                Comprehensive
                Income(Loss)
              
              
              Treasury
                Stock
              
              
              TotalBalance,January
      1, 2009
              
              $
              3,017
              
              
              $
              -
              
              
              $
              22,942
              
              
              $
              11,482
              
              
              $
              (409
              )
              
              $
              (464
              )
              
              $
              36,568Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,142
              
              
              
              -
              
              
              
              -
              
              
              
              1,142Net
      change in unrealized gain (loss) on available- for-sale securities, net of
      tax
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              394
              
              
              
              -
              
              
              
              394Net
      change in unrealized gain (loss) on derivative, net of tax
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              17
              
              
              
              -
              
              
              
              17Issuance
      of preferred stock and warrant
              
              
              -
              
              
              
              4,716
              
              
              
              284
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              5,000Exercise
      ofstock
      options
              
              
              29
              
              
              
              -
              
              
              
              193
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              222Accretion
      of preferred stock discount
              
              
              -
              
              
              
              42
              
              
              
              -
              
              
              
              (42
              )
              
              
              -
              
              
              
              -
              
              
              
              -Dividends
      on preferred stock
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (163
              )
              
              
              -
              
              
              
              -
              
              
              
              (163
              )Balance,
      Sept. 30, 2009
              
              $
              3,046
              
              
              $
              4,758
              
              
              $
              23,419
              
              
              $
              12,419
              
              
              $
              2
              
              
              $
              (464
              )
              
              $
              43,180Balance,
      January 1, 2010
              
              $
              3,046
              
              
              $
              4,773
              
              
              $
              23,418
              
              
              $
              12,944
              
              
              $
              (101
              )
              
              $
              (464
              )
              
              $
              43,616Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,807
              
              
              
              -
              
              
              
              -
              
              
              
              1,807Net
      change in unrealized gain (loss)  on available- for-sale
      securities, net of tax
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              234
              
              
              
              -
              
              
              
              234Net
      change in unrealized gain (loss) on derivative, net of tax
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              13
              
              
              
              -
              
              
              
              13Accretion
      of preferred stock discount
              
              
              -
              
              
              
              42
              
              
              
              -
              
              
              
              (42
              )
              
              
              -
              
              
              
              -
              
              
              
              -Dividends
      on preferred Stock
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (186
              )
              
              
              -
              
              
              
              -
              
              
              
              (186
              )Dividends
      on common stock, $.15 per share
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (454
              )
              
              
              -
              
              
              
              -
              
              
              
              (454
              )Issuance
      of preferred stock
              
              
              -
              
              
              
              12,124
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              12,124Restricted
      stock grant
              
              
              -
              
              
              
              -
              
              
              
              6
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              6Balance,
      Sept. 30, 2010
              
              $
              3,046
              
              
              $
              16,939
              
              
              $
              23,424
              
              
              $
              14,069
              
              
              $
              146
              
              
              $
              (464
              )
              
              $
              57,160




3




THE FIRST
BANCSHARES, INC.





CONSOLIDATED
STATEMENTS OF CASH FLOWS





($
Amounts in Thousands)





(Unaudited)
              Nine
      Months Ended
              September
      30,2010
            
            
            2009CASH
      FLOWS FROM OPERATING ACTIVITIES:NET
      INCOME
            
            $
            1,807
            
            
            $
            1,142Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation,
      amortization and accretion
            
            
            880
            
            
            
            967Impairment
      loss on securities
            
            
            349
            
            
            
            85Gain
      on sale of securities
            
            
            (51
            )
            
            
            -Provision
      for loan losses
            
            
            754
            
            
            
            1,056Loss
      on sale/writedown of ORE
            
            
            115
            
            
            
            128Loss
      on disposal of premises and equipment
            
            
            -
            
            
            
            28Increase
      in cash value of life insurance
            
            
            (178
            )
            
            
            (159
            )Federal
      Home Loan Bank stock dividends
            
            
            (3
            )
            
            
            (11
            )Changes
      in:Interest
      receivable
            
            
            448
            
            
            
            355Loans
      held for sale
            
            
            (2,591
            )
            
            
            (1,082
            )Interest
      payable
            
            
            (257
            )
            
            
            (138
            )Other,
      net
            
            
            877
            
            
            
            3,661NET
      CASH PROVIDED BY OPERATING ACTIVITIES
            
            
            2,150
            
            
            
            6,032CASH
      FLOWS FROM INVESTING ACTIVITIES:Maturities
      and calls of securities available-for-sale
            
            
            47,506
            
            
            
            36,581Purchases
      of securities available-for-sale
            
            
            (31,160
            )
            
            
            (55,997
            )Decrease
      in other securities
            
            
            324
            
            
            
            210Proceeds
      from sale of securities available-for-sale
            
            
            1,051
            
            
            
            -Net
      (increase) decrease in loans
            
            
            (18,804
            )
            
            
            226Net
      (additions)disposals in premises and equipment
            
            
            (839
            )
            
            
            236NET
      CASH USED IN INVESTING ACTIVITIES
            
            
            (1,922
            )
            
            
            (18,744
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Increase
      in deposits
            
            
            13,912
            
            
            
            15,417Net
      decrease in borrowed funds
            
            
            (1,412
            )
            
            
            (13,964
            )Dividends
      paid on common stock
            
            
            (454
            )
            
            
            -Dividends
      paid on preferred stock
            
            
            (186
            )
            
            
            (163
            )Net
      proceeds from issuance and redemption of preferred stock
            
            
            12,123
            
            
            
            5,000Exercise
      of stock options
            
            
            5
            
            
            
            223NET
      CASH PROVIDED BY FINANCING ACTIVITIES
            
            
            23,988
            
            
            
            6,513NET
      INCREASE (DECREASE) IN CASH
            
            
            24,216
            
            
            
            (6,199
            )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
            
            
            15,991
            
            
            
            25,008CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
            
            $
            40,207
            
            
            $
            18,809SUPPLEMENTAL
      DISCLOSURES:CASH
      PAYMENTS FOR INTEREST
            
            $
            5,839
            
            
            $
            8,077CASH
      PAYMENTS FOR INCOME TAXES
            
            
            1,089
            
            
            
            719LOANS
      TRANSFERRED TO OTHER REAL ESTATE
            
            
            3,162
            
            
            
            1,110





4




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
nine months ended September 30, 2010, are not necessarily indicative of the
results that may be expected for the year ending December 31,
2010.  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, 2009.





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
September 30, 2010, the Company had approximately $504.7 million in assets,
$336.1 million in loans,$397.7 million in deposits, and $57.2 million in
stockholders' equity.  For the nine months ended September 30, 2010,
the Company reported a net income of $1,807,000 ($1,579,000 applicable to common
stockholders).





In the
first quarter of 2010, the Company declared and paid a special dividend of $.05
and a quarterly dividend of $.025 for a total dividend of $.075 per common
share.





In the
second quarter of 2010, the Company declared and paid a dividend of $.025 per
common share.





In the
third quarter of 2010, the Company declared and paid a dividend of $.05 per
common share.





No
dividend was paid on common shares during 2009.




5




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





The
Company allocated the proceeds received from the Treasury, net of transaction
costs, on a pro rata basis to the Series A preferred stock and the warrant based
on their relative fair values.  The Company assigned $.3 million and
$4.7 million to the warrant and the Series A preferred stock,
respectively.  The resulting discount on the Series A preferred stock
is being accreted up to the $5.0 million liquidation amount over the five year
expected life of the Series A preferred stock.





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





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





The most
significant difference in terms between the CDCI Preferred Shares and the CPP
Preferred Shares is the dividend rate applicable to each.  The CPP
Preferred Shares entitled the holder to an annual dividend of 5% of the
liquidation value of the shares, payable quarterly in arrears; by contrast, the
CDCI Preferred Shares entitle the holder to an annual dividend of 2% of the
liquidation value of the shares, payable quarterly in arrears.  Other
differences in terms between the CDCI Preferred Shares and the CPP Preferred
Shares, 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.




6




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





NOTE D —
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
              September
      30, 2010Net
      Income (Numerator)
            
            
            Shares
      (Denominator)
            
            
            Per
      Share DataBasic
      per share
            
            $
            547,000
            
            
            
            3,019,869
            
            
            $
            .18Diluted
      per share
            
            $
            547,000
            
            
            
            3,020,558
            
            
            $
            .18




For
      the Nine Months Ended
              September
      30, 2010Net
      Income (Numerator)
            
            
            Shares
      (Denominator)
            
            
            Per
      Share DataBasic
      per share
            
            $
            1,579,000
            
            
            
            3,019,869
            
            
            $
            .52Diluted
      per share
            
            $
            1,579,000
            
            
            
            3,020,558
            
            
            $
            .52




For
      the Three Months Ended
              September
      30, 2009Net
      Income (Numerator)
            
            
            Shares
      (Denominator)
            
            
            Per
      Share DataBasic
      per share
            
            $
            693,000
            
            
            
            3,019,869
            
            
            $
            .23Diluted
      per share
            
            $
            693,000
            
            
            
            3,019,869
            
            
            $
            .23




7




For
      the Nine Months Ended
              September
      30, 2009Net
      Income (Numerator)
            
            
            Shares
      (Denominator)
            
            
            Per
      Share DataBasic
      per share
            
            $
            937,000
            
            
            
            3,008,617
            
            
            $
            .31Diluted
      per share
            
            $
            937,000
            
            
            
            3,008,617
            
            
            $
            .31




The
Company granted 12,353 shares in restricted stock in the third quarter of
2010.





NOTE E —
COMPREHENSIVE INCOME





The
following table discloses Comprehensive Income for the periods reported
in


the
Consolidated Statements of Income:





(In
thousands)




Quarter
      Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2010
            
            
            2009
            
            
            2010
            
            
            2009Net
      Income
            
            $
            622
            
            
            $
            770
            
            
            $
            1,807
            
            
            $
            1,142Other
      Comprehensive Income, net of tax:Unrealized
      holding gains on available-for-sale securities during the
      period
            
            
            207
            
            
            
            297
            
            
            
            234
            
            
            
            394Unrealized
      gain (loss) on derivative carried at fair value during the
      period
            
            
            (12
            )
            
            
            17
            
            
            
            13
            
            
            
            17Comprehensive
      Income
            
            $
            817
            
            
            $
            1,084
            
            
            $
            2,054
            
            
            $
            1,553Unrealized
      holding gains on available- for-sale securities during the
      period
            
            $
            207
            
            
            $
            297
            
            
            $
            234
            
            
            $
            394Unrealized
      gain (loss)on derivative carried at fair value during the
      period
            
            
            (12
            )
            
            
            17
            
            
            
            13
            
            
            
            17Accumulated
      Other Comprehensive Loss, beginning of period
            
            
            (49
            )
            
            
            (312
            )
            
            
            (101
            )
            
            
            (409
            )Accumulated
      Other Comprehensive Income, end of period
            
            $
            146
            
            
            $
            2
            
            
            $
            146
            
            
            $
            2





8




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.




9




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 September 30, 2010 and December 31, 2009 (in
thousands):




September 30,
2010




Fair
      Value Measurements UsingFair
      Value
            
            Quoted
      Prices
              inActive
              Markets
      for
              Identical
      Assets
              (Level
      1)
            
            Significant
      Other
              Observable
      Inputs
              (Level
      2)
            
            Significant
              Unobservable
              Inputs
              (Level
      3)Available-for-sale
      securities
            
            $
            94,554
            
            
            $
            987
            
            
            $
            90,879
            
            
            $
            2,688




December 31,2009




Fair
      Value Measurements UsingFair
      Value
            
            Quoted
      Prices
              inActive
              Markets
      for
              Identical
      Assets
              (Level
      1)
            
            Significant
      Other
              Observable
      Inputs
              (Level
      2)
            
            Significant
              Unobservable
              Inputs
              (Level
      3)Available-for-sale
      securities
            
            $
            112,231
            
            
            $
            958
            
            
            $
            108,040
            
            
            $
            3,233




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




(Dollars in
      thousands)
            
            Bank-Issued
              TrustPreferredSecurities2010
            
            
            2009Balance,
      January 1
            
            $
            3,233
            
            
            $
            -Transfers
      into Level 3
            
            
            -
            
            
            
            5,338Transfers
      out of Level 3
            
            
            -
            
            
            
            -Other-than-temporary
      impairment loss included in earnings
            
            
            (349
            )
            
            
            (111
            )Unrealized
      loss included in comprehensive income
            
            
            (196
            )
            
            
            (1,994
            )Balance
      at September 30, 2010 and December 31, 2009
            
            $
            2,688
            
            
            $
            3,233




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 in
accordance with the provisions of applicable authoritative guidance. 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.




10




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 September
30, 2010, amounted to $4.6 million.




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 September 30, 2010 and December 31,
2009.




September 30,
2010




Fair
      Value Measurements UsingFair
      Value
            
            
            Quoted
      Prices inActive
              Markets
      for
              Identical
      Assets
              (Level
      1)
            
            
            Significant
      Other
              Observable
      Inputs
              (Level
      2)
            
            
            Significant
              Unobservable
              Inputs
              (Level
      3)Impaired
      loans
            
            $
            4,770
            
            
            $
            -
            
            
            $
            4,770
            
            
            $
            -Other
      real estate owned
            
            $
            4,552
            
            
            $
            -
            
            
            $
            4,552
            
            
            $
            -




December 31,
2009




Fair
      Value Measurements UsingFair
      Value
            
            
            Quoted
      Prices inActive
      Markets for
              Identical
      Assets
              (Level
      1)
            
            
            Significant
      Other
              Observable
      Inputs
              (Level
      2)
            
            
            Significant
              Unobservable
              Inputs
              (Level
      3)Impaired
      loans
            
            $
            20,609
            
            
            $
            -
            
            
            $
            20,609
            
            
            $
            -Other
      real estate owned
            
            $
            2,903
            
            
            $
            -
            
            
            $
            2,903
            
            
            $
            -




11




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.





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





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





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





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





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




As
      of September 30, 2010
            
            
            As
      of December 31, 2009Carrying
              Amount
            
            
            Estimated
              Fair
      Value
            
            
            Carrying
              Amount
            
            
            Estimated
              Fair
      Value(In
      thousands)Financial
      Instruments:Assets:Cash
      and cash equivalents
            
            $
            40,207
            
            
            $
            40,207
            
            
            $
            15,991
            
            
            $
            15,991Securities
      available-for-sale
            
            
            94,554
            
            
            
            94,554
            
            
            
            112,231
            
            
            
            112,231Securities
      held-to-maturity
            
            
            3
            
            
            
            3
            
            
            
            3
            
            
            
            3Other
      securities
            
            
            2,063
            
            
            
            2,063
            
            
            
            2,384
            
            
            
            2,384Loans,
      net
            
            
            331,512
            
            
            
            344,596
            
            
            
            314,033
            
            
            
            326,271Liabilities:Noninterest-bearingdeposits
            
            $
            47,686
            
            
            $
            47,686
            
            
            $
            48,527
            
            
            $
            48,527Interest-bearing
      deposits
            
            
            349,980
            
            
            
            351,485
            
            
            
            335,227
            
            
            
            337,238Subordinated
      debentures
            
            
            10,310
            
            
            
            10,310
            
            
            
            10,310
            
            
            
            10,310FHLB
      and other borrowings
            
            
            30,625
            
            
            
            30,625
            
            
            
            32,037
            
            
            
            32,037





12





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 September 30, 2010 and December 31,
2009, respectively, loans accounted for 72.4% and 72.2% of earning assets. The
Company controls and mitigates the inherent credit and liquidity risks through
the composition of its loan portfolio.





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




Composition
      of Loan PortfolioSeptember
      30, 2010
            
            
            December
      31, 2009Amount
            
            
            Percent
              ofTotal
            
            
            Amount
            
            
            Percent
              ofTotal(Dollars
      in thousands)Mortgage
      loans held for sale
            
            $
            6,283
            
            
            
            1.9
            %
            
            $
            3,692
            
            
            
            1.2
            %Commercial,
      financial and agricultural
            
            
            50,765
            
            
            
            15.1
            
            
            
            43,229
            
            
            
            13.6Real
      Estate:Mortgage-commercial
            
            
            105,232
            
            
            
            31.3
            
            
            
            87,492
            
            
            
            27.4Mortgage-residential
            
            
            99,632
            
            
            
            29.6
            
            
            
            102,738
            
            
            
            32.2Construction
            
            
            64,568
            
            
            
            19.2
            
            
            
            68,695
            
            
            
            21.5Consumer
      and other
            
            
            9,597
            
            
            
            2.9
            
            
            
            12,949
            
            
            
            4.1Total
      loans
            
            
            336,077
            
            
            
            100
            %
            
            
            318,795
            
            
            
            100
            %Allowance
      for loan losses
            
            
            (4,565
            )
            
            
            
            
            
            
            (4,762
            )Net
      loans
            
            $
            331,512
            
            
            
            
            
            
            $
            314,033





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 comply with regulatory guidelines.
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.




13




The
following tables represent how the allowance for loan losses is allocated to a
particular loan type as well as the percentage of the category to total loans at
December 31, 2009 and September 30, 2010.





Allocation
of the Allowance for Loan Losses




September 30,
      2010(Dollars
      in thousands)Amount
            
            
            %
      of loans
              in
      each category to total
      loansCommercial
      Non Real Estate
            
            $
            544
            
            
            
            15.5
            %Commercial
      Real Estate
            
            
            2,939
            
            
            
            62.8Consumer
      Real Estate
            
            
            782
            
            
            
            16.9Consumer
            
            
            157
            
            
            
            2.7Unallocated
            
            
            143
            
            
            
            2.1Total
            
            $
            4,565
            
            
            
            100
            %




December
      31, 2009(Dollars
      in thousands)Amount
            
            
            %
      of loans
              in
      each category to total
      loansCommercial
      Non Real Estate
            
            $
            1,015
            
            
            
            13.9
            %Commercial
      Real Estate
            
            
            2,564
            
            
            
            62.2Consumer
      Real Estate
            
            
            687
            
            
            
            17.8Consumer
            
            
            317
            
            
            
            3.9Unallocated
            
            
            179
            
            
            
            2.2Total
            
            $
            4,762
            
            
            
            100
            %




The
following table represents the Company’s impaired loans at December 31, 2009 and
September 30, 2010.  This table excludes performing troubled debt
restructurings.




September
      30, 2010
            
            
            December
      31, 2009(In
      thousands)Impaired
      Loans:Impaired
      loans without a valuation allowance
            
            $
            3,020
            
            
            $
            12,295Impaired
      loans with a valuation allowance
            
            
            1,750
            
            
            
            8,314Total
      impaired loans
            
            $
            4,770
            
            
            $
            20,609Allowance
      for loan losses on impaired loans at periodend
            
            $
            584
            
            
            $
            2,004Total
      nonaccrual loans
            
            $
            4,443
            
            
            
            4,367Past
      due 90 days or more and still accruing
            
            
            159
            
            
            
            1,447Average
      investment in impaired loans
            
            
            4,770
            
            
            
            19,114Interest
      paid on impaired loans for the nine monthperiod ended Sept. 30, 2010 and year endedDecember 31, 2009
            
            
            175
            
            
            
            1,297





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.




14




A summary
of the amortized cost and estimated fair value of available-for-sale securities
and held-to-maturity securities at September 30, 2010, follows:





September 30, 2010Amortized
      Cost
            
            
            Gross
      Unrealized Gains
            
            
            Gross
      Unrealized Losses
            
            
            Estimated
      Fair ValueAvailable-for-sale
      securities:Obligations
      of U.S.Government Agencies
            
            $
            14,839
            
            
            $
            225
            
            
            $
            7
            
            
            $
            15,057Tax-exempt
      and taxableobligations of statesand municipalsubdivisions
            
            
            48,448
            
            
            
            1,647
            
            
            
            47
            
            
            
            50,048Mortgage-backedsecurities
            
            
            19,915
            
            
            
            822
            
            
            
            65
            
            
            
            20,672Corporate
      obligations
            
            
            9,879
            
            
            
            13
            
            
            
            2,102
            
            
            
            7,790Other
            
            
            1,255
            
            
            
            -
            
            
            
            268
            
            
            
            987Total
            
            $
            94,336
            
            
            $
            2,707
            
            
            $
            2,489
            
            
            $
            94,554Held-to-maturity
      securities:Mortgage-backed
      securities
            
            $
            3
            
            
            $
            0
            
            
            $
            0
            
            
            $
            3





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 short operating
history and rapid growth.  Thus, there can be no assurance that
charge-offs in future periods will not exceed the allowance for loan losses or
that additional increases in the loan loss allowance will not be
required.





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.




15




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. Impaired loans are
loans for which the Bank does not expect to receive contractual interest and/or
principal by the due date. A specific allowance is assigned to each loan
determined to be impaired based upon the value of the loan’s underlying
collateral. Appraisals are used by management to determine the value of the
collateral.





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





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





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 2009 financial statements have been reclassified for comparative
purposes to conform to the current period financial statement
presentation.




16




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 $503.8 million at September 30, 2010, compared to $476.6 million at
December 31, 2009.  Loans increased $17.3 million, or 5.4%, during the
first nine months of 2010.  Deposits at September 30, 2010, totaled
$409.8 million compared to $384.0 million at December 31, 2009. For the nine
month period ended September 30, 2010, The First reported net income of $2.1
million compared to $1.4 million for the nine months ended September 30,
2009.





NONPERFORMING
ASSETS AND RISK ELEMENTS. Diversification within the loan portfolio
is an important means of reducing inherent lending risks. At September
30, 2010, 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, 2010, The First had loans past due as follows:





($
      In Thousands)Past
      due 30 through 89 days
              
              $
              9,456Past
      due 90 days or more and still accruing
              
              
              159
  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 $4.4
million at September 30, 2010, an increase of $.1 million from December 31,
2009.  Any other real estate owned is carried at fair value,
determined by an appraisal. Other real estate owned totaled $4.6 million at
September 30, 2010.  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. At September 30, 2010, the Bank had $4.1 million
in commercial loans and $.8 million in consumer loans that were modified as
troubled debt restructurings.  Of these amounts considered as troubled
debt restructurings $.7 million was 1-4 family performing in accordance with the
modified terms and $1.1 million was commercial loans performing in accordance
with modified terms.




LIQUIDITY
AND CAPITAL RESOURCES





Liquidity
is adequate with cash and cash equivalents of $40.2 million as of
September 30, 2010. In addition, loans and investment securities repricing
or maturing within one year or less exceeded $145.1 million at September
30, 2010.  Approximately $45.1 million in loan commitments could fund
within the next six months and other commitments, primarily standby letters of
credit, totaled $.6 million at September 30, 2010.





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.




17




Total
consolidated equity capital at September 30, 2010, was $57.2 million, or approximately
11.3% 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 September, 2010, were as follows:




Tier
      1 leverage
            
            13.36%Tier
      1 risk-based
            
            18.21%Total
      risk-based
            
            19.46%




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
authoritative guidance, the trusts are not included in the consolidated
financial statements.





RESULTS
OF OPERATIONS – QUARTERLY





The
Company had a consolidated net income of $622,000 for the three months ended
September 30, 2010, compared with consolidated net income of $770,000 for the
same period last year.





Net
interest income increased to $4.2 million from $3.6 million for the three months
ended  September 30, 2010, or an increase of 17.0% as compared to the
same period in 2009.  Earning assets through September 30, 2010,
increased $10.9 million, or 2.4% and interest-bearing liabilities decreased $8.5
million or 2.1% when compared to June 30, 2010.





Non
interest income for the three months ended September 30, 2010, was $1,054,000
compared to $1,131,000 for the same period in 2009, reflecting a decrease of
$77,000 or 6.8%.  An increase of $200,000 in impairment losses to the
Company’s trust preferred securities attributed to the
decrease.  Included in noninterest income is service charges on
deposit accounts, which for the three months ended September 30, 2010, totaled
$600,000 compared to $640,000 for the same period in 2009.





Non
interest expense increased by $318,000 or 8.6% for the three months ended
September 30, 2010, when compared with the same period in
2009.  Increases in expenses related to Other Real Estate and FDIC
assessments accounted for this increase.




18




RESULTS
OF OPERATIONS – YEAR TO DATE





The
Company had a consolidated net income of $1,807,000 for the nine months ended
September 30, 2010, compared with consolidated net income of $1,142,000 for the
same period last year.





Net
interest income after provision for loan losses increased to $11.3 million from
$9.5 million for the nine months ended September 30, 2010, or an increase of
19.2% as compared to the same period in 2009.  Earning assets through
September 30, 2010, increased $10.8 million, or 2.4% and interest-bearing
liabilities  increased $3.8 million when compared to September 30,
2009.





Noninterest
income for the nine months ended September 30, 2010, was $2,881,000
compared to $3,284,000 for the same period in 2009, reflecting a decrease
of $403,000 or 12.2%. Included in noninterest income are service charges on
deposit accounts, which for the nine months ended September 30, 2010, totaled
$1,786,000 compared to $1,845,000 for the same period in 2009, reflecting a
decrease of $59,000.  An increase of $264,000 in impairment losses
related to trust preferred securities attributed to this decrease.





The
provision for loan losses was $754,000 in the nine months ended September 30,
2010, compared with $1,056,000 for the same period in 2009. The allowance for loan
losses of $4.6 million at September 30, 2010 (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 $363,000 or 3.2% for the nine months ended September 30,
2010, when compared with the same period in 2009.  Increases in
expenses related to Other Real Estate and FDIC assessments accounted for this
increase.





ITEM NO.
3.  CONTROLS AND PROCEDURES





As of
September 30, 2010, (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.





There
have been no changes, significant or otherwise, in our internal controls over
financial reporting  that occurred during the quarter ended September
30, 2010, that have materially affected, or are reasonably likely to affect, our
internal control over financial reporting.




19




ITEM NO.
4.  RECENT ACCOUNTING PRONOUNCEMENTS





In
January 2010, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) No. 2010-06, “Improving Disclosures about
Fair Value Measurements” (ASC Subtopic 820-10). This guidance requires
additional disclosures concerning transfers into and out of Levels 1 and 2 of
the fair value measurement hierarchy and activity in Level 3 measurements. ASU
No. 2010-06 also clarifies existing disclosure requirements regarding the level
of disaggregation and inputs and valuation techniques. ASU No. 2010-06 is
generally effective for reporting periods beginning after December 15, 2009. The
Company adopted the guidance in ASU No. 2010-06 for the quarter ended March 31,
2010. Please refer to Note F of these Notes to Consolidated Financial Statements
for disclosures related to the Company’s fair value measurements.





On
January 1, 2010, ASU No. 2009-16, “Transfers and Servicing, Topic 860:
Accounting for Transfers of Financial Assets”became
effective.  This ASU removed the concept of a qualifying
special-purpose entity from generally accepted accounting principles and changed
the requirements for derecognizing financial assets.  Upon adoption of
the ASU, the Company had no change in its balance sheet or required capital
since the Company has not used off-balance sheet financing.





In July
2010, the FASB issued ASU No. 2010-20, “Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses.” This guidance will
require companies to provide additional disclosures relating to the credit
quality of their financing receivables and the credit reserves held against
them, including the aging of past-due receivables, credit quality indicators,
and modifications of financing receivables. For public companies, the disclosure
requirements as of the end of a reporting period are effective for periods
ending on or after December 15, 2010. The disclosure requirements for activity
occurring during a reporting period are effective for periods beginning on or
after December 15, 2010. The Company is currently evaluating the possible
effects of this guidance on its financial statement disclosures.




PART II —
OTHER INFORMATION




ITEM
1.  LEGAL PROCEEDINGS





On
October 8, 2007 The First Bancshares, Inc. (the "Company") and
its     subsidiary, The First, A National Banking
Association (the "Bank") were formally named as defendants and served with a
First Amended Complaint in litigation styled Nick D. Welch v. Oak Grove Land
Company, Inc., Fred McMurry, David E. Johnson, J. Douglas Seidenburg, The First,
a National Banking Association, The First Bancshares, Inc., and John Does 1
through 10, Civil Action No. 2006-236-CV4, pending in the Circuit Court of Jones
County, Mississippi, Second Judicial District (the "First Amended
Complaint").





The
allegations by Welch against the Company and the Bank include counts of 1)
Intentional Misrepresentation and Omission; 2) Negligent Misrepresentation
and/or Omission; 3) Breach of Fiduciary Duty; 4) Breach of Duty of Good Faith
and Fair Dealing; and 5) Civil Conspiracy.  The First
Amended   Complaint served by Welch on October 8, 2007 added the
Company and the Bank as defendants in this ongoing litigation.  The
Plaintiff seeks damages from all the defendants, including $2,957,385.00, annual
dividends for the year 2006 in the amount of $.30 per share, punitive damages,
and attorneys' fees and costs, and is more fully described in Form 8-K filed by
the Company on October 10, 2007.  The Company and the Bank both deny
any liability to Welch, and they intend to defend vigorously against this
lawsuit.




20




The
Defendants removed the case to the United States District Court for the Southern
District of Mississippi, Hattiesburg Division, on March 12, 2008 based upon the
Court's federal question jurisdiction.  On April 11, 2008, the Plaintiff
filed a Motion to Remand the case to the Circuit Court of Jones County,
Mississippi.  The Motion to Remand was granted, and the case is
currently pending in the Circuit Court of Jones County, Mississippi, Second
Judicial District. The case has been set for trial on February 7, 2011 in the
Circuit Court of Jones County, Mississippi.




ITEM 1A.
RISK FACTORS





There are
no material changes in the Company’s risk factors since December 31,
2009.  Please refer to the Annual Report on Form 10-K of The First
Bancshares, Inc., filed with the Securities and Exchange Commission on March 30,
2010.




ITEM
2.  UNREGISTERED SALES OF EQUITY SECURITY AND USE OF
PROCEEDS





Not
Applicable





ITEM
3.  DEFAULTS UPON SENIOR SECURITIES





Not
Applicable




ITEM
4.  REMOVED AND RESERVED




ITEM
5.  OTHER INFORMATION





Not
Applicable




21




ITEM
6.  EXHIBITS





(a)  Exhibits





Exhibit
      No.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.




22




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)November
      12, 2010
              
              /s/
      M. RAY (HOPPY) COLE, JR.(Date)
              
              M.
      Ray (Hoppy) Cole, Jr.Chief
      Executive Officer




November
      12, 2010
              
              /s/
      DEEDEE LOWERY(Date)
              
              DeeDee
      Lowery,Executive
      Vice
      President and Chief Financial
      Officer




23