Firstbank Financial Services 10QSB 2006 Q1 Quarterly report (small business)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended	March 31, 2006

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

	For the transition period from	to

Commission File Number: 000-51147

FirstBank Financial Services, Inc.

(Exact name of small business issuer as specified in its charter)

Georgia		20-2198785
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)

120 Keys Ferry Street McDonough, Georgia 30253

(Address of principal executive offices)

(678) 583-2265

(Issuer’s telephone number)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ý No o

Check whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No ý

State the number of shares outstanding of each of the issuer’s classes of common equity, as of May 13, 2006: 2,359,753 shares, $5.00 par value per share.

Transitional Small Business Disclosure Format Yes o No ý

FIRSTBANK FINANCIAL SERVICES, INC.

AND SUBSIDIARY

TABLE OF CONTENTS

PART I.		FINANCIAL INFORMATION

	Item 1. Consolidated Financial Statements

		Consolidated Balance Sheets (unaudited) as of March 31, 2006 and December 31, 2005

		Consolidated Statements of Income (unaudited) for the three months ended March 31, 2006 and 2005

		Consolidated Statements of Comprehensive Income (unaudited) for the three months ended March 31, 2006 and 2005

		Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2006 and 2005

		Notes to Consolidated Financial Statements

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

	Item 3. Controls and Procedures

PART II.		OTHER INFORMATION

		SIGNATURES

		CERTIFICATION

		SECTION 906 CERTIFICATION

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FIRSTBANK FINANCIAL SERVICES, INC.

AND SUBSIDIARY

Consolidated Balance Sheets

(unaudited)

March 31, 2006 and December 31, 2005

		March 31, 2006				December 31, 2005
ASSETS

Cash and due from banks		$	2,766,426			$		1,236,443
Interest-bearing deposits in banks		1,748,364				789,979
Federal funds sold		33,929,000				13,765,000
Securities available-for-sale, at fair value		34,124,927				31,125,111
Restricted equity securities, at cost		1,810,556				1,584,256

Loans, net of unearned income		169,321,890				168,674,463
Less allowance for loan losses		1,957,813				1,917,216
Loans, net		167,364,077				166,757,247

Premises and equipment		4,559,032				4,112,851
Other assets		3,287,847				3,110,034
Total assets		$	249,590,229			$	222,480,921

LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits:
Noninterest-bearing	��	$		19,946,740		$	11,994,193
Interest-bearing		179,631,449				162,341,815
Total deposits		199,578,189				174,336,008
Federal Home Loan Bank borrowings		23,000,000				22,000,000
Other liabilities		1,605,194				1,361,448
Total liabilities		224,183,383				197,697,456

Stockholders’ equity:
Preferred stock, no par value per share, 2,000,000 shares authorized; -0- shares issued and outstanding		—				—
Common stock, par value $5.00 per share, 10,000,000 shares authorized; 2,359,753 and 2,145,250 shares issued and outstanding, respectively		11,798,765				10,726,250
Surplus		13,751,667				11,235,374
Retained earnings		419,888				3,298,408
Accumulated other comprehensive loss		(563,474			)	(476,567			)
Total stockholders’ equity		25,406,846				24,783,465
Total liabilities and stockholders’ equity		$	249,590,229			$	222,480,921

See notes to consolidated financial statements.

FIRSTBANK FINANCIAL SERVICES, INC.

AND SUBSIDIARY

Consolidated Statements of Income

(unaudited)

For the Three Months Ended March 31, 2006 and 2005

	March 31, 2006		March 31, 2005
Interest and dividend income:
Loans, including fees	$	3,553,984	$	2,404,081
Taxable securities	328,545		259,074
Tax-free securities	26,026		22,795
Federal funds sold	134,458		50,218
Deposits in banks	21,653		14,582
Total interest and dividend income	4,064,666		2,750,750

Interest expense:
Deposits	1,605,002		868,951
Federal Home Loan Bank borrowings	212,613		156,696
Total interest expense	1,817,615		1,025,647

Net interest income	2,247,051		1,725,103
Provision for loan losses	45,000		159,615

Net interest income after provision for loan losses	2,202,051		1,565,488

Noninterest income:
Service charges on deposit accounts	53,451		45,801
Gain on sale of assets	1,425		—
Other operating	18,712		20,563
Total noninterest income	73,588		66,364

Noninterest expense:
Salaries and employee benefits	671,874		455,425
Equipment and occupancy	157,358		59,547
Other operating	416,188		264,493
Total noninterest expense	1,245,420		779,465

Income before provision for income taxes	1,030,219		852,387

Provision for income taxes	377,658		311,334
Net income	$	652,561	$	541,053

Income per share:
Basic	$	0.28	$	0.23
Diluted	$	0.26	$	0.23
Cash dividends per share:	$	—	$	—

See notes to consolidated financial statements.

FIRSTBANK FINANCIAL SERVICES, INC

AND SUBSIDIARY

Consolidated Statements of Comprehensive Income

(unaudited)

For the Three Months Ended March 31, 2006 and 2005

	March 31, 2006			March 31, 2006

Net income	$	652,561		$		541,053

Other comprehensive loss:

Unrealized losses on securities available for sale:

Net unrealized losses arising during period, net of tax	(61,105		)	(367,475			)
	(61,105		)	(367,475			)

Unrealized losses on interest rate floor:

Net unrealized losses arising during period, net of tax	(25,802		)	—
	(25,802		)	—

Other comprehensive loss	(86,907		)	(367,475			)

Comprehensive income	$	565,654		$	173,578

See notes to consolidated financial statements.

FIRSTBANK FINANCIAL SERVICES, INC.

AND SUBSIDIARY

Consolidated Statements of Cash Flows

(unaudited)

For the Three Months Ended March 31, 2006 and 2005

	March 31, 2006				March 31, 2005
Cash flow from operating activities:
Net income	$	652,561			$			541,053
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	78,679				37,824
Deferred taxes	—				—
Stock compensation expense	58,089
Provision for loan losses	45,000				159,615
Gain on sale of assets	(1,425			)	—
Increase in accrued interest receivable	(41,107			)	(258,865				)
Decrease in accrued interest payable	(101,243			)	(12,263				)
Net other operating activities	257,888				242,239

Net cash flow provided by operating activities	948,442				709,603

Cash flow from investing activities:
Net increase in loans	(651,830			)	(13,734,002				)
Net (increase) decrease in interest bearing deposits in banks	(958,385			)	174,449
Net (increase) decrease in federal funds sold	(20,164,000			)	703,000
Purchases of restricted equity securities	(226,300			)	(313,700				)
Purchases of investment securities available-for-sale	(4,496,730			)	(3,898,056				)
Proceeds from maturities of securities available-for-sale	1,352,098				—
Proceeds from sales of securities available-for-sale	—				2,438,247
Proceeds from sale of assets	1,425				—
Purchases of premises, equipment and software	(516,556			)	(75,595				)

Net cash flow used by investing activities	(25,660,278			)	(14,705,657				)

Cash flow from financing activities:
Net increase in deposits	25,242,181				12,238,423
Net increase in other borrowings	1,000,000				3,000,000
Purchase of fractional shares	(362			)	—

Net cash flow provided by financing activities	26,241,819				15,238,423

Net increase in cash and due from banks	1,529,983				1,242,369
Cash and due from banks at beginning of period	1,236,443				1,136,424
Cash and due from banks at end of period	$	2,766,426			$		2,378,793

Supplemental schedule of noncash investing and financing activities -
Change in accumulated other comprehensive loss	$		(86,907	)	$	(367,475			)

Supplemental disclosures of cash flow information -
Cash paid for:
Interest	$		1,918,858		$	1,037,910
Income taxes	$		89,035		$	18,523

See notes to consolidated financial statements.

FIRSTBANK FINANCIAL SERVICES, INC.

AND SUBSIDIARY

Notes to Consolidated Financial Statements

(unaudited)

1. Basis of Presentation

FirstBank Financial Services, Inc. (the “Company”) is a bank holding company whose business is conducted by its wholly-owned commercial bank, First Bank of Henry County (the “Bank”). The Bank is located in McDonough, Henry County, Georgia with a branch in Stockbridge.

The shareholders of the Bank approved an Agreement and Plan of Share Exchange on June 30, 2004, and the holding company information became effective February 1, 2005. Pursuant to the Plan, each share of the Bank common stock was exchanged on a one-for-one basis for shares of Company common stock.

The accompanying consolidated financial statements are unaudited. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-KSB for the year ended December 31, 2005, which was filed with the Securities and Exchange Commission.

The financial information included herein reflects all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary to a fair presentation of the Company’s financial position and results for the interim period ended March 31, 2006.

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and income and expense amounts. Actual results could differ from those estimates. The results of operations for the three months ended March 31, 2006 are not necessarily indicative of the results to be expected for the full year.

2. Stock Compensation Plans

At March 31, 2006, the Company had two stock-based employee compensation plans. The Company accounts for these plans in accordance with FASB statement No. 123 (revised 2004), “Share-Based Payments”, SFAS 123(R). SFAS 123(R) applied to all companies as of the beginning of the first interim period that began after December 15, 2005. Accordingly, the stock-based employee compensation cost reflected in net income for the period ending March 31, 2006 is $58,089. The Company has elected the modified prospective transition method as allowed by SFAS 123(R). The Company uses the Black-Scholes option pricing model to calculate its stock based compensation costs.

2. Stock Compensation Plans

In applying this model, the fair value of the option grants has been calculated based upon the following range of assumptions:

Dividend Yield		0.00%
Expected Life		5-10 years
Expected Volatility		18.35% - 23.67%
Risk Free Weight		4.53%

The Company uses a peer group average of stock prices to compute the expected volatility of its stock. The risk free rate assumption is based upon the yield of a treasury security whose maturity period equals the option period. The dividend yield assumption is based upon that of the Company.

The following tables summarize stock option activity for the periods ending March 31, 2006 and December 31, 2005.

	March 31, 2006			December 31, 2005
	Number	Weighted- Average Exercise Price		Number	Weighted- Average Exercise Price

Balance, beginning of period	138,499	$	12.78	68,750	$	9.09
Granted	28,462	16.60		69,749	16.42
Exercised	—	—
Forfeited/Expired	—	—
Balance, end of period	166,961	$	13.43	138,499	$	12.78

Exercisable, end of period	105,998	$	14.81	97,352	$	12.76

Weighted-average fair value of options granted during the period		$	5.47		$	6.87

2. Stock Compensation Plans

Information pertaining to options outstanding at March 31, 2006 is as follows:

	Options Outstanding
		Weighted-
		Average			Options Exercisable
		Remaining	Weighted-			Weighted-
Range of	Number	Contractual	Average		Number	Average
Exercise Prices	Outstanding	Life	Exercise Price		Exercisable	Exercise Price
$ 9.09	68,750	5.62 years	$	9.09	48,584	$	9.09
16.42	69,749	10 years	16.42		48,768	16.42
16.50 - 17.25	28,462	10 years	16.60		8,646	16.91
	166,961	8.20 years	13.43		105,998	14.81

Information pertaining to options outstanding at December 31, 2005 is as follows:

	Options Outstanding
		Weighted-
		Average			Options Exercisable
		Remaining	Weighted-			Weighted-
Range of	Number	Contractual	Average		Number	Average
Exercise Prices	Outstanding	Life	Exercise Price		Exercisable	Exercise Price
$ 9.09	68,750	5.62 years	$	9.09	48,584	$	9.09
16.42	69,749	10 years	16.42		48,768	16.42
	138,499	7.83 years	12.78		97,352	12.76

At March 31, 2006, there was $289,718 of unrecognized compensation cost related to stock-based payments, which is expected to be recognized over a weighted-average period of 1.6 years. Shares available for future stock option grants to employees under existing plans was 83,039 at March 31, 2006. At March 31, 2006, the aggregate intrinsic value of options and warrants outstanding was $2,614,700, and the aggregate intrinsic value of options and warrants exercisable was $2,365,000. Total intrinsic value of options and warrants exercised was $-0- for the three months ended March 31, 2006.

The Company has also issued stock warrants to the Company’s organizers in an effort to compensate them for their efforts and financial risks undertaken. These warrants were fully vested as of December 31, 2005 and are exercisable in whole or in part during the ten year period begin with the date the Company began operations. This plan is more fully described in the Company’s annual report dated December 31, 2005.

2. Stock Compensation Plans

Other information related to the warrants is as follows:

	March 31, 2006			December 31, 2005
	Number	Weighted- Average Exercise Price		Number	Weighted- Average Exercise Price

Warrants outstanding, beginning of period	218,680	$	9.09	218,680	$	9.09
Granted	—			—
Exercised	—			—
Forfeited	—			—
Warrants outstanding, end of period	218,680	$	9.09	218,680	$	9.09

Exercisable, end of period	218,680	$	9.09	218,680	$	9.09

3. Earnings Per Common Share

The Company is required to report earnings per common share with and without the dilutive effects of potential common stock issuances from instruments such as options, convertible securities and warrants on the face of the statements of income. Earnings per common share are based on the weighted average number of common shares outstanding during the period while the effects of potential common shares outstanding during the period are included in diluted earnings per share. Additionally, the Company must reconcile the amounts used in the computation of both “basic earnings per share” and “diluted earnings per share”. Presented below is a summary of the components used to calculate basic and diluted earnings per common share.

	Three Months Ended March 31,
	2006			2005
Basic earnings per share:
Weighted average common shares outstanding	2,359,753			2,359,753

Net income	$		652,561	$	541,053

Basic earnings per share	$		0.28	$	0.23

Diluted earnings per share:
Weighted average common shares outstanding	2,359,753			2,359,753
Net effect of the assumed exercise of stock options based on the treasury stock method using average market prices for the year	126,500			26,131
Total weighted average common shares and common stock equivalents outstanding	2,486,253			2,385,884

Net income	$	652,561		$	541,053

Diluted earnings per share	$	0.26		$	0.23

4. Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting (SFAS) No. 123R (revised 2004), Share-Based Payment, which revises SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. This statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. This statement does not address the accounting for employee share ownership plans, which are subject to AICPA Statement of Position 93-6, Employers’ Accounting for Stock Ownership Plans. This statement requires an entity to recognize the cost of employee services received in share-based payment transactions and measure the cost on a grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. The provisions of SFAS 123R (revised 2004) are effective for financial statements issued for the first fiscal year beginning after June 15, 2005. Accordingly, during the quarter ended March 31, 2006, the Company recognized $58,089 in expense associated with vesting stock options.

In May 2005, the FASB issued Statement No. 154, (SFAS No. 154) Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3. This new standard replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. Among other changes, SFAS No. 154 requires that a voluntary change in an accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS No. 154 also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in an accounting principle, and (2) correction of errors in previously issued financial statements should be termed a “restatement.” The new standard is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of this standard did not have a material effect on the Company’s consolidated financial statements.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140. SFAS No. 155 simplifies accounting for certain hybrid instruments currently governed by SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, by allowing fair value remeasurement of hybrid instruments that contain an embedded derivative that otherwise would require bifurcation. SFAS No. 155 also eliminates the guidance in SFAS No. 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets, which provides such beneficial interests are not subject to SFAS No. 133. SFAS No. 155 amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - - a Replacement of FASB Statement No. 125, by eliminating the restriction on passive derivative instruments that a qualifying special-purpose entity may hold. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company does not expect the adoption of this statement to have a material impact on our financial condition, results of operations or cash flows.

4. Recent Accounting Pronouncements

In March 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 156, Accounting for Servicing of Financial Assets- an amendment of FASB Statement No. 140. SFAS No. 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in specific situations. Additionally, the servicing asset or servicing liability shall be initially measured at fair value; however, an entity may elect the “amortization method” or “fair value method” for subsequent balance sheet reporting periods. SFAS No. 156 is effective as of an entity’s first fiscal year beginning after September 15, 2006. Early adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year. The Company does not expect the adoption of this statement to have a material impact on our financial condition, results of operations or cash flows.

5. Stock Dividend

On November 17, 2005, the Company declared a ten percent stock dividend payable to shareholders of record on November 30, 2005 to be distributed on January 31, 2006. Earnings per common share for the period ended March 31, 2006 and all stock option and warrant information has been retroactively adjusted for the dividends as if it occurred on January 1, 2005.

6. Interest Rate Derivatives

The Company maintains an overall interest rate risk-management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest volatility. One interest rate derivative is used to hedge variable-rate deposits. This instrument is reflected in other liabilities at March 31, 2006 at a fair value of $73,058. The Company has another derivative, an interest rate floor, with a notional value of $40 million and a 7.50% strike. The fair value of this instrument at March 31, 2006 is $304,000 and is reflected in other assets. The instruments are more fully described in the Company’s annual report dated December 31, 2005.

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

The following is our discussion and analysis of certain significant factors which have affected the financial position and operating results of FirstBank Financial Services, Inc. (the “Company”) during the periods included in the accompanying consolidated financial statements.

Forward Looking Statements

Certain of the statements made herein under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) are forward-looking statements for purposes of the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”), and as such may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Such forward looking statements include statements using the words such as “will,” “anticipate,” “should,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “may” or “intend,” or other similar words and expressions of the future. Our actual results may differ significantly from the results we discuss in these forward-looking statements.

These forward-looking statements involve risks and uncertainties and may not be realized due to a variety of factors, including, without limitation:

• the effects of future economic conditions;

• governmental monetary and fiscal policies, as well as legislative and regulatory changes;

• the risks of changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral, securities, and other interest-sensitive assets and liabilities;

• changes in the interest rate environment which could reduce anticipated or actual margins;

• the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our market area and elsewhere, including institutions operating regionally, nationally, and internationally, together with such competitors offering banking products and services by mail, telephone, computer, and the Internet;

• changes occurring in business conditions and inflation;

• changes in monetary and tax policies;

• changes in technology;

• the level of allowance for loan loss;

• the rate of delinquencies and amounts of charge-offs;

• the rates of loan growth;

• adverse changes in asset quality and resulting credit risk-related losses and expenses;

• changes in the securities market; and

• other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission.

Introduction

On February 1, 2005, pursuant to an Agreement and Plan of Shares Exchange approved by the shareholders of First Bank of Henry County (the “Bank”), the Company acquired each share of the Bank’s common stock in exchange for one share of the Company’s stock. The Company now serves as a holding company for the Bank.

The Company performs banking services customary for full service banks of similar size and character. The Company offers personal and business checking accounts, interest-bearing checking accounts, savings accounts and various types of certificates of deposit. The Company also offers commercial loans, installment and other consumer loans, home equity loans, home equity lines of credit, construction loans and mortgage loans. In addition, the Company provides such services as official bank checks, traveler’s checks, direct deposit and United States Savings Bonds. The Company provides other customary banking services including ATM services, safe deposit facilities, money transfers, and individual retirement accounts.

Overview

Management monitors the financial condition of the Company in order to protect depositors, increase undivided profits and protect current and future earnings. Further discussion of significant items affecting the Company’s financial condition are discussed in detail below.

Critical Accounting Policies

We have adopted various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation of our consolidated financial statement of FirstBank Financial Services, Inc. Our significant accounting policies are described in the footnotes to the financial statements for FirstBank Financial Services, Inc. at December 31, 2005 as filed in our annual report on Form 10-KSB, which was filed with the Securities and Exchange Commission.

Certain accounting policies involve significant judgments and assumptions by us which have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates which could have a material impact on our carrying values of assets and liabilities and our results of operations.

We believe the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of our consolidated financial statements. Refer to the portion of this discussion that addresses asset quality for a description of our processes and methodology for determining our allowance for loan losses.

Asset Quality

A major key to long-term earnings growth is the maintenance of a high-quality loan portfolio. The Company’s directive in this regard is carried out through its policies and procedures for extending credit to the Company’s customers. The goal and result of these policies and procedures is to provide a sound basis for new credit extensions and an early recognition of problem assets to allow the most flexibility in their timely disposition. Additions to the allowance for loan losses will be made periodically to maintain the allowance at an appropriate level based upon management’s analysis of potential risk in the loan portfolio. The amount of the loan loss provision is determined by an evaluation of the level of loans outstanding, the level of non-performing loans, historical loan loss experience, delinquency trends, the amount of actual losses charged to the allowance in a given period, and assessment of present and anticipated economic conditions.

A provision for loan losses was made during the first quarter of 2006 of $45,000 as compared to $159,615 in the first quarter of 2005 resulting in a decrease of $114,615 on a comparative basis. The amounts provided are due primarily to our assessment of inherent risk in the loan portfolio. The allowance for loan losses as a percentage of total loans was 1.16% at March 31, 2006 as compared to 1.14% at December 31, 2005. Based upon our evaluation of the loan portfolio, we believe the allowance for loan losses to be adequate to absorb losses on existing loans that may become uncollectible.

The allowance for loan losses is established through a provision for loan losses charged to expense. Loan losses are charged against the allowance when management believes the collectibility of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.

The allowance is an amount that management believes will be adequate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectibility of existing loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, concentrations and current economic conditions that may affect the borrower’s ability to pay. This evaluation does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are any significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses, and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect

management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

Information with respect to nonaccrual, past due and restructured loans is as follows:

	March 31
	2006		2005
	(Dollars in Thousands)
Nonaccrual loans	$	119	$	12
Loans contractually past due ninety days or more as to interest or principal payments and still accruing	25		100
Restructured loans	—		—
Potential problem loans	—		—
Interest income that would have been recorded on non-accrual and restructured loans under original terms	—		—
Interest income that was recorded on nonaccrual and restructured loans	—		—

Potential problem loans are defined as loans about which we have serious doubts as to the ability of the borrower to comply with the present loan repayment terms and which may cause the loan to be placed on nonaccrual status, to become past due more than ninety days, or to be restructured.

It is our policy to discontinue the accrual of interest income when, in the opinion of management, collection of interest becomes doubtful. We will generally discontinue the accrual of interest when (1) there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected and (2) the principal or interest is more than ninety days past due, unless the loan is both well-secured and in the process of collection.

Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been included in the table above do not represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity or capital resources. These classified loans do not represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.

Information regarding certain loans and allowance for loan loss data is as follows:

	Three Months Ended March 31
	2006			2005
	(Dollars in Thousands )

Average amount of loans outstanding	$	171,120		$	140,207
Balance of allowance for loan losses at beginning of period	$	1,917		$	1,471
Loans charged off:
Commercial and financial	—			—
Real estate mortgage	—			—
Installment	(5		)	(4		)
	(5		)	(4		)
Loans recovered:
Commercial and financial	—			—
Real estate mortgage	—			—
Installment	1			—
	1			—
Net charge-offs	(4		)	(4		)
Additions to allowance charged to operating expense during period	45			160
Balance of allowance for loan losses at end of period	$	1,958		$	1,627
Ratio of net loans charged off during the period to average loans outstanding	0.00		%	0.00		%

Liquidity and Capital Resources

Liquidity management involves the matching of the cash flow requirements of customers, who may be either depositors desiring to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs, and the ability of the Company to meet those needs. The Company strives to maintain an adequate liquidity position by managing the balances and maturities of interest-earning assets and interest-bearing liabilities so that the balance it has in short-term investments at any given time will adequately cover any reasonably anticipated immediate need for funds. Additionally, the Company maintains relationships with correspondent banks, which could provide funds on short notice, if needed. At March 31, 2006 the Company had no federal funds purchased.

The liquidity and capital resources of the Company are monitored daily by management, and monthly by the Company’s Board-authorized Asset and Liability Management Committee, and on a periodic basis by state and federal regulatory authorities. As determined under guidelines established by these regulatory authorities, the Company’s liquidity ratios at March 31, 2006 were considered satisfactory. At that date, the Company’s short-term investments and available federal funding were adequate to cover any reasonably anticipated immediate need for funds. At March 31, 2006, the Company had unused available federal fund lines of $11,200,000 and unused Federal Home Loan Bank borrowing capacity of approximately $21,490,000.

The consolidated financial statements, as of March 31, 2006, evidenced an increased liquidity position. Cash and due from banks, interest-bearing deposits in banks and federal funds sold totaled $38,443,790 as of March 31, 2006 as compared to $15,791,422 as of December 31, 2005. Total cash and due from banks amounted to $2,766,426 representing 1.11% of total assets.

As our loan demand has continued to increase, we have relied upon the use of brokered deposits as a funding source. Total brokered deposits amounted to $79.7 million as of March 31, 2006, which is a $126,000 decrease since December 31, 2005. These deposits are readily obtainable at rates not significantly different from rates that we pay on deposits in our local market. The Company’s ability to maintain and expand its deposit base and borrowing capabilities is a source of liquidity. For the three-month period ended March 31, 2006, total deposits increased from $174.3 million at December 31, 2005 to $199.6 million at March 31, 2006. Management is committed to maintaining capital at a level sufficient to protect depositors, provide for reasonable growth, and fully comply with all regulatory requirements. The table below illustrates the Company’s and the Bank’s regulatory capital ratios at March 31, 2006.

	Company		Bank		Minimum Regulatory Requirement

Leverage capital ratios	11.42	%	11.41	%	4.00	%
Risk-based capital ratios:
Tier I capital	13.33	%	13.32	%	4.00	%
Total capital	14.33	%	14.32	%	8.00	%

Off-Balance Sheet Risk

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheets.

Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments.

A summary of our commitments is as follows:

	March 31 2006

Commitments to extend credit	$		41,233,000
Letters of credit	726,000
	$	41,959,000

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the customer.

Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral is required in instances which we deem necessary.

Financial Condition

Our total assets grew by 12.19% for the first three months of 2006. Deposit growth of approximately $25.2 million and additional FHLB borrowings of $1.0 million were used to fund net loan growth of approximately $.7 million with the remainder being primarily invested in securities or maintained in cash and due from banks and federal funds sold. The increase in deposits included approximately $12 million from one customer relationship. A majority of the deposits were withdrawn from the bank shortly after quarter end. Loan demand continues to be strong in our primary market area of Henry County, Georgia and surrounding counties even though there appears to be minimum overall net growth for the quarter. Several large loans paid off during the quarter which contributed to our minimal net loan growth. Our loan to available funds ratio, adjusting for the $12 million deposit relationship discussed above, has remained steady since December 31, 2005, holding in the 80-87% range.

Stockholders’ equity has increased by $623,381 due to net income of $652,561 less unrealized losses on securities available-for-sale, net of tax, of $61,105, less unrealized losses on derivatives, net or tax, of $25,802, less cash paid for partial shares owned in payout of the 10% stock dividend of $362 and including recognition of share based payments transactions as required by SFAS 123(R) of approximately $58,089. We have not identified any permanent impairment in the securities portfolio, and no loss will be recognized in our income statement if those securities with unrealized losses are held to maturity.

The Company opened its Stockbridge branch in January 2006 and is currently branching into another location in Henry County. The Company has contractual obligations for approximately $758,000 of additional construction costs in this additional branch.

Results of Operations For The Three Months Ended March 31, 2006 and 2005

Following is a summary of our operations for the periods indicated.

	Three Months Ended March 31,
	2006			2005
	(Dollars in Thousands)

Interest income	$	4,065		$	2,751
Interest expense	(1,818		)	(1,026		)
Net interest income	2,247			1,725
Provision for loan losses	(45		)	(160		)
Other income	74			66
Other expense	(1,245		)	(779		)
Pretax income	1,031			852
Income tax expense	(378		)	(311		)
Net income	$	653		$	541

Net Interest Income

Our net interest income increased approximately $522,000 for the first quarter of 2006 as compared to the same period in 2005. Our net interest margin increased to 4.10% during the first three months of 2006 as compared to 3.88% for the first three months of 2005. The increase in net interest margin is due to the increase in volume of interest-earning assets and the increase in yields in our floating rate assets. Our cost of funds increased to 3.86% for the first three months of 2006 as compared to 2.86% for the first three months of 2005.

Noninterest Income

Noninterest income increased approximately $7,000 for the first quarter of 2006 as compared to the same period in 2005. The increase in the first quarter of 2006 consists of $8,000 increase in service charges on deposit accounts due to bank growth, a $1,000 increase in gain on sale of assets, and a $2,000 decrease in other income. The decrease in other income was due to approximately $4,500 for the Discover/Pulse reorganization that was received in March 2005.

Noninterest Expenses

Noninterest expenses increased approximately $466,000 for the first quarter of 2006. This increase consists of an increase of $217,000 in salaries and employee benefits, $98,000 in equipment and occupancy, and $151,000 in other operating expenses. The increase in salaries and employee benefits represents normal increases in salaries, an increase in the number of full time equivalent employees and the expense of stock options of $58,089 as required by SFAS 123(R). Equipment and occupancy expenses have increased due to the need for additional equipment for employees and for the new branch and the operations center. The increases in other operating expenses are due primarily to our overall

growth. In 2005, the company signed an operating lease agreement for approximately $70,000 a year in lease expense to provide space for an operations center.

Income Taxes

We have recorded a provision for income taxes of $377,658 for the three months ended March 31, 2006 as compared to $311,334 for the same period in 2005. The increase in income tax expense is directly related to the increase in income before taxes of $177,832 for the three months ended March 31, 2006 as compared to the same period in 2005. The effective tax rate for 2006 and 2005 was 36.7% and 36.5%, respectively.

Regulatory Matters

From time to time, various bills are introduced in the United States Congress with respect to the regulation of financial institutions. Certain of these proposals, if adopted, could significantly change the regulation of banks and the financial services industry. We cannot predict whether any of these proposals will be adopted or, if adopted, how these proposals would affect us.

We are not aware of any current recommendation by our regulatory authorities which, if implemented, would have a material effect on our liquidity, capital resources, or results of operations.

ITEM 3. Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective for gathering, analyzing and disclosing the information that we are required to disclose in the reports we file under the Securities Exchange Act of 1934, within the time periods specified in the SEC’s rules and forms. Our Chief Executive Officer and Chief Financial Officer also concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to our Company required to be included in our periodic SEC filings. In connection with the new rules, we are in the process of further reviewing and documenting our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes designed to enhance their effectiveness and to ensure that our systems evolve with our business.

There have been no changes in the Company’s internal control over financial reporting during the three months ended March 31, 2006, or, to the Company’s knowledge, other factors that could significantly affect those internal controls subsequent to the date the Company carried out its evaluation, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting, and there have been no corrective actions with respect to significant deficiencies or material weaknesses.

The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 6. EXHIBITS

31.1		Certification of the Chief Executive Officer, Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.

31.2		Certification of the Chief Financial Officer, Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.

32		Certification of the Chief Executive Officer and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		FIRSTBANK FINANCIAL SERVICES, INC.
		(Registrant)


May 12, 2006		/s/ J. Randall Dixon
Date		J. Randall Dixon, President and C.E.O.
		(Principal Executive Officer)

May 12, 2006		/s/ Lisa J. Maxwell
Date		Lisa J. Maxwell, C.F.O.
		(Principal Financial and Accounting Officer)

Firstbank Financial Services (FBFS) Inactive 10QSB2006 Q1 Quarterly report (small business)

PART I.

FINANCIAL INFORMATION

Notes to Consolidated Financial Statements

SIGNATURES

CERTIFICATION

SECTION 906 CERTIFICATION