Firstbank Financial Services (FBFS) 10QSB 2006 Q3 Quarterly report (small business)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 x  No o

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of November 9, 2006: 2,359,753 shares, $5.00 par value per share.

Transitional Small Business Disclosure Format  Yes o  No x

FIRSTBANK FINANCIAL SERVICES, INC.

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION
Item	1. Consolidated Financial Statements
	Consolidated Balance Sheet (unaudited) as of September 30, 2006
	Consolidated Statements of Income (unaudited) for the three months ended September 30, 2006 and 2005 and nine months ended September 30, 2006 and 2005
	Consolidated Statements of Comprehensive Income (unaudited) for the three months ended September 30, 2006 and 2005 and nine months ended September 30, 2006 and 2005
	Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 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

                                                                                                                                                       &# 160;                                       

PART I - FINANCIAL INFORMATION

ITEM 1.     Financial Statements

FIRSTBANK FINANCIAL SERVICES, INC.

AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

SEPTEMBER 30, 2006

(Unaudited)

Assets
Cash and due from banks	$	3,235,650
Interest-bearing deposits in banks	704,147
Federal funds sold	12,541,000
Securities available-for-sale, at fair value	37,773,008
Restricted equity securities, at cost	1,765,556
Loans, net of unearned income	197,040,015
Less allowance for loan losses	2,283,188
Loans, net	194,756,827
Premises and equipment	5,809,198
Other assets	3,600,829
Total assets	$	260,186,215
Liabilities and Stockholders’ Equity
Deposits
Noninterest-bearing	$	16,414,892
Interest-bearing	192,725,991
Total deposits	209,140,883
Other borrowings	22,000,000
Other liabilities	2,093,191
Total liabilities	233,234,074
Commitments and contingencies
Stockholders’ equity
Preferred stock, no par value per share, 2,000,000 shares authorized; -0- shares issued and outstanding	—
Common stock, par value $5; 10,000,000 shares authorized; 2,359,753 shares issued and outstanding	11,798,765
Surplus	13,905,787
Retained earnings	1,729,877
Accumulated other comprehensive loss	(482,288		)
Total stockholders’ equity	26,952,141
Total liabilities and stockholders’ equity	$	260,186,215

See notes to consolidated financial statements.

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FIRSTBANK FINANCIAL SERVICES, INC.

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 AND

NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

(Unaudited)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2006			2005		2006			2005
Interest income
Loans, including fees	$	4,425,084		$	3,146,064	$	11,832,237		$	8,382,310
Taxable securities	390,513			293,936		1,083,691			834,656
Tax-free securities	36,926			27,621		96,583			76,509
Deposits in banks	6,629			20,636		40,356			207,959
Federal funds sold	158,894			86,451		461,720			46,458
Total interest income	5,018,046			3,574,708		13,514,587			9,547,892
Interest expense
Deposits	2,259,133			1,260,040		5,691,164			3,216,207
Federal funds purchased	—			—		—			18
Other borrowings	234,864			225,851		672,719			579,272
Total interest expense	2,493,997			1,485,891		6,363,883			3,795,497
Net interest income	2,524,049			2,088,817		7,150,704			5,752,395
Provision for loan losses	190,000			165,000		370,000			509,615
Net interest income after provision for loan losses	2,334,049			1,923,817		6,780,704			5,242,780
Other income
Service charges on deposit accounts	55,760			58,771		163,245			156,754
Gain on sale of assets	(7,718		)	—		(6,293		)	2,519
Other operating income	23,032			17,764		66,811			53,661
Total other income	71,074			76,535		223,763			212,934
Other expenses
Salaries and employee benefits	710,654			555,553		2,170,609			1,516,392
Equipment and occupancy expenses	175,001			127,183		481,345			265,014
Other operating expenses	392,954			341,896		1,217,746			903,607
Total other expenses	1,278,609			1,024,632		3,869,700			2,685,013
Income before income taxes	1,126,514			975,720		3,134,767			2,770,701
Income tax expense	419,287			347,171		1,172,218			994,964
Net income	$	707,227		$	628,549	$	1,962,549		$	1,775,737
Basic earnings per share	$	0.30		$	0.27	$	0.83		$	0.75
Diluted earnings per share	$	0.28		$	0.25	$	0.78		$	0.72
Cash dividends per share	$	—		$	—	$	—		$	—

See notes to consolidated financial statements.

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FIRSTBANK FINANCIAL SERVICES, INC.

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 AND

NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Net income	$	707,227		$	628,549		$	1,962,549		$	1,775,737
Other comprehensive income (loss):
Unrealized gains (losses) on securities available for sale:
Net unrealized gains (losses) arising during period, net of tax	499,527			(206,982		)	83,971			(266,950		)
	499,527			(206,982		)	83,971			(266,950		)
Unrealized losses on interest rate floor:
Net unrealized losses arising during period, net of tax	(26,353		)	—			(89,691		)	—
	(26,353		)	—			(89,691		)	—
Other comprehensive income (loss)	473,174			(206,982		)	(5,720		)	(266,950		)
Comprehensive income	$	1,180,401		$	421,567		$	1,956,829		$	1,508,787

See notes to consolidated financial statements.

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FIRSTBANK FINANCIAL SERVICES, INC.

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

(Unaudited)

	2006			2005
OPERATING ACTIVITIES
Net income	$	1,962,549		$	1,775,737
Adjustments to reconcile net income to net cash provided by operating activities:
(Gain) loss on sale of assets	6,293			(2,519		)
Depreciation and amortization	252,455			141,938
Stock compensation expense	212,209			—
Provision for loan losses	370,000			509,615
Increase in accrued interest receivable	(324,759		)	(588,863		)
Increase in accrued interest payable	688,509			358,312
Net other operating activities	52,028			(79,403		)
Net cash provided by operating activities	3,219,284			2,114,817
INVESTING ACTIVITIES
Net decrease in interest-bearing deposits in banks	85,832			644,993
Purchases of securities available-for-sale	(8,599,686		)	(8,729,590		)
Proceeds from maturities of securities available-for-sale	2,040,967			4,214,243
Purchases of restricted equity securities	(181,300		)	(403,700		)
Net (increase) decrease in federal funds sold	1,224,000			(5,327,000		)
Net increase in loans	(28,369,580		)	(27,815,375		)
Proceeds from sale of assets	3,491			14,019
Purchase of interest rate floor	(298,500		)	—
Purchase of premises, equipment and software	(1,929,814		)	(1,290,138		)
Net cash used in investing activities	(36,024,590		)	(38,692,548		)
FINANCING ACTIVITIES
Net increase in deposits	34,804,875			34,040,398
Net increase in borrowings	—			5,000,000
Purchase of fractional shares	(362		)	—
Net cash provided by financing activities	34,804,513			39,040,398
Net increase in cash and due from banks	1,999,207			2,462,667
Cash and due from banks at beginning of period	1,236,443			1,136,424
Cash and due from banks at end of period	$	3,235,650		$	3,599,091
Supplemental schedule of noncash investing and financing activities -
Change in accumulated other comprehensive loss	$	(5,720	)	$	(266,950	)
Supplemental disclosures of cash flow information -
Cash paid during the period for interest	$	5,675,374		$	3,437,185
Cash paid during the period for income taxes	$	1,341,035		$	1,129,723

See notes to consolidated financial statements.

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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 and another branch also in McDonough known as our South Point location.

The shareholders of the Bank approved an Agreement and Plan of Shares Exchange on June 30, 2004, and the holding company formation became effective February 1, 2005.  Pursuant to the Plan, each share of the Bank’s common stock was exchanged on a one-for-one basis for shares of Company 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 Bank’s financial position and results for the interim period ended September 30, 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 nine months ended September 30, 2006 are not necessarily indicative of the results to be expected for the full year.

2.       Stock Compensation Plans

At September 30, 2006, the Company has two stock-based employee/director compensation plans which are more fully described in Note 7 of the consolidated financial statements in the Annual Report on Form 10-KSB for the year ended December 31, 2005.  Prior to January 1, 2006, the Company accounted for those plans under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation.  No stock-based employee/director compensation cost was recognized in the Statement of Income for the year ended December 31, 2005, nor in the three and nine month periods ended September 30, 2005, as all options and warrants granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.  Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123 (R), Share-Based Payment, using the modified-prospective-transition method.  Under that transition method, compensation cost recognized in the first nine months and second quarter of 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of Statement 123, and (b) compensation

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cost for all share-based payments granted subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of Statement 123(R).  Results for prior periods have not been restated.

As a result of adopting Statement 123(R) on January 1, 2006, the Company’s income before income taxes for the three and nine months ended September 30, 2006 was $33,439 and $212,209 lower, respectively, than if we had continued to account for share-based compensation under Opinion 25.

Prior to the adoption of Statement 123(R), the Company presented all tax benefits of deductions resulting from the exercise of stock options and warrants as operating cash flows in the Statement of Cash Flows.  Statement 123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options and warrants (excess tax benefits) to be classified as financing cash flows.  The Company had no cash flows resulting from excess tax benefits.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement 123 to options and warrants granted under the Company’s stock option and warrant plans for the three and nine months ended September 30, 2005.

	Three Months		Nine Months
	Ended		Ended
	September 30,		September 30,
	2005		2005
Net income, as reported	$	628,549	$	1,775,737
Deduct:  Total stock-based employee compensation expense determined under fair value based method for all awards	—		(288,625		)
Pro forma net income	$	628,549	$	1,487,112
Earnings per share:
Basic - as reported	$	0.27	$	0.75
Basic - pro forma	$	0.27	$	0.63
Diluted - as reported	$	0.25	$	0.72
Diluted - pro forma	$	0.25	$	0.60

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the weighted-average assumptions listed in the following table.  Expected volatility is based on expected volatility of similar entities.  Expected dividends are based on dividend trends and the market price of the Company’s stock price at grant.  Historical data is used to estimate option exercises and employee terminations within the valuation model.  The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

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2.       Stock Compensation Plans

	Nine Months Ended
	September 30,
	2006
Risk-free interest rate	4.41%
Expected life of the options	5 – 6 years
Expected dividends (as a percentage of the fair value of the stock)	0%
Expected volatility	21.00% - 21.39%
Weighted-average grant date fair value	$5.08

At September 30, 2006, there was $202,854 of unrecognized compensation cost related to stock-based payments, which is expected to be recognized over a weighted-average period of 1.33 years.

A summary of the status of the fixed stock option and warrant plans at September 30, 2006 and changes during the three and nine month periods ended September 30, 2006 follows:

	Three Months Ended
	September 30, 2006
	Number	Weighted- average Exercise Price		Weighted- average Remaining Contractual Life
Under option, beginning of period	390,641	$	11.06
Granted	—	—
Exercised	—	—
Forfeited	—	—
Under option, end of period	390,641	$	11.06	6.30 years
Exercisable at end of period	345,564	$	10.79	6.20 years

	Nine Months Ended
	September 30, 2006
	Number		Weighted- average Exercise Price
		��
Under option, beginning of period	357,179		$	10.52
Granted	33,462		16.84
Exercised	—		—
Forfeited	—		—
Under option, end of period	390,641		$	11.06
Exercisable at end of period	345,564		$	10.79

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Shares available for future stock option grants to employees under existing plans was 125,039 at September 30, 2006.  At September 30, 2006, the aggregate intrinsic value of options and warrants outstanding was $2,229,641, and the aggregate intrinsic value of options and warrants exercisable was $2,068,551.  Total intrinsic value of options and warrants exercised was $-0- for the three and nine months ended September 30, 2006.

A summary of the status of the nonvested options and warrants in the fixed stock option and warrant plans at September 30, 2006 and changes during the three and nine month periods ended September 30, 2006 follows:

	Three Months Ended			Nine Months Ended
	September 30, 2006			September 30, 2006
	Number	Weighted- average Grant-Date Fair Value		Number		Weighted- average Grant-Date Fair Value
Nonvested, beginning of period	45,077	$	4.62	41,147		$	4.94
Granted	—	—		33,462		5.17
Vested	—	—		(29,532	)	5.68
Forfeited	—	—		—		—
Nonvested, end of period	45,077	$	4.62	45,077		$	4.62

A further summary of the options and warrants outstanding at September 30, 2006 follows:

	Options and Warrants Outstanding				Options and Warrants Exercisable
		Weighted-
		Average
		Remaining	Weighted-			Weighted-
Range of		Contractual	Average			Average
Exercise Prices	Number	Life	Exercise Price		Number	Exercise Price
$9.09	287,430	5.23 years	$	9.09	267,263	$	9.09
16.42	69,749	9.25 years	16.42		57,484	16.42
16.50 - 17.25	28,462	9.34 years	16.60		15,817	16.63
18.25	5,000	9.58 years	18.25		5,000	18.25
	390,641	6.30 years	11.06		345,564	10.79

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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 September 30,
	2006		2005
Basic earnings per share:
Weighted average common shares outstanding	2,359,753		2,359,753
Net income	$	707,227	$	628,549
Basic earnings per share	$	0.30	$	0.27
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	135,078		107,787
Total weighted average common shares and common stock equivalents outstanding	2,494,831		2,467,540
Net income	$	707,227	$	628,549
Diluted earnings per share	$	0.28	$	0.25

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	Nine Months Ended September 30,
	2006		2005
Basic earnings per share:
Weighted average common shares outstanding	2,359,753		2,359,753
Net income	$	1,962,549	$	1,775,737
Basic earnings per share	$	0.83	$	0.75
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	140,556		107,787
Total weighted average common shares and common stock equivalents outstanding	2,500,309		2,467,540
Net income	$	1,962,549	$	1,775,737
Diluted earnings per share	$	0.78	$	0.72

4.       Recent Accounting Pronouncements

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

10

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.

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 shares for the periods ended September 30, 2005 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 September 30, 2006 at a fair value of $74,642.  The Company has two other derivatives, interest rate floors, one with a notional value of $40 million and a 7.50% strike and the other with a notional value of $30 million and a 8.50% strike.  The fair value of these instruments at September 30, 2006 is $435,000 and is reflected in other assets.  The instruments are more fully described in the Company’s annual report dated December 31, 2005.

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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.

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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.

Through its subsidiary 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 statements.  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 the Company’s 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.

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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 third quarter and first nine months of 2006, respectively of $190,000 and $370,000 as compared to the same periods in 2005 of $165,000 and $509,615, respectively.  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 September 30, 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 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 that 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

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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:

	September 30,
	2006		2005
	(Dollars in Thousands)
Nonaccrual loans	$	432	$	345
Loans contractually past due ninety days or more as to interest or principal payments and still accruing	—		15
Restructured loans	—		—
Potential problem loans	—		—
Interest income that would have been recorded on non-accrual and restructured loans under original terms	6		—
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.

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

	Nine Months Ended
	September 30,
	2006			2005
	(Dollars in Thousands)
Average amount of loans outstanding	$	180,914		$	153,826
Balance of allowance for loan losses at beginning of period	$	1,917		$	1,471	��
Loans charged off:
Commercial and financial	—			—
Real estate mortgage	—			—
Installment	(11		)	(16		)
	(11		)	(16		)
Loans recovered:
Commercial and financial	6			—
Real estate mortgage	—			—
Installment	1			3
	7			3
Net charge-offs	(4		)	(13		)
Additions to allowance charged to operating expense during period	370			510
Balance of allowance for loan losses at end of period	$	2,283		$	1,968
Ratio of net loans charged off during the period to average loans outstanding	0.00		%	0.01		%

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 September 30, 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 September 30, 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 September 30, 2006, the Company had unused available federal fund lines of $9,500,000 and unused Federal Home Loan Bank borrowing capacity of approximately $28,270,000.  The Company is aware of no events or trends likely to result in a material change in liquidity.

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The consolidated financial statements, as of September 30, 2006, evidenced an increased liquidity position.  Cash and due from banks, interest-bearing deposits in banks and federal funds sold totaled $16,480,797 as of September 30, 2006 as compared to $15,791,422 as of December 31, 2005.  Total cash and due from banks amounted to $3,235,650 representing 1.24% 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 $90.1 million as of September 30, 2006, which is a $10.2 million increase 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 nine-month period ended September 30, 2006, total deposits increased from $174.3 million at December 31, 2005 to $209.1 million at September 30, 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 September 30, 2006. 

					Minimum
					Regulatory
	Company		Bank		Requirement
Leverage capital ratios	10.74	%	10.73	%	4.00	%
Risk-based capital ratios:
Tier I capital	12.33	%	12.31	%	4.00	%
Total capital	13.36	%	13.34	%	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:

	September 30,
	2006
Commitments to extend credit	$	45,221,516
Letters of credit	1,616,517
	$	46,838,033

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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 17% for the first nine months of 2006.  Deposit growth of approximately $34.8 million was used to fund net loan growth of approximately $28.3 million with the remainder being primarily invested in securities or maintained in cash and due from banks.  Loan demand continues to be strong in our primary market area of Henry County, Georgia and surrounding counties.  The loan to available funds ratio at September 30, 2006 was 85.24% compared to 85.91% at December 31, 2005.

Stockholders’ equity has increased by $2,168,676 due to net income of $1,962,549 plus unrealized gains on securities available-for-sale, net of tax, of $83,971, less unrealized losses on derivatives, net of tax, of $89,691, 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 $212,209.  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. Its South Point location in McDonough opened on October 2, 2006.  The Company has contractual obligations for approximately $100,000 of additional construction costs for the South Point branch.  The Company has also paid $15,000 in earnest money to review a branch location in Clayton County.

Junior Subordinated Debentures

On October 4, 2006, FirstBank Financial Capital Trust 1 (“FFCT”), a wholly owned subsidiary of the Company closed a pooled private offering of 8,000 Trust Preferred Securities with a liquidation amount of $1,000 per security. The proceeds of the offering were loaned to the Company in exchange for junior subordinated debentures with terms similar to the Trust Preferred Securities. The sole assets of FFCT are the junior subordinated debentures of the Company and payments thereunder. The junior subordinated debentures and the back-up obligations, in the aggregate, constitute a full and unconditional guarantee by the Company of the obligations of FFCT under the Trust Preferred Securities. Distributions on the Trust Preferred Securities are payable quarterly at the annual rate of three month LIBOR plus 167 basis points and are included in interest expense in the consolidated financial statements. These securities are considered Tier 1 capital (with certain limitations applicable) under current regulatory guidelines. As of October 31, 2006, the outstanding principal balance of the junior subordinated debentures was $8,248,000.

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The junior subordinated debentures are subject to mandatory redemption, in whole or in part, upon repayment of the Trust Preferred Securities at maturity or their earlier redemption at the liquidation amount. Subject to the Company having received prior approval of the Federal Reserve, if then required, the Trust Preferred Securities are redeemable prior to the maturity date of October 7, 2036 at the option of the Company on or after October 7, 2011 at par, before October 7, 2011 at a premium, or upon the occurrence of specific events defined within the trust indenture. The Company has the option to defer distributions on the Trust Preferred Securities from time to time for a period not to exceed 20 consecutive quarterly periods.

In accordance with FASB Interpretation No. 46, FirstBank Financial Capital Trust I is not consolidated with the Company. Accordingly, the Company does not report the securities issued by FirstBank Financial Capital Trust I as liabilities, and instead reports as liabilities the junior subordinated debentures issued by the Company and held by FirstBank Financial Capital Trust I, as these are no longer eliminated in consolidation. The Trust Preferred Securities are recorded as junior subordinated debentures on the balance sheets, but subject to certain limitations qualify for Tier 1 capital for regulatory capital purposes.

Results of Operations For The Three Months Ended September 30, 2006 and 2005 and for the Nine Months Ended September 30, 2006 and 2005

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

	Three Months Ended
	September 30,
	2006			2005
	(Dollars in Thousands)
Interest income	$	5,018		$	3,575
Interest expense	(2,494		)	(1,486		)
Net interest income	2,524			2,089
Provision for loan losses	(190		)	(165		)
Other income	71			77
Other expense	(1,279		)	(1,025		)
Pretax income	1,126			976
Income tax expense	(419		)	(347		)
Net income	$	707		$	629

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	Nine Months Ended
	September 30,
	2006			2005
	(Dollars in Thousands)
Interest income	$	13,515		$	9,548
Interest expense	(6,364		)	(3,796		)
Net interest income	7,151			5,752
Provision for loan losses	(370		)	(510		)
Other income	224			214
Other expense	(3,870		)	(2,685		)
Pretax income	3,135			2,771
Income tax expense	(1,172		)	(995		)
Net income	$	1,963		$	1,776

Net Interest Income

Our net interest income increased approximately $435,000 and $1,399,000 for the three and nine month periods ended September 30, 2006, respectively, as compared to the same periods in 2005.  Our net interest margin increased to 4.11% during the first nine months of 2006 as compared to 3.92% for the first nine months of 2005. The increase in net interest income is due primarily to the increased volume of interest- earning assets and the increase in yields in our floating rate assets.   Our cost of funds increased to 4.26% for the first nine months of 2006 as compared to 3.06% for the first nine months of 2005.

Other Income

Other income decreased approximately $6,000 for the three month period and increased $10,000 for the nine month period ended September 30, 2006, respectively, as compared to the same periods in 2005.  Year-to-date service charges on deposit accounts associated with deposit growth have increased by $6,000.  Other fee income has increased approximately $13,000 when compared to the nine months ended September 30, 2005 due to the increase in the volume of transactions resulting from our growth.  Gains and losses from sales of assets, other real estate and securities available-for-sale have decreased approximately $9,000 as compared to the nine months ended September 30, 2005.

Other Expenses

Other expenses increased approximately $254,000 and $1,185,000 for the three and nine month periods ended September 30, 2006, respectively, compared to the same periods in 2005.  The increases in 2006 consist of increases of $155,000 and $654,000 in salaries and employee benefits, $48,000 and $217,000 in equipment and occupancy and $51,000 and $314,000 in other operating for the three and nine months ended September 30, 2006, respectively as compared to the same periods in 2005.   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 $212,209 as required by SFAS 123(R).

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Equipment and occupancy expenses have increased due the need for additional equipment for employees and for the expenses related to our new branches and our operations center.  In 2005, the Company signed an operating lease for approximately $70,000 a year in lease expense to provide space for an operations center.  The increases in other operating expenses are due primarily to our overall growth.

Income Taxes

We have recorded a provision for income taxes of $419,287 and $1,172,218 for the three and nine months ended September 30, 2006, respectively, as compared to $347,171 and $994,964 for the same periods in 2005.  The increase in our income tax provision was $72,116 and $177,254 for the three and nine months ended September 30, 2006, respectively, compared to the same periods in 2005. The effective tax rate for the three and nine months ended September 30, 2006, respectively, was 37.2% and 37.4% as compared to 35.6% and 35.9% for the same periods in 2005.  The increase in our effective tax rate is due primarily to the permanent non-deductibility of incentive stock options that have been expensed in the amount of $124,631.  We have also increased our municipal bond portfolio in an effort to offset the Company’s tax liability.

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.

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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 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 nine months ended September 30, 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, regardless of how remote.

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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-15 under the Securities Exchange Act of 1934, as amended.
31.2	Certification of the Chief Financial Officer, Pursuant to Rule 13a-15 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.

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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)
November 10, 2006	/s/ J. Randall Dixon
Date	J. Randall Dixon, President and C.E.O.
	(Principal Executive Officer)
November 10, 2006	/s/ Lisa J. Maxwell
Date	Lisa J. Maxwell, C.F.O.
	(Principal Financial and Accounting Officer)

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