FIRSTBANK FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 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, FirstBank Financial Services, formerly First Bank of Henry County, (the “Bank”). The Bank is a commercial bank located in McDonough, Henry County, Georgia with a branch in Stockbridge, Georgia and another branch also in McDonough known as the Bank’s South Point branch.
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 annual report on Form 10-KSB for the year ended December 31, 2006, 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, 2007.
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, 2007 are not necessarily indicative of the results to be expected for the full year.
NOTE 2. Stock Compensation Plans
At March 31, 2007, the Company has two stock-based compensation plans which include certain employees and directors. The Company accounts for these plans under FASB Statement No. 123(R), Share-Based Payment, using the modified-prospective-transition method. Under that transition method, compensation cost recognized includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of Statement 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of Statement
123(R).
At March 31, 2007, there was approximately $48,735 of unrecognized compensation cost related to stock-based payments, which is expected to be recognized over a weighted-average period of 1.36 years. Stock based compensation expense recognized in earnings totaled $69,557 and $58,089 as of March 31, 2007 and 2006, respectively.
5
NOTE 3. Earnings Per Common Share
SFAS No. 128, Earnings Per Share, establishes standards for computing and presenting basic and diluted earnings per share. In this regard, 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, | |
| | 2007 | | 2006 | |
Basic earnings per share: | | | | | |
Weighted average common shares outstanding | | 2,831,676 | | 2,831,676 | |
| | | | | |
Net income | | $ | 475,516 | | $ | 652,561 | |
| | | | | |
Basic earnings per share | | $ | 0.17 | | $ | 0.23 | |
| | | | | |
Diluted earnings per share: | | | | | |
Weighted average common shares outstanding | | 2,831,676 | | 2,831,676 | |
Net effect of the assumed exercise of stock options based on the treasury stock method using average market prices for the year | | 172,443 | | 151,800 | |
Total weighted average common shares and common stock equivalents outstanding | | 3,004,119 | | 2,983,476 | |
| | | | | |
Net income | | $ | 475,516 | | $ | 652,561 | |
| | | | | |
Diluted earnings per share | | $ | 0.16 | | $ | 0.22 | |
NOTE 4. Recent Accounting Pronouncements
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109. This interpretation addresses the accounting for uncertainty in income taxes recognized in a Company’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. It prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken in a tax return. It requires that only benefits from tax positions that are more-likely-than-not of being sustained upon examination should be recognized in the financial statements. These benefits would be recorded at amounts considered to be the maximum amounts more-likely-than-not of being sustained. At the time these positions become more-likely-than-not to be disallowed, their recognition would be reversed. This interpretation is effective for fiscal years beginning after December 15, 2006 and is not expected to have a material impact on the Company’s financial condition or results of operations.
6
NOTE 4. Recent Accounting Pronouncements
In September 2006, the FASB issued FAS 157, Fair Value Measurements. The standard provides guidance for using fair value to measure assets and liabilities. It defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurement. Under the standard, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. It clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, the standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. Statement 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact the adoption of this statement could have on its financial condition, results of operations and cash flows.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 permits entities to make an irrevocable election, at specified election dates, to measure eligible financial instruments and certain other items at fair value. This statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. The provisions of this statement are effective as of the beginning of the first fiscal year that begins after November 15, 2007. The Company has not chosen to early adopt this statement.
NOTE 5. Stock Dividend
On November 16, 2006, the Company declared a six-for-five stock split payable to shareholders of record on December 1, 2006 which was distributed on December 29, 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, 2006.
NOTE 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 rate volatility. One interest rate derivative is used to hedge variable-rate deposits. This instrument is reflected in other liabilities at March 31, 2007 at a fair value of $86,782. 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 an 8.50% strike. The fair value of these instruments at March 31, 2007 is $362,044 and is reflected in other assets. The instruments are more fully described in the Company’s annual report dated December 31, 2006.
7
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.
8
Introduction
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, 2006 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.
Another of our critical accounting policies involves stock-based compensation. The assumptions used in the determination of the fair value of stock options granted ultimately determine the recognition of stock-based compensation expense. The short-cut method was used to determine the expected life of the
9
options. This method, as prescribed by SAB Topic 14.D.2, calculates the expected term based on the midpoint between the vesting date of the option and the end of the contractual term. Expected volatility was based upon the historical volatility of the Company’s stock. Risk-free interest rates for periods within the contractual life of the option are based upon the U.S. Treasury yield curve in effect at the time of the grant. Because of the need to retain capital for expected growth and past history, the expected dividend rate is 0%. These assumptions have a significant impact on the amount of expense recognized for stock-based compensation.
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 2007 of $210,000 as compared to $45,000 in the first quarter of 2006 resulting in an increase of $165,000 on a comparative basis. The amounts provided are due primarily to our assessment of inherent risk in the loan portfolio and the increase in loan growth as compared to the same period in 2006. The allowance for loan losses as a percentage of total loans was 1.13% at March 31, 2007 as compared to 1.14% at December 31, 2006. 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.
During the first quarter of 2007, the Company foreclosed on the properties related to loans totaling approximately $1,022,000 that were included in non-accrual loans as of December 31, 2006. Additional expenses have been capitalized for the first three months of 2007 totaling approximately $13,000. Management does not anticipate any significant losses in the disposition of these properties.
Subsequent to the first quarter, loans to a single borrower totaling approximately $2,321,000 were classified as non-accrual loans. Management will continue to evaluate the necessity of recording additional reserves as more information becomes available on the borrower’s workout plan for these loans.
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
10
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 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, | |
| | 2007 | | 2006 | |
| | (Dollars in Thousands) | |
Nonaccrual loans | | $ | — | | $ | 119 | |
Loans contractually past due ninety days or more as to interest or principal payments and still accruing | | 23 | | 25 | |
Restructured loans | | — | | — | |
Potential problem loans | | 2,321 | | — | |
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.
11
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, | |
| | 2007 | | 2006 | |
| | (Dollars in Thousands) | |
| | | | | |
Average amount of loans outstanding | | $ | 217,403 | | $ | 171,120 | |
Balance of allowance for loan losses at beginning of period | | $ | 2,392 | | $ | 1,917 | |
Loans charged off: | | | | | |
Commercial and financial | | — | | — | |
Real estate mortgage | | — | | — | |
Installment | | (6 | ) | (5 | ) |
| | (6 | ) | (5 | ) |
Loans recovered: | | | | | |
Commercial and financial | | — | | — | |
Real estate mortgage | | — | | — | |
Installment | | — | | 1 | |
| | — | | 1 | |
Net charge-offs | | (6 | ) | (4 | ) |
Additions to allowance charged to operating expense during period | | 210 | | 45 | |
Balance of allowance for loan losses at end of period | | $ | 2,596 | | $ | 1,958 | |
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, 2007 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, 2007 were considered satisfactory.
12
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, 2007, the Company had unused available federal fund lines of $9.5 million and unused Federal Home Loan Bank borrowing capacity of approximately $35.4 million. The Company is aware of no events or trends likely to result in a material change in liquidity.
The consolidated financial statements, as of March 31, 2007, evidenced an increased liquidity position. Cash and due from banks, interest-bearing deposits in banks and federal funds sold totaled $21,679,388 as of March 31, 2007 as compared to $17,452,004 as of December 31, 2006. Total cash and due from banks amounted to $7,115,628 representing 2.33% of total assets.
As our loan demand has continued to increase, we have increased the use of brokered deposits as a funding source. Total brokered deposits amounted to $97.5 million as of March 31, 2007. 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, 2007, total deposits increased from $216.4 million at December 31, 2006 to $245.4 million at March 31, 2007. 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 minimum capital requirements and the actual capital ratios for the Company and the Bank at March 31, 2007 are as follows:
| | | | | | Minimum | |
| | | | | | Regulatory | |
| | Company | | Bank | | Requirement | |
| | | | | | | |
Leverage capital ratios | | 12.50 | % | 10.11 | % | 4.00 | % |
Risk-based capital ratios: | | | | | | | |
Tier I capital | | 14.21 | % | 11.17 | % | 4.00 | % |
Total capital | | 15.22 | % | 12.18 | % | 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:
13
| | March 31, | |
| | 2007 | |
| | | |
Commitments to extend credit | | $ | 45,418,000 | |
Letters of credit | | 1,579,000 | |
| | $ | 46,997,000 | |
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 10.20% for the first three months of 2007. Deposit growth of approximately $29.03 million was used to fund net loan growth of approximately $19.1 million with the remainder being primarily invested in securities or maintained in cash and due from banks and federal funds sold. Loan demand continues to be strong in our primary market area of Henry County, Georgia and surrounding counties. Our loan to available funds ratio has remained steady since December 31, 2006, holding in the 83-88% range. Advances from the Federal Home Loan Bank decreased by $2 million for the three months ended March 31, 2007. The net decrease is the result a $3 million advance being called, $4 million of advances maturing and the subsequent borrowing of an additional $5 million advance.
Stockholders’ equity has increased by $556,473 due to net income of $475,516, a decrease in unrealized losses on securities available-for-sale, net of tax, of $11,401 and including recognition of share based payments transactions as required by SFAS 123(R) of $69,556.
The Company opened two branches during 2006 and is currently branching into Clayton county. The Company has contractual obligations for approximately $519,000 of renovation costs for this additional branch.
In an effort to offset the Company’s state tax liability, the Company has commitments to purchase $1 million of state tax credits with $200,000 having already been paid and the remaining $800,000 to be paid in the fourth quarter of 2007.
14
Results of Operations For The Three Months Ended March 31, 2007 and 2006
Following is a summary of our operations for the periods indicated.
| | Three Months Ended | |
| | March 31, | |
| | 2007 | | 2006 | |
| | (Dollars in Thousands) | |
| | | | | |
Interest income | | $ | 5,496 | | $ | 4,065 | |
Interest expense | | (3,111 | ) | (1,818 | ) |
Net interest income | | 2,385 | | 2,247 | |
Provision for loan losses | | (210 | ) | (45 | ) |
Other income | | 135 | | 74 | |
Other expense | | (1,555 | ) | (1,245 | ) |
Pretax income | | 755 | | 1,031 | |
Income tax expense | | 280 | | 378 | |
Net income | | $ | 475 | | $ | 653 | |
Net Interest Income
Our net interest income increased approximately $138,000 for the first quarter of 2007 as compared to the same period in 2006. Our net interest margin decreased to 3.49% during the first three months of 2007 as compared to 4.10% for the first three months of 2006. The increase in net interest income is due primarily to the increased volume of average loans outstanding. Our cost of funds increased to 5.11% for the first three months of 2007 as compared to 3.86% for the first three months of 2006.
Noninterest Income
Noninterest income increased approximately $61,000 for the first quarter of 2007 as compared to the same period in 2006. The increase in the first quarter of 2007 consists of $58,000 in service charges on deposit accounts, a $4,000 loss on sale of assets, and a $9,000 increase in other income.
Noninterest Expenses
Noninterest expenses increased approximately $310,000 for the first quarter of 2007. This increase consists of an increase of $92,000 in salaries and employee benefits, $49,000 in equipment and occupancy, $20,000 in losses on sale of securities and $149,000 in other operating expenses. The increase in salaries and employee benefits represents normal increases in salaries and an increase in the number of full time equivalent employees. Equipment and occupancy expenses have increased due to the need for additional equipment for employees and for the new branches. The increases in other operating expenses are due primarily to our overall growth. The Company leases its operations center facilities under an operating lease agreement for approximately $70,000 a year in rental expense.
15
Income Taxes
We have recorded a provision for income taxes of $280,000 for the three months ended March 31, 2007 as compared to $378,000 for the same period in 2006. The decrease in our income tax provision was $98,000 for the three months ended March 31, 2007 compared to the same period in 2006. The effective tax rate for the three months ended March 31, 2007 was 37.1% as compared to 36.7% for the same period in 2006. 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 $53,535.
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. Quantitative and Qualitative Disclosures About Market Risk
The information called for by Item 3 is being omitted in reliance upon instruction 1 to paragraph 305(c) of Regulation S-K, which states that such information is not required until after the first fiscal year end in which Item 305 of Regulation S-K is applicable.
ITEM 4. 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 three months ended March 31, 2007, 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
16
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.
17
PART II – OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceeding (nor is any property of the Company subject to any legal proceeding) other than routine litigation that is incidental to the business.
Item 1A. RISK FACTORS
In addition to the other information set forth in this report, you should consider the factors discussed in Part 1, “Item 1 – Description of Business” in our Annual Report on Form 10-KSB for the year ended December 31, 2006.
There have been no material changes in the risk factors relating to the Company or its business during the three months ended March 31, 2007.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
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. |
18
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 14, 2007 | | | /s/ Thaddeus M. Williams |
Date | | | Thaddeus M. Williams, President and C.E.O. |
| | (Principal Executive Officer) |
| | |
| | |
May 14, 2007 | | | /s/ Lisa J. Maxwell |
Date | | | Lisa J. Maxwell, C.F.O. |
| | (Principal Financial and Accounting Officer) |
19
