Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For thequarterly period ended  June ****30, 2008**

 

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

 

**For thetransition period from                      to                      **

 

**CommissionFile Number:  000-51147**

 

**FirstBankFinancial Services, Inc.**

(Exact name of small business issuer as specified inits charter)

 

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

 

**120 Keys Ferry StreetMcDonough, Georgia 30253**

(Address of principal executive offices)

 

**(678)583-2265**

(Issuer’stelephone number)

 

**N/A**

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

 

Check whether theregistrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for thepast 90 days. Yes x No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of theExchange Act.  (Check one)

 

Largeaccelerated filer o   Accelerated filer o   Non-accelerated filer o   Smaller reporting company x

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes o   No x

 

State the number ofshares outstanding of each of the issuer’s classes of common equity, as of August 8,2008: 2,701,882 shares, $5.00 par value per share.

 

 

 

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Table ofContents

 

**FIRSTBANK FINANCIAL SERVICES, INC.**

 

**TABLE OFCONTENTS**

 
| ** **                                                                                           | ** **                                                                                                                     | **Page** |
|------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                 |                                                                                                                           |     |
| PART I.                                                                                         | FINANCIAL  INFORMATION                                                                                                         |     |
|                                                                                                 |                                                                                                                           |     |
| Item 1. Consolidated Financial  Statements                                                           |                                                                                                                           |
|                                                                                                 |                                                                                                                           |     |
|                                                                                                 | Consolidated Balance Sheets as of June 30, 2008 and December 31,  2007                                               | 1        |
|                                                                                                 |                                                                                                                           |     |
|                                                                                                 | Consolidated Statements of  Operations for the three months and six months ended June 30, 2008 and  2007                  | 2        |
|                                                                                                 |                                                                                                                           |     |
|                                                                                                 | Consolidated Statements of  Comprehensive Income (Loss) for the three months and six months ended  June 30, 2008 and 2007 | 3        |
|                                                                                                 |                                                                                                                           |     |
|                                                                                                 | Consolidated Statements of  Cash Flows for the six months ended June 30, 2008 and 2007                                    | 4        |
|                                                                                                 |                                                                                                                           |     |
|                                                                                                 | Notes  to Consolidated Financial Statements                                                                                    | 5 - 9    |
|                                                                                                 |                                                                                                                           |     |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations | 10-22                                                                                                                          |
|                                                                                                 |                                                                                                                           |     |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                  | 23                                                                                                                             |
|                                                                                                 |                                                                                                                           |     |
| Item 4. Controls  and Procedures                                                                     | 23                                                                                                                             |
|                                                                                                 |                                                                                                                           |     |
| PART II.                                                                                        | OTHER INFORMATION                                                                                                              | 24-28    |
|                                                                                                 |                                                                                                                           |     |
| Item 1.                                                                                              | Legal Proceedings                                                                                                              |     |
|                                                                                                 |                                                                                                                           |     |
| Item 1A.                                                                                             | Risk Factors                                                                                                                   |     |
|                                                                                                 |                                                                                                                           |     |
| Item 2.                                                                                              | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                   |     |
|                                                                                                 |                                                                                                                           |     |
| Item 3.                                                                                              | Defaults  Upon Senior Securities                                                                                               |     |
|                                                                                                 |                                                                                                                           |     |
| Item 4.                                                                                              | Submission  of Matters to Vote of Security Holders                                                                             |     |
|                                                                                                 |                                                                                                                           |     |
| Item 5.                                                                                              | Other Information                                                                                                              |     |
|                                                                                                 |                                                                                                                           |     |
| Item 6.                                                                                              | Exhibits                                                                                                                       |     |
|                                                                                                 |                                                                                                                           |     |
|                                                                                                 | Certifications                                                                                                                 |     |
|                                                                                                      |                                                                                                                                |          |  |

 

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Table of Contents

 

**PART I - FINANCIAL INFORMATION**

 

**ITEM 1.     Financial Statements**

** **

**FIRSTBANK FINANCIAL SERVICES, INC.**

**AND SUBSIDIARY**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                      | ** ** | **June 30, 2008** | ** **  | **December 31, 2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|---------------------------------|------------|
| ** **                                                                                                                      | ** ** | **(Unaudited)**             | ** **  | **(Audited)**                   | ** ** |
| **Assets**                                                                                                                      |       |                        |        |                            |       |
|                                                                                                                            |       |                        |        |                            |       |
| Cash and due  from banks                                                                                                        |       | $                           | 2,118,177   |                            | $          | 1,576,976 |   |
| Interest-bearing  deposits in banks                                                                                             |       | 12,625,116                  |        | 780,914                         |       |
| Federal funds  sold                                                                                                             |       | 8,827,000                   |        | 14,620,000                      |       |
| Securities  available for sale, at fair value                                                                                   |       | 82,081,803                  |        | 54,645,511                      |       |
| Restricted  equity securities, at cost                                                                                          |       | 2,913,056                   |        | 2,516,856                       |       |
| Loans, net of  unearned income                                                                                                  |       | 246,793,076                 |        | 256,865,762                     |       |
| Less allowance  for loan losses                                                                                                 |       | 8,004,628                   |        | 7,141,996                       |       |
| Loans, net                                                                                                                      |       | 238,788,448                 |        | 249,723,766                     |       |
| Premises and  equipment                                                                                                         |       | 7,941,814                   |        | 7,565,255                       |       |
| Other real  estate owned                                                                                                        |       | 24,311,375                  |        | 2,556,179                       |       |
| Other assets                                                                                                                    |       | 15,191,410                  |        | 11,672,636                      |       |
| **Total  assets**                                                                                                               |       | $                           | 394,798,199 |                            | $          | 345,658,093 |   |
|                                                                                                                            |       |                        |        |                            |       |
| **Liabilities and Stockholders’ Equity**                                                                                   |       |                        |        |                            |       |
|                                                                                                                            |       |                        |        |                            |       |
| Deposits                                                                                                                        |       |                        |        |                            |       |
| Noninterest-bearing                                                                                                             |       | $                           | 9,717,894   |                            | $          | 9,852,593 |   |
| Interest-bearing                                                                                                                |       | 315,966,725                 |        | 265,093,731                     |       |
| Total deposits                                                                                                                  |       | 325,684,619                 |        | 274,946,324                     |       |
| Other borrowings                                                                                                                |       | 40,000,000                  |        | 34,000,000                      |       |
| Subordinated  debentures                                                                                                        |       | 8,248,000                   |        | 8,248,000                       |       |
| Other  liabilities                                                                                                              |       | 1,920,094                   |        | 2,596,846                       |       |
| Total  liabilities                                                                                                              |       | 375,852,713                 |        | 319,791,170                     |       |
|                                                                                                                            |       |                        |        |                            |       |
| 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; 2,701,882 and 2,696,882 shares  issued and outstanding, respectively |       | 13,509,410                  |        | 13,484,410                      |       |
| Surplus                                                                                                                         |       | 11,149,582                  |        | 11,139,662                      |       |
| (Accumulated  deficit) retained earnings                                                                                        |       | (5,180,156                  | )           | 1,046,207                       |       |
| Restricted  stock- unearned compensation                                                                                        |       | (25,000                     | )           | —                          |       |
| Accumulated  other comprehensive income (loss)                                                                                  |       | (508,350                    | )           | 196,644                         |       |
| Total  stockholders’ equity                                                                                                |       | 18,945,486                  |        | 25,866,923                      |       |
| **Total  liabilities and stockholders’ equity**                                                                            |       | $                           | 394,798,199 |                            | $          | 345,658,093 |   |

 

See notes toconsolidated financial statements.

 

1

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Table of Contents

 

**FIRSTBANK FINANCIAL SERVICES, INC.**

**AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                               | ** ** | **Three Months Ended** | ** **     | **Six Months Ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|----------------|--------------------------------|------------|
| ** **                                               | ** ** | **June 30,**                | ** **     | **June 30,**              | ** ** |
| ** **                                               | ** ** | **2008**                         | ** **     | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                     |       |                             |           |                           |       |   | ** ** |   |   |
| **Interest  income**                                     |       |                             |           |                           |       |   | ** ** |   |   |
| Loans, including  fees                                   | ** ** | **$**                            | **4,127,020**  | ** **                     | $          | 5,284,558 |   | **$** | **8,376,036** | ** ** | $ | 10,133,782 |   |
| Taxable  securities                                      | ** ** | **866,986**                      | ** **     | 468,410                        |       | **1,553,332** | ** ** | 903,641 |   |
| Tax-free  securities                                     | ** ** | **69,462**                       | ** **     | 64,600                         |       | **136,891** | ** ** | 116,294 |   |
| Deposits in  banks                                       | ** ** | **108,740**                      | ** **     | 22,155                         |       | **141,635** | ** ** | 50,967 |   |
| Federal funds  sold                                      | ** ** | **124,417**                      | ** **     | 57,487                         |       | **225,365** | ** ** | 188,654 |   |
| **Total  interest income**                               | ** ** | **5,296,625**                    | ** **     | 5,897,210                      |       | **10,433,259** | ** ** | 11,393,338 |   |
|                                                     |       |                             | ** **     |                           |       |   | ** ** |   |   |
| **Interest  expense**                                    |       |                             | ** **     |                           |       |   | ** ** |   |   |
| Deposits                                                 | ** ** | **3,433,223**                    | ** **     | 2,974,041                      |       | **6,581,129** | ** ** | 5,706,576 |   |
| Other borrowings                                         | ** ** | **418,968**                      | ** **     | 421,178                        |       | **927,424** | ** ** | 800,057 |   |
| **Total  interest expense**                              | ** ** | **3,852,191**                    | ** **     | 3,395,219                      |       | **7,508,553** | ** ** | 6,506,633 |   |
|                                                     |       |                             | ** **     |                           |       |   | ** ** |   |   |
| **Net  interest income**                                 | ** ** | **1,444,434**                    | ** **     | 2,501,991                      |       | **2,924,706** | ** ** | 4,886,705 |   |
| **Provision  for loan losses**                           | ** ** | **5,037,999**                    | ** **     | 205,000                        |       | **5,893,718** | ** ** | 415,000 |   |
| **Net  interest income after provision for loan losses** | ** ** | **(3,593,565**                   | **)**          | 2,296,991                      |       | **(2,969,012** | **)** | 4,471,705 |   |
|                                                     |       |                             | ** **     |                           |       |   | ** ** |   |   |
| **Other  income**                                        |       |                             | ** **     |                           |       |   | ** ** |   |   |
| Service charges  on deposit accounts                     | ** ** | **141,174**                      | ** **     | 77,131                         |       | **239,405** | ** ** | 188,792 |   |
| Gain (loss) on  sale of securities available for sale    | ** ** | **59,697**                       | ** **     | (8,966                         | )          | **93,548** | ** ** | (28,990 | ) |
| Other operating  income                                  | ** ** | **96,593**                       | ** **     | 31,649                         |       | **189,794** | ** ** | 59,389 |   |
| **Total  other income**                                  | ** ** | **297,464**                      | ** **     | 99,814                         |       | **522,747** | ** ** | 219,191 |   |
|                                                     |       |                             | ** **     |                           |       |   | ** ** |   |   |
| **Other  expenses**                                      |       |                             | ** **     |                           |       |   | ** ** |   |   |
| Salaries and  employee benefits                          | ** ** | **872,048**                      | ** **     | 780,148                        |       | **1,738,214** | ** ** | 1,544,402 |   |
| Equipment and  occupancy expenses                        | ** ** | **269,366**                      | ** **     | 217,183                        |       | **541,501** | ** ** | 422,835 |   |
| (Gain) loss on  sale of assets                           | ** ** | **(262**                         | **)**          | —                         |       | **18,864** | ** ** | 3,956 |   |
| (Gain) loss on  sale of other real estate owned          | ** ** | **61,673**                       | ** **     | (21,306                        | )          | **132,295** | ** ** | (21,306 | ) |
| Other operating  expenses                                | ** ** | **690,940**                      | ** **     | 478,371                        |       | **1,312,341** | ** ** | 1,043,153 |   |
| **Total  other expenses**                                | ** ** | **1,893,765**                    | ** **     | 1,454,396                      |       | **3,743,215** | ** ** | 2,993,040 |   |
|                                                     |       |                             | ** **     |                           |       |   | ** ** |   |   |
| **Income  (loss) before income taxes**                   | ** ** | **(5,189,866**                   | **)**          | 942,409                        |       | **(6,189,480** | **)** | 1,697,856 |   |
|                                                     |       |                             | ** **     |                           |       |   | ** ** |   |   |
| **Income  tax expense**                                  | ** ** | **481,770**                      |           | 333,697                        |       | **36,882** | ** ** | 613,628 |   |
|                                                     |       |                             |           |                           |       |   |   |   |   |
| **Net  income (loss)**                                   | ** ** | **$**                            | **(5,671,636** | **)**                          | $          | 608,712 |   | **$** | **(6,226,362** | **)** | $ | 1,084,228 | ** ** |
|                                                     |       |                             |           |                           |       |   |   |   |   |
| **Basic  earnings (losses) per share**                   | ** ** | **$**                            | **(2.10**      | **)**                          | $          | 0.21 |   | **$** | **(2.30** | **)** | $ | 0.38 | ** ** |
|                                                     |       |                             |           |                           |       |   |   |   |   |
| **Diluted  earnings (losses) per share**                 | ** ** | **$**                            | **(2.10**      | **)**                          | $          | 0.20 | ** ** | **$** | **(2.30** | **)** | $ | 0.36 | ** ** |
|                                                     |       |                             |           |                           |       |   |   |   |   |
| **Cash  dividends per share**                            | ** ** | **$**                            | **—**     | ** **                     | $          | — | ** ** | **$** | **—** |   | $ | — |   |

 

See notes toconsolidated financial statements.

 

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**FIRSTBANK FINANCIAL SERVICES, INC.**

**AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME (LOSS)**

**THREEMONTHS ENDED JUNE 30, 2008 AND 2007 AND**

**SIXMONTHS ENDED JUNE 30, 2008 AND 2007**

**(Unaudited)**

 
| ** **                                                                                                                            | ** ** | **Three Months Ended** | ** **     | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|----------------|--------------------------------|------------|
| ** **                                                                                                                            | ** ** | **June 30,**                | ** **     | **June 30,**              | ** ** |
| ** **                                                                                                                            | ** ** | **2008**                         | ** **     | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                                                                            | ** ** | ** **                       | ** **     | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income  (loss)                                                                                                                    | ** ** | **$**                            | **(5,671,636** | **)**                          | $          | 608,712 |   | **$** | **(6,226,362** | **)** | $ | 1,084,228 |   |
|                                                                                                                                  |       |                             | ** **     |                           |       |   | ** ** |   |   |
| Other comprehensive  income (loss):                                                                                                   |       |                             | ** **     |                           |       |   | ** ** |   |   |
|                                                                                                                                  |       |                             | ** **     |                           |       |   | ** ** |   |   |
| Net unrealized  holding losses arising during period, net of tax benefit                                                              | ** ** | **(1,051,442**                   | **)**          | (454,355                       | )          | **(710,303** | **)** | (484,375 | ) |
|                                                                                                                                  |       |                             | ** **     |                           |       |   | ** ** |   |   |
| Reclassification  adjustment for (gains) losses on securities available for sale realized in  net income (loss), net of (tax) benefit | ** ** | **(37,012**                      | **)**          | 5,559                          |       | **(58,000** | **)** | 17,974 |   |
|                                                                                                                                  |       |                             | ** **     |                           |       |   | ** ** |   |   |
| Net unrealized  holding gains (losses) on interest rate floors arising during period, net of  (tax) benefit                           | ** ** | **(200,807**                     | **)**          | (48,859                        | )          | **63,309** | ** ** | (32,268 | ) |
|                                                                                                                                  |       |                             | ** **     |                           |       |   | ** ** |   |   |
| Other  comprehensive loss                                                                                                             | ** ** | **(1,289,261**                   | **)**          | (497,655                       | )          | **(704,994** | **)** | (498,669 | ) |
|                                                                                                                                  |       |                             | ** **     |                           |       |   | ** ** |   |   |
| Comprehensive  income (loss)                                                                                                          | ** ** | **$**                            | **(6,960,897** | **)**                          | $          | 111,057 |   | **$** | **(6,931,356** | **)** | $ | 585,559 |   |

 

See notes to consolidated financial statements.

 

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** **

**FIRSTBANK FINANCIAL SERVICES, INC.**

**AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**SIXMONTHS ENDED JUNE 30, 2008 AND 2007**

**(Unaudited)**

 
| ** **                                                                                           | ** ** | **2008**        | ** **     | **2007**    | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------|----------------|-------------|------------|
| **OPERATING  ACTIVITIES**                                                                            |       |            |           |        |       |
| Net income  (loss)                                                                                   | ** ** | **$**           | **(6,226,362** | **)**       | $          | 1,084,228 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |       |            | ** **     |        |       |
| Loss on sale of  assets                                                                              | ** ** | **18,864**      | ** **     | 3,956       |       |
| (Gain) loss on  sale of other real estate owned                                                      | ** ** | **132,295**     | ** **     | (21,306     | )          |
| (Gain) loss on  sale of securities available for sale                                                | ** ** | **(93,548**     | **)**          | 28,990      |       |
| Depreciation and  amortization                                                                       | ** ** | **251,114**     | ** **     | 226,137     |       |
| Stock  compensation expense                                                                          | ** ** | **4,919**       | ** **     | 104,931     |       |
| Provision for  loan losses                                                                           | ** ** | **5,893,718**   | ** **     | 415,000     |       |
| Increase in  accrued interest receivable                                                             | ** ** | **(702,056**    | **)**          | (480,386    | )          |
| Decrease in  accrued interest payable                                                                | ** ** | **(623,789**    | **)**          | (481,668    | )          |
| Net other  operating activities                                                                      | ** ** | **(743,895**    | **)**          | (551,861    | )          |
|                                                                                                 |       |            | ** **     |        |       |
| Net cash  provided by (used in) operating activities                                                 | ** ** | **(2,088,740**  | **)**          | 328,021     |       |
|                                                                                                 |       |            | ** **     |        |       |
| **INVESTING  ACTIVITIES**                                                                            |       |            | ** **     |        |       |
| Net (increase)  decrease in interest-bearing deposits in banks                                       | ** ** | **(11,844,202** | **)**          | 662,538     |       |
| Purchases of  securities available for sale                                                          | ** ** | **(59,067,685** | **)**          | (13,242,570 | )          |
| Proceeds from  sales of securities available for sale                                                | ** ** | **8,373,365**   | ** **     | 2,301,210   |       |
| Proceeds from  maturities of securities available for sale                                           | ** ** | **22,112,377**  | ** **     | 2,741,231   |       |
| Purchases of  restricted equity securities                                                           | ** ** | **(396,200**    | **)**          | (278,300    | )          |
| Net decrease in  federal funds sold                                                                  | ** ** | **5,793,000**   | ** **     | 5,920,000   |       |
| Net increase in  loans                                                                               | ** ** | **(17,998,724** | **)**          | (30,600,005 | )          |
| Proceeds from  sales of repossessed assets                                                           | ** ** | **121,757**     | ** **     | 22,000      |       |
| Purchase of bank  owned life insurance                                                               | ** ** | **(2,000,000**  | **)**          | —      |       |
| Proceeds from  sales of other real estate owned                                                      | ** ** | **1,412,984**   | ** **     | 133,961     |       |
| Purchase of  premises, equipment and software                                                        | ** ** | **(620,026**    | **)**          | (1,299,967  | )          |
|                                                                                                 |       |            | ** **     |        |       |
| Net cash used in  investing activities                                                               | ** ** | **(54,113,354** | **)**          | (33,639,902 | )          |
|                                                                                                 |       |            | ** **     |        |       |
| **FINANCING  ACTIVITIES**                                                                            |       |            | ** **     |        |       |
| Net increase in  deposits                                                                            | ** ** | **50,738,295**  | ** **     | 26,318,000  |       |
| Net increase in  other borrowings                                                                    | ** ** | **6,000,000**   | ** **     | 7,000,000   |       |
| Issuance of  restricted stock                                                                        | ** ** | **5,000**       | ** **     | —      |       |
|                                                                                                 |       |            | ** **     |        |       |
| Net cash  provided by financing activities                                                           | ** ** | **56,743,295**  | ** **     | 33,318,000  |       |
|                                                                                                 |       |            | ** **     |        |       |
| Net increase in  cash and due from banks                                                             | ** ** | **541,201**     | ** **     | 6,119       |       |
|                                                                                                 |       |            | ** **     |        |       |
| Cash and due  from banks at beginning of period                                                      | ** ** | **1,576,976**   | ** **     | 4,047,726   |       |
|                                                                                                 |       |            | ** **     |        |       |
| Cash and due  from banks at end of period                                                            | ** ** | **$**           | **2,118,177**  | ** **  | $          | 4,053,845 |   |
|                                                                                                 |       |            | ** **     |        |       |
| Supplemental  schedule of noncash investing and financing activities -                               |       |            | ** **     |        |       |
| Change in accumulated  other comprehensive loss                                                      | ** ** | **$**           | **(704,994**   | **)**       | $          | (498,669 | ) |
| Loans  transferred to other real estate owned                                                        | ** ** | **$**           | **23,258,577** | ** **  | $          | 1,021,811 |   |
|                                                                                                 |       |            | ** **     |        |       |
| Supplemental  disclosures of cash flow information -                                                 |       |            | ** **     |        |       |
|                                                                                                 |       |            | ** **     |        |       |
| Cash paid during  the period for interest                                                            | ** ** | **$**           | **8,132,342**  | ** **  | $          | 6,988,301 |   |
| Cash paid during  the period for income taxes                                                        | ** ** | **$**           | **22,000**     | ** **  | $          | 690,384 |   |
| Financed sales  of other real estate owned                                                           | ** ** | **$**           | **218,253**    |        | $          | — |   |

 

See notes toconsolidated financial statements.

 

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** **

**FirstBANKFINANCIAL SERVICES, INC. AND SUBSIDIARY**

 

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

(Unaudited)

 

**NOTE1.  Ba****sis ofPresentation**

 

FirstBank Financial Services, Inc.(the “Company”) is a bank holding company whose business is conducted by itswholly-owned commercial bank, FirstBank Financial Services, formerly First Bankof Henry County, (the “Bank”).  The Bankis a commercial bank located in McDonough, Henry County, Georgia, with a branchin Stockbridge, Georgia and another branch also in McDonough known as the Bank’sSouth Point branch and a branch in Morrow, Clayton County, Georgia.

 

The accompanyingconsolidated financial statements are unaudited. Certain information andfootnote disclosures normally included in consolidated financial statementsprepared in accordance with generally accepted accounting principles have beencondensed or omitted pursuant to such rules and regulations.  These consolidated financial statementsshould be read in conjunction with the audited consolidated financialstatements and notes thereto included in the Company’s annual report on Form 10-Kfor the year ended December 31, 2007, which was filed with the Securitiesand Exchange Commission.

 

The financial informationincluded herein reflects all adjustments (consisting of normal recurringadjustments), which are, in the opinion of management, necessary to a fairpresentation of the Company’s financial position and results for the interimperiod ended June 30, 2008.

 

The preparation ofconsolidated financial statements requires management to make estimates andassumptions that affect the reported amounts of assets, liabilities and incomeand expense amounts.  Actual resultscould differ from those estimates.  Theresults of operations for the six months ended June 30, 2008 are notnecessarily indicative of the results to be expected for the full year.

 

**NOTE2.  Stock Compensation Plans**

 

At June 30, 2008, 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, 2007, 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, 2007, based on the grant-date fair value estimated in accordance with the provisions of Statement 123(R).

 

At June 30, 2008, there was approximately $14,759 of unrecognized compensation cost related to stock-based payments, which is expected to be recognized over a weighted-average period of 1.17 years. Stock based compensation expense recognized in earnings totaled $2,460 and $4,919 for the three and six months ended June 30, 2008, respectively, as compared to $35,374 and $104,931 for the same periods in 2007.

 

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**NOTE 3. Earnings (Losses) Per Common Share**

 

SFAS No. 128, *Earnings Per Share,*establishes standards for computing and presenting basic and diluted earningsper share.  In this regard, the Companyis required to report earnings per common share with and without the dilutiveeffects of potential common stock issuances from instruments such as options,convertible securities and warrants on the face of the statements ofincome.  Earnings per common share arebased on the weighted average number of common shares outstanding during theperiod while the effects of potential common shares outstanding during theperiod are included in diluted earnings per share.  Additionally, the Company must reconcile theamounts used in the computation of both “basic earnings per share” and “dilutedearnings per share”.  Presented below isa summary of the components used to calculate basic and diluted earnings(losses) per common share.

 
| ** **                                                                                                                        | ** ** | **Three Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                        | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
|                                                                                                                              |       |                                                |       |   |   |
| Basic earnings  (losses) per share:                                                                                               |       |                                                |       |   |   |
| Weighted average  common shares outstanding                                                                                       |       | 2,701,882                                           |       | 2,831,676 |   |
|                                                                                                                              |       |                                                |       |   |   |
| Net income  (loss)                                                                                                                |       | $                                                   | (5,671,636 | ) | $ | 608,712 |   |
|                                                                                                                              |       |                                                |       |   |   |
| Basic earnings  (losses) per share                                                                                                |       | $                                                   | (2.10      | ) | $ | 0.21 |   |
|                                                                                                                              |       |                                                |       |   |   |
| Diluted earnings  (losses) per share:                                                                                             |       |                                                |       |   |   |
| Weighted average  common shares outstanding                                                                                       |       | 2,701,882                                           |       | 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 |       | —                                              |       | 139,891 |   |
| Total weighted  average common shares andcommon stock equivalents outstanding                                                     |       | 2,701,882                                           |       | 2,971,567 |   |
|                                                                                                                              |       |                                                |       |   |   |
| Net income  (loss)                                                                                                                |       | $                                                   | (5,671,636 | ) | $ | 608,712 |   |
|                                                                                                                              |       |                                                |       |   |   |
| Diluted earnings  (losses) per share                                                                                              |       | $                                                   | (2.10      | ) | $ | 0.20 |   |

 

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**NOTE 3. Earnings (Losses) Per Common Share**

 
| ** **                                                                                                                        | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                                        | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
|                                                                                                                              |       |                                              |       |   |   |
| Basic earnings  (losses) per share:                                                                                               |       |                                              |       |   |   |
| Weighted average  common shares outstanding                                                                                       |       | 2,701,882                                         |       | 2,831,676 |   |
|                                                                                                                              |       |                                              |       |   |   |
| Net income  (loss)                                                                                                                |       | $                                                 | (6,226,362 | ) | $ | 1,084,228 |   |
|                                                                                                                              |       |                                              |       |   |   |
| Basic earnings  (losses) per share                                                                                                |       | $                                                 | (2.30      | ) | $ | 0.38 |   |
|                                                                                                                              |       |                                              |       |   |   |
| Diluted earnings  (losses) per share:                                                                                             |       |                                              |       |   |   |
| Weighted average  common shares outstanding                                                                                       |       | 2,701,882                                         |       | 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 |       | —                                            |       | 156,167 |   |
| Total weighted  average common shares and common stock equivalents outstanding                                                    |       | 2,701,882                                         |       | 2,987,843 |   |
|                                                                                                                              |       |                                              |       |   |   |
| Net income  (loss)                                                                                                                |       | $                                                 | (6,226,362 | ) | $ | 1,084,228 |   |
|                                                                                                                              |       |                                              |       |   |   |
| Diluted earnings  (losses) per share                                                                                              |       | $                                                 | (2.30      | ) | $ | 0.36 |   |

 

**NOTE 4.  Recent Accounting Pronouncements**

 

In March 2008, the Financial Accounting Standards Board (FASB)issued Statement No. 161, **Disclosures  about Derivative Instruments and Hedging Activities**(SFAS 161) – an amendment of FASB Statement No. 133, **Accounting forDerivative Instruments and Hedging Activities**. SFAS 161 isintended to improve financial reporting transparency regarding derivativeinstruments and hedging activities by providing investors with a betterunderstanding of their effects on financial position, financial performance,and cash flows. SFAS 161 applies to all entities and is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008 with early adoption encouraged.

 

**NOTE5.  Interest Rate Derivatives**

 

TheCompany maintains an overall interest rate risk-management strategy thatincorporates the use of derivative instruments to minimize significantunplanned fluctuations in earnings that are caused by interest ratevolatility.  One interest rate derivativeis used to hedge variable-rate deposits. This instrument is reflected in other liabilities at June 30, 2008at a fair value of $39,058.  The Companyalso has an interest rate floor, with a notional value of $30 million and an8.50% strike which will mature in July 2008.  The fair value of this instrument at June 30,2008 is $263,625 and is reflected in other assets.  In addition, the Company has two interestrate swaps with a notional value totaling $20 million.  The Company receives a fixed rate of interestfrom the counterparty and pays a fixed rate tied to prime to the counterparty.  The instruments are more fully described inthe Company’s annual report on Form 10-K dated December 31, 2007.

 

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**NOTE6.  Fair Value Measurement**

 

OnJanuary 1, 2008, the Company adopted FASB No. 157, Fair ValueMeasurements.  FASB No. 157 definesfair value, establishes a framework for measuring fair value, and expandsdisclosures about fair value measurements. FASB No. 157 applies to reported balances that are required or permittedto be measured at fair value under existing accounting pronouncements;accordingly, the standard does not require any new fair value measurements ofreported balances.

 

FASBNo. 157 emphasizes that fair value is market-based measurement, not an entity-specificmeasurement.  Therefore, a fair valuemeasurement should be determined based on the assumptions that marketparticipants would use in pricing the asset or liability.  As a basis for considering market participantassumptions in fair value measurements, FASB No. 157 establishes a fairvalue hierarchy that distinguishes between market participant assumptions basedon market data obtained from sources independent of the reporting entity(observable inputs that are classified within Level 1 and 2 of the hierarchy)and the reporting entity’s own assumptions about market participant assumptions(unobservable inputs classified within Level 3 of the hierarchy).

 

Level1 inputs utilize quoted prices (unadjusted) in active markets for identicalassets or liabilities that the Company has the ability to access.  Level 2 inputs are inputs other than quotedprices included in Level 1 that are observable for the asset or liability,either directly or indirectly.  Level 2inputs may include quoted prices for similar assets and liabilities in activemarkets, as well as inputs that are observable for the asset or liability(other than quoted prices), such as interest rates, foreign exchange rates andyield curves that are observable at commonly quoted intervals.  Level 3 inputs are unobservable inputs forthe asset or liabilities, which are typically based on an entity’s ownassumptions, as there is little, if any, related market activity.  In instances where the determination of thefair value hierarchy within which the entire fair value measurement falls isbased on the lowest level input that is significant to the fair valuemeasurement in its entirety.  The Company’sassessment of the significance of a particular input to the fair valuemeasurement in its entirety requires judgment, and considers factors specificto the asset or liability.

 

Thetable below presents the Company’s assets and liabilities measured at fairvalue on a recurring basis as of June 30, 2008, aggregated by the level inthe fair value hierarchy within which those measurements fall.

 
| ** **                                | ** ** | **Quoted Prices**    | ** ** | **Significant** | ** ** | ** **       | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|---------------------------|------------|-----------------|------------|------------------|------------|------------|------------|
| ** **                                | ** ** | **in Active**        | ** ** | **Other**       | ** ** | **Significant**  | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Markets for**      | ** ** | **Observable**  | ** ** | **Unobservable** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Identical Assets** | ** ** | **Inputs**      | ** ** | **Inputs**       | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **(Level 1)**             | ** ** | **(Level 2)**   | ** ** | **(Level 3)**    | ** ** | **Total**  | ** ** |
| **Assets**                                |       |                      |       |            |       |             |       |       |       |
| Available for  sale investment securities |       | $                         | —     |            | $          | 82,081,803       |       | $          | —     |   | $ | 82,081,803 |   |
| Interest rate  floor                      |       | —                    |       | 263,625         |       | —           |       | 263,625    |       |
| Total assets at  fair value               |       | $                         | —     |            | $          | 82,345,428       |       | $          | —     |   | $ | 82,345,428 |   |

 

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**NOTE 7.  Reclassification**

 

Certain items on the statements of operations andcash flows for the period ended June 30, 2007 have been reclassified to beconsistent with the classifications adopted for the period ended June 30,2008.  The items reclassified are gain(loss) on sale of securities available for sale and loss on sale of otherassets.  Net income was not impacted dueto the reclassifications.

 

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

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

 

**Forward Looking Statements**

 

Certain of the statements made hereinunder the caption “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” (“MD&A”) are forward-looking statements forpurposes of the Securities Act of 1933 (the “Securities Act”) and theSecurities Exchange Act of 1934 (the “Exchange Act”), and as such may involveknown and unknown risks, uncertainties and other factors which may cause ouractual results, performance or achievements to be materially different fromfuture results, performance or achievements expressed or implied by suchforward-looking statements.  Suchforward-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 significantlyfrom the results we discuss in these forward-looking statements.

 

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

 

·                  the effects of future economicconditions;

 

·                  governmental monetary and fiscalpolicies, as well as legislative and regulatory changes;

 

·                  the risks of changes in interest rates onthe level and composition of deposits, loan demand, and the values of loancollateral, securities, and other interest-sensitive assets and liabilities;

 

·                  changes in the interest rate environmentwhich could reduce anticipated or actual margins;

 

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

 

·                  changes occurring in business conditionsand inflation;

 

·                  changes in monetary and tax policies;

 

·                  changes in technology;

 

·                  the level of allowance for loan loss;

 

·                  the rate of delinquencies and amounts ofcharge-offs;

 

·                  the rates of loan growth;

 

·                  adverse changes in asset quality andresulting credit risk-related losses and expenses;

 

·                  changes in the securities market; and

 

·                  other risks and uncertainties detailedfrom time to time in our filings with the Securities and Exchange Commission.

 

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**Introduction**

 

The Company, through its banking subsidiary, performsbanking services customary for full service banks of similar size andcharacter.  The Company offers personaland business checking accounts, interest-bearing checking accounts, savingsaccounts and various types of certificates of deposit.  The Company also offers commercial loans,installment and other consumer loans, home equity loans, home equity lines ofcredit, 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 bankingservices including ATM services, safe deposit facilities, money transfers andindividual retirement accounts.

 

**Overview**

 

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

 

**Critical Accounting Policies**

 

We have adopted various accountingpolicies which govern the application of accounting principles generallyaccepted in the United States of America in the preparation of our consolidatedfinancial statements of FirstBank Financial Services, Inc.  Our significant accounting policies aredescribed in the footnotes to the financial statements for FirstBank FinancialServices, Inc. at December 31, 2007 as filed in the Company’s annualreport on Form 10-K, which was filed with the Securities and ExchangeCommission.

 

Certain accounting policies involvesignificant judgments and assumptions by us which have a material impact on thecarrying value of certain assets and liabilities.  We consider these accounting policies to becritical accounting policies.  Thejudgments and assumptions we use are based on historical experience and otherfactors, which we believe to be reasonable under the circumstances.  Because of the nature of the judgments andassumptions we make, actual results could differ from these judgments andestimates which could have a material impact on our carrying values of assetsand liabilities and our results of operations.

 

We believe theallowance for loan losses is a critical accounting policy that requires themost significant judgments and estimates used in preparation of ourconsolidated financial statements.  Referto the portion of this discussion that addresses asset quality for adescription of our processes and methodology for determining our allowance forloan losses.

 

Another of our critical accounting policiesinvolves stock-based compensation.  Theassumptions used in the determination of the fair value of stock optionsgranted ultimately determine the recognition of stock-based compensationexpense.  The short-cut method was usedto determine the expected life of the options. This method, as prescribed by SAB Topic 14.D.2, calculates the expectedterm based on the midpoint between the vesting date of the option and the endof the contractual term.  Expectedvolatility was based upon the historical volatility of the Company’sstock.  Risk-free interest rates forperiods 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 forexpected growth and past history, the expected 

 

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dividend rate is 0%.  These assumptions have a significant impacton the amount of expense recognized for stock-based compensation.

 

**Asset Quality**

 

A major key to long-termearnings growth is the maintenance of a high-quality loan portfolio. TheCompany’s directive in this regard is carried out through its policies andprocedures for extending credit to the Company’s customers.  The goal and result of these policies andprocedures is to provide a sound basis for new credit extensions and an earlyrecognition of problem assets to allow the most flexibility in their timelydisposition.  Additions to the allowancefor loan losses will be made periodically to maintain the allowance at anappropriate level based upon management’s analysis of potential risk in theloan portfolio.  The amount of the loanloss provision is determined by an evaluation of the level of loans outstanding,the level of non-performing loans, historical loan loss experience, delinquencytrends, the amount of actual losses charged to the allowance in a given period,and assessment of present and anticipated economic conditions.  While risk of loss in the Company’s portfoliois primarily tied to the credit quality of the various borrowers, risk of lossmay increase due to factors beyond the Company’s control such as local,regional and/or national economic downturns. General conditions in the real estate market may also impact therelative risk in the real estate portfolio.

 

A provision for loan losses was madeduring the second quarter and first six months of 2008, respectively ofapproximately $5,038,000 and $5,894,000 as compared to the same periods in 2007of $205,000 and $415,000, respectively. The amounts provided are due primarily to our assessment of inherentrisk in the loan portfolio and the increase in problem and potential problemloans.  We can make no assurances thatthe Company will not see a further deterioration in credit quality which wouldrequire additional reserves. The allowance for loan losses as a percentage oftotal loans was 3.24% at June 30,2008 as compared to 2.78% at December 31, 2007.  Based upon our evaluation of the loanportfolio, we believe the allowance for loan losses to be adequate to absorblosses on existing loans that may become uncollectible.

 

During the second quarter of 2008, theCompany foreclosed on properties related to loans totaling approximately$15,905,000 with immediate write-downs at the time of transfer to other realestate totaling approximately $2,986,000. Additional improvement costs have been capitalized during the first sixmonths of 2008 totaling approximately $260,000. Management does not anticipateany significant losses in the disposition of these properties.  During the second quarter of 2008, theCompany sold five single family detached homes for approximately $1,309,000resulting in a net loss of approximately $62,000.

 

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The followingtable presents the aggregate of nonperforming assets for the categoriesindicated.

 
| ** **                                                                                                 | ** ** | **June 30,**                    | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                 | ** ** | **2008**                             | ** ** | **2007**              | ** ** |
| ** **                                                                                                 | ** ** | **(Dollars in Thousands)** | ** ** |
| Nonaccrual loans                                                                                           |       | $                                    | 30,448     |                  | $          | 48,804 |   |
| Loans  contractually past due ninety days or more as to interest or principal  payments and still accruing |       | 2,602                                |       | 1,637                 |       |
| Restructured  loans                                                                                        |       | —                               |       | —                |       |
| Total  nonperforming loans                                                                                 |       | 33,050                               |       | 50,441                |       |
|                                                                                                       |       |                                 |       |                  |       |
| Other real  estate                                                                                         |       | 24,311                               |       | 2,556                 |       |
| Total  nonperforming assets                                                                                |       | $                                    | 57,361     |                  | $          | 52,997 |   |

 

Summarizedbelow is a list of other real estate acquired through foreclosure totaling$24,311,000 as of June 30, 2008 detailed by collateral type and location:

** **

·                  $4,295,000secured by one residential A & D project located in Lovejoy, ClaytonCounty, Georgia;

 

·                  $4,045,000secured by two residential A & D projects in various stages ofcompletion located in McDonough, Henry County, Georgia;

 

·                  $2,685,000secured by eleven new construction single family detached homes in variousstages of completion located in McDonough, Henry County, Georgia;

 

·                  $2,215,000secured by six new construction single family detached homes in various stagesof completion located in Forsyth, Monroe County, Georgia;

 

·                  $1,686,000secured by one residential A & D project located in Forsyth, MonroeCounty, Georgia;

 

·                  $1,557,000secured by thirteen new construction single family detached homes in variousstages of completion located in Griffin, Spalding County, Georgia;

 

·**                 **$1,499,000secured by two developed residential lots on Lake Spivey located in Jonesboro,Clayton County, Georgia;

 

·**                 **$990,000secured by twenty-three developed residential lots located in McDonough, HenryCounty, Georgia;

 

·**                 **$947,000 securedby a car wash facility located in Stockbridge, Henry County, Georgia;

 

·                  $902,000secured by three new construction single family detached homes in variousstages of completion located in Stockbridge, Henry County, Georgia;

 

·                  $593,000secured by five new construction single family detached homes in various stagesof completion located in Hampton, Henry County, Georgia;

 

·                  $566,000secured by a condo unit at the Atlanta Motor Speedway located in Hampton, HenryCounty, Georgia;

 

·                  $520,000secured by one new construction single family detached home located in Oxford,Newton County, Georgia;

 

·                  $512,000secured by one residential A & D project located in Stockbridge, HenryCounty, Georgia;

 

·**                 **$450,000secured by ten developed residential lots located in Forsyth, Monroe County,Georgia;

 

·**                 **$234,000secured by two new construction single family detached homes in various stagesof completion located in Luthersville, Meriweather County, Georgia;

 

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·                  $151,000secured by seven developed residential lots located in Luthersville,Meriweather County, Georgia;

 

·                  $94,000 securedby one new construction single family detached home located in Monticello,Jasper County, Georgia;

 

·**                 **$90,000  secured by five developed residential lotslocated in Griffin, Spalding County, Georgia;

 

·**                 **$75,000 securedby two single family rental properties located in Morrow, Clayton County, Georgia;

 

·                  $56,000 securedby two developed residential lots located in Riverdale, Clayton County,Georgia;

 

·                  $42,000 securedby one single family detached home located in Barnesville, Lamar County,Georgia;

 

·                  $36,000 securedby one developed residential lot located in Stockbridge, Henry County, Georgia;

 

·                  $36,000 securedby one developed residential lot located in Hampton, Henry County, Georgia;

 

·                  $35,000 securedby one single family rental property located in Riverdale, Clayton County,Georgia.

 

Subsequent to June 30, 2008, otherreal estate acquired through foreclosure totaling approximately $248,200 wassold with a resulting loss on the sale of approximately $12,500.

 

Summarizedbelow are nonaccrual loans totaling $30,448,000 as of June 30, 2008.  This information is provided to give detailas to the collateral type and location of our nonaccrual loans and to assist inthe assessment of possible collateral concentrations.

 

·                  $7,192,000 inloans secured by three residential A & D projects in various stages ofcompletion located in McDonough, Henry County, Georgia;

 

·                  $3,888,000 inloans secured by developed residential lots located in McDonough, Henry County,Georgia;

 

·                  $3,515,000 inloans secured by twenty-four new construction single family detached homes invarious stages of completion located in McDonough, Henry County, Georgia;

 

·                  $2,652,000 inloans secured by twenty-one new construction single family detached homes in variousstages of completion located in Covington, Newton County, Georgia;

 

·                  $1,808,000 inloans secured by commercial property located in Covington, Newton County,Georgia;

 

·                  $1,786,000 inloans secured by one residential A & D project located in LocustGrove, Henry County, Georgia;

 

·**                 **$1,565,000 inloans secured by developed residential lots located in Hampton, Clayton County,Georgia;

 

·                  $1,365,000 inloans secured by one residential A & D project located in Barnesville,Lamar County, Georgia;

 

·                  $1,083,000 inloans secured by one residential A &D project located in Stockbridge,Henry County, Georgia;

 

·**                 **$1,078,000 inloans secured by four new construction single family detached homes in variousstages of completion located in Grayson, Gwinnett County, Georgia;

 

·**                 **$915,000 inloans secured by twenty new construction single family detached homes invarious stages of completion located in Palmetto, Fulton County, Georgia;

 

·**                 **$714,000 inloans secured by six new construction single family detached homes in variousstages of completion located in College Park, Fulton County, Georgia;

 

·                  $510,000 inloans secured by commercial property located in McDonough, Henry County,Georgia;

 

·**                 **$499,000 inloans secured by four new construction single family detached homes in variousstages of 

 

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completion located in Barnesville, Lamar County,Georgia;

 

·                  $465,000 inloans secured by commercial property located in Lithonia, DeKalb County,Georgia;

 

·                  $279,000 inloans secured by two new construction single family detached homes in variousstages of completion located in Hampton, Henry County, Georgia;

 

·                  $204,000 inloans secured by one new construction single family detached home located inMonticello, Jasper County, Georgia;

 

·                  $198,000 inloans secured by one new construction single family detached home located inMcDonough, Henry County, Georgia;

 

·                  $173,000 inloans secured by various vehicles;

 

·                  $161,000 inloans secured by one new construction single family detached home located inHampton, Henry County, Georgia;

 

·                  $124,000 inloans secured by one new construction single family detached home located inMonroe, Walton County, Georgia;

 

·                  $84,000 inloans secured by a single family detached home located in Covington, NewtonCounty, Georgia;

 

·                  $54,000 inloans secured by stock of a national bank;

 

·                  $53,000 inloans secured by a single family detached home located in McDonough, HenryCounty, Georgia;

 

·                  $41,000 inloans secured by a new construction single family detached home located inLocust Grove, Henry County, Georgia;

 

·                  $27,000 inloans secured by various large equipment;

 

·                  $15,000 inloans secured by a single family detached home located in Stockbridge, HenryCounty, Georgia.

 

The allowance for loan losses on theseloans is determined based on fair value estimates (net of selling costs) of therespective collateral.  The actual losseson these loans could differ significantly if the fair value of the collateralis different from the estimates used in determining the allocatedallowance.  Most of our collateraldependent impaired loans are secured by real estate.  The fair value of these real estateproperties is generally determined based upon appraisals performed by acertified or licensed appraiser. Management also considers other factors or recent developments whichcould result in adjustments to the collateral value estimates indicated in theappraisals.  The allowance for loanlosses is established through a provision for loan losses charged toexpense.  Loan losses are charged againstthe allowance when management believes the collectibility of the principal isunlikely.  Subsequent recoveries, if any,are credited to the allowance.

 

The allowance is an amount thatmanagement believes will be adequate to absorb estimated losses relating tospecifically identified loans as well as probable credit losses inherent in thebalance of the loan portfolio, based on an evaluation of the collectibility ofexisting loans and prior loss experience. This evaluation also takes into consideration such factors as changes inthe nature and volume of the loan portfolio, overall portfolio quality, andreview of specific problem loans, concentrations and current

economic conditions that may affect theborrower’s ability to pay.  Thisevaluation does not include the effects of expected losses on specific loans orgroups of loans that are related to future events or expected changes in economicconditions.  While management uses thebest information available to make its evaluation, future adjustments to theallowance may be necessary if there are significant changes in economicconditions.

 

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In addition, regulatory agencies, as anintegral part of their examination process, periodically review the Company’sallowance for loan losses, and may require the Company to make additions to theallowance based on their judgment about information available to them at thetime of their examinations.

 

The allowance consists of specific,general and unallocated components.  Thespecific component relates to loans that have been evaluated forimpairment.  For such loans that are alsoclassified as impaired, an allowance is established when the discounted cashflows (or collateral value or observable market price) of the impaired loan islower than the carrying value of that loan. The general component covers non-classified loans and is based onhistorical loss experience adjusted for qualitative factors.  An unallocated component is maintained tocover uncertainties that could affect management’s estimate of probablelosses.  The unallocated component of theallowance reflects the margin of imprecision inherent in the underlyingassumptions used in the methodologies for estimating specific and generallosses in the portfolio.

 

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

 
| ** **                                                                                                 | ** ** | **June 30,**                    | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                                                 | ** ** | **2008**                             | ** ** | **2007**              | ** ** | **2007**          | ** ** |
| ** **                                                                                                 | ** ** | **(Dollars in Thousands)** | ** ** |
| Nonaccrual loans                                                                                           |       | $                                    | 30,448     |                  | $          | 48,804            |       | $ | 4,448 |   |
| Potential  problem loans                                                                                   |       | 16,694                               |       | 7,516                 |       | 161               |       |
| Loans  contractually past due ninety days or more as                                                       |       |                                 |       |                  |       |              |       |
| to interest or  principal payments and still accruing                                                      |       | 2,602                                |       | 1,637                 |       | 36                |       |
| Restructured  loans                                                                                        |       | —                               |       | —                |       | —            |       |
| Other  criticized/watch loans                                                                              |       | 44,101                               |       | 18,046                |       | 3,629             |       |
| Interest income  that would have been recorded on non-accrual and restructured loans under  original terms |       | 1,092                                |       | 1,694                 |       | 57                |       |
| Interest income  that was recorded on nonaccrual andrestructured loans                                     |       | —                               |       | —                |       | —            |       |
|                                                                                                            |            |                                      |            |                       |            |                   |            |  |  |  |

 

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

 

Other criticized /watch loans are definedas loans that may possess credit deficiencies which may require management’sattention to monitor the borrower’s ability to comply with the present loanrepayment terms and to detect any further credit deterioration of the borrower.

 

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

 

Loans classified for regulatory purposesas loss, doubtful, substandard, or special mention that have not been includedin the table above do not represent or result from trends or uncertaintieswhich 

 

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management reasonably expects willmaterially impact future operating results, liquidity or capital resources.These classified loans do not represent material credits about which managementis aware of any information which causes management to have serious doubts asto the ability of such borrowers to comply with the loan repayment terms.

 

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

 
| ** **                                                                     | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                     | ** ** | **June 30,**              | ** ** |
| ** **                                                                     | ** ** | **2008**                       | ** ** | **2007** | ** ** |
| ** **                                                                     | ** ** | **(Dollars  in Thousands)**    | ** ** |
| ** **                                                                     | ** ** | ** **                     | ** ** |
| Average amount  of loans outstanding                                           |       | $                              | 258,387    |   | $ | 227,625 |   |
| Balance of  allowance for loan losses at beginning of period                   |       | $                              | 7,142      |   | $ | 2,392 |   |
| Loans charged  off:                                                            |       |                           |       |   |   |
| Commercial and  financial                                                      |       | (693                           | )          | — |   |
| Real estate  mortgage                                                          |       | (4,393                         | )          | — |   |
| Installment                                                                    |       | (31                            | )          | (9 | ) |
|                                                                           |       | (5,117                         | )          | (9 | ) |
| Loans recovered:                                                               |       |                           |       |   |   |
| Commercial and  financial                                                      |       | 37                             |       | — |   |
| Real estate  mortgage                                                          |       | 45                             |       | — |   |
| Installment                                                                    |       | 4                              |       | 1 |   |
|                                                                           |       | 86                             |       | 1 |   |
| Net charge-offs                                                                |       | (5,031                         | )          | (8 | ) |
| Additions to  allowance charged to operating expense during period             |       | 5,894                          |       | 415 |   |
| Balance of  allowance for loan losses at end of period                         |       | $                              | 8,005      |   | $ | 2,799 |   |
| Ratio of net  loans charged off during the period to average loans outstanding |       | 1.95                           | %          | 0.00 | % |

 

**Liquidity and Capital Resources**

 

Liquidity managementinvolves the matching of the cash flow requirements of customers, who may beeither depositors desiring to withdraw funds or borrowers needing assurancethat sufficient funds will be available to meet their credit needs, and theability of the Company to meet those needs. The Company strives to maintain an adequate liquidity position bymanaging the balances and maturities of interest-earning assets andinterest-bearing liabilities so that the balance it has in short-terminvestments at any given time will adequately cover any reasonably anticipatedimmediate need for funds.  Additionally,the Company maintains relationships with correspondent banks, which couldprovide funds on short notice, if needed. At June 30, 2008 theCompany had no federal funds purchased.

 

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The liquidity and capitalresources of the Company are monitored daily by management, monthly by theCompany’s Board-authorized Asset and Liability Management Committee, and on aperiodic basis by state and federal regulatory authorities.  As determined under guidelines established bythese regulatory authorities, the Company’s liquidity ratios at June 30, 2008 were consideredsatisfactory.  At that date, the Company’sshort-term investments and available federal funding were adequate to cover anyreasonably anticipated immediate need for funds.  At June 30,2008, the Company had an unused available secured federal funds line of$9.4 million and unused Federal Home Loan Bank borrowing capacity ofapproximately $46.4 million which must be secured by certain real estate loansand/or investment securities.  During thefirst quarter of 2008, management prefunded future brokered certificates ofdeposit maturities totaling approximately $81.2 million with a weighted averagelife of forty months in an effort to stabilize the Company’s liquidityneeds.  The funding plan provided theincrease in liquidity and balance sheet growth for the year.  As the brokered certificates of depositmature, the balance sheet will continue to contract.  The Company is aware of no events or trends likelyto result in a material change in liquidity.

 

The consolidatedfinancial statements as of June 30,2008 evidenced an increased liquidity position.  Cash and due from banks, interest-bearingdeposits in banks and federal funds sold totaled $23,570,293 as of June 30, 2008 as compared to$16,977,890 as of December 31, 2007. Total cash and due from banks amounted to $2,118,177 representing .53%of total assets.

 

Totalbrokered deposits amounted to $184.7 million as of June 30, 2008 as compared to $127.2 million at December 31,2007, an increase of approximately $57.5 million.  These deposits are obtainable at ratesnot significantly different from rates that we pay on deposits in our localmarket.  The Company’s ability tomaintain and expand its deposit base and borrowing capabilities is a source ofliquidity.  For the six-month periodended June 30, 2008, totaldeposits increased from $274.9 million at December 31, 2007 to $325.7million at June 30, 2008.  Due to the expected decline in the Company’scredit rating which is used to determine deposit pricing and the level ofaccessibility to the brokered deposit market and the volume of brokered depositmaturities within the next twelve months, during the first quarter of 2008,management implemented a prefunding plan to reduce volatility in the brokereddeposit portfolio by extending the maturities of the prefunded deposits and toensure the Company can meet its future funding needs.  Excess funds were invested in securitiesavailable for sale and bank owned certificates of deposit with the maturitiesof the instruments matching the maturities of the upcoming brokereddeposits.  Management is committed tomaintaining capital at a level sufficient to protect depositors and to fullycomply with all regulatory requirements.

 

Bankingregulations require us to maintain minimum capital levels in relation toassets.  At June 30, 2008, theCompany was considered well-capitalized and the Bank was considered adequatelycapitalized based on regulatory minimum requirements.  On August 11, 2008, the Company injected$1.25 million into the Bank to meet capital needs.

 

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Thetable below illustrates the Company’s and the Bank’s regulatory capital ratiosat June 30, 2008.

 
| ** **                  | ** ** | ** **  | ** ** | ** ** | ** ** | **Minimum**     | ** ** | **Regulatory Minimum**           | ** ** |
|-----------------------------|------------|-------------|------------|------------|------------|-----------------|------------|---------------------------------------|------------|
| ** **                  | ** ** | ** **  | ** ** | ** ** | ** ** | **Regulatory**  | ** ** | **Requirement for**              | ** ** |
| ** **                  | ** ** | **Company** | ** ** | **Bank**   | ** ** | **Requirement** | ** ** | **Well Capitalized Status** | ** ** |
|                        |       |        |       |       |       |            |       |                                  |       |
| Leverage capital  ratios    |       | 5.89        | %          | 5.94       | %          | 4.00            | %          | 5.00                                  | %          |
| Risk-based  capital ratios: |       |        |       |       |       |            |       |                                  |       |
| Tier I capital              |       | 8.38        | %          | 8.42       | %          | 4.00            | %          | 6.00                                  | %          |
| Total capital               |       | 10.20       | %          | 9.69       | %          | 8.00            | %          | 10.00                                 | %          |

 

We are continually monitoring our liquidity andcapital position and intend to focus on maintaining our capital at appropriatelevels.  One impact of not being “well-capitalized”is that it could limit the Bank’s ability to acquire needed funding throughsources such as brokered deposits, FHLB advances and unsecured federal fundscredit lines, and could further impact liquidity through damages to ourreputation in our deposit service area. We continue to examine alternative strategies to strengthen our capitalposition which may in the future include, but not be limited to, restrainingasset growth, raising additional capital, or shrinking our asset base, with thegoal of maintaining the appropriate regulatory capital levels.  Our efforts to improve our capital position;however, may be unsuccessful or may be offset by further losses sustained as aresult of the weakening real estate markets.

 

**Off-Balance Sheet Risk**

 

We are a party to financial instrumentswith off-balance sheet risk in the normal course of business to meet thefinancing needs of our customers.  Thesefinancial instruments include commitments to extend credit and standby lettersof credit.  Such commitments involve, tovarying degrees, elements of credit risk and interest rate risk in excess ofthe amount recognized in the balance sheets.

 

Our exposure tocredit loss in the event of nonperformance by the other party to the financialinstrument for commitments to extend credit and standby letters of credit is representedby the contractual amount of those instruments. We use the same credit policies in making commitments and conditionalobligations as we do for on-balance sheet instruments.  A summary of our commitments is as follows:

 
| ** **                    | ** ** | **June 30,** | ** ** |
|-------------------------------|------------|-------------------|------------|
| ** **                    | ** ** | **2008**          | ** ** |
|                          |       |              |       |
| Commitments to  extend credit |       | $                 | 20,552,344 |   |
| Letters of  credit            |       | 381,335           |       |
|                          |       | $                 | 20,933,679 |   |

 

Commitments to extend credit areagreements to lend to a customer as long as there is no violation of anycondition established in the contract. Since many of the commitments are expected to expire without being drawnupon, the total commitment amounts do not necessarily represent future cashrequirements.  The amount of collateralobtained, if deemed necessary by us upon extension of credit, is based on ourcredit evaluation of the customer.

 

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Standby letters of credit are conditionalcommitments issued by us to guarantee the performance of a customer to a thirdparty.  Those letters of credit areprimarily issued to support public and private borrowing arrangements.  The credit risk involved in issuing lettersof credit is essentially the same as that involved in extending loans tocustomers.  Collateral is required ininstances which we deem necessary.

 

**Financial Condition**

 

Our totalassets grew by 14.2% for the first six months of 2008 in part due to the implementationof our prefunding plan as explained in the Liquidity and Capital Resourcessection of this report.  Deposit growthof approximately $50.7 million and additional Federal Home Loan Bank borrowingsof $6 million was used to fund loan growth of approximately $18.0 million withthe remainder being primarily invested in securities or maintained in cash anddue from banks and federal funds sold. Our loan to available funds ratio was steady during January and February 2008,holding in the 80% range. Our loan to available funds ratio decreased to 64% inMarch 2008 due to the implementation of our prefunding plan and hasremained in the 64-67% range through June 2008.  In general, economic activity in the housingsector continued to slow during the second quarter of 2008.  Although we do not make sub-prime loans, wecontinue to be impacted by them as evidenced in the slowness of themetro-Atlanta real estate market. Advances from the Federal Home Loan Bank increased by $6 million for thesix months ended June 30, 2008.  Thenet increase is the result of $5 million in advances maturing and thesubsequent borrowings of an additional $11 million in advances.

 

Stockholders’equity has decreased by $6,921,437 due to net losses of $6,226,362 offset byunrealized loss on securities available-for-sale, net of tax, of $768,303,unrealized gain on derivatives, net or tax, of $63,309, net earned restrictedstock of $5,000 and including recognition of share based payments transactionsas required by SFAS 123(R) of $4,919.

 

**Results of Operations****For The Three Months EndedJune 30, 2008 and 2007 and for the Six Months Ended June 30, 2008 and2007**

 

Following is a summary of our operationsfor the periods indicated.

 
| ** **                 | ** ** | **Three Months Ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **June 30,**                | ** ** |
| ** **                 | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| ** **                 | ** ** | **(Dollars  in Thousands)**      | ** ** |
|                       |       |                             |       |   |   |
| Interest income            |       | $                                | 5,297      |   | $ | 5,897 |   |
| Interest expense           |       | (3,852                           | )          | (3,395 | ) |
| Net interest  income       |       | 1,445                            |       | 2,502 |   |
| Provision for  loan losses |       | (5,038                           | )          | (205 | ) |
| Other income               |       | 297                              |       | 100 |   |
| Other expense              |       | (1,894                           | )          | (1,454 | ) |
| Pretax income  (loss)      |       | (5,190                           | )          | 943 |   |
| Income tax  expense        |       | (482                             | )          | (334 | ) |
| Net income  (loss)         |       | $                                | (5,672     | ) | $ | 609 |   |

 

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| ** **                 | ** ** | **Six Months Ended** | ** ** |
|----------------------------|------------|--------------------------------|------------|
| ** **                 | ** ** | **June 30,**              | ** ** |
| ** **                 | ** ** | **2008**                       | ** ** | **2007** | ** ** |
| ** **                 | ** ** | **(Dollars  in Thousands)**    | ** ** |
|                       |       |                           |       |   |   |
| Interest income            |       | $                              | 10,433     |   | $ | 11,393 |   |
| Interest expense           |       | (7,508                         | )          | (6,506 | ) |
| Net interest  income       |       | 2,925                          |       | 4,887 |   |
| Provision for  loan losses |       | (5,894                         | )          | (415 | ) |
| Other income               |       | 523                            |       | 219 |   |
| Other expense              |       | (3,743                         | )          | (2,993 | ) |
| Pretax income  (loss)      |       | (6,189                         | )          | 1,698 |   |
| Income tax  expense        |       | (37                            | )          | (614 | ) |
| Net income  (loss)         |       | $                              | (6,226     | ) | $ | 1,084 |   |

 

Net Interest Income

 

Our net interest income decreasedapproximately $1,057,000 and $1,962,000 for the three and six month periodsended June 30, 2008, respectively, as compared to the same periods in2007.  Our net interest margin decreasedto 1.61% during the first six months of 2008 as compared to 3.47% for the firstsix months of 2007. The decrease in net interest income is due primarily to theincreased volume of nonperforming assets and the negative impact of thecumulative 300 basis point rate decreases since March 2007.   Our cost of funds decreased to 4.28% for thefirst six months of 2008 as compared to 5.16% for the first six months of 2007.

 

Noninterest Income

 

Noninterest income increasedapproximately $197,000 and $304,000 for the three and six month periods ended June 30,2008, respectively, as compared to the same periods in 2007.  The increase in noninterest income for thesix months ended June 30, 2008 consists of $51,000 in service charges ondeposit accounts, a $123,000 gain on sale of securities available for sale, anda $130,000 increase in other income primarily due to bank owned life insuranceincome of $116,000.

 

Noninterest Expenses

 

Noninterest expenses increasedapproximately $440,000 and $750,000 for the three and six month periods ended June 30,2008, respectively, compared to the same periods in 2007.  The variances in 2008 consist of a $92,000and $194,000 increase in salaries and employee benefits, a $52,000 and $118,000increase in equipment and occupancy expenses, a $15,000 year to date loss onsale of assets, a $83,000 and $154,000 increase in losses on the sale of otherreal estate owned and a $213,000 and $269,000 increase in other operatingexpenses for the three and six months ended June 30, 2008, respectively ascompared to the same periods in 2007.  The increase in salaries and employee benefits represents normalincreases in salaries and an increase in the number of full time equivalentemployees

 

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due to the opening of our Morrow branch.Equipment and occupancy expenses have increased due to the need for additionalequipment for employees and for the new branches.  The increases in other operating expenses aredue primarily to our overall growth. The Company leases its operations centerfacilities under an operating lease agreement for approximately $70,000 a yearin rental expense.  The Company also hasa ground lease for its Covington branch for approximately $96,000 a year inrental expense.  The construction of theCovington branch has been temporarily postponed.

 

Income Taxes

 

We have recorded an income tax expense of$482,000 and $37,000 for the three and six months ended June 30, 2008,respectively, as compared to $334,000 and $614,000 for the same periods in2007.  We recorded a deferred tax assetvaluation allowance of $2,507,000 effective June 30, 2008 due to theuncertainties of future taxable income. The increase in our income tax expense of $148,000 for the three monthsended June 30, 2008 compared to the same period in 2007 was due to thetiming of the deferred tax asset valuation allowance. Our income tax expensedecreased $577,000 for the six months ended June 30, 2008 compared to thesame period in 2007. This decrease in our income tax expense is due primarilyto the decrease in net income, the decrease of expense related to the permanentnon-deductibility of incentive stock options that have been expensed in theamount of $0 for 2008 as compared to $72,886 for the same period in 2007,income from bank owned life insurance totaling $116,000 and an increase in taxexempt interest income totaling $137,000.

 

Regulatory Matters

 

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

 

Weare not aware of any current recommendation by our regulatory authoritieswhich, if implemented, would have a material effect on our liquidity, capitalresources, or results of operations.

 

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**ITEM 3. Quantitative and Qualitative Disclosures About Market Risk**

 

Pursuantto the revised disclosure requirements for smaller public companies, nodisclosure under this item is required.

 

**ITEM 4T. Controls and Procedures**

 

As of the end of the period covered bythis report, we carried out an evaluation, under the supervision and with theparticipation of our Chief Executive Officer and the Chief Financial Officer,of the effectiveness of the design and operation of our disclosure controls andprocedures.  Based on this evaluation,our Chief Executive and Chief Financial Officer concluded that our disclosurecontrols and procedures are effective for gathering, analyzing andcommunicating information to management, including the Chief Executive Officerand Chief Financial Officer, as appropriate, to allow timely decisionsregarding disclosure of that information within the time periods specified inthe SEC’s rules and forms.  OurChief Executive Officer and Chief Financial Officer also concluded that ourdisclosure controls and procedures are effective in timely alerting them tomaterial information relating to our Company required to be included in ourperiodic SEC filings.  As we, from timeto time, further review and document our disclosure controls and procedures,including our internal controls and procedures for financial reporting, we mayfrom time to time make changes designed to enhance their effectiveness and toensure that our systems evolve with our business.

 

There have been no changes in the Company’sinternal control over financial reporting during the six months ended June 30,2008, or, to the Company’s knowledge, other factors that could significantlyaffect those internal controls subsequent to the date the Company carried outits evaluation, that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting, andthere have been no corrective actions with respect to significant deficienciesor material weaknesses.

 

Thedesign of any system of controls and procedures is based in part upon certainassumptions about the likelihood of future events.  There can be no assurance that any designwill succeed in achieving its stated goals under all potential futureconditions.

 

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**PART II - OTHER INFORMATION**

** **

**Item 1.           LEGALPROCEEDINGS**

 

The Company is not a party to any pendinglegal proceeding (nor is any property of the Company subject to any legalproceeding) other than routine litigation that is incidental to the business.

 

**Item 1A.        RISKFACTORS**

 

Other than as noted below, we believethere have been no material changes from the factors discussed in Part I, “Item1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31,2007. You should carefully consider the factors discussed below and in ourAnnual Report on Form 10-K, which could materially affect our business,financial condition or future results. The risks described below and in our Annual Report on Form 10-K arenot the only risks facing us.  Additionalrisks and uncertainties not currently known to us or that we currently deem tobe immaterial also may materially adversely affect our business, financialcondition and/or operating results.

 

The following are supplemental riskfactors relating to the recent changes in the strength of the economy and the impact of public perception on ourperformance.

 

*Weakness in the economy and in the real estate market,including specific weakness within our geographic footprint, has adverselyaffected us and may continue to adversely affect us.*

 

If the strength of the U.S. economy ingeneral and the strength of the local economies in which we conduct operationsdecline, or continue to decline, this could result in, among other things, adeterioration in credit quality or a reduced demand for credit, including aresultant adverse effect on our loan portfolio and allowance for loan and leaselosses. Declines in the U.S. economy and the real estate market contributed toour increasing provisions for loan losses in the fourth quarter of 2007 andthrough the second quarter of 2008, and our expectation for future loan lossesand loss provisions for the remainder of 2008 and 2009. These factors could resultin loan loss provisions in excess of charge-offs, delinquencies and/or greatercharge-offs in future periods, which may adversely affect our financialcondition and results of operations. In addition, deterioration of the U.S.economy may adversely impact our traditional banking business. Economicdeclines may be accompanied by a decrease in demand for consumer or commercialcredit and declining real estate and other asset values. Declining real estateand other asset values may reduce the ability of borrowers to use such equityto support borrowings. Delinquencies, foreclosures and losses generallyincrease during economic slow downs or recessions. Additionally, our servicingcosts, collection costs and credit losses may also increase in periods of economicslow down or recessions. The impact of recent events relating to subprimemortgages resulting in a substantial housing recession has not been limited tothose directly involved in the real estate construction industry (such asbuilders and developers). Rather, it has impacted a number of relatedbusinesses such as building materials suppliers, equipment leasing firms, andreal estate attorneys, among others. All of these affected businesses havebanking relationships and when their businesses suffer from recession, thebanking relationship suffers as well.

 

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*The impact of the current economic downturn on the performanceof other financial institutions in our primary market area, actions taken byour competitors to address the current economic downturn, and the publicperception of and confidence in the economy generally, and the banking industryspecifically, could negatively impact our performance and operations.*

 

All financial institutions are subject tothe same risks resulting from a weakening economy such as increased charge-offsand levels of past due loans and nonperforming assets. As troubled institutionsin our market area continue to dispose of problem assets, the already excessinventory of residential homes and lots will continue to negatively impact homevalues and increase the time it takes us or our borrowers to sell existinginventory. The perception that troubled banking institutions (and smallerbanking institutions that are not “in trouble”) are risky institutions forpurposes of regulatory compliance or safeguarding deposits may cause depositorsnonetheless to move their funds to larger institutions. If our depositorsshould move their funds based on events happening at other financialinstitutions, our operating results would suffer.

 

**Item2.****                                         ****UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

None

 

**Item3.****                                         ****DEFAULTS UPON SENIOR SECURITIES**

 

None

 

**Item4.****                                         ****SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS**

 

(a)                           The annual meeting of the stockholders ofthe Company was held on June 19, 2008.

 

(b)                          The following Class III directorswere elected at the meeting to serve terms for three years:

 

Milton Stanley Goggins

Richard Allen Grimes

Robert J. McDonald

Larry Max Phillips

 

Set forth below is the number of votescast for, against, or withheld, as well as the number of abstentions and brokernon-votes, with respect to each nominee for office:

 

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| ** **                           | ** ** | **# of Shares** | ** ** |
|--------------------------------------|------------|---------------------------|------------|
|                                 |       |                      |       |
| **Milton Stanley Goggins** |       |                      |       |
| For                                  |       | 1,713,105                 |       |
| Against                              |       | —                    |       |
| Abstained                            |       | 59,831                    |       |
| Not voted                            |       | 928,946                   |       |
| Total                                |       | 2,701,882                 |       |

 
| ** **                | ** ** | **# of  Shares** | ** ** |
|---------------------------|------------|------------------|------------|
|                      |       |             |       |
| **Richard  Allen Grimes** |       |             |       |
| For                       |       | 1,710,341        |       |
| Against                   |       | —           |       |
| Abstained                 |       | 62,595           |       |
| Not voted                 |       | 928,946          |       |
| Total                     |       | 2,701,882        |       |

 
| ** **              | ** ** | **# of  Shares** | ** ** |
|-------------------------|------------|------------------|------------|
|                    |       |             |       |
| **Robert  J. McDonald** |       |             |       |
| For                     |       | 1,713,765        |       |
| Against                 |       | —           |       |
| Abstained               |       | 59,171           |       |
| Not voted               |       | 928,946          |       |
| Total                   |       | 2,701,882        |       |

 
| ** **                       | ** ** | **# of Shares** | ** ** |
|----------------------------------|------------|---------------------------|------------|
|                             |       |                      |       |
| **Larry Max Phillips** |       |                      |       |
| For                              |       | 1,711,521                 |       |
| Against                          |       | —                    |       |
| Abstained                        |       | 61,415                    |       |
| Not voted                        |       | 928,946                   |       |
| Total                            |       | 2,701,882                 |       |

 

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**Item5.****                                         ****OTHER INFORMATION**

 

None

 

**Item6.****                                         ****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. |

 

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**SIGNATURES**

 

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

 

 
|                 | FIRSTBANK  FINANCIAL SERVICES, INC. |
|----------------------|-------------------------------------|
|                 | (Registrant)                        |
|                 |                                |
|                 |                                |
| August 14, 2008 |                                | /s/  Thaddeus M. Williams |
| Date                 |                                | Thaddeus  M. Williams, President and C.E.O. |
|                 |                                | (Principal  Executive Officer) |
|                 |                                |   |
|                 |                                |   |
| August 14, 2008 |                                | /s/  Lisa J. Maxwell |
| Date                 |                                | Lisa  J. Maxwell, C.F.O. |
|                 |                                | (Principal  Financial and Accounting Officer) |

 

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