**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

| **x**                                                   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|---------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|                                                    |                                                                                                     |
| For the  quarterly period ended **March 31, 2008** |
|                                                    |                                                                                                     |
| **o**                                                   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

For the transition period from                      to

 

**CommissionFile Number:  000-51147**

 

**FirstBank Financial Services, Inc.**

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

 

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

 

**120 KeysFerry Street McDonough, Georgia 30253**

(Address of principal executive offices)

 

**(678) 583-2265**

(Issuer’s telephone number)

 

**N/A**

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

 

Check whether 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, anon-accelerated filer, or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 

| Large accelerated filer  o                     |   | Accelerated filer o          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer o                        |   | Smaller reporting  company x |
| (Do not check if a  smaller reporting company) |   |                              |

 

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 May 9,2008: 2,701,882 shares, $5.00 par value per share.

 

 

----

 

**FIRSTBANKFINANCIAL SERVICES, INC. AND SUBSIDIARY**

 

**TABLE OFCONTENTS**

 
| ** **                                                                                                                                                                                                                              | **Page** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| PART I.                             FINANCIAL  INFORMATION                             |     |
|                                                                                                                                                                                                                                    |     |
| Item 1.                       Consolidated  Financial Statements                                                          |     |
|                                                                                                                                                                                                                                    |     |
| Consolidated  Balance Sheets as of March 31,  2008 and December 31, 2007                                                                                                                                                      | 1        |
|                                                                                                                                                                                                                                    |     |
| Consolidated  Statements of Operations for the three months ended March 31, 2008 and 2007                                                                                                                                          | 2        |
|                                                                                                                                                                                                                                    |     |
| Consolidated  Statements of Comprehensive Income for the three months ended March 31,  2008 and 2007                                                                                                                               | 3        |
|                                                                                                                                                                                                                                    |     |
| Consolidated  Statements of Cash Flows for the three months ended March 31, 2008 and 2007                                                                                                                                          | 4        |
|                                                                                                                                                                                                                                    |     |
| Notes to Consolidated Financial Statements                                                                                                                                                                                              | 5-8      |
|                                                                                                                                                                                                                                    |     |
| Item 2.                       Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 9-21     |
|                                                                                                                                                                                                                                    |     |
| Item 3.                       Quantitative  and Qualitative Disclosures About Market Risk                                 | 21       |
|                                                                                                                                                                                                                                    |     |
| Item 4T.               Controls and Procedures                                                                                                                    | 21       |
|                                                                                                                                                                                                                                    |     |
| PART II.                         OTHER  INFORMATION                                                        | 22       |
|                                                                                                                                                                                                                                    |     |
| 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                                                                                                                                                                                                                          |     |

#####  

----

 

**PART I - FINANCIAL INFORMATION**

 

**ITEM 1.    Financial Statements**

 

**FIRSTBANKFINANCIAL SERVICES, INC.**

**AND SUBSIDIARY**

**CONSOLIDATEDBALANCE SHEETS**

**MARCH 31,2008 AND DECEMBER 31, 2007**

 
| ** **                                                                                                                      | ** ** | **March 31, 2008** | ** **  | **December 31, 2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|-------------|----------------------------|------------|
| ** **                                                                                                                      | ** ** | **(Unaudited)**         | ** **  | **(Audited)**              | ** ** |
| **Assets**                                                                                                                      | ** ** | ** **              | ** **  | ** **                 | ** ** |
| Cash and due from banks                                                                                                         |       | $                       | 3,616,321   |                       | $          | 1,576,976 |   |
| Interest-bearing deposits in banks                                                                                              |       | 4,078,845               |        | 780,914                    |       |
| Federal funds sold                                                                                                              |       | 81,891,000              |        | 14,620,000                 |       |
| Securities available for sale, at fair value                                                                                    |       | 59,257,803              |        | 54,645,511                 |       |
| Restricted equity securities, at cost                                                                                           |       | 2,913,056               |        | 2,516,856                  |       |
|                                                                                                                            |       |                    |        |                       |       |
| Loans, net of unearned income                                                                                                   |       | 254,732,845             |        | 256,865,762                |       |
| Less allowance for loan losses                                                                                                  |       | 6,076,044               |        | 7,141,996                  |       |
| Loans, net                                                                                                                      |       | 248,656,801             |        | 249,723,766                |       |
|                                                                                                                            |       |                    |        |                       |       |
| Premises and equipment                                                                                                          |       | 7,697,993               |        | 7,565,255                  |       |
| Other real estate owned                                                                                                         |       | 9,517,547               |        | 2,556,179                  |       |
| Other assets                                                                                                                    |       | 14,805,726              |        | 11,672,636                 |       |
| **Total  assets**                                                                                                               |       | $                       | 432,435,092 |                       | $          | 345,658,093 |   |
|                                                                                                                            |       |                    |        |                       |       |
| **Liabilities  and Stockholders’ Equity**                                                                                  | ** ** | ** **              | ** **  | ** **                 | ** ** |
| Deposits                                                                                                                        |       |                    |        |                       |       |
| Noninterest-bearing                                                                                                             |       | $                       | 8,827,427   |                       | $          | 9,852,593 |   |
| Interest-bearing                                                                                                                |       | 346,636,646             |        | 265,093,731                |       |
| Total deposits                                                                                                                  |       | 355,464,073             |        | 274,946,324                |       |
| Other borrowings                                                                                                                |       | 40,000,000              |        | 34,000,000                 |       |
| Subordinated debentures                                                                                                         |       | 8,248,000               |        | 8,248,000                  |       |
| Other liabilities                                                                                                               |       | 2,821,595               |        | 2,596,846                  |       |
| Total  liabilities                                                                                                              |       | 406,533,668             |        | 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                                                                                                                         |       | 11,147,122              |        | 11,139,662                 |       |
| Retained  earnings                                                                                                              |       | 491,481                 |        | 1,046,207                  |       |
| Restricted  stock- unearned compensation                                                                                        |       | (27,500                 | )           | —                     |       |
| Accumulated  other comprehensive income                                                                                         |       | 780,911                 |        | 196,644                    |       |
| Total  stockholders’ equity                                                                                                |       | 25,901,424              |        | 25,866,923                 |       |
| **Total  liabilities and stockholders’ equity**                                                                            |       | $                       | 432,435,092 |                       | $          | 345,658,093 |   |

 

See notes to consolidated financial statements.

 

1

----

 

**FIRSTBANKFINANCIAL SERVICES, INC.**

**AND SUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**THREEMONTHS ENDED MARCH 31, 2008 AND 2007**

**(Unaudited)**

 
| ** **                                               | ** ** | **Three Months Ended  March 31,** | ** **    |
|----------------------------------------------------------|------------|----------------------------------------|---------------|
| ** **                                               | ** ** | **2008**                               | ** **    | **2007** | ** ** |
| **Interest income**                                      | ** ** | ** **                             | ** **    | ** ** | ** ** |
| Loans, including  fees                                   | ** ** | **$**                                  | **4,249,016** | ** ** | $ | 4,849,224 | ** ** |
| Taxable  securities                                      | ** ** | **686,346**                            |          | 435,231 |   |
| Tax-exempt securities                                    | ** ** | **67,429**                             |          | 51,694 |   |
| Deposits in  banks                                       | ** ** | **32,895**                             |          | 28,812 |   |
| Federal funds  sold                                      | ** ** | **100,948**                            |          | 131,167 |   |
| **Total  interest income**                               | ** ** | **5,136,634**                          |          | 5,496,128 |   |
|                                                     |       |                                   |          |   |   |
| **Interest expense**                                     | ** ** | ** **                             | ** **    | ** ** | ** ** |
| Deposits                                                 | ** ** | **3,147,906**                          |          | 2,732,535 |   |
| Other borrowings                                         | ** ** | **508,456**                            |          | 378,879 |   |
| **Total interest  expense**                              | ** ** | **3,656,362**                          |          | 3,111,414 |   |
| **Net  interest income**                                 | ** ** | **1,480,272**                          |          | 2,384,714 |   |
| **Provision for loan losses**                            | ** ** | **855,719**                            |          | 210,000 |   |
| **Net  interest income after provision for loan losses** | ** ** | **624,553**                            |          | 2,174,714 |   |
| ** **                                               | ** ** | ** **                             | ** **    | ** ** | ** ** |
| **Other income**                                         | ** ** | ** **                             | ** **    | ** ** | ** ** |
| Service charges  on deposit accounts                     | ** ** | **98,231**                             |          | 111,661 |   |
| Gain (loss) on  sale of securities available for sale    | ** ** | **33,851**                             |          | (20,024 | ) |
| Other operating  income                                  | ** ** | **93,201**                             |          | 27,740 |   |
| **Total  other income**                                  | ** ** | **225,283**                            |          | 119,377 |   |
| ** **                                               | ** ** | ** **                             | ** **    | ** ** | ** ** |
| **Other expenses**                                       | ** ** | ** **                             | ** **    | ** ** | ** ** |
| Salaries and  employee benefits                          | ** ** | **866,166**                            |          | 764,254 |   |
| Equipment and  occupancy expenses                        | ** ** | **272,135**                            |          | 205,652 |   |
| Loss on sale of  assets                                  | ** ** | **19,126**                             |          | 3,956 |   |
| Loss on sale of  other real estate owned                 | ** ** | **70,622**                             |          | — |   |
| Other operating  expenses                                | ** ** | **621,401**                            |          | 564,782 |   |
| **Total  other expenses**                                | ** ** | **1,849,450**                          |          | 1,538,644 |   |
| **Income  (loss) before income taxes**                   | ** ** | **(999,614**                           | **)**         | 755,447 |   |
| **Income  tax (benefit) expense**                        | ** ** | **(444,888**                           | **)**         | 279,931 |   |
| **Net  income (loss)**                                   | ** ** | **$**                                  | **(554,726**  | **)** | **$** | **475,516** | ** ** |
|                                                     |       |                                   |          |   |   |
| **Basic earnings (losses) per share**                    | ** ** | **$**                                  | **(0.21**     | **)** | **$** | **0.17** | ** ** |
| **Diluted earnings (losses) per share**                  | ** ** | **$**                                  | **(0.21**     | **)** | **$** | **0.16** | ** ** |
| **Cash dividends per share**                             | ** ** | **$**                                  | **—**    | ** ** | **$** | **—** | ** ** |

 

See notes toconsolidated financial statements.

 

2

----

 

**FIRSTBANKFINANCIAL SERVICES, INC.**

**AND SUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF COMPREHENSIVE INCOME**

**THREEMONTHS ENDED MARCH 31, 2008 AND 2007**

**(Unaudited)**

 
| ** **                                                                                                                            | ** ** | **2008**    | ** **   | **2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|--------------|----------|------------|
| Net income  (loss)                                                                                                                    | ** ** | **$**       | **(554,726** | **)**    | $          | 475,516 |   |
|                                                                                                                                  |       |        |         |     |       |
| Other  comprehensive income:                                                                                                          |       |        |         |     |       |
|                                                                                                                                  |       |        |         |     |       |
| Net unrealized  holding gains (losses) arising during period, net of tax (benefit)                                                    | ** ** | **341,139** |         | (17,605  | )          |
|                                                                                                                                  |       |        |         |     |       |
| Reclassification  adjustment for (gains) losses on securities available for sale realized in  net income (loss), net of (tax) benefit | ** ** | **(20,988** | **)**        | 12,415   |       |
|                                                                                                                                  |       |        |         |     |       |
| Net unrealized  holding gains on interest rate floors arising during period, net of tax                                               | ** ** | **264,116** |         | 16,591   |       |
|                                                                                                                                  |       |        |         |     |       |
| Other  comprehensive income                                                                                                           | ** ** | **584,267** |         | 11,401   |       |
|                                                                                                                                  |       |        |         |     |       |
| Comprehensive  income                                                                                                                 | ** ** | **$**       | **29,541**   |     | $          | 486,917 |   |

 

See notes to consolidated financial statements.

 

3

----

 

**FIRSTBANKFINANCIAL SERVICES, INC.**

**AND SUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**THREEMONTHS ENDED MARCH 31, 2008 AND 2007**

**(Unaudited)**

 
| ** **                                                                                | ** ** | **2008**        | ** **    | **2007**    | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------|---------------|-------------|------------|
| **OPERATING ACTIVITIES**                                                                  | ** ** | ** **      | ** **    | ** **  | ** ** |
| Net income  (loss)                                                                        | ** ** | **$**           | **(554,726**  | **)**       | $          | 475,516 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |            |          |        |       |
| Loss on sale of  assets                                                                   | ** ** | **19,126**      |          | 3,956       |       |
| Loss on sale of  other real estate owned                                                  | ** ** | **70,622**      |          | —      |       |
| (Gain) loss on  sale of securities available for sale                                     | ** ** | **(33,851**     | **)**         | 20,024      |       |
| Depreciation and  amortization                                                            | ** ** | **127,734**     |          | 112,845     |       |
| Stock  compensation expense                                                               | ** ** | **2,460**       |          | 69,557      |       |
| Provision for  loan losses                                                                | ** ** | **855,719**     |          | 210,000     |       |
| (Increase)  decrease in interest receivable                                               | ** ** | **16,019**      |          | (141,659    | )          |
| Increase  (decrease) in interest payable                                                  | ** ** | **334,078**     |          | (145,094    | )          |
| Net other  operating activities                                                           | ** ** | **10,845**      |          | (193,917    | )          |
| Net cash  provided by operating activities                                                | ** ** | **848,026**     |          | 411,228     |       |
|                                                                                      |       |            |          |        |       |
| **INVESTING ACTIVITIES**                                                                  | ** ** | ** **      | ** **    | ** **  | ** ** |
| Net (increase)  decrease in interest-bearing deposits in banks                            | ** ** | **(3,297,931**  | **)**         | 73,518      |       |
| Purchases of  securities available for sale                                               | ** ** | **(11,463,555** | **)**         | (5,117,623  | )          |
| Proceeds from  maturities of securities available for sale                                | ** ** | **5,384,724**   |          | 1,345,161   |       |
| Proceeds from  sales of securities available for sale                                     | ** ** | **2,016,762**   |          | 1,477,500   |       |
| Net (increase)  decrease in restricted equity securities                                  | ** ** | **(396,200**    | **)**         | 126,700     |       |
| Net increase in  federal funds sold                                                       | ** ** | **(67,271,000** | **)**         | (1,233,000  | )          |
| Net increase in  loans                                                                    | ** ** | **(8,270,839**  | **)**         | (20,119,406 | )          |
| Proceeds from  sales of other real estate owned                                           | ** ** | **165,652**     |          | —      |       |
| Proceeds from  sale of assets                                                             | ** ** | **57,232**      |          | 22,000      |       |
| Purchase of bank  owned life insurance                                                    | ** ** | **(2,000,000**  | **)**         | —      |       |
| Purchase of  premises, equipment and software                                             | ** ** | **(253,775**    | **)**         | (951,495    | )          |
| Net cash used in  investing activities                                                    | ** ** | **(85,328,930** | **)**         | (24,376,645 | )          |
|                                                                                      |       |            |          |        |       |
| **FINANCING ACTIVITIES**                                                                  | ** ** | ** **      | ** **    | ** **  | ** ** |
| Net increase in  deposits                                                                 | ** ** | **80,517,749**  |          | 29,033,319  |       |
| Net increase  (decrease) in borrowings                                                    | ** ** | **6,000,000**   |          | (2,000,000  | )          |
| Issuance of  restricted stock                                                             | ** ** | **2,500**       |          | —      |       |
| Net cash  provided by financing activities                                                | ** ** | **86,520,249**  |          | 27,033,319  |       |
| Net increase in cash and due from banks                                                   | ** ** | **2,039,345**   |          | 3,067,902   |       |
| Cash and due from banks at beginning of period                                            | ** ** | **1,576,976**   |          | 4,047,726   |       |
| Cash and due from banks at end of period                                                  | ** ** | **$**           | **3,616,321** |        | $          | 7,115,628 |   |
|                                                                                      |       |            |          |        |       |
| Supplemental schedule of noncash investing and  financing activities -                    |       |            |          |        |       |
| Change in  accumulated other comprehensive loss                                           | ** ** | **$**           | **584,267**   |        | $          | 11,401 |   |
| Loans  transferred to other real estate owned                                             | ** ** | **$**           | **7,353,518** |        | $          | 1,021,811 |   |
|                                                                                      |       |            |          |        |       |
| Supplemental disclosures of cash flow information -                                       |       |            |          |        |       |
| Cash paid during  the period for interest                                                 | ** ** | **$**           | **3,322,284** |        | $          | 3,256,508 |   |
| Cash paid during  the period for income taxes                                             | ** ** | **$**           | **—**    |        | $          | 60,854 |   |
| Financed sales  of other real estate owned                                                | ** ** | **$**           | **218,253**   | ** **  | **$**      | **—** | ** ** |

 

See notes toconsolidated financial statements.

 

4

----

 

**FIRSTBANK FINANCIAL SERVICES, INC. AND SUBSIDIARY**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

(Unaudited)

 

**NOTE 1. Basis of Presentation**

 

FirstBank Financial Services, Inc. (the “Company”)is a bank holding company whose business is conducted by its wholly-ownedcommercial bank, FirstBank Financial Services, formerly First Bank of HenryCounty, (the “Bank”). The Bank is a commercial bank located in McDonough, HenryCounty, Georgia, with a branch in Stockbridge, Georgia, another branch also inMcDonough known as the Bank’s South 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 financial statementsand notes thereto included in the annual report on Form 10-K for the yearended December 31, 2007, which was filed with the Securities and ExchangeCommission.

 

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 March 31, 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 three months ended March 31, 2008 are not necessarilyindicative of the results to be expected for the full year.

 

**NOTE 2.  Stock Compensation Plans**

 

At March 31, 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 March 31, 2008, there was approximately $19,678 of unrecognized compensation cost related to stock-based payments, which is expected to be recognized over a weighted-average period of 1.25 years. Stock based compensation expense recognized in earnings totaled $2,460 and $69,557 as of March 31, 2008 and 2007, respectively.

 

5

----

 

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

 

SFAS No. 128,*Earnings Per Share*, establishesstandards for computing and presenting basic and diluted earnings pershare.  In this regard, the Company isrequired 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 March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                        | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| Basic earnings (losses) per share:                                                                                                |       |                                  |       |   |   |
| Weighted average  common shares outstanding                                                                                       |       | 2,701,882                             |       | 2,831,676 |   |
| Net income  (loss)                                                                                                                |       | $                                     | (554,726   | ) | $ | 475,516 |   |
| Basic earnings  (losses) per share                                                                                                |       | $                                     | (0.21      | ) | $ | 0.17 |   |
|                                                                                                                              |       |                                  |       |   |   |
| 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 |       | —                                |       | 172,443 |   |
| Total weighted  average common shares and common stock equivalents outstanding                                                    |       | 2,701,882                             |       | 3,004,119 |   |
| Net income  (loss)                                                                                                                |       | $                                     | (554,726   | ) | $ | 475,516 |   |
| Diluted earnings  (losses) per share                                                                                              |       | $                                     | (0.21      | ) | $ | 0.16 |   |

 

**NOTE 4.  Recent Accounting Pronouncements**

 

In March 2008,the Financial Accounting Standards Board (FASB) issued Statement No. 161, **Disclosures   about Derivative Instruments and HedgingActivities** (SFAS 161) — an amendment of FASB Statement No. 133,**Accountingfor Derivative 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.

 

6

----

 

**NOTE 5. 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 March 31, 2008at a fair value of $87,031.  The Companyhas two interest rate floors, one with a notional value of $40 million and a7.50% strike and the other with a notional value of $30 million and an 8.50%strike.  The fair value of theseinstruments at March 31, 2008 is $677,780 and is reflected in otherassets.  The Company also has twointerest rate swaps with a notional value totaling $20 million.  The Company receives a fixed rate of interestfrom the counterparty and pays a floating rate tied to prime to thecounterparty.  These instruments are morefully described in the Company’s annual report on Form 10-K dated December 31,2007.

 

**NOTE 6.  Fair Value Measurement**

 

On January 1, 2008,the Company adopted FASB No. 157, Fair Value Measurements.  FASB No. 157 defines fair value, establishesa framework for measuring fair value, and expands disclosures about fair valuemeasurements.  FASB No. 157 appliesto reported balances that are required or permitted to be measured at fairvalue under existing accounting pronouncements; accordingly, the standard doesnot require any new fair value measurements of reported balances.

 

FASB No. 157emphasizes 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).

 

Level 1 inputs utilizequoted prices (unadjusted) in active markets for identical assets orliabilities 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.

 

7

----

 

The table below presentsthe Company’s assets and liabilities measured at fair value on a recurringbasis as of March 31, 2008, aggregated by the level in the fair valuehierarchy within which those measurements fall.

 
| ** **                                | ** ** | **Quoted Prices  in Active  Markets for  Identical Assets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** | **Total**  | ** ** |
|-------------------------------------------|------------|------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------|------------|------------|------------|
| **Assets**                                | ** ** | ** **                                                             | ** ** | ** **                                            | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Available for  sale investment securities |       | $                                                                      | —     |                                                  | $          | 59,257,803                                       |       | $          | —     |   | $ | 59,257,803 |   |
| Interest rate  floors                     |       | —                                                                 |       | 677,780                                               |       | —                                           |       | 677,780    |       |
| Total assets at fair value                |       | $                                                                      | —     |                                                  | $          | 59,935,583                                       |       | $          | —     |   | $ | 59,935,583 |   |

 

**NOTE 7. Reclassification**

 

Certainitems on the statements of operations and cash flows for the period ended March 31,2007 have been reclassified to be consistent with the classifications adoptedfor the period ended March 31, 2008. The items reclassified are gain (loss) on sale of securities availablefor sale and loss on sale of other assets. Net income was not impacted due to the reclassifications.

 

8

----

 

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

 

Thefollowing is our discussion and analysis of certain significant factors which haveaffected the financial position and operating results of FirstBank FinancialServices, Inc. (the “Company”) during the periods included in theaccompanying consolidated financial statements.

 

**Forward Looking Statements**

 

Certainof the statements made herein under the caption “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” (“MD&A”) areforward-looking statements for purposes of the Securities Act of 1933 (the “SecuritiesAct”) and the Securities Exchange Act of 1934 (the “Exchange Act”), and as suchmay involve known and unknown risks, uncertainties and other factors which maycause our actual results, performance or achievements to be materiallydifferent from future results, performance or achievements expressed or impliedby such forward-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.

 

Theseforward-looking statements involve risks and uncertainties and may not be realizeddue to a variety of factors, including, without limitation:

 

·                                          theeffects of future economic conditions;

 

·                                          governmentalmonetary and fiscal policies, as well as legislative and regulatory changes;

 

·                                          therisks of changes in interest rates on the level and composition of deposits,loan demand, and the values of loan collateral, securities, and otherinterest-sensitive assets and liabilities;

 

·                                          changesin the interest rate environment which could reduce anticipated or actualmargins;

 

·                                          theeffects of competition from other commercial banks, thrifts, mortgage bankingfirms, consumer finance companies, credit unions, securities brokerage firms,insurance companies, money market and other mutual funds and other financialinstitutions operating in our market area and elsewhere, including institutionsoperating regionally, nationally, and internationally, together with suchcompetitors offering banking products and services by mail, telephone,computer, and the Internet;

 

·                                          changesoccurring in business conditions and inflation;

 

·                                          changesin monetary and tax policies;

 

·                                          changesin technology;

 

·                                          thelevel of allowance for loan loss;

 

·                                          therate of delinquencies and amounts of charge-offs;

 

·                                          therates of loan growth;

 

·                                          adversechanges in asset quality and resulting credit risk-related losses and expenses;

 

·                                          changesin the securities market; and

 

·                                          otherrisks and uncertainties detailed from time to time in our filings with theSecurities and Exchange Commission.

 

9

----

 

**Introduction**

 

The Company, through its banking subsidiary, performs banking servicescustomary for full service banks of similar size and character.  The Company offers personal and businesschecking accounts, interest-bearing checking accounts, savings accounts andvarious types of certificates of deposit. The Company also offers commercial loans, installment and other consumerloans, home equity loans, home equity lines of credit, construction loans andmortgage loans.  In addition, the Companyprovides such services as official bank checks, traveler’s checks, directdeposit and United States Savings Bonds. The Company provides other customary banking services including ATMservices, safe deposit facilities, money transfers, and individual retirementaccounts.

 

**Overview**

 

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

 

**Critical Accounting Policies**

 

Wehave adopted various accounting policies which govern the application ofaccounting principles generally accepted in the United States of America in thepreparation of our consolidated financial statement of FirstBank FinancialServices, Inc.  Our significantaccounting policies are described in the footnotes to the financial statementsfor FirstBank Financial Services, Inc. at December 31, 2007 as filedin our annual report on Form 10-K, which was filed with the Securities andExchange Commission.

 

Certainaccounting policies involve significant judgments and assumptions by us whichhave a material impact on the carrying value of certain assets andliabilities.  We consider theseaccounting policies to be critical accounting policies.  The judgments and assumptions we use arebased on historical experience and other factors, which we believe to bereasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actualresults could differ from these judgments and estimates which could have amaterial impact on our carrying values of assets and liabilities and ourresults of operations.

 

We believe the allowance for loan lossesis a critical accounting policy that requires the most significant judgmentsand estimates used in preparation of our consolidated financialstatements.  Refer to the portion of thisdiscussion that addresses asset quality for a description of our processes andmethodology for determining our allowance for loan losses.

 

Anotherof our critical accounting policies involves stock-based compensation.  The assumptions used in the determination ofthe fair value of stock options granted ultimately determine the recognition ofstock-based compensation expense.  Theshort-cut method was used to determine the expected life of the options.  This method, as prescribed by SAB Topic14.D.2, calculates the expected term based on the midpoint between the vestingdate of the option and the end of the contractual term.  Expected volatility was based upon thehistorical volatility of the Company’s stock. Risk-free interest rates for periods

 

10

----

 

withinthe contractual life of the option are based upon the U.S. Treasury yield curvein effect at the time of the grant. Because of the need to retain capital for expected growth and pasthistory, the expected dividend rate is 0%. These assumptions have a significant impact on the amount of expenserecognized for stock-based compensation.

 

**AssetQuality**

 

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 loansoutstanding, the level of non-performing loans, historical loan lossexperience, delinquency trends, the amount of actual losses charged to theallowance in a given period, and assessment of present and anticipated economicconditions.  While risk of loss in theCompany’s portfolio is primarily tied to the credit quality of the variousborrowers, risk of loss may increase due to factors beyond the Company’scontrol such as local, regional and/or national economic downturns.  General conditions in the real estate marketmay also impact the relative risk in the real estate portfolio.

 

A provision for loanlosses of $855,719 was made during the first quarter of 2008 as compared to$210,000 in the first quarter of 2007 resulting in an increase of $645,719 on acomparative basis.  The amounts providedare due primarily to our assessment of inherent risk in the loan portfolio andthe increase in problem and potential problem loans. We can make no assurancesthat the Company will not see a further deterioration in credit quality whichwould require additional reserves. The allowance for loan losses as apercentage of total loans was 2.39% at March 31, 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 first quarterof 2008, the Company foreclosed on the properties related to loans totalingapproximately $7,354,000 with immediate write-downs totaling approximately$1,347,000. These loans were included in non-accrual loans as of December 31,2007 and the related losses provided for in the final December 31, 2007allowance for loan losses.  Managementdoes not anticipate any additional losses in the disposition of theseproperties.  During the first quarter,the Company also sold five lots and two new single family detached homes forapproximately $384,000 resulting in a net loss of approximately $71,000.

 

11

----

 

 

The following table presents theaggregate of nonperforming assets for the categories indicated.

 
| ** **                                                                                                 | ** ** | **March 31,  2008**   | ** ** | **December 31,  2007** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-----------------------------|------------|
| ** **                                                                                                 | ** ** | **(Dollars in Thousands)** | ** ** |
| Nonaccrual loans                                                                                           |       | $                          | 41,981     |                        | $          | 48,804 |   |
| Loans  contractually past due ninety days or more as to interest or principal  payments and still accruing |       | 2,927                      |       | 1,637                       |       |
| Restructured  loans                                                                                        |       | —                     |       | —                      |       |
| Total  nonperforming loans                                                                                 |       | 44,908                     |       | 50,441                      |       |
|                                                                                                       |       |                       |       |                        |       |
| Other real  estate                                                                                         |       | 9,518                      |       | 2,556                       |       |
| Total  nonperforming assets                                                                                |       | $                          | 54,426     |                        | $          | 52,997 |   |

 

Summarized below is alist of other real estate acquired through foreclosure totaling $9,518,000 asof March 31, 2008 detailed by collateral type and location:

** **

·                                          $1,941,000 in loans secured by five new constructionsingle family detached homes in various stages of completion located inForsyth, Monroe County, Georgia;

 

·                                          $1,502,000 secured by four completed new constructionsingle family detached homes in Stockbridge, Henry County, Georgia;

 

·                                          $1,500,000 in loans secured by two developedresidential lots on Lake Spivey in Jonesboro, Clayton County, Georgia;

 

·                                          $1,424,000 in loans secured by six new constructionsingle family detached homes in various stages of completion located inMcDonough, Henry County, Georgia;

 

·                                          $887,000 secured by two new construction single familydetached homes in various stages of completion in Oxford, Newton County,Georgia.

 

·                                          $566,000 in loans secured by a condo unit at theAtlanta Motor Speedway in Hampton, Henry County, Georgia;

 

·                                          $450,000 in loans secured by ten developed residentiallots in Forsyth, Monroe County, Georgia;

 

·                                          $276,000 secured by two new construction single familydetached homes in various stages of completion in Jackson, Butts County,Georgia; 

 

·                                          $265,000 in loans secured by seven developedresidential lots in McDonough, Henry County, Georgia;

 

·                                          $230,000 in loans secured by two new constructionsingle family detached homes in various stages of completion located inLuthersville, Meriweather County, Georgia;

 

·                                          $176,000 in loans secured by two developed residentiallots in Stockbridge, Henry County, Georgia;

 

·                                          $151,000 in loans secured by seven developedresidential lots in Luthersville, Meriweather County, Georgia;

 

·                                          $94,000 secured by one new construction single familydetached home in Monticello, Jasper County, Georgia; 

 

·                                          $56,000 secured by two developed residential lots inRiverdale, Clayton County, Georgia;

 

12

----

 

Subsequentto March 31, 2008, other real estate acquired through foreclosure totalingapproximately $439,000 was sold with a resulting gain on the sale ofapproximately $14,000.

 

Summarized below arenonaccrual loans totaling $41,981,000 as of March 31, 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.

 

·                                          $8,895,000 in loans secured by three residential A &D projects in various stages of completion located in McDonough, Henry County,Georgia; 

 

·                                          $5,079,000 in loans secured by thirty-six newconstruction single family detached homes in various stages of completionlocated in McDonough, Henry County, Georgia; 

 

·                                          $4,650,000 in loans secured by three residential A &D projects in various stages of completion located in Stockbridge, Henry County,Georgia; 

 

·                                          $4,529,000 in loans secured by one residential A &D project located in Lovejoy, Clayton County, Georgia; 

 

·                                          $1,808,000 in loans secured by commercial property inCovington, Newton County, Georgia; 

 

·                                          $1,687,000 in loans secured by seventeen newconstruction single family detached homes in various stages of completionlocated in Covington, Newton County, Georgia;

 

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

 

·                                          $1,565,000 in loans secured by developed residentiallots located in Hampton, Henry County, Georgia; 

 

·                                          $1,515,000 in loans secured by various developedresidential lots in McDonough, Henry County, Georgia; 

 

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

 

·                                          $1,041,000 in loans secured by two commercial landparcels located in McDonough, Henry County, Georgia;

 

·                                          $1,024,000 in loans secured by eleven new constructionsingle family detached homes in various stages of completion located inGriffin, Spalding County, Georgia; 

 

·                                          $1,000,000 in loans secured by a car wash facilitylocated in Stockbridge, Henry County, Georgia;

 

·                                          $915,000 in loans secured by twenty new constructionsingle family detached homes in various stages of completion located inPalmetto, Fulton County, Georgia; 

 

·                                          $763,000 in loans secured by six new constructionsingle family detached homes in various stages of completion in Hampton,Clayton County, Georgia;

 

·                                          $714,000 in loans secured by six new constructionsingle family detached homes in various stages of completion in College Park,Fulton County, Georgia;

 

·                                          $628,000 in loans secured by five new constructionsingle family detached homes in various stages of completion located in Barnesville,Lamar County, Georgia;

 

·                                          $465,000 in loans secured by commercial property inLithonia, DeKalb County, Georgia;

 

·                                          $443,000 in loans secured by three new constructionsingle family detached homes in various stages of completion located in Hampton,Henry County, Georgia;

 

13

----

 

·                                          $368,000 in loans secured by various equipment;

 

·                                          $367,000 in loans secured by three new constructionsingle family detached homes in various stages of completion located in Jackson,Butts County, Georgia;

 

·                                          $341,000 in loans secured by three single familyrental properties located in Griffin, Spalding County, Georgia;

 

·                                          $204,000 in loans secured by one new family rentalproperties located in Morrow, Clayton County, Georgia;

 

·                                          $197,000 in loans secured by two single family rentalproperties located in Morrow, Clayton County, Georgia;

 

·                                          $143,000 in loans secured by other bank stock;

 

·                                          $124,000 in loans secured by one new constructionsingle family detached home located in Monroe, Walton County, Georgia;

 

·                                          $93,000 in loans secured by a single family rentalproperty located in McDonough, Henry County, Georgia;

 

·                                          $92,000 in loans secured by a single family rentalproperty located in Riverdale, Clayton County, Georgia;

 

·                                          $84,000 in loans secured by a single family detachedhome located in Covington, Newton County, Georgia;

 

·                                          $75,000 in loans secured by assignments on accountsreceivables contracts;

 

·                                          $54,000 in loans secured by a single family detachedhome located in Henry County, Georgia;

 

·                                          $41,000 in loans secured by a single family detachedhome under construction located in Locust Grove, Henry County, Georgia;

 

·                                          $14,000 in loans secured by a single family detachedhome located in Stockbridge, Henry County, Georgia;

 

·                                          $12,000 in loans secured by three vehicles.

 

Theallowance for loan losses on these loans is determined based on fair valueestimates (net of selling costs) of the respective collateral.  The actual losses on these loans could differsignificantly if the fair value of the collateral is different from theestimates used in determining the allocated allowance.  Most of our collateral dependent impairedloans are secured by real estate.  Thefair value of these real estate properties is generally determined based uponappraisals performed by a certified or licensed appraiser.  Management also considers other factors orrecent developments which could result in adjustments to the collateral valueestimates indicated in the appraisals. The allowance for loan losses is established through a provision forloan losses charged to expense.  Loanlosses are charged against the allowance when management believes thecollectibility of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.

 

Theallowance is an amount that management believes will be adequate to absorbestimated losses relating to specifically identified loans as well as probablecredit losses inherent in the balance of the loan portfolio, based on anevaluation of the collectibility of existing loans and prior lossexperience.  This evaluation also takesinto consideration such factors as changes in the nature and volume of the loanportfolio, overall portfolio quality, and review of specific problem loans,concentrations and current

 

14

----

 

economicconditions that may affect the borrower’s ability to pay.  This evaluation does not include the effectsof expected losses on specific loans or groups of loans that are related to futureevents or expected changes in economic conditions.  While management uses the best informationavailable to make its evaluation, future adjustments to the allowance may benecessary if there are significant changes in economic conditions.  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.

 

Theallowance consists of specific, general and unallocated components.  The specific component relates to loans thathave been evaluated for impairment.  Forsuch loans that are also classified as impaired, an allowance is establishedwhen the discounted cash flows (or collateral value or observable market price)of the impaired loan is lower than the carrying value of that loan.  The general component covers non-classifiedloans and is based on historical loss experience adjusted for qualitativefactors.  An unallocated component ismaintained to cover uncertainties that could affect management’s estimate ofprobable losses.  The unallocatedcomponent of the allowance reflects the margin of imprecision inherent in the underlyingassumptions used in the methodologies for estimating specific and generallosses in the portfolio.

 

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

 
| ** **                                                                                                  | ** ** | **March 31,  2008**   | ** ** | **December 31,  2007** | ** ** | **March 31,  2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|------------------------|------------|--------------------------|------------|
| ** **                                                                                                  | ** ** | **(Dollars in Thousands)** | ** ** |
| Nonaccrual loans                                                                                            |       | $                          | 41,981     |                   | $          | 48,804                   |       | $ | — |   |
| Potential  problem loans                                                                                    |       | 12,461                     |       | 7,516                  |       | 2,321                    |       |
| Loans  contractually past due ninety days or more as to interest or principal  payments and still accruing  |       | 2,927                      |       | 1,637                  |       | 23                       |       |
| Restructured loans                                                                                          |       | —                     |       | —                 |       | —                   |       |
| Other  criticized/watch loans                                                                               |       | 27,545                     |       | 18,046                 |       | 3,577                    |       |
| Interest income  that would have been recorded on non- accrual and restructured loans under  original terms |       | 752                        |       | 1,694                  |       | —                   |       |
| Interest income  that was recorded on nonaccrual and restructured loans                                     |       | —                     |       | —                 |       | —                   |       |
|                                                                                                             |            |                            |            |                        |            |                          |            |  |  |  |

 

Potentialproblem loans are defined as loans about which we have serious doubts as to theability of the borrower to comply with the present loan repayment terms andwhich may cause the loan to be placed on nonaccrual status, to become past duemore than ninety days, or to be restructured.

 

Othercriticized /watch loans are defined as loans that may possess creditdeficiencies which may require management’s attention to monitor the borrower’sability to comply with the present loan repayment terms and to detect anyfurther credit deterioration of the borrower.

 

15

----

 

Itis our policy to discontinue the accrual of interest income when, in theopinion of management, collection of interest becomes doubtful. We willgenerally discontinue the accrual of interest when (1) there is asignificant deterioration in the financial condition of the borrower and fullrepayment of principal and interest is not expected and (2) the principalor interest is more than ninety days past due, unless the loan is bothwell-secured and in the process of collection.

 

Loansclassified for regulatory purposes as loss, doubtful, substandard, or specialmention that have not been included in the table above do not represent orresult from trends or uncertainties which 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.

 

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

 
| ** **                                                                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                     | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| ** **                                                                     | ** ** | **(Dollars in Thousands)**             | ** ** |
| Average amount of loans outstanding                                            |       | $                                      | 257,506    |   | $ | 217,403 |   |
| Balance of allowance for loan losses at beginning of  period                   |       | $                                      | 7,142      |   | $ | 2,392 |   |
| Loans charged off:                                                             |       |                                   |       |   |   |
| Commercial and  financial                                                      |       | (524                                   | )          | — |   |
| Real estate mortgage                                                           |       | (1,407                                 | )          | — |   |
| Installment                                                                    |       | (23                                    | )          | (6 | ) |
|                                                                           |       | (1,954                                 | )          | (6 | ) |
| Loans recovered:                                                               |       |                                   |       |   |   |
| Commercial and  financial                                                      |       | 29                                     |       | — |   |
| Real estate  mortgage                                                          |       | —                                 |       | — |   |
| Installment                                                                    |       | 3                                      |       | — |   |
|                                                                           |       | 32                                     |       | — |   |
| Net charge-offs                                                                |       | (1,922                                 | )          | (6 | ) |
| Additions to allowance charged to operating expense  during period             |       | 856                                    |       | 210 |   |
| Balance of allowance for loan losses at end of  period                         |       | $                                      | 6,076      |   | $ | 2,596 |   |
| Ratio of net loans charged off during the period to  average loans outstanding |       | 0.75                                   | %          | 0.00 | % |

 

16

----

 

**Liquidityand 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 could providefunds on short notice, if needed.  At March 31, 2008 the Company had nofederal funds purchased.

 

The liquidity and capitalresources of the Company are monitored daily by management, and 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 March 31, 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 March 31,2008, the Company had an unused available unsecured federal fund line of$5 million and unused Federal Home Loan Bank borrowing capacity ofapproximately $29.4 million.  Managementprefunded future brokered certificates of deposit maturities totalingapproximately $81.2 million with a weighted average life of forty months in aneffort to stabilize the Company’s liquidity needs. The funding plan providedthe increase in liquidity and balance sheet growth for the quarter.  As the brokered certificates of depositmature, the balance sheet will contract. The Company is aware of no other events or trends likely to result in amaterial change in liquidity.

 

The consolidatedfinancial statements, as of March 31,2008, evidenced an increased liquidity position.  Cash and due from banks, interest-bearingdeposits in banks and federal funds sold totaled $89,586,166 as of March 31, 2008 as compared to$16,977,890 as of December 31, 2007. Total cash and due from banks amounted to $3,616,321 representing .84%of total assets.

 

Totalbrokered deposits amounted to $214.3 million as of March 31, 2008 as compared to $127.2 million at December 31,2007, an increase of approximately $87.1 million.  These deposits are readily obtainable atrates consistently lower than rates 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 three-month periodended March 31, 2008, totaldeposits increased from $274.9 million at December 31, 2007 to $355.5million at March 31, 2008.  Due to an expected decline in the Company’srating which is used to determine deposit pricing and the Company’s level ofaccessibility to the brokered deposit market and the volume of brokered depositmaturities within the next twelve months, management implemented a prefundingplan to reduce volatility in the brokered deposit portfolio by extending thematurities of the prefunded deposits and to ensure the Company can meet itsfuture funding needs.  Excess funds wereplaced in federal funds sold at quarter end. The funds have subsequently been invested in securities available forsale and bank owned certificates of deposit with the maturities of theinstruments matching the maturities of the upcoming brokered deposits.  Management is committed to maintainingcapital at a level sufficient to protect depositors, provide for reasonablegrowth, and fully comply with all regulatory requirements.

 

17

----

 

Theminimum capital requirements and the actual capital ratios for the Company andthe Bank at March 31, 2008are as follows:

 
| ** **                 | ** ** | **Company** | ** ** | **Bank** | ** ** | **Minimum  Regulatory  Requirement** | ** ** |
|----------------------------|------------|-------------|------------|----------|------------|--------------------------------------|------------|
| Leverage capital ratios    |       | 9.34        | %          | 8.63     | %          | 4.00                                 | %          |
| Risk-based capital ratios: |       |        |       |     |       |                                 |       |
| Tier I capital             |       | 10.58       | %          | 9.87     | %          | 4.00                                 | %          |
| Total capital              |       | 11.84       | %          | 11.13    | %          | 8.00                                 | %          |

 

**Off-BalanceSheet Risk**

 

Weare a party to financial instruments with off-balance sheet risk in the normalcourse of business to meet the financing needs of our customers.  These financial instruments includecommitments to extend credit and standby letters of credit.  Such commitments involve, to varying degrees,elements of credit risk and interest rate risk in excess of the amountrecognized in the balance sheets.

 

Our exposure to credit loss in the eventof nonperformance by the other party to the financial instrument forcommitments to extend credit and standby letters of credit is represented bythe 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:

 
| ** **                   | ** ** | **March 31, 2008** | ** ** |
|------------------------------|------------|-------------------------|------------|
| Commitments to extend credit |       | $                       | 29,040,000 |   |
| Letters of credit            |       | 712,000                 |       |
|                         |       | $                       | 29,752,000 |   |

 

Commitmentsto extend credit are agreements to lend to a customer as long as there is noviolation of any condition established in the contract.  Since many of the commitments are expected toexpire without being drawn upon, the total commitment amounts do notnecessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by us uponextension of credit, is based on our credit evaluation of the customer.

 

Standbyletters of credit are conditional commitments issued by us to guarantee theperformance of a customer to a third party. Those letters of credit are primarily issued to support public andprivate borrowing arrangements.  Thecredit risk involved in issuing letters of credit is essentially the same asthat involved in extending loans to customers. Collateral is required in instances which we deem necessary.

 

18

----

 

**Financial Condition**

 

Our total assets grew by 25% for thefirst three months of 2008 in part due to the implementation of our prefundingplan as explained in the Liquidity and Capital Resources section of thisreport.  Deposit growth of approximately$80.52 million and additional Federal Home Loan Bank borrowings of $6 millionwas used to fund loan growth of approximately $8.27 million with the remainderbeing primarily invested in securities or maintained in cash and due from banksand federal funds sold.  Our loan toavailable funds ratio has remained steady during January and February 2008,holding in the 80% range.  The loan toavailable funds ratio decreased to 64% in March 2008 due to theimplementation of our prefunding plan. In general, economic activity in the housing sector continued to slowduring the first quarter of 2008. Although we do not make sub-prime loans, we are impacted by them asevidenced by the slowness of the metro-Atlanta real estate market. Advancesfrom the Federal Home Loan Bank increased by $6 million for the three monthsended March 31, 2008.  The netincrease is the result of a $5 million advance maturing and the subsequentborrowings of an additional $11 million in advances.

 

Stockholders’ equity has increased by$34,501 due to net losses of $554,726 offset by unrealized gain on securitiesavailable-for-sale, net of tax, of $320,151, unrealized gain on derivatives,net of tax, of $264,116, net earned restricted stock of $2,500 and includingrecognition of share based payments transactions as required by SFAS 123(R) of$2,460.

 

TheCompany opened two branches during 2006 in Henry County and one branch in 2007in Clayton County.  The Company continuesto look for opportunities to expand its footprint and to increase franchise valuethrough organic growth.

 

**Results of Operations****For The Three Months Ended March 31, 2008 and2007**

 

Following is a summary of our operationsfor the periods indicated.

 
| ** **                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------|------------|----------------------------------------|------------|
| ** **                   | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| ** **                   | ** ** | **(Dollars in Thousands)**             | ** ** |
| Interest income              |       | $                                      | 5,136      |   | $ | 5,496 |   |
| Interest expense             |       | (3,656                                 | )          | (3,111 | ) |
| Net interest income          |       | 1,480                                  |       | 2,385 |   |
| Provision for loan losses    |       | (856                                   | )          | (210 | ) |
| Other income                 |       | 225                                    |       | 119 |   |
| Other expense                |       | (1,849                                 | )          | (1,539 | ) |
| Pretax income (loss)         |       | (1,000                                 | )          | 755 |   |
| Income tax (benefit) expense |       | (445                                   | )          | 280 |   |
| Net income (loss)            |       | $                                      | (555       | ) | $ | 475 |   |

 

19

----

 

NetInterest Income

 

Ournet interest income decreased approximately $905,000 for the first quarter of2008 as compared to the same period in 2007. Our net interest margin decreased to 1.79% during the first three monthsof 2008 as compared to 3.49% for the first three months of 2007.  The decrease in net interest income is dueprimarily to the increased volume of nonperforming assets and the negativeimpact of the cumulative 300 basis point rate decreases since March 2007.   Our cost of funds decreased to 4.73% for thefirst three months of 2008 as compared to 5.11% for the first three months of2007.

 

NoninterestIncome

 

Noninterestincome increased approximately $106,000 for the first quarter of 2008 ascompared to the same period in 2007.  Theincrease in the first quarter of 2008 consists of a $13,000 decrease in servicecharges on deposit accounts, a $54,000 gain on sale of securities available forsale, and a $65,000 increase in other income.

 

NoninterestExpenses

 

Noninterestexpenses increased approximately $310,000 for the first quarter of 2008. Thisincrease consists of an increase of $102,000 in salaries and employee benefits,$66,000 in equipment and occupancy, $15,000 in losses on sale of assets,$71,000 in losses on sale of other real estate owned and $56,000 in otheroperating expenses. The increase in salaries and employee benefits representsnormal increases in salaries and an increase in the number of full timeequivalent employees.  Equipment andoccupancy expenses have increased due to the need for additional equipment foremployees and for the new branches.  The increases in other operatingexpenses are due primarily to our overall growth. The Company leases itsoperations center facilities under an operating lease agreement forapproximately $70,000 a year in rental expense. The Company also has a ground lease for its Covington branch forapproximately $96,000 a year in rental expense. The construction of the Covington branch has been temporarily postponed.

 

Income Taxes

 

Wehave recorded an income tax benefit of $445,000 for the three months ended March 31,2008 as compared to a tax provision of $280,000 for the same period in2007.  The decrease in our income taxprovision was $725,000 for the three months ended March 31, 2008 comparedto the same period in 2007.  The decreasein our income tax provision is due primarily to the decrease in net income,decrease of expense related to the permanent non-deductibility of incentivestock options that have been expensed in the amount of $0 for 2008 as comparedto $54,000 for the same period in 2007, income from bank owned life insurancetotaling $58,000 and an increase in tax exempt interest income totaling$16,000.

 

20

----

 

RegulatoryMatters

 

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.

 

We are not aware of any currentrecommendation by our regulatory authorities which, if implemented, would havea material effect on our liquidity, capital resources, or results ofoperations.

 

**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.  Controlsand Procedures**

 

Asof the end of the period covered by this report, we carried out an evaluation,under the supervision and with the participation of our Chief Executive Officerand the Chief Financial Officer, of the effectiveness of the design andoperation of our disclosure controls and procedures.  Based on this evaluation, our Chief Executiveand Chief Financial Officer concluded that our disclosure controls andprocedures are effective for gathering, analyzing and disclosing theinformation that we are required to disclose in the reports we file under theSecurities Exchange Act of 1934, within the time periods specified in the SEC’srules and forms.  Our ChiefExecutive 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.  In connection withthe new rules, we are in the process of further reviewing and documenting ourdisclosure controls and procedures, including our internal controls andprocedures for financial reporting, and may from time to time make changesdesigned to enhance their effectiveness and to ensure that our systems evolvewith our business.

 

Therehave been no changes in the Company’s internal control over financial reportingduring the three months ended March 31, 2008, or, to the Company’sknowledge, other factors that could significantly affect those internalcontrols subsequent to the date the Company carried out its evaluation, thathave materially affected, or are reasonably likely to materially affect, theCompany’s internal control over financial reporting, and there have been nocorrective actions with respect to significant deficiencies or materialweaknesses.

 

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.

 

21

----

 

**PART II — OTHER INFORMATION**

 

**Item1.****                                                          ****LEGAL PROCEEDINGS**

 

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

 

**Item1A.****                                                 ****RISK FACTORS**

 

In addition to the other information set forthin this report, you should consider the factors discussed in Part 1, “Item 1— Description of Business” in our Annual Report on Form 10-K for the yearended December 31, 2007.

 

There have been no material changes in the riskfactors relating to the Company or its business during the three months ended March 31,2008.

 

**Item2.****                                                          ****UNREGISTERED SALES OF EQUITY SECURITIES AND USE OFPROCEEDS**

 

None

 

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

 

None

 

**Item4.****                                                          ****SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

None

 

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

 

None

 

**Item6.****                                                          ****EXHIBITS**

 

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

 

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

 

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

 

22

----

 

**SIGNATURES**

 

Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|              |   |   |   |   | FIRSTBANK FINANCIAL  SERVICES, INC.           |   |
|-------------------|--------|--------|--------|--------|-----------------------------------------------|--------|
|              |   |   |   |   | (Registrant)                                  |   |
|              |   |   |   |   |                                          |   |
| May 15, 2008 |   |   |   |   | /s/ Thaddeus M.  Williams                     |   |
| Date              |   |   |   |   | Thaddeus M. Williams,  President and C.E.O.   |   |
|              |   |   |   |   | (Principal Executive  Officer)                |   |
|              |   |   |   |   |                                          |   |
| May 15, 2008 |   |   |   |   | /s/ Lisa J. Maxwell                           |   |
| Date              |   |   |   |   | Lisa J. Maxwell,  C.F.O.                      |   |
|              |   |   |   |   | (Principal Financial  and Accounting Officer) |   |

 

 

23

----