**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-QSB**

**x**                              QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

**Forthe quarterly period ended**                            **June 30, 2006

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

**Forthe transition period from                     to                     **

**CommissionFile Number:   000-5114***7*

**FirstBank Financial Services, Inc.**

(Exact name of smallbusiness issuer as specified in its charter)

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

**120 Keys Ferry Street McDonough, Georgia 30253**(Address of principalexecutive offices)

**(678) 583-2265**(Issuer’s telephone number)

**N/A**(Former name, former address and former fiscal year, ifchanged since last report)

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filingrequirements for the past 90 days.Yes  x ** **No  o

Check whether theregistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

Yes         o              No         x

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

Transitional SmallBusiness Disclosure Format                              Yes       o              No      x

 

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**FIRSTBANK FINANCIAL SERVICES, INC.**

**TABLE OFCONTENTS**
| PART I.   |                                                                                                                                                          | FINANCIAL  INFORMATION                                                                      |   |
|-----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|--------|
|      |                                                                                                                                                          |
| Item  1.  |                                                                                                                                                          | Consolidated  Financial Statements                                                          |   |
|      |                                                                                                                                                          |
|      | Consolidated  Balance Sheet (unaudited) as of June  30, 2006                                                                                                  |                                                                                        |
|      |                                                                                                                                                          |
|      | Consolidated Statements of Income (unaudited) for the  three months

ended June 30, 2006  and 2005 and six months ended  June 30, 2006 and 2005               |                                                                                        |
|      |                                                                                                                                                          |
|      | Consolidated Statements of Comprehensive Income  (unaudited) for the

three months ended June 30, 2006 and 2005 and six  months ended

June 30, 2006 and 2005 |                                                                                        |
|      |                                                                                                                                                          |
|      | Consolidated Statements of Cash Flows (unaudited) for  the six months ended June 30, 2006  and 2005                                                           |                                                                                        |
|      |                                                                                                                                                          |
|      | Notes to Consolidated Financial Statements                                                                                                                    |                                                                                        |
|      |                                                                                                                                                          |
| Item 2.   |                                                                                                                                                          | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |   |
|      |                                                                                                                                                          |
| Item 3.   |                                                                                                                                                          | Controls and Procedures                                                                     |   |
|      |                                                                                                                                                          |
| PART  II. | OTHER  INFORMATION                                                                                                                                            |                                                                                        |
|      |                                                                                                                                                          |
|      | SIGNATURES                                                                                                                                                    |                                                                                        |
|      |                                                                                                                                                          |                                                                                        |
|      | CERTIFICATION                                                                                                                                                 |                                                                                        |
|      |                                                                                                                                                          |                                                                                        |
|      | SECTION 906 CERTIFICATION                                                                                                                                     |                                                                                        |

 

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**PART I - FINANCIAL INFORMATION**

**ITEM 1.     Financial Statements**

**FIRSTBANK FINANCIAL SERVICES, INC.**

**AND SUBSIDIARY**

**CONSOLIDATED BALANCE SHEET**

**JUNE 30,2006**

**(Unaudited)**
| **Assets**                                                                                                | ** ** | ** **  | ** **  |
|-----------------------------------------------------------------------------------------------------------|------------|-------------|-------------|
|                                                                                                      |       |        |        |
| Cash and due from banks                                                                                   |       | $           | 2,934,622   |   |
| Interest-bearing  deposits in banks                                                                       |       | 423,080     |        |
| Federal funds sold                                                                                        |       | 17,121,000  |        |
| Securities  available-for-sale, at fair value                                                             |       | 35,241,706  |        |
| Restricted equity  securities, at cost                                                                    |       | 1,765,556   |        |
|                                                                                                      |       |        |        |
| Loans, net of unearned  income                                                                            |       | 187,132,918 |        |
| Less allowance for loan  losses                                                                           |       | 2,095,190   |        |
| Loans, net                                                                                                |       | 185,037,728 |        |
|                                                                                                      |       |        |        |
| Premises and equipment                                                                                    |       | 5,251,415   |        |
| Other assets                                                                                              |       | 3,610,044   |        |
| ** **                                                                                                | ** ** | ** **  | ** **  |
| **Total  assets**                                                                                         |       | $           | 251,385,151 |   |
|                                                                                                      |       |        |        |
| **Liabilities  and Stockholders’ Equity**                                                            | ** ** | ** **  | ** **  |
|                                                                                                      |       |        |        |
| Deposits                                                                                                  |       |        |        |
| Noninterest-bearing                                                                                       |       | $           | 15,256,255  |   |
| Interest-bearing                                                                                          |       | 186,900,270 |        |
| Total deposits                                                                                            |       | 202,156,525 |        |
| Other borrowings                                                                                          |       | 22,000,000  |        |
| Other liabilities                                                                                         |       | 1,490,325   |        |
| Total  liabilities                                                                                        |       | 225,646,850 |        |
|                                                                                                      |       |        |        |
| Commitments and  contingencies                                                                            |       |        |        |
|                                                                                                      |       |        |        |
| Stockholders’ equity                                                                                 |       |        |        |
| Preferred stock,  no par value per share, 2,000,000 shares authorized; -0- shares issued and  outstanding |       | —      |        |
| Common stock,  par value $5; 10,000,000 shares authorized; 2,359,753 shares issued and  outstanding       |       | 11,798,765  |        |
| Surplus                                                                                                   |       | 13,872,348  |        |
| Retained  earnings                                                                                        |       | 1,022,649   |        |
| Accumulated  other comprehensive loss                                                                     |       | (955,461    | )           |
| Total  stockholders’ equity                                                                          |       | 25,738,301  |        |
|                                                                                                      |       |        |        |
| **Total  liabilities and stockholders’ equity**                                                      |       | $           | 251,385,151 |   |

See notes to consolidated financial statements.

1

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** **

**FIRSTBANK FINANCIAL SERVICES, INC.**

**AND SUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF INCOME**

**THREE MONTHS ENDED JUNE 30, 2006 AND 2005 AND**

**SIX MONTHS ENDED JUNE 30, 2006 AND 2005**

**(Unaudited)**
|                                                          | ** ** | **Three Months Ended** | ** **    | **Six Months Ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|---------------|--------------------------------|------------|
| ** **                                               | ** ** | **June 30,**                | ** **    | **June 30,**              | ** ** |
| ** **                                               | ** ** | **2006**                         | ** **    | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                     |       |                             |          |                           |       |   |   |   |   |
| **Interest income**                                      | ** ** | ** **                       | ** **    | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loans, including  fees                                   | ** ** | **$**                            | **3,853,169** | ** **                     | $          | 2,832,165 | ** ** | **$** | **7,407,153** |   | $ | 5,236,246 |   |
| Taxable  securities                                      | ** ** | **364,633**                      |          | 281,646                        | ** ** | **693,178** |   | 540,720 |   |
| Tax-free  securities                                     | ** ** | **33,631**                       |          | 26,093                         | ** ** | **59,657** |   | 48,888 |   |
| Deposits in  banks                                       | ** ** | **12,074**                       |          | 71,290                         | ** ** | **33,727** |   | 121,508 |   |
| Federal funds  sold                                      | ** ** | **168,368**                      |          | 11,240                         | ** ** | **302,826** |   | 25,822 |   |
| **Total  interest income**                               | ** ** | **4,431,875**                    |          | 3,222,434                      | ** ** | **8,496,541** |   | 5,973,184 |   |
|                                                     |       |                             |          |                           |       |   |   |   |   |
| **Interest expense**                                     | ** ** | ** **                       | ** **    | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deposits                                                 | ** ** | **1,827,029**                    |          | 1,087,216                      | ** ** | **3,432,031** |   | 1,956,167 |   |
| Other borrowings                                         | ** ** | **225,242**                      |          | 196,743                        | ** ** | **437,855** |   | 353,439 |   |
| **Total  interest expense**                              | ** ** | **2,052,271**                    |          | 1,283,959                      | ** ** | **3,869,886** |   | 2,309,606 |   |
|                                                     |       |                             |          |                           |       |   |   |   |   |
| **Net  interest income**                                 | ** ** | **2,379,604**                    |          | 1,938,475                      | ** ** | **4,626,655** |   | 3,663,578 |   |
| **Provision for loan losses**                            | ** ** | **135,000**                      |          | 185,000                        | ** ** | **180,000** |   | 344,615 |   |
| **Net  interest income after provision for loan losses** | ** ** | **2,244,604**                    | ** **    | 1,753,475                      | ** ** | **4,446,655** | ** ** | 3,318,963 | ** ** |
| ** **                                               | ** ** | ** **                       | ** **    | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other income**                                         | ** ** | ** **                       | ** **    | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service charges  on deposit accounts                     | ** ** | **54,034**                       |          | 52,182                         | ** ** | **107,485** |   | 97,983 |   |
| Gain on sale of  assets                                  | ** ** | **—**                       |          | 1,769                          | ** ** | **1,425** |   | 2,519 |   |
| Other operating  income                                  | ** ** | **25,067**                       |          | 16,084                         | ** ** | **43,779** |   | 35,897 |   |
| **Total  other income**                                  | ** ** | **79,101**                       |          | 70,035                         | ** ** | **152,689** |   | 136,399 |   |
| ** **                                               | ** ** | ** **                       | ** **    | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other expenses**                                       | ** ** | ** **                       | ** **    | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries and  employee benefits                          | ** ** | **788,081**                      |          | 505,414                        | ** ** | **1,459,955** |   | 960,839 |   |
| Equipment and  occupancy expenses                        | ** ** | **148,986**                      |          | 78,284                         | ** ** | **306,344** |   | 137,831 |   |
| Other operating  expenses                                | ** ** | **408,604**                      |          | 297,218                        | ** ** | **824,792** |   | 561,711 |   |
| **Total  other expenses**                                | ** ** | **1,345,671**                    |          | 880,916                        | ** ** | **2,591,091** |   | 1,660,381 |   |
|                                                     |       |                             |          |                           |       |   |   |   |   |
| **Income  before income taxes**                          | ** ** | **978,034**                      |          | 942,594                        | ** ** | **2,008,253** |   | 1,794,981 |   |
| ** **                                               | ** ** | ** **                       | ** **    | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Income tax expense**                                   | ** ** | **375,273**                      |          | 336,459                        | ** ** | **752,931** |   | 647,793 |   |
| ** **                                               | ** ** | ** **                       | ** **    | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  income**                                          | ** ** | **$**                            | **602,761**   | ** **                     | $          | 606,135 | ** ** | **$** | **1,255,322** | ** ** | $ | 1,147,188 | ** ** |
|                                                     |       |                             |          |                           |       |   |   |   |   |
| **Basic earnings per share**                             | ** ** | **$**                            | **0.26**      | ** **                     | $          | 0.26 | ** ** | **$** | **0.53** | ** ** | $ | 0.49 | ** ** |
|                                                     |       |                             |          |                           |       |   |   |   |   |
| **Diluted earnings per share**                           | ** ** | **$**                            | **0.24**      | ** **                     | $          | 0.25 | ** ** | **$** | **0.50** | ** ** | $ | 0.48 | ** ** |
|                                                     |       |                             |          |                           |       |   |   |   |   |
| **Cash dividends per share**                             | ** ** | **$**                            | **—**    | ** **                     | $          | — | ** ** | **$** | **—** |   | $ | — |   |

See notes toconsolidated financial statements.

2

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** **

**FIRSTBANK FINANCIAL SERVICES, INC.**

**AND SUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF COMPREHENSIVE INCOME**

**THREEMONTHS ENDED JUNE 30, 2006 AND 2005 AND**

**SIX MONTHS ENDED JUNE 30, 2006 AND 2005**

**(Unaudited)**

 
|                                                                  | ** ** | **Three Months Ended** | ** **  | **Six Months Ended** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|-------------|--------------------------------|------------|
| ** **                                                       | ** ** | **June 30,**                | ** **  | **June 30,**              | ** ** |
| ** **                                                       | ** ** | **2006**                         | ** **  | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                             |       |                             |        |                           |       |   |   |   |   |
| Net income                                                       | ** ** | **$**                            | **602,761** |                           | $          | 606,135 | ** ** | **$** | **1,255,322** |   | $ | 1,147,188 |   |
|                                                             |       |                             |        |                           |       |   |   |   |   |
| Other comprehensive  income (loss):                              |       |                             |        |                           |       |   |   |   |   |
| ** **                                                       | ** ** | ** **                       | ** **  | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Unrealized gains  (losses) on securities available for sale:     |       |                             |        |                           |       |   |   |   |   |
|                                                             |       |                             |        |                           |       |   |   |   |   |
| Net unrealized  gains (losses) arising during period, net of tax | ** ** | **(354,451**                     | **)**       | 307,507                        | ** ** | **(415,556** | **)** | (59,968 | ) |
|                                                             | ** ** | **(354,451**                     | **)**       | 307,507                        | ** ** | **(415,556** | **)** | (59,968 | ) |
|                                                             |       |                             |        |                           |       |   |   |   |   |
| Unrealized  losses on interest rate floor:                       |       |                             |        |                           |       |   |   |   |   |
|                                                             |       |                             |        |                           |       |   |   |   |   |
| Net unrealized  losses arising during period, net of tax         | ** ** | **(37,537**                      | **)**       | —                         | ** ** | **(63,338** | **)** | — |   |
|                                                             | ** ** | **(37,537**                      | **)**       | —                         | ** ** | **(63,338** | **)** | — |   |
|                                                             |       |                             |        |                           |       |   |   |   |   |
| Other comprehensive  income (loss)                               | ** ** | **(391,988**                     | **)**       | 307,507                        | ** ** | **(478,894** | **)** | (59,968 | ) |
|                                                             |       |                             |        |                           |       |   |   |   |   |
| Comprehensive income                                             | ** ** | **$**                            | **210,773** |                           | $          | 913,642 | ** ** | **$** | **776,428** |   | $ | 1,087,220 |   |

 

See notes toconsolidated financial statements.

3

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** **

**FIRSTBANK FINANCIAL SERVICES, INC.**

**AND SUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**SIX MONTHS ENDED JUNE 30, 2006 AND 2005**

**(Unaudited)**

 
|                                                                        | ** ** | **2006**        | ** **    | **2005**    | ** ** |
|------------------------------------------------------------------------|------------|-----------------|---------------|-------------|------------|
| **OPERATING ACTIVITIES**                                               | ** ** | ** **      | ** **    | ** **  | ** ** |
| Net income                                                             | ** ** | **$**           | **1,255,322** |        | $          | 1,147,188 |   |
| Adjustments to  reconcile net income to net                            |       |            |          |        |       |
| cash provided by  operating activities:                                |       |            |          |        |       |
| Gain on sale of  assets                                                | ** ** | **(1,425**      | **)**         | (2,519      | )          |
| Depreciation and  amortization                                         | ** ** | **165,129**     |          | 79,340      |       |
| Stock  compensation expense                                            | ** ** | **178,770**     |          | —      |       |
| Provision for  loan losses                                             | ** ** | **180,000**     |          | 344,615     |       |
| Increase in  accrued interest receivable                               | ** ** | **(250,699**    | **)**         | (315,112    | )          |
| Increase in  accrued interest payable                                  | ** ** | **103,191**     |          | 141,501     |       |
| Net other  operating activities                                        | ** ** | **(4,547**      | **)**         | (62,324     | )          |
|                                                                   |       |            |          |        |       |
| Net cash  provided by operating activities                             | ** ** | **1,625,741**   |          | 1,332,689   |       |
|                                                                   |       |            |          |        |       |
| **INVESTING ACTIVITIES**                                               | ** ** | ** **      | ** **    | ** **  | ** ** |
| Net decrease in  interest-bearing deposits in banks                    | ** ** | **366,899**     |          | 376,295     |       |
| Purchases of securities  available-for-sale                            | ** ** | **(6,543,873**  | **)**         | (6,900,600  | )          |
| Proceeds from  maturities of securities available-for-sale             | ** ** | **1,710,768**   |          | 3,176,423   |       |
| Purchases of  restricted equity securities                             | ** ** | **(181,300**    | **)**         | (498,200    | )          |
| Net increase in  federal funds sold                                    | ** ** | **(3,356,000**  | **)**         | (2,133,000  | )          |
| Net increase in  loans                                                 | ** ** | **(18,460,481** | **)**         | (26,995,635 | )          |
| Proceeds from  sale of assets                                          | ** ** | **1,425**       |          | 14,019      |       |
| Purchase of  premises, equipment and software                          | ** ** | **(1,285,155**  | **)**         | (671,604    | )          |
|                                                                   |       |            |          |        |       |
| Net cash used in  investing activities                                 | ** ** | **(27,747,717** | **)**         | (33,632,302 | )          |
|                                                                   |       |            |          |        |       |
| **FINANCING ACTIVITIES**                                               | ** ** | ** **      | ** **    | ** **  | ** ** |
| Net increase in  deposits                                              | ** ** | **27,820,517**  |          | 28,684,444  |       |
| Net increase in  borrowings                                            | ** ** | **—**      |          | 6,000,000   |       |
| Purchase of  fractional shares                                         | ** ** | **(362**        | **)**         | —      |       |
|                                                                   |       |            |          |        |       |
| Net cash  provided by financing activities                             | ** ** | **27,820,155**  |          | 34,684,444  |       |
|                                                                   |       |            |          |        |       |
| Net increase in cash  and due from banks                               | ** ** | **1,698,179**   |          | 2,384,831   |       |
|                                                                   |       |            |          |        |       |
| Cash and due from banks  at beginning of period                        | ** ** | **1,236,443**   |          | 1,136,424   |       |
|                                                                   |       |            |          |        |       |
| Cash and due from banks  at end of period                              | ** ** | **$**           | **2,934,622** |        | $          | 3,521,255 |   |
|                                                                   |       |            |          |        |       |
| Supplemental schedule  of noncash investing and financing activities - |       |            |          |        |       |
| Change in  accumulated other comprehensive loss                        |       | **$**           | **(478,894)** | ** **  | $          | (59,968 | ) |
|                                                                   |       |            |          |        |       |
| Supplemental  disclosures of cash flow information -                   |       |            |          |        |       |
|                                                                   |       |            |          |        |       |
| Cash paid during  the period for interest                              | ** ** | **$**           | **3,766,695** |        | $          | 2,168,105 |   |
| Cash paid during the  period for income taxes                          | ** ** | **$**           | **892,035**   |        | $          | 744,123 |   |

See notes toconsolidated financial statements.

4

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**1.****                    Basisof Presentation**

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

The shareholders of the Bank approved anAgreement and Plan of Shares Exchange on June 30, 2004, and the holding companyformation became effective February 1, 2005. Pursuant to the Plan, each share of the Bank’s common stock wasexchanged on a one-for-one basis for shares of Company stock.

The accompanying consolidated financial statements areunaudited. Certain information and footnote disclosures normally included inconsolidated financial statements prepared in accordance with generallyaccepted accounting principles have been condensed or omitted pursuant to suchrules and regulations.  These consolidatedfinancial statements should be read in conjunction with the auditedconsolidated financial statements and notes thereto included in the Company’sannual report on Form 10-KSB for the year ended December 31, 2005, which wasfiled with the Securities and Exchange Commission.

The financial information included herein reflects alladjustments (consisting of normal recurring adjustments), which are, in theopinion of management, necessary to a fair presentation of the Bank’s financialposition and results for the interim period ended June 30, 2006.

The preparation of consolidated financial statementsrequires management to make estimates and assumptions that affect the reportedamounts of assets, liabilities and income and expense amounts.  Actual results could differ from thoseestimates.  The results of operations forthe six months ended June 30, 2006 are not necessarily indicative of theresults to be expected for the full year.

**2.       StockCompensation Plans**

At June 30, 2006, the Company has two stock-basedemployee/director compensation plans which are more fully described in Note 7of the consolidated financial statements in the Annual Report on Form 10-KSBfor the year ended December 31, 2005. Prior to January 1, 2006, the Company accounted for those plans underthe recognition and measurement provisions of APB Opinion No. 25, *Accounting for Stock Issued to Employees*, and relatedInterpretations, as permitted by FASB Statement No. 123, *Accountingfor Stock-Based Compensation.* No stock-based employee/director compensation cost was recognized in theStatement of Income for the year ended December 31, 2005, nor in the three andsix month periods ended June 30, 2005, as all options and warrants grantedunder those plans had an exercise price equal to the market value of theunderlying common stock on the date of grant. Effective January 1, 2006, the Company adopted the fair valuerecognition provisions of FASB Statement No. 123 (R), *Share-BasedPayment*, using the modified-prospective-transition method.  Under that transition method, compensationcost recognized in the first six months and second quarter of 2006 includes:(a) compensation cost for all share-based payments granted prior to, but notyet vested as of December 31, 2005, based on the grant date fair valueestimated in accordance with the original provisions of Statement 123, and (b)compensation cost for all share-based payments granted subsequent to December31, 2005, based on the grant date fair value estimated in accordance with theprovisions of Statement 123(R).  Resultsfor prior periods have not been restated.

5

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As a result of adopting Statement 123(R) on January 1,2006, the Company’s income before income taxes for the three and six monthsended June 30, 2006 was $120,681 and $178,770 lower, respectively, than if wehad continued to account for share-based compensation under Opinion 25.

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

The following table illustrates the effect onnet income and earnings per share if the Company had applied the fair valuerecognition provisions of Statement 123 to options and warrants granted underthe Company’s stock option and warrant plans for the three and six months endedJune 30, 2005.
|                                                                                                                   | ** ** | **Three Months** | ** ** | **Six Months** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                                                                                        | ** ** | **Ended**             | ** ** | **Ended**           | ** ** |
| ** **                                                                                                        | ** ** | **June 30,**     | ** ** | **June 30,**   | ** ** |
| ** **                                                                                                        | ** ** | **2005**              | ** ** | **2005**            | ** ** |
|                                                                                                              |       |                  |       |                |       |
| Net income, as reported                                                                                           |       | $                     | 606,135    |                | $          | 1,147,188 |   |
|                                                                                                              |       |                  |       |                |       |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards |       | —                |       | (288,625            | )          |
|                                                                                                              |       |                  |       |                |       |
| Pro forma net income                                                                                              |       | $                     | 606,135    |                | $          | 858,563 |   |
|                                                                                                              |       |                  |       |                |       |
| Earnings per share:                                                                                               |       |                  |       |                |       |
| Basic - as  reported                                                                                              |       | $                     | 0.26       |                | $          | 0.49 |   |
| Basic - pro  forma                                                                                                |       | $                     | 0.26       |                | $          | 0.36 |   |
| Diluted - as  reported                                                                                            |       | $                     | 0.25       |                | $          | 0.48 |   |
| Diluted - pro forma                                                                                               |       | $                     | 0.25       |                | $          | 0.36 |   |

The fair value of each option grant is estimatedon the date of grant using the Black-Scholes option-pricing model with theweighted-average assumptions listed in the following table.  Expected volatility is based on expectedvolatility of similar entities.  Expecteddividends are based on dividend trends and the market price of the Company’sstock price at grant.  Historical data isused to estimate option exercises and employee terminations within thevaluation model.  The risk-free rate forperiods within the contractual life of the option is based on the U.S. Treasuryyield curve in effect at the time of grant.

6

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|                                                                             | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                  | ** ** | **June 30,**              | ** ** |
| ** **                                                                  | ** ** | **2006**                       | ** ** |
| Risk-free  interest rate                                                    | ** ** | **4.53%**                      | ** ** |
| Expected life of  the options                                               | ** ** | **5 – 6 years**           | ** ** |
| Expected  dividends (as a percentage  of the fair  value of the stock) | ** ** | **0%**                         | ** ** |
| Expected  volatility                                                        | ** ** | **18.35% - 23.98%**            | ** ** |
| Weighted-average grant  date fair value                                     | ** ** | **$5.49**                      | ** ** |

AtJune 30, 2006, there was $196,987 of unrecognized compensation cost related tostock-based payments, which is expected to be recognized over aweighted-average period of 1.75 years.

A summary of the status of the fixed stockoption and warrant plans at June 30, 2006 and changes during the three and sixmonth periods ended June 30, 2006 follows:

 
|                                    | ** ** | Three Months Ended  June 30, 2006 | ** ** |
|------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                         | ** ** | ** **                                            | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                         | ** ** | ** **                                            | ** ** | **Weighted-** | ** ** | **average** | ** ** |
| ** **                         | ** ** | ** **                                            | ** ** | **average** | ** ** | **Remaining** | ** ** |
| ** **                         | ** ** | ** **                                            | ** ** | **Exercise** | ** ** | **Contractual** | ** ** |
| ** **                         | ** ** | **Number**                                            | ** ** | **Price** | ** ** | **Life** | ** ** |
|                               |       |                                                  |       |   |   |   |   |
| Under option,  beginning of period |       | 385,641                                               |       | $ | 10.97 |   |   |   |
| Granted                            |       | 5,000                                                 |       | 18.25 |   |   |   |
| Exercised                          |       | —                                                |       | — |   |   |   |
| Forfeited                          |       | —                                                |       | — |   |   |   |
| Under option,  end of period       |       | 390,641                                               |       | $ | 11.06 |   | 6.53 years |   |
|                               |       |                                                  |       |   |   |   |   |
| Exercisable at end of  period      |       | 345,568                                               |       | $ | 10.79 |   | 6.89 years |   |

 

 
|                                    | ** ** | **Six Months Ended** | ** ** |
|------------------------------------|------------|--------------------------------|------------|
| ** **                         | ** ** | **June 30, 2006**    | ** ** |
| ** **                         | ** ** | ** **                     | ** ** | **Weighted-** | ** ** |
| ** **                         | ** ** | ** **                     | ** ** | **average** | ** ** |
| ** **                         | ** ** | ** **                     | ** ** | **Exercise** | ** ** |
|                               |       | **Number**                     | ** ** | **Price** |   |
|                               |       |                           |       |   |   |
| Under option,  beginning of period |       | 357,179                        |       | $ | 10.52 |   |
| Granted                            |       | 33,462                         |       | 16.84 |   |
| Exercised                          |       | —                         |       | — |   |
| Forfeited                          |       | —                         |       | — |   |
| Under option,  end of period       |       | 390,641                        |       | $ | 11.06 |   |
|                               |       |                           |       |   |   |
| Exercisable at end of  period      |       | 345,568                        |       | $ | 10.79 |   |

7

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Sharesavailable for future stock option grants to employees under existing plans was78,039 at June 30, 2006.  At June 30,2006, the aggregate intrinsic value of options and warrants outstanding was$2,421,881, and the aggregate intrinsic value of options and warrantsexercisable was $2,238,358.  Totalintrinsic value of options and warrants exercised was $-0- for the three andsix months ended June 30, 2006.

A summary of the status of the nonvestedoptions and warrants in the fixed stock option and warrant plans at June 30,2006 and changes during the three and six month periods ended June 30, 2006follows:
|                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                      | ** ** | **June 30, 2006**      | ** ** | **June 30, 2006**    | ** ** |
| ** **                      | ** ** | ** **                       | ** ** | **Weighted-**                  | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                      | ** ** | ** **                       | ** ** | **average**                    | ** ** | ** ** | ** ** | **average** | ** ** |
| ** **                      | ** ** | ** **                       | ** ** | **Grant-Date**                 | ** ** | ** ** | ** ** | **Grant-Date** | ** ** |
| ** **                      | ** ** | **Number**                       | ** ** | **Fair Value**            | ** ** | **Number** | ** ** | **Fair Value** | ** ** |
|                            |       |                             |       |                           |       |   |   |   |   |
| Nonvested,  beginning of period |       | 60,963                           |       | $                              | 5.11       |   | 41,147 |   | $ | 5.08 |   |
| Granted                         |       | 5,000                            |       | 5.59                           |       | 33,462 |   | 5.49 |   |
| Vested                          |       | (20,890                          | )          | 5.78                           |       | (29,536 | ) | 5.89 |   |
| Forfeited                       |       | —                           |       | —                         |       | — |   |   |   |
| Nonvested, end of  period       |       | 45,073                           |       | $                              | 4.85       |   | 45,073 |   | $ | 4.85 |   |

 

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

|                          | ** ** | **Options and Warrants** | ** ** | ** **      | ** ** | **Options and Warrants** | ** ** |
|--------------------------|------------|------------------------------------|------------|-----------------|------------|------------------------------------|------------|
| ** **               | ** ** | **Outstanding**                    | ** ** | ** **      | ** ** | **Exercisable**                    | ** ** |
| ** **               | ** ** | ** **                         | ** ** | **Weighted-**   | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **               | ** ** | ** **                         | ** ** | **Average**     | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **               | ** ** | ** **                         | ** ** | **Remaining**   | ** ** | **Weighted-**                      | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| **Range of**        | ** ** | ** **                         | ** ** | **Contractual** | ** ** | **Average**                        | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Exercise Prices** | ** ** | **Number**                         | ** ** | **Life**        | ** ** | **Exercise Price**            | ** ** | **Number** | ** ** | **Exercise Price** | ** ** |
| $  9.09        |       | 287,430                            |       | 5.46  years     |       | $                                  | 9.09       |   | 267,264 |   | $ | 9.09 |   |
| 16.42                    |       | 69,749                             |       | 9.50  years     |       | 16.42                              |       | 57,485 |   | 16.42 |   |
| 16.50 - 17.25            |       | 28,462                             |       | 9.53  years     |       | 16.60                              |       | 15,819 |   | 16.63 |   |
| 18.25                    |       | 5,000                              |       | 9.83  years     |       | 18.25                              |       | 5,000 |   | 18.25 |   |
|                     |       | 390,641                            |       | 6.53 years      |       | 11.06                              |       | 345,568 |   | 10.79 |   |
|                          |            |                                    |            |                 |            |                                    |            |  |  |  |  |  |  |

8

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**3.       Earnings Per Common Share**

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

|                                                                                                                                   | ** ** | **Three Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                        | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| Basic earnings per share:                                                                                                         |       |                                                |       |   |   |
| Weighted average  common shares outstanding                                                                                       |       | 2,359,753                                           |       | 2,359,753 |   |
|                                                                                                                              |       |                                                |       |   |   |
| Net income                                                                                                                        |       | $                                                   | 602,761    |   | $ | 606,135 |   |
|                                                                                                                              |       |                                                |       |   |   |
| Basic earnings  per share                                                                                                         |       | $                                                   | 0.26       |   | $ | 0.26 |   |
|                                                                                                                              |       |                                                |       |   |   |
| Diluted earnings per  share:                                                                                                      |       |                                                |       |   |   |
| Weighted average  common shares outstanding                                                                                       |       | 2,359,753                                           |       | 2,359,753 |   |
| Net effect of  the assumed exercise of stock options based on the treasury stock method using  average market prices for the year |       | 135,669                                             |       | 26,130 |   |
| Total weighted  average common shares and common stock equivalents outstanding                                                    |       | 2,495,422                                           |       | 2,385,883 |   |
|                                                                                                                              |       |                                                |       |   |   |
| Net income                                                                                                                        |       | $                                                   | 602,761    |   | $ | 606,135 |   |
|                                                                                                                              |       |                                                |       |   |   |
| Diluted earnings per  share                                                                                                       |       | $                                                   | 0.24       |   | $ | 0.25 |   |

9

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|                                                                                                                                   | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                                        | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| Basic earnings per  share:                                                                                                        |       |                                              |       |   |   |
| Weighted average  common shares outstanding                                                                                       |       | 2,359,753                                         |       | 2,359,753 |   |
|                                                                                                                              |       |                                              |       |   |   |
| Net income                                                                                                                        |       | $                                                 | 1,255,322  |   | $ | 1,147,188 |   |
|                                                                                                                              |       |                                              |       |   |   |
| Basic earnings  per share                                                                                                         |       | $                                                 | 0.53       |   | $ | 0.49 |   |
|                                                                                                                              |       |                                              |       |   |   |
| Diluted earnings per  share:                                                                                                      |       |                                              |       |   |   |
| Weighted average  common shares outstanding                                                                                       |       | 2,359,753                                         |       | 2,359,753 |   |
| Net effect of  the assumed exercise of stock options based on the treasury stock method using  average market prices for the year |       | 131,998                                           |       | 26,130 |   |
| Total weighted  average common shares and common stock equivalents outstanding                                                    |       | 2,491,751                                         |       | 2,385,883 |   |
|                                                                                                                              |       |                                              |       |   |   |
| Net income                                                                                                                        |       | $                                                 | 1,255,322  |   | $ | 1,147,188 |   |
|                                                                                                                              |       |                                              |       |   |   |
| Diluted earnings per  share                                                                                                       |       | $                                                 | 0.50       |   | $ | 0.48 |   |

 

**4.**    **RecentAccounting Pronouncements**

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

In February 2006, the FASB issued SFAS No.155, *Accounting for Certain Hybrid FinancialInstruments - an amendment of FASB Statements No. 133 and 140*. SFASNo. 155 simplifies accounting for certain hybrid instruments currently governedby SFAS No. 133, *Accounting for Derivative Instrumentsand Hedging Activities*, by allowing fair value remeasurement ofhybrid instruments that contain an embedded derivative that otherwise wouldrequire bifurcation. SFAS No. 155 also eliminates the guidance in SFAS No. 133Implementation Issue No. D1, *Application ofStatement 133 to Beneficial Interests in Securitized Financial**Assets*, which provides such beneficialinterests are not subject to SFAS No. 133. SFAS No. 155 amends SFAS No. 140, *Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities - a*

10

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*Replacement of FASB StatementNo. 125*, by eliminating the restriction on passivederivative instruments that a qualifying special-purpose entity may hold. SFASNo. 155 is effective for all financial instruments acquired or issuedafter the beginning of an entity’s first fiscal year that begins afterSeptember 15, 2006. The Company does not expect the adoption of thisstatement to have a material impact on our financial condition, results ofoperations or cash flows.

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

**5.****                    StockDividend**

On November 17, 2005, the Companydeclared a ten percent stock dividend payable to shareholders of record onNovember 30, 2005 to be distributed on January 31, 2006. Earnings percommon shares for the periods ended June 30, 2005 and all stock option andwarrant information has been retroactively adjusted for the dividends as if itoccurred on January 1, 2005.

**6.****                    InterestRate Derivatives**

The Company maintains anoverall interest rate risk-management strategy that incorporates the use ofderivative instruments to minimize significant unplanned fluctuations inearnings that are caused by interest volatility. One interest rate derivativeis used to hedge variable-rate deposits. This instrument is reflected in otherliabilities at June 30, 2006 at a fair value of $64,539. The Company hasanother derivative, an interest rate floor, with a notional value of $40million and a 7.50% strike. The fair value of this instrument at June 30,2006 is $221,000 and is reflected in other assets. The instruments are morefully described in the Company’s annual report dated December 31, 2005.

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

Thefollowing is our discussion and analysis of certain significant factors whichhave affected the financial position and operating results of FirstBankFinancial Services, Inc. (the “Company”) during the periods included inthe accompanying 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. Such forward-looking statements includestatements using the words such as “will,” “anticipate,” “should,” “would,” “believe,”“contemplate,” “expect,” “estimate,” “continue,” “may” or “intend,” or othersimilar words and expressions of the future. Our actual results may differsignificantly from 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:

·                  the effectsof future economic conditions;

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

·                  the risks ofchanges in interest rates on the level and composition of deposits, loandemand, and the values of loan collateral, securities, and otherinterest-sensitive assets and liabilities;

·                  changes inthe interest rate environment which could reduce anticipated or actual margins;

·                  the effectsof competition from other commercial banks, thrifts, mortgage banking firms,consumer finance companies, credit unions, securities brokerage firms,insurance companies, money market and other mutual funds and other 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;

·                  changes inmonetary and tax policies;

·                  changes intechnology;

·                  the level ofallowance for loan loss;

·                  the rate ofdelinquencies and amounts of charge-offs;

·                  the rates ofloan growth;

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

·                  changes inthe securities market; and

·                  other risksand uncertainties detailed from time to time in our filings with the Securitiesand Exchange Commission.

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**Introduction**

On February 1, 2005, pursuant to an Agreement andPlan of Shares Exchange approved by the shareholders of First Bank of HenryCounty (the “Bank”), the Company acquired each share of the Bank’s common stockin exchange for one share of the Company’s stock. The Company now serves as aholding company for the Bank.

Through its subsidiary bank, the Company performsbanking services customary for full service banks of similar size andcharacter. The Company offers personal and business checking accounts,interest-bearing checking accounts, savings accounts and various types ofcertificates of deposit. The Company also offers commercial loans, installmentand other consumer loans, home equity loans, home equity lines of credit,construction loans and mortgage loans. In addition, the Company provides suchservices as official bank checks, traveler’s checks, direct deposit and UnitedStates Savings Bonds. The Company provides other customary banking servicesincluding ATM services, safe deposit facilities, money transfers, andindividual retirement accounts.

**Overview**

Management monitors the financial condition of theCompany in order to protect depositors, increase undivided profits and protectcurrent and future earnings. Further discussion of significant items affectingthe 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 statements. Our significantaccounting policies are described in the footnotes to the financial statementsfor FirstBank Financial Services, Inc. at December 31, 2005 as filedin the Company’s annual report on Form 10-KSB, which was filed withthe Securities and Exchange Commission.

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

We believe the allowancefor loan losses is a critical accounting policy that requires the mostsignificant judgments and estimates used in preparation of our consolidatedfinancial statements. Refer to the portion of this discussion that addressesasset quality for a description of our processes and methodology fordetermining our allowance for loan losses.

13

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**Asset Quality**

A major key to long-term earnings growth is themaintenance of a high-quality loan portfolio. The Company’s directive in thisregard is carried out through its policies and procedures for extending creditto 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 allowance for loan losses will be madeperiodically to maintain the allowance at an appropriate level based uponmanagement’s analysis of potential risk in the loan portfolio. The amount ofthe loan loss 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.

Aprovision for loan losses was made during the second quarter and first sixmonths of 2006, respectively of $135,000 and $180,000 as compared to the same periodsin 2005 of $185,000 and $344,615, respectively. The amounts provided are dueprimarily to our assessment of inherent risk in the loan portfolio. Theallowance for loan losses as a percentage of total loans was 1.12% at June 30, 2006 as compared to1.14% at December 31, 2005. 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.

Theallowance for loan losses is established through a provision for loan lossescharged to expense. Loan losses are charged against the allowance whenmanagement believes the collectibility of the principal is unlikely. Subsequentrecoveries, 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 loss experience.This evaluation also takes into consideration such factors as changes in thenature and volume of the loan portfolio, overall portfolio quality, review ofspecific problem loans, concentrations and current economic conditions that mayaffect the borrower’s ability to pay. This evaluation does not include theeffects of expected losses on specific loans or groups of loans that arerelated to future events or expected changes in economic conditions. Whilemanagement uses the best information available to make its evaluation, futureadjustments to the allowance may be necessary if there are significant changesin economic conditions. In addition, regulatory agencies, as an integral partof their examination process, periodically review the Company’s allowance forloan losses, and may require the Company to make additions to the allowancebased on their judgment about information available to them at the time oftheir examinations.

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

14

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management’sestimate of probable losses. The unallocated component of the allowancereflects the margin of imprecision inherent in the underlying assumptions usedin the methodologies for estimating specific and general losses in theportfolio.

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

|                                                                                                            | ** ** | **June 30,**                    | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                                                                                                 | ** ** | **(Dollars in Thousands)** | ** ** |
| Nonaccrual loans                                                                                           |       | $                                    | 111        |   | $ | 109 |   |
| Loans  contractually past due ninety days or more as to interest or principal  payments and still accruing |       | 1                                    |       | 72 |   |
| Restructured  loans                                                                                        |       | —                               |       | — |   |
| Potential  problem loans                                                                                   |       | —                               |       | — |   |
| Interest income  that would have been recorded on non-accrual and restructured loans under  original terms |       | —                               |       | — |   |
| Interest income that  was recorded on nonaccrual and restructured loans                                    |       | —                               |       | — |   |
|                                                                                                            |            |                                      |            |  |  |  |  |

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.

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 full repaymentof principal and interest is not expected and (2) the principal orinterest 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.

15

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

|                                                                                | ** ** | **Six Months Ended**       | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                     | ** ** | **June 30,**                    | ** ** |
| ** **                                                                     | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                                                                     | ** ** | **(Dollars in Thousands)** | ** ** |
| ** **                                                                     | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Average amount  of loans outstanding                                           |       | $                                    | 173,785    |   | $ | 148,811 |   |
| Balance of  allowance for loan losses at beginning of period                   |       | $                                    | 1,917      |   | $ | 1,471 |   |
| Loans charged  off:                                                            |       |                                 |       |   |   |
| Commercial and financial                                                       |       | —                               |       | — |   |
| Real estate mortgage                                                           |       | —                               |       | — |   |
| Installment                                                                    |       | (9                                   | )          | (5 | ) |
|                                                                           |       | (9                                   | )          | (5 | ) |
| Loans recovered:                                                               |       |                                 |       |   |   |
| Commercial and financial                                                       |       | 6                                    |       | — |   |
| Real estate mortgage                                                           |       | —                               |       | — |   |
| Installment                                                                    |       | 1                                    |       | — |   |
|                                                                           |       | 7                                    |       | — |   |
| Net charge-offs                                                                |       | (2                                   | )          | (5 | ) |
| Additions to  allowance charged to operating expense during period             |       | 180                                  |       | 345 |   |
| Balance of  allowance for loan losses at end of period                         |       | $                                    | 2,095      |   | $ | 1,811 |   |
| Ratio of net loans  charged off during the period to average loans outstanding |       | 0.00                                 | %          | 0.00 | % |

**Liquidity and Capital Resources**

Liquidity management involves the matching of the cashflow requirements of customers, who may be either depositors desiring towithdraw funds or borrowers needing assurance that sufficient funds will beavailable to meet their credit needs, and the ability of the Company to meetthose needs. The Company strives to maintain an adequate liquidity position bymanaging the balances and maturities of interest-earning assets and interest-bearingliabilities so that the balance it has in short-term investments at any giventime will adequately cover any reasonably anticipated immediate need for funds.Additionally, the Company maintains relationships with correspondent banks,which could provide funds on short notice, if needed. At June 30, 2006 the Company had nofederal funds purchased.

The liquidity and capital resources of the Company aremonitored daily by management, and monthly by the Company’s Board-authorizedAsset and Liability Management Committee, and on a periodic basis by state andfederal regulatory authorities. As determined under guidelines established bythese regulatory authorities, the Company’s liquidity ratios at June 30, 2006 were consideredsatisfactory. At that date, the Company’s short-term investments and availablefederal funding were adequate to cover any reasonably anticipated immediateneed for funds. At June 30, 2006,the Company had unused available federal fund lines of $9,500,000 and unusedFederal Home Loan Bank borrowing capacity of approximately $27,910,000. TheCompany is aware of no events or trends likely to result in a material changein liquidity.

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The consolidated financial statements, as of June 30, 2006, evidenced anincreased liquidity position. Cash and due from banks, interest-bearingdeposits in banks and federal funds sold totaled $20,478,702 as of June 30, 2006 as compared to$15,791,422 as of December 31, 2005. Total cash and due from banksamounted to $2,934,622 representing 1.17% of total assets.

Asour loan demand has continued to increase, we have relied upon the use ofbrokered deposits as a funding source. Total brokered deposits amounted to$83.5 million as of June 30, 2006,which is a $3.6 million increase since December 31, 2005. These depositsare readily obtainable at rates not significantly different from rates that wepay on deposits in our local market. The Company’s ability to maintain andexpand its deposit base and borrowing capabilities is a source of liquidity.For the six-month period ended June 30,2006, total deposits increased from $174.3 million at December 31,2005 to $202.2 million at June 30,2006. Management is committed to maintaining capital at a levelsufficient to protect depositors, provide for reasonable growth, and fullycomply with all regulatory requirements. The table below illustrates theCompany’s and the Bank’s regulatory capital ratios at June 30, 2006. 

|                                   | ** ** | **Company** | ** ** | **Bank** | ** ** | **Minimum  Regulatory  Requirement** | ** ** |
|-----------------------------------|------------|-------------|------------|----------|------------|--------------------------------------|------------|
|                              |       |        |       |     |       |                                 |       |
| Leverage capital ratios |       | 11.28       | %          | 11.26    | %          | 4.00                                 | %          |
| Risk-based  capital ratios:       |       |        |       |     |       |                                 |       |
| Tier I capital                    |       | 12.68       | %          | 12.66    | %          | 4.00                                 | %          |
| Total capital                     |       | 13.68       | %          | 13.65    | %          | 8.00                                 | %          |

**Off-Balance Sheet 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. Thesefinancial instruments include commitments to extend credit and standby lettersof credit. Such commitments involve, to varying degrees, elements of creditrisk and interest rate risk in excess of the amount recognized in the balancesheets.

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

|                               | ** ** | **June 30,** | ** ** |
|-------------------------------|------------|-------------------|------------|
| ** **                    | ** ** | **2006**          | ** ** |
|                          |       |              |       |
| Commitments to  extend credit |       | $                 | 41,675,658 |   |
| Letters of  credit            |       | 1,418,517         |       |
|                          |       | $                 | 43,094,175 |   |

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Commitments to extend credit are agreements tolend to a customer as long as there is no violation of any conditionestablished 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 collateralobtained, if deemed necessary by us upon extension of credit, is based on ourcredit 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 areprimarily issued to support public and private borrowing arrangements. The creditrisk involved in issuing letters of credit is essentially the same as thatinvolved in extending loans to customers. Collateral is required in instanceswhich we deem necessary.

**Financial Condition**

Our total assets grew by13% for the first six months of 2006. Deposit growth of approximately $27.8million was used to fund net loan growth of approximately $18.5 million withthe remainder being primarily invested in securities or maintained in cash anddue from banks. Loan demand continues to be strong in our primary market areaof Henry County, Georgia and surrounding counties. The loan to available fundsratio at June 30, 2006 was 83% compared to 86% at December 31, 2005.The decrease in the loan to available funds ratio as compared to December 31,2005 is due to total loans increasing by only $18.5 million and total depositsincreasing by $27.8 million.

Stockholders’ equity hasincreased by $954,836 due to net income of $1,255,322 less unrealized losses onsecurities available-for-sale, net of tax, of $415,556, less unrealized losseson derivatives, net or tax, of $63,338, less cash paid for partial shares ownedin payout of the 10% stock dividend of $362 and including recognition of sharebased payments transactions as required by SFAS 123(R) of approximately$178,770. We have not identified any permanent impairment in the securitiesportfolio, and no loss will be recognized in our income statement if thosesecurities with unrealized losses are held to maturity.

TheCompany opened its Stockbridge branch in January 2006 and is currentlybranching into another location in Henry County. The Company has contractualobligations for approximately $432,000 of additional construction costs forthis additional branch.

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**Results of Operations****For The Three Months Ended June 30, 2006 and 2005 and for the SixMonths Ended June 30, 2006 and 2005**

Followingis a summary of our operations for the periods indicated.

|                            | ** ** | **Three Months Ended**     | ** ** |
|----------------------------|------------|--------------------------------------|------------|
| ** **                 | ** ** | **June 30,**                    | ** ** |
| ** **                 | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                 | ** ** | **(Dollars in Thousands)** | ** ** |
|                       |       |                                 |       |   |   |
| Interest income            |       | $                                    | 4,432      |   | $ | 3,222 |   |
| Interest expense           |       | (2,052                               | )          | (1,284 | ) |
| Net interest  income       |       | 2,380                                |       | 1,938 |   |
| Provision for  loan losses |       | (135                                 | )          | (185 | ) |
| Other income               |       | 79                                   |       | 70 |   |
| Other expense              |       | (1,346                               | )          | (881 | ) |
| Pretax income              |       | 978                                  |       | 942 |   |
| Income tax  expense        |       | (375                                 | )          | (336 | ) |
| Net income                 |       | $                                    | 603        |   | $ | 606 |   |

 

|                            | ** ** | **Six Months Ended**       | ** ** |
|----------------------------|------------|--------------------------------------|------------|
| ** **                 | ** ** | **June 30,**                    | ** ** |
| ** **                 | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                 | ** ** | **(Dollars in Thousands)** | ** ** |
|                       |       |                                 |       |   |   |
| Interest income            |       | $                                    | 8,496      |   | $ | 5,973 |   |
| Interest expense           |       | (3,870                               | )          | (2,309 | ) |
| Net interest  income       |       | 4,626                                |       | 3,664 |   |
| Provision for  loan losses |       | (180                                 | )          | (345 | ) |
| Other income               |       | 153                                  |       | 136 |   |
| Other expense              |       | (2,591                               | )          | (1,660 | ) |
| Pretax income              |       | 2,008                                |       | 1,795 |   |
| Income tax  expense        |       | (753                                 | )          | (648 | ) |
| Net income                 |       | $                                    | 1,255      |   | $ | 1,147 |   |

NetInterest Income

Ournet interest income increased approximately $442,000 and $962,000 for the threeand six month periods ended June 30, 2006, respectively, as compared tothe same periods in 2005. Our net interest margin increased to 4.14% during thefirst six months of 2006 as compared to 3.88% for the first six months of 2005.The increase in net interest income is due primarily to the increased volume ofinterest- earning assets and the increase in yields in our floating rateassets.  Our cost of funds increased to 4.03%for the first six months of 2006 as compared to 2.90% for the first six monthsof 2005.

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Other Income

Otherincome increased approximately $9,000 and $17,000 for the three and six monthperiods ended June 30, 2006, respectively, as compared to the same periodsin 2005. Year-to-date service charges on deposit accounts associated withdeposit growth have increased by $10,000. Other fee income has increasedapproximately $8,000 when compared to the six months ended June 30, 2005due to the increase in the volume of transactions resulting from our growth.Gains from sales of assets, other real estate and securities available-for-salehave decreased approximately $1,000 as compared to the six months endedJune 30, 2005.

OtherExpenses

Otherexpenses increased approximately $465,000 and $931,000 for the three and sixmonth periods ended June 30, 2006, respectively, compared to the sameperiods in 2005. The increases in 2006 consist of increases of $283,000 and$499,000 in salaries and employee benefits, $71,000 and $168,000 in equipmentand occupancy and $111,000 and $264,000 in other operating for the three andsix months ended June 30, 2006, respectively as compared to the sameperiods in 2005.  The increase insalaries and employee benefits represents normal increases in salaries, anincrease in the number of full time equivalent employees and the expense ofstock options of $178,770 as required by SFAS 123(R). Equipment and occupancyexpenses have increased due the need for additional equipment for employees andfor the expenses related to our new branch and our operations center. In 2005,the Company signed an operating lease for approximately $70,000 a year in leaseexpense to provide space for an operations center. The increases in otheroperating expenses are due primarily to our overall growth.

IncomeTaxes

Wehave recorded a provision for income taxes of $375,273 and $752,931 for thethree and six months ended June 30, 2006, respectively, as compared to$336,459 and $647,793 for the same periods in 2005. The increase in our incometax provision was $38,814 and $105,138 for the three and six months endedJune 30, 2006, respectively, compared to the same periods in 2005. Theeffective tax rate for the three and six months ended June 30, 2006,respectively, was 38.4% and 37.5% as compared to 35.7% and 36.1% for the sameperiods in 2005. The increase in our effective tax rate is due primarily to thepermanent non-deductibility of incentive stock options that have been expensedin the amount of $113,357. We have also increased our municipal bond portfolioin an effort to offset the Company’s tax liability.

RegulatoryMatters

From time to time, various bills are introduced in theUnited States Congress with respect to the regulation of financialinstitutions. Certain of these proposals, if adopted, could significantlychange the regulation of banks and the financial services industry. We cannotpredict whether any of these proposals will be adopted or, if adopted, howthese proposals would affect us.

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

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**ITEM 3.   Controls and Procedures**

As of the end of the period covered bythis report, we carried out an evaluation, under the supervision and with theparticipation of our Chief Executive Officer and the Chief Financial Officer,of the effectiveness of the design and operation of our disclosure controls andprocedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934.  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 Chief Executive Officerand Chief Financial Officer also concluded that our disclosure controls andprocedures are effective in timely alerting them to material informationrelating to our Company required to be included in our periodic SECfilings.  In connection with the newrules, 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.

There have been no changes in the Company’sinternal control over financial reporting during the six months ended June 30, 2006,or, to the Company’s knowledge, other factors that could significantly affectthose internal controls subsequent to the date the Company carried out itsevaluation, that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting, andthere have been no corrective actions with respect to significant deficienciesor material weaknesses.

The design of any system of controls and procedures is based in part uponcertain assumptions about the likelihood of future events.  There can be no assurance that any designwill succeed in achieving its stated goals under all potential futureconditions, regardless of how remote.

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**PART II.                OTHER INFORMATION**

**ITEM 4.   SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

(a)           The annual meeting of thestockholders of the Company was held on May 18, 2006.

(b)           Thefollowing Class I directors were elected at the meeting to serve terms forthree years:

Larry D. Adams

Wiley A. Brown, Jr.

Don H. Cagle

James Troy Chafin, III

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

| Larry D. Adams | ** ** | **# of Shares** | ** ** |
|--------------------------|------------|---------------------------|------------|
|                     |       |                      |       |
| For                      |       | 1,810,776                 |       |
|                     |       |                      |       |
| Against                  |       | —                    |       |
|                     |       |                      |       |
| Abstained                |       | 3,190                     |       |
|                     |       |                      |       |
| Not voted                |       | 545,787                   |       |
|                     |       |                      |       |
| Total                    |       | 2,359,753                 |       |

 

| Wiley A. Brown, Jr. | ** ** | **# of Shares** | ** ** |
|------------------------------------|------------|---------------------------|------------|
|                               |       |                      |       |
| For                                |       | 1,783,276                 |       |
|                               |       |                      |       |
| Against                            |       | —                    |       |
|                               |       |                      |       |
| Abstained                          |       | 30,690                    |       |
|                               |       |                      |       |
| Not voted                          |       | 545,787                   |       |
|                               |       |                      |       |
| Total                              |       | 2,359,753                 |       |

 

| Don H. Cagle | ** ** | **# of Shares** | ** ** |
|------------------------|------------|---------------------------|------------|
|                   |       |                      |       |
| For                    |       | 1,810,776                 |       |
|                   |       |                      |       |
| Against                |       | —                    |       |
|                   |       |                      |       |
| Abstained              |       | 3,190                     |       |
|                   |       |                      |       |
| Not voted              |       | 545,787                   |       |
|                   |       |                      |       |
| Total                  |       | 2,359,753                 |       |

 

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| James Troy Chafin, III | ** ** | **# of Shares** | ** ** |
|---------------------------------------|------------|---------------------------|------------|
|                                  |       |                      |       |
| For                                   |       | 1,810,776                 |       |
|                                  |       |                      |       |
| Against                               |       | —                    |       |
|                                  |       |                      |       |
| Abstained                             |       | 3,190                     |       |
|                                  |       |                      |       |
| Not voted                             |       | 545,787                   |       |
|                                  |       |                      |       |
| Total                                 |       | 2,359,753                 |       |

The terms of the Class II directors willexpire at the 2007 Annual Shareholders Meeting. The terms of the Class III directors expire at the 2008 AnnualShareholders Meeting.  Our directors andtheir classes are:

| Class I                 | ** ** | **Class II**              | ** ** | **Class III**          |
|-------------------------|------------|---------------------------|------------|------------------------|
| Larry D. Adams          |       | William Lee Craddock, Jr. |       | Milton Stanley Goggins |
| Wiley A. Brown,  Jr.    |       | Luther Martin Denney, III |       | Richard Allen Grimes   |
| Don H. Cagle            |       | James Randall Dixon       |       | Larry Max Phillips     |
| James Troy  Chafin, III |       |                      |       |                   |

**ITEM 6. EXHIBITS**

31.1                   Certification of the Chief ExecutiveOfficer, Pursuant to Rule 13a-15 under the Securities Exchange Act of1934, as amended.

31.2                   Certification of the Chief FinancialOfficer, Pursuant to Rule 13a-15 under the Securities Exchange Act of1934, as amended.

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

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**SIGNATURES**

In accordance with the requirements ofthe Exchange Act, the registrant caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.
|                 | FIRSTBANK FINANCIAL SERVICES, INC.           |
|-----------------|----------------------------------------------|
|            | (Registrant)                                 |
|            |                                         |
|            |                                         |
| August 11, 2006 |                                         | /s/ J. Randall  Dixon |   |
| Date            |                                         | J. Randall Dixon, President and C.E.O. |
|            | (Principal  Executive Officer)               |
|            |                                         |
|            |                                         |
| August 11, 2006 |                                         | /s/ Lisa J.  Maxwell |   |
| Date            |                                         | Lisa J. Maxwell,  C.F.O. |   |
|            | (Principal Financial and Accounting Officer) |   |

 

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