**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For thequarterly period ended  September 30, 2007**

 

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

 

**For thetransition period from                          to**

 

**CommissionFile Number:  000-51147**

 

**FirstBankFinancial Services, Inc.**

(Exact name ofsmall business issuer as specified in its charter)

 

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

 

**120 Keys Ferry Street McDonough, Georgia 30253**

(Address of principal executive offices)

 

**(678)583-2265**

(Issuer’stelephone number)

 

**N/A**

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

 

Check whether theregistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports)and (2) has been subject to such filing requirements for the past 90 days. Yes x  No  o

 

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

 

| Large  accelerated filer o |   | Accelerated  filer o | Non-accelerated filer x |
|----------------------------|--------|----------------------|-------------------------|

 

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

 

State the number ofshares outstanding of each of the issuer’s classes of common equity, as ofNovember 8, 2007: 2,704,182 shares, $5.00 par value per share.

 

 

----

 

**FIRSTBANK FINANCIAL SERVICES, INC.**

 

**TABLE OFCONTENTS**

 
| PART I.  | FINANCIAL INFORMATION                                                                                                                                      |                                                         |
|----------|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------|
|     |                                                                                                                                                       |                                                         |
|     | Item 1. Consolidated  Financial Statements                                                                                                                 |                                                         |
|     |                                                                                                                                                       |                                                         |
|     | Consolidated Balance Sheets as of September 30, 2007 and December 31,  2006                                                                                |                                                         |
|     |                                                                                                                                                       |                                                         |
|     | Consolidated Statements of  Income for the three months ended September 30, 2007 and 2006 and  nine months ended September 30, 2007 and 2006               |                                                         |
|     |                                                                                                                                                       |                                                         |
|     | Consolidated Statements of  Comprehensive Income for the three months ended September 30, 2007 and 2006  and nine months ended September 30, 2007 and 2006 |                                                         |
|     |                                                                                                                                                       |                                                         |
|     | Consolidated Statements of  Cash Flows for the nine months ended September 30, 2007 and 2006                                                               |                                                         |
|     |                                                                                                                                                       |                                                         |
|     | Notes to Consolidated  Financial Statements                                                                                                                |                                                         |
|     |                                                                                                                                                       |                                                         |
|     | Item 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                        |                                                         |
|     |                                                                                                                                                       |                                                         |
|     | Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                                                                        |                                                         |
|     |                                                                                                                                                       |                                                         |
|     | Item 4. Controls and  Procedures                                                                                                                           |                                                         |
|     |                                                                                                                                                       |                                                         |
| PART II. | OTHER INFORMATION                                                                                                                                          |                                                         |
|     |                                                                                                                                                       |                                                         |
|     | Item 1.                                                                                                                                                    | Legal Proceedings                                            |   |
|     |                                                                                                                                                       |                                                         |   |
|     | Item  1A.                                                                                                                                                  | Risk  Factors                                                |   |
|     |                                                                                                                                                       |                                                         |   |
|     | Item 2.                                                                                                                                                    | Unregistered  Sales of Equity Securities and Use of Proceeds |   |
|     |                                                                                                                                                       |                                                         |   |
|     | Item 3.                                                                                                                                                    | Defaults Upon  Senior Securities                             |   |
|     |                                                                                                                                                       |                                                         |   |
|     | Item 4.                                                                                                                                                    | Submission of Matters  to Vote of Security Holders           |   |
|     |                                                                                                                                                       |                                                         |   |
|     | Item 5.                                                                                                                                                    | Other Information                                            |   |
|     |                                                                                                                                                       |                                                         |   |
|     | Item  6.                                                                                                                                                   | Exhibits                                                     |   |
|     |                                                                                                                                                       |                                                         |   |
|     |                                                                                                                                                       | Certifications                                               |   |

 

----

** **

**PART I -FINANCIAL INFORMATION**

** **

**ITEM1.     Financial Statements**

** **

**FIRSTBANK FINANCIAL SERVICES,INC.**

**AND SUBSIDIARY**

**CONSOLIDATEDBALANCE SHEETS**

**SEPTEMBER 30, 2007 AND DECEMBER31, 2006**

 
| ** **                                                                                                | ** ** | **September 30, 2007** | ** **  | **December 31, 2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|----------------------------------|-------------|---------------------------------|------------|
| ** **                                                                                                | ** ** | **(Unaudited)**                  | ** **  | **(Audited)**                   | ** ** |
| **Assets**                                                                                                |       |                             |        |                            |       |
|                                                                                                      |       |                             |        |                            |       |
| Cash and due  from banks                                                                                  |       | $                                | 2,834,463   |                            | $          | 4,047,726 |   |
| Interest-bearing  deposits in banks                                                                       |       | 1,310,287                        |        | 1,790,278                       |       |
| Federal funds  sold                                                                                       |       | 7,612,000                        |        | 11,614,000                      |       |
| Securities  available for sale, at fair value                                                             |       | 55,390,225                       |        | 39,559,041                      |       |
| Restricted  equity securities, at cost                                                                    |       | 2,516,856                        |        | 2,013,556                       |       |
|                                                                                                      |       |                             |        |                            |       |
| Loans, net of  unearned income                                                                            |       | 249,109,364                      |        | 210,397,450                     |       |
| Less allowance  for loan losses                                                                           |       | 3,671,820                        |        | 2,392,086                       |       |
| Loans, net                                                                                                |       | 245,437,544                      |        | 208,005,364                     |       |
|                                                                                                      |       |                             |        |                            |       |
| Premises and  equipment                                                                                   |       | 7,604,759                        |        | 6,013,068                       |       |
| Other real  estate owned                                                                                  |       | 1,729,345                        |        | —                          |       |
| Other assets                                                                                              |       | 5,501,770                        |        | 4,036,623                       |       |
|                                                                                                      |       |                             |        |                            |       |
| **Total  assets**                                                                                         |       | $                                | 329,937,249 |                            | $          | 277,079,656 |   |
|                                                                                                      |       |                             |        |                            |       |
| **Liabilities and Stockholders’ Equity**                                                             |       |                             |        |                            |       |
|                                                                                                      |       |                             |        |                            |       |
| Deposits                                                                                                  |       |                             |        |                            |       |
| Noninterest-bearing                                                                                       |       | $                                | 11,293,073  |                            | $          | 11,571,364 |   |
| Interest-bearing                                                                                          |       | 245,653,197                      |        | 204,840,106                     |       |
| Total deposits                                                                                            |       | 256,946,270                      |        | 216,411,470                     |       |
| Other borrowings                                                                                          |       | 34,000,000                       |        | 22,000,000                      |       |
| Subordinated  debentures                                                                                  |       | 8,248,000                        |        | 8,248,000                       |       |
| Other  liabilities                                                                                        |       | 2,609,076                        |        | 2,667,458                       |       |
| Total  liabilities                                                                                        |       | 301,803,346                      |        | 249,326,928                     |       |
|                                                                                                      |       |                             |        |                            |       |
| 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;                                                |       |                             |        |                            |       |
| 2,729,706 and  2,831,676 shares issued and outstanding, respectively                                      |       | 13,648,530                       |        | 14,158,380                      |       |
| Surplus                                                                                                   |       | 11,285,973                       |        | 11,655,045                      |       |
| Retained  earnings                                                                                        |       | 3,436,724                        |        | 2,328,567                       |       |
| Accumulated  other comprehensive loss                                                                     |       | (237,324                         | )           | (389,264                        | )          |
| Total  stockholders’ equity                                                                          |       | 28,133,903                       |        | 27,752,728                      |       |
|                                                                                                      |       |                             |        |                            |       |
| **Total liabilities  and stockholders’ equity**                                                      |       | $                                | 329,937,249 |                            | $          | 277,079,656 |   |

 

See notes to consolidatedfinancial statements.

 

1

----

 

**FIRSTBANK FINANCIAL SERVICES,INC.**

**AND SUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF INCOME**

**THREE MONTHS ENDED SEPTEMBER 30,2007 AND 2006 AND**

**NINE MONTHS ENDED SEPTEMBER 30,2007 AND 2006**

**(Unaudited)**

 
| ** **                                               | ** ** | **Three Months Ended** | ** **    | **Nine Months Ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|---------------|---------------------------------|------------|
| ** **                                               | ** ** | **September 30,**           | ** **    | **September 30,**          | ** ** |
| ** **                                               | ** ** | ** **                       | ** **    | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                               | ** ** | **2007**                         | ** **    | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                     |       |                             |          |                            |       |   |   |   |   |
| **Interest  income**                                     |       |                             |          |                            |       |   |   |   |   |
| Loans, including  fees                                   | ** ** | **$**                            | **5,266,637** | ** **                      | $          | 4,425,084 | ** ** | **$** | **15,400,419** |   | $ | 11,832,237 |   |
| Taxable  securities                                      | ** ** | **618,401**                      |          | 390,513                         | ** ** | **1,522,042** |   | 1,083,691 |   |
| Tax-free  securities                                     | ** ** | **65,766**                       |          | 36,926                          | ** ** | **182,060** |   | 96,583 |   |
| Deposits in  banks                                       | ** ** | **14,641**                       |          | 6,629                           | ** ** | **65,608** |   | 40,356 |   |
| Federal funds  sold                                      | ** ** | **133,412**                      |          | 158,894                         | ** ** | **322,066** |   | 461,720 |   |
| **Total  interest income**                               | ** ** | **6,098,857**                    |          | 5,018,046                       | ** ** | **17,492,195** |   | 13,514,587 |   |
|                                                     |       |                             |          |                            |       |   |   |   |   |
| **Interest  expense**                                    |       |                             |          |                            |       |   |   |   |   |
| Deposits                                                 | ** ** | **3,161,652**                    |          | 2,259,133                       | ** ** | **8,868,228** |   | 5,691,164 |   |
| Other borrowings                                         | ** ** | **544,333**                      |          | 234,864                         | ** ** | **1,344,390** |   | 672,719 |   |
| **Total  interest expense**                              | ** ** | **3,705,985**                    |          | 2,493,997                       | ** ** | **10,212,618** |   | 6,363,883 |   |
|                                                     |       |                             |          |                            |       |   |   |   |   |
| **Net  interest income**                                 | ** ** | **2,392,872**                    |          | 2,524,049                       | ** ** | **7,279,577** |   | 7,150,704 |   |
| **Provision  for loan losses**                           | ** ** | **911,966**                      |          | 190,000                         | ** ** | **1,326,966** |   | 370,000 |   |
| **Net  interest income after provision for loan losses** |       | **1,480,906**                    |          | 2,334,049                       |       | **5,952,611** |   | 6,780,704 |   |
|                                                     |       |                             |          |                            |       |   |   |   |   |
| **Other  income**                                        |       |                             |          |                            |       |   |   |   |   |
| Service charges  on deposit accounts                     | ** ** | **95,175**                       |          | 55,760                          | ** ** | **283,967** |   | 163,245 |   |
| Gain (loss) on  sale of assets                           | ** ** | **(3,035**                       | )             | (7,718                          | **)**      | **(6,991** | ) | (6,293 | ) |
| Gain on sale of  other real estate owned                 | ** ** | **—**                       |          | —                          | ** ** | **21,306** |   | — |   |
| Other operating  income                                  | ** ** | **34,901**                       |          | 23,032                          | ** ** | **94,290** |   | 66,811 |   |
| **Total  other income**                                  | ** ** | **127,041**                      |          | 71,074                          | ** ** | **392,572** |   | 223,763 |   |
|                                                     |       |                             |          |                            |       |   |   |   |   |
| **Other  expenses**                                      |       |                             |          |                            |       |   |   |   |   |
| Salaries and  employee benefits                          | ** ** | **821,417**                      |          | 710,654                         | ** ** | **2,365,819** |   | 2,170,609 |   |
| Equipment and  occupancy expenses                        | ** ** | **260,299**                      |          | 175,001                         | ** ** | **683,134** |   | 481,345 |   |
| Loss on sale of  securities available for sale           | ** ** | **16,536**                       |          | —                          | ** ** | **45,526** |   | — |   |
| Other operating  expenses                                | ** ** | **529,460**                      |          | 392,954                         | ** ** | **1,572,613** |   | 1,217,746 |   |
| **Total  other expenses**                                | ** ** | **1,627,712**                    |          | 1,278,609                       | ** ** | **4,667,092** |   | 3,869,700 |   |
|                                                     |       |                             |          |                            |       |   |   |   |   |
| **Income  (loss) before income taxes**                   | ** ** | **(19,765**                      | )             | 1,126,514                       | ** ** | **1,678,091** |   | 3,134,767 |   |
|                                                     |       |                             |          |                            |       |   |   |   |   |
| **Income  tax (benefit) expense**                        | ** ** | **(43,694**                      | )             | 419,287                         | ** ** | **569,934** |   | 1,172,218 |   |
|                                                     |       |                             |          |                            |       |   |   |   |   |
| **Net  income**                                          | ** ** | **$**                            | **23,929**    | ** **                      | $          | 707,227 | ** ** | **$** | **1,108,157** | ** ** | $ | 1,962,549 | ** ** |
|                                                     |       |                             |          |                            |       |   |   |   |   |
| **Basic  earnings per share**                            | ** ** | **$**                            | **0.01**      | ** **                      | $          | 0.25 | ** ** | **$** | **0.39** | ** ** | $ | 0.69 | ** ** |
|                                                     |       |                             |          |                            |       |   |   |   |   |
| **Diluted  earnings per share**                          | ** ** | **$**                            | **0.01**      | ** **                      | $          | 0.24 | ** ** | **$** | **0.38** | ** ** | $ | 0.65 | ** ** |
|                                                     |       |                             |          |                            |       |   |   |   |   |
| **Cash  dividends per share**                            | ** ** | **$**                            | **—**    | ** **                      | $          | **—** | ** ** | **$** | **—** |   | $ | — |   |

 

See notes to consolidatedfinancial statements.

 

2

----

** **

**FIRSTBANK FINANCIAL SERVICES,INC.**

**AND SUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF COMPREHENSIVE INCOME**

**THREE MONTHS ENDED SEPTEMBER 30,2007 AND 2006 AND**

**NINE MONTHS ENDED SEPTEMBER 30,2007 AND 2006**

**(Unaudited)**

 
| ** **                                                                                                           | ** ** | **Three Months Ended** | ** **  | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|-------------|---------------------------------|------------|
| ** **                                                                                                           | ** ** | **September 30,**           | ** **  | **September 30,**          | ** ** |
| ** **                                                                                                           | ** ** | ** **                       | ** **  | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                           | ** ** | **2007**                         | ** **  | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                                           | ** ** | ** **                       | ** **  | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                                                           | ** ** | **$**                            | **23,929**  |                            | $          | 707,227 | ** ** | **$** | **1,108,157** |   | $ | 1,962,549 |   |
|                                                                                                                 |       |                             |        |                            |       |   |   |   |   |
| Other  comprehensive income (loss):                                                                                  |       |                             |        |                            |       |   |   |   |   |
|                                                                                                                 |       |                             |        |                            |       |   |   |   |   |
| Net unrealized  holding gains (losses) arising during period, net of tax benefit                                     |       | **465,685**                      |        | 499,527                         |       | **(18,690** | ) | 83,971 |   |
|                                                                                                                 |       |                             |        |                            |       |   |   |   |   |
| Reclassification  adjustment for losses on securities available for sale realized in net  income, net of tax benefit |       | **10,252**                       |        | —                          |       | **28,226** |   | — |   |
|                                                                                                                 |       |                             |        |                            |       |   |   |   |   |
| Net unrealized  holding gains (losses) on interest rate floors arising during period, net of  tax benefit            |       | **146,446**                      |        | (26,353                         | )          | **114,178** |   | (89,691 | ) |
|                                                                                                                 |       |                             |        |                            |       |   |   |   |   |
| Other  comprehensive income (loss)                                                                                   | ** ** | **622,383**                      |        | 473,174                         | ** ** | **123,714** |   | (5,720 | ) |
|                                                                                                                 |       |                             |        |                            |       |   |   |   |   |
| Comprehensive  income                                                                                                | ** ** | **$**                            | **646,312** |                            | $          | 1,180,401 | ** ** | **$** | **1,231,871** |   | $ | 1,956,829 |   |

 

See notes to consolidatedfinancial statements.

 

3

----

 

**FIRSTBANK FINANCIAL SERVICES,INC.**

**AND SUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**NINE MONTHS ENDED SEPTEMBER 30,2007 AND 2006**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **2007**        | ** **     | **2006**    | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------|----------------|-------------|------------|
| **OPERATING ACTIVITIES**                                                           |       |            |           |        |       |
| Net income                                                                         | ** ** | **$**           | **1,108,157**  | ** **  | $          | 1,962,549 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |            | ** **     |        |       |
| Loss on sale of  assets                                                            | ** ** | **6,991**       | ** **     | 6,293       |       |
| Gain on sale of  other real estate owned                                           | ** ** | **(21,306**     | **)**          | —      |       |
| Loss on sale of  securities available for sale                                     | ** ** | **45,526**      | ** **     | —      |       |
| Depreciation and  amortization                                                     | ** ** | **359,069**     | ** **     | 252,455     |       |
| Stock  compensation expense                                                        | ** ** | **128,477**     | ** **     | 212,209     |       |
| Provision for  loan losses                                                         | ** ** | **1,326,966**   | ** **     | 370,000     |       |
| Increase in  accrued interest receivable                                           | ** ** | **(525,365**    | **)**          | (324,759    | )          |
| Increase  (decrease) in accrued interest payable                                   | ** ** | **(70,127**     | **)**          | 688,509     |       |
| Net other  operating activities                                                    | ** ** | **(877,066**    | **)**          | 52,028      |       |
|                                                                               |       |            | ** **     |        |       |
| Net cash provided  by operating activities                                         | ** ** | **1,481,322**   | ** **     | 3,219,284   |       |
|                                                                               |       |            | ** **     |        |       |
| **INVESTING  ACTIVITIES**                                                          |       |            | ** **     |        |       |
| Net decrease in  interest-bearing deposits in banks                                | ** ** | **479,991**     | ** **     | 85,832      |       |
| Purchases of  securities available for sale                                        | ** ** | **(22,770,195** | **)**          | (8,599,686  | )          |
| Proceeds from  sales of securities available for sale                              | ** ** | **3,782,653**   | ** **     | —      |       |
| Proceeds from  maturities of securities available for sale                         | ** ** | **3,171,737**   | ** **     | 2,040,967   |       |
| Purchases of  restricted equity securities                                         | ** ** | **(503,300**    | **)**          | (181,300    | )          |
| Net decrease in  federal funds sold                                                | ** ** | **4,002,000**   | ** **     | 1,224,000   |       |
| Net increase in  loans                                                             | ** ** | **(40,609,531** | **)**          | (28,369,580 | )          |
| Proceeds from  sale of assets                                                      | ** ** | **22,000**      | ** **     | 3,491       |       |
| Purchase of  interest rate floor                                                   | ** ** | **—**      | ** **     | (298,500    | )          |
| Proceeds from  sale of other real estate owned                                     | ** ** | **155,267**     | ** **     | —      |       |
| Purchase of  premises, equipment and software                                      | ** ** | **(1,952,609**  | **)**          | (1,929,814  | )          |
|                                                                               |       |            | ** **     |        |       |
| Net cash used in  investing activities                                             | ** ** | **(54,221,987** | **)**          | (36,024,590 | )          |
|                                                                               |       |            | ** **     |        |       |
| **FINANCING  ACTIVITIES**                                                          |       |            | ** **     |        |       |
| Net increase in  deposits                                                          | ** ** | **40,534,800**  | ** **     | 34,804,875  |       |
| Net increase in  borrowings                                                        | ** ** | **12,000,000**  | ** **     | —      |       |
| Purchase of  fractional shares                                                     | ** ** | **—**      | ** **     | (362        | )          |
| Stock repurchase                                                                   | ** ** | **(1,007,398**  | **)**          | —      |       |
|                                                                               |       |            | ** **     |        |       |
| Net cash  provided by financing activities                                         | ** ** | **51,527,402**  | ** **     | 34,804,513  |       |
|                                                                               |       |            | ** **     |        |       |
| Net increase  (decrease) in cash and due from banks                                | ** ** | **(1,213,263**  | **)**          | 1,999,207   |       |
|                                                                               |       |            | ** **     |        |       |
| Cash and due  from banks at beginning of period                                    | ** ** | **4,047,726**   | ** **     | 1,236,443   |       |
|                                                                               |       |            | ** **     |        |       |
| Cash and due  from banks at end of period                                          | ** ** | **$**           | **2,834,463**  | ** **  | $          | 3,235,650 |   |
|                                                                               |       |            | ** **     |        |       |
| Supplemental  schedule of noncash investing and financing activities -             |       |            | ** **     |        |       |
| Change in  accumulated other comprehensive loss                                    | ** ** | **$**           | **123,714**    | ** **  | $          | (5,720 | ) |
| Loans  transferred to other real estate owned                                      | ** ** | **$**           | **1,850,385**  | ** **  | $          | — |   |
|                                                                               |       |            | ** **     |        |       |
| Supplemental  disclosures of cash flow information -                               |       |            | ** **     |        |       |
|                                                                               |       |            | ** **     |        |       |
| Cash paid during  the period for interest                                          | ** ** | **$**           | **10,282,745** | ** **  | $          | 5,675,374 |   |
| Cash paid during  the period for income taxes                                      | ** ** | **$**           | **1,214,384**  | ** **  | $          | 1,341,035 |   |

 

See notes to consolidatedfinancial statements.

 

4

----

 

**FIRSTBANKFINANCIAL SERVICES, INC. AND SUBSIDIARY**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

(Unaudited)

 

**NOTE 1. Ba****sis of Presentation**

 

FirstBank FinancialServices, Inc. (the “Company”) is a bank holding company whose business isconducted by its wholly-owned commercial bank, FirstBank Financial Services,formerly First Bank of Henry County, (the “Bank”). The Bank is a commercialbank located in McDonough, Henry County, Georgia, with a branch in Stockbridge,Georgia, another branch also in McDonough known as the Bank’s South Pointbranch and a branch in Morrow, Clayton County, Georgia.

 

The accompanyingconsolidated financial statements are unaudited. Certain information andfootnote disclosures normally included in consolidated financial statementsprepared in accordance with generally accepted accounting principles have beencondensed or omitted pursuant to such rules and regulations. These 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, 2006, which wasfiled with the Securities and Exchange Commission.

 

The financial informationincluded herein reflects all adjustments (consisting of normal recurringadjustments), which are, in the opinion of management, necessary to a fairpresentation of the Bank’s financial position and results for the interimperiod ended September 30, 2007.

 

The preparation ofconsolidated financial statements requires management to make estimates andassumptions that affect the reported amounts of assets, liabilities and incomeand expense amounts. Actual results could differ from those estimates. Theresults of operations for the nine months ended September 30, 2007 are notnecessarily indicative of the results to be expected for the full year.

 

**NOTE 2. Stock Compensation Plans**

 

At September 30, 2007, the Company has two stock-based compensation plans which include certain employees and directors. The Company accounts for these plans under FASB Statement No. 123(R), Share-Based Payment, using the modified-prospective-transition method. Under that transition method, compensation cost recognized includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of Statement 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of Statement 123(R).

 

At September 30, 2007, there was approximately $24,529 of unrecognized compensation cost related to stock-based payments, which is expected to be recognized over a weighted-average period of 1.45 years. Stock based compensation expense recognized in earnings totaled $23,547 and $128,477 for the three and nine months ended September 30, 2007, respectively, as compared to $33,439 and $212,209 for the same periods in 2006.

 

5

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**NOTE 3. Earnings Per Common Share**

 

SFAS No. 128, *Earnings Per Share,*establishes standards for computing and presenting basic and diluted earningsper share. In this regard, the Company is required to report earnings percommon share with and without the dilutive effects of potential common stockissuances from instruments such as options, convertible securities and warrantson the face of the statements of income. Earnings per common share are based onthe weighted average number of common shares outstanding during the periodwhile the effects of potential common shares outstanding during the period areincluded in diluted earnings per share. 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 thecomponents used to calculate basic and diluted earnings per common share.

 
| ** **                                                                                                                        | ** ** | **Three Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                                                                        | ** ** | **2007**                                                 | ** ** | **2006** | ** ** |
| Basic earnings  per share:                                                                                                        |       |                                                     |       |   |   |
| Weighted average  common shares outstanding                                                                                       |       | 2,800,096                                                |       | 2,831,676 |   |
|                                                                                                                              |       |                                                     |       |   |   |
| Net income                                                                                                                        |       | $                                                        | 23,929     |   | $ | 707,227 |   |
|                                                                                                                              |       |                                                     |       |   |   |
| Basic earnings  per share                                                                                                         |       | $                                                        | 0.01       |   | $ | 0.25 |   |
|                                                                                                                              |       |                                                     |       |   |   |
| Diluted earnings  per share:                                                                                                      |       |                                                     |       |   |   |
| Weighted average  common shares outstanding                                                                                       |       | 2,800,096                                                |       | 2,831,676 |   |
| Net effect of  the assumed exercise of stock options based on the treasury stock method using  average market prices for the year |       | 78,684                                                   |       | 162,094 |   |
| Total weighted  average common shares and common stock equivalents outstanding                                                    |       | 2,878,780                                                |       | 2,993,770 |   |
|                                                                                                                              |       |                                                     |       |   |   |
| Net income                                                                                                                        |       | $                                                        | 23,929     |   | $ | 707,227 |   |
|                                                                                                                              |       |                                                     |       |   |   |
| Diluted earnings  per share                                                                                                       |       | $                                                        | 0.01       |   | $ | 0.24 |   |

 

6

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**NOTE 3. Earnings Per Common Share**

 
| ** **                                                                                                                        | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                                                        | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| Basic earnings  per share:                                                                                                        |       |                                                    |       |   |   |
| Weighted average  common shares outstanding                                                                                       |       | 2,821,033                                               |       | 2,831,676 |   |
|                                                                                                                              |       |                                                    |       |   |   |
| Net income                                                                                                                        |       | $                                                       | 1,108,157  |   | $ | 1,962,549 |   |
|                                                                                                                              |       |                                                    |       |   |   |
| Basic earnings  per share                                                                                                         |       | $                                                       | 0.39       |   | $ | 0.69 |   |
|                                                                                                                              |       |                                                    |       |   |   |
| Diluted earnings  per share:                                                                                                      |       |                                                    |       |   |   |
| Weighted average  common shares outstanding                                                                                       |       | 2,821,033                                               |       | 2,831,676 |   |
| Net effect of  the assumed exercise of stock options based on the treasury stock method using  average market prices for the year |       | 130,339                                                 |       | 168,667 |   |
| Total weighted  average common shares and common stock equivalents outstanding                                                    |       | 2,951,372                                               |       | 3,000,343 |   |
|                                                                                                                              |       |                                                    |       |   |   |
| Net income                                                                                                                        |       | $                                                       | 1,108,157  |   | $ | 1,962,549 |   |
|                                                                                                                              |       |                                                    |       |   |   |
| Diluted earnings  per share                                                                                                       |       | $                                                       | 0.38       |   | $ | 0.65 |   |

 

**NOTE 4. Recent AccountingPronouncements**

 

InJuly 2006, the FASB issued Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109*.This interpretation addresses the accounting for uncertainty in income taxesrecognized in a Company’s financial statements in accordance with FASBStatement No. 109, Accounting for Income Taxes. It prescribes a comprehensivemodel for recognizing, measuring, presenting and disclosing in the financialstatements tax positions taken or expected to be taken in a tax return. Itrequires that only benefits from tax positions that are more-likely-than-not ofbeing sustained upon examination should be recognized in the financialstatements. These benefits would be recorded at amounts considered to be themaximum amounts more-likely-than-not of being sustained. At the time thesepositions become more-likely-than-not to be disallowed, their recognition wouldbe reversed. This interpretation is effective for fiscal years beginning afterDecember 15, 2006 and is not expected to have a material impact on theCompany’s financial condition or results of operations.

 

InSeptember 2006, the FASB issued FAS 157, *Fair Value Measurements*.The standard provides guidance for using fair value to measure assets andliabilities. It defines fair value, establishes a framework for measuring fairvalue under generally accepted accounting principles and expands disclosuresabout fair value measurement. Under the standard, fair value refers to theprice that would be received to sell an asset or paid to transfer a liabilityin an orderly transaction between market participants in the market in whichthe reporting entity transacts. It clarifies the principle that fair valueshould be based on the assumptions market participants would use when pricingthe asset or liability. In support of this principle, the standard establishesa fair value hierarchy that prioritizes the information used to develop thoseassumptions. Under the standard, fair value

 

7

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measurementswould be separately disclosed by level within the fair value hierarchy. Statement157 is effective for financial statements issued for fiscal years beginningafter November 15, 2007. The Company is currently evaluating the impact theadoption of this statement could have on its financial condition, results of operationsand cash flows.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 permits entities to make an irrevocable election, at specified election dates, to measure eligible financial instruments and certain other items at fair value. This statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. The provisions of this statement are effective as of the beginning of the first fiscal year that begins after November 15, 2007. The Company has not chosen to early adopt this statement.

 

**NOTE 5. StockDividend**

 

OnNovember 16, 2006, the Company declared a six-for-five stock split payable toshareholders of record on December 1, 2006 which was distributed on December29, 2006. Earnings per common share for the periods ended September 30, 2006and all stock option and warrant information has been retroactively adjustedfor the split as if it occurred on January 1, 2006. 

 

**NOTE 6. InterestRate Derivatives**

 

TheCompany maintains an overall interest rate risk-management strategy thatincorporates the use of derivative instruments to minimize significantunplanned fluctuations in earnings that are caused by interest volatility. Oneinterest rate derivative is used to hedge variable-rate deposits. Thisinstrument is reflected in other liabilities at September 30, 2007 at a fairvalue of $93,806. The Company has two other derivatives, interest rate floors,one with a notional value of $40 million and a 7.50% strike and the other witha notional value of $30 million and an 8.50% strike. The fair value of theseinstruments at September 30, 2007 is $356,409 and is reflected in other assets.The instruments are more fully described in the Company’s annual report datedDecember 31, 2006.

 

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**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

The following is our discussion andanalysis of certain significant factors which have affected the financialposition and operating results of FirstBank Financial Services, Inc. (the“Company”) during the periods included in the accompanying consolidatedfinancial statements and should be read in conjunction with management’sdiscussion and analysis included in the Company’s annual report on Form 10-KSBfor the year ended December 31, 2006, which was filed with the Securities andExchange Commission.

 

**Forward Looking Statements**

 

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

 

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

•                  the effects of future economicconditions;

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

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

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

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

•                  changes occurring in business conditionsand inflation;

•                  changes in monetary and tax policies;

•                  changes in technology;

•                  the level of allowance for loan loss;

•                  the rate of delinquencies and amounts ofcharge-offs;

•                  the rates of loan growth;

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

•                  changes in the securities market; and

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

 

9

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**Introduction**

 

The Company performs banking services customary forfull service banks of similar size and character. The Company offers personaland business checking accounts, interest-bearing checking accounts, savingsaccounts and various types of certificates of deposit. The Company also offerscommercial loans, installment and other consumer loans, home equity loans, homeequity lines of credit, construction loans and mortgage loans. In addition, theCompany provides such services as official bank checks, traveler’s checks,direct deposit and United States Savings Bonds. The Company provides othercustomary banking services including ATM services, safe deposit facilities,money transfers and individual retirement accounts.

 

**Overview**

 

Management monitors the financial condition of the Company in order toprotect depositors, increase undivided profits and protect current and futureearnings. Further discussion of significant items affecting the Company’sfinancial condition are discussed in detail below.

 

**Critical Accounting Policies**

 

We have adopted various accountingpolicies which govern the application of accounting principles generallyaccepted in the United States of America in the preparation of our consolidatedfinancial statements of FirstBank Financial Services, Inc. Our significantaccounting policies are described in the footnotes to the financial statementsfor FirstBank Financial Services, Inc. at December 31, 2006 as filed in theCompany’s annual report on Form 10-KSB, which was filed with the Securities andExchange Commission.

 

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

 

We believe the allowance for loan lossesis a critical accounting policy that requires the most significant judgmentsand estimates used in preparation of our consolidated financial statements.Refer to the portion of this discussion that addresses asset quality for adescription of our processes and methodology for determining our allowance forloan losses.

 

Another of our critical accounting policiesinvolves stock-based compensation. The assumptions used in the determination ofthe fair value of stock options granted ultimately determine the recognition ofstock-based compensation expense. The short-cut method was used to determinethe expected life of the options. This method, as prescribed by SAB Topic14.D.2, calculates the expected term based on the midpoint between the vestingdate of the option and the end of the contractual term. Expected volatility wasbased upon the historical volatility of the Company’s stock. Risk-free interestrates for periods within the contractual life of the option are based upon theU.S. Treasury yield curve in effect at the time of the grant. Because of theneed to retain capital for expected growth and past history, the expected 

 

10

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dividend rate is 0%. These assumptions have asignificant impact on the amount of expense recognized for stock-basedcompensation.

 

**Asset Quality**

 

A major key to long-term earnings growth is the maintenance of ahigh-quality loan portfolio. The Company’s directive in this regard is carriedout through its policies and procedures for extending credit to the Company’scustomers. The goal and result of these policies and procedures is to provide asound basis for new credit extensions and an early recognition of problemassets to allow the most flexibility in their timely disposition. Additions tothe allowance for loan losses will be made periodically to maintain theallowance at an appropriate level based upon management’s analysis of potentialrisk in the loan portfolio. The amount of the loan loss provision is determinedby an evaluation of the level of loans outstanding, the level of non-performingloans, historical loan loss experience, delinquency trends, the amount ofactual losses charged to the allowance in a given period, and assessment ofpresent and anticipated economic conditions. While risk of loss in theCompany’s portfolio is primarily tied to the credit quality of the variousborrowers, risk of loss may increase due to factors beyond the Company’s controlsuch as local, regional and/or national economic downturns. General conditionsin the real estate market may also impact the relative risk in the real estateportfolio.

 

A provision for loan losses was made during the third quarter and firstnine months of 2007, respectively of $912,000 and $1,327,000 as compared to thesame periods in 2006 of $190,000 and $370,000, respectively. The amountsprovided are due primarily to our assessment of inherent risk in the loanportfolio, the increase in problem and potential problem loans and the increasein loan growth as compared to the same period in 2006. We can make noassurances that the Company will not see a further deterioration in creditquality which would require additional reserves for those problem loans. Theallowance for loan losses as a percentage of total loans was 1.47% at September 30, 2007 as compared to1.14% at December 31, 2006. Based upon our evaluation of the loanportfolio, we believe the allowance for loan losses to be adequate to absorblosses on existing loans that may become uncollectible.

 

During the first quarter of 2007, the Company foreclosed on theproperties related to loans totaling approximately $1,022,000 that wereincluded in non-accrual loans as of December 31, 2006. During the secondquarter of 2007, the Company sold three lots totaling approximately $134,000with a marginal gain of approximately $21,000. During the third quarter of2007, the Company foreclosed on additional properties related to loans totalingapproximately $829,000 with immediate write-downs of $38,205. Management doesnot anticipate any significant losses in the disposition of these properties.

 

During the quarter ending September 30, 2007, nonperforming assetsincreased $6,700,000 over the quarter ending June 30, 2007. Totalnon-performing assets at September 30, 2007 of $12,003,506 were comprisedof $1,729,345 in other real estate acquired through foreclosure and $10,274,161in non-accrual loans.

 

Other real estate acquired through foreclosure totaling $1,729,345includes:

 
|   | • |   | $900,770 secured by three completed new construction single family  detached homes in Stockbridge, Henry County, Georgia; |
|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------|

 
|   | • |   | $505,575 secured by four new construction single family detached  homes in various stages of |
|--------|--------|--------|----------------------------------------------------------------------------------------------|

 

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|   |   |   | completion in Jackson, Butts County, Georgia; |
|--------|--------|--------|-----------------------------------------------|

 
|   | • |   | $245,000 secured by five developed residential lots in Jackson, Butts  County, Georgia; |
|--------|--------|--------|-----------------------------------------------------------------------------------------|

 
|   | • |   | $78,000 secured by two developed residential lots in Riverdale,  Clayton County, Georgia. |
|--------|--------|--------|-------------------------------------------------------------------------------------------|

 

The non-accrual loans totaling $10,274,161 include:

 
|   | • |   | $2,390,149 in loans secured by six new construction single family  detached homes in various stages of completion located in Forsyth, Monroe  County, Georgia; |
|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
|   | • |   | $2,154,275 in loans secured by nine new construction single family  detached homes in various stages of completion located in McDonough, Henry  County, Georgia; |
|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
|   | • |   | $1,499,800 in loans secured by two developed residential lots in  Jonesboro, Clayton County, Georgia; |
|--------|--------|--------|-------------------------------------------------------------------------------------------------------|

 
| ** ** | • | ** ** | $900,636 in loans secured by two new construction single family  detached homes in various stages of completion in Covington, Newton County,  Georgia; |
|------------|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| ** ** | • | ** ** | $643,175 in loans secured by five new construction single family  detached homes in various stages of completion in Griffin, Spalding County,  Georgia; |
|------------|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| ** ** | • | ** ** | $602,700 in loans secured by nine developed residential lots in  Forsyth, Monroe County, Georgia; |
|------------|--------|------------|---------------------------------------------------------------------------------------------------|

 
| ** ** | • |   | $525,000 in loans secured by a condo unit at the Atlanta Motor Speedway,  in Hampton, Henry County, Georgia; |
|------------|--------|--------|--------------------------------------------------------------------------------------------------------------|

 
| ** ** | • | ** ** | $519,693 in loans secured by commercial property in McDonough, Henry  County, Georgia; |
|------------|--------|------------|----------------------------------------------------------------------------------------|

** **
| ** ** | • | ** ** | $367,485 in loans secured by three new construction single family  detached homes in various stages of completion in Jackson, Butts County,  Georgia; |
|------------|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|

** **
| ** ** | • |       | $358,291 in loans secured by seven new construction single family  detached homes in various stages of completion in Luthersville, Meriwether  County, Georgia; |
|------------|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |       |                                                                                                                                                            |
| ** ** | • | ** ** | $140,216 in loans secured by three developed residential lots in  McDonough, Henry County, Georgia;                                                             |

** **
|   | • |   | $120,300 in loans secured one developed residential lot in Griffin,  Spalding County, Georgia; |
|--------|--------|--------|------------------------------------------------------------------------------------------------|

 
|   | • |   | $41,193 in loans secured by a new construction single family detached  home in Locust Grove, Henry County, Georgia; |
|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------|

 
|   | • |   | $11,248 in loans secured by vehicles. |
|--------|--------|--------|---------------------------------------|

 

The allowance for loan losses on theseloans is determined based on fair value estimates (net of selling costs) of therespective collateral. The actual losses on these loans could differsignificantly if the fair value of the collateral is different from theestimates used in determining the allocated allowance. Most of our collateraldependent impaired loans are secured by real estate. The fair value of thesereal estate properties is generally determined based upon appraisals performedby a certified or licensed appraiser. Management also considers other factorsor recent developments which could result in adjustments to the collateralvalue estimates indicated in the appraisals. The allowance for loan losses isestablished through a provision for loan losses charged to expense. Loan lossesare charged against the allowance when management believes the collectibilityof the principal is unlikely. Subsequent recoveries, if any, are credited tothe allowance.

 

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The allowance is an amount thatmanagement believes will be adequate to absorb estimated losses relating tospecifically identified loans as well as probable credit losses inherent in thebalance of the loan portfolio, based on an evaluation of the collectibility ofexisting loans and prior loss experience. This evaluation also takes intoconsideration such factors as changes in the nature and volume of the loanportfolio, overall portfolio quality, and review of specific problem loans,concentrations and current economic conditions that may affect the borrower’sability to pay. This evaluation does not include the effects of expected losseson specific loans or groups of loans that are related to future events orexpected changes in economic conditions. While management uses the bestinformation available to make its evaluation, future adjustments to theallowance may be necessary if there are significant changes in economic conditions.In addition, regulatory agencies, as an integral part of their examinationprocess, periodically review the Company’s allowance for loan losses, and mayrequire the Company to make additions to the allowance based on their judgmentabout information available to them at the time of their examinations.

 

The allowance consists of specific,general and unallocated components. The specific component relates to loansthat have been evaluated for impairment. For such loans that are alsoclassified as impaired, an allowance is established when the discounted cashflows (or collateral value or observable market price) of the impaired loan islower that the carrying value of that loan. The general component coversnon-classified loans and is based on historical loss experience adjusted forqualitative factors. An unallocated component is maintained to coveruncertainties that could affect management’s estimate of probable losses. Theunallocated component of the allowance reflects the margin of imprecision inherentin the underlying assumptions used in the methodologies for estimating specificand general losses in the portfolio.

 

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

 
| ** **                                                                                                 | ** ** | **September 30,**               | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **                                                                                                 | ** ** | **(Dollars in Thousands)** | ** ** |
| Nonaccrual loans                                                                                           |       | $                                    | 10,274     |   | $ | 432 |   |
| Other problem loans                                                                                        |       | 16,700                               |       | — |   |
| Loans contractually past due ninety days or  more as to interest or principal payments and still accruing  |       | 498                                  |       | — |   |
| Restructured loans                                                                                         |       | —                               |       | — |   |
| Potential problem loans                                                                                    |       | 18,426                               |       | — |   |
| Interest income that would have been  recorded on non- accrual and restructured loans under original terms |       | 143                                  |       | 6 |   |
| Interest income that was recorded on  nonaccrual and restructured loans                                    |       | —                               |       | — |   |
|                                                                                                            |            |                                      |            |  |  |  |  |

 

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

 

It is our policy to discontinue theaccrual of interest income when, in the opinion of management, collection ofinterest becomes doubtful. We will generally discontinue the accrual ofinterest when (1) there is a significant deterioration in the financialcondition of the borrower and full repayment of

 

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principal and interest is not expectedand (2) the principal or interest is more than ninety days past due, unless theloan is both well-secured and in the process of collection.

 

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

 
| ** **                                                                     | ** ** | **Nine Months Ended**      | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                     | ** ** | **September 30,**               | ** ** |
| ** **                                                                     | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **                                                                     | ** ** | **(Dollars in Thousands)** | ** ** |
|                                                                           |       |                                 |       |   |   |
| Average amount of loans outstanding                                            |       | $                                    | 232,905    |   | $ | 180,914 |   |
| Balance of allowance for loan losses at  beginning of period                   |       | $                                    | 2,392      |   | $ | 1,917 |   |
| Loans charged off:                                                             |       |                                 |       |   |   |
| Commercial and financial                                                       |       | (1                                   | )          | — |   |
| Real estate mortgage                                                           |       | (38                                  | )          | — |   |
| Installment                                                                    |       | (10                                  | )          | (11 | ) |
|                                                                           |       | (49                                  | )          | (11 | ) |
| Loans recovered:                                                               |       |                                 |       |   |   |
| Commercial and financial                                                       |       | —                               |       | 6 |   |
| Real estate mortgage                                                           |       | —                               |       | — |   |
| Installment                                                                    |       | 2                                    |       | 1 |   |
|                                                                           |       | 2                                    |       | 7 |   |
| Net charge-offs                                                                |       | (47                                  | )          | (4 | ) |
| Additions to allowance charged to operating  expense during period             |       | 1,327                                |       | 370 |   |
| Balance of allowance for loan losses at end  of period                         |       | $                                    | 3,672      |   | $ | 2,283 |   |
| Ratio of net loans charged off during the  period to average loans outstanding |       | 0.02                                 | %          | 0.00 | % |
|                                                                           |       |                                 |       |   |   |

 

**Liquidity and Capital Resources**

 

Liquidity management involves the matching of the cash flowrequirements of customers, who may be either depositors desiring to withdrawfunds or borrowers needing assurance that sufficient funds will be available tomeet their credit needs, and the ability of the Company to meet those needs.The Company strives to maintain an adequate liquidity position by managing thebalances 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 September 30, 2007 the Company had nofederal funds purchased.

 

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The liquidity and capital resources of the Company are monitored dailyby management, monthly by the Company’s Board-authorized Asset and LiabilityManagement Committee, and on a periodic basis by state and federal regulatoryauthorities. As determined under guidelines established by these regulatoryauthorities, the Company’s liquidity ratios at September 30, 2007 were considered satisfactory. At that date, theCompany’s short-term investments and available federal funding were adequate tocover any reasonably anticipated immediate need for funds. At September 30, 2007, the Company hadunused available federal fund lines of $14.4 million and unused Federal HomeLoan Bank borrowing capacity of approximately $28 million. The Company is awareof no events or trends likely to result in a material change in liquidity.

 

The consolidated financial statements as of September 30, 2007 evidenced a decreased liquidity position. Cashand due from banks, interest-bearing deposits in banks and federal funds soldtotaled $11,756,750 as of September 30,2007 as compared to $17,452,004 as of December 31, 2006. Total cash anddue from banks amounted to $2,834,463 representing .86% of total assets.

 

Asour loan demand has continued to increase, we have increased the use ofbrokered deposits as a funding source. Total brokered deposits amounted to$111.4 million as of September 30,2007. These deposits are readily obtainable at rates not significantlydifferent from rates that we pay on deposits in our local market. The Company’sability to maintain and expand its deposit base and borrowing capabilities is asource of liquidity. For the nine-month period ended September 30, 2007, total deposits increased from $216.4 millionat December 31, 2006 to $256.9 million at September 30, 2007. Management is committed to maintaining capitalat a level sufficient to protect depositors, provide for reasonable growth, andfully comply with all regulatory requirements. The table below illustrates theCompany’s and the Bank’s regulatory capital ratios at September 30, 2007. 

 
| ** **                 | ** ** | ** **  | ** ** | ** ** | ** ** | **Minimum**     | ** ** |
|----------------------------|------------|-------------|------------|------------|------------|-----------------|------------|
| ** **                 | ** ** | ** **  | ** ** | ** ** | ** ** | **Regulatory**  | ** ** |
| ** **                 | ** ** | **Company** | ** ** | **Bank**   | ** ** | **Requirement** | ** ** |
|                       |       |        |       |       |       |            |       |
| Leverage capital ratios    |       | 11.18       | %          | 9.14       | %          | 4.00            | %          |
| Risk-based capital ratios: |       |        |       |       |       |            |       |
| Tier I capital             |       | 12.99       | %          | 10.61      | %          | 4.00            | %          |
| Total capital              |       | 14.24       | %          | 11.87      | %          | 8.00            | %          |

 

The Holding Company will continue toprovide financial strength to the Company and has the ability to downstreamcapital to the Bank if necessary.

 

**Off-Balance Sheet Risk**

 

We are a party to financial instrumentswith off-balance sheet risk in the normal course of business to meet thefinancing needs of our customers. These financial instruments includecommitments to extend credit and standby letters of credit. Such commitmentsinvolve, to varying degrees, elements of credit risk and interest rate risk inexcess of the amount recognized in the balance sheets.

 

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Our exposure to credit loss in the eventof nonperformance by the other party to the financial instrument forcommitments to extend credit and standby letters of credit is represented bythe contractual amount of those instruments. We use the same credit policies inmaking commitments and conditional obligations as we do for on-balance sheetinstruments.

 

A summary of our commitments is asfollows:

 
| ** **                   | ** ** | **September 30,** | ** ** |
|------------------------------|------------|------------------------|------------|
| ** **                   | ** ** | **2007**               | ** ** |
|                         |       |                   |       |
| Commitments to extend credit |       | $                      | 42,960,379 |   |
| Letters of credit            |       | 1,292,897              |       |
|                         |       | $                      | 44,253,276 |   |

 

Commitments to extend credit areagreements to lend to a customer as long as there is no violation of anycondition established in the contract. Since many of the commitments areexpected to expire without being drawn upon, the total commitment amounts donot necessarily 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.

 

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

 

**Financial Condition**

 

Ourtotal assets grew by 19.3% for the first nine months of 2007. Deposit growth ofapproximately $40.5 million and federal funds sold of approximately $4.0million were used to fund net loan growth of approximately $38.0 million withthe remainder being primarily invested in securities or maintained in cash anddue from banks. Our loan to available funds ratio has remained steady sinceDecember 31, 2006, holding in the 83-89% range. In general, economic activityin the housing sector slowed during the first nine months of 2007 in comparisonto the prior year. Although we do not make sub-prime loans, we are impacted bythem as evidenced by the slowness of the metro-Atlanta real estate market.Advances from the Federal Home Loan Bank increased by $12 million for the ninemonths ended September 30, 2007. The net increase is the result of $6 millionin advances being called, $6 million in advances maturing and the subsequentborrowings of an additional $24 million.

 

Stockholders’ equity has increased by$381,175 due to net income of $1,108,157, proceeds from a stock repurchase of$1,007,398, unrealized gains on securities available-for-sale, net of tax, of$37,761, unrealized gains on derivatives, net of tax, of $114,178 and includingrecognition of share based payments transactions as required by SFAS123(R) ofapproximately $128,477.

 

The Company opened two branches during2006 in Henry County and one branch in 2007 in Clayton County.  TheCompany continues to look for opportunities to expand its footprint and toincrease franchise value through organic growth.

 

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In an effort to offset the Company’sstate tax liability, the Company has commitments to purchase $1 million ofstate tax credits with $200,000 having already been paid and the remaining$800,000 to be paid in the fourth quarter of 2007.

 

**Results of Operations****For The Three Months EndedSeptember 30, 2007 and 2006 and for the Nine Months Ended September 30, 2007and 2006**

 

Following is a summary of our operationsfor the periods indicated.

 
| ** **                   | ** ** | **Three Months Ended**     | ** ** |
|------------------------------|------------|--------------------------------------|------------|
| ** **                   | ** ** | **September 30,**               | ** ** |
| ** **                   | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **                   | ** ** | **(Dollars in Thousands)** | ** ** |
|                         |       |                                 |       |   |   |
| Interest income              |       | $                                    | 6,099      |   | $ | 5,018 |   |
| Interest expense             |       | (3,706                               | )          | (2,494 | ) |
| Net interest income          |       | 2,393                                |       | 2,524 |   |
| Provision for loan losses    |       | (912                                 | )          | (190 | ) |
| Other income                 |       | 127                                  |       | 71 |   |
| Other expense                |       | (1,628                               | )          | (1,279 | ) |
| Pretax income                |       | (20                                  | )          | 1,126 |   |
| Income tax benefit (expense) |       | 44                                   |       | (419 | ) |
| Net income                   |       | $                                    | 24         |   | $ | 707 |   |

 
| ** **                | ** ** | **Nine Months Ended**      | ** ** |
|---------------------------|------------|--------------------------------------|------------|
| ** **                | ** ** | **September 30,**               | ** ** |
| ** **                | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **                | ** ** | **(Dollars in Thousands)** | ** ** |
|                      |       |                                 |       |   |   |
| Interest income           |       | $                                    | 17,492     |   | $ | 13,515 |   |
| Interest expense          |       | (10,213                              | )          | (6,364 | ) |
| Net interest income       |       | 7,279                                |       | 7,151 |   |
| Provision for loan losses |       | (1,327                               | )          | (370 | ) |
| Other income              |       | 393                                  |       | 224 |   |
| Other expense             |       | (4,667                               | )          | (3,870 | ) |
| Pretax income             |       | 1,678                                |       | 3,135 |   |
| Income tax expense        |       | (570                                 | )          | (1,172 | ) |
| Net income                |       | $                                    | 1,108      |   | $ | 1,963 |   |

 

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Net Interest Income

 

Ournet interest income decreased approximately $131,000 and increased approximately$128,000 for the three and nine month periods ended September 30, 2007,respectively, as compared to the same periods in 2006. The decrease in netinterest income for the three months ended September 30, 2007 was due toapproximately $221,000 of loan interest income reversed during the three monthperiod. During the first nine months of 2007, the yield on loans was negativelyaffected by the increase in the number of non-accrual credits with $313,000 ofloan interest reversed during the nine month period. During the same period in2006, non-accrual credits accounted for $16,204 of loan interest reversals. Ournet interest margin decreased to 3.34% during the first nine months of 2007 ascompared to 4.11% for the first nine months of 2006. Our cost of fundsincreased to 5.22% for the first nine months of 2007 as compared to 4.26% forthe first nine months of 2006.

 

Noninterest Income

 

Noninterest income increasedapproximately $56,000 and $169,000 for the three and nine month periods endedSeptember 30, 2007, respectively, as compared to the same periods in 2006. Theincrease in noninterest income for the nine months ended September 30, 2007consists of $121,000 in service charges on deposit accounts, a $1,000 loss onsale of assets, a $21,000 gain on sale of other real estate owned and a $28,000increase in other income.

 

Noninterest Expenses

 

Noninterest expenses increasedapproximately $349,000 and $797,000 for the three and nine month periods endedSeptember 30, 2007, respectively, compared to the same periods in 2006. Thevariances in 2007 consist of a $111,000 and $195,000 increase in salaries andemployee benefits, an $85,000 and $202,000 increase in equipment and occupancyexpenses, a $16,000 and $46,000 loss on sale of securities and a $137,000 and$354,000 increase in other operating expenses for the three and nine monthsended September 30, 2007, respectively as compared to the same periods in 2006.The nine month period increase in salaries and employee benefits representsnormal increases in salaries and an increase in the number of full timeequivalent employees. Equipment and occupancy expenses have increased due tothe need for additional equipment for employees and for the new branches. Theincreases in other operating expenses are due primarily to our overall growth.The Company leases its operations center facilities under an operating leaseagreement for approximately $70,000 a year in rental expense.

 

Income Taxes

 

We have recorded an income tax benefit of$44,000 and a provision for income taxes of $570,000 for the three and ninemonths ended September 30, 2007, respectively, as compared to an income taxprovision of $419,000 and $1,172,000 for the same periods in 2006. The decreasein our income tax provision was $463,000 and $602,000 for the three and ninemonths ended September 30, 2007, respectively, compared to the same periods in2006. The effective tax rate for the nine months ended September 30, 2007, was34.0% as compared to 37.4% for the same period in 2006. The decrease in our effectivetax rate is due primarily to the decrease of expense related to the permanentnon-deductibility of incentive stock options that have been expensed in theamount of $80,410 for the period ended September 30, 2007 compared to $124,631for the same period in 2006.

 

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Regulatory Matters

 

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

 

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

 

**ITEM 3.  Quantitativeand Qualitative Disclosures About Market Risk**

 

Theinformation called for by Item 3 is being omitted in reliance upon instruction1 to paragraph 305(c) of Regulation S-K, which states that such information isnot required until after the first fiscal year end in which Item 305 ofRegulation S-K is applicable.

 

**ITEM 4.  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 Executive and Chief Financial Officerconcluded that our disclosure controls and procedures are effective for gathering,analyzing and disclosing the information that we are required to disclose inthe reports we file under the Securities Exchange Act of 1934, within the timeperiods specified in the SEC’s rules and forms. Our Chief Executive Officer andChief 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 SEC filings. Aswe continue to review and document our disclosure controls and procedures,including our internal controls and procedures for financial reporting we mayfrom time to time make changes designed to enhance their effectiveness and toensure that our systems evolve with our business as discussed below.

 

Subsequent to September 30, 2007, a review was performed by anindependent third party firm which identified material weaknesses in thesystems and processes that are used to identify problem credits. Theseweaknesses, coupled with rapid growth and the recent slowdown in acquisition,development and construction activity, where our loan portfolio is heavilyconcentrated, resulted in an increase of potential problem credits identifiedand augmented the allowance for loan losses. Efforts are currently underway tohire additional qualified staff to eliminate these weaknesses in internalcontrols. The Company has enhanced its risk rating methodology and has takensteps to strengthen the internal controls over financial reporting with regardto problem asset identification, appropriate classification and adequate loanloss provision.

 

The design of any system of controls andprocedures is based in part upon certain assumptions about the likelihood offuture events. There can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions, regardless ofhow remote.

 

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**Item 1.         LEGALPROCEEDINGS**

 

The Company is not aparty to any pending legal proceeding (nor is any property of the Companysubject to any legal proceeding) other than routine litigation that isincidental to the business.

 

**Item 1A.      RISKFACTORS**

 

In addition to theother information set forth in this report, you should consider the factorsdiscussed in Part 1, “Item 1 – Description of Business” in our Annual Report onForm 10-KSB for the year ended December 31, 2006.

 

There have been nomaterial changes in the risk factors relating to the Company or its businessduring the nine months ended September 30, 2007.

 

**Item 2.         UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

The following stockrepurchases were made during the quarter ended September 30, 2007:

 
| ** **                            | ** ** | **Shares:** | ** ** | **Weighted average price per share:** | ** ** |
|---------------------------------------|------------|-------------|------------|-----------------------------------------------------------|------------|
| July 1 – July 31, 2007           |       | —      |       | —                                                    |       |
| August 1 – August 31, 2007       |       | 52,918      |       | $                                                         | 10.00      |   |
| September 1 – September 30, 2007 |       | 49,052      |       | $                                                         | 9.75       |   |

 

**Item 3.         DEFAULTSUPON SENIOR SECURITIES**

 

None

 

**Item 4.         SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

None

 

**Item 5.         OTHERINFORMATION**

 

None

 

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**Item 6.         EXHIBITS**

 
| 31.1   | Certification of the Chief Executive  Officer, Pursuant to Rule 13a-14(a) under the Securities Exchange Act of  1934, as amended.                                                     |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                  |
| 31.2   | Certification of the Chief Financial  Officer, Pursuant to Rule 13a-14(a) under the Securities Exchange Act of  1934, as amended.                                                     |
|   |                                                                                                                                                                                  |
| 32     | Certification of the Chief Executive  Officer and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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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)                                  |
|                     |   |                                          |
|                     |   |                                          |
|  November 14, 2007  |   | /s/ Thaddeus M. Williams                      |
| Date                     |   | Thaddeus M. Williams, President and  C.E.O.   |
|                     |   | (Principal  Executive Officer)                |
|                     |   |                                          |
|                     |   |                                          |
|  November  14, 2007 |   | /s/  Lisa J. Maxwell                          |
| Date                     |   | Lisa  J. Maxwell, C.F.O.                      |
|                     |   | (Principal  Financial and Accounting Officer) |

 

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