**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-Q**

| **x**      |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|--------|-----------------------------------------------------------------------------------------------|
| ** ** |   | ** **                                                                                    |
|       |   | ** **                                                                                    | **For the  quarterly period ended March  31, 2007** |
|       |   |                                                                                          |
| **o**      |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** ** |   | ** **                                                                                    |
|       |   | ** **                                                                                    | **For the transition period from                    to                    ** |

 

**CommissionFile Number:     000-51147**

**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**

(Addressof principal executive offices)

**(678)583-2265**

(Issuer’s telephonenumber)

**N/A**

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

Check whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject to suchfiling requirements for the past 90 days. Yes x  No o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer.  Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act.  (Check one)

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

 

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

State the number of sharesoutstanding of each of the issuer’s classes of common equity, as of May 9,2007: 2,831,676 shares,$5.00 par value per share.

 

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

**TABLE OFCONTENTS**
| PART I.                                                                                              |                                                         | FINANCIAL INFORMATION                                                                                                       |   |   |
|------------------------------------------------------------------------------------------------------|--------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                 |                                                         |                                                                                                                        |   |   |
| Item 1. Consolidated  Financial Statements                                                           |                                                         |                                                                                                                        |
|                                                                                                 |                                                         |                                                                                                                        |   |   |
|                                                                                                 |                                                         | Consolidated  Balance Sheets (unaudited) as of March  31, 2007 and  December 31, 2006                                       |   |   |
|                                                                                                 |                                                         |                                                                                                                        |   |   |
|                                                                                                 |                                                         | Consolidated Statements of Income and  Comprehensive Income  (unaudited) for the three months ended March 31, 2007 and 2006 |   |   |
|                                                                                                 |                                                         |                                                                                                                        |   |   |
|                                                                                                 |                                                         | Consolidated Statements of  Comprehensive Income (unaudited) for the  three months ended March 31, 2007 and 2006            |   |   |
|                                                                                                 |                                                         |                                                                                                                        |   |   |
|                                                                                                 |                                                         | Consolidated Statements of Cash Flows  (unaudited) for the three months  ended March 31, 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                                                                                                              |   |   |
|                                                                                                      |                                                              |                                                                                                                             |        |        |  |  |

 

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**PART I - FINANCIAL INFORMATION**

**ITEM 1.    FinancialStatements**

**FIRSTBANK FINANCIAL SERVICES, INC.**

**AND SUBSIDIARY**

**CONSOLIDATEDBALANCE SHEETS**

**MARCH 31, 2007 AND DECEMBER 31, 2006**

 
| ** **                                                                                                | ** ** | **March 31, 2007** | ** **  | **December 31, 2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------------------------|-------------|---------------------------------|------------|
| ** **                                                                                                | ** ** | **(Unaudited)**              | ** **  | **(Audited)**                   | ** ** |
| **Assets**                                                                                                |       |                         |        |                            |       |
|                                                                                                      |       |                         |        |                            |       |
| Cash and due from banks                                                                                   |       | $                            | 7,115,628   |                            | $          | 4,047,726 |   |
| Interest-bearing  deposits in banks                                                                       |       | 1,716,760                    |        | 1,790,278                       |       |
| Federal funds sold                                                                                        |       | 12,847,000                   |        | 11,614,000                      |       |
| Securities available  for sale, at fair value                                                             |       | 41,825,607                   |        | 39,559,041                      |       |
| Restricted equity securities,  at cost                                                                    |       | 1,886,856                    |        | 2,013,556                       |       |
|                                                                                                      |       |                         |        |                            |       |
| Loans, net of unearned  income                                                                            |       | 229,475,996                  |        | 210,397,450                     |       |
| Less allowance for loan  losses                                                                           |       | 2,595,957                    |        | 2,392,086                       |       |
| Loans, net                                                                                                |       | 226,880,039                  |        | 208,005,364                     |       |
|                                                                                                      |       |                         |        |                            |       |
| Premises and equipment                                                                                    |       | 6,835,846                    |        | 6,013,068                       |       |
| Other real estate owned                                                                                   |       | 1,034,731                    |        | —                          |       |
| Other assets                                                                                              |       | 5,186,138                    |        | 4,036,623                       |       |
| ** **                                                                                                |       |                         |        |                            |       |
| **Total  assets**                                                                                         |       | $                            | 305,328,605 |                            | $          | 277,079,656 |   |
|                                                                                                      |       |                         |        |                            |       |
| **Liabilities  and Stockholders’ Equity**                                                            |       |                         |        |                            |       |
|                                                                                                      |       |                         |        |                            |       |
| Deposits                                                                                                  |       |                         |        |                            |       |
| Noninterest-bearing                                                                                       |       | $                            | 14,091,814  |                            | $          | 11,571,364 |   |
| Interest-bearing                                                                                          |       | 231,352,975                  |        | 204,840,106                     |       |
| Total deposits                                                                                            |       | 245,444,789                  |        | 216,411,470                     |       |
| Other borrowings                                                                                          |       | 20,000,000                   |        | 22,000,000                      |       |
| Subordinated debentures                                                                                   |       | 8,248,000                    |        | 8,248,000                       |       |
| Other liabilities                                                                                         |       | 3,326,615                    |        | 2,667,458                       |       |
| Total  liabilities                                                                                        |       | 277,019,404                  |        | 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; 2,831,676 shares issued and  outstanding       |       | 14,158,380                   |        | 14,158,380                      |       |
| Surplus                                                                                                   |       | 11,724,601                   |        | 11,655,045                      |       |
| Retained  earnings                                                                                        |       | 2,804,083                    |        | 2,328,567                       |       |
| Accumulated  other comprehensive loss                                                                     |       | (377,863                     | )           | (389,264                        | )          |
| Total  stockholders’ equity                                                                          |       | 28,309,201                   |        | 27,752,728                      |       |
|                                                                                                      |       |                         |        |                            |       |
| **Total liabilities and  stockholders’ equity**                                                      |       | $                            | 305,328,605 |                            | $          | 277,079,656 |   |

 

See notes to consolidatedfinancial statements.

1

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

**CONSOLIDATEDSTATEMENTS OF INCOME**

**THREEMONTHS ENDED MARCH 31, 2007 AND 2006**

**(Unaudited)**
| ** **                                               | ** ** | **Three Months Ended** | ** **    |
|----------------------------------------------------------|------------|----------------------------------|---------------|
| ** **                                               | ** ** | **March 31,**               | ** **    |
| ** **                                               | ** ** | **2007**                         | ** **    | **2006** | ** ** |
|                                                     |       |                             |          |   |   |
| **Interest  income**                                     | ** ** | ** **                       | ** **    | ** ** | ** ** |
| Loans, including fees                                    | ** ** | **$**                            | **4,849,224** | ** ** | $ | 3,553,984 | ** ** |
| Taxable securities                                       | ** ** | **435,231**                      |          | 328,545 |   |
| Tax-free securities                                      | ** ** | **51,694**                       |          | 26,026 |   |
| Deposits in banks                                        | ** ** | **28,812**                       |          | 134,458 |   |
| Federal funds sold                                       | ** ** | **131,167**                      |          | 21,653 |   |
| **Total interest income**                                | ** ** | **5,496,128**                    |          | 4,064,666 |   |
|                                                     |       |                             |          |   |   |
| **Interest  expense**                                    | ** ** | ** **                       | ** **    | ** ** | ** ** |
| Deposits                                                 | ** ** | **2,732,535**                    |          | 1,605,002 |   |
| Other borrowings                                         | ** ** | **378,879**                      |          | 212,613 |   |
| **Total interest expense**                               | ** ** | **3,111,414**                    |          | 1,817,615 |   |
|                                                     |       |                             |          |   |   |
| **Net interest income**                                  | ** ** | **2,384,714**                    |          | 2,247,051 |   |
| **Provision  for loan losses**                           | ** ** | **210,000**                      |          | 45,000 |   |
| **Net interest income after  provision for loan losses** | ** ** | **2,174,714**                    |          | 2,202,051 |   |
| ** **                                               | ** ** | ** **                       | ** **    | ** ** | ** ** |
| **Other  income**                                        | ** ** | ** **                       | ** **    | ** ** | ** ** |
| Service charges on deposit accounts                      | ** ** | **111,661**                      |          | 53,451 |   |
| Gain (loss) on sale of assets                            | ** ** | **(3,956**                       | **)**         | 1,425 |   |
| Other operating income                                   | ** ** | **27,740**                       |          | 18,712 |   |
| **Total other income**                                   | ** ** | **135,445**                      |          | 73,588 |   |
| ** **                                               | ** ** | ** **                       | ** **    | ** ** | ** ** |
| **Other  expenses**                                      | ** ** | ** **                       | ** **    | ** ** | ** ** |
| Salaries and employee benefits                           | ** ** | **764,254**                      |          | 671,874 |   |
| Equipment and occupancy expenses                         | ** ** | **205,652**                      |          | 157,358 |   |
| Loss on sale of securities available for sale            | ** ** | **20,024**                       |          | — |   |
| Other operating expenses                                 | ** ** | **564,782**                      |          | 416,188 |   |
| **Total other expenses**                                 | ** ** | **1,554,712**                    |          | 1,245,420 |   |
|                                                     |       |                             |          |   |   |
| **Income before income taxes**                           | ** ** | **755,447**                      |          | 1,030,219 |   |
| ** **                                               | ** ** | ** **                       | ** **    | ** ** | ** ** |
| **Income  tax expense**                                  | ** ** | **279,931**                      |          | 377,658 |   |
| ** **                                               | ** ** | ** **                       | ** **    | ** ** | ** ** |
| **Net income**                                           | ** ** | **$**                            | **475,516**   | ** ** | $ | 652,561 | ** ** |
|                                                     |       |                             |          |   |   |
| **Basic  earnings per share**                            | ** ** | **$**                            | **0.17**      | ** ** | $ | 0.23 | ** ** |
|                                                     |       |                             |          |   |   |
| **Diluted  earnings per share**                          | ** ** | **$**                            | **0.16**      | ** ** | $ | 0.22 | ** ** |
|                                                     |       |                             |          |   |   |
| **Cash dividends per share**                             | ** ** | **$**                            | **—**    | ** ** | $ | — | ** ** |

 

See notes to consolidated financial statements.

2

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

**CONSOLIDATEDSTATEMENTS OF COMPREHENSIVE INCOME**

**THREEMONTHS ENDED MARCH 31, 2007 AND 2006**

**(Unaudited)**
| ** **                                                                                                          | ** ** | **Three Months Ended** | ** **  |
|---------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|-------------|
| ** **                                                                                                          | ** ** | **March 31,**               | ** **  |
| ** **                                                                                                          | ** ** | **2007**                         | ** **  | **2006** | ** ** |
|                                                                                                                |       |                             |        |   |   |
| Net income                                                                                                          | ** ** | **$**                            | **475,516** |   | $ | 652,561 |   |
|                                                                                                                | ** ** | ** **                       |        |   |   |
| Other  comprehensive income (loss):                                                                                 | ** ** | ** **                       |        |   |   |
| ** **                                                                                                          | ** ** | ** **                       |        |   |   |
| Net unrealized holding losses arising during period,  net of tax benefit                                            | ** ** | **(17,605**                      | **)**       | (61,105 | ) |
|                                                                                                                | ** ** | ** **                       |        |   |   |
| Reclassification adjustment for losses on securities  available for sale realized in net income, net of tax benefit | ** ** | **12,415**                       |        | — |   |
|                                                                                                                | ** ** | ** **                       |        |   |   |
| Net unrealized holding gains (losses) on interest  rate floors arising during period, net of tax (benefit)          | ** ** | **16,591**                       |        | (25,802 | ) |
|                                                                                                                | ** ** | ** **                       |        |   |   |
| Other  comprehensive income (loss)                                                                                  | ** ** | **11,401**                       |        | (86,907 | ) |
|                                                                                                                | ** ** | ** **                       |        |   |   |
| Comprehensive income                                                                                                | ** ** | **$**                            | **486,917** |   | $ | 565,654 |   |
|                                                                                                                     |            |                                  |             |  |  |  |  |  |

 

See notes to consolidated financial statements.

3

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

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**THREEMONTHS ENDED MARCH 31, 2007 AND 2006**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **2007**        | ** **    | **2006**    | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------|---------------|-------------|------------|
| **OPERATING  ACTIVITIES**                                                          | ** ** | ** **      | ** **    | ** **  | ** ** |
| Net income                                                                         | ** ** | **$**           | **475,516**   |        | $          | 652,561 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: | ** ** | ** **      |          |        |       |
| (Gain) loss on sale of assets                                                      | ** ** | **3,956**       |          | (1,425      | )          |
| Loss on sale of securities available for sale                                      | ** ** | **20,024**      |          | —      |       |
| Depreciation and amortization                                                      | ** ** | **112,845**     |          | 78,679      |       |
| Stock compensation expense                                                         | ** ** | **69,557**      |          | 58,089      |       |
| Provision for loan losses                                                          | ** ** | **210,000**     |          | 45,000      |       |
| Increase in interest receivable                                                    | ** ** | **(141,659**    | **)**         | (41,107     | )          |
| Decrease in interest payable                                                       | ** ** | **(145,094**    | **)**         | (101,243    | )          |
| Net other operating activities                                                     | ** ** | **(193,917**    | **)**         | 257,888     |       |
|                                                                               |       |            |          |        |       |
| Net cash provided by operating activities                                          | ** ** | **411,228**     |          | 948,442     |       |
|                                                                               |       |            |          |        |       |
| **INVESTING  ACTIVITIES**                                                          | ** ** | ** **      |          |        |       |
| Net (increase) decrease in interest-bearing deposits  in banks                     | ** ** | **73,518**      |          | (958,385    | )          |
| Purchases of securities available for sale                                         | ** ** | **(5,117,623**  | **)**         | (4,496,730  | )          |
| Proceeds from maturities of securities available for  sale                         | ** ** | **1,345,161**   |          | 1,352,098   |       |
| Proceeds from sales of securities available for sale                               | ** ** | **1,477,500**   |          | —      |       |
| Net (increase) decrease in restricted equity  securities                           | ** ** | **126,700**     |          | (226,300    | )          |
| Net increase in federal funds sold                                                 | ** ** | **(1,233,000**  | **)**         | (20,164,000 | )          |
| Net increase in loans                                                              | ** ** | **(20,119,406** | **)**         | (651,830    | )          |
| Proceeds from sale of assets                                                       | ** ** | **22,000**      |          | 1,425       |       |
| Purchase of premises, equipment and software                                       | ** ** | **(951,495**    | **)**         | (516,556    | )          |
|                                                                               |       |            |          |        |       |
| Net cash used in investing activities                                              | ** ** | **(24,376,645** | **)**         | (25,660,278 | )          |
|                                                                               |       |            |          |        |       |
| **FINANCING  ACTIVITIES**                                                          | ** ** | ** **      |          |        |       |
| Net increase in deposits                                                           | ** ** | **29,033,319**  |          | 25,242,181  |       |
| Net increase (decrease) in borrowings                                              | ** ** | **(2,000,000**  | **)**         | 1,000,000   |       |
| Purchase of fractional shares                                                      | ** ** | **—**      |          | (362        | )          |
|                                                                               |       |            |          |        |       |
| Net cash provided by financing activities                                          | ** ** | **27,033,319**  |          | 26,241,819  |       |
|                                                                               |       |            |          |        |       |
| Net increase in  cash and due from banks                                           | ** ** | **3,067,902**   |          | 1,529,983   |       |
|                                                                               | ** ** | ** **      |          |        |       |
| Cash and due  from banks at beginning of period                                    | ** ** | **4,047,726**   |          | 1,236,443   |       |
|                                                                               |       |            |          |        |       |
| Cash and due  from banks at end of period                                          | ** ** | **$**           | **7,115,628** |        | $          | 2,766,426 |   |
|                                                                               |       |            |          |        |       |
| Supplemental  schedule of noncash investing and financing activities -             | ** ** | ** **      |          |        |       |
| Change in accumulated other comprehensive loss                                     | ** ** | **$**           | **11,401**    |        | $          | (86,907 | ) |
| Loans transferred to other real estate owned                                       | ** ** | **$**           | **1,021,811** |        | $          | — |   |
|                                                                               | ** ** | ** **      |          |        |       |
| Supplemental  disclosures of cash flow information -                               | ** ** | ** **      |          |        |       |
|                                                                               | ** ** | ** **      |          |        |       |
| Cash paid during the period for interest                                           | ** ** | **$**           | **3,256,508** |        | $          | 1,918,858 |   |
| Cash paid during  the period for income taxes                                      | ** ** | **$**           | **60,854**    |        | $          | 89,035 |   |

 

See notes to consolidated financial statements.

4

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

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**(Unaudited)

**NOTE 1.****Basis of Presentation**

FirstBank Financial Services, Inc. (the “Company”)is a bank holding company whose business is conducted by its wholly-ownedcommercial bank, FirstBank Financial Services, formerly First Bank of HenryCounty, (the “Bank”). The Bank is a commercial bank located in McDonough, HenryCounty, Georgia with a branch in Stockbridge, Georgia and another branch alsoin McDonough known as the Bank’s South Point branch.

The accompanying consolidated financial statements areunaudited. Certain information and footnote disclosures normally included inconsolidated financial statements prepared in accordance with generallyaccepted accounting principles have been condensed or omitted pursuant to suchrules and regulations.  Theseconsolidated financial statements should be read in conjunction with theaudited consolidated financial statements and notes thereto included in theannual report on Form 10-KSB for the year ended December 31, 2006, which wasfiled with the Securities and Exchange Commission.

The financial information included herein reflects alladjustments (consisting of normal recurring adjustments), which are, in theopinion of management, necessary to a fair presentation of the Company’sfinancial position and results for the interim period ended March 31, 2007.

The preparation of consolidated financial statementsrequires management to make estimates and assumptions that affect the reportedamounts of assets, liabilities and income and expense amounts.  Actual results could differ from thoseestimates.  The results of operations forthe three months ended March 31, 2007 are not necessarily indicative of theresults to be expected for the full year.

**NOTE 2. Stock Compensation Plans**

At March 31, 2007, the Company has two stock-based compensation plans which include certain employees and directors. The Company accounts for these plans under FASB Statement No. 123(R), Share-Based Payment, using the modified-prospective-transition method. Under that transition method, compensation cost recognized includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of Statement 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of Statement123(R).

At March 31, 2007, there was approximately $48,735 of unrecognized compensation cost related to stock-based payments, which is expected to be recognized over a weighted-average period of 1.36 years. Stock based compensation expense recognized in earnings totaled $69,557 and $58,089 as of March 31, 2007 and 2006, respectively.

5

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**NOTE 3. Earnings Per Common Share**

SFAS No. 128, *Earnings Per Share*, establishes standardsfor computing and presenting basic and diluted earnings per share.  In this regard, the Company is required to report earningsper common share with and without the dilutive effects of potential commonstock issuances from instruments such as options, convertible securities and warrantson the face of the statements of income. Earnings per common share are based on the weighted average number ofcommon shares outstanding during the period while the effects of potentialcommon shares outstanding during the period are included in diluted earningsper share.  Additionally, the Companymust reconcile the amounts used in the computation of both “basic earnings pershare” and “diluted earnings per share”. Presented below is a summary of the components used to calculate basicand diluted earnings per common share.
|                                                                                                                                  | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                                                       | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Basic earnings  per share:                                                                                                       |       |                                                 |       |   |   |
| Weighted average common shares outstanding                                                                                       |       | 2,831,676                                            |       | 2,831,676 |   |
|                                                                                                                             |       |                                                 |       |   |   |
| Net income                                                                                                                       |       | $                                                    | 475,516    |   | $ | 652,561 |   |
|                                                                                                                             |       |                                                 |       |   |   |
| Basic earnings per share                                                                                                         |       | $                                                    | 0.17       |   | $ | 0.23 |   |
|                                                                                                                             |       |                                                 |       |   |   |
| Diluted earnings  per share:                                                                                                     |       |                                                 |       |   |   |
| Weighted average common shares outstanding                                                                                       |       | 2,831,676                                            |       | 2,831,676 |   |
| Net effect of the assumed exercise of stock options  based on the treasury stock method using average market prices for the year |       | 172,443                                              |       | 151,800 |   |
| Total weighted average common shares and common  stock equivalents outstanding                                                   |       | 3,004,119                                            |       | 2,983,476 |   |
|                                                                                                                             |       |                                                 |       |   |   |
| Net income                                                                                                                       |       | $                                                    | 475,516    |   | $ | 652,561 |   |
|                                                                                                                             |       |                                                 |       |   |   |
| Diluted earnings  per share                                                                                                      |       | $                                                    | 0.16       |   | $ | 0.22 |   |

 

**NOTE 4.  Recent Accounting Pronouncements**

In July 2006, the FASB issued InterpretationNo. 48, *Accounting for Uncertainty in Income Taxes - AnInterpretation of FASB Statement No. 109*.  This interpretation addresses the accountingfor uncertainty in income taxes recognized in a Company’s financial statementsin accordance with FASB Statement No. 109, Accounting for Income Taxes.  It prescribes a comprehensive model forrecognizing, measuring, presenting and disclosing in the financial statementstax positions taken or expected to be taken in a tax return.  It requires that only benefits from taxpositions that are more-likely-than-not of being sustained upon examinationshould be recognized in the financial statements.  These benefits would be recorded at amountsconsidered to be the maximum amounts more-likely-than-not of beingsustained.  At the time these positionsbecome more-likely-than-not to be disallowed, their recognition would bereversed.  This interpretation iseffective for fiscal years beginning after December 15, 2006 and is notexpected to have a material impact on the Company’s financial condition orresults of operations.

6

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**NOTE4.  Recent Accounting Pronouncements**

In September 2006, the FASB issued FAS 157, *Fair Value Measurements*. The standard provides guidance for using fair value to measure assetsand liabilities.  It defines fair value,establishes a framework for measuring fair value under generally acceptedaccounting principles and expands disclosures about 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.  Itclarifies the principle that fair value should be based on the assumptionsmarket participants would use when pricing the asset or liability.  In support of this principle, the standardestablishes a fair value hierarchy that prioritizes the information used to developthose assumptions.  Under the standard,fair value measurements would be separately disclosed by level within the fairvalue hierarchy.  Statement 157 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007.  The Company iscurrently evaluating the impact the adoption of this statement could have onits financial condition, results of operations and cash flows.

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

**NOTE 5.  Stock Dividend**

On November 16, 2006, the Company declared asix-for-five stock split payable to shareholders of record on December 1, 2006which was distributed on December 29, 2006. Earnings per common share for the period ended March 31, 2006 and allstock option and warrant information has been retroactively adjusted for thedividends as if it occurred on January 1, 2006. 

**NOTE 6. Interest Rate Derivatives**

The Company maintains anoverall interest rate risk-management strategy that incorporates the use ofderivative instruments to minimize significant unplanned fluctuations inearnings that are caused by interest rate volatility.  One interest rate derivative is used to hedgevariable-rate deposits.  This instrumentis reflected in other liabilities at March 31, 2007 at a fair value of$86,782.  The Company has two otherderivatives, interest rate floors, one with a notional value of $40 million anda 7.50% strike and the other with a notional value of $30 million and an 8.50%strike.  The fair value of theseinstruments at March 31, 2007 is $362,044 and is reflected in otherassets.  The instruments are more fullydescribed in the Company’s annual report dated December 31, 2006.

7

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

The following is ourdiscussion and analysis of certain significant factors which have affected thefinancial position and operating results of FirstBank Financial Services, Inc.(the “Company”) during the periods included in the accompanying consolidatedfinancial statements.

**ForwardLooking Statements**

Certain of thestatements made herein under the caption “Management’s Discussion and Analysisof Financial Condition and Results of Operations” (“MD&A”) areforward-looking statements for purposes of the Securities Act of 1933 (the “SecuritiesAct”) and the Securities Exchange Act of 1934 (the “Exchange Act”), and as suchmay involve known and unknown risks, uncertainties and other factors which maycause our actual results, performance or achievements to be materiallydifferent from future results, performance or achievements expressed or impliedby such forward-looking statements.  Suchforward looking statements include statements using the words such as “will,” “anticipate,”“should,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “may”or “intend,” or other similar words and expressions of the future.  Our actual results may differ significantlyfrom the results we discuss in these forward-looking statements.

These forward-lookingstatements involve risks and uncertainties and may not be realized due to avariety of factors, including, without limitation:

·                  the effects of future economicconditions;

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

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

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

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

·                  changes occurring in business conditionsand inflation;

·                  changes in monetary and tax policies;

·                  changes in technology;

·                  the level of allowance for loan loss;

·                  the rate of delinquencies and amounts ofcharge-offs;

·                  the rates of loan growth;

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

·                  changes in the securities market; and

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

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**Introduction**

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

**Overview**

Managementmonitors the financial condition of the Company in order to protect depositors,increase undivided profits and protect current and future earnings.  Further discussion of significant itemsaffecting the Company’s financial condition are discussed in detail below.

**CriticalAccounting Policies**

We have adoptedvarious accounting policies which govern the application of accountingprinciples generally accepted in the United States of America in thepreparation of our consolidated financial statement of FirstBank FinancialServices, Inc.  Our significantaccounting policies are described in the footnotes to the financial statementsfor FirstBank Financial Services, Inc. at December 31, 2006 as filed in ourannual report on Form 10-KSB, which was filed with the Securities and ExchangeCommission.

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

We believe the allowance for loan losses is acritical accounting policy that requires the most significant judgments andestimates used in preparation of our consolidated financial statements.  Refer to the portion of this discussion thataddresses asset quality for a description of our processes and methodology fordetermining our allowance for loan losses.

Another of our critical accounting policiesinvolves stock-based compensation.  Theassumptions used in the determination of the fair value of stock optionsgranted ultimately determine the recognition of stock-based compensationexpense.  The short-cut method was usedto determine the expected life of the

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options. This method, as prescribed by SAB Topic 14.D.2, calculates the expectedterm based on the midpoint between the vesting date of the option and the endof the contractual term.  Expectedvolatility was based upon the historical volatility of the Company’sstock.  Risk-free interest rates forperiods within the contractual life of the option are based upon the U.S.Treasury yield curve in effect at the time of the grant.  Because of the need to retain capital forexpected growth and past history, the expected dividend rate is 0%.  These assumptions have a significant impacton the amount of expense recognized for stock-based compensation.

**Asset Quality**

A major key tolong-term earnings growth is the maintenance of a high-quality loan portfolio.The Company’s directive in this regard is carried out through its policies andprocedures for extending credit to the Company’s customers.  The goal and result of these policies andprocedures is to provide a sound basis for new credit extensions and an earlyrecognition of problem assets to allow the most flexibility in their timelydisposition.  Additions to the allowancefor loan losses will be made periodically to maintain the allowance at anappropriate level based upon management’s analysis of potential risk in theloan portfolio.  The amount of the loanloss provision is determined by an evaluation of the level of loansoutstanding, the level of non-performing loans, historical loan loss experience,delinquency trends, the amount of actual losses charged to the allowance in agiven period, and assessment of present and anticipated economic conditions.

A provision for loan losses was madeduring the first quarter of 2007 of $210,000 as compared to $45,000 in thefirst quarter of 2006 resulting in an increase of $165,000 on a comparativebasis.  The amounts provided are dueprimarily to our assessment of inherent risk in the loan portfolio and theincrease in loan growth as compared to the same period in 2006. The allowancefor loan losses as a percentage of total loans was 1.13% at March 31, 2007 as compared to 1.14% atDecember 31, 2006.  Based upon ourevaluation of the loan portfolio, we believe the allowance for loan losses tobe adequate to absorb losses on existing loans that may become uncollectible.

During the first quarter of 2007, theCompany foreclosed on the properties related to loans totaling approximately$1,022,000 that were included in non-accrual loans as of December 31,2006.  Additional expenses have beencapitalized for the first three months of 2007 totaling approximately$13,000.  Management does not anticipateany significant losses in the disposition of these properties.

Subsequent to the first quarter, loans toa single borrower totaling approximately $2,321,000 were classified asnon-accrual loans.  Management willcontinue to evaluate the necessity of recording additional reserves as moreinformation becomes available on the borrower’s workout plan for these loans.

The allowance for loan losses isestablished through a provision for loan losses charged to expense.  Loan losses are charged against the allowancewhen management believes the collectibility of the principal is unlikely.  Subsequent recoveries, if any, are creditedto the allowance.

The allowance is an amount thatmanagement believes will be adequate to absorb estimated losses relating tospecifically identified loans, as well as probable credit losses inherent inthe balance of the loan portfolio, based on an evaluation of the collectibilityof existing loans and prior loss experience. This evaluation also takes into consideration such factors as changes inthe nature and volume of the

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loan portfolio, overall portfolioquality, review of specific problem loans, concentrations and current economicconditions that may affect the borrower’s ability to pay.  This evaluation does not include the effectsof expected losses on specific loans or groups of loans that are related tofuture events or expected changes in economic conditions.  While management uses the best informationavailable to make its evaluation, future adjustments to the allowance may benecessary if there any significant changes in economic conditions.  In addition, regulatory agencies, as anintegral part of their examination process, periodically review the Company’sallowance for loan losses, and may require the Company to make additions to theallowance based on their judgment about information available to them at thetime of their examinations.

The allowance consists of specific,general and unallocated components.  Thespecific component relates to loans that are classified as either doubtful,substandard or special mention.  For suchloans that are also classified as impaired, an allowance is established whenthe discounted cash flows (or collateral value or observable market price) ofthe impaired loan is lower than the carrying value of that loan.  The general component covers non-classifiedloans and is based on historical loss experience adjusted for qualitativefactors.  An unallocated component ismaintained to cover uncertainties that could affect management’s estimate ofprobable losses.  The unallocatedcomponent of the allowance reflects the margin of imprecision inherent in theunderlying assumptions used in the methodologies for estimating specific andgeneral losses in the portfolio.

Information with respect to nonaccrual,past due and restructured loans is as follows:
|                                                                                                            | ** ** | **March 31,**                   | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **                                                                                                 | ** ** | **(Dollars in Thousands)** | ** ** |
| Nonaccrual loans                                                                                           |       | $                                    | —     |   | $ | 119 |   |
| Loans  contractually past due ninety days or more as to interest or principal  payments and still accruing |       | 23                                   |       | 25 |   |
| Restructured  loans                                                                                        |       | —                               |       | — |   |
| Potential  problem loans                                                                                   |       | 2,321                                |       | — |   |
| Interest income  that would have been recorded on non-accrual and restructured loans under  original terms |       | —                               |       | — |   |
| Interest income that  was recorded on nonaccrual and restructured loans                                    |       | —                               |       | — |   |
|                                                                                                            |            |                                      |            |  |  |  |  |

 

Potential problem loans are defined 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 principal and interest is notexpected and (2) the principal or interest is more than ninety days past due,unless the loan is both well-secured and in the process of collection.

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Loans classified for regulatory purposesas loss, doubtful, substandard, or special mention that have not been includedin the table above do not represent or result from trends or uncertaintieswhich management reasonably expects will materially impact future operatingresults, liquidity or capital resources. These classified loans do notrepresent material credits about which management is aware of any informationwhich causes management to have serious doubts as to the ability of suchborrowers to comply with the loan repayment terms.

Information regarding certain loans andallowance for loan loss data is as follows:
|                                                                                | ** ** | **Three Months Ended**     | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                     | ** ** | **March 31,**                   | ** ** |
| ** **                                                                     | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **                                                                     | ** ** | **(Dollars in Thousands)** | ** ** |
|                                                                           |       |                                 |       |   |   |
| Average amount  of loans outstanding                                           |       | $                                    | 217,403    |   | $ | 171,120 |   |
| Balance of  allowance for loan losses at beginning of period                   |       | $                                    | 2,392      |   | $ | 1,917 |   |
| Loans charged  off:                                                            |       |                                 |       |   |   |
| Commercial and financial                                                       |       | —                               |       | — |   |
| Real estate mortgage                                                           |       | —                               |       | — |   |
| Installment                                                                    |       | (6                                   | )          | (5 | ) |
|                                                                           |       | (6                                   | )          | (5 | ) |
| Loans recovered:                                                               |       |                                 |       |   |   |
| Commercial and financial                                                       |       | —                               |       | — |   |
| Real estate mortgage                                                           |       | —                               |       | — |   |
| Installment                                                                    |       | —                               |       | 1 |   |
|                                                                           |       | —                               |       | 1 |   |
| Net charge-offs                                                                |       | (6                                   | )          | (4 | ) |
| Additions to  allowance charged to operating expense during period             |       | 210                                  |       | 45 |   |
| Balance of  allowance for loan losses at end of period                         |       | $                                    | 2,596      |   | $ | 1,958 |   |
| Ratio of net loans  charged off during the period to average loans outstanding |       | 0.00                                 | %          | 0.00 | % |

 

**Liquidity and Capital Resources**

Liquiditymanagement involves the matching of the cash flow requirements of customers,who may be either depositors desiring to withdraw funds or borrowers needingassurance that sufficient funds will be available to meet their credit needs,and the ability of the Company to meet those needs.  The Company strives to maintain an adequateliquidity position by managing the balances and maturities of interest-earningassets and interest-bearing liabilities so that the balance it has inshort-term investments at any given time will adequately cover any reasonablyanticipated immediate need for funds. Additionally, the Company maintains relationships with correspondentbanks, which could provide funds on short notice, if needed.  At March31, 2007 the Company had no federal funds purchased.

The liquidity andcapital resources of the Company are monitored daily by management, and monthlyby the Company’s Board-authorized Asset and Liability Management Committee, andon a periodic basis by state and federal regulatory authorities.  As determined under guidelines established bythese regulatory authorities, the Company’s liquidity ratios at March 31, 2007 were consideredsatisfactory.

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At that date, theCompany’s short-term investments and available federal funding were adequate tocover any reasonably anticipated immediate need for funds.  At March31, 2007, the Company had unused available federal fund lines of $9.5million and unused Federal Home Loan Bank borrowing capacity of approximately$35.4 million.  The Company is aware ofno events or trends likely to result in a material change in liquidity.

The consolidatedfinancial statements, as of March 31,2007, evidenced an increased liquidity position.  Cash and due from banks, interest-bearingdeposits in banks and federal funds sold totaled $21,679,388 as of March 31, 2007 as compared to$17,452,004 as of December 31, 2006. Total cash and due from banks amounted to $7,115,628 representing 2.33%of total assets.

As our loan demand has continued to increase, wehave increased the use of brokered deposits as a funding source.  Total brokered deposits amounted to $97.5million as of March 31, 2007.  These deposits are readily obtainable atrates not significantly different from rates that we pay on deposits in ourlocal market.  The Company’s ability tomaintain and expand its deposit base and borrowing capabilities is a source ofliquidity.  For the three-month periodended March 31, 2007, totaldeposits increased from $216.4 million at December 31, 2006 to $245.4 millionat March 31, 2007.  Management is committed to maintainingcapital at a level sufficient to protect depositors, provide for reasonablegrowth, and fully comply with all regulatory requirements.  The minimum capital requirements and theactual capital ratios for the Company and the Bank at March 31, 2007 are as follows:
|                             | ** ** | ** **  | ** ** | ** ** | ** ** | **Minimum**     | ** ** |
|-----------------------------|------------|-------------|------------|------------|------------|-----------------|------------|
| ** **                  | ** ** | ** **  | ** ** | ** ** | ** ** | **Regulatory**  | ** ** |
| ** **                  | ** ** | **Company** | ** ** | **Bank**   | ** ** | **Requirement** | ** ** |
|                        |       |        |       |       |       |            |       |
| Leverage capital  ratios    |       | 12.50       | %          | 10.11      | %          | 4.00            | %          |
| Risk-based  capital ratios: |       |        |       |       |       |            |       |
| Tier I capital              |       | 14.21       | %          | 11.17      | %          | 4.00            | %          |
| Total capital               |       | 15.22       | %          | 12.18      | %          | 8.00            | %          |

 

**Off-Balance Sheet Risk**

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

Our exposure to credit loss in the event ofnonperformance by the other party to the financial instrument for commitmentsto extend credit and standby letters of credit is represented by thecontractual amount of those instruments. We use the same credit policies in making commitments and conditionalobligations as we do for on-balance sheet instruments.  A summary of our commitments is as follows:

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|                               | ** ** | **March 31,** | ** ** |
|-------------------------------|------------|--------------------|------------|
| ** **                    | ** ** | **2007**           | ** ** |
|                          |       |               |       |
| Commitments to  extend credit |       | $                  | 45,418,000 |   |
| Letters of  credit            |       | 1,579,000          |       |
|                          |       | $                  | 46,997,000 |   |

 

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

Standby letters ofcredit are conditional commitments issued by us to guarantee the performance ofa customer to a third party.  Thoseletters of credit are primarily issued to support public and private borrowingarrangements.  The credit risk involvedin issuing letters of credit is essentially the same as that involved inextending loans to customers.  Collateralis required in instances which we deem necessary.

**FinancialCondition**

Our total assets grew by 10.20% for the firstthree months of 2007.  Deposit growth ofapproximately $29.03 million was used to fund net loan growth of approximately$19.1 million with the remainder being primarily invested in securities ormaintained in cash and due from banks and federal funds sold.  Loan demand continues to be strong in ourprimary market area of Henry County, Georgia and surrounding counties.  Our loan to available funds ratio hasremained steady since December 31, 2006, holding in the 83-88% range.  Advances from the Federal Home Loan Bankdecreased by $2 million for the three months ended March 31, 2007.  The net decrease is the result a $3 millionadvance being called, $4 million of advances maturing and the subsequentborrowing of an additional $5 million advance.

Stockholders’ equity has increased by $556,473due to net income of $475,516, a decrease in unrealized losses on securitiesavailable-for-sale, net of tax, of $11,401 and including recognition of sharebased payments transactions as required by SFAS123(R) of$69,556.

The Company opened two branches during2006 and is currently branching into Clayton county.  The Company hascontractual obligations for approximately $519,000 of renovation costs for thisadditional branch.

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.

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**Results of Operations****For The Three Months EndedMarch 31, 2007 and 2006**

Following is a summary of our operationsfor the periods indicated.
|                            | ** ** | **Three Months Ended**     | ** ** |
|----------------------------|------------|--------------------------------------|------------|
| ** **                 | ** ** | **March 31,**                   | ** ** |
| ** **                 | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **                 | ** ** | **(Dollars in Thousands)** | ** ** |
|                       |       |                                 |       |   |   |
| Interest income            |       | $                                    | 5,496      |   | $ | 4,065 |   |
| Interest expense           |       | (3,111                               | )          | (1,818 | ) |
| Net interest income        |       | 2,385                                |       | 2,247 |   |
| Provision for loan  losses |       | (210                                 | )          | (45 | ) |
| Other income               |       | 135                                  |       | 74 |   |
| Other expense              |       | (1,555                               | )          | (1,245 | ) |
| Pretax income              |       | 755                                  |       | 1,031 |   |
| Income tax expense         |       | 280                                  |       | 378 |   |
| Net income                 |       | $                                    | 475        |   | $ | 653 |   |

 

Net Interest Income

Our net interestincome increased approximately $138,000 for the first quarter of 2007 ascompared to the same period in 2006.  Ournet interest margin decreased to 3.49% during the first three months of 2007 ascompared to 4.10% for the first three months of 2006.  The increase in net interest income is dueprimarily to the increased volume of average loans outstanding.   Our cost of funds increased to 5.11% for thefirst three months of 2007 as compared to 3.86% for the first three months of2006.

Noninterest Income

Noninterest income increasedapproximately $61,000 for the first quarter of 2007 as compared to the sameperiod in 2006.  The increase in thefirst quarter of 2007 consists of $58,000 in service charges on deposit accounts,a $4,000 loss on sale of assets, and a $9,000 increase in other income.

Noninterest Expenses

Noninterest expenses increasedapproximately $310,000 for the first quarter of 2007. This increase consists ofan increase of $92,000 in salaries and employee benefits, $49,000 in equipmentand occupancy, $20,000 in losses on sale of securities and $149,000 in otheroperating expenses. The increase in salaries and employee benefits representsnormal increases in salaries and an increase in the number of full timeequivalent employees.  Equipment andoccupancy expenses have increased due to the need for additional equipment foremployees and for the new branches.  The increases in other operatingexpenses are due primarily to our overall growth. The Company leases itsoperations center facilities under an operating lease agreement forapproximately $70,000 a year in rental expense.

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Income Taxes

We have recorded a provision for incometaxes of $280,000 for the three months ended March 31, 2007 as compared to$378,000 for the same period in 2006. The decrease in our income tax provision was $98,000 for the threemonths ended March 31, 2007 compared to the same period in 2006. The effectivetax rate for the three months ended March 31, 2007 was 37.1% as compared to36.7% for the same period in 2006.  Theincrease in our effective tax rate is due primarily to the permanentnon-deductibility of incentive stock options that have been expensed in theamount of $53,535.

Regulatory Matters

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

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

**ITEM 3. Quantitative and 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.  Based on this evaluation,our Chief Executive and Chief Financial Officer concluded that our disclosurecontrols and procedures are effective for gathering, analyzing and disclosingthe information that we are required to disclose in the reports we file underthe Securities Exchange Act of 1934, within the time periods specified in theSEC’s rules and forms.  Our ChiefExecutive Officer and Chief Financial Officer also concluded that ourdisclosure controls and procedures are effective in timely alerting them tomaterial information relating to our Company required to be included in ourperiodic SEC filings.  In connection withthe new rules, we are in the process of further reviewing and documenting ourdisclosure controls and procedures, including our internal controls andprocedures for financial reporting, and may from time to time make changesdesigned to enhance their effectiveness and to ensure that our systems evolvewith our business.

There have been no changes in the Company’sinternal control over financial reporting during the three months ended March31, 2007, or, to the Company’s knowledge, other factors that couldsignificantly affect those internal controls subsequent to the date the Companycarried out its evaluation, that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over

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financial reporting, and there have beenno corrective actions with respect to significant deficiencies or materialweaknesses.

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

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**PART II – OTHER INFORMATION**

**Item1.            LEGAL PROCEEDINGS**

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

**Item1A.         RISK FACTORS**

In addition to the other information set forthin this report, you should consider the factors discussed in Part 1, “Item 1 **–** Description of Business” in our Annual Report on Form10-KSB for the year ended December 31, 2006.

There have been no material changes in the riskfactors relating to the Company or its business during the three months endedMarch 31, 2007.

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

None

**Item3.            DEFAULTS UPON SENIORSECURITIES**

None

**Item4.            SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS**

None

**Item5.            OTHER INFORMATION**

None

**Item6.            EXHIBITS**
|        | 31.1   | Certification of the Chief Executive Officer,  Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as  amended.                                                     |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                  |
|   | 31.2   | Certification of the Chief Financial Officer,  Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as  amended.                                                     |
|   |   |                                                                                                                                                                                  |
|   | 32     | Certification of the Chief Executive Officer and  Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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**SIGNATURES**

In accordance with therequirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.
|              |   | FIRSTBANK  FINANCIAL SERVICES, INC.           |
|--------------|--------|-----------------------------------------------|
|         |   | (Registrant)                                  |
|         |   |                                          |
|         |   |                                          |
| May 14, 2007 |   |                                          | /s/ Thaddeus M.  Williams |
| Date         |   |                                          | Thaddeus M.  Williams, President and C.E.O. |
|         |   | (Principal  Executive Officer)                |
|         |   |                                          |
|         |   |                                          |
| May 14, 2007 |   |                                          | /s/ Lisa J.  Maxwell |
| Date         |   |                                          | Lisa J. Maxwell,  C.F.O. |
|         |   | (Principal  Financial and Accounting Officer) |

 

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