**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-QSB**

 
| **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|------------|-----------------------------------------------------------------------------------------------|
|       |       |                                                                                          |
|       |       | **For the  quarterly period ended**                                                           | **March 31, 2006** |
|       |       |                                                                                          |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|       |       |                                                                                          |
|       |       | **For the  transition period from**                                                           | **                  to                  ** |

 

**Commission File Number:   000-51147**

 

**FirstBankFinancial Services, Inc.**

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

 

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

 

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

(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 issuer(1) filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 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  ý   No  o

 

Check whether the registrant is a shellcompany (as defined in Rule 12b-2 of the Exchange Act):   Yes  o  No  ý

 

State the number of shares outstanding of each of the issuer’s classesof common equity, as of May 13, 2006:    2,359,753shares, $5.00 par value per share.

 

Transitional SmallBusiness Disclosure Format              Yes  o        No  ý

 

 

----

 

**FIRSTBANKFINANCIAL SERVICES, INC.**

**AND SUBSIDIARY**

 

**TABLE OF CONTENTS**

 
| PART I.  | FINANCIAL  INFORMATION                                                                                           |   |
|----------|------------------------------------------------------------------------------------------------------------------|--------|
|     |                                                                                                             |
|     | Item 1.  Consolidated Financial Statements                                                                       |   |
|     |                                                                                                             |
|     | Consolidated  Balance Sheets (unaudited) as of March  31, 2006 and December 31, 2005                             |   |
|     |                                                                                                             |
|     | Consolidated  Statements of Income (unaudited) for the three months ended March 31, 2006  and 2005               |   |
|     |                                                                                                             |
|     | Consolidated Statements of  Comprehensive Income (unaudited) for the three months ended March 31, 2006  and 2005 |   |
|     |                                                                                                             |
|     | Consolidated  Statements of Cash Flows (unaudited) for the three months ended March 31,  2006 and 2005           |   |
|     |                                                                                                             |
|     | Notes to Consolidated  Financial Statements                                                                      |   |
|     |                                                                                                             |
|     | Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations             |   |
|     |                                                                                                             |
|     | Item  3. Controls and Procedures                                                                                 |   |
|     |
| PART II. | OTHER INFORMATION                                                                                                |   |
|     |                                                                                                             |
|     | SIGNATURES                                                                                                       |   |
|     |                                                                                                             |
|     | CERTIFICATION                                                                                                    |   |
|     |                                                                                                             |
|     | SECTION 906 CERTIFICATION                                                                                        |   |
|          |                                                                                                                  |        |  |

 

----

 

**PART I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**FIRSTBANKFINANCIAL SERVICES, INC.**

**ANDSUBSIDIARY**

**Consolidated Balance Sheets**

**(unaudited)**

**March31, 2006 and December 31, 2005**

 
| ** **                                                                                                                                   | ** ** | **March 31,  2006** | ** **  | **December 31,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|-------------|------------------------|------------|
| ASSETS                                                                                                                                       |       |                |        |                   |       |
|                                                                                                                                         |       |                |        |                   |       |
| Cash and due  from banks                                                                                                                     |       | $                   | 2,766,426   |                   | $          | 1,236,443 |   |
| Interest-bearing  deposits in banks                                                                                                          |       | 1,748,364           |        | 789,979                |       |
| Federal funds  sold                                                                                                                          |       | 33,929,000          |        | 13,765,000             |       |
| Securities  available-for-sale, at fair value                                                                                                |       | 34,124,927          |        | 31,125,111             |       |
| Restricted  equity securities, at cost                                                                                                       |       | 1,810,556           |        | 1,584,256              |       |
|                                                                                                                                         |       |                |        |                   |       |
| Loans, net of  unearned income                                                                                                               |       | 169,321,890         |        | 168,674,463            |       |
| Less allowance  for loan losses                                                                                                              |       | 1,957,813           |        | 1,917,216              |       |
| Loans, net                                                                                                                                   |       | 167,364,077         |        | 166,757,247            |       |
|                                                                                                                                         |       |                |        |                   |       |
| Premises and  equipment                                                                                                                      |       | 4,559,032           |        | 4,112,851              |       |
| Other assets                                                                                                                                 |       | 3,287,847           |        | 3,110,034              |       |
| Total assets                                                                                                                                 |       | $                   | 249,590,229 |                   | $          | 222,480,921 |   |
|                                                                                                                                         |       |                |        |                   |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                   |       |                |        |                   |       |
|                                                                                                                                         |       |                |        |                   |       |
| Deposits:                                                                                                                                    |       |                |        |                   |       |
| Noninterest-bearing                                                                                                                          |       | $                   | 19,946,740  |                   | $          | 11,994,193 |   |
| Interest-bearing                                                                                                                             |       | 179,631,449         |        | 162,341,815            |       |
| Total deposits                                                                                                                               |       | 199,578,189         |        | 174,336,008            |       |
| Federal Home  Loan Bank borrowings                                                                                                           |       | 23,000,000          |        | 22,000,000             |       |
| Other  liabilities                                                                                                                           |       | 1,605,194           |        | 1,361,448              |       |
| Total liabilities                                                                                                                            |       | 224,183,383         |        | 197,697,456            |       |
|                                                                                                                                         |       |                |        |                   |       |
| Stockholders’  equity:                                                                                                                  |       |                |        |                   |       |
| Preferred stock,  no par value per share, 2,000,000 shares authorized; -0- shares issued and  outstanding                                    |       | —              |        | —                 |       |
| Common stock,  par value $5.00 per share, 10,000,000 shares authorized; 2,359,753 and  2,145,250 shares issued and outstanding, respectively |       | 11,798,765          |        | 10,726,250             |       |
| Surplus                                                                                                                                      |       | 13,751,667          |        | 11,235,374             |       |
| Retained  earnings                                                                                                                           |       | 419,888             |        | 3,298,408              |       |
| Accumulated  other comprehensive loss                                                                                                        |       | (563,474            | )           | (476,567               | )          |
| Total  stockholders’ equity                                                                                                             |       | 25,406,846          |        | 24,783,465             |       |
| Total  liabilities and stockholders’ equity                                                                                             |       | $                   | 249,590,229 |                   | $          | 222,480,921 |   |
|                                                                                                                                              |            |                     |             |                        |            |  |  |  |  |

 

See notes to consolidatedfinancial statements.

 

1

----

 

**FIRSTBANKFINANCIAL SERVICES, INC.**

**AND SUBSIDIARY**

**Consolidated Statements of Income**

**(unaudited)**

**For theThree Months Ended March 31, 2006 and 2005**

 
| ** **                                           | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** |
|------------------------------------------------------|------------|---------------------|------------|---------------------|------------|
| Interest and  dividend income:                       |       |                |       |                |       |
| Loans, including  fees                               |       | $                   | 3,553,984  |                | $          | 2,404,081 |   |
| Taxable  securities                                  |       | 328,545             |       | 259,074             |       |
| Tax-free  securities                                 |       | 26,026              |       | 22,795              |       |
| Federal funds  sold                                  |       | 134,458             |       | 50,218              |       |
| Deposits in  banks                                   |       | 21,653              |       | 14,582              |       |
| Total interest  and dividend income                  |       | 4,064,666           |       | 2,750,750           |       |
|                                                 |       |                |       |                |       |
| Interest  expense:                                   |       |                |       |                |       |
| Deposits                                             |       | 1,605,002           |       | 868,951             |       |
| Federal Home  Loan Bank borrowings                   |       | 212,613             |       | 156,696             |       |
| Total interest  expense                              |       | 1,817,615           |       | 1,025,647           |       |
|                                                 |       |                |       |                |       |
| Net interest  income                                 |       | 2,247,051           |       | 1,725,103           |       |
| Provision for  loan losses                           |       | 45,000              |       | 159,615             |       |
|                                                 |       |                |       |                |       |
| Net interest  income after provision for loan losses |       | 2,202,051           |       | 1,565,488           |       |
|                                                 |       |                |       |                |       |
| Noninterest  income:                                 |       |                |       |                |       |
| Service charges  on deposit accounts                 |       | 53,451              |       | 45,801              |       |
| Gain on sale of  assets                              |       | 1,425               |       | —              |       |
| Other operating                                      |       | 18,712              |       | 20,563              |       |
| Total  noninterest income                            |       | 73,588              |       | 66,364              |       |
|                                                 |       |                |       |                |       |
| Noninterest  expense:                                |       |                |       |                |       |
| Salaries and  employee benefits                      |       | 671,874             |       | 455,425             |       |
| Equipment and  occupancy                             |       | 157,358             |       | 59,547              |       |
| Other operating                                      |       | 416,188             |       | 264,493             |       |
| Total  noninterest expense                           |       | 1,245,420           |       | 779,465             |       |
|                                                 |       |                |       |                |       |
| Income before  provision for income taxes            |       | 1,030,219           |       | 852,387             |       |
|                                                 |       |                |       |                |       |
| Provision for  income taxes                          |       | 377,658             |       | 311,334             |       |
| Net income                                           |       | $                   | 652,561    |                | $          | 541,053 |   |
|                                                 |       |                |       |                |       |
| Income per  share:                                   |       |                |       |                |       |
| Basic                                                |       | $                   | 0.28       |                | $          | 0.23 |   |
| Diluted                                              |       | $                   | 0.26       |                | $          | 0.23 |   |
| Cash dividends  per share:                           |       | $                   | —     |                | $          | — |   |

 

See notes to consolidatedfinancial statements.

 

2

----

 

**FIRSTBANKFINANCIAL SERVICES, INC**

**ANDSUBSIDIARY**

**Consolidated Statements of Comprehensive Income**

**(unaudited)**

**For theThree Months Ended March 31, 2006 and 2005**

 
| ** **                                               | ** ** | **March 31,  2006** | ** ** | **March 31,  2006** | ** ** |
|----------------------------------------------------------|------------|---------------------|------------|---------------------|------------|
|                                                     |       |                |       |                |       |
| Net income                                               |       | $                   | 652,561    |                | $          | 541,053 |   |
|                                                     |       |                |       |                |       |
| Other comprehensive loss:                                |       |                |       |                |       |
| ** **                                               | ** ** | ** **          | ** ** | ** **          | ** ** |
| Unrealized  losses on securities available for sale:     |       |                |       |                |       |
|                                                     |       |                |       |                |       |
| Net unrealized  losses arising during period, net of tax |       | (61,105             | )          | (367,475            | )          |
|                                                     |       | (61,105             | )          | (367,475            | )          |
|                                                     |       |                |       |                |       |
| Unrealized  losses on interest rate floor:               |       |                |       |                |       |
|                                                     |       |                |       |                |       |
| Net unrealized  losses arising during period, net of tax |       | (25,802             | )          | —              |       |
|                                                     |       | (25,802             | **)**      | —              | ** ** |
|                                                     |       |                |       |                |       |
| Other comprehensive loss                                 |       | (86,907             | )          | (367,475            | )          |
|                                                     |       |                |       |                |       |
| Comprehensive income                                     |       | $                   | 565,654    |                | $          | 173,578 |   |
|                                                          |            |                     |            |                     |            |  |  |  |

 

See notes to consolidatedfinancial statements.

 

3

----

 

**FIRSTBANKFINANCIAL SERVICES, INC.**

**ANDSUBSIDIARY**

**Consolidated Statements of Cash Flows**

**(unaudited)**

**For theThree Months Ended March 31, 2006 and 2005**

 
| ** **                                                                         | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------|------------|---------------------|------------|
| Cash flow from  operating activities:                                              |       |                |       |                |       |
| Net income                                                                         |       | $                   | 652,561    |                | $          | 541,053 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                |       |                |       |
| Depreciation and  amortization                                                     |       | 78,679              |       | 37,824              |       |
| Deferred taxes                                                                     |       | —              |       | —              |       |
| Stock  compensation expense                                                        |       | 58,089              |       |                |       |
| Provision for  loan losses                                                         |       | 45,000              |       | 159,615             |       |
| Gain on sale of  assets                                                            |       | (1,425              | )          | —              |       |
| Increase in  accrued interest receivable                                           |       | (41,107             | )          | (258,865            | )          |
| Decrease in  accrued interest payable                                              |       | (101,243            | )          | (12,263             | )          |
| Net other  operating activities                                                    |       | 257,888             |       | 242,239             |       |
|                                                                               |       |                |       |                |       |
| Net cash flow  provided by operating activities                                    |       | 948,442             |       | 709,603             |       |
|                                                                               |       |                |       |                |       |
| Cash flow from  investing activities:                                              |       |                |       |                |       |
| Net increase in  loans                                                             |       | (651,830            | )          | (13,734,002         | )          |
| Net (increase)  decrease in interest bearing deposits in banks                     |       | (958,385            | )          | 174,449             |       |
| Net (increase)  decrease in federal funds sold                                     |       | (20,164,000         | )          | 703,000             |       |
| Purchases of  restricted equity securities                                         |       | (226,300            | )          | (313,700            | )          |
| Purchases of  investment securities available-for-sale                             |       | (4,496,730          | )          | (3,898,056          | )          |
| Proceeds from  maturities of securities available-for-sale                         |       | 1,352,098           |       | —              |       |
| Proceeds from  sales of securities available-for-sale                              |       | —              |       | 2,438,247           |       |
| Proceeds from  sale of assets                                                      |       | 1,425               |       | —              |       |
| Purchases of  premises, equipment and software                                     |       | (516,556            | )          | (75,595             | )          |
|                                                                               |       |                |       |                |       |
| Net cash flow  used by investing activities                                        |       | (25,660,278         | )          | (14,705,657         | )          |
|                                                                               |       |                |       |                |       |
| Cash flow from  financing activities:                                              |       |                |       |                |       |
| Net increase in  deposits                                                          |       | 25,242,181          |       | 12,238,423          |       |
| Net increase in  other borrowings                                                  |       | 1,000,000           |       | 3,000,000           |       |
| Purchase of  fractional shares                                                     |       | (362                | )          | —              |       |
|                                                                               |       |                |       |                |       |
| Net cash flow  provided by financing activities                                    |       | 26,241,819          |       | 15,238,423          |       |
|                                                                               |       |                |       |                |       |
| Net increase in  cash and due from banks                                           |       | 1,529,983           |       | 1,242,369           |       |
| Cash and due  from banks at beginning of period                                    |       | 1,236,443           |       | 1,136,424           |       |
| Cash and due  from banks at end of period                                          |       | $                   | 2,766,426  |                | $          | 2,378,793 |   |
|                                                                               |       |                |       |                |       |
| Supplemental  schedule of noncash investing and financing activities -             |       |                |       |                |       |
| Change in  accumulated other comprehensive loss                                    |       | $                   | (86,907    | )                   | $          | (367,475 | ) |
|                                                                               |       |                |       |                |       |
| Supplemental  disclosures of cash flow information -                               |       |                |       |                |       |
| Cash paid for:                                                                     |       |                |       |                |       |
| Interest                                                                           |       | $                   | 1,918,858  |                | $          | 1,037,910 |   |
| Income taxes                                                                       |       | $                   | 89,035     |                | $          | 18,523 |   |
|                                                                                    |            |                     |            |                     |            |  |  |  |  |  |

 

See notes to consolidatedfinancial statements.

 

4

----

 

**FIRSTBANK FINANCIAL SERVICES,INC.**

**AND SUBSIDIARY**

 

**Notes toConsolidated Financial Statements**

**(unaudited)**

 

**1.**     Basisof Presentation

 

FirstBank Financial Services,Inc. (the “Company”) is a bank holding company whose business is conducted byits wholly-owned commercial bank, First Bank of Henry County (the “Bank”). TheBank is located in McDonough, Henry County, Georgia with a branch in Stockbridge.

 

The shareholders of the Bankapproved an Agreement and Plan of Share Exchange on June 30, 2004, and theholding company information became effective February 1, 2005.  Pursuant to the Plan, each share of the Bankcommon stock was exchanged on a one-for-one basis for shares of Company commonstock.

 

The accompanying consolidatedfinancial statements are unaudited. Certain information and footnotedisclosures normally included in consolidated financial statements prepared inaccordance with generally accepted accounting principles have been condensed oromitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunctionwith the audited consolidated financial statements and notes thereto includedin the Company’s annual report on Form 10-KSB for the year ended December 31, 2005,which was filed 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 Company’s financial position and results for the interimperiod ended March 31, 2006.

 

The preparation of consolidatedfinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets, liabilities and income and expenseamounts.  Actual results could differfrom those estimates.  The results ofoperations for the three months ended March 31, 2006 are not necessarilyindicative of the results to be expected for the full year.

 

**2.**     StockCompensation Plans

 

At March 31, 2006, the Companyhad two stock-based employee compensation plans.  The Company accounts for these plans inaccordance with FASB statement No. 123 (revised 2004), “Share-Based Payments”,SFAS 123(R).  SFAS 123(R) applied to allcompanies as of the beginning of the first interim period that began afterDecember 15, 2005. Accordingly, the stock-based employee compensation cost reflectedin net income for the period ending March 31, 2006 is $58,089.  The Company has elected the modifiedprospective transition method as allowed by SFAS 123(R).  The Company uses the Black-Scholes optionpricing model to calculate its stock based compensation costs.

 

5

----

 

**2.**     StockCompensation Plans

 

In applying this model, thefair value of the option grants has been calculated based upon the followingrange of assumptions:

 
| Dividend Yield      |   | 0.00%           |
|---------------------|--------|-----------------|
| Expected Life       |   | 5-10 years      |
| Expected Volatility |   | 18.35% - 23.67% |
| Risk Free Weight    |   | 4.53%           |

 

The Company uses a peer groupaverage of stock prices to compute the expected volatility of its stock.   The risk free rate assumption is based uponthe yield of a treasury security whose maturity period equals the optionperiod.  The dividend yield assumption isbased upon that of the Company.

 

The following tables summarizestock option activity for the periods ending March 31, 2006 and December 31,2005.

 
| ** **                                                        | ** ** | **March 31, 2006** | ** ** | **December 31, 2005**                  | ** ** |
|-------------------------------------------------------------------|------------|--------------------|------------|----------------------------------------|------------|
| ** **                                                        | ** ** | **Number**         | ** ** | **Weighted- Average  Exercise  Price** | ** ** | **Number** | ** ** | **Weighted- Average  Exercise Price** | ** ** |
| ** **                                                        | ** ** | ** **         | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance,  beginning of period                                     | ** ** | **138,499**        | ** ** | **$**                                  | **12.78**  |   | 68,750 |   | $ | 9.09 |   |
| Granted                                                           | ** ** | **28,462**         | ** ** | **16.60**                              |       | 69,749 |   | 16.42 |   |
| Exercised                                                         | ** ** | **—**         | ** ** | **—**                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Forfeited/Expired                                                 | ** ** | **—**         | ** ** | **—**                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance, end of  period                                           | ** ** | **166,961**        | ** ** | **$**                                  | **13.43**  |   | 138,499 |   | $ | 12.78 |   |
|                                                              |       |               |       |                                   |       |   |   |   |   |
| Exercisable, end  of period                                       | ** ** | **105,998**        | ** ** | **$**                                  | **14.81**  |   | 97,352 |   | $ | 12.76 |   |
|                                                              |       |               |       |                                   |       |   |   |   |   |
| Weighted-average  fair value of options granted during the period |       |               |       | **$**                                  | **5.47**   |   |   |   | $ | 6.87 |   |

 

6

----

 

**2.**     StockCompensation Plans

 

Information pertaining tooptions outstanding at March 31, 2006 is as follows:

 
| ** **          | ** ** | **Options Outstanding** | ** ** | ** **      | ** ** |
|---------------------|------------|-------------------------|------------|-----------------|------------|
| ** **          | ** ** | **Weighted-**           | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** |
| ** **          | ** ** | ** **              | ** ** | **Average**     | ** ** | ** ** | ** ** | **Options Exercisable** | ** ** |
| ** **          | ** ** | ** **              | ** ** | **Remaining**   | ** ** | **Weighted-** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| **Range of**        | ** ** | **Number**              | ** ** | **Contractual** | ** ** | **Average** | ** ** | **Number** | ** ** | **Average** | ** ** |
| **Exercise Prices** |       | **Outstanding**         | ** ** | **Life**        | ** ** | **Exercise Price** | ** ** | **Exercisable** | ** ** | **Exercise Price** |   |
| $ 9.09         |       | 68,750                  |       | 5.62 years      |       | $ | 9.09 |   | 48,584 |   | $ | 9.09 |   |
| 16.42               |       | 69,749                  |       | 10 years        |       | 16.42 |   | 48,768 |   | 16.42 |   |
| 16.50 - 17.25       |       | 28,462                  |       | 10 years        |       | 16.60 |   | 8,646 |   | 16.91 |   |
|                |       | 166,961                 |       | 8.20 years      |       | 13.43 |   | 105,998 |   | 14.81 |   |
|                     |            |                         |            |                 |            |  |  |  |  |  |  |  |  |

 

Information pertaining tooptions outstanding at December 31, 2005 is as follows:

 
| ** **          | ** ** | **Options Outstanding** | ** ** | ** **      | ** ** |
|---------------------|------------|-------------------------|------------|-----------------|------------|
| ** **          | ** ** | ** **              | ** ** | **Weighted-**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **          | ** ** | ** **              | ** ** | **Average**     | ** ** | ** ** | ** ** | **Options Exercisable** | ** ** |
| ** **          | ** ** | ** **              | ** ** | **Remaining**   | ** ** | **Weighted-** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| **Range of**        | ** ** | **Number**              | ** ** | **Contractual** | ** ** | **Average** | ** ** | **Number** | ** ** | **Average** | ** ** |
| **Exercise Prices** | ** ** | **Outstanding**         | ** ** | **Life**        | ** ** | **Exercise Price** | ** ** | **Exercisable** | ** ** | **Exercise Price** | ** ** |
| $ 9.09         |       | 68,750                  |       | 5.62 years      |       | $ | 9.09 |   | 48,584 |   | $ | 9.09 |   |
| 16.42               |       | 69,749                  |       | 10 years        |       | 16.42 |   | 48,768 |   | 16.42 |   |
|                |       | 138,499                 |       | 7.83 years      |       | 12.78 |   | 97,352 |   | 12.76 |   |
|                     |            |                         |            |                 |            |  |  |  |  |  |  |  |  |

 

At March 31, 2006, there was $289,718of unrecognized compensation cost related to stock-based payments, which isexpected to be recognized over a weighted-average period of 1.6 years.  Shares available for future stock optiongrants to employees under existing plans was 83,039 at March 31, 2006.  At March 31, 2006, the aggregate intrinsicvalue of options and warrants outstanding was $2,614,700, and the aggregateintrinsic value of options and warrants exercisable was $2,365,000.  Total intrinsic value of options and warrantsexercised was $-0- for the three months ended March 31, 2006.

 

The Company has also issuedstock warrants to the Company’s organizers in an effort to compensate them fortheir efforts and financial risks undertaken. These warrants were fully vested as of December 31, 2005 and areexercisable in whole or in part during the ten year period begin with the datethe Company began operations.   This planis more fully described in the Company’s annual report dated December 31, 2005.

 

7

----

 

**2.**     StockCompensation Plans

 

Other information related tothe warrants is as follows:

 
| ** **                                 | ** ** | **March 31, 2006** | ** ** | **December 31, 2005**                   | ** ** |
|--------------------------------------------|------------|--------------------|------------|-----------------------------------------|------------|
| ** **                                 | ** ** | **Number**         | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Number** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
|                                       |       |               |       |                                    |       |   |   |   |   |
| Warrants  outstanding, beginning of period |       | 218,680            |       | $                                       | 9.09       |   | 218,680 |   | $ | 9.09 |   |
| Granted                                    |       | —             |       |                                    |       | — |   |   |   |
| Exercised                                  |       | —             |       |                                    |       | — |   |   |   |
| Forfeited                                  |       | —             |       |                                    |       | — |   |   |   |
| Warrants  outstanding, end of period       |       | 218,680            |       | $                                       | 9.09       |   | 218,680 |   | $ | 9.09 |   |
|                                       |       |               |       |                                    |       |   |   |   |   |
| Exercisable, end  of period                |       | 218,680            |       | $                                       | 9.09       |   | 218,680 |   | $ | 9.09 |   |

 

**3.**     EarningsPer Common Share

 

The Company is required toreport earnings per common share with and without the dilutive effects ofpotential common stock issuances from instruments such as options, convertiblesecurities and warrants on the face of the statements of income.  Earnings per common share are based on theweighted average number of common shares outstanding during the period whilethe effects of potential common shares outstanding during the period areincluded in diluted earnings per share. Additionally, the Company must reconcile the amounts used in thecomputation 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 March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                        | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Basic earnings  per share:                                                                                                        |       |                             |       |   |   |
| Weighted average  common shares outstanding                                                                                       |       | 2,359,753                        |       | 2,359,753 |   |
|                                                                                                                              |       |                             |       |   |   |
| Net income                                                                                                                        |       | $                                | 652,561    |   | $ | 541,053 |   |
|                                                                                                                              |       |                             |       |   |   |
| Basic earnings  per share                                                                                                         |       | $                                | 0.28       |   | $ | 0.23 |   |
|                                                                                                                              |       |                             |       |   |   |
| Diluted earnings  per share:                                                                                                      |       |                             |       |   |   |
| Weighted average  common shares outstanding                                                                                       |       | 2,359,753                        |       | 2,359,753 |   |
| Net effect of  the assumed exercise of stock options based on the treasury stock method using  average market prices for the year |       | 126,500                          |       | 26,131 |   |
| Total weighted  average common shares and common stock equivalents outstanding                                                    |       | 2,486,253                        |       | 2,385,884 |   |
|                                                                                                                              |       |                             |       |   |   |
| Net income                                                                                                                        |       | $                                | 652,561    |   | $ | 541,053 |   |
|                                                                                                                              |       |                             |       |   |   |
| Diluted earnings  per share                                                                                                       |       | $                                | 0.26       |   | $ | 0.23 |   |
|                                                                                                                                   |            |                                  |            |  |  |  |  |  |

 

8

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**4.**     RecentAccounting Pronouncements

 

In December 2004, the FinancialAccounting Standards Board (FASB) issued Statement of Financial Accounting(SFAS) No. 123R (revised 2004), *Share-BasedPayment*, which revises SFAS No. 123, *Accounting for Stock-Based Compensation*, and supersedesAccounting Principles Board (APB) Opinion No. 25, *Accounting for Stock Issued to Employees*.This statement focuses primarily on accounting for transactions in which anentity obtains employee services in share-based payment transactions. Thisstatement does not address the accounting for employee share ownership plans,which are subject to AICPA Statement of Position 93-6, *Employers’ Accounting for Stock Ownership Plans*.This statement requires an entity to recognize the cost of employee servicesreceived in share-based payment transactions and measure the cost on agrant-date fair value of the award. That cost will be recognized over theperiod during which an employee is required to provide service in exchange forthe award. The provisions of SFAS 123R (revised 2004) are effective forfinancial statements issued for the first fiscal year beginning afterJune 15, 2005.  Accordingly, duringthe quarter ended March 31, 2006, the Company recognized $58,089 inexpense associated with vesting stock options.

 

In May 2005, the FASB issued StatementNo. 154, (SFAS No. 154) *Accounting Changes andError Corrections - A Replacement of APB Opinion No. 20 and FASB StatementNo. 3*. This new standard replaces APB Opinion No. 20, *Accounting Changes*, and FASB StatementNo. 3, *Reporting Accounting Changes inInterim Financial Statements*. Among other changes, SFAS No. 154requires that a voluntary change in an accounting principle be appliedretrospectively with all prior period financial statements presented on the newaccounting principle, unless it is impracticable to do so. SFAS No. 154also provides that (1) a change in method of depreciating or amortizing along-lived nonfinancial asset be accounted for as a change in estimate(prospectively) that was effected by a change in an accounting principle, and(2) correction of errors in previously issued financial statements shouldbe termed a “restatement.” The new standard is effective for accounting changesand corrections of errors made in fiscal years beginning afterDecember 15, 2005. The adoption of this standard did not have a materialeffect on the Company’s consolidated financial statements.

 

In February 2006, the FASBissued SFAS No. 155, *Accounting for CertainHybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140*.SFAS No. 155 simplifies accounting for certain hybrid instruments currentlygoverned by SFAS No. 133, *Accounting forDerivative Instruments and Hedging Activities*, by allowing fairvalue remeasurement of hybrid instruments that contain an embedded derivativethat otherwise would require bifurcation. SFAS No. 155 also eliminates theguidance in SFAS No. 133 Implementation Issue No. D1, *Application of Statement 133 to Beneficial Interestsin Securitized Financial**Assets*,which provides such beneficial interests are not subject to SFAS No. 133. SFASNo. 155 amends SFAS No. 140, *Accounting forTransfers and Servicing of Financial Assets and Extinguishments of Liabilities- a Replacement of FASB Statement No. 125*, by eliminating therestriction on passive derivative instruments that a qualifying special-purposeentity may hold. SFAS No. 155 is effective for all financial instrumentsacquired or issued after the beginning of an entity’s first fiscal year thatbegins after September 15, 2006. The Company does not expect the adoption ofthis statement to have a material impact on our financial condition, results ofoperations or cash flows.

 

9

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**4.**     RecentAccounting Pronouncements

 

In March 2006, the FinancialAccounting Standards Board (FASB) issued SFAS No. 156, *Accounting for Servicing of Financial**Assets- an amendment of FASB Statement No. 140*.SFAS No. 156 requires an entity to recognize a servicing asset or servicingliability each time it undertakes an obligation to service a financial asset byentering into a servicing contract in specific situations. Additionally, theservicing asset or servicing liability shall be initially measured at fairvalue; however, an entity may elect the “amortization method” or “fair valuemethod” for subsequent balance sheet reporting periods. SFAS No. 156 iseffective as of an entity’s first fiscal year beginning after September 15,2006. Early adoption is permitted as of the beginning of an entity’s fiscalyear, provided the entity has not yet issued financial statements, includinginterim financial statements, for any period of that fiscal year. The Companydoes not expect the adoption of this statement to have a material impact on ourfinancial condition, results of operations or cash flows.

 

**5.**     StockDividend

 

On November 17, 2005, theCompany declared a ten percent stock dividend payable to shareholders of recordon November 30, 2005 to be distributed on January 31, 2006.  Earnings per common share for the periodended March 31, 2006 and all stock option and warrant information has beenretroactively adjusted for the dividends as if it occurred on January 1, 2005. 

 

**6.**     InterestRate Derivatives

 

The Company maintains anoverall interest rate risk-management strategy that incorporates the use ofderivative instruments to minimize significant unplanned fluctuations inearnings that are caused by interest volatility.  One interest rate derivative is used to hedgevariable-rate deposits.  This instrumentis reflected in other liabilities at March 31, 2006 at a fair value of$73,058.  The Company has anotherderivative, an interest rate floor, with a notional value of $40 million and a7.50% strike.  The fair value of thisinstrument at March 31, 2006 is $304,000 and is reflected in other assets.  The instruments are more fully described inthe Company’s annual report dated December 31, 2005.

 

10

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

 

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

 

**Forward Looking Statements**

 

Certain of the statements made herein under thecaption “Management’s Discussion and Analysis of Financial Condition andResults of Operations” (“MD&A”) are forward-looking statements for purposesof the Securities Act of 1933 (the “Securities Act”) and the SecuritiesExchange Act of 1934 (the “Exchange Act”), and as such may involve known andunknown risks, uncertainties and other factors which may cause our actualresults, performance or achievements to be materially different from futureresults, performance or achievements expressed or implied by suchforward-looking statements.  Such forwardlooking statements include statements using the words such as “will,” “anticipate,”“should,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “may”or “intend,” or other similar words and expressions of the future.  Our actual results may differ significantlyfrom the results we discuss in these forward-looking statements.

 

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

•      the effects of future economic conditions;

•      governmental monetary and fiscal policies, aswell as legislative and regulatory changes;

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

•      changes in the interest rate environment whichcould reduce anticipated or actual margins;

•      the effects of competition from other commercialbanks, thrifts, mortgage banking firms, consumer finance companies, creditunions, securities brokerage firms, insurance companies, money market and othermutual funds and other financial institutions operating in our market area andelsewhere, including institutions operating regionally, nationally, andinternationally, together with such competitors offering banking products andservices by mail, telephone, computer, and the Internet;

•      changes occurring in business conditions andinflation;

•      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 and resultingcredit risk-related losses and expenses;

•      changes in the securities market; and

•      other risks and uncertainties detailed from timeto time in our filings with the Securities and Exchange Commission.

 

11

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**Introduction**

 

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

 

TheCompany performs banking services customary for full service banks of similarsize and character.  The Company offerspersonal and business checking accounts, interest-bearing checking accounts,savings accounts and various types of certificates of deposit.  The Company also offers commercial loans,installment and other consumer loans, home equity loans, home equity lines ofcredit, construction loans and mortgage loans. In addition, the Company provides such services as official bank checks,traveler’s checks, direct deposit and United States Savings Bonds.  The Company provides other customary bankingservices including ATM services, safe deposit facilities, money transfers, andindividual retirement accounts.

 

**Overview**

 

Management monitors the financial condition of the Company in order toprotect depositors, increase undivided profits and protect current and futureearnings.  Further discussion of significantitems affecting the Company’s financial condition are discussed in detailbelow.

 

**Critical Accounting Policies**

 

We have adopted various accounting policieswhich govern the application of accounting principles generally accepted in theUnited States of America in the preparation of our consolidated financialstatement of FirstBank Financial Services, Inc. Our significant accounting policies are described in the footnotes to thefinancial statements for FirstBank Financial Services, Inc. at December 31, 2005as filed in our annual report on Form 10-KSB, which was filed with the Securitiesand Exchange Commission.

 

Certain accounting policies involve significantjudgments and assumptions by us which have a material impact on the carryingvalue of certain assets and liabilities. We consider these accounting policies to be critical accountingpolicies.  The judgments and assumptionswe use are based on historical experience and other factors, which we believeto be reasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actualresults could differ from these judgments and estimates which could have amaterial impact on our carrying values of assets and liabilities and ourresults of operations.

 

We believe the allowance for loan 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.

 

12

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**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 thesepolicies and procedures is to provide a sound basis for new credit extensionsand an early recognition of problem assets to allow the most flexibility intheir 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 amountof the loan loss provision is determined by an evaluation of the level of loansoutstanding, the level of non-performing loans, historical loan lossexperience, delinquency trends, the amount of actual losses charged to theallowance in a given period, and assessment of present and anticipated economicconditions.

 

A provision for loan losses was madeduring the first quarter of 2006 of $45,000 as compared to $159,615 in thefirst quarter of 2005 resulting in a decrease of $114,615 on a comparativebasis.  The amounts provided are dueprimarily to our assessment of inherent risk in the loan portfolio. Theallowance for loan losses as a percentage of total loans was 1.16% at March 31, 2006 as compared to 1.14% atDecember 31, 2005.  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.

 

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 loan portfolio, overall portfolio quality, reviewof specific problem loans, concentrations and current economic conditions thatmay affect the borrower’s ability to pay. This evaluation does not include the effects of expected losses onspecific loans or groups of loans that are related to future events or expectedchanges in economic conditions.  Whilemanagement uses the best information available to make its evaluation, futureadjustments to the allowance may be necessary if there are any significantchanges in economic conditions.  Inaddition, 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, generaland unallocated components.  The specificcomponent relates to loans that are classified as either doubtful, substandardor special mention.  For such loans thatare also classified as impaired, an allowance is established when thediscounted cash flows (or collateral value or observable market price) of theimpaired 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

 

13

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management’s estimate of probablelosses.  The unallocated component of theallowance reflects the margin of imprecision inherent in the underlyingassumptions used in the methodologies for estimating specific and generallosses in the portfolio.

 

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

 
| ** **                                                                                                 | ** ** | **March 31**               | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                                 | ** ** | **2006**                   | ** ** | **2005** | ** ** |
| ** **                                                                                                 | ** ** | **(Dollars in Thousands)** | ** ** |
| Nonaccrual loans                                                                                           |       | $                          | 119        |   | $ | 12 |   |
| Loans  contractually past due ninety days or more as to interest or principal  payments and still accruing |       | 25                         |       | 100 |   |
| Restructured  loans                                                                                        |       | —                     |       | — |   |
| Potential  problem loans                                                                                   |       | —                     |       | — |   |
| Interest income  that would have been recorded on non-accrual and restructured loans under  original terms |       | —                     |       | — |   |
| Interest income  that was recorded on nonaccrual and restructured loans                                    |       | —                     |       | — |   |
|                                                                                                            |            |                            |            |  |  |  |  |

 

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.

 

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.

 

14

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

 
| ** **                                                                     | ** ** | **Three Months Ended  March 31**           | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                     | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| ** **                                                                     | ** ** | **(Dollars in Thousands )** | ** ** |
|                                                                           |       |                                       |       |   |   |
| Average amount  of loans outstanding                                           |       | $                                          | 171,120    |   | $ | 140,207 |   |
| Balance of  allowance for loan losses at beginning of period                   |       | $                                          | 1,917      |   | $ | 1,471 |   |
| Loans charged  off:                                                            |       |                                       |       |   |   |
| Commercial and  financial                                                      |       | —                                     |       | — |   |
| Real estate  mortgage                                                          |       | —                                     |       | — |   |
| Installment                                                                    |       | (5                                         | )          | (4 | ) |
|                                                                           |       | (5                                         | )          | (4 | ) |
| Loans recovered:                                                               |       |                                       |       |   |   |
| Commercial and  financial                                                      |       | —                                     |       | — |   |
| Real estate  mortgage                                                          |       | —                                     |       | — |   |
| Installment                                                                    |       | 1                                          |       | — |   |
|                                                                           |       | 1                                          |       | — |   |
| Net charge-offs                                                                |       | (4                                         | )          | (4 | ) |
| Additions to  allowance charged to operating expense during period             |       | 45                                         |       | 160 |   |
| Balance of  allowance for loan losses at end of period                         |       | $                                          | 1,958      |   | $ | 1,627 |   |
| Ratio of net  loans charged off during the period to average loans outstanding |       | 0.00                                       | %          | 0.00 | % |

 

**Liquidity and Capital Resources**

 

Liquidity management involves the matching of the 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 thoseneeds.  The Company strives to maintainan adequate liquidity 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, 2006 the Company had no federal funds purchased.

 

The liquidity and capital resources of the Company are monitored dailyby management, and monthly by the Company’s Board-authorized Asset andLiability Management Committee, and on a periodic basis by state and federalregulatory authorities.  As determinedunder guidelines established by these regulatory authorities, the Company’sliquidity ratios at March 31, 2006were considered satisfactory.  At thatdate, the Company’s short-term investments and available federal funding wereadequate to cover any reasonably anticipated immediate need for funds.  At March31, 2006, the Company had unused available federal fund lines of $11,200,000and unused Federal Home Loan Bank borrowing capacity of approximately $21,490,000.

 

15

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The consolidated financial statements, as of March 31, 2006, evidenced an increased liquidity position.  Cash and due from banks, interest-bearingdeposits in banks and federal funds sold totaled $38,443,790 as of March 31, 2006 as compared to $15,791,422as of December 31, 2005.  Total cash and duefrom banks amounted to $2,766,426 representing 1.11% of total assets.

 

Asour loan demand has continued to increase, we have relied upon the use ofbrokered deposits as a funding source. Total brokered deposits amounted to $79.7 million as of March 31, 2006, which is a $126,000decrease since December 31, 2005.  Thesedeposits are readily obtainable at rates not significantly different from ratesthat we pay on deposits in our local market. The Company’s ability to maintain and expand its deposit base andborrowing capabilities is a source of liquidity.  For the three-month period ended March 31, 2006, total depositsincreased from $174.3 million at December 31, 2005 to $199.6 million at March 31, 2006.  Management is committed to maintainingcapital at a level sufficient to protect depositors, provide for reasonablegrowth, and fully comply with all regulatory requirements.  The table below illustrates the Company’s andthe Bank’s regulatory capital ratios at March31, 2006.

 
| ** **                  | ** ** | **Company** | ** ** | **Bank** | ** ** | **Minimum  Regulatory  Requirement** | ** ** |
|-----------------------------|------------|-------------|------------|----------|------------|--------------------------------------|------------|
|                        |       |        |       |     |       |                                 |       |
| Leverage capital  ratios    |       | 11.42       | %          | 11.41    | %          | 4.00                                 | %          |
| Risk-based  capital ratios: |       |        |       |     |       |                                 |       |
| Tier I capital              |       | 13.33       | %          | 13.32    | %          | 4.00                                 | %          |
| Total capital               |       | 14.33       | %          | 14.32    | %          | 8.00                                 | %          |

 

**Off-Balance Sheet Risk**

 

We are a party to financial instruments withoff-balance sheet risk in the normal course of business to meet the financingneeds of our customers.  These financialinstruments include commitments to extend credit and standby letters ofcredit.  Such commitments involve, tovarying degrees, elements of credit risk and interest rate risk in excess ofthe amount recognized 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.

 

16

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A summary of our commitments is as follows:

 
| ** **                    | ** ** | **March 31  2006** | ** ** |
|-------------------------------|------------|--------------------|------------|
|                          |       |               |       |
| Commitments to  extend credit |       | $                  | 41,233,000 |   |
| Letters of  credit            |       | 726,000            |       |
|                          |       | $                  | 41,959,000 |   |
|                               |            |                    |            |  |  |

 

Commitments to extend credit are agreements tolend to a customer as long as there is no violation of any conditionestablished in the contract.  Since manyof the commitments are expected to expire without being drawn upon, the totalcommitment amounts do not necessarily represent future cash requirements.  The amount of collateral obtained, if deemednecessary by us upon extension of credit, is based on our credit evaluation ofthe customer.

 

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

 

**Financial Condition**

 

Our total assets grew by 12.19% for the first threemonths of 2006.  Deposit growth of approximately$25.2 million and additional FHLB borrowings of $1.0 million were used to fundnet loan growth of approximately $.7 million with the remainder being primarilyinvested in securities or maintained in cash and due from banks and federalfunds sold.  The increase in depositsincluded approximately $12 million from one customer relationship.  A majority of the deposits were withdrawnfrom the bank shortly after quarter end. Loan demand continues to be strong in our primary market area of HenryCounty, Georgia and surrounding counties even though there appears to beminimum overall net growth for the quarter. Several large loans paid off during the quarter which contributed to ourminimal net loan growth.  Our loan to availablefunds ratio, adjusting for the $12 million deposit relationship discussedabove, has remained steady since December 31, 2005, holding in the 80-87%range.

 

Stockholders’ equity has increased by $623,381due to net income of $652,561 less unrealized losses on securitiesavailable-for-sale, net of tax, of $61,105, less unrealized losses onderivatives, net or tax, of $25,802, less cash paid for partial shares owned inpayout of the 10% stock dividend of $362 and including recognition of sharebased payments transactions as required by SFAS123(R) ofapproximately $58,089.  We have notidentified any permanent impairment in the securities portfolio, and no losswill be recognized in our income statement if those securities with unrealizedlosses are held to maturity.

 

The Company opened its Stockbridge branchin January 2006 and is currently branching into another location in Henry County. The Company has contractual obligations for approximately $758,000 of additionalconstruction costs in this additional branch.

 

17

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**Results of Operations****For The Three Months EndedMarch 31, 2006 and 2005**

 

Following is a summary of our operationsfor the periods indicated.

 
| ** **                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------|------------|-----------------------------------|------------|
| ** **                 | ** ** | **2006**                          | ** ** | **2005** | ** ** |
| ** **                 | ** ** | **(Dollars in Thousands)**        | ** ** |
|                       |       |                              |       |   |   |
| Interest income            |       | $                                 | 4,065      |   | $ | 2,751 |   |
| Interest expense           |       | (1,818                            | )          | (1,026 | ) |
| Net interest  income       |       | 2,247                             |       | 1,725 |   |
| Provision for  loan losses |       | (45                               | )          | (160 | ) |
| Other income               |       | 74                                |       | 66 |   |
| Other expense              |       | (1,245                            | )          | (779 | ) |
| Pretax income              |       | 1,031                             |       | 852 |   |
| Income tax  expense        |       | (378                              | )          | (311 | ) |
| Net income                 |       | $                                 | 653        |   | $ | 541 |   |

 

Net Interest Income

 

Our net interest income increased approximately$522,000 for the first quarter of 2006 as compared to the same period in 2005.  Our net interest margin increased to 4.10%during the first three months of 2006 as compared to 3.88% for the first threemonths of 2005. The increase in net interest margin is due to the increase involume of interest-earning assets and the increase in yields in our floatingrate assets.   Our cost of funds increasedto 3.86% for the first three months of 2006 as compared to 2.86% for the first threemonths of 2005.

 

Noninterest Income

 

Noninterest income increasedapproximately $7,000 for the first quarter of 2006 as compared to the sameperiod in 2005.  The increase in thefirst quarter of 2006 consists of $8,000 increase in service charges on depositaccounts due to bank growth, a $1,000 increase in gain on sale of assets, and a$2,000 decrease in other income.  Thedecrease in other income was due to approximately $4,500 for the Discover/Pulsereorganization that was received in March 2005.

 

Noninterest Expenses

 

Noninterest expenses increasedapproximately $466,000 for the first quarter of 2006. This increase consists ofan increase of $217,000 in salaries and employee benefits, $98,000 in equipmentand occupancy, and $151,000 in other operating expenses.   Theincrease in salaries and employee benefits represents normal increases in salaries,an increase in the number of full time equivalent employees and the expense ofstock options of $58,089 as required by SFAS 123(R).  Equipment and occupancy expenses haveincreased due to the need for additional equipment for employees and for the newbranch and the operations center.  The increases in other operatingexpenses are due primarily to our overall

 

18

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growth. In 2005, the company signed anoperating lease agreement for approximately $70,000 a year in lease expense toprovide space for an operations center.

 

Income Taxes

 

We have recorded a provision for incometaxes of $377,658 for the three months ended March 31, 2006 as compared to $311,334for the same period in 2005. The increase in income tax expense is directlyrelated to the increase in income before taxes of $177,832 for the three monthsended March 31, 2006 as compared to the same period in 2005.  The effective tax rate for 2006 and 2005 was36.7% and 36.5%, respectively.

 

Regulatory Matters

 

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

 

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

 

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**ITEM 3.  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 Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures are effective for gathering, analyzing anddisclosing the information that we are required to disclose in the reports wefile under the Securities Exchange Act of 1934, within the time periodsspecified in the SEC’s rules and forms. Our Chief Executive Officer and Chief Financial Officer also concludedthat our disclosure controls and procedures are effective in timely alertingthem to material information relating to our Company required to be included inour periodic SEC filings.  In connectionwith the new rules, we are in the process of further reviewing and documentingour disclosure 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, 2006, 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 financialreporting, and there have been no corrective actions with respect tosignificant deficiencies or material weaknesses.

 

The design of any system of controls andprocedures is based in part upon certain assumptions about the likelihood offuture events.  There can be no assurancethat any design will succeed in achieving its stated goals under all potentialfuture conditions.

 

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

 

None

 

**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 of theExchange Act, the registrant caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

 
|         | FIRSTBANK FINANCIAL SERVICES, INC.           |
|--------------|----------------------------------------------|
|         | (Registrant)                                 |
|         |                                         |
|         |                                         |
| May 12, 2006 |                                         | /s/  J. Randall  Dixon |
| Date         |                                         | J. Randall Dixon, President and C.E.O. |
|         | (Principal Executive Officer)                |
|         |                                         |
| May 12, 2006 |                                         | /s/  Lisa J.  Maxwell |
| Date         |                                         | Lisa J. Maxwell, C.F.O. |
|         | (Principal Financial and Accounting Officer) |

 

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