**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-QSB**
| **x**                                                                                                                                                                                                                                                                                                                                                                                                        | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                   | ** **                                                                                    |
| **For the quarterly period ended  September 30, 2006**                                                                                                                                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                                                                                                                                                                                         |
| **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,former address and former fiscal year, if changed since last report)

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for the past90 days.  Yes** **x  No o

Check whether theregistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o  No x

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

Transitional SmallBusiness Disclosure Format  Yes o  No x

 

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**FIRSTBANK FINANCIAL SERVICES, INC.**

**TABLE OFCONTENTS**
| PART I.  | FINANCIAL INFORMATION                                                                                                                                                  |   |
|----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|     |                                                                                                                                                                   |   |
| Item     | 1. Consolidated Financial  Statements                                                                                                                                  |   |
|     |                                                                                                                                                                   |   |
|     | Consolidated Balance  Sheet (unaudited) as of September 30, 2006                                                                                                       |   |
|     |                                                                                                                                                                   |   |
|     | Consolidated  Statements of Income (unaudited) for the three months ended September 30, 2006 and 2005 and nine months ended September 30, 2006 and 2005                |   |
|     |                                                                                                                                                                   |   |
|     | Consolidated  Statements of Comprehensive Income (unaudited) for the three months ended  September 30, 2006 and 2005 and nine months ended September 30, 2006 and 2005 |   |
|     |                                                                                                                                                                   |   |
|     | Consolidated  Statements of Cash Flows (unaudited) for the nine months ended September 30, 2006 and 2005                                                               |   |
|     |                                                                                                                                                                   |   |
|     | Notes to  Consolidated Financial Statements                                                                                                                            |   |
|     |                                                                                                                                                                   |   |
| Item     | 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                         |   |
|     |                                                                                                                                                                   |   |
| Item     | 3. Controls and  Procedures                                                                                                                                            |   |
|     |                                                                                                                                                                   |   |
| PART II. | OTHER  INFORMATION                                                                                                                                                     |   |
|     |                                                                                                                                                                   |   |
|     | SIGNATURES                                                                                                                                                             |   |
|     |                                                                                                                                                                   |   |
|     | CERTIFICATION                                                                                                                                                          |   |
|     |                                                                                                                                                                   |   |
|     | SECTION 906  CERTIFICATION                                                                                                                                             |   |

                                                                                                                                                                                                

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**PART I - FINANCIAL INFORMATION**

**ITEM 1.     Financial Statements**

**FIRSTBANK FINANCIAL SERVICES, INC.**

**AND SUBSIDIARY**

**CONSOLIDATED BALANCE SHEET**

**SEPTEMBER30, 2006**

**(Unaudited)**
| **Assets**                                                                                                | ** ** | ** **  | ** **  |
|-----------------------------------------------------------------------------------------------------------|------------|-------------|-------------|
|                                                                                                      |       |        |        |
| Cash and due from banks                                                                                   |       | $           | 3,235,650   |   |
| Interest-bearing  deposits in banks                                                                       |       | 704,147     |        |
| Federal funds sold                                                                                        |       | 12,541,000  |        |
| Securities  available-for-sale, at fair value                                                             |       | 37,773,008  |        |
| Restricted equity  securities, at cost                                                                    |       | 1,765,556   |        |
|                                                                                                      |       |        |        |
| Loans, net of unearned  income                                                                            |       | 197,040,015 |        |
| Less allowance for loan  losses                                                                           |       | 2,283,188   |        |
| Loans, net                                                                                                |       | 194,756,827 |        |
|                                                                                                      |       |        |        |
| Premises and equipment                                                                                    |       | 5,809,198   |        |
| Other assets                                                                                              |       | 3,600,829   |        |
| ** **                                                                                                | ** ** | ** **  | ** **  |
| **Total  assets**                                                                                         |       | $           | 260,186,215 |   |
|                                                                                                      |       |        |        |
| **Liabilities  and Stockholders’ Equity**                                                            | ** ** | ** **  | ** **  |
|                                                                                                      |       |        |        |
| Deposits                                                                                                  |       |        |        |
| Noninterest-bearing                                                                                       |       | $           | 16,414,892  |   |
| Interest-bearing                                                                                          |       | 192,725,991 |        |
| Total deposits                                                                                            |       | 209,140,883 |        |
| Other borrowings                                                                                          |       | 22,000,000  |        |
| Other liabilities                                                                                         |       | 2,093,191   |        |
| Total  liabilities                                                                                        |       | 233,234,074 |        |
|                                                                                                      |       |        |        |
| Commitments and  contingencies                                                                            |       |        |        |
|                                                                                                      |       |        |        |
| Stockholders’ equity                                                                                 |       |        |        |
| Preferred stock,  no par value per share, 2,000,000 shares authorized; -0- shares issued and  outstanding |       | —      |        |
| Common stock,  par value $5; 10,000,000 shares authorized; 2,359,753 shares issued and  outstanding       |       | 11,798,765  |        |
| Surplus                                                                                                   |       | 13,905,787  |        |
| Retained  earnings                                                                                        |       | 1,729,877   |        |
| Accumulated  other comprehensive loss                                                                     |       | (482,288    | )           |
| Total  stockholders’ equity                                                                          |       | 26,952,141  |        |
|                                                                                                      |       |        |        |
| **Total liabilities and  stockholders’ equity**                                                      |       | $           | 260,186,215 |   |

 

See notes to consolidatedfinancial statements.

1

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**FIRSTBANK FINANCIAL SERVICES, INC.**

**AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF INCOME**

**THREE MONTHSENDED SEPTEMBER 30, 2006 AND 2005 AND**

**NINEMONTHS ENDED SEPTEMBER 30, 2006 AND 2005**

**(Unaudited)**
| ** **                                               | ** ** | **Three Months Ended** | ** **    | **Nine Months Ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|---------------|---------------------------------|------------|
| ** **                                               | ** ** | **September 30,**           | ** **    | **September 30,**          | ** ** |
| ** **                                               | ** ** | **2006**                         | ** **    | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                     |       |                             |          |                            |       |   |   |   |   |
| **Interest  income**                                     | ** ** | ** **                       | ** **    | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loans, including fees                                    | ** ** | **$**                            | **4,425,084** | ** **                      | **$**      | 3,146,064 | ** ** | **$** | **11,832,237** |   | $ | 8,382,310 |   |
| Taxable securities                                       | ** ** | **390,513**                      |          | 293,936                         | ** ** | **1,083,691** |   | 834,656 |   |
| Tax-free securities                                      | ** ** | **36,926**                       |          | 27,621                          | ** ** | **96,583** |   | 76,509 |   |
| Deposits in banks                                        | ** ** | **6,629**                        |          | 20,636                          | ** ** | **40,356** |   | 207,959 |   |
| Federal funds sold                                       | ** ** | **158,894**                      |          | 86,451                          | ** ** | **461,720** |   | 46,458 |   |
| **Total interest income**                                | ** ** | **5,018,046**                    |          | 3,574,708                       | ** ** | **13,514,587** |   | 9,547,892 |   |
|                                                     |       |                             |          |                            |       |   |   |   |   |
| **Interest  expense**                                    | ** ** | ** **                       | ** **    | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deposits                                                 | ** ** | **2,259,133**                    |          | 1,260,040                       | ** ** | **5,691,164** |   | 3,216,207 |   |
| Federal funds purchased                                  | ** ** | **—**                       |          | —                          | ** ** | **—** |   | 18 |   |
| Other borrowings                                         | ** ** | **234,864**                      |          | 225,851                         | ** ** | **672,719** |   | 579,272 |   |
| **Total interest expense**                               | ** ** | **2,493,997**                    |          | 1,485,891                       | ** ** | **6,363,883** |   | 3,795,497 |   |
|                                                     |       |                             |          |                            |       |   |   |   |   |
| **Net interest income**                                  | ** ** | **2,524,049**                    |          | 2,088,817                       | ** ** | **7,150,704** |   | 5,752,395 |   |
| **Provision  for loan losses**                           | ** ** | **190,000**                      |          | 165,000                         | ** ** | **370,000** |   | 509,615 |   |
| **Net interest income after provision for loan  losses** | ** ** | **2,334,049**                    | ** **    | 1,923,817                       | ** ** | **6,780,704** | ** ** | 5,242,780 | ** ** |
| ** **                                               | ** ** | ** **                       | ** **    | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other  income**                                        | ** ** | ** **                       | ** **    | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service charges on deposit accounts                      | ** ** | **55,760**                       |          | 58,771                          | ** ** | **163,245** |   | 156,754 |   |
| Gain on sale of assets                                   | ** ** | **(7,718**                       | **)**         | —                          | ** ** | **(6,293** | **)** | 2,519 |   |
| Other operating income                                   | ** ** | **23,032**                       |          | 17,764                          | ** ** | **66,811** |   | 53,661 |   |
| **Total other income**                                   | ** ** | **71,074**                       |          | 76,535                          | ** ** | **223,763** |   | 212,934 |   |
| ** **                                               | ** ** | ** **                       | ** **    | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other  expenses**                                      | ** ** | ** **                       | ** **    | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries and employee benefits                           | ** ** | **710,654**                      |          | 555,553                         | ** ** | **2,170,609** |   | 1,516,392 |   |
| Equipment and occupancy expenses                         | ** ** | **175,001**                      |          | 127,183                         | ** ** | **481,345** |   | 265,014 |   |
| Other operating expenses                                 | ** ** | **392,954**                      |          | 341,896                         | ** ** | **1,217,746** |   | 903,607 |   |
| **Total other expenses**                                 | ** ** | **1,278,609**                    |          | 1,024,632                       | ** ** | **3,869,700** |   | 2,685,013 |   |
|                                                     |       |                             |          |                            |       |   |   |   |   |
| **Income before income taxes**                           | ** ** | **1,126,514**                    |          | 975,720                         | ** ** | **3,134,767** |   | 2,770,701 |   |
| ** **                                               | ** ** | ** **                       | ** **    | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Income  tax expense**                                  | ** ** | **419,287**                      |          | 347,171                         | ** ** | **1,172,218** |   | 994,964 |   |
| ** **                                               | ** ** | ** **                       | ** **    | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net income**                                           | ** ** | **$**                            | **707,227**   | ** **                      | **$**      | 628,549 | ** ** | **$** | **1,962,549** | ** ** | **$** | 1,775,737 | ** ** |
|                                                     |       |                             |          |                            |       | ** ** |   |   |   |
| **Basic  earnings per share**                            | ** ** | **$**                            | **0.30**      | ** **                      | **$**      | 0.27 | ** ** | **$** | **0.83** | ** ** | **$** | 0.75 | ** ** |
|                                                     |       |                             |          |                            |       | ** ** |   |   |   |
| **Diluted  earnings per share**                          | ** ** | **$**                            | **0.28**      | ** **                      | **$**      | 0.25 | ** ** | **$** | **0.78** | ** ** | **$** | 0.72 | ** ** |
|                                                     |       |                             |          |                            |       | ** ** |   |   |   |
| **Cash  dividends per share**                            | ** ** | **$**                            | **—**    | ** **                      | **$**      | — | ** ** | **$** | **—** |   | $ | — |   |

 

See notes toconsolidated financial statements.

2

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**FIRSTBANK FINANCIAL SERVICES, INC.**

**AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME**

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

**NINEMONTHS ENDED SEPTEMBER 30, 2006 AND 2005**

**(Unaudited)**
| ** **                                                       | ** ** | **Three Months Ended** | ** **    | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|---------------|---------------------------------|------------|
| ** **                                                       | ** ** | **September 30,**           | ** **    | **September 30,**          | ** ** |
| ** **                                                       | ** ** | **2006**                         | ** **    | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                             |       |                             |          |                            |       |   |   |   |   |
| Net income                                                       | ** ** | $                                | **707,227**   |                            | $          | 628,549 | ** ** | **$** | **1,962,549** |   | $ | 1,775,737 |   |
|                                                             |       |                             |          |                            |       |   |   |   |   |
| Other comprehensive  income (loss):                              |       |                             |          |                            |       |   |   |   |   |
| ** **                                                       | ** ** | ** **                       | ** **    | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Unrealized gains (losses) on securities available  for sale:     |       |                             |          |                            |       |   |   |   |   |
|                                                             |       |                             |          |                            |       |   |   |   |   |
| Net unrealized gains (losses) arising during period,  net of tax | ** ** | **499,527**                      |          | (206,982                        | )          | **83,971** |   | (266,950 | ) |
|                                                             | ** ** | **499,527**                      |          | (206,982                        | )          | **83,971** |   | (266,950 | ) |
|                                                             |       |                             |          |                            |       |   |   |   |   |
| Unrealized losses on interest rate floor:                        |       |                             |          |                            |       |   |   |   |   |
|                                                             |       |                             |          |                            |       |   |   |   |   |
| Net unrealized losses arising during period, net of  tax         | ** ** | **(26,353**                      | **)**         | —                          | ** ** | **(89,691** | **)** | — |   |
|                                                             | ** ** | **(26,353**                      | **)**         | —                          | ** ** | **(89,691** | **)** | — |   |
|                                                             |       |                             |          |                            |       |   |   |   |   |
| Other  comprehensive income (loss)                               | ** ** | **473,174**                      |          | (206,982                        | )          | **(5,720** | **)** | (266,950 | ) |
|                                                             |       |                             |          |                            |       |   |   |   |   |
| Comprehensive income                                             | ** ** | $                                | **1,180,401** |                            | $          | 421,567 | ** ** | **$** | **1,956,829** |   | $ | 1,508,787 |   |

 

See notes to consolidated financial statements.

3

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**FIRSTBANK FINANCIAL SERVICES, INC.**

**AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**NINEMONTHS ENDED SEPTEMBER 30, 2006 AND 2005**

**(Unaudited)**
| ** **                                                                         | ** ** | **2006**        | ** **    | **2005**    | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------|---------------|-------------|------------|
| **OPERATING  ACTIVITIES**                                                          | ** ** | ** **      | ** **    | ** **  | ** ** |
| Net income                                                                         | ** ** | **$**           | **1,962,549** |        | $          | 1,775,737 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |            |          |        |       |
| (Gain) loss on sale of assets                                                      | ** ** | **6,293**       |          | (2,519      | )          |
| Depreciation and amortization                                                      | ** ** | **252,455**     |          | 141,938     |       |
| Stock compensation expense                                                         | ** ** | **212,209**     |          | —      |       |
| Provision for loan losses                                                          | ** ** | **370,000**     |          | 509,615     |       |
| Increase in accrued interest receivable                                            | ** ** | **(324,759**    | **)**         | (588,863    | )          |
| Increase in accrued interest payable                                               | ** ** | **688,509**     |          | 358,312     |       |
| Net other operating activities                                                     | ** ** | **52,028**      |          | (79,403     | )          |
|                                                                               |       |            |          |        |       |
| Net cash provided by operating activities                                          | ** ** | **3,219,284**   |          | 2,114,817   |       |
|                                                                               |       |            |          |        |       |
| **INVESTING  ACTIVITIES**                                                          | ** ** | ** **      | ** **    | ** **  | ** ** |
| Net decrease in interest-bearing deposits in banks                                 | ** ** | **85,832**      |          | 644,993     |       |
| Purchases of securities available-for-sale                                         | ** ** | **(8,599,686**  | **)**         | (8,729,590  | )          |
| Proceeds from maturities of securities  available-for-sale                         | ** ** | **2,040,967**   |          | 4,214,243   |       |
| Purchases of restricted equity securities                                          | ** ** | **(181,300**    | **)**         | (403,700    | )          |
| Net (increase) decrease in federal funds sold                                      | ** ** | **1,224,000**   |          | (5,327,000  | )          |
| Net increase in loans                                                              | ** ** | **(28,369,580** | **)**         | (27,815,375 | )          |
| Proceeds from sale of assets                                                       | ** ** | **3,491**       |          | 14,019      |       |
| Purchase of interest rate floor                                                    | ** ** | **(298,500**    | **)**         | —      |       |
| Purchase of premises, equipment and software                                       | ** ** | **(1,929,814**  | **)**         | (1,290,138  | )          |
|                                                                               |       |            |          |        |       |
| Net cash used in investing activities                                              | ** ** | **(36,024,590** | **)**         | (38,692,548 | )          |
|                                                                               |       |            |          |        |       |
| **FINANCING  ACTIVITIES**                                                          | ** ** | ** **      | ** **    | ** **  | ** ** |
| Net increase in deposits                                                           | ** ** | **34,804,875**  |          | 34,040,398  |       |
| Net increase in borrowings                                                         | ** ** | **—**      |          | 5,000,000   |       |
| Purchase of fractional shares                                                      | ** ** | **(362**        | **)**         | —      |       |
|                                                                               |       |            |          |        |       |
| Net cash provided by financing activities                                          | ** ** | **34,804,513**  |          | 39,040,398  |       |
|                                                                               |       |            |          |        |       |
| Net increase in  cash and due from banks                                           | ** ** | **1,999,207**   |          | 2,462,667   |       |
|                                                                               |       |            |          |        |       |
| Cash and due  from banks at beginning of period                                    | ** ** | **1,236,443**   |          | 1,136,424   |       |
|                                                                               |       |            |          |        |       |
| Cash and due  from banks at end of period                                          | ** ** | **$**           | **3,235,650** |        | $          | 3,599,091 |   |
|                                                                               |       |            |          |        |       |
| Supplemental  schedule of noncash investing and financing activities -             |       | ** **      | ** **    |        |       |
| Change in accumulated other comprehensive loss                                     |       | **$**           | **(5,720**    | **)**       | $          | (266,950 | ) |
|                                                                               |       |            |          |        |       |
| Supplemental  disclosures of cash flow information -                               |       |            |          |        |       |
|                                                                               |       |            |          |        |       |
| Cash paid during the period for interest                                           | ** ** | **$**           | **5,675,374** |        | $          | 3,437,185 |   |
| Cash paid during  the period for income taxes                                      | ** ** | **$**           | **1,341,035** |        | $          | 1,129,723 |   |

 

See notes to consolidatedfinancial statements.

4

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

FirstBank Financial Services, Inc. (the “Company”)is a bank holding company whose business is conducted by its wholly-ownedcommercial bank, First Bank of Henry County (the “Bank”).  The Bank is located in McDonough, HenryCounty, Georgia, with a branch in Stockbridge and another branch also inMcDonough known as our South Point location.

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

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

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

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

**2.       StockCompensation Plans**

At September 30, 2006, the Company has twostock-based employee/director compensation plans which are more fully describedin Note 7 of the consolidated financial statements in the Annual Report on Form10-KSB for the year ended December 31, 2005. Prior to January 1, 2006, the Company accounted for those plans underthe recognition and measurement provisions of APB Opinion No. 25, *Accounting for Stock Issued to Employees*, and relatedInterpretations, as permitted by FASB Statement No. 123, *Accountingfor Stock-Based Compensation.* No stock-based employee/director compensation cost was recognized in theStatement of Income for the year ended December 31, 2005, nor in the three andnine month periods ended September 30, 2005, as all options and warrantsgranted under those plans had an exercise price equal to the market value ofthe underlying common stock on the date of grant.  Effective January 1, 2006, the Companyadopted the fair value recognition provisions of FASB Statement No. 123 (R), *Share-Based Payment*, using themodified-prospective-transition method. Under that transition method, compensation cost recognized in the firstnine months and second quarter of 2006 includes: (a) compensation cost for allshare-based payments granted prior to, but not yet vested as of December 31,2005, based on the grant date fair value estimated in accordance with theoriginal provisions of Statement 123, and (b) compensation

5

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cost for all share-based payments grantedsubsequent to December 31, 2005, based on the grant date fair value estimatedin accordance with the provisions of Statement 123(R).  Results for prior periods have not beenrestated.

As a result of adopting Statement 123(R) onJanuary 1, 2006, the Company’s income before income taxes for the three andnine months ended September 30, 2006 was $33,439 and $212,209 lower,respectively, than if we had continued to account for share-based compensationunder Opinion 25.

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

The following table illustrates the effect onnet income and earnings per share if the Company had applied the fair valuerecognition provisions of Statement 123 to options and warrants granted underthe Company’s stock option and warrant plans for the three and nine monthsended September 30, 2005.
| ** **                                                                                                              | ** ** | **Three Months**  | ** ** | **Nine Months**   | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                              | ** ** | **Ended**              | ** ** | **Ended**              | ** ** |
| ** **                                                                                                              | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                                                              | ** ** | **2005**               | ** ** | **2005**               | ** ** |
|                                                                                                                    |       |                   |       |                   |       |
| Net income, as  reported                                                                                                |       | $                      | 628,549    |                   | $          | 1,775,737 |   |
|                                                                                                                    |       |                   |       |                   |       |
| Deduct:  Total  stock-based employee compensation expense determined under fair value based  method for all awards |       | —                 |       | (288,625               | )          |
|                                                                                                                    |       |                   |       |                   |       |
| Pro forma net  income                                                                                                   |       | $                      | 628,549    |                   | $          | 1,487,112 |   |
|                                                                                                                    |       |                   |       |                   |       |
| Earnings per  share:                                                                                                    |       |                   |       |                   |       |
| Basic - as reported                                                                                                     |       | $                      | 0.27       |                   | $          | 0.75 |   |
| Basic - pro forma                                                                                                       |       | $                      | 0.27       |                   | $          | 0.63 |   |
| Diluted - as reported                                                                                                   |       | $                      | 0.25       |                   | $          | 0.72 |   |
| Diluted - pro  forma                                                                                                    |       | $                      | 0.25       |                   | $          | 0.60 |   |

 

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

6

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**2.       StockCompensation Plans**
|                                                                      | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                           | ** ** | **September 30,**          | ** ** |
| ** **                                                           | ** ** | **2006**                        | ** ** |
| Risk-free  interest rate                                             | ** ** | **4.41%**                       | ** ** |
| Expected life of  the options                                        | ** ** | **5 – 6 years**            | ** ** |
| Expected  dividends (as a percentage of the fair value of the stock) | ** ** | **0%**                          | ** ** |
| Expected  volatility                                                 | ** ** | **21.00% - 21.39%**             | ** ** |
| Weighted-average grant  date fair value                              | ** ** | **$5.08**                       | ** ** |

 

At September 30, 2006, therewas $202,854 of unrecognized compensation cost related to stock-based payments,which is expected to be recognized over a weighted-average period of 1.33years.

A summary of the status of the fixed stockoption and warrant plans at September 30, 2006 and changes during the three andnine month periods ended September 30, 2006 follows:
|                                    | ** ** | **Three Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **September 30, 2006** | ** ** |
| ** **                         | ** ** | **Number**                       | ** ** | **Weighted-  average  Exercise Price** | ** ** | **Weighted-  average  Remaining  Contractual  Life** | ** ** |
| ** **                         | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Under option,  beginning of period |       | 390,641                          |       | $ | 11.06 |   |   |   |
| Granted                            |       | —                           |       | — |   |   |   |
| Exercised                          |       | —                           |       | — |   |   |   |
| Forfeited                          |       | —                           |       | — |   |   |   |
| Under option,  end of period       |       | 390,641                          |       | $ | 11.06 |   | 6.30 years |   |
|                               |       |                             |       |   |   |   |   |
| Exercisable at end of  period      |       | 345,564                          |       | $ | 10.79 |   | 6.20 years |   |

 
|                                    | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **September 30, 2006** | ** ** |
| ** **                         | ** ** | **Number**                       | ** ** | **Weighted-  average  Exercise  Price** | ** ** |
| ** **                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Under option,  beginning of period |       | 357,179                          |       | $ | 10.52 |   |
| Granted                            |       | 33,462                           |       | 16.84 |   |
| Exercised                          |       | —                           |       | — |   |
| Forfeited                          |       | —                           |       | — |   |
| Under option,  end of period       |       | 390,641                          |       | $ | 11.06 |   |
|                               |       |                             |       |   |   |
| Exercisable at  end of period      |       | 345,564                          |       | $ | 10.79 |   |
|                               |       |                             |       |   |   |

 

7

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Shares available for future stock optiongrants to employees under existing plans was 125,039 at September 30,2006.  At September 30, 2006, theaggregate intrinsic value of options and warrants outstanding was $2,229,641,and the aggregate intrinsic value of options and warrants exercisable was$2,068,551.  Total intrinsic value ofoptions and warrants exercised was $-0- for the three and nine months endedSeptember 30, 2006.

A summary of the status of the nonvestedoptions and warrants in the fixed stock option and warrant plans at September30, 2006 and changes during the three and nine month periods ended September30, 2006 follows:
| ** **                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**                     | ** ** |
|---------------------------------|------------|----------------------------------|------------|-----------------------------------------------------|------------|
| ** **                      | ** ** | **September 30, 2006** | ** ** | **September 30, 2006**                    | ** ** |
| ** **                      | ** ** | **Number**                       | ** ** | **Weighted-  average  Grant-Date  Fair Value** | ** ** | **Number** | ** ** | **Weighted-  average  Grant-Date  Fair Value** | ** ** |
|                            |       |                             |       |                                                |       |   |   |   |   |
| Nonvested,  beginning of period |       | 45,077                           |       | $                                                   | 4.62       |   | 41,147 |   | $ | 4.94 |   |
| Granted                         |       | —                           |       | —                                              |       | 33,462 |   | 5.17 |   |
| Vested                          |       | —                           |       | —                                              |       | (29,532 | ) | 5.68 |   |
| Forfeited                       |       | —                           |       | —                                              |       | — |   | — |   |
| Nonvested, end  of period       |       | 45,077                           |       | $                                                   | 4.62       |   | 45,077 |   | $ | 4.62 |   |

 

Afurther summary of the options and warrants outstanding at September 30, 2006follows:
| ** **          | ** ** | **Options and Warrants  Outstanding** | ** ** | **Options and Warrants  Exercisable** | ** ** |
|---------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **          | ** ** | ** **                            | ** ** | **Weighted-**                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **          | ** ** | ** **                            | ** ** | **Average**                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **          | ** ** | ** **                            | ** ** | **Remaining**                         | ** ** | **Weighted-** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| **Range of**        | ** ** | ** **                            | ** ** | **Contractual**                       | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Exercise Prices** | ** ** | **Number**                            | ** ** | **Life**                              | ** ** | **Exercise Price** | ** ** | **Number** | ** ** | **Exercise Price** | ** ** |
| $9.09               |       | 287,430                               |       | 5.23 years                            |       | $ | 9.09 |   | 267,263 |   | $ | 9.09 |   |
| 16.42               |       | 69,749                                |       | 9.25 years                            |       | 16.42 |   | 57,484 |   | 16.42 |   |
| 16.50 - 17.25       |       | 28,462                                |       | 9.34 years                            |       | 16.60 |   | 15,817 |   | 16.63 |   |
| 18.25               |       | 5,000                                 |       | 9.58 years                            |       | 18.25 |   | 5,000 |   | 18.25 |   |
|                |       | 390,641                               |       | 6.30 years                            |       | 11.06 |   | 345,564 |   | 10.79 |   |
|                     |            |                                       |            |                                       |            |  |  |  |  |  |  |  |  |

 

8

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**3.       EarningsPer Common Share**

The Company is required to report earnings per commonshare with and without the dilutive effects of potential common stock issuancesfrom instruments such as options, convertible securities and warrants on theface of the statements of income. Earnings per common share are based on the weighted average number 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 September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                                                                       | ** ** | **2006**                                                 | ** ** | **2005** | ** ** |
| Basic earnings  per share:                                                                                                       |       |                                                     |       |   |   |
| Weighted average common shares outstanding                                                                                       |       | 2,359,753                                                |       | 2,359,753 |   |
|                                                                                                                             |       |                                                     |       |   |   |
| Net income                                                                                                                       |       | $                                                        | 707,227    |   | $ | 628,549 |   |
|                                                                                                                             |       |                                                     |       |   |   |
| Basic earnings per share                                                                                                         |       | $                                                        | 0.30       |   | $ | 0.27 |   |
|                                                                                                                             |       |                                                     |       |   |   |
| Diluted earnings  per share:                                                                                                     |       |                                                     |       |   |   |
| Weighted average common shares outstanding                                                                                       |       | 2,359,753                                                |       | 2,359,753 |   |
| Net effect of the assumed exercise of stock options  based on the treasury stock method using average market prices for the year |       | 135,078                                                  |       | 107,787 |   |
| Total weighted average common shares and common  stock equivalents outstanding                                                   |       | 2,494,831                                                |       | 2,467,540 |   |
|                                                                                                                             |       |                                                     |       |   |   |
| Net income                                                                                                                       |       | $                                                        | 707,227    |   | $ | 628,549 |   |
|                                                                                                                             |       |                                                     |       |   |   |
| Diluted earnings  per share                                                                                                      |       | $                                                        | 0.28       |   | $ | 0.25 |   |

 

9

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|                                                                                                                                  | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                                                       | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| Basic earnings  per share:                                                                                                       |       |                                                    |       |   |   |
| Weighted average common shares outstanding                                                                                       |       | 2,359,753                                               |       | 2,359,753 |   |
|                                                                                                                             |       |                                                    |       |   |   |
| Net income                                                                                                                       |       | $                                                       | 1,962,549  |   | $ | 1,775,737 |   |
|                                                                                                                             |       |                                                    |       |   |   |
| Basic earnings per share                                                                                                         |       | $                                                       | 0.83       |   | $ | 0.75 |   |
|                                                                                                                             |       |                                                    |       |   |   |
| 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 |       | 140,556                                                 |       | 107,787 |   |
| Total weighted average common shares and common  stock equivalents outstanding                                                   |       | 2,500,309                                               |       | 2,467,540 |   |
|                                                                                                                             |       |                                                    |       |   |   |
| Net income                                                                                                                       |       | $                                                       | 1,962,549  |   | $ | 1,775,737 |   |
|                                                                                                                             |       |                                                    |       |   |   |
| Diluted earnings  per share                                                                                                      |       | $                                                       | 0.78       |   | $ | 0.72 |   |

 

**4.**       **Recent Accounting Pronouncements**

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

In February 2006, the 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*

10

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*ofStatement 133 to Beneficial Interests in Securitized Financial**Assets*, which provides such beneficialinterests are not subject to SFAS No. 133. SFAS No. 155 amends SFAS No. 140,

*Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities - a Replacement of FASB Statement No. 125*, byeliminating the restriction on passive derivative instruments that a qualifyingspecial-purpose entity may hold. SFAS No. 155 is effective for all financialinstruments acquired or issued after the beginning of an entity’s first fiscalyear that begins after September 15, 2006. The Company does not expect theadoption of this statement to have a material impact on our financialcondition, results of operations or cash flows.

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, the Company declared aten percent stock dividend payable to shareholders of record on November 30,2005 to be distributed on January 31, 2006. Earnings per common shares for the periods ended September 30, 2005 andall stock option and warrant information has been retroactively adjusted forthe 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 September 30, 2006 at a fair value of$74,642.  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 a 8.50%strike.  The fair value of theseinstruments at September 30, 2006 is $435,000 and is reflected in otherassets.  The instruments are more fullydescribed in the Company’s annual report dated December 31, 2005.

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**Item 2.    Management’s Discussion and Analysis ofFinancial 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 materially differentfrom future results, performance or achievements expressed or implied by suchforward-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**

On February 1, 2005,pursuant to an Agreement and Plan of Shares Exchange approved by theshareholders of First Bank of Henry County (the “Bank”), the Company acquiredeach share of the Bank’s common stock in exchange for one share of the Company’sstock. The Company now serves as a holding company for the Bank.

Through its subsidiary bank, the Company performsbanking services customary for full service banks of similar size andcharacter.  The Company offers personaland business checking accounts, interest-bearing checking accounts, savingsaccounts 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**

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 items affectingthe 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 statements.  Our significant accounting policies aredescribed in the footnotes to the financial statements for FirstBank FinancialServices, Inc. at December 31, 2005 as filed in the Company’s annual report onForm 10-KSB, which was filed with the Securities and Exchange Commission.

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 theallowance for loan losses is a critical accounting policy that requires themost significant judgments and estimates used in preparation of ourconsolidated financial statements.  Referto the portion of this discussion that addresses asset quality for a descriptionof our processes and methodology for determining our allowance for loan losses.

13

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**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 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 third quarter and first nine months of 2006, respectively of$190,000 and $370,000 as compared to the same periods in 2005 of $165,000 and$509,615, respectively.  The amountsprovided are due primarily to our assessment of inherent risk in the loanportfolio. The allowance for loan losses as a percentage of total loans was1.16% at September 30, 2006 ascompared to 1.14% at December 31, 2005. Based upon our evaluation of the loan portfolio, we believe the allowancefor loan losses to be adequate to absorb losses on existing loans that maybecome 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 in thebalance of the loan portfolio, based on an evaluation of the collectibility ofexisting 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, future adjustmentsto the allowance may be necessary if there are significant changes in economicconditions.  In addition, regulatoryagencies, as an integral part of their examination process, periodically reviewthe Company’s allowance for loan losses, and may require the Company to makeadditions to the allowance based on their judgment about information availableto them at the time 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 that 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

14

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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, pastdue and restructured loans is as follows:
|                                                                                                            | ** ** | **September 30,**               | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                                                                                                 | ** ** | **(Dollars in Thousands)** | ** ** |
| Nonaccrual loans                                                                                           |       | $                                    | 432        |   | $ | 345 |   |
| Loans  contractually past due ninety days or more as to interest or principal  payments and still accruing |       | —                               |       | 15 |   |
| Restructured  loans                                                                                        |       | —                               |       | — |   |
| Potential  problem loans                                                                                   |       | —                               |       | — |   |
| Interest income  that would have been recorded on non-accrual and restructured loans under  original terms |       | 6                                    |       | — |   |
| Interest income that  was recorded on nonaccrual and restructured loans                                    |       | —                               |       | — |   |
|                                                                                                            |            |                                      |            |  |  |  |  |

 

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

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

15

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Information regarding certain loans andallowance for loan loss data is as follows:
|                                                                                | ** ** | **Nine Months Ended**      | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                     | ** ** | **September 30,**               | ** ** |
| ** **                                                                     | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                                                                     | ** ** | **(Dollars in Thousands)** | ** ** |
|                                                                           |       |                                 |       |   |   |
| Average amount  of loans outstanding                                           |       | $                                    | 180,914    |   | $ | 153,826 |   |
| Balance of  allowance for loan losses at beginning of period                   |       | $                                    | 1,917      |   | $ | 1,471 |   |
| Loans charged  off:                                                            |       |                                 |       |   |   |
| Commercial and financial                                                       |       | —                               |       | — |   |
| Real estate mortgage                                                           |       | —                               |       | — |   |
| Installment                                                                    |       | (11                                  | )          | (16 | ) |
|                                                                           |       | (11                                  | )          | (16 | ) |
| Loans recovered:                                                               |       |                                 |       |   |   |
| Commercial and financial                                                       |       | 6                                    |       | — |   |
| Real estate mortgage                                                           |       | —                               |       | — |   |
| Installment                                                                    |       | 1                                    |       | 3 |   |
|                                                                           |       | 7                                    |       | 3 |   |
| Net charge-offs                                                                |       | (4                                   | )          | (13 | ) |
| Additions to  allowance charged to operating expense during period             |       | 370                                  |       | 510 |   |
| Balance of  allowance for loan losses at end of period                         |       | $                                    | 2,283      |   | $ | 1,968 |   |
| Ratio of net loans  charged off during the period to average loans outstanding |       | 0.00                                 | %          | 0.01 | % |

 

**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 September30, 2006 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 September 30, 2006 were consideredsatisfactory.  At that date, the Company’sshort-term investments and available federal funding were adequate to cover anyreasonably anticipated immediate need for funds.  At September30, 2006, the Company had unused available federal fund lines of$9,500,000 and unused Federal Home Loan Bank borrowing capacity ofapproximately $28,270,000.  The Companyis aware of no events or trends likely to result in a material change inliquidity.

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The consolidatedfinancial statements, as of September30, 2006, evidenced an increased liquidity position.  Cash and due from banks, interest-bearingdeposits in banks and federal funds sold totaled $16,480,797 as of September 30, 2006 as compared to $15,791,422as of December 31, 2005.  Total cash anddue from banks amounted to $3,235,650 representing 1.24% of total assets.

As our loan demand has continued to increase, wehave relied upon the use of brokered deposits as a funding source.  Total brokered deposits amounted to $90.1million as of September 30, 2006,which is a $10.2 million increase since December 31, 2005.  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 nine-month periodended September 30, 2006, totaldeposits increased from $174.3 million at December 31, 2005 to $209.1 millionat September 30, 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 September30, 2006.  
|                             | ** ** | ** **  | ** ** | ** ** | ** ** | **Minimum**     | ** ** |
|-----------------------------|------------|-------------|------------|------------|------------|-----------------|------------|
| ** **                  | ** ** | ** **  | ** ** | ** ** | ** ** | **Regulatory**  | ** ** |
| ** **                  | ** ** | **Company** | ** ** | **Bank**   | ** ** | **Requirement** | ** ** |
|                        |       |        |       |       |       |            |       |
| Leverage capital ratios     |       | 10.74       | %          | 10.73      | %          | 4.00            | %          |
| Risk-based capital  ratios: |       |        |       |       |       |            |       |
| Tier I capital              |       | 12.33       | %          | 12.31      | %          | 4.00            | %          |
| Total capital               |       | 13.36       | %          | 13.34      | %          | 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 creditloss in the event of nonperformance by the other party to the financialinstrument for commitments to extend credit and standby letters of credit is representedby the contractual amount of those instruments. We use the same credit policies in making commitments and conditionalobligations as we do for on-balance sheet instruments.  A summary of our commitments is as follows:
|                               | ** ** | **September 30,** | ** ** |
|-------------------------------|------------|------------------------|------------|
| ** **                    | ** ** | **2006**               | ** ** |
|                          |       |                   |       |
| Commitments to extend  credit |       | $                      | 45,221,516 |   |
| Letters of credit             |       | 1,616,517              |       |
|                          |       | $                      | 46,838,033 |   |

 

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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 grewby 17% for the first nine months of 2006. Deposit growth of approximately $34.8 million was used to fund net loangrowth of approximately $28.3 million with the remainder being primarilyinvested in securities or maintained in cash and due from banks.  Loan demand continues to be strong in ourprimary market area of Henry County, Georgia and surrounding counties.  The loan to available funds ratio atSeptember 30, 2006 was 85.24% compared to 85.91% at December 31, 2005.

Stockholders’ equityhas increased by $2,168,676 due to net income of $1,962,549 plus unrealizedgains on securities available-for-sale, net of tax, of $83,971, less unrealizedlosses on derivatives, net of tax, of $89,691, less cash paid for partialshares owned in payout of the 10% stock dividend of $362 and includingrecognition of share based payments transactions as required by SFAS123(R) ofapproximately $212,209.  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. Its South Point location in McDonough opened on October 2,2006.  The Company has contractual obligations for approximately $100,000of additional construction costs for the South Point branch.  The Company has also paid $15,000 in earnestmoney to review a branch location in Clayton County.

**JuniorSubordinated Debentures**

On October 4, 2006,FirstBank Financial Capital Trust 1 (“FFCT”), a wholly owned subsidiary of theCompany closed a pooled private offering of 8,000 Trust Preferred Securitieswith a liquidation amount of $1,000 per security. The proceeds of the offeringwere loaned to the Company in exchange for junior subordinated debentures withterms similar to the Trust Preferred Securities. The sole assets of FFCT arethe junior subordinated debentures of the Company and payments thereunder. Thejunior subordinated debentures and the back-up obligations, in the aggregate,constitute a full and unconditional guarantee by the Company of the obligationsof FFCT under the Trust Preferred Securities. Distributions on the TrustPreferred Securities are payable quarterly at the annual rate of three monthLIBOR plus 167 basis points and are included in interest expense in theconsolidated financial statements. These securities are considered Tier 1capital (with certain limitations applicable) under current regulatoryguidelines. As of October 31, 2006, the outstanding principal balance ofthe junior subordinated debentures was $8,248,000.

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The junior subordinateddebentures are subject to mandatory redemption, in whole or in part, uponrepayment of the Trust Preferred Securities at maturity or their earlierredemption at the liquidation amount. Subject to the Company having receivedprior approval of the Federal Reserve, if then required, the Trust PreferredSecurities are redeemable prior to the maturity date of October 7, 2036 at theoption of the Company on or after October 7, 2011 at par, before October 7,2011 at a premium, or upon the occurrence of specific events defined within thetrust indenture. The Company has the option to defer distributions on the TrustPreferred Securities from time to time for a period not to exceed 20consecutive quarterly periods.

In accordance with FASBInterpretation No. 46, FirstBank Financial Capital Trust I is notconsolidated with the Company. Accordingly, the Company does not report thesecurities issued by FirstBank Financial Capital Trust I as liabilities, andinstead reports as liabilities the junior subordinated debentures issued by theCompany and held by FirstBank Financial Capital Trust I, as these are no longereliminated in consolidation. The Trust Preferred Securities are recorded asjunior subordinated debentures on the balance sheets, but subject to certainlimitations qualify for Tier 1 capital for regulatory capital purposes.

**Results of Operations****For The Three Months EndedSeptember 30, 2006 and 2005 and for the Nine Months Ended September 30, 2006and 2005**

Following is a summary of our operationsfor the periods indicated.
|                            | ** ** | **Three Months Ended**     | ** ** |
|----------------------------|------------|--------------------------------------|------------|
| ** **                 | ** ** | **September 30,**               | ** ** |
| ** **                 | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                 | ** ** | **(Dollars in Thousands)** | ** ** |
|                       |       |                                 |       |   |   |
| Interest income            |       | $                                    | 5,018      |   | $ | 3,575 |   |
| Interest expense           |       | (2,494                               | )          | (1,486 | ) |
| Net interest income        |       | 2,524                                |       | 2,089 |   |
| Provision for loan  losses |       | (190                                 | )          | (165 | ) |
| Other income               |       | 71                                   |       | 77 |   |
| Other expense              |       | (1,279                               | )          | (1,025 | ) |
| Pretax income              |       | 1,126                                |       | 976 |   |
| Income tax expense         |       | (419                                 | )          | (347 | ) |
| Net income                 |       | $                                    | 707        |   | $ | 629 |   |

 

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|                            | ** ** | **Nine Months Ended**      | ** ** |
|----------------------------|------------|--------------------------------------|------------|
| ** **                 | ** ** | **September 30,**               | ** ** |
| ** **                 | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                 | ** ** | **(Dollars in Thousands)** | ** ** |
|                       |       |                                 |       |   |   |
| Interest income            |       | $                                    | 13,515     |   | $ | 9,548 |   |
| Interest expense           |       | (6,364                               | )          | (3,796 | ) |
| Net interest income        |       | 7,151                                |       | 5,752 |   |
| Provision for loan  losses |       | (370                                 | )          | (510 | ) |
| Other income               |       | 224                                  |       | 214 |   |
| Other expense              |       | (3,870                               | )          | (2,685 | ) |
| Pretax income              |       | 3,135                                |       | 2,771 |   |
| Income tax expense         |       | (1,172                               | )          | (995 | ) |
| Net income                 |       | $                                    | 1,963      |   | $ | 1,776 |   |

 

Net Interest Income

Our net interestincome increased approximately $435,000 and $1,399,000 for the three and ninemonth periods ended September 30, 2006, respectively, as compared to the sameperiods in 2005.  Our net interest marginincreased to 4.11% during the first nine months of 2006 as compared to 3.92%for the first nine months of 2005. The increase in net interest income is dueprimarily to the increased volume of interest- earning assets and the increasein yields in our floating rate assets.  Our cost of funds increased to 4.26% for the first nine months of 2006as compared to 3.06% for the first nine months of 2005.

Other Income

Other income decreased approximately$6,000 for the three month period and increased $10,000 for the nine monthperiod ended September 30, 2006, respectively, as compared to the same periodsin 2005.  Year-to-date service charges ondeposit accounts associated with deposit growth have increased by $6,000.  Other fee income has increased approximately$13,000 when compared to the nine months ended September 30, 2005 due to theincrease in the volume of transactions resulting from our growth.  Gains and losses from sales of assets, otherreal estate and securities available-for-sale have decreased approximately$9,000 as compared to the nine months ended September 30, 2005.

Other Expenses

Other expenses increased approximately$254,000 and $1,185,000 for the three and nine month periods ended September30, 2006, respectively, compared to the same periods in 2005.  The increases in 2006 consist of increases of$155,000 and $654,000 in salaries and employee benefits, $48,000 and $217,000in equipment and occupancy and $51,000 and $314,000 in other operating for thethree and nine months ended September 30, 2006, respectively as compared to thesame periods in 2005.   The increase insalaries and employee benefits represents normal increases in salaries, anincrease in the number of full time equivalent employees and the expense ofstock options of $212,209 as required by SFAS 123(R).

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Equipment and occupancy expenses haveincreased due the need for additional equipment for employees and for theexpenses related to our new branches and our operations center.  In 2005, the Company signed an operatinglease for approximately $70,000 a year in lease expense to provide space for anoperations center.  The increases inother operating expenses are due primarily to our overall growth.

Income Taxes

We have recorded a provision for income taxesof $419,287 and $1,172,218 for the three and nine months ended September 30,2006, respectively, as compared to $347,171 and $994,964 for the same periodsin 2005.  The increase in our income taxprovision was $72,116 and $177,254 for the three and nine months endedSeptember 30, 2006, respectively, compared to the same periods in 2005. Theeffective tax rate for the three and nine months ended September 30, 2006,respectively, was 37.2% and 37.4% as compared to 35.6% and 35.9% for the sameperiods in 2005.  The increase in oureffective tax rate is due primarily to the permanent non-deductibility ofincentive stock options that have been expensed in the amount of $124,631.  We have also increased our municipal bondportfolio in an effort to offset the Company’s tax liability.

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.We are 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 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 the SEC’srules and forms.  Our Chief ExecutiveOfficer and Chief Financial Officer also concluded that our disclosure controlsand procedures are effective in timely alerting them to material informationrelating to our Company required to be included in our periodic SECfilings.  In connection with the newrules, we are in the process of further reviewing and documenting ourdisclosure controls and procedures, including our internal controls andprocedures for financial reporting, and may from time to time make changesdesigned to enhance their effectiveness and to ensure that our systems evolvewith our business.

There have been no changes in the Company’sinternal control over financial reporting during the nine months endedSeptember 30, 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 and procedures is based in part uponcertain assumptions about the likelihood of future events.  There can be no assurance that any designwill succeed in achieving its stated goals under all potential futureconditions, regardless of how remote.

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**ITEM 4.****    ****SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS**

None.

**ITEM 6.****    ****EXHIBITS**
| 31.1   | Certification of the Chief Executive Officer,  Pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as  amended.                                                        |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                  |
| 31.2   | Certification of the Chief Financial Officer,  Pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as  amended.                                                        |
|   |                                                                                                                                                                                  |
| 32     | Certification of the Chief Executive Officer and  Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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**SIGNATURES**

In accordance with the requirements ofthe Exchange Act, the registrant caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.
|              | FIRSTBANK FINANCIAL  SERVICES, INC. |
|-------------------|-------------------------------------|
|              | (Registrant)                        |
|              |                                |
|              |                                |
| November 10, 2006 |                                | /s/ J. Randall  Dixon |
| Date              |                                | J. Randall  Dixon, President and C.E.O. |
|              |                                | (Principal  Executive Officer) |
|              |                                |   |
|              |                                |   |
| November 10, 2006 |                                | /s/ Lisa J.  Maxwell |
| Date              |                                | Lisa J. Maxwell,  C.F.O. |
|              |                                | (Principal  Financial and Accounting Officer) |

 

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