**UNITED STATES********SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-QSB**

 

**ý****  ****QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For thequarterly period ended**                         **March 31, 2005**

 

**o****  ****TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For thetransition period from****                                  to                        **

 

**CommissionFile Number: 000-51147**

 

**FirstBank Financial Services, Inc.**

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

 
| **Georgia**                                                                         | ** ** | **20-2198785**       |
|-------------------------------------------------------------------------------------|------------|----------------------|
| (State or other  jurisdiction of                                                    |       | (IRS Employer        |
| incorporation or  organization)                                                     |       | Identification  No.) |
|                                                                                |       |                 |
| **120 Keys Ferry Street McDonough, Georgia 30253**                                  |
| (Address of principal executive offices)                                            |
|                                                                                |       |                 |
| **(678)  583-2265**                                                                 |
| (Issuer’s  telephone number)                                                   |
|                                                                                |       |                 |
| **N/A**                                                                             |
| (Former name,  former address and former fiscal year, if changed since last report) |

 

Check whether the issuer (1) filedall reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days.                      Yes  ý    No  o

 

State the number ofshares outstanding of each of the issuer’s classes of common equity, as of May 132005: 2,145,250 shares, $5.00 par value per share.

 

Transitional SmallBusiness Disclosure Format              Yes     o                No     ý

 

 

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**FIRSTBANK FINANCIAL SERVICES, INC.**

 

**TABLE OFCONTENTS**

 
|                                                                                                |                                                                                                                              | **Page** |
|-----------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------|----------|
| PART I.                                                                                        | FINANCIAL INFORMATION                                                                                                             |     |
|                                                                                                |                                                                                                                              |
| Item 1. Consolidated  financial statements                                                          |                                                                                                                              |
| 1                                                                                                   |                                                                                                                              |
| ** **                                                                                          | Consolidated Balance Sheets  (unaudited) as of March 31, 2005  and December 31, 2004                                    | 1        |
|                                                                                                |                                                                                                                              |
|                                                                                                | Consolidated  Statements of Income and Comprehensive Income (unaudited) for the three  months ended March 31, 2005  and 2004 | 2        |
|                                                                                                |                                                                                                                              |
|                                                                                                | Consolidated  Statements of Cash Flows (unaudited) for the three months ended  March 31, 2005 and 2004                       | 3        |
|                                                                                                |                                                                                                                              |
|                                                                                                | Notes to  Consolidated Financial Statements                                                                                       | 4-6      |
|                                                                                                |                                                                                                                              |
| Item 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 7-14                                                                                                                              |
|                                                                                                |                                                                                                                              |
| Item 3. Controls and  Procedures                                                                    | 15                                                                                                                                |
|                                                                                                |                                                                                                                              |
| PART II.                                                                                       | OTHER INFORMATION                                                                                                                 | 16       |
|                                                                                                |                                                                                                                              |
|                                                                                                | SIGNATURES                                                                                                                        | 17       |
|                                                                                                |                                                                                                                              |
|                                                                                                | CERTIFICATION                                                                                                                     | 18-19    |
|                                                                                                |                                                                                                                              |
|                                                                                                | SECTION 906 CERTIFICATION                                                                                                    | 20       |

 

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**PART I****. FINANCIAL INFORMATION**

 

**Item 1****. Financial Statements**

 

**FIRSTBANKFINANCIAL SERVICES, INC.**

**ConsolidatedBalance Sheets**

**(unaudited)**

**March 31,2005 and December 31, 2004**

 
| ** **                                                                                                             | ** ** | **March 31,** | ** **  | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|--------------------|-------------|-----------------------|------------|
| ** **                                                                                                             | ** ** | **2005**           | ** **  | **2004**              | ** ** |
| ASSETS                                                                                                                 |       |               |        |                  |       |
|                                                                                                                   |       |               |        |                  |       |
| Cash and due  from banks                                                                                               |       | $                  | 2,378,793   |                  | $          | 1,136,424 |   |
| Interest-bearing  deposits in banks                                                                                    |       | 1,787,344          |        | 1,961,793             |       |
| Federal funds  sold                                                                                                    |       | 8,855,000          |        | 9,558,000             |       |
| Securities  available-for-sale (at fair value)                                                                         |       | 26,989,842         |        | 26,086,812            |       |
| Restricted  equity securities, at cost                                                                                 |       | 1,719,256          |        | 1,405,556             |       |
| Loans, less  allowance for loan losses of $1,627,426 and $1,471,333, respectively                                      |       | 145,883,830        |        | 132,309,442           |       |
| Accrued interest  receivable                                                                                           |       | 1,079,750          |        | 820,885               |       |
| Premises and  equipment, net                                                                                           |       | 2,780,644          |        | 2,736,587             |       |
| Other assets                                                                                                           |       | 1,119,994          |        | 807,366               |       |
| Total assets                                                                                                           |       | $                  | 192,594,453 |                  | $          | 176,822,865 |   |
|                                                                                                                   |       |               |        |                  |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                             |       |               |        |                  |       |
|                                                                                                                   |       |               |        |                  |       |
| Deposits:                                                                                                              |       |               |        |                  |       |
| Noninterest-bearing                                                                                                    |       | $                  | 9,422,729   |                  | $          | 8,546,778 |   |
| Interest-bearing                                                                                                       |       | 134,179,034        |        | 122,816,562           |       |
| Total deposits                                                                                                         |       | 143,601,763        |        | 131,363,340           |       |
| Accrued interest  payable                                                                                              |       | 622,139            |        | 634,402               |       |
| Federal Home  Loan Bank borrowings                                                                                     |       | 25,000,000         |        | 22,000,000            |       |
| Other  liabilities                                                                                                     |       | 488,466            |        | 116,617               |       |
| Total  liabilities                                                                                                     |       | 169,712,368        |        | 154,114,359           |       |
|                                                                                                                   |       |               |        |                  |       |
| Stockholders’  equity:                                                                                            |       |               |        |                  |       |
| Preferred stock,  no par value per share, 2,000,000 shares  authorized; -0- shares issued and  outstanding        |       | —             |        | —                |       |
| Common stock,  par value $5.00 per share, 10,000,000 shares  authorized; 2,145,250 shares issued and  outstanding |       | 10,726,250         |        | 10,726,250            |       |
| Capital surplus                                                                                                        |       | 11,235,374         |        | 11,235,374            |       |
| Retained  earnings                                                                                                     |       | 1,295,295          |        | 754,241               |       |
| Accumulated  other comprehensive loss                                                                                  |       | (374,834           | )           | (7,359                | )          |
| Total  stockholders’ equity                                                                                       |       | 22,882,085         |        | 22,708,506            |       |
| Total  liabilities and stockholders’ equity                                                                       |       | $                  | 192,594,453 |                  | $          | 176,822,865 |   |

 

See notes toconsolidated financial statements.

 

1

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**FIRSTBANKFINANCIAL SERVICES, INC.**

 

**ConsolidatedStatements of Income and Comprehensive Income**

**(unaudited)**

**Forthe Three Months Ended March 31, 2005 and 2004**

 
| ** **                                                                                          | ** ** | **March 31, 2005** | ** ** | **March 31, 2004** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| Interest and  dividend income:                                                                      |       |                    |       |                    |       |
| Loans, including  fees                                                                              |       | $                       | 2,404,081  |                    | $          | 1,272,029 |   |
| Taxable  securities                                                                                 |       | 259,074                 |       | 147,455                 |       |
| Tax-free securities                                                                                 |       | 22,795                  |       | —                  |       |
| Federal funds  sold                                                                                 |       | 50,218                  |       | 23,444                  |       |
| Deposits in  banks                                                                                  |       | 14,582                  |       | 9,798                   |       |
| Total interest  and dividend income                                                                 |       | 2,750,750               |       | 1,452,726               |       |
|                                                                                                |       |                    |       |                    |       |
| Interest  expense:                                                                                  |       |                    |       |                    |       |
| Deposits                                                                                            |       | 868,951                 |       | 433,650                 |       |
| Federal Home  Loan Bank borrowings                                                                  |       | 156,696                 |       | 35,873                  |       |
| Total interest  expense                                                                             |       | 1,025,647               |       | 469,523                 |       |
|                                                                                                |       |                    |       |                    |       |
| Net interest  income                                                                                |       | 1,725,103               |       | 983,203                 |       |
|                                                                                                |       |                    |       |                    |       |
| Provision for  loan losses                                                                          |       | 159,615                 |       | 240,000                 |       |
|                                                                                                |       |                    |       |                    |       |
| Net interest  income after  provision for loan losses                                          |       | 1,565,488               |       | 743,203                 |       |
|                                                                                                |       |                    |       |                    |       |
| Noninterest  income:                                                                                |       |                    |       |                    |       |
| Service charges  on deposit accounts                                                                |       | 45,801                  |       | 36,242                  |       |
| Gain on sales of  securities available-for-sale                                                     |       | —                  |       | 13,054                  |       |
| Other                                                                                               |       | 20,563                  |       | 9,975                   |       |
| Total  noninterest income                                                                           |       | 66,364                  |       | 59,271                  |       |
|                                                                                                |       |                    |       |                    |       |
| Noninterest  expense:                                                                               |       |                    |       |                    |       |
| Salaries and  employee benefits                                                                     |       | 455,425                 |       | 269,575                 |       |
| Equipment and  occupancy                                                                            |       | 59,547                  |       | 50,600                  |       |
| Other operating                                                                                     |       | 264,493                 |       | 146,671                 |       |
| Total  noninterest expense                                                                          |       | 779,465                 |       | 466,846                 |       |
|                                                                                                |       |                    |       |                    |       |
| Income before  provision for income taxes                                                           |       | 852,387                 |       | 335,628                 |       |
| Provision for  income taxes                                                                         |       | 311,334                 |       | —                  |       |
|                                                                                                |       |                    |       |                    |       |
| Net income                                                                                          |       | 541,053                 |       | 335,628                 |       |
| Other  comprehensive income:                                                                        |       |                    |       |                    |       |
| Unrealized  (losses) gains on securities available-for-sale  arising during period, net of tax |       | (367,475                | )          | 138,291                 |       |
| Comprehensive  income                                                                               |       | $                       | 173,578    |                    | $          | 473,919 |   |
|                                                                                                |       |                    |       |                    |       |
| Income per  share:                                                                                  |       |                    |       |                    |       |
|                                                                                                | Basic      |                    | $          | 0.25                    |       | $ | 0.18 |   |
|                                                                                                | Diluted    |                    | $          | 0.25                    |       | $ | 0.18 |   |
| Cash dividends  per share:                                                                          |       | $                       | —     |                    | $          | — |   |

 

See notes toconsolidated financial statements.

 

2

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**FIRSTBANKFINANCIAL SERVICES, INC.**

 

**ConsolidatedStatements of Cash Flows**

**(unaudited)**

**Forthe Three Months Ended March 31, 2005 and 2004**

 
| ** **                                                                                                                    | ** ** | **March 31,** | ** ** | **March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                                                                                    | ** ** | **2005**           | ** ** | **2004**           | ** ** |
| Cash flow from operating activities:                                                                                          |       |               |       |               |       |
| Net income                                                                                                                    |       | $                  | 541,053    |               | $          | 335,628 |   |
| Adjustments to  reconcile net income to net cash  provided  by operating activities:                                     |       |               |       |               |       |
| Depreciation                                                                                                                  |       | 37,824             |       | 33,508             |       |
| Provision for  loan losses                                                                                                    |       | 159,615            |       | 240,000            |       |
| Gain on sales of  securities available-for-sale                                                                               |       | —             |       | (13,054            | )          |
| Increase in  accrued interest receivable                                                                                      |       | (258,865           | )          | (180,146           | )          |
| (Decrease)  increase in accrued interest payable                                                                              |       | (12,263            | )          | 33,209             |       |
| Net other  operating activities                                                                                               |       | 242,239            |       | (54,381            | )          |
|                                                                                                                          |       |               |       |               |       |
| Net cash flow  provided by operating activities                                                                               |       | 709,603            |       | 394,764            |       |
|                                                                                                                          |       |               |       |               |       |
| Cash flow from  investing activities:                                                                                         |       |               |       |               |       |
| Net increase in  loans                                                                                                        |       | (13,734,002        | )          | (19,931,598        | )          |
| Net decrease  (increase) in interest bearing deposits in banks                                                                |       | 174,449            |       | (855,104           | )          |
| Net decrease  (increase) in federal funds sold                                                                                |       | 703,000            |       | (12,432,000        | )          |
| Purchases of  restricted equity securities                                                                                    |       | (313,700           | )          | (650,000           | )          |
| Purchases of  investment securities available-for-sale                                                                        |       | (3,898,056         | )          | (17,198,938        | )          |
| Proceeds from  sales of securities available-for-sale                                                                         |       | —             |       | 1,031,500          |       |
| Proceeds from maturities  of securities available-for-sale                                                                    |       | 2,438,247          |       | 2,024,185          |       |
| Purchases of  premises and equipment                                                                                          |       | (75,595            | )          | (18,543            | )          |
|                                                                                                                          |       |               |       |               |       |
| Net cash flow  used by investing activities                                                                                   |       | (14,705,657        | )          | (48,030,498        | )          |
|                                                                                                                          |       |               |       |               |       |
| Cash flow from  financing activities:                                                                                         |       |               |       |               |       |
| Net increase in  deposits                                                                                                     |       | 12,238,423         |       | 23,277,385         |       |
| Net proceeds  from sale of common stock                                                                                       |       | —             |       | 12,161,625         |       |
| Net increase in  borrowings from Federal Home Loan Bank                                                                       |       | 3,000,000          |       | 13,000,000         |       |
|                                                                                                                          |       |               |       |               |       |
| Net cash flow  provided by financing activities                                                                               |       | 15,238,423         |       | 48,439,010         |       |
|                                                                                                                          |       |               |       |               |       |
| Net increase in  cash and due from banks                                                                                      |       | 1,242,369          |       | 803,276            |       |
| Cash and due  from banks at beginning of period                                                                               |       | 1,136,424          |       | 619,622            |       |
| Cash and due  from banks at end of period                                                                                     |       | $                  | 2,378,793  |               | $          | 1,422,898 |   |
|                                                                                                                          |       |               |       |               |       |
| Supplemental  schedule of noncash investing and financing activities - Change in  accumulated other comprehensive income |       | $                  | (367,475   | )                  | $          | 138,291 |   |
|                                                                                                                          |       |               |       |               |       |
| Supplemental  disclosures of cash flow information - Cash paid for:                                                           |       |               |       |               |       |
| Interest                                                                                                                      |       | $                  | 1,037,910  |               | $          | 436,314 |   |
| Income taxes                                                                                                                  |       | $                  | 18,523     |               | $          | — |   |

 

See consolidatednotes to financial statements.

 

3

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**FIRSTBANK FINANCIAL SERVICES,INC.**

** **

**Notes to Consolidated FinancialStatements**

**(unaudited)**

 

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

 

FirstBank FinancialServices, Inc. (the “Company”) is a bank holding company whose principalactivity is the ownership and management of its wholly-owned subsidiary, FirstBank of Henry County (the “Bank”).  On February 1,2005, pursuant to an Agreement and Plan of Shares Exchange approved by the Bank’sshareholders, the Company acquired each share of the Bank’s common stock inexchange for one share of the Company’s stock. The Bank is a commercial banklocated in McDonough, Henry County, Georgia.

 

The accompanyingconsolidated financial statements are unaudited. Certain information andfootnote disclosures normally included in consolidated financial statementsprepared in accordance with generally accepted accounting principles have beencondensed or omitted pursuant to such rules and regulations.  These consolidated financial statementsshould be read in conjunction with the audited consolidated financialstatements and notes thereto included in the Bank’s annual report on Form 10-KSBfor the year ended December 31, 2004,which was filed with the Federal Deposit Insurance Corporation.

 

The financial informationincluded herein reflects all adjustments (consisting of normal recurringadjustments), which are, in the opinion of management, necessary to a fairpresentation of the Bank’s financial position and results for the interimperiod ended March 31, 2005.

 

The preparation ofconsolidated financial statements requires management to make estimates andassumptions that affect the reported amounts of assets, liabilities and incomeand expense amounts.  Actual resultscould differ from those estimates.  Theresults of operations for the three months ended March 31, 2005 are notnecessarily indicative of the results to be expected for the full year.

 

**2.****       StockCompensation Plans**

 

At March 31,2005, the Company had two stock-based employee compensation plans.  The Company accounts for these plans underthe recognition and measurement principles of APB Opinion No. 25, *Accounting for Stock Issued to Employees*, and relatedInterpretations.  No stock-based employeecompensation cost is reflected in net income, as all options granted underthose plans had an exercise price that approximates the market value of theunderlying stock on the date of grant. The following table illustrates the effect on net income and earningsper share if the Company had applied the fair value recognition provisions ofSFAS Statement No. 123, *Accounting for Stock-BasedCompensation*, to stock-based employee compensation.

 

4

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| ** **                                                                                                                                                                  | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                                                                  | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Net income, as  reported                                                                                                                                                    |       | 541,053                               |       | 335,628 |   |
| Deduct: Total  stock-based employee compensation  expense  determined under fair value based  method  for all awards, net of tax of $108,915 and $0, respectively |       | (179,710                              | )          | (259,084 | ) |
| Pro forma net  income                                                                                                                                                       |       | 361,343                               |       | 76,544 |   |
| Earnings per  share:                                                                                                                                                        |       |                                  |       |   |   |
| Basic - as  reported                                                                                                                                                        |       | $                                     | 0.25       |   | $ | 0.18 |   |
| Basic - pro  forma                                                                                                                                                          |       | $                                     | 0.17       |   | $ | 0.04 |   |
| Diluted - as  reported                                                                                                                                                      |       | $                                     | 0.25       |   | $ | 0.18 |   |
| Diluted - pro forma                                                                                                                                                         |       | $                                     | 0.17       |   | $ | 0.04 |   |

 

**3.****      ****Earnings Per Common Share**

 

The Company is required to report earnings per commonshare with and without the dilutive effects of potential common stock issuancesfrom instruments such as options, convertible securities and warrants on theface of the statements of income. Earnings per common share are based on the weighted average number 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”. Earnings per common share for the three months ended March 31, 2005 and 2004 is as follows:

 
| ** **                                  | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|
| ** **                                  | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Basic earnings  per share:                  |       |                                  |       |   |   |
| Weighted average  common shares outstanding |       | 2,145,250                             |       | 1,841,389 |   |
|                                        |       |                                  |       |   |   |
| Net income                                  |       | $                                     | 541,053    |   | $ | 335,628 |   |
|                                        |       |                                  |       |   |   |
| Basic earnings  per share                   |       | $                                     | 0.25       |   | $ | 0.18 |   |

 

5

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| ** **                                                                                                                                     | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                                     | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Diluted earnings  per share:                                                                                                                   |       |                                  |       |   |   |
| Weighted average  common shares outstanding                                                                                                    |       | 2,145,250                             |       | 1,841,389 |   |
| Net effect of  the assumed exercise of stock  options  based on the treasury stock method  using  average market prices for the year |       | 23,755                                |       | 12,605 |   |
| Total weighted  average common shares and  common stock  equivalents outstanding                                                          |       | 2,169,005                             |       | 1,853,994 |   |
|                                                                                                                                           |       |                                  |       |   |   |
| Net income                                                                                                                                     |       | $                                     | 541,053    |   | $ | 335,628 |   |
|                                                                                                                                           |       |                                  |       |   |   |
| Diluted earnings  per share                                                                                                                    |       | $                                     | 0.25       |   | $ | 0.18 |   |

 

**4.****      ****Recent AccountingPronouncements**

 

InDecember 2004, the Financial Accounting Standards Board (FASB) issued FASBStatement No. 123 (revised 2004) (FAS 123(R)), *Share-Based Payment*. FAS 123(R) establishes standards for the accounting for transactions inwhich an entity exchanges its equity instruments for goods or services.  It also addresses transactions in which anentity incurs liabilities in exchange for goods or services that are based onthe fair value of the entity’s equity instruments or that may be settled by theissuance of those equity instruments. FAS 123(R) focuses primarily on accounting for transactions in which anentity obtains employee services in share-based payment transactions such asthe issuance of stock options in exchange for employee services.  FAS 123(R) does not change the accountingguidance for share-based payment transactions with parties other than employeesprovided in FAS 123 as originally issued and EITF Issue No. 96-18, “Accountingfor Equity Instruments That Are Issued to Other Than Employees for Acquiring,or in Conjunction with Selling, Goods or Services.”  FAS 123(R) does not address the accountingfor employee share ownership plans, which are subject to AICPA SOP 93-6, *Employers’ Accounting for Employee Stock OwnershipPlans*.  Public entities thatfile as small business issuers will be required to apply FAS 123(R) in thefirst interim or annual reporting period that begins after December 15,2005.

 

InMarch 2005, the Securities and Exchange Commission’s (SEC or Commission)Office of the Chief Accountant and its Division of Corporation Financeannounced the release of Staff Accounting Bulletin No. 107 (SAB 107), “ShareBased Payment”, in response to frequently asked questions and to provide theSEC staff’s views regarding the application of FAS 123(R).  SAB 107 provides interpretive guidancerelated to the interaction between FAS 123(R) and certain SEC rules andregulations; addresses the staff’s views on the subject of valuation ofshare-based payment transactions for public companies; and reiterates theimportance of disclosures related to share-based payment transactions in theconsolidated financial statements filed with the SEC.

 

6

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** **

**Item 2****. Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

The following our discussion and analysisof certain significant factors which have affected the financial position andoperating results of FirstBank Financial Services, Inc. (the “Company”)during the periods included in the accompanying consolidated financialstatements.

 

**Forward Looking Statements**

 

Certain of the statements made hereinunder the caption “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” (“MD&A”) are forward-looking statements forpurposes of the Securities Act of 1933 (the “Securities Act”) and theSecurities Exchange Act of 1934 (the “Exchange Act”), and as such may involveknown and unknown risks, uncertainties and other factors which may cause ouractual results, performance or achievements to be materially different fromfuture results, performance or achievements expressed or implied by suchforward-looking statements.  Such forwardlooking statements include statements using the words such as “will,” “anticipate,”“should,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “may,”or “intend,” or other similar words and expressions of the future.  Our actual results may differ significantlyfrom the results we discuss in these forward-looking statements.

 

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

•      the effects of future economic conditions;

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

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

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

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

•      changes occurring in business conditions andinflation;

•      changes in monetary and tax policies;

•      changes in technology;

•      the level of allowance for loan loss;

•      the rate of delinquencies and amounts ofcharge-offs;

•      the rates of loan growth;

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

•      changes in the securities market; and

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

 

7

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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.

 

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

 

**Overview**

 

Management monitors thefinancial condition of the Company in order to protect depositors, increaseundivided profits and protect current and future earnings.  Further discussion of significant itemsaffecting the Company’s financial condition are discussed in detail below.

 

**Critical Accounting Policies**

 

We have adopted various accountingpolicies which govern the application of accounting principles generallyaccepted in the United States of America in the preparation of our consolidatedfinancial statements.  Our significantaccounting policies are described in the footnotes to the financial statementsfor First Bank of Henry County at December 31, 2004 as filed in our annualreport on Form 10-KSB.

 

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

 

We believe the allowance for loan lossesis a critical accounting policy that requires the most significant judgmentsand estimates used in preparation of our consolidated financialstatements.  Refer to the portion of thisdiscussion that addresses asset quality for a description of our processes andmethodology for determining our allowance for loan losses.

 

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**Asset Quality**

 

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

 

The provision for loan losses decreasedby $80,385 for the first quarter of 2005as compared to the same period in 2004. The amounts provided are due primarily to our assessment of inherentrisk in the loan portfolio. The allowance for loan losses as a percentage oftotal loans was 1.10% at March 31,2005 and December 31, 2004. Based upon our evaluation of the loan portfolio, we believe theallowance for loan losses to be adequate to absorb losses on existing loansthat may become uncollectible.

 

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

 

The allowance is an amount thatmanagement believes will be adequate to absorb estimated losses relating tospecifically identified loans as well as probable credit losses inherent 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, futureadjustments to the allowance may be necessary if there are significant changesin economic conditions.  In addition,regulatory agencies, as an integral part of their examination process,periodically review the Company’s allowance for loan losses, and may requirethe Company to make additions to the allowance based on their judgment aboutinformation available to 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 management’s estimate ofprobable losses.  The unallocatedcomponent of the allowance reflects the margin of imprecision inherent in theunderlying assumptions used in the methodologies for estimating specific andgeneral losses in the portfolio.

 

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

 
| ** **                                                                                                       | ** ** | **(Dollars in Thousands)** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| Nonaccrual loans                                                                                                 |       | $                          | 12         |   | $ | — |   |
| Loans  contractually past due ninety days or more as  to interest or principal payments and still  accruing |       | 100                        |       | 316 |   |
| Restructured  loans                                                                                              |       | —                     |       | — |   |
| Potential  problem loans                                                                                         |       | —                     |       | 612 |   |
| Interest income  that would have been recorded on non- accrual and restructured loans under  original terms      |       | —                     |       | — |   |
| Interest income  that was recorded on nonaccrual and  restructured  loans                                   |       | —                     |       | — |   |
|                                                                                                                  |            |                            |            |  |  |  |  |

 

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

 

It is our policy to discontinue theaccrual of interest income when, in the opinion of management, collection ofinterest becomes doubtful. We will generally discontinue the accrual ofinterest when (1) there is a significant deterioration in the financialcondition of the borrower and full repayment of principal and interest is notexpected and (2) the principal or interest is more than ninety days pastdue, 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.

 

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

 
| Balance of  allowance for loan losses at beginning of period                          |   | $      | 1,471  |   | $      | 712 |   |
|---------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|-----|--------|
| Loans charged  off:                                                                   |   |   |   |   |   |
| Commercial and  financial                                                             |   | — |   | — |   |
| Real estate  mortgage                                                                 |   | — |   | — |   |
| Installment                                                                           |   | (4     | )      | — |   |
|                                                                                  |   | (4     | )      | — |   |
| Loans recovered:                                                                      |   |   |   |   |   |
| Commercial and  financial                                                             |   | — |   | — |   |
| Real estate  mortgage                                                                 |   | — |   | — |   |
| Installment                                                                           |   | — |   | — |   |
|                                                                                  |   | — |   | — |   |
| Net charge-offs                                                                       |   | (4     | )      | — |   |
| Additions to  allowance charged to operating  expense  during period             |   | 160    |   | 240    |   |
| Balance of  allowance for loan losses at end of period                                |   | $      | 1,627  |   | $      | 952 |   |
| Ratio of net  loans charged off during the period  to  average loans outstanding |   | 0.00   | %      | 0.00   | %      |

 

**Liquidity and Capital Resources**

 

Liquidity managementinvolves the matching of the cash flow requirements of customers, who may beeither depositors desiring to withdraw funds or borrowers needing assurancethat sufficient funds will be available to meet their credit needs, and theability of the Company to meet those needs. The Company strives to maintain an adequate liquidity position bymanaging the balances and maturities of interest-earning assets andinterest-bearing liabilities so that the balance it has in short-terminvestments at any given time will adequately cover any reasonably anticipatedimmediate need for funds.  Additionally,the Company maintains relationships with correspondent banks, which couldprovide funds to them on short notice, if needed.  At March 31,2005 the Company had no federal funds purchased.

 

The liquidity and capitalresources of the Company are monitored daily by management, and monthly by theCompany’s Board-authorized Asset and Liability Management Committee, and on aperiodic basis by state and federal regulatory authorities.  As determined under guidelines established bythese regulatory authorities, the Company’s liquidity ratios at March 31, 2005 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 March 31,2005, the Company had unused available federal fund lines of $11,200,000and unused Federal Home Loan Bank borrowing capacity of approximately$7,360,000.  The Company is aware of noevents or trends likely to result in a material change in liquidity.

 

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The consolidatedfinancial statements, as of March 31,2005, evidenced an increased liquidity position.  Cash and due from banks, interest-bearingdeposits in banks and federal funds sold totaled $13,021,136 as of March 31, 2005 as compared to$12,656,217 as of December 31,2004.  Total cash and due frombanks amounted to $2,378,792 representing 1.24% of total assets.

 

Asour loan demand has continued to increase, we have increased the use ofbrokered deposits as a funding source. Total brokered deposits amounted to $70.2 million as of March 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 three-month periodended March 31, 2005, totaldeposits increased from $131.4 million at December 31, 2004 to $143.6million at March 31, 2005.  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’sregulatory capital ratios at March 31,2005.

 
| ** **                  | ** ** | ** **  | ** ** | **Minimum**     | ** ** |
|-----------------------------|------------|-------------|------------|-----------------|------------|
| ** **                  | ** ** | ** **  | ** ** | **Regulatory**  | ** ** |
| ** **                  | ** ** | **Company** | ** ** | **Requirement** | ** ** |
|                        |       |        |       |            |       |
| Leverage capital  ratios    |       | 12.64       | %          | 4.00            | %          |
| Risk-based  capital ratios: |       |        |       |            |       |
| Tier I capital              |       | 14.32       | %          | 4.00            | %          |
| Total capital               |       | 15.32       | %          | 8.00            | %          |

 

**Off-Balance Sheet Risk**

 

We are a party to financial instrumentswith off-balance sheet risk in the normal course of business to meet thefinancing needs of our customers.  Thesefinancial instruments include commitments to extend credit and standby lettersof credit.  Such commitments involve, tovarying degrees, elements of credit risk and interest rate risk in excess ofthe amount recognized in the balance sheets.

 

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

 
| ** **                    | ** ** | **March 31,** | ** ** |
|-------------------------------|------------|--------------------|------------|
| ** **                    | ** ** | **2005**           | ** ** |
|                          |       |               |       |
| Commitments to  extend credit |       | $                  | 40,847,000 |   |
| Letters of  credit            |       | 940,000            |       |
|                          |       | $                  | 41,787,000 |   |

 

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Commitments to extend credit areagreements to lend to a customer as long as there is no violation of anycondition established in the contract. Since many of the commitments 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 of credit are conditionalcommitments issued by us to guarantee the performance of a customer to a thirdparty.  Those letters of credit areprimarily issued to support public and private borrowing arrangements.  The credit risk involved in issuing lettersof credit is essentially the same as that involved in extending loans tocustomers.  Collateral is required ininstances which we deem necessary.

 

**Financial Condition**

 

Our total assets grew by 9% for the firstthree months of 2005.  Deposit growth of$12.2 million and additional FHLB borrowings of $3.0 million were used to fundnet loan growth of almost $13.6 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.  Our loan to available funds ratio hasremained steady since December 31, 2004, holding in the 87% range.  Stockholders’ equity has increased by$173,578 due to net income of $541,053 less increases in unrealized losses onsecurities available-for-sale, net of tax, of $367,475.

 

**Results of Operations****For The Three Months EndedMarch 31, 2005 and 2004**

 

Following is a summary of our operationsfor the periods indicated.

 
| ** **                 | ** ** | **Three Months Ended**     | ** ** |
|----------------------------|------------|----------------------------|------------|
| ** **                 | ** ** | **March 31,**         | ** ** |
| ** **                 | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| ** **                 | ** ** | **(Dollars in Thousands)** | ** ** |
|                       |       |                       |       |   |   |
| Interest income            |       | $                          | 2,751      |   | $ | 1,453 |   |
| Interest expense           |       | 1,026                      |       | 470 |   |
| Net interest  income       |       | 1,725                      |       | 983 |   |
| Provision for  loan losses |       | (160                       | )          | (240 | ) |
| Other income               |       | 66                         |       | 60 |   |
| Other expense              |       | (779                       | )          | (467 | ) |
| Pretax income              |       | 852                        |       | 336 |   |
| Income tax                 |       | (311                       | )          | — |   |
| Net income                 |       | $                          | 541        |   | $ | 336 |   |

 

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Net Interest Income

 

Our net interest income increased byapproximately $742,000 for the first quarter of 2005 as compared to the sameperiod in 2004.  Our net interest marginincreased to 3.88% during the first three months of 2005 as compared to 3.81%for the first three months of 2004. The increase in net interest income is dueprimarily to the increased volume of average loans outstanding.   Our cost of funds increased to 2.86% for thefirst three months of 2005 as compared to 2.29% for the first three months of2004.

 

Other Income

 

Other income increased by approximately$6,000 for the first quarter of 2005 as compared to the same period in 2004.Increased service charges on deposit accounts associated with deposit growthhave increased by $9,000.  We have had nogains on sales of securities available-for-sale as of March 31, 2005 ascompared to $13,000 in the same period in 2004. Other income has increased by $10,000 primarily due to our growth.

 

Other Expenses

 

Other expenses increased by approximately$312,000 for the first quarter of 2005 as compared to the same period in2004.  Salaries and employee benefitshave increased by $186,000 due to an increase in the number of full timeequivalent employees and to other salary increases. Equipment and occupancy expenseshave remained stable, only increasing by $9,000 as compared to the same periodin 2004.  Other operating expenses haveincreased by $117,000 due primarily to our overall growth.

 

Income Taxes

 

We have recorded a provision for incometaxes of $311,334 for the first quarter of 2005 which represents 36.5% ofincome before provision for income taxes. We recorded no income tax provision for the first quarter of 2004 due toaccumulated deficits incurred through that date.

 

Regulatory Matters

 

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

 

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

 

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** **

**ITEM3****. Controlsand Procedures**

 

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

 

There have been no changes in the Company’sinternal control over financial reporting during the three months ended March 31,2005, or, to the Company’s knowledge, other factors that could significantlyaffect those internal controls subsequent to the date the Company carried outits evaluation, that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting, andthere have been no corrective actions with respect to significant deficienciesor material weaknesses.

 

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

 

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**PART II****- OTHER INFORMATION**

 

**ITEM4.****                 ****SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS**

 

None

 

**ITEM 6.****                 ****EXHIBITS**

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

 

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**SIGNATURES**

 

In accordance with the requirements ofthe Exchange Act, the registrant caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.

 

 
|               |   | FIRSTBANK  FINANCIAL SERVICES, INC.           |
|--------------------|--------|-----------------------------------------------|
|               |   | (Registrant)                                  |
|               |   |                                          |
|               |   |                                          |
| May 13,  2005 |   |                                          | /s/  J. Randall Dixon |
| Date               |   |                                          | J.  Randall Dixon, President and C.E.O. |
|               |   |                                          | (Principal  Executive Officer) |
|               |   |                                          |   |
|               |   |                                          |   |
| May 13,  2005 |   |                                          | /s/  Lisa J. Maxwell |
| Date               |   |                                          | Lisa  J. Maxwell, C.F.O. |
|               |   | (Principal  Financial and Accounting Officer) |

 

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