**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549**

**FORM 10-Q**

**x****                             ****QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the quarterly periodended  June 30, 2007**

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

**For the transition period from                              to                            **

**CommissionFile Number: 000-51147**

**FirstBank Financial Services, Inc.**(Exact name of small business issuer as specified in itscharter)

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

 

**120 Keys Ferry Street McDonough, Georgia 30253**(Address of principalexecutive offices)

**(678)583-2265**(Issuer’s telephone number)

**N/A**(Former name, former address and former fiscal year, ifchanged since last report)

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

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

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

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

State the number of shares outstanding of each of the issuer’s classesof common equity, as of August 8, 2007: 2,831,676 shares, $5.00 par value pershare.

 

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**FIRSTBANK FINANCIAL SERVICES, INC.**

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

 

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**PART I - FINANCIAL INFORMATION**

 

**ITEM 1.     FinancialStatements**

 

**FIRSTBANK FINANCIAL SERVICES, INC.**

**AND SUBSIDIARY**

**CONSOLIDATED BALANCE SHEETSJUNE 30, 2007 AND DECEMBER 31, 2006**
| ** **                                                                                                | ** ** | **June 30, 2007** | ** **  | **December 31, 2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|---------------------------------|------------|
| ** **                                                                                                | ** ** | **(Unaudited)**             | ** **  | **(Audited)**                   | ** ** |
| **Assets**                                                                                                | ** ** | ** **                  | ** **  | ** **                      | ** ** |
|                                                                                                      |       |                        |        |                            |       |
| Cash and due from banks                                                                                   |       | $                           | 4,053,845   |                            | $          | 4,047,726 |   |
| Interest-bearing  deposits in banks                                                                       |       | 1,127,740                   |        | 1,790,278                       |       |
| Federal funds sold                                                                                        |       | 5,694,000                   |        | 11,614,000                      |       |
| Securities available  for sale, at fair value                                                             |       | 47,006,910                  |        | 39,559,041                      |       |
| Restricted equity securities,  at cost                                                                    |       | 2,291,856                   |        | 2,013,556                       |       |
|                                                                                                      |       |                        |        |                            |       |
| Loans, net of unearned  income                                                                            |       | 240,089,083                 |        | 210,397,450                     |       |
| Less allowance for loan  losses                                                                           |       | 2,799,484                   |        | 2,392,086                       |       |
| Loans, net                                                                                                |       | 237,289,599                 |        | 208,005,364                     |       |
|                                                                                                      |       |                        |        |                            |       |
| Premises and equipment                                                                                    |       | 7,080,965                   |        | 6,013,068                       |       |
| Other real estate owned                                                                                   |       | 900,770                     |        | —                          |       |
| Other assets                                                                                              |       | 5,756,395                   |        | 4,036,623                       |       |
| ** **                                                                                                | ** ** | ** **                  | ** **  | ** **                      | ** ** |
| **Total  assets**                                                                                         |       | $                           | 311,202,080 |                            | $          | 277,079,656 |   |
|                                                                                                      |       |                        |        |                            |       |
| **Liabilities  and Stockholders’ Equity**                                                            | ** ** | ** **                  | ** **  | ** **                      | ** ** |
|                                                                                                      |       |                        |        |                            |       |
| Deposits                                                                                                  |       |                        |        |                            |       |
| Noninterest-bearing                                                                                       |       | $                           | 11,466,913  |                            | $          | 11,571,364 |   |
| Interest-bearing                                                                                          |       | 231,262,557                 |        | 204,840,106                     |       |
| Total deposits                                                                                            |       | 242,729,470                 |        | 216,411,470                     |       |
| Other borrowings                                                                                          |       | 29,000,000                  |        | 22,000,000                      |       |
| Subordinated debentures                                                                                   |       | 8,248,000                   |        | 8,248,000                       |       |
| Other liabilities                                                                                         |       | 2,763,419                   |        | 2,667,458                       |       |
| Total  liabilities                                                                                        |       | 282,740,889                 |        | 249,326,928                     |       |
|                                                                                                      |       |                        |        |                            |       |
| Commitments and  contingencies                                                                            |       |                        |        |                            |       |
|                                                                                                      |       |                        |        |                            |       |
| Stockholders’ equity                                                                                 |       |                        |        |                            |       |
| Preferred stock,  no par value per share, 2,000,000 shares authorized; -0- shares issued and  outstanding |       | —                      |        | —                          |       |
| Common stock,  par value $5; 10,000,000 shares authorized; 2,831,676 shares issued and  outstanding       |       | 14,158,380                  |        | 14,158,380                      |       |
| Surplus                                                                                                   |       | 11,759,975                  |        | 11,655,045                      |       |
| Retained  earnings                                                                                        |       | 3,412,795                   |        | 2,328,567                       |       |
| Accumulated  other comprehensive loss                                                                     |       | (869,959                    | )           | (389,264                        | )          |
| Total  stockholders’ equity                                                                          |       | 28,461,191                  |        | 27,752,728                      |       |
|                                                                                                      |       |                        |        |                            |       |
| **Total liabilities and  stockholders’ equity**                                                      |       | $                           | 311,202,080 |                            | $          | 277,079,656 |   |

 

See notes to consolidated financial statements.

1

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**FIRSTBANK FINANCIAL SERVICES, INC.**

**AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF INCOMETHREE MONTHS ENDED JUNE 30, 2007 AND 2006 ANDSIX MONTHS ENDED JUNE 30, 2007 AND 2006**

**(Unaudited)**
| ** **                                               | ** ** | **Three Months Ended** | ** **    | **Six Months Ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|---------------|--------------------------------|------------|
| ** **                                               | ** ** | **June 30,**                | ** **    | **June 30,**              | ** ** |
| ** **                                               | ** ** | **2007**                         | ** **    | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                     |       |                             |          |                           |       |   |   |   |   |
| **Interest  income**                                     | ** ** | ** **                       | ** **    | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loans, including fees                                    | ** ** | **$**                            | **5,284,558** | ** **                     | **$**      | 3,853,169 | ** ** | **$** | **10,133,782** |   | **$** | 7,407,153 |   |
| Taxable securities                                       | ** ** | **468,410**                      |          | 364,633                        | ** ** | **903,641** |   | 693,178 |   |
| Tax-free securities                                      | ** ** | **64,600**                       |          | 33,631                         | ** ** | **116,294** |   | 59,657 |   |
| Deposits in banks                                        | ** ** | **22,155**                       |          | 12,074                         | ** ** | **50,967** |   | 33,727 |   |
| Federal funds sold                                       | ** ** | **57,487**                       |          | 168,368                        | ** ** | **188,654** |   | 302,826 |   |
| **Total interest income**                                | ** ** | **5,897,210**                    |          | 4,431,875                      | ** ** | **11,393,338** |   | 8,496,541 |   |
|                                                     |       |                             |          |                           |       |   |   |   |   |
| **Interest  expense**                                    | ** ** | ** **                       | ** **    | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deposits                                                 | ** ** | **2,974,041**                    |          | 1,827,029                      | ** ** | **5,706,576** |   | 3,432,031 |   |
| Other borrowings                                         | ** ** | **421,178**                      |          | 225,242                        | ** ** | **800,057** |   | 437,855 |   |
| **Total interest expense**                               | ** ** | **3,395,219**                    |          | 2,052,271                      | ** ** | **6,506,633** |   | 3,869,886 |   |
|                                                     |       |                             |          |                           |       |   |   |   |   |
| **Net interest income**                                  | ** ** | **2,501,991**                    |          | 2,379,604                      | ** ** | **4,886,705** |   | 4,626,655 |   |
| **Provision  for loan losses**                           | ** ** | **205,000**                      |          | 135,000                        | ** ** | **415,000** |   | 180,000 |   |
| **Net interest income after provision for loan  losses** | ** ** | **2,296,991**                    | ** **    | 2,244,604                      | ** ** | **4,471,705** | ** ** | 4,446,655 | ** ** |
| ** **                                               | ** ** | ** **                       | ** **    | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other  income**                                        | ** ** | ** **                       | ** **    | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service charges on deposit accounts                      | ** ** | **77,131**                       |          | 54,034                         | ** ** | **188,792** |   | 107,485 |   |
| Gain (loss) on sale of assets                            | ** ** | **—**                       |          | —                         | ** ** | **(3,956** | **)** | 1,425 |   |
| Gain on sale of other real estate owned                  | ** ** | **21,306**                       |          | —                         | ** ** | **21,306** |   | — |   |
| Other operating income                                   | ** ** | **31,649**                       |          | 25,067                         | ** ** | **59,389** |   | 43,779 |   |
| **Total other income**                                   | ** ** | **130,086**                      |          | 79,101                         | ** ** | **265,531** |   | 152,689 |   |
| ** **                                               | ** ** | ** **                       | ** **    | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other  expenses**                                      | ** ** | ** **                       | ** **    | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries and employee benefits                           | ** ** | **780,148**                      |          | 788,081                        | ** ** | **1,544,402** |   | 1,459,955 |   |
| Equipment and occupancy expenses                         | ** ** | **217,183**                      |          | 148,986                        | ** ** | **422,835** |   | 306,344 |   |
| Loss on sale of securities available for sale            | ** ** | **8,966**                        |          | —                         | ** ** | **28,990** |   | — |   |
| Other operating expenses                                 | ** ** | **478,371**                      |          | 408,604                        | ** ** | **1,043,153** |   | 824,792 |   |
| **Total other expenses**                                 | ** ** | **1,484,668**                    |          | 1,345,671                      | ** ** | **3,039,380** |   | 2,591,091 |   |
|                                                     |       |                             |          |                           |       |   |   |   |   |
| **Income before income taxes**                           | ** ** | **942,409**                      |          | 978,034                        | ** ** | **1,697,856** |   | 2,008,253 |   |
| ** **                                               | ** ** | ** **                       | ** **    | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Income  tax expense**                                  | ** ** | **333,697**                      |          | 375,273                        | ** ** | **613,628** |   | 752,931 |   |
| ** **                                               | ** ** | ** **                       | ** **    | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net income**                                           | ** ** | **$**                            | **608,712**   | ** **                     | $          | 602,761 | ** ** | **$** | **1,084,228** | ** ** | $ | 1,255,322 | ** ** |
|                                                     |       |                             |          |                           |       |   |   |   |   |
| **Basic  earnings per share**                            | ** ** | **$**                            | **0.21**      | ** **                     | $          | 0.21 | ** ** | **$** | **0.38** | ** ** | $ | 0.44 | ** ** |
|                                                     |       |                             |          |                           |       |   |   |   |   |
| **Diluted  earnings per share**                          | ** ** | **$**                            | **0.20**      | ** **                     | $          | 0.20 | ** ** | **$** | **0.36** | ** ** | $ | 0.42 | ** ** |
|                                                     |       |                             |          |                           |       |   |   |   |   |
| **Cash dividends per share**                             | ** ** | **$**                            | **—**    | ** **                     | $          | — | ** ** | **$** | **—** |   | $ | — |   |

 

See notes to consolidated financial statements.

2

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**FIRSTBANK FINANCIAL SERVICES, INC.**

**AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMETHREE MONTHS ENDED JUNE 30, 2007 AND 2006 ANDSIX MONTHS ENDED JUNE 30, 2007 AND 2006**

**(Unaudited)**
| ** **                                                                                                          | ** ** | **Three Months Ended** | ** **  | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|-------------|--------------------------------|------------|
| ** **                                                                                                          | ** ** | **June 30,**                | ** **  | **June 30,**              | ** ** |
| ** **                                                                                                          | ** ** | **2007**                         | ** **  | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                                                                |       |                             |        |                           |       |   |   |   |   |
| Net income                                                                                                          | ** ** | $                                | **608,712** |                           | $          | 602,761 | ** ** | **$** | **1,084,228** |   | $ | 1,255,322 |   |
|                                                                                                                |       |                             |        |                           |       |   |   |   |   |
| Other  comprehensive income (loss):                                                                                 |       |                             |        |                           |       |   |   |   |   |
| ** **                                                                                                          | ** ** | ** **                       | ** **  | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net unrealized holding losses arising during period,  net of tax benefit                                            | ** ** | **(454,355**                     | **)**       | (354,451                       | )          | (484,375 | ) | (415,556 | ) |
|                                                                                                                |       |                             |        |                           |       |   |   |   |   |
| Reclassification adjustment for losses on securities  available for sale realized in net income, net of tax benefit |       | **5,559**                        |        | —                         |       | **17,974** |   | — |   |
|                                                                                                                |       |                             |        |                           |       |   |   |   |   |
| Net unrealized holding losses on interest rate  floors arising during period, net of tax benefit                    |       | **(48,859**                      | **)**       | (37,537                        | )          | **(32,268** | **)** | (63,338 | ) |
|                                                                                                                |       |                             |        |                           |       |   |   |   |   |
| Other  comprehensive loss                                                                                           | ** ** | **(497,655**                     | **)**       | (391,988                       | )          | **(498,669** | **)** | (478,894 | ) |
|                                                                                                                |       |                             |        |                           |       |   |   |   |   |
| Comprehensive income                                                                                                | ** ** | $                                | **111,057** |                           | $          | 210,773 | ** ** | **$** | **585,559** |   | $ | 776,428 |   |

 

See notes to consolidated financialstatements.

3

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**FIRSTBANK FINANCIAL SERVICES, INC.**

**AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF CASH FLOWSSIX MONTHS ENDED JUNE 30, 2007 AND 2006**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **2007**        | ** **    | **2006**    | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------|---------------|-------------|------------|
| **OPERATING  ACTIVITIES**                                                          | ** ** | ** **      | ** **    | ** **  | ** ** |
| Net income                                                                         | ** ** | **$**           | **1,084,228** |        | $          | 1,255,322 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |            |          |        |       |
| (Gain) loss on sale of assets                                                      | ** ** | **3,956**       |          | (1,425      | )          |
| Gain on sale of other real estate owned                                            | ** ** | **(21,306**     | **)**         | —      |       |
| Loss on sale of securities available for sale                                      | ** ** | **28,990**      |          | —      |       |
| Depreciation and amortization                                                      | ** ** | **226,137**     |          | 165,129     |       |
| Stock compensation expense                                                         | ** ** | **104,931**     |          | 178,770     |       |
| Provision for loan losses                                                          | ** ** | **415,000**     |          | 180,000     |       |
| Increase in accrued interest receivable                                            | ** ** | **(480,386**    | **)**         | (250,699    | )          |
| Increase (decrease) in accrued interest payable                                    | ** ** | **(481,668**    | **)**         | 103,191     |       |
| Net other operating activities                                                     | ** ** | **(551,861**    | **)**         | (4,547      | )          |
|                                                                               |       |            |          |        |       |
| Net cash provided by operating activities                                          | ** ** | **328,021**     |          | 1,625,741   |       |
|                                                                               |       |            |          |        |       |
| **INVESTING  ACTIVITIES**                                                          | ** ** | ** **      | ** **    | ** **  | ** ** |
| Net decrease in interest-bearing deposits in banks                                 | ** ** | **662,538**     |          | 366,899     |       |
| Purchases of securities available for sale                                         | ** ** | **(13,242,570** | **)**         | (6,543,873  | )          |
| Proceeds from sales of securities available for sale                               | ** ** | **2,301,210**   |          | —      |       |
| Proceeds from maturities of securities available for  sale                         | ** ** | **2,741,231**   |          | 1,710,768   |       |
| Purchases of restricted equity securities                                          | ** ** | **(278,300**    | **)**         | (181,300    | )          |
| Net (increase) decrease in federal funds sold                                      | ** ** | **5,920,000**   |          | (3,356,000  | )          |
| Net increase in loans                                                              | ** ** | **(30,600,005** | **)**         | (18,460,481 | )          |
| Proceeds from sale of assets                                                       | ** ** | **22,000**      |          | 1,425       |       |
| Proceeds from sale of other real estate owned                                      | ** ** | **133,961**     |          | —      |       |
| Purchase of premises, equipment and software                                       | ** ** | **(1,299,967**  | **)**         | (1,285,155  | )          |
|                                                                               |       |            |          |        |       |
| Net cash used in investing activities                                              | ** ** | **(33,639,902** | **)**         | (27,747,717 | )          |
|                                                                               |       |            |          |        |       |
| **FINANCING  ACTIVITIES**                                                          | ** ** | ** **      | ** **    | ** **  | ** ** |
| Net increase in deposits                                                           | ** ** | **26,318,000**  |          | 27,820,517  |       |
| Net increase in borrowings                                                         | ** ** | **7,000,000**   |          | —      |       |
| Purchase of fractional shares                                                      | ** ** | **—**      |          | (362        | )          |
|                                                                               |       |            |          |        |       |
| Net cash provided by financing activities                                          | ** ** | **33,318,000**  |          | 27,820,155  |       |
|                                                                               |       |            |          |        |       |
| Net increase in  cash and due from banks                                           | ** ** | **6,119**       |          | 1,698,179   |       |
|                                                                               |       |            |          |        |       |
| Cash and due  from banks at beginning of period                                    | ** ** | **4,047,726**   |          | 1,236,443   |       |
|                                                                               |       |            |          |        |       |
| Cash and due  from banks at end of period                                          | ** ** | **$**           | **4,053,845** |        | $          | 2,934,622 |   |
|                                                                               |       |            |          |        |       |
| Supplemental  schedule of noncash investing and financing activities -             |       |            |          |        |       |
| Change in accumulated other comprehensive loss                                     | ** ** | **$**           | **(498,669**  | **)**       | $          | (478,894 | ) |
| Loans transferred to other real estate owned                                       | ** ** | **$**           | **1,021,811** |        | $          | — |   |
|                                                                               |       |            |          |        |       |
| Supplemental  disclosures of cash flow information -                               |       |            |          |        |       |
|                                                                               |       |            |          |        |       |
| Cash paid during the period for interest                                           | ** ** | **$**           | **6,988,301** |        | $          | 3,766,695 |   |
| Cash paid during  the period for income taxes                                      | ** ** | **$**           | **690,384**   |        | $          | 892,035 |   |

 

See notes toconsolidated financial statements.

4

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

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

(Unaudited)

**NOTE1.  Ba****sis of Presentation**

FirstBankFinancial Services, Inc. (the “Company”) is a bank holding company whosebusiness is conducted by its wholly-owned commercial bank, FirstBank FinancialServices, formerly First Bank of Henry County, (the “Bank”).  The Bank is a commercial bank located inMcDonough, Henry County, Georgia, with a branch in Stockbridge, Georgia andanother branch also in McDonough known as the Bank’s South Point branch.  Subsequent to June 30, 2007, the Bank openedits branch in Morrow, Clayton County, Georgia.

The accompanying consolidated financial statements are unaudited.Certain information and footnote disclosures normally included in consolidatedfinancial statements prepared in accordance with generally accepted accountingprinciples have been condensed or omitted pursuant to such rules andregulations.  These consolidatedfinancial statements should be read in conjunction with the auditedconsolidated financial statements and notes thereto included in the Company’sannual report on Form 10-KSB for the year ended December 31, 2006, which wasfiled with the Securities and Exchange Commission.

The financial information included herein reflects all adjustments(consisting of normal recurring adjustments), which are, in the opinion ofmanagement, necessary to a fair presentation of the Bank’s financial positionand results for the interim period ended June 30, 2007.

The preparation of consolidated financial statements requiresmanagement to make estimates and assumptions that affect the reported amountsof assets, liabilities and income and expense amounts.  Actual results could differ from those estimates.  The results of operations for the six monthsended June 30, 2007 are not necessarily indicative of the results to beexpected for the full year.

**NOTE 2.  Stock Compensation Plans**

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

At June 30, 2007, there was approximately $30,576 of unrecognized compensation cost related to stock-based payments, which is expected to be recognized over a weighted-average period of 1.47 years. Stock based compensation expense recognized in earnings totaled $35,374 and $104,931 for the three and six months ended June 30, 2007, respectively, as compared to $120,681 and $178,770 for the same periods in 2006.

5

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**NOTE 3.  Earnings Per Common Share**

SFAS No. 128, *Earnings Per Share,* establishes standards for computing andpresenting basic and diluted earnings per share.  In this regard, the Company is required toreport earnings per common share with and without the dilutive effects ofpotential common stock issuances from instruments such as options, convertiblesecurities and warrants on the face of the statements of income.  Earnings per common share are based on theweighted average number of common shares outstanding during the period whilethe effects of potential common shares outstanding during the period areincluded in diluted earnings per share. Additionally, the Company must reconcile the amounts used in thecomputation of both “basic earnings per share” and “diluted earnings per share”.  Presented below is a summary of thecomponents used to calculate basic and diluted earnings per common share.
|                                                                                                                                  | ** ** | **Three Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                       | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Basic earnings  per share:                                                                                                       |       |                                                |       |   |   |
| Weighted average common shares outstanding                                                                                       |       | 2,831,676                                           |       | 2,831,676 |   |
|                                                                                                                             |       |                                                |       |   |   |
| Net income                                                                                                                       |       | $                                                   | 608,712    |   | $ | 602,761 |   |
|                                                                                                                             |       |                                                |       |   |   |
| Basic earnings per share                                                                                                         |       | $                                                   | 0.21       |   | $ | 0.21 |   |
|                                                                                                                             |       |                                                |       |   |   |
| Diluted earnings  per share:                                                                                                     |       |                                                |       |   |   |
| Weighted average common shares outstanding                                                                                       |       | 2,831,676                                           |       | 2,831,676 |   |
| Net effect of the assumed exercise of stock options  based on the treasury stock method using average market prices for the year |       | 139,891                                             |       | 162,803 |   |
| Total weighted average common shares and common  stock equivalents outstanding                                                   |       | 2,971,567                                           |       | 2,994,479 |   |
|                                                                                                                             |       |                                                |       |   |   |
| Net income                                                                                                                       |       | $                                                   | 608,712    |   | $ | 602,761 |   |
|                                                                                                                             |       |                                                |       |   |   |
| Diluted earnings  per share                                                                                                      |       | $                                                   | 0.20       |   | $ | 0.20 |   |

 

6

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**NOTE 3. Earnings Per Common Share**
|                                                                                                                                  | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                                       | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| Basic earnings  per share:                                                                                                       |       |                                              |       |   |   |
| Weighted average common shares outstanding                                                                                       |       | 2,831,676                                         |       | 2,831,676 |   |
|                                                                                                                             |       |                                              |       |   |   |
| Net income                                                                                                                       |       | $                                                 | 1,084,228  |   | $ | 1,255,322 |   |
|                                                                                                                             |       |                                              |       |   |   |
| Basic earnings per share                                                                                                         |       | $                                                 | 0.38       |   | $ | 0.44 |   |
|                                                                                                                             |       |                                              |       |   |   |
| Diluted earnings  per share:                                                                                                     |       |                                              |       |   |   |
| Weighted average common shares outstanding                                                                                       |       | 2,831,676                                         |       | 2,831,676 |   |
| Net effect of the assumed exercise of stock options  based on the treasury stock method using average market prices for the year |       | 156,167                                           |       | 158,398 |   |
| Total weighted average common shares and common  stock equivalents outstanding                                                   |       | 2,987,843                                         |       | 2,990,074 |   |
|                                                                                                                             |       |                                              |       |   |   |
| Net income                                                                                                                       |       | $                                                 | 1,084,228  |   | $ | 1,255,322 |   |
|                                                                                                                             |       |                                              |       |   |   |
| Diluted earnings  per share                                                                                                      |       | $                                                 | 0.36       |   | $ | 0.42 |   |

 

**NOTE 4.  Recent Accounting Pronouncements**

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

In September 2006, the FASB issued FAS 157, *Fair Value Measurements*. The standard provides guidance for using fair value to measure assetsand liabilities.  It defines fair value,establishes a framework for measuring fair value under generally accepted accountingprinciples and expands disclosures about fair value measurement.  Under the standard, fair value refers to theprice that would be received to sell an asset or paid to transfer a liabilityin an orderly transaction between market participants in the market in whichthe reporting entity transacts.  Itclarifies the principle that fair value should be based on the assumptionsmarket participants would use when pricing the asset or liability.  In support of this principle, the standardestablishes a fair value hierarchy that prioritizes the information used todevelop those assumptions.  Under thestandard, fair value measurements would be separately disclosed by level withinthe fair value hierarchy.  Statement 157is effective for financial statements issued for fiscal years beginning afterNovember 15, 2007.

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The Company is currently evaluating theimpact the adoption of this statement could have on its financial condition,results of operations and cash flows.

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

**NOTE5.  Stock Dividend**

On November 16, 2006, the Company declared asix-for-five stock split payable to shareholders of record on December 1, 2006which was distributed on December 29, 2006. Earnings per common share for the periods ended June 30, 2006 and allstock option and warrant information has been retroactively adjusted for thesplit as if it occurred on January 1, 2006. 

**NOTE6.  Interest Rate Derivatives**

The Company maintains an overall interestrate risk-management strategy that incorporates the use of derivativeinstruments to minimize significant unplanned fluctuations in earnings that arecaused by interest volatility.  Oneinterest rate derivative is used to hedge variable-rate deposits.  This instrument is reflected in otherliabilities at June 30, 2007 at a fair value of $92,170.  The Company has two other derivatives,interest rate floors, one with a notional value of $40 million and a 7.50%strike and the other with a notional value of $30 million and an 8.50%strike.  The fair value of theseinstruments at June 30, 2007 is $207,837 and is reflected in other assets.  The instruments are more fully described inthe Company’s annual report dated December 31, 2006.

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

The following is our discussion andanalysis of certain significant factors which have affected the financialposition and operating results of FirstBank Financial Services, Inc. (the “Company”)during the periods included in the accompanying 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.  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-looking statements involverisks and uncertainties and may not be realized due to a variety of factors,including, without limitation:

·                  the effects of future economicconditions;

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

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

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

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

·                  changes occurring in business conditionsand inflation;

·                  changes in monetary and tax policies;

·                  changes in technology;

·                  the level of allowance for loan loss;

·                  the rate of delinquencies and amounts ofcharge-offs;

·                  the rates of loan growth;

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

·                  changes in the securities market; and

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

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**Introduction**

The Companyperforms banking 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**

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 of FirstBank Financial Services, Inc.  Our significant accounting policies aredescribed in the footnotes to the financial statements for FirstBank FinancialServices, Inc. at December 31, 2006 as filed in the Company’s annual report onForm 10-KSB, which was filed with the Securities and Exchange Commission.

Certain accounting policies involvesignificant judgments and assumptions by us which have a material impact on thecarrying value of certain assets and liabilities.  We consider these 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 financial statements.  Refer to the portion of this discussion thataddresses asset quality for a description of our processes and methodology fordetermining our allowance for loan losses.

Another of our critical accounting policiesinvolves stock-based compensation.  Theassumptions used in the determination of the fair value of stock optionsgranted ultimately determine the recognition of stock-based compensationexpense.  The short-cut method was usedto determine the expected life of the options. This method, as prescribed by SAB Topic 14.D.2, calculates the expectedterm based on the midpoint between the vesting date of the option and the endof the contractual term.  Expectedvolatility was based upon the historical volatility of the Company’sstock.  Risk-free interest rates forperiods within the contractual life of the option are based upon the U.S.Treasury yield curve in effect at the time of the grant.  Because of the need to retain capital forexpected growth and past history, the expected

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dividend rate is 0%.  These assumptions have a significant impacton the amount of expense recognized for stock-based compensation.

**AssetQuality**

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 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 second quarter and first six months of 2007, respectively of$205,000 and $415,000 as compared to the same periods in 2006 of $135,000 and$180,000, respectively.  The amountsprovided are due primarily to our assessment of inherent risk in the loanportfolio and the increase in loan growth as compared to the same period in2006. The allowance for loan losses as a percentage of total loans was 1.17% atJune 30, 2007 as compared to1.14% at December 31, 2006.  Basedupon our evaluation of the loan portfolio, we believe the allowance for loanlosses to be adequate to absorb losses on existing loans that may becomeuncollectible.

During the first quarter of 2007, theCompany foreclosed on the properties related to loans totaling approximately$1,022,000 that were included in non-accrual loans as of December 31,2006.  Additional expenses have beencapitalized for the first six months of 2007 totaling approximately $16,000.During the second quarter of 2007, the Company sold three lots totalingapproximately $134,000 with a marginal gain of approximately $21,000.  Management does not anticipate any significantlosses in the disposition of these properties.

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

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Company to make additions to theallowance based on their judgment about information available to them at thetime of their examinations.

The allowance consists of specific,general and unallocated components.  Thespecific component relates to loans that have been evaluated forimpairment.  For such loans that are alsoclassified as impaired, an allowance is established when the discounted cashflows (or collateral value or observable market price) of the impaired loan islower that the carrying value of that loan. The general component covers non-classified loans and is based onhistorical loss experience adjusted for qualitative factors.  An unallocated component is maintained tocover uncertainties that could affect management’s estimate of probable losses.  The unallocated component of the allowancereflects the margin of imprecision inherent in the underlying assumptions usedin the methodologies for estimating specific and general losses in theportfolio.

Information with respect to nonaccrual,past due and restructured loans is as follows:
|                                                                                                             | ** ** | **June 30,**                    | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                  | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **                                                                                                  | ** ** | **(Dollars in Thousands)** | ** ** |
| Nonaccrual loans                                                                                            |       | $                                    | 4,448      |   | $ | 111 |   |
| Loans  contractually past due ninety days or more as to interest or principal  payments and still accruing  |       | 36                                   |       | 1 |   |
| Restructured  loans                                                                                         |       | —                               |       | — |   |
| Potential  problem loans                                                                                    |       | —                               |       | — |   |
| Interest income  that would have been recorded on non- accrual and restructured loans under  original terms |       | 57                                   |       | — |   |
| 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 of interestwhen (1) there is a significant deterioration in the financial condition of theborrower and full repayment of principal and interest is not expected and (2)the principal or interest is more than ninety days past due, unless the loan isboth 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:
|                                                                                | ** ** | **Six Months Ended**       | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                     | ** ** | **June 30,**                    | ** ** |
| ** **                                                                     | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **                                                                     | ** ** | **(Dollars in Thousands)** | ** ** |
|                                                                           |       |                                 |       |   |   |
| Average amount  of loans outstanding                                           |       | $                                    | 227,625    |   | $ | 173,785 |   |
| Balance of  allowance for loan losses at beginning of period                   |       | $                                    | 2,392      |   | $ | 1,917 |   |
| Loans charged  off:                                                            |       |                                 |       |   |   |
| Commercial and  financial                                                      |       | —                               |       | — |   |
| Real estate  mortgage                                                          |       | —                               |       | — |   |
| Installment                                                                    |       | (9                                   | )          | (9 | ) |
|                                                                           |       | (9                                   | )          | (9 | ) |
| Loans recovered:                                                               |       |                                 |       |   |   |
| Commercial and  financial                                                      |       | —                               |       | 6 |   |
| Real estate  mortgage                                                          |       | —                               |       | — |   |
| Installment                                                                    |       | 1                                    |       | 1 |   |
|                                                                           |       | 1                                    |       | 7 |   |
| Net charge-offs                                                                |       | (8                                   | )          | (2 | ) |
| Additions to  allowance charged to operating expense during period             |       | 415                                  |       | 180 |   |
| Balance of  allowance for loan losses at end of period                         |       | $                                    | 2,799      |   | $ | 2,095 |   |
| 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 on short notice, if needed. At June 30, 2007 theCompany had no federal funds purchased.

The liquidity and capitalresources of the Company are monitored daily by management, 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 June 30, 2007 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 June30, 2007, the Company had unused available federal fund lines of $9.5million and unused Federal Home Loan Bank borrowing capacity of approximately$32 million.  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 June 30,2007 evidenced a decreased liquidity position.  Cash and due from banks, interest-bearingdeposits in banks and federal funds sold totaled $10,875,585 as of June 30, 2007 as compared to $17,452,004as of December 31, 2006.  Total cash anddue from banks amounted to $4,053,845 representing 1.30% 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 $105.5 million as of June 30, 2007.  These deposits are readily obtainableat rates 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 six-month periodended June 30, 2007, totaldeposits increased from $216.4 million at December 31, 2006 to $242.7 millionat June 30, 2007.  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 June30, 2007.
|                             | ** ** | ** **  | ** ** | ** ** | ** ** | **Minimum**     | ** ** |
|-----------------------------|------------|-------------|------------|------------|------------|-----------------|------------|
| ** **                  | ** ** | ** **  | ** ** | ** ** | ** ** | **Regulatory**  | ** ** |
| ** **                  | ** ** | **Company** | ** ** | **Bank**   | ** ** | **Requirement** | ** ** |
|                        |       |        |       |       |       |            |       |
| Leverage capital  ratios    |       | 12.34       | %          | 9.75       | %          | 4.00            | %          |
| Risk-based  capital ratios: |       |        |       |       |       |            |       |
| Tier I capital              |       | 13.86       | %          | 10.98      | %          | 4.00            | %          |
| Total capital               |       | 14.90       | %          | 12.02      | %          | 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:
|                               | ** ** | **June 30,** | ** ** |
|-------------------------------|------------|-------------------|------------|
| ** **                    | ** ** | **2007**          | ** ** |
|                          |       |              |       |
| Commitments to  extend credit |       | $                 | 48,353,864 |   |
| Letters of  credit            |       | 1,152,272         |       |
|                          |       | $                 | 49,506,136 |   |

 

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 cash

14

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requirements.  The amount of collateral obtained, if deemednecessary by us upon extension of credit, is based on our credit evaluation ofthe customer.

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

**Financial Condition**

Our total assets grew by 12.3% for thefirst six months of 2007.  Deposit growthof approximately $26.3 million and federal funds sold of approximately $5.9million were used to fund net loan growth of approximately $29.3 million withthe remainder being primarily invested in securities or maintained in cash anddue from banks. Loan demand continues to be strong in our primary market areaof Henry County, Georgia and surrounding counties.  Our loan to available funds ratio has remainedsteady since December 31, 2006, holding in the 83-89% range.  Advances from the Federal Home Loan Bankincreased by $7 million for the six months ended June 30, 2007.  The net increase is the result of $6 millionin advances being called, $6 million in advances maturing and the subsequentborrowings of an additional $19 million.

Stockholders’ equity has increased by$708,463 due to net income of $1,084,228, an increase in unrealized losses onsecurities available-for-sale, net of tax, of $448,427, an increase inunrealized losses on derivatives, net or tax, of $32,269 and includingrecognition of share based payments transactions as required by SFAS123(R) ofapproximately $104,931.

The Company opened two branches during2006 in Henry County and one branch in 2007 in Clayton County.  TheCompany has contractual obligations for approximately $264,000 of additionalrenovation costs for the Clayton County branch.

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

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**Results of Operations****For The Three Months EndedJune 30, 2007 and 2006 and for the Six Months Ended June 30, 2007 and 2006**

Following is a summary of our operationsfor the periods indicated.
|                            | ** ** | **Three Months Ended**     | ** ** |
|----------------------------|------------|--------------------------------------|------------|
| ** **                 | ** ** | **June 30,**                    | ** ** |
| ** **                 | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **                 | ** ** | **(Dollars in Thousands)** | ** ** |
|                       |       |                                 |       |   |   |
| Interest income            |       | $                                    | 5,897      |   | $ | 4,432 |   |
| Interest expense           |       | (3,395                               | )          | (2,052 | ) |
| Net interest  income       |       | 2,502                                |       | 2,380 |   |
| Provision for  loan losses |       | (205                                 | )          | (135 | ) |
| Other income               |       | 130                                  |       | 79 |   |
| Other expense              |       | (1,484                               | )          | (1,346 | ) |
| Pretax income              |       | 943                                  |       | 978 |   |
| Income tax  expense        |       | (334                                 | )          | (375 | ) |
| Net income                 |       | $                                    | 609        |   | $ | 603 |   |

 
|                            | ** ** | **Six Months Ended**       | ** ** |
|----------------------------|------------|--------------------------------------|------------|
| ** **                 | ** ** | **June 30,**                    | ** ** |
| ** **                 | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **                 | ** ** | **(Dollars in Thousands)** | ** ** |
|                       |       |                                 |       |   |   |
| Interest income            |       | $                                    | 11,393     |   | $ | 8,496 |   |
| Interest expense           |       | (6,506                               | )          | (3,870 | ) |
| Net interest  income       |       | 4,887                                |       | 4,626 |   |
| Provision for  loan losses |       | (415                                 | )          | (180 | ) |
| Other income               |       | 265                                  |       | 153 |   |
| Other expense              |       | (3,039                               | )          | (2,591 | ) |
| Pretax income              |       | 1,698                                |       | 2,008 |   |
| Income tax  expense        |       | (614                                 | )          | (753 | ) |
| Net income                 |       | $                                    | 1,084      |   | $ | 1,255 |   |

 

Net Interest Income

Our net interest income increasedapproximately $122,000 and $261,000 for the three and six month periods endedJune 30, 2007, respectively, as compared to the same periods in 2006.  Our net interest margin decreased to 3.47%during the first six months of 2007 as compared to 4.14% for the first sixmonths of 2006. The increase in net interest income is due primarily to theincreased volume of average loans outstanding.  Our cost of funds increased to 5.16% for the first six months of 2007 ascompared to 4.03% for the first six months of 2006.

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Noninterest Income

Noninterest income increased approximately$51,000 and $112,000 for the three and six month periods ended June 30, 2007,respectively, as compared to the same periods in 2006.  The increase in noninterest income for thesix months ended June 30, 2007 consists of $81,000 in service charges on depositaccounts, a $4,000 loss on sale of assets, a $21,000 gain on sale of other realestate owned and a $14,000 increase in other income.

Noninterest Expenses

Noninterest expenses increasedapproximately $138,000 and $448,000 for the three and six month periods endedJune 30, 2007, respectively, compared to the same periods in 2006.  The variances in 2007 consist of a decreaseof $8,000 and an increase of $85,000 in salaries and employee benefits, a$68,000 and $116,000 increase in equipment and occupancy expenses, a $9,000 and$29,000 loss on sale of securities and a $69,000 and $218,000 increase in otheroperating expenses for the three and six months ended June 30, 2007,respectively as compared to the same periods in 2006.   The six month period increase in salariesand employee benefits represents normal increases in salaries and an increasein the number of full time equivalent employees. Equipment and occupancyexpenses have increased due to the need for additional equipment for employeesand for the new branches.  The increasesin other operating expenses are due primarily to our overall growth. TheCompany leases its operations center facilities under an operating leaseagreement for approximately $70,000 a year in rental expense.

Income Taxes

We have recorded a provision for incometaxes of $334,000 and $614,000 for the three and six months ended June 30,2007, respectively, as compared to $375,000 and $753,000 for the same periodsin 2006.  The decrease in our income taxprovision was $41,000 and $139,000 for the three and six months ended June 30,2007, respectively, compared to the same periods in 2006. The effective taxrate for the three and six months ended June 30, 2007, respectively, was 35.4%and 36.1% as compared to 38.4% and 37.5% for the same periods in 2006.  The decrease in our effective tax rate is dueprimarily to the decrease of expense related to the permanent non-deductibilityof incentive stock options that have been expensed in the amount of $72,886 forthe period ended June 30, 2007 compared to $113,357 for the same period in2006.

Regulatory Matters

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

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

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**ITEM 3. Quantitative and Qualitative Disclosures About Market Risk**

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

**ITEM 4.**** ****Controls and Procedures**

As of the end of the period covered bythis report, we carried out an evaluation, under the supervision and with theparticipation of our Chief Executive Officer and the Chief Financial Officer,of the effectiveness of the design and operation of our disclosure controls andprocedures pursuant to Rule 13a-15 of the Securities Exchange Act of1934.  Based on this evaluation, ourChief 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.  As we continue toreview and document our disclosure controls and procedures, including ourinternal controls and procedures for financial reporting we may from time totime make changes designed to enhance their effectiveness and to ensure thatour systems evolve with our business.

There have been no changes in the Company’sinternal control over financial reporting during the six months ended June 30,2007, 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**

**Item 1.****                   ****LEGAL PROCEEDINGS**

TheCompany is not a party to any pending legal proceeding (nor is any property ofthe Company subject to any legal proceeding) other than routine litigation thatis incidental to the business.

**Item 1A.****                ****RISK FACTORS**

Inaddition to the other information set forth in this report, you should considerthe factors discussed in Part 1, “Item 1 – Description of Business” in ourAnnual Report on Form 10-KSB for the year ended December 31, 2006.

Therehave been no material changes in the risk factors relating to the Company orits business during the six months ended June 30, 2007.

**Item 2.****                   ****UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

None

**Item 3.****                   ****DEFAULTS UPON SENIOR SECURITIES**

None

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

(a)           The annual meeting of the stockholders ofthe Company was held on May 17, 2007.

(b)           The following Class II directors wereelected at the meeting to serve terms for three years:

William Lee Craddock,Jr.

Luther Martin Denney,III

Thaddeus M. Williams

Set forth below is the number of votes cast for,against, or withheld, as well as the number of abstentions and brokernon-votes, with respect to each nominee for office:

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| William Lee Craddock, Jr. | ** ** | **# of Shares** | ** ** |
|------------------------------------------|------------|---------------------------|------------|
|                                     |       |                      |       |
| For                                      |       | 2,256,991                 |       |
|                                     |       |                      |       |
| Against                                  |       | —                    |       |
|                                     |       |                      |       |
| Abstained                                |       | 3,120                     |       |
|                                     |       |                      |       |
| Not voted                                |       | 571,565                   |       |
|                                     |       |                      |       |
| Total                                    |       | 2,831,676                 |       |

 
| Luther Martin Denney, III | ** ** | **# of Shares** | ** ** |
|---------------------------|------------|-----------------|------------|
|                      |       |            |       |
| For                       |       | 2,230,591       |       |
|                      |       |            |       |
| Against                   |       | —          |       |
|                      |       |            |       |
| Abstained                 |       | 29,520          |       |
|                      |       |            |       |
| Not voted                 |       | 571,565         |       |
|                      |       |            |       |
| Total                     |       | 2,831,676       |       |

 
| Thaddeus M. Williams | ** ** | **# of Shares** | ** ** |
|----------------------|------------|-----------------|------------|
|                 |       |            |       |
| For                  |       | 2,255,731       |       |
|                 |       |            |       |
| Against              |       | —          |       |
|                 |       |            |       |
| Abstained            |       | 4,380           |       |
|                 |       |            |       |
| Not voted            |       | 571,565         |       |
|                 |       |            |       |
| Total                |       | 2,831,676       |       |

 

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**Item 5.****                   ****OTHER INFORMATION**

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)                                 |
|            |                                         |
|            |                                         |
| August 13, 2007 |                                         | /s/ Thaddeus M. Williams |
| Date            |                                         | Thaddeus M.  Williams, President and C.E.O. |
|            |                                         | (Principal Executive Officer) |
|            |                                         |   |
|            |                                         |   |
| August 13, 2007 |                                         | /s/ Lisa J. Maxwell |
| Date            |                                         | Lisa J. Maxwell, C.F.O. |
|            | (Principal Financial and Accounting Officer) |

 

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