**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-QSB**

 

| **ý**                                                                                                                                                                                                                                                    | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                          |       |                                                                                          |
| **For the quarterly period ended**** ****September 30, 2005**                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                          |       |                                                                                          |
| **o**                                                                                                                                                                                                                                                         | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                          |       |                                                                                          |
| For  the transition period from                   to                      |

 

| **Commission  File Number:**                                                        | ** ** | **000-51147**        |   |
|-------------------------------------------------------------------------------------|------------|----------------------|--------|
|                                                                                |       |                 |
| **FirstBank  Financial Services, Inc.**                                             |
| (Exact  name of small business issuer as specified in its charter)                  |
|                                                                                |       |                 |
| **Georgia**                                                                         | ** ** | **20-2198785**       |
| (State  or other jurisdiction of                                                    |       | (IRS  Employer       |
| incorporation  or organization)                                                     |       | Identification  No.) |
|                                                                                |       |                 |
| **120 Keys Ferry Street McDonough, Georgia 30253**                                  |
| (Address  of principal executive offices)                                           |
|                                                                                |       |                 |
| **(678) 583-2265**                                                                  |
| (Issuer’s  telephone number)                                                   |
|                                                                                |       |                 |
| **N/A**                                                                             |
| (Former  name, former address and former fiscal year, if changed since last report) |

 

Checkwhether the issuer (1) filed all reports required to be filed by Section 13 or15(d) of the Exchange Act during the past 12 months (or for such shorter periodthat the registrant was required to file such reports) and (2) has been subjectto such filing requirements for the past 90 days.   Yes ý   No o

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act)   Yes o   No ý

 

State the number of shares outstanding ofeach of the issuer’s classes of common equity, as of November 9, 2005:   

2,145,250 shares, $5.00 par value per share.

 

Transitional Small Business Disclosure Format   Yes o   No ý

 

----

 

**FIRSTBANKFINANCIAL SERVICES, INC.**

 

**TABLEOF CONTENTS**

 
|     |                       |                                                                                                                                                                                          | ** ** |
|----------|----------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|     |                       |                                                                                                                                                                                          |       |
| PART  I. | FINANCIAL  INFORMATION     |                                                                                                                                                                                          |
|     |                       |                                                                                                                                                                                          |       |
|     | Item 1.                    | Consolidated Financial  Statements                                                                                                                                                            |       |
|     |                       |                                                                                                                                                                                          |       |
|     |                       | Consolidated  Balance Sheets (unaudited) as of September 30,  2005 and December 31, 2004                                                                                            |       |
|     |                       |                                                                                                                                                                                          |       |
|     |                       | Consolidated  Statements of Income and Comprehensive Income (unaudited) for the three  months ended September 30, 2005  and 2004 and nine months ended  September 30, 2005 and 2004 |       |
|     |                       |                                                                                                                                                                                          |       |
|     |                       | Consolidated  Statements of Cash Flows (unaudited) for the nine months ended September 30,  2005 and 2004                                                                                |       |
|     |                       |                                                                                                                                                                                          |       |
|     |                       | Notes to  Consolidated Financial Statements                                                                                                                                                   |       |
|     |                       |                                                                                                                                                                                          |       |
|     | Item 2.                    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                                   |       |
|     |                       |                                                                                                                                                                                          |       |
|     | Item 3.                    | Controls and  Procedures                                                                                                                                                                      |       |
|     |                       |                                                                                                                                                                                          |       |
| PART II. | OTHER INFORMATION          |                                                                                                                                                                                          |
|     |                       |                                                                                                                                                                                          |       |
|     | SIGNATURES                 |                                                                                                                                                                                          |
|     |                       |                                                                                                                                                                                          |       |
|     | CERTIFICATION              |                                                                                                                                                                                          |
|     |                       |                                                                                                                                                                                          |       |
|     | SECTION 906  CERTIFICATION |                                                                                                                                                                                          |
|          |                            |                                                                                                                                                                                               |            |  |

 

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**FIRSTBANK FINANCIALSERVICES, INC.**

**ConsolidatedBalance Sheets**

**(unaudited)**

**September30, 2005 and December 31, 2004**

 
| ** **                                                                                                      | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-------------------|-------------|------------------|------------|
| ** **                                                                                                      | ** ** | **2005**          | ** **  | **2004**         | ** ** |
| ASSETS                                                                                                          |       |              |        |             |       |
|                                                                                                            |       |              |        |             |       |   |   |
| Cash and due from banks                                                                                         |       | $                 | 3,599,091   |             | $          | 1,136,424 |   |
| Interest-bearing deposits  in banks                                                                             |       | 1,316,800         |        | 1,961,793        |       |
| Federal funds sold                                                                                              |       | 14,885,000        |        | 9,558,000        |       |
| Securities  available-for-sale (at fair value)                                                                  |       | 30,161,670        |        | 26,086,812       |       |
| Restricted equity securities,  at cost                                                                          |       | 1,809,256         |        | 1,405,556        |       |
| Loans, less allowance for  loan losses of $1,968,131 and $1,471,333, respectively                               |       | 159,615,202       |        | 132,309,442      |       |
| Accrued interest  receivable                                                                                    |       | 1,409,748         |        | 820,885          |       |
| Premises and equipment,  net                                                                                    |       | 3,864,393         |        | 2,736,587        |       |
| Other assets                                                                                                    |       | 1,100,187         |        | 807,366          |       |
| Total assets                                                                                                    |       | $                 | 217,761,347 |             | $          | 176,822,865 |   |
|                                                                                                            |       |              |        |             |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                      |       |              |        |             |       |
|                                                                                                            |       |              |        |             |       |
| Deposits:                                                                                                       |       |              |        |             |       |
| Noninterest-bearing                                                                                             |       | $                 | 13,582,985  |             | $          | 8,546,778 |   |
| Interest-bearing                                                                                                |       | 151,820,753       |        | 122,816,562      |       |
| Total deposits                                                                                                  |       | 165,403,738       |        | 131,363,340      |       |
| Accrued interest payable                                                                                        |       | 992,714           |        | 634,402          |       |
| Federal Home Loan Bank borrowings                                                                               |       | 27,000,000        |        | 22,000,000       |       |
| Other liabilities                                                                                               |       | 147,601           |        | 116,617          |       |
| Total liabilities                                                                                               |       | 193,544,053       |        | 154,114,359      |       |
|                                                                                                            |       |              |        |             |       |
| Stockholders’ equity:                                                                                      |       |              |        |             |       |
| Preferred stock, no par value per share, 2,000,000 shares authorized;  -0- shares issued and outstanding        |       | —            |        | —           |       |
| Common stock, par value $5.00 per share, 10,000,000 shares authorized;  2,145,250 shares issued and outstanding |       | 10,726,250        |        | 10,726,250       |       |
| Capital surplus                                                                                                 |       | 11,235,374        |        | 11,235,374       |       |
| Retained earnings                                                                                               |       | 2,529,979         |        | 754,241          |       |
| Accumulated other comprehensive loss                                                                            |       | (274,309          | )           | (7,359           | )          |
| Total stockholders’ equity                                                                                 |       | 24,217,294        |        | 22,708,506       |       |
| Total liabilities and stockholders’ equity                                                                 |       | $                 | 217,761,347 |             | $          | 176,822,865 |   |
|                                                                                                                 |            |                   |             |                  |            |  |  |  |  |

 

Seenotes to consolidated financial statements.

 

1

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**FIRSTBANKFINANCIAL SERVICES, INC.**

** **

**Consolidated Statements of Income and Comprehensive Income**

**(unaudited)**

**For theThree Months Ended September 30, 2005 and 2004**

**andNine Months Ended September 30, 2005 and 2004**

 
| ** **                                                                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                    | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| ** **                                                                                    | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Interest and dividend  income:                                                                |       |                   |       |                  |       |   |   |   |   |
| Loans, including fees                                                                         |       | $                      | 3,146,064  |                  | $          | 1,862,819 |   | $ | 8,382,310 |   | $ | 4,664,367 |   |
| Taxable securities                                                                            |       | 293,936                |       | 246,830               |       | 834,656 |   | 638,521 |   |
| Tax-free securities                                                                           |       | 27,621                 |       | 18,195                |       | 76,509 |   | 18,555 |   |
| Federal funds sold                                                                            |       | 86,451                 |       | 27,141                |       | 207,959 |   | 71,259 |   |
| Deposits in banks                                                                             |       | 20,636                 |       | 7,286                 |       | 46,458 |   | 23,794 |   |
| Total interest and dividend income                                                            |       | 3,574,708              |       | 2,162,271             |       | 9,547,892 |   | 5,416,496 |   |
|                                                                                          |       |                   |       |                  |       |   |   |   |   |
| Interest expense:                                                                             |       |                   |       |                  |       |   |   |   |   |
| Deposits                                                                                      |       | 1,260,040              |       | 618,806               |       | 3,216,207 |   | 1,553,368 |   |
| Federal funds purchased                                                                       |       | —                 |       | —                |       | 18 |   | — |   |
| Federal Home Loan Bank borrowings                                                             |       | 225,851                |       | 132,153               |       | 579,272 |   | 264,832 |   |
| Total interest expense                                                                        |       | 1,485,891              |       | 750,959               |       | 3,795,497 |   | 1,818,200 |   |
| Net interest income                                                                           |       | 2,088,817              |       | 1,411,312             |       | 5,752,395 |   | 3,598,296 |   |
|                                                                                          |       |                   |       |                  |       |   |   |   |   |
| Provision for loan losses                                                                     |       | 165,000                |       | 155,000               |       | 509,615 |   | 605,000 |   |
|                                                                                          |       |                   |       |                  |       |   |   |   |   |
| Net interest income after provision for loan losses                                           |       | 1,923,817              |       | 1,256,312             |       | 5,242,780 |   | 2,993,296 |   |
|                                                                                          |       |                   |       |                  |       |   |   |   |   |
| Noninterest income:                                                                           |       |                   |       |                  |       |   |   |   |   |
| Service charges on deposit accounts                                                           |       | 58,771                 |       | 42,563                |       | 156,754 |   | 129,807 |   |
| Gain on sale of securities available-for-sale                                                 |       | —                 |       | —                |       | — |   | 13,054 |   |
| Gain on sale of assets                                                                        |       | —                 |       | —                |       | 2,519 |   | — |   |
| Other                                                                                         |       | 17,764                 |       | 8,731                 |       | 53,661 |   | 58,555 |   |
| Total noninterest income                                                                      |       | 76,535                 |       | 51,294                |       | 212,934 |   | 201,416 |   |
|                                                                                          |       |                   |       |                  |       |   |   |   |   |
| Noninterest expense:                                                                          |       |                   |       |                  |       |   |   |   |   |
| Salaries and employee benefits                                                                |       | 555,553                |       | 362,065               |       | 1,516,392 |   | 960,627 |   |
| Equipment and occupancy                                                                       |       | 127,183                |       | 52,286                |       | 265,014 |   | 160,678 |   |
| Other operating                                                                               |       | 341,896                |       | 240,962               |       | 903,607 |   | 615,153 |   |
| Total noninterest expense                                                                     |       | 1,024,632              |       | 655,313               |       | 2,685,013 |   | 1,736,458 |   |
|                                                                                          |       |                   |       |                  |       |   |   |   |   |
| Income before provision for income taxes                                                      |       | 975,720                |       | 652,293               |       | 2,770,701 |   | 1,458,254 |   |
| Provision for income taxes                                                                    |       | 347,171                |       | 227,871               |       | 994,964 |   | 127,871 |   |
| Net income                                                                                    |       | 628,549                |       | 424,422               |       | 1,775,737 |   | 1,330,383 |   |
| Other comprehensive  income:                                                                  |       |                   |       |                  |       |   |   |   |   |
| Unrealized (losses) gains  on securities available-for-sale arising during period, net of tax |       | (206,982               | )          | 569,578               |       | (266,950 | ) | (26,885 | ) |
| Comprehensive income                                                                          |       | $                      | 421,567    |                  | $          | 994,000 |   | $ | 1,508,787 |   | $ | 1,303,498 |   |
|                                                                                          |       |                   |       |                  |       |   |   |   |   |
| Income per share:                                                                             |       |                   |       |                  |       |   |   |   |   |
| Basic                                                                                         |       | $                      | 0.29       |                  | $          | 0.20 |   | $ | 0.83 |   | $ | 0.65 |   |
| Diluted                                                                                       |       | $                      | 0.28       |                  | $          | 0.20 |   | $ | 0.79 |   | $ | 0.64 |   |
| Cash dividends per share                                                                      |       | $                      | —     |                  | $          | — |   | $ | — |   | $ | — |   |
|                                                                                               |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Seenotes to consolidated financial statements.

 

2

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**FIRSTBANKFINANCIAL SERVICES, INC.**

** **

**Consolidated Statements of Cash Flows**

**(unaudited)**

**For theNine Months Ended September 30, 2005 and 2004**

 
| ** **                                                                         | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| Cash flow from operating  activities:                                              |       |        |       |        |       |
| Net income                                                                         |       | $           | 1,775,737  |        | $          | 1,330,383 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |        |       |        |       |
| Depreciation and amortization                                                      |       | 141,938     |       | 103,394     |       |
| Provision for loan losses                                                          |       | 509,615     |       | 605,000     |       |
| Gain on sales of securities available-for-sale                                     |       | —      |       | (13,054     | )          |
| Gain on sale of other real estate owned                                            |       | —      |       | (23,965     | )          |
| Gain on sale of assets                                                             |       | (2,519      | )          | —      |       |
| Increase in accrued interest receivable                                            |       | (588,863    | )          | (347,188    | )          |
| Increase in accrued interest payable                                               |       | 358,312     |       | 147,939     |       |
| Net other operating activities                                                     |       | (79,403     | )          | (428,533    | )          |
|                                                                               |       |        |       |        |       |
| Net cash flow provided by operating activities                                     |       | 2,114,817   |       | 1,373,976   |       |
|                                                                               |       |        |       |        |       |
| Cash flow from investing  activities:                                              |       |        |       |        |       |
| Net increase in loans                                                              |       | (27,815,375 | )          | (54,184,591 | )          |
| Net decrease (increase) in interest bearing deposits in banks                      |       | 644,993     |       | (1,375,777  | )          |
| Net (increase) decrease in federal funds sold                                      |       | (5,327,000  | )          | 3,123,000   |       |
| Purchases of restricted equity securities                                          |       | (403,700    | )          | (900,000    | )          |
| Purchases of investment securities available-for-sale                              |       | (8,729,590  | )          | (21,712,330 | )          |
| Proceeds from maturities of securities available-for-sale                          |       | 4,214,243   |       | 3,934,808   |       |
| Proceeds from sales of securities available-for-sale                               |       | —      |       | 1,031,500   |       |
| Proceeds from sale of assets                                                       |       | 14,019      |       | —      |       |
| Proceeds from sale of other real estate owned                                      |       | —      |       | 762,227     |       |
| Purchases of premises, equipment and software                                      |       | (1,290,138  | )          | (1,139,138  | )          |
|                                                                               |       |        |       |        |       |
| Net cash flow used by investing activities                                         |       | (38,692,548 | )          | (70,460,301 | )          |
|                                                                               |       |        |       |        |       |
| Cash flow from financing  activities:                                              |       |        |       |        |       |
| Net increase in deposits                                                           |       | 34,040,398  |       | 39,054,775  |       |
| Net proceeds from sale of common stock                                             |       | —      |       | 12,161,625  |       |
| Repayments of Federal Home Loan Bank borrowings                                    |       | (8,100,000  | )          | —      |       |
| Borrowings from Federal Home Loan Bank                                             |       | 13,100,000  |       | 18,000,000  |       |
|                                                                               |       |        |       |        |       |
| Net cash flow provided by financing activities                                     |       | 39,040,398  |       | 69,216,400  |       |
|                                                                               |       |        |       |        |       |
| Net increase in cash and  due from banks                                           |       | 2,462,667   |       | 130,075     |       |
| Cash and due from banks at  beginning of period                                    |       | 1,136,424   |       | 619,622     |       |
| Cash and due from banks at  end of period                                          |       | $           | 3,599,091  |        | $          | 749,697 |   |
|                                                                               |       |        |       |        |       |
| Supplemental schedule of  noncash investing and financing activities -             |       |        |       |        |       |
| Change in accumulated other comprehensive loss                                     |       | $           | (266,950   | )           | $          | (26,885 | ) |
|                                                                               |       |        |       |        |       |
| Supplemental disclosures  of cash flow information -                               |       |        |       |        |       |
| Cash paid for:                                                                     |       |        |       |        |       |
| Interest                                                                           |       | $           | 3,437,185  |        | $          | 1,670,261 |   |
| Income taxes                                                                       |       | $           | 1,129,723  |        | $          | 568,000 |   |
| Financed sales of other real estate owned                                          |       | $           |       | $           | 189,738    |   |
|                                                                                    |            |             |            |             |            |  |  |  |

 

Seeconsolidated notes to financial statements.

 

3

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**FIRSTBANK FINANCIAL SERVICES,INC.**

 

**Notes toConsolidated Financial Statements**

**(unaudited)**

 

 

**1.       Basis of Presentation**

 

FirstBank Financial Services, Inc. (the “Company”)is a bank holding company whose principal activity is the ownership andmanagement of its wholly-owned subsidiary, First Bank of Henry County (the “Bank”).  On February 1, 2005, pursuant to an Agreementand Plan of Shares Exchange approved by the Bank’s shareholders, the Companyacquired each share of the Bank’s common stock in exchange for one share of theCompany’s stock. The Bank is a commercial bank located in McDonough, HenryCounty, Georgia.

 

Theaccompanying consolidated financial statements are unaudited. Certaininformation 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 audited consolidatedfinancial statements and notes thereto included in the Bank’s annual report onForm 10-KSB for the year ended December 31, 2004, which was filed with theFederal Deposit Insurance Corporation.

 

Thefinancial information included herein reflects all adjustments (consisting ofnormal recurring adjustments), which are, in the opinion of management,necessary to a fair presentation of the Company’s financial position andresults for the interim period ended September30, 2005.

 

Thepreparation of consolidated financial statements requires management to makeestimates and assumptions that affect the reported amounts of assets,liabilities and income and expense amounts. Actual results could differ from those estimates.  The results of operations for the nine monthsended September 30, 2005 are not necessarily indicative of the results to beexpected for the full year.

 

**2.       Stock Compensation Plans**

 

At September 30, 2005, the Company hadtwo stock-based employee compensation plans. The Company accounts for these plans under the recognition andmeasurement principles of APB Opinion No. 25, *Accountingfor Stock Issued to Employees*, and related Interpretations.  No stock-based employee compensation cost isreflected in net income, as all options granted under those plans had anexercise price that approximates the market value of the underlying stock onthe date of grant.  The following tableillustrates the effect on net income and earnings per share if the Company hadapplied the fair value recognition provisions of SFAS Statement No. 123, *Accounting for Stock-Based Compensation*, to stock-basedemployee compensation.

 

4

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**2.       Stock Compensation Plans**

 

** **
| ** **                                                                                                       | ** ** | **Three Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                       | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Net income, as reported                                                                                          |       | $                                    | 628,549    |   | $ | 424,422 |   |
| Deduct: Total stock-based employee compensation expense determined  under fair value based method for all awards |       | —                               |       | — |   |
| Pro forma net income                                                                                             |       | $                                    | 628,549    |   | $ | 424,422 |   |
| Earnings per share:                                                                                              |       |                                 |       |   |   |
| Basic - as reported                                                                                              |       | $                                    | 0.29       |   | $ | 0.20 |   |
| Basic - pro forma                                                                                                |       | $                                    | 0.29       |   | $ | 0.20 |   |
| Diluted - as reported                                                                                            |       | $                                    | 0.28       |   | $ | 0.20 |   |
| Diluted - pro forma                                                                                              |       | $                                    | 0.28       |   | $ | 0.20 |   |

 

 
| ** **                                                                                                       | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                       | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| Net income, as reported                                                                                          |       | $                                   | 1,775,737  |   | $ | 1,330,383 |   |
| Deduct: Total stock-based employee compensation expense determined  under fair value based method for all awards |       | (288,626                            | )          | (259,084 | ) |
| Pro forma net income                                                                                             |       | $                                   | 1,487,111  |   | $ | 1,071,299 |   |
| Earnings per share:                                                                                              |       |                                |       |   |   |
| Basic - as reported                                                                                              |       | $                                   | 0.83       |   | $ | 0.65 |   |
| Basic - pro forma                                                                                                |       | $                                   | 0.69       |   | $ | 0.52 |   |
| Diluted - as reported                                                                                            |       | $                                   | 0.79       |   | $ | 0.64 |   |
| Diluted - pro forma                                                                                              |       | $                                   | 0.66       |   | $ | 0.52 |   |
|                                                                                                                  |            |                                     |            |  |  |  |  |  |  |

 

**3.       EarningsPer Common Share**

 

TheCompany is required to report earnings per common share with and without thedilutive effects of potential common stock issuances from instruments such asoptions, convertible securities and warrants on the face of the statements ofincome.  Earnings per common share arebased on the weighted average number of common shares outstanding during theperiod while the effects of potential common shares outstanding during theperiod are included in diluted earnings per share.  Additionally, the Company must reconcile theamounts used in the computation of both “basic earnings per share” and “dilutedearnings per share”.  Presented below isa summary of the components used to calculate basic and diluted earnings percommon share.

 

5

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**3.       EarningsPer Common Share**

 
| ** **                                                                                                                       | ** ** | **Three Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                       | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Basic earnings per share:                                                                                                        |       |                                 |       |   |   |
| Weighted average common shares outstanding                                                                                       |       | 2,145,250                            |       | 2,145,250 |   |
|                                                                                                                             |       |                                 |       |   |   |
| Net income                                                                                                                       |       | $                                    | 628,549    |   | $ | 424,422 |   |
|                                                                                                                             |       |                                 |       |   |   |
| Basic earnings per share                                                                                                         |       | $                                    | 0.29       |   | $ | 0.20 |   |
|                                                                                                                             |       |                                 |       |   |   |
| Diluted earnings per  share:                                                                                                     |       |                                 |       |   |   |
| Weighted average common shares outstanding                                                                                       |       | 2,145,250                            |       | 2,145,250 |   |
| Net effect of the assumed exercise of stock options based on the  treasury stock method using average market prices for the year |       | 97,988                               |       | 26,845 |   |
| Total weighted average common shares and common stock equivalents  outstanding                                                   |       | 2,243,238                            |       | 2,172,095 |   |
|                                                                                                                             |       |                                 |       |   |   |
| Net income                                                                                                                       |       | $                                    | 628,549    |   | $ | 424,422 |   |
|                                                                                                                             |       |                                 |       |   |   |
| Diluted earnings per share                                                                                                       |       | $                                    | 0.28       |   | $ | 0.20 |   |

 

 
| ** **                                                                                                                       | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                       | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| Basic earnings per share:                                                                                                        |       |                                |       |   |   |
| Weighted average common shares outstanding                                                                                       |       | 2,145,250                           |       | 2,044,513 |   |
|                                                                                                                             |       |                                |       |   |   |
| Net income                                                                                                                       |       | $                                   | 1,775,737  |   | $ | 1,330,383 |   |
|                                                                                                                             |       |                                |       |   |   |
| Basic earnings per share                                                                                                         |       | $                                   | 0.83       |   | $ | 0.65 |   |
|                                                                                                                             |       |                                |       |   |   |
| Diluted earnings per  share:                                                                                                     |       |                                |       |   |   |
| Weighted average common shares outstanding                                                                                       |       | 2,145,250                           |       | 2,044,513 |   |
| Net effect of the assumed exercise of stock options based on the  treasury stock method using average market prices for the year |       | 97,988                              |       | 19,654 |   |
| Total weighted average common shares and common stock equivalents  outstanding                                                   |       | 2,243,238                           |       | 2,064,167 |   |
|                                                                                                                             |       |                                |       |   |   |
| Net income                                                                                                                       |       | $                                   | 1,775,737  |   | $ | 1,330,383 |   |
|                                                                                                                             |       |                                |       |   |   |
| Diluted earnings per share                                                                                                       |       | $                                   | 0.79       |   | $ | 0.64 |   |
|                                                                                                                                  |            |                                     |            |  |  |  |  |  |  |

 

6

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

 

In December 2004, theFinancial Accounting Standards Board (FASB) issued FASB Statement No. 123(revised 2004) (FAS 123(R)), *Share-BasedPayment*.  FAS 123(R) establishes standards for the accountingfor transactions in which an entity exchanges its equity instruments for goodsor services.  It also addresses transactions in which an entity incursliabilities in exchange for goods or services that are based on the fair valueof the entity’s equity instruments or that may be settled by the issuance ofthose equity instruments.  FAS 123(R) focuses primarily on accounting fortransactions in which an entity obtains employee services in share-basedpayment transactions such as the issuance of stock options in exchange foremployee services.  FAS 123(R) does not change the accounting guidance forshare-based payment transactions with parties other than employees provided inFAS 123 as originally issued and EITF Issue No. 96-18, “Accounting forEquity Instruments That Are Issued to Other Than Employees for Acquiring, or inConjunction with Selling, Goods or Services.”  FAS 123(R) does not addressthe accounting for employee share ownership plans, which are subject to AICPASOP 93-6, *Employers’ Accounting for EmployeeStock Ownership Plans*.  Public entities that file as smallbusiness issuers will be required to apply FAS 123(R) in the first interim orannual reporting period that begins after December 15, 2005.

 

In March 2005, theSecurities and Exchange Commission’s (SEC or Commission) Office of the ChiefAccountant and its Division of Corporation Finance announced the release ofStaff Accounting Bulletin No. 107 (SAB 107), “Share Based Payment”, inresponse to frequently asked questions and to provide the SEC staff’s viewsregarding the application of FAS 123(R).  SAB 107 provides interpretiveguidance related to the interaction between FAS 123(R) and certain SECrules and regulations; addresses the staff’s views on the subject ofvaluation of share-based payment transactions for public companies; andreiterates the importance of disclosures related to share-based paymenttransactions in the consolidated financial statements filed with the SEC.

 

7

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

 

The following is our discussion and analysis ofcertain significant factors which have affected the financial position andoperating results of FirstBank Financial Services, Inc. (the “Company”) duringthe periods included in the accompanying consolidated financial statements.

 

**Forward Looking Statements**

 

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

 

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

•                  the effects of future economic conditions;

•                  governmental monetary and 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, creditunions, securities brokerage firms, insurance companies, money market and othermutual funds and other financial institutions operating in our market area andelsewhere, including institutions operating regionally, nationally, andinternationally, together with such competitors offering banking products andservices by mail, telephone, computer, and the Internet;

•                  changes occurring in business 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.

 

8

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**Introduction**

 

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

 

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

 

**Overview**

 

Management monitors the financial conditionof the Company in order to protect depositors, increase undivided profits andprotect current and future earnings. Further discussion of significant items affecting the Company’sfinancial condition are discussed in detail below.

 

**Critical Accounting Policies**

 

We have adopted various accounting policieswhich govern the application of accounting principles generally accepted in theUnited States of America in the preparation of our consolidated financialstatements.  Our significant accountingpolicies are described in the footnotes to the financial statements for FirstBank of Henry County at December 31, 2004 as filed in our annual report on Form10-KSB, which was filed with the Federal Deposit Insurance Corporation.

 

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

 

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

 

9

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**Asset Quality**

 

A major key to long-term earnings growth isthe maintenance of a high-quality loan portfolio. The Company’s directive inthis regard is carried out through its policies and procedures for extendingcredit to the Company’s customers.  Thegoal and result of these policies and procedures is to provide a sound basisfor new credit extensions and an early recognition of problem assets to allowthe most flexibility in their timely disposition.  Additions to the allowance for loan losseswill be made periodically to maintain the allowance at an appropriate levelbased upon management’s analysis of potential risk in the loan portfolio.  The amount of the loan loss provision isdetermined by an evaluation of the level of loans outstanding, the level ofnon-performing loans, historical loan loss experience, delinquency trends, theamount of actual losses charged to the allowance in a given period, andassessment of present and anticipated economic conditions.

 

A provision for loan losses was madeduring the third quarter and first nine months of 2005, respectively of$165,000 and $509,615 as compared to the same period in 2004 of $155,000 and$605,000 respectively.  The amountsprovided are due primarily to our assessment of inherent risk in the loanportfolio. The allowance for loan losses as a percentage of total loans was1.22% at September 30, 2005 ascompared to 1.10% at December 31, 2004. Based upon our evaluation of the loan portfolio, we believe theallowance for loan losses to be adequate to absorb losses on existing loansthat may become uncollectible.

 

During the third quarter, a loan customer declared bankruptcy with loanbalances of approximately $345,000.  Management will continue to evaluatethe necessity of recording additional reserves as more information concerningthe bankruptcy proceedings become available.  In addition, $100,000 wasforeclosed upon during the quarter and is included in other assets.  Subsequent to the third quarter, theforeclosed asset was sold for a marginal gain.

 

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

 

The allowance is an amount thatmanagement believes will be adequate to absorb estimated losses relating tospecifically identified loans as well as probable credit losses inherent in thebalance of the loan portfolio, based on an evaluation of the collectibility ofexisting loans and prior loss experience. This evaluation also takes into consideration such factors as changes inthe nature and volume of the loan portfolio, overall portfolio quality, reviewof specific problem loans, concentrations and current economic conditions thatmay affect the borrower’s ability to pay. This evaluation does not include the effects of expected losses onspecific loans or groups of loans that are related to future events or expectedchanges in economic conditions.  Whilemanagement uses the best information available to make its evaluation, futureadjustments to the allowance may be necessary if there are significant changesin economic conditions.  In addition,regulatory agencies, as an integral part of their examination process,periodically review the Company’s allowance for loan losses, and may requirethe Company to make additions to the allowance based on their judgment aboutinformation available to them at the time of their examinations.

 

10

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

 

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

 
| ** **                                                                                                | ** ** | **September 30,**          | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                                | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| ** **                                                                                                | ** ** | **(Dollars in Thousands)** | ** ** |
| Nonaccrual loans                                                                                          |       | $                          | 345        |   | $ | 6 |   |
| Loans contractually past due ninety days or more as to interest or  principal payments and still accruing |       | 15                         |       | — |   |
| Restructured loans                                                                                        |       | —                     |       | — |   |
| Potential problem loans                                                                                   |       | —                     |       | — |   |
| Interest income that would have been recorded on non-accrual and  restructured loans under original terms |       | —                     |       | — |   |
| 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 the accrualof interest income when, in the opinion of management, collection of interestbecomes doubtful. We will generally discontinue the accrual of interest when(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.

 

11

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

 
| ** **                                                                     | ** ** | **Nine Months Ended**      | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                     | ** ** | **September 30,**          | ** ** |
| ** **                                                                     | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| ** **                                                                     | ** ** | **(Dollars in Thousands)** | ** ** |
| Average amount of loans outstanding                                            |       | $                          | 153,826    |   | $ | 94,522 |   |
| Balance of allowance for loan losses at beginning of period                    |       | $                          | 1,471      |   | $ | 712 |   |
| Loans charged off:                                                             |       |                       |       |   |   |
| Commercial and financial                                                       |       | —                     |       | — |   |
| Real estate mortgage                                                           |       | —                     |       | — |   |
| Installment                                                                    |       | (16                        | )          | (10 | ) |
|                                                                           |       | (16                        | )          | (10 | ) |
| Loans recovered:                                                               |       |                       |       |   |   |
| Commercial and financial                                                       |       | —                     |       | — |   |
| Real estate mortgage                                                           |       | —                     |       | — |   |
| Installment                                                                    |       | 3                          |       | 7 |   |
|                                                                           |       | 3                          |       | 7 |   |
| Net charge-offs                                                                |       | (13                        | )          | (3 | ) |
| Additions to allowance charged to operating expense during period              |       | 510                        |       | 605 |   |
| Balance of allowance for loan losses at end of period                          |       | $                          | 1,968      |   | $ | 1,314 |   |
| Ratio of net loans charged off during the period to average loans  outstanding |       | 0.01                       | %          | 0.01 | % |

 

**Liquidity and Capital Resources**

 

Liquidity management involves the matching ofthe cash flow requirements of customers, who may be either depositors desiringto withdraw funds or borrowers needing assurance that sufficient funds will beavailable to meet their credit needs, and the ability of the Company to meetthose needs.  The Company strives tomaintain an adequate liquidity position by managing the balances and maturitiesof interest-earning assets and interest-bearing liabilities so that the balanceit has in short-term investments at any given time will adequately cover anyreasonably anticipated immediate need for funds.  Additionally, the Company maintainsrelationships with correspondent banks, which could provide funds on shortnotice, if needed.  At September 30, 2005 the Company had nofederal funds purchased.

 

The liquidity and capital resources of theCompany are monitored daily by management, and monthly by the Company’sBoard-authorized Asset and Liability Management Committee, and on a periodicbasis by state and federal regulatory authorities.  As determined under guidelines established bythese regulatory authorities, the Company’s liquidity ratios at September 30, 2005 were consideredsatisfactory.  At that date, the Company’sshort-term investments and available federal funding were adequate to cover anyreasonably anticipated immediate need for funds.  At September30, 2005, the Company had unused available federal fund lines of$11,200,000 and unused Federal Home Loan Bank borrowing capacity ofapproximately $15,640,000.  The Companyis aware of no events or trends likely to result in a material change inliquidity.

 

12

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The consolidated financial statements, as of September 30, 2005, evidenced anincreased liquidity position.  Cash anddue from banks, interest-bearing deposits in banks and federal funds soldtotaled $19,800,891 as of September 30,2005 as compared to $12,656,217 as of December 31, 2004.  Total cash and due from banks amounted to$3,599,091 representing 1.65% 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 $77.2 million as of September 30, 2005.  These deposits are readily obtainable atrates not significantly different from rates that we pay on deposits in ourlocal market.  The Company’s ability tomaintain and expand its deposit base and borrowing capabilities is a source ofliquidity.  For the nine-month periodended September 30, 2005, totaldeposits increased from $131.4 million at December 31, 2004 to $165.4 millionat September 30, 2005.  Management is committed to maintainingcapital at a level sufficient to protect depositors, provide for reasonablegrowth, and fully comply with all regulatory requirements.  The table below illustrates the Company’sregulatory capital ratios at September30, 2005.

 
| ** **                 | ** ** | ** **  | ** ** | **Minimum**     | ** ** |
|----------------------------|------------|-------------|------------|-----------------|------------|
| ** **                 | ** ** | ** **  | ** ** | **Regulatory**  | ** ** |
| ** **                 | ** ** | **Company** | ** ** | **Requirement** | ** ** |
| Leverage capital ratios    |       | 11.42       | %          | 4.00            | %          |
| Risk-based capital ratios: |       |        |       |            |       |
| Tier I capital             |       | 13.52       | %          | 4.00            | %          |
| Total capital              |       | 14.61       | %          | 8.00            | %          |

 

**Off-Balance Sheet Risk**

 

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

 

Our exposure to credit loss in the 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:

 
| ** **                    | ** ** | **September 30,** | ** ** |
|-------------------------------|------------|-------------------|------------|
| ** **                    | ** ** | **2005**          | ** ** |
| Commitments to extend  credit |       | $                 | 34,097,000 |   |
| Letters of credit             |       | 1,056,000         |       |
|                          |       | $                 | 35,153,000 |   |
|                               |            |                   |            |  |  |

 

13

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

 

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

 

**Financial Condition**

 

Our total assets grew by 23.15% for thefirst nine months of 2005.  Depositgrowth of approximately $34.04 million and additional FHLB borrowings of $5.0million were used to fund net loan growth of approximately $27.81 million withthe remainder being primarily invested in securities or maintained in cash anddue from banks and federal funds sold. Loan demand continues to be strong in our primary market area of HenryCounty, Georgia and surrounding counties. Our loan to available funds ratio has remained steady since December 31,2004, holding in the 83-88% range. Stockholders’ equity has increased by $1,508,787 due to net income of$1,775,737 less unrealized losses on securities available-for-sale, net of tax,of $266,950.

 

The Company is currently branching intotwo locations in Henry county.  The Company has contractual obligationsfor approximately $1.1 million of additional construction costs in theseprojects.

 

**Results of Operations****For The Three Months EndedSeptember 30, 2005 and 2004 and for the Nine Months Ended September 30, 2005and 2004**

 

Following is a summary of our operationsfor the periods indicated.
| ** **                | ** ** | **Three Months Ended**     | ** ** |
|---------------------------|------------|----------------------------|------------|
| ** **                | ** ** | **September 30,**          | ** ** |
| ** **                | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| ** **                | ** ** | **(Dollars in Thousands)** | ** ** |
| Interest income           |       | $                          | 3,575      |   | $ | 2,162 |   |
| Interest expense          |       | (1,486                     | )          | (751 | ) |
| Net interest income       |       | 2,089                      |       | 1,411 |   |
| Provision for loan losses |       | (165                       | )          | (155 | ) |
| Other income              |       | 77                         |       | 51 |   |
| Other expense             |       | (1,025                     | )          | (655 | ) |
| Pretax income             |       | 976                        |       | 652 |   |
| Income tax expense        |       | 347                        |       | 228 |   |
| Net income                |       | $                          | 629        |   | $ | 424 |   |

 

14

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| ** **                | ** ** | **Nine Months Ended**      | ** ** |
|---------------------------|------------|----------------------------|------------|
| ** **                | ** ** | **September 30,**          | ** ** |
| ** **                | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| ** **                | ** ** | **(Dollars in Thousands)** | ** ** |
| Interest income           |       | $                          | 9,548      |   | $ | 5,416 |   |
| Interest expense          |       | (3,796                     | )          | (1,818 | ) |
| Net interest income       |       | 5,752                      |       | 3,598 |   |
| Provision for loan losses |       | (510                       | )          | (605 | ) |
| Other income              |       | 214                        |       | 201 |   |
| Other expense             |       | (2,685                     | )          | (1,736 | ) |
| Pretax income             |       | 2,771                      |       | 1,458 |   |
| Income tax expense        |       | 995                        |       | 128 |   |
| Net income                |       | $                          | 1,776      |   | $ | 1,330 |   |

 

Net Interest Income

 

Our net interest income increased approximately$678,000 and $2,154,000 for the three and nine month periods ended September30, 2005, respectively, compared to the same periods in 2004.  Our net interest margin increased to 3.92%during the first nine months of 2005 as compared to 3.76% for the first ninemonths of 2004. The increase in net interest income is due primarily to theincreased volume of average loans outstanding.  Our cost of funds increased to 3.06% for the first nine months of 2005as compared to 2.37% for the first nine months of 2004.

 

Noninterest Income

 

Noninterest income increasedapproximately $26,000 and $13,000 for the three and nine month periods endedSeptember 30, 2005, respectively, compared to the same periods in 2004.  The increase in 2005 consists of $16,000 and$27,000 in service charges on deposit accounts for the three and nine monthsended September 30, 2005, a $13,000 decrease in gain on sale of securitiesavailable-for-sale and a $3,000 increase in gain on sale of assets for the ninemonths ended September 30, 2005, and a $10,000 increase and $4,000 decrease inother income for the three and nine months ended September 30, 2005.

 

Noninterest Expenses

 

Noninterest expenses increasedapproximately $370,000 and $949,000 for the three and nine month periods endedSeptember 30, 2005, respectively, compared to the same periods in 2004.  The increases in 2005 consist of increases of$193,000 and $556,000 in salaries and employee benefits, $75,000 and $104,000in equipment and occupancy and $102,000 and $289,000 in other operating for thethree and nine months ended September 30, 2005, respectively as compared to thesame periods in 2004.   The increase insalaries and employee benefits represents normal increases in salaries and anincrease in the number of full time equivalent employees.  Equipment and occupancy expenses haveincreased due to the need for additional equipment for employees, board roomrenovation into offices and other occupancy expenses related to the OperationsCenter.  The company has signed an operating lease agreement forapproximately $70,000 a year in lease expense to provide space for anOperations Center.

The increases in other operating expensesare due primarily to our overall growth.

 

15

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Income Taxes

 

We have recorded a provision for incometaxes of $347,171 and $994,964 for the three and nine months ended September30, 2005, respectively, which represents 35.6% and 35.9% of income beforeprovision for income taxes, respectively. The income tax benefit recorded for the nine months ended September 30,2004 consisted of current tax expense of $526,000 offset by the recognition ofdeferred tax assets of $398,000.

 

Regulatory Matters

 

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

 

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

 

**ITEM 3.  Controlsand Procedures**

 

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

 

There have been no changes in the Company’sinternal control over financial reporting during the nine months endedSeptember 30, 2005, or, to the Company’s knowledge, other factors that couldsignificantly affect those internal controls subsequent to the date the Companycarried out its evaluation, that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting, and there have been no corrective actions with respect to significantdeficiencies or material weaknesses.

 

The design of anysystem of controls and procedures is based in part upon certain assumptionsabout the likelihood of future events. There can be no assurance that any design will succeed in achieving itsstated goals under all potential future conditions.

 

16

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

 
| None |
|------|

 

**ITEM 6.  EXHIBITS**

 
| 31.1   |   | Certification of the Chief Executive Officer,  Pursuant to Rule 13a-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. |

 

17

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**SIGNATURES**

 

 

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

 

 
|             |   | FIRSTBANK FINANCIAL SERVICES, INC.                 |
|------------------|--------|----------------------------------------------------|
|             |   | (Registrant)                                       |
|             |   |                                               |
| November 9, 2005 |   | /s/ Thaddeus M. Williams                           |
| Date             |   | Thaddeus M. Williams, Acting President  and C.E.O. |
|             |   | (Principal Executive Officer)                      |
|             |   |                                               |
| November 9, 2005 |   | /s/ Lisa J. Maxwell                                |
| Date             |   | Lisa J. Maxwell, C.F.O.                            |
|             |   | (Principal Financial and Accounting  Officer)      |

 

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