10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For fiscal year ended December 31, 2006

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 000-23550

FENTURA FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

Michigan	38-2806518
(State or other jurisdiction of	(IRS Employer Identification No.)
incorporation or organization)
175 North Leroy, Fenton, Michigan	48430-0725
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code (810) 750-8725

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act: Common Stock

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes o     No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes o      No þ

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for 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.  þ Yes       o No

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.       þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o      Accelerated filer o      Non-accelerated filer þ

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

State the aggregate market value of the voting and nonvoting common equity held by nonaffiliates of the registrant computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant’s most recently completed second quarter.

Aggregate Market Value as of June 30, 2006: $58,752,175.

State the number of shares outstanding of each of issuer’s classes of common equity, as of the latest practicable date. 2,160,106 shares of Common Stock as of March 14, 2007.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Fentura Financial, Inc. Proxy Statement for its annual meeting of shareholders to be held April 24, 2007 and its Rule 14a-3 annual report are incorporated by reference into Parts II and III.

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Fentura Financial, Inc.

2006 Annual Report on Form 10-K

Table Of Contents

	Page
PART I
Item 1. Description of Business		3
Item 1A Risk Factors		9
Item 1B Unresolved Staff Comments		14
Item 2. Description of Property		15
Item 3. Legal Proceedings		15
Item 4. Submission of Matters to a Vote of Security Holders		15
Additional Item — Executive Officers of Registrant		15
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		16
Item 6. Selected Financial Data		17
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk		17
Item 8. Financial Statements and Supplementary Data		17
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		17
Item 9A. Controls and Procedures		17
Item 9B. Other Information		18
PART III
Item 10. Directors, Executive Officers and Corporate Governance		18
Item 11. Executive Compensation		18
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		18
Item 13. Certain Relationships and Related Transactions, and Director Independence		19
Item 14. Principal Accountant Fees and Services		19
PART IV
Item 15. Exhibits and Financial Statement Schedules		19
SIGNATURES		21
EXHIBIT INDEX		22
Annual Report to Security Holders
Code of Ethics
Subsidiaries of the Registrant
Consent of Independent Registered Public Accounting Firm
Certificate of President & Chief Executive Officer Pursuant to Section 302
Certificate of Chief Financial Officer Pursuant to Section 302
Certificate of Chief Executive Officer & Chief Financial Officer Pursuant to Section 906

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

The Company

     Fentura Financial, Inc. (the “Company” or “Fentura”) is a bank holding company headquartered in Fenton, Michigan that owns three subsidiary banks (see “The Banks” below). All information in this Item 1 is as of December 31, 2006. The Company’s subsidiary banks operate 17 community banking offices offering a full range of banking services principally to individuals, small business, and government entities throughout mid-Michigan and western Michigan. At the close of business on December 31, 2006, the Company had assets of $622 million, deposits of $528 million, and shareholders’ equity of $51 million. Trust assets under management totaled $142 million.

     Fentura was incorporated in 1987 to serve as the holding company of its sole subsidiary bank, The State Bank (“TSB” or one of the “Banks”). TSB traces its origins to its predecessor, The Commercial Savings Bank of Fenton, which was incorporated in 1898. See “The Banks” below. On March 13, 2000 a second bank subsidiary, Davison State Bank (“DSB” or one of the “Banks”) commenced operation. On March 15, 2004, Fentura acquired West Michigan Community Bank (“WMCB” or one of the “Banks”).

     The Company’s principal executive offices are located at 175 North Leroy, Fenton, Michigan 48430-0725, and its telephone number is (810) 750-8725.

The Banks

     TSB’s original predecessor was incorporated as a state banking corporation under the laws of Michigan on September 16, 1898 under the name “The Commercial Savings Bank of Fenton.” In 1931, it changed its name to State Savings Bank of Fenton, and in 1988 became The State Bank. For over 100 years, TSB has been engaged in the general banking business in the Fenton, Michigan area. TSB is headquartered in Fenton and considers its primary service area to be portions of Genesee, Oakland, and Livingston counties in Michigan. As of December 31, 2006, TSB operated four offices and an operations center in the City of Fenton, Michigan, one office in the City of Linden, Michigan, one office in the Village of Holly, Michigan, three offices in the Township of Grand Blanc, Michigan, and one office in Brighton, Michigan. Its main office is located in downtown Fenton.

     DSB commenced operations on March 13, 2000, and is engaged in the general banking business in the Davison, Michigan area. DSB is headquartered in Davison and considers its primary service area to be portions of Genesee and Lapeer Counties. As of December 31, 2006, DSB operated two offices in the City of Davison, Michigan.

     Fentura acquired West Michigan Community Bank on March 15, 2004. WMCB is engaged in the general banking business in Hudsonville, Michigan, and other portions of Ottawa County and western Kent County, Michigan. WMCB is headquartered in Hudsonville and considers its primary service areas to be portions of Kent and Ottawa counties. As of December 31, 2006, WMCB operated two offices in the City of Hudsonville, Michigan, one office in the City of Jenison, Michigan, one office in the City of Holland, Michigan and one office in the City of Grandville, Michigan.

     All of the Banks are community-oriented providers of financial services engaged in the business of general commercial banking. Their activities include investing in state and federal securities, accepting demand deposits, savings and other time deposits, extending retail, commercial, consumer and real estate loans to individuals and businesses, providing safe deposit boxes and credit card services, transmitting funds and providing other services generally associated with full service commercial banking. Lending is focused on individuals and small businesses in the local markets served by the Banks. In addition, TSB and WMCB operate trust departments offering a full range of fiduciary services.

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     All three banks are state banks, chartered under the Michigan Banking Code. None are members of the Federal Reserve, but the deposits of each are insured by the Federal Deposit Insurance Corporation (the “FDIC”). See “Supervision and Regulation” below.

     As of December 31, 2006, TSB employed 130 full time personnel, including 45 officers, and an additional 38 part time employees; DSB employed 13 full time personnel, including 5 officers, and an additional 10 part time employees; WMCB employed 45 full time personnel, including 18 officers, and an additional 15 part time employees. All Banks consider their employee relations to be excellent.

Competition

     The financial services industry is highly competitive. The Banks compete with other commercial banks, many of which are subsidiaries of bank holding companies, for loans, deposits, trust accounts, and other business on the basis of interest rates, fees, convenience and quality of service. The Banks also compete with a variety of other financial services organizations including savings and loan associations, finance companies, mortgage banking companies, brokerage firms, credit unions and other financial organizations. Many of the Banks’ competitors have substantially greater resources than the Banks.

Supervision and Regulation

     The following is a summary of certain statutes and regulations affecting the Company and the Banks. This summary is qualified in its entirety by such statutes and regulations. A change in applicable laws or regulations may have a material effect on the Company, the Banks and the business of the Company and the Banks.

General

     Financial institutions and their holding companies are extensively regulated under federal and state law. Consequently, the growth and earnings performance of the Company and the Banks can be affected not only by management decisions and general economic conditions, but also by the statutes administered by, and the regulations and policies of, various governmental regulatory authorities. Those authorities include, but are not limited to, the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), the FDIC, the Commissioner of the Michigan Office of Financial and Insurance Services (“Commissioner”), the Internal Revenue Service, and state taxing authorities. The effect of such statutes, regulations and policies can be significant, and cannot be predicted with a high degree of certainty.

     Federal and state laws and regulations generally applicable to financial institutions and their holding companies regulate, among other things, the scope of business, investments, reserves against deposits, capital levels relative to operations, lending activities and practices, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. The system of supervision and regulation applicable to the Company and the Banks establishes a comprehensive framework for their respective operations and is intended primarily for the protection of the FDIC’s deposit insurance funds, the depositors of the Banks, and the public, rather than shareholders of the Banks or the Company.

     Federal law and regulations establish supervisory standards applicable to the lending activities of the Banks, including internal controls, credit underwriting, loan documentation and loan-to-value ratios for loans secured by real property.

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     The Company’s common stock is registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). It is therefore subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act provided for numerous changes to the reporting, accounting, corporate governance and business practices of companies as well as financial and other professionals who have involvement with the U.S. public markets.

The Company

     General. The Company, as the sole shareholder of the Banks, is a bank holding company and is registered with, and subject to regulation by, the Federal Reserve Board under the Bank Holding Company Act, as amended (the “BHCA”). Under the BHCA, the Company is subject to periodic examination by the Federal Reserve Board, and is required to file with the Federal Reserve Board periodic reports of its operations and such additional information as the Federal Reserve Board may require.

     In accordance with Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Banks and to commit resources to support the Banks in circumstances where the Company might not do so absent such policy. In addition, if the Commissioner deems a Bank’s capital to be impaired, the Commissioner may require the Bank to restore its capital by a special assessment upon the Company as the Bank’s sole shareholder. If the Company were to fail to pay any such assessment, the directors of the Bank would be required, under Michigan law, to sell the shares of the Bank’s stock owned by the Company to the highest bidder at either a public or private auction and use the proceeds of the sale to restore the Bank’s capital.

     Investments and Activities. Under the BHCA, a bank holding company must obtain Federal Reserve approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company. The Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States without regard to geographic restrictions or reciprocity requirements imposed by state law, but subject to certain conditions, including limitations on the aggregate amount of deposits that may be held by the acquiring holding company and all of its insured depository institution affiliates.

     The merger or consolidation of an existing bank subsidiary of the Company with another bank, or the acquisition by such a subsidiary of assets of another bank, or the assumption of liability by such a subsidiary to pay any deposits in another bank, will require the prior written approval of the responsible Federal depository institution regulatory agency under the Bank Merger Act. In addition, in certain such cases an application to, and the prior approval of, the Federal Reserve Board under the BHCA and/or the Commissioner under the Michigan Banking Code, may be required.

     With certain limited exceptions, the BHCA prohibits any bank holding company from engaging, either directly or indirectly through a subsidiary, in any activity other than managing or controlling banks unless the proposed non-banking activity is one that the Federal Reserve Board has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Under current Federal Reserve Board regulations, such permissible non-banking activities include such things as mortgage banking, equipment leasing, securities brokerage, and consumer and commercial finance company operations. Well-capitalized and well-managed bank holding companies may engage de novo in certain types of non-banking activities without prior notice to, or approval of, the Federal Reserve Board, provided that written notice of the new activity is given to the Federal Reserve Board within 10 business days after the activity is commenced. If a bank holding company wishes to engage in a non-banking activity by acquiring a going concern, prior notice and/or prior approval will be required, depending upon the activities in which the company to be acquired is engaged, the size of the company to be acquired and the financial and managerial condition of the acquiring bank holding company.

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     A bank holding company whose subsidiary depository institutions all are well-capitalized and well-managed and who have Community Reinvestment Act ratings of at least “satisfactory” may elect to become a financial holding company. A financial holding company is permitted to engage in a broader range of activities than are permitted to bank holding companies.

     Those expanded activities include any activity which the Federal Reserve (in certain instances in consultation with the Department of the Treasury) determines, by order or regulation, to be financial in nature or incidental to such financial activity, or to be complementary to a financial activity and not to pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. Such expanded activities include, among others: insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability or death, or issuing annuities, and acting as principal, agent, or broker for such purposes; providing financial, investment, or economic advisory services, including advising a mutual fund; and underwriting, dealing in, or making a market in securities.

     The BHCA generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank or financial holding companies.

     Federal legislation also prohibits the acquisition of control of a bank holding company, such as the Company, by a person or a group of persons acting in concert, without prior notice to the Federal Reserve. Control is defined in certain cases as the acquisition of 10% of the outstanding shares of a bank holding company.

     Capital Requirements. The Federal Reserve Board uses capital adequacy guidelines in its examination and regulation of bank holding companies. If capital falls below minimum guidelines, a bank holding company may, among other things, be denied approval to acquire or establish additional banks or non-bank businesses. These capital guidelines are comparable to those established by the regulatory authorities for the Banks discussed below.

     Dividends. The Company is a corporation separate and distinct from the Banks. Most of the Company’s revenues are received by it in the form of dividends paid by the Banks. Thus, the Company’s ability to pay dividends to its shareholders is indirectly limited by statutory restrictions on the Banks’ ability to pay dividends described below. Further, in a policy statement, the Federal Reserve Board has expressed its view that a bank holding company experiencing earnings weaknesses should not pay cash dividends exceeding its net income or which can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. Additionally, the Federal Reserve Board possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. Similar enforcement powers over the Banks are possessed by the FDIC. The “prompt corrective action” provisions of federal law and regulation authorizes the Federal Reserve Board to restrict the payment of dividends by the Company for an insured bank which fails to meet specified capital levels.

     In addition to the restrictions on dividends imposed by the Federal Reserve Board, the Michigan Business Corporation Act provides that dividends may be legally declared or paid only if after the distribution a corporation, such as the Company, can pay its debts as they come due in the usual course of business and its total assets equal or exceed the sum of its liabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of any holders of preferred stock whose preferential rights are superior to those receiving the distribution.

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The Banks

     General. The Banks are Michigan banking corporations, and their deposit accounts are insured by the deposit insurance fund of the FDIC. As FDIC-insured Michigan chartered banks, the Banks are subject to the examination, supervision, reporting and enforcement requirements of the Commissioner, as the chartering authority for Michigan banks, and the FDIC, as administrator of the deposit insurance fund. These agencies and the federal and state laws applicable to the Banks and their operations, extensively regulate various aspects of the banking business including, among other things, permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and on deposits, the maintenance of non-interest bearing reserves on deposit accounts, and the safety and soundness of banking practices.

     Deposit Insurance. As FDIC-insured institutions, the Banks are required to pay deposit insurance premium assessments to the FDIC. Following the adoption of the Federal Deposit Insurance Reform Act of 2005, the FDIC has the opportunity, through its rulemaking authority, to better price deposit insurance for risk than was previously authorized. The FDIC adopted regulations effective January 1, 2007 that create a new system of risk-based assessments, set assessment rates beginning January 1, 2007 and establish a new insurance assessment system. Under the new regulations there are four risk categories, and each insured institution will be assigned to a risk category based on capital levels and supervisory ratings. Well-capitalized institutions with CAMELS composite ratings of 1 or 2 will be placed in Risk Category I while other institutions will be placed in Risk Categories II, III or IV depending on their capital levels and CAMELS composite ratings. The new regulations also established assessment rates beginning January 1, 2007 with the highest rated institutions, those in Risk Category I, paying premiums of between .05% and .07% of deposits and the lowest rated institutions, those in Risk Category IV, paying premiums of .43% of deposits. The assessment rates may be changed by the FDIC as necessary to maintain the insurance fund at the reserve ratio designated by the FDIC, which currently is 1.25% of insured deposits. The FDIC may set the reserve ratio annually at between 1.15% and 1.50% of insured deposits. Deposit insurance assessments will be collected for a quarter at the end of the next quarter with the first assessments under the new system being collected on June 30, 2007 for insurance coverage for the first quarter of 2007. Assessments will be based on deposit balances at the end of the quarter, except for institutions with $1 billion or more in assets and institutions that become insured on or after January 1, 2007 which will have their assessment base determined using average daily balances of insured deposits.

     FICO Assessments. The Banks are subject to assessments to cover the payments on outstanding obligations of the Financing Corporation (“FICO”). FICO was created to finance the recapitalization of the Federal Savings and Loan Insurance Corporation, during the thrift crisis in the 1980s. From now until the maturity of the outstanding FICO obligations in 2019, insured institutions will share the cost of the interest on the FICO bonds on a pro rata basis.

     Commissioner Assessments. Michigan banks are required to pay supervisory fees to the Commissioner to fund the operations of the Commissioner. The amount of supervisory fees paid by a bank is based upon the bank’s total assets, as reported to the Commissioner.

     Capital Requirements. The FDIC has established the following minimum capital standards for state-chartered, FDIC insured non-member banks, such as the Banks: a leverage requirement consisting of a minimum ratio of Tier 1 capital to total average assets of 3% for the most highly-rated banks with minimum requirements of 4% to 5% for all others, and a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. Tier 1 capital consists principally of shareholders’ equity. These capital requirements are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions.

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     Prompt Corrective Regulatory Action. Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators’ powers depends on whether the institution in question is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized.” Federal regulations define these capital categories as follows:

	Total		Tier 1
	Risk-Based		Risk-Based
	Capital Ratio		Capital Ratio		Leverage Ratio
Well capitalized	10% or above		6% or above		5% or above
Adequately capitalized	8% or above		4% or above		4% or above
Undercapitalized	Less than 8%		Less than 4%		Less than 4%
Significantly undercapitalized	Less than 6%		Less than 3%		Less than 3%
Critically undercapitalized		—		—	A ratio of tangible equity to total assets of 2% or less

     As of December 31, 2006, each of the Banks’ ratios exceeded minimum requirements for the well capitalized category.

     Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include: requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution.

     In general, a depository institution may be reclassified to a lower category than is indicated by its capital levels if the appropriate federal depository institution regulatory agency determines the institution to be otherwise in an unsafe or unsound condition or to be engaged in an unsafe or unsound practice. This could include a failure by the institution, following receipt of a less-than-satisfactory rating on its most recent examination report, to correct the deficiency.

     Dividends. Under Michigan law, the Banks are restricted as to the maximum amount of dividends they may pay on their common stock. The Banks may not pay dividends except out of net income after deducting their losses and bad debts. A Michigan state bank may not declare or pay a dividend unless the bank will have surplus amounting to at least 20% of its capital after the payment of the dividend.

     Federal law generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. The FDIC may prevent an insured bank from paying dividends if the bank is in default of payment of any assessment due to the FDIC. In addition, the FDIC may prohibit the payment of dividends by an insured bank, if such payment is determined, by reason of the financial condition of the bank, to be an unsafe and unsound banking practice.

     Insider Transactions. The Banks are subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the Company or its subsidiaries, on investments in the stock or other securities of the Company or its subsidiaries and the acceptance of the stock or other securities of the Company or its subsidiaries as collateral for loans. Certain limitations and reporting requirements are also placed on extensions of credit by the Banks to their directors and officers, to directors and officers of the Company and its subsidiaries, to principal shareholders of the Company, and to “related interests” of such directors, officers and principal shareholders. In addition, federal law and regulations may affect the

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terms upon which any person becoming a director or officer of the Company or one of its subsidiaries or a principal shareholder of the Company may obtain credit from banks with which the Banks maintain a correspondent relationship.

     Safety and Soundness Standards. The FDIC has adopted guidelines to promote the safety and soundness of federally insured depository institutions. These guidelines establish standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.

     Investments and Other Activities. Under federal law and FDIC regulations, FDIC -insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. Federal law, as implemented by FDIC regulations, also prohibits FDIC insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank or its subsidiary, respectively, unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines the activity would not pose a significant risk to the deposit insurance fund. Impermissible investments and activities must be divested or discontinued within certain time frames set by the FDIC in accordance with federal law. These restrictions are not currently expected to have a material impact on the operations of the Banks.

     Consumer Protection Laws. The Banks’ businesses include making a variety of types of loans to individuals. In making these loans, the Banks are subject to State usury and regulatory laws and to various federal statutes, including the privacy of consumer financial information provisions of the Gramm-Leach-Bliley Act and regulations promulgated thereunder, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Real Estate Settlement Procedures Act, and the Home Mortgage Disclosure Act, and the regulations promulgated thereunder, which prohibit discrimination, specify disclosures to be made to borrowers regarding credit and settlement costs, and regulate the mortgage loan servicing activities of the Banks, including the maintenance and operation of escrow accounts and the transfer of mortgage loan servicing. In receiving deposits, the Banks are subject to extensive regulation under State and federal law and regulations, including the Truth in Savings Act, the Expedited Funds Availability Act, the Bank Secrecy Act, the Electronic Funds Transfer Act, and the Federal Deposit Insurance Act. Violation of these laws could result in the imposition of significant damages and fines upon the Bank and its directors and officers.

     Branching Authority. Michigan banks, such as the Banks, have the authority under Michigan law to establish branches in any state, including Michigan, the District of Columbia, a territory or protectorate of the United States or a foreign country, subject to receipt of all required regulatory approvals. Under federal law banks may establish interstate branch networks through merger or consolidation with other banks without regard to whether such activity is contrary to state law. The establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state (rather than the merger or consolidation with an out-of-state bank) is allowed only if specifically authorized by the law of the state where the branch will be established or acquired.

     Michigan law permits both U.S. and non-U.S. banks to establish branch offices in Michigan. The Michigan Banking Code permits, in appropriate circumstances and with the approval of the Commissioner, (1) sale by a Michigan bank of branches to an FDIC-insured bank, savings bank or savings and loan association located in a state in which a Michigan bank could purchase branches of the purchasing entity, (2) consolidation of Michigan banks and FDIC-insured banks, savings banks or savings and loan associations located in other states having laws, (3) establishment of branches in Michigan by FDIC-insured banks located in other states, the District of Columbia or U.S. territories or protectorates having laws permitting a Michigan bank to establish a branch in such jurisdiction, and (4) establishment by foreign banks of branches located in Michigan.

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ITEM 1A. Risk Factors.

     You should carefully consider the following risk factors, together with the other information provided in this Annual Report on Form 10-K.

     The Company may need additional capital in the future and adequate financing may not be available to it on acceptable terms, or at all.

     On March 15, 2004, the Company completed its acquisition of West Michigan Community Bank. At the time it was acquired, West Michigan Community Bank was operating under a Memorandum of Understanding (MOU) with the FDIC and the Michigan Office of Financial and Insurance Services. The MOU was lifted in July 2004, and the bank is no longer under special scrutiny by the FDIC or OFIS and is considered well capitalized under federal banking regulations. However, projections for West Michigan Community Bank indicate that it could require capital infusions in the near term to remain a well capitalized bank. The Company raised some capital in 2005 through an offering of its common stock to Michigan residents (resulting in approximately $758,000 of gross proceeds to the Company) and the issuance of $2 million aggregate principal amount of floating rate preferred securities through the Company’s newly-formed, wholly-owned trust, Fentura Financial Capital Trust II. However, additional capital may be required in the future, which may not be available to the Company on acceptable terms or at all. If the Company is unable to obtain the funding it needs, it may be unable to develop its products and services, take advantage of future opportunities, or respond to competitive pressures, which could have a material adverse effect on its financial condition and profitability.

     The Company has credit risk inherent in its asset portfolio, and its allowance for loan losses may not be sufficient to cover actual loan losses.

     The Banks’ loan customers may not repay their loans according to their respective terms, and any collateral securing the payment of these loans may be insufficient to assure repayment. As a result, the Banks may experience significant credit losses which could have a material adverse effect on the Company’s operating results.

     To offset this risk, the Company makes various assumptions and judgments about the collectibility of the loan portfolios of the Banks, including the creditworthiness of borrowers and the value of the real estate and other assets that may serve as collateral for the repayment of loans. In determining the size of the allowance for loan losses, the Company relies on its experience and its evaluation of current economic conditions. If its assumptions prove to be incorrect, its current allowance for loan losses may not be sufficient to cover any loan losses inherent in its loan portfolio and adjustments may be necessary to allow for different economic conditions or adverse developments in its loan portfolio. Material additions to the allowance would materially decrease net income.

     In the near term, the Company’s strategy is to continue to expand commercial lending activities in the markets in which its Banks are currently operating. The Company may also pursue opportunities to expand into new markets outside its traditional markets by establishing offices staffed by commercial loan officers who come from other commercial banks in these new markets. The Company cannot be sure that its loan loss experience with any new borrowers in these newer markets will be consistent with its loan loss experience in its traditional markets. Its actual loan loss experience in these markets may cause the Company to increase its reserves.

     The allowance for loan losses is based upon ranges of estimates and is not intended to imply either limitations on the usage of the allowance or precision of the specific amounts. The Company does not view the allowance for loan losses as being divisible among the various categories of loans. The entire allowance is available to absorb any future losses without regard to the category or categories in which the charged-off loans are classified. In addition, federal and state regulators periodically review the Company’s allowance for loan losses and may require it to increase the provision for loan losses or recognize additional loan charge-offs. Any increase in the allowance for loan losses or loan charge-offs

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required by these regulatory agencies could have a material adverse effect on the results of operations and financial condition of the Company.

     The Company has credit risk inherent in its securities portfolio.

     The Company maintains diversified securities portfolios, which include obligations of the U.S. Treasury and government-sponsored agencies as well as securities issued by states and political subdivisions, corporate securities, and mortgage-backed securities. The Company may also invest in capital securities, which include preferred stocks and trust preferred securities. At December 31, 2006, the Company owned (stated at fair value) approximately $2 million of common stock in other entities, which primarily represents its minority investments in four Michigan banks.

     The Company seeks to limit credit losses in its securities portfolios by generally purchasing only highly rated securities (rated “A” or higher by a major debt rating agency) or by conducting significant due diligence on the issuer for unrated securities. However, the Company may, in the future, experience losses in its securities portfolio which may be other than temporary in nature and result in charges that could materially adversely affect its results of operations.

     The Company’s mortgage-banking revenues are susceptible to substantial variations dependent largely upon factors that the Company does not control, such as market interest rates.

     The Company’s mortgage-banking revenues are earned in the form of gains on the sale of real estate mortgage loans. The amount of gains realized by the Company primarily depends on the volume of loans the Company sells, which depends on the Company’s ability to originate real estate mortgage loans and the demand for fixed-rate obligations and other loans that are outside of its established interest-rate risk parameters. Net gains on real estate mortgage loans are also dependent upon economic and competitive factors, which are largely outside of the Company’s control, as well as the Company’s ability to effectively manage exposure to changes in interest rates and can often be a volatile part of its overall revenues. As market interest rates continue to stabilize in 2007 or future periods, which they are generally expected to do, the Company’s level of mortgage loan activity, particularly refinancing activity, could decline, resulting in lower levels of real estate mortgage loan originations, sales, and gains on such sales.

     Fluctuations in interest rates and economic conditions could reduce the Company’s profitability and negatively affect its capital and liquidity.

     The Company realizes income primarily from the difference between interest earned on loans and investments and the interest paid on deposits and borrowings. The Company’s interest income and interest expense are affected by general economic conditions and by the policies of regulatory authorities. While the Company has taken measures intended to manage the risks of operating in a changing interest rate environment, there can be no assurance that these measures will be effective in avoiding undue interest rate risk. The Company expects that it will periodically experience “gaps” in the interest rate sensitivities of its assets and liabilities, meaning that either its interest-bearing liabilities will be more sensitive to changes in market interest rates than its interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to its position, this “gap” will work against it, and its earnings may be negatively affected.

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     The Company is unable to predict fluctuations of market interest rates, which are affected by, among other factors, changes in the following:

• inflation or deflation rates;

• levels of business activity;

• recession;

• unemployment levels;

• money supply;

• domestic or foreign events; and

• instability in domestic and foreign financial markets.

     In addition, substantially all of its loans are to businesses and individuals in mid-Michigan and West Michigan, and any decline in the economy of either of these areas could adversely affect it.

     The Company’s operations may be adversely affected if the Company is unable to secure adequate funding. The Company’s use of wholesale funding sources exposes it to liquidity risk and potential earnings volatility.

     The Company relies on wholesale funding to a modest extent, including its revolving credit facility, Federal Home Loan Bank borrowings, and brokered deposits, to augment its core deposits to fund its business. Because wholesale funding sources are affected by general market conditions, the availability of funding from wholesale lenders may be dependent on the confidence these investors have in the Company’s commercial and consumer finance operations. The continued availability to the Company of these funding sources is uncertain, and it may be difficult to retain or replace brokered deposits at attractive rates as they mature. The Company’s liquidity will be constrained if it is unable to renew its wholesale funding sources or if adequate financing is not available in the future at acceptable rates of interest or at all. The Company may not have sufficient liquidity to continue to fund new loans, and the Company may need to liquidate loans or other assets unexpectedly in order to repay obligations as they mature.

     The Company relies heavily on its management team, and the unexpected loss of key managers may adversely affect its operations.

     The Company’s success to date has been influenced strongly by its ability to attract and to retain senior management experienced in banking and financial services. The ability to retain executive officers and the current management teams of each of its lines of business will continue to be important to successful implementation of its strategies. The Company does not have employment or non-compete agreements with any of these key employees, except that the Company entered into non-compete agreements with each of the directors of West Michigan Financial Corp. in connection with the Company’s acquisition of West Michigan Financial Corp. and its subsidiaries (including West Michigan Community Bank). The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on the Company’s business and financial results.

     Competition with other financial institutions could adversely affect the Company’s profitability.

     The Company faces vigorous competition from banks and other financial institutions, including savings and loan associations, savings banks, finance companies, mortgage banking companies, credit unions, and other financial organizations. A number of these banks and other financial institutions have substantially greater resources and lending limits, larger branch systems, and a wider array of banking services. To a limited extent, the Company also competes with other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies, and insurance companies, which are not subject to the same degree of regulation as that imposed on the Banks. As a result, these non-bank competitors may have an advantage over the Company in providing certain

12

services, and this competition may reduce or limit the Company’s margins on banking services, reduce its market share, and adversely affect its results of operations and financial condition.

     Changes in economic conditions could adversely affect the Company’s loan portfolio.

     The Company’s success depends to a great extent upon general economic conditions. The Company has in general experienced a slowing economy in Michigan since 2001. Unlike larger banks that are more geographically diversified, the Company provides banking services to customers primarily in mid-Michigan and, with the March 2004 acquisition of West Michigan Community Bank, in West Michigan. The Company’s loan portfolio, the ability of the borrowers to repay these loans, and the value of the collateral securing these loans will be impacted by local economic conditions.

     An economic slowdown could have many adverse consequences, including the following:

• Loan delinquencies may increase;

• Problem assets and foreclosures may increase;

• Demand for the Company’s products and services may decline; and

• Collateral for the Company’s loans may decline in value, in turn reducing customers’ borrowing power and reducing the value of assets and collateral associated with existing loans.

     In addition to local economic conditions in Michigan, the Company’s success will also depend in part upon the state of the national economy. A general downturn in the local or national economy may impact the Company’s operations. In addition, the effect of possible future terrorist attacks or war on the Company or the local or national economy cannot be known or predicted.

     The Company may be unable to maintain its historical growth rate, which may adversely impact its results of operation and financial condition.

     To achieve its growth, the Company has opened additional branches and acquired other financial institutions and branches. The Company may be unable to sustain its historical rate of growth or may not even be able to grow at all, and the Company may encounter difficulties obtaining the funding necessary to support its growth. Various factors, such as economic conditions, competition, and regulatory considerations, may impede or prohibit the opening of new branch offices. In addition, the Company may have difficulty identifying suitable financial institutions and other non-banking entities that the Company desires to acquire that are available for sale. Further, its inability to attract and retain experienced bankers may adversely affect its internal growth. A significant decrease in its historical rate of growth may adversely impact its results of operations and financial condition.

     The Company operates in a highly regulated environment and may be adversely affected by changes in federal and local laws and regulations.

     The Company is subject to extensive regulation, supervision, and examination by federal and state banking authorities. Any change in applicable regulations or federal or state legislation could have a substantial impact on it and its Banks and their operations. Additional legislation and regulations may be enacted or adopted in the future that could significantly affect its powers, authority, and operations, which could increase its costs of doing business and, as a result, give an advantage to its competitors who may not be subject to similar legislative and regulatory requirements. Further, regulators have significant discretion and power to prevent or remedy unsafe or unsound practices or violations of laws by banks and bank holding companies in the performance of their supervisory and enforcement duties. The exercise of regulatory power may have a negative impact on the Company’s results of operations and financial condition. The effect of this regulation can be significant and cannot be predicted with a high degree of certainty.

13

     The Company may face challenges in managing its operational risks as the Company grows.

     Like other financial services companies, the Company faces a number of operational risks, including the potential for processing errors, internal or external fraud, failure of computer systems, and external events beyond its control such as natural disasters. Acts of fraud are difficult to detect and deter, and the Company cannot assure investors that its risk management procedures and controls will prevent losses from fraudulent activity. The Company’s growth may strain its existing managerial resources and internal monitoring, accounting, and reporting systems.

     The Company’s ability to pay dividends on its common stock is limited not only by its profitability, but also by bank regulation.

     Most of the Company’s revenues are received in the form of dividends paid to it by its subsidiary Banks. Thus, its ability to pay dividends to the holders of its common stock is indirectly limited by statutory restrictions on the ability of its subsidiary Banks to pay dividends to it. Further, in a policy statement, the Federal Reserve Board has expressed its view that a bank holding company experiencing earnings weaknesses should not pay cash dividends exceeding its net income or that can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. In addition, the Federal Reserve Board possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. The FDIC has similar enforcement powers over the Company’s subsidiary Banks. Federal law has “prompt corrective action” provisions that authorize the Federal Reserve Board to restrict its payment of dividends for an insured bank that fails to meet specified capital levels.

     In addition to the restrictions on dividends imposed by federal banking regulation, the Michigan Business Corporation Act provides that dividends may be legally declared or paid only if, after the distribution, the Company is able to pay its debts as they become due in the usual course of business and its total assets equal or exceed the sum of its total liabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of any holders of preferred stock whose preferential rights are superior to those receiving the dividend.

     In addition, under Michigan banking laws, the Company’s Banks may not pay dividends except out of net income after deducting their losses and bad debts. Each Bank may not declare or pay a dividend unless it will have surplus amounting to at least 20% of its capital after the payment of the dividend.

     There is a only limited trading market for the Company’s common stock.

     The Company’s common stock is reported on the OTC Bulletin Board under the symbol “FETM.” The development and maintenance of an active trading market depends, however, upon the existence of willing buyers and sellers, the presence of which is beyond the Company’s control or the control of any market maker. Although the Company is publicly traded and file reports with the SEC, the volume of trading activity in its stock is relatively limited. Even if a more active market develops, there can be no assurance that such a market will continue.

ITEM 1B. Unresolved Staff Comments.

     Not applicable.

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ITEM 2. DESCRIPTION OF PROPERTY

     The Company’s executive offices are located at 175 North Leroy Street, Fenton, Michigan, which is also the main office of The State Bank. The State Bank also has the following community offices (all of which are in Michigan):

• Branch — 15095 Silver Parkway, Fenton (owned)

• Branch — 18005 Silver Parkway, Fenton (leased)

• Loan Extension Office — 101 North Leroy Street, Fenton (owned)

• Branch — 107 Main Street, Linden (owned)

• Branch — 4043 Grange Hall Road, Holly (leased)

• Branch — 7606 S Saginaw, Grand Blanc (owned)

• Branch — 8185 Holly Road, Grand Blanc (leased)

• Loan Extension Office — 8245 Holly Road, Grand Blanc (leased)

• Branch — 315 E. Grand River Ave, Brighton (leased)

• Operations Center — 3202 Owen Road, Fenton (owned)

     Davison State Bank is headquartered in Davison, Michigan, at 625 S. State Street. Davison State Bank also has the following community offices (both of which are in Michigan):

• Branch — 8503 Davison Road, Davison (leased)

• Branch — 7521 S. State Road, Goodrich (leased)

     West Michigan Community Bank is headquartered in Hudsonville, Michigan, at 5367 School Avenue. West Michigan Community Bank also has the following community offices (all of which are in Michigan):

• Branch — 3467 Kelly Street, Hudsonville (owned)

• Branch — 81 E. 8^th Street, Holland (leased)

• Branch — 437 Baldwin Road, Jenison (owned)

• Branch — 4471 Wilson Ave., S.W., Grandville (leased)

     The Company owns the headquarters of each of its three Banks and many of the other bank offices (as noted above). The balance of the bank offices are leased from third parties. All properties have maintenance contracts and are maintained in good condition.

ITEM 3. LEGAL PROCEEDINGS

     From time to time, the Company and its subsidiaries are parties to various legal proceedings incident to their business. At December 31, 2006, there were no legal proceedings which management anticipates would have a material adverse effect on the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted during the fourth quarter of 2006 to a vote of security holders through the solicitation of proxies or otherwise.

ADDITIONAL ITEM — EXECUTIVE OFFICERS OF REGISTRANT

     The following information concerning executive officers of the Company has been omitted from the Registrant’s proxy statement pursuant to Instruction 3 to Regulation S-K, Item 401(b).

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     Officers of the Company are appointed annually by the Board of Directors of the Company and serve at the pleasure of the Board of Directors. Certain of the officers named below are appointed annually by the Board of Directors of one or the other of the Banks and serve at the pleasure of the Board of the Bank that appointed them. The Bank officers are included in the listing of executive officers of the Company because of the nature of the office they hold. Information concerning these executive officers is given below:

     Donald L. Grill (age 59) serves as President and Chief Executive Officer of the Company and Chief Executive Officer of The State Bank since 1996. From 1983 to 1996, Mr. Grill was employed by First of America Bank Corporation and served as President and Chief Executive Officer of First of America Bank — Frankenmuth.

     Robert E. Sewick (age 57) was appointed President and CEO of West Michigan Community Bank on March 15, 2004, and was appointed Senior Vice President of the Company on December 1, 2004. Prior to the appointment, Mr. Sewick was Senior Vice President and Senior Lender of The State Bank. Prior to joining The State Bank in June of 1999, he was Senior Vice President and Regional Credit officer for Huntington National Bank for Western Michigan. Mr, Sewick has over 30 years of banking experience.

     Ronald L. Justice (age 42) is the CEO of Davison State Bank and the Secretary and Senior Vice President of the Company. Prior to holding these positions, he served as the CFO of the Company and its subsidiary Banks. Prior to that, Mr. Justice held other positions with The State Bank.

     Dennis E. Leyder (age 53) was appointed Senior Vice President of the Company on December 1, 2004 and was promoted to President and Chief Operating Officer of The State Bank in December 2006. In his new capacity at The State Bank, he is responsible for all retail banking, marketing, trust and investment management. Mr. Leyder has over 23 years of banking experience, all in Genesee County.

     Holly J Pingatore (age 49) was named Senior Vice President of the Company on December 1, 2004. Her responsibilities include data processing, bank operations, product support, and network services. Prior to such appointment, she was Senior Vice President of The State Bank. Prior to joining The State Bank in 1999, Ms. Pingatore served in various capacities at a large Michigan based regional bank.

     Douglas J. Kelley (age 38) was appointed Chief Financial Officer of the Company in 2003 and was appointed Senior Vice President of the Company on December 1, 2004. Prior to being named Chief Financial Officer, he served as Controller and CFO of The State Bank and Davison State Bank since 2001. Prior to joining the Banks, Mr. Kelley was an Assistant Vice President and Accounting Officer with Citizens Bank. Mr. Kelley has over 16 years of banking experience .

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     The market, dividend, and holders of record information required by this item appears under the caption “Fentura Financial, Inc. Common Stock” and Table 16 on page 58 under the title “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”, of the Company’s 2006 Rule 14a-3 annual report, and is incorporated herein by reference. The performance graph is incorporated by reference from page 59 of the Company’s 2006 Rule 14a-3 annual report.

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     The table required by Item 703 of regulation S-K is intentionally omitted due to the fact the Company does not currently have an issuer repurchase plan in place.

ITEM 6. SELECTED FINANCIAL DATA

     The information required by this item appears under the title “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — SELECTED FINANCIAL DATA”, appearing in Table 1 on page 38 of the Company’s 2006 Rule 14a-3 annual report, and is incorporated herein by reference.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The information required by this item appears under the title “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”, appearing on pages 38 through 58 of the Company’s 2006 Rule 14a-3 annual report, and is incorporated herein by reference.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The information required by this item appears under the headings “Liquidity and Interest Rate Risk Management” on pages 51 and 52 and “Quantitative and Qualitative Disclosure About Market Risk” on page 54 and 55 under the title “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” of the Company’s 2006 Rule 14a-3 annual report, and is incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The consolidated financial statements of the Company and Report of Crowe Chizek and Company LLC, Independent Registered Public Accounting Firm, appear on pages 2 through 7 of the Financial Statements portion of the Company’s 2006 Rule 14a-3 annual report, and are incorporated herein by reference. The supplementary data required by this item is contained in Note 16 thereto.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     None

ITEM 9A CONTROLS AND PROCEDURES

     (a) Evaluation of Disclosure Controls and Procedures.

     The Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) as of the end of the period covered by this Form 10-K Annual Report, have concluded that the Company’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company would be made known to them by others within the Company, particularly during the period in which this Form 10-K Annual Report was being prepared.

     (b) Changes in Internal Controls.

     During the fourth quarter ended December 31, 2006, there have been no changes in the Company’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

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ITEM 9B OTHER INFORMATION

     None

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

     The Company’s executive officers are identified under “Additional Item” in Part I of this Report on Form 10-K. The other information required by this item appears under the captions “2007 Election of Directors,” “The Corporation’s Board of Directors,” “Code of Ethics,” “Committees of the Corporation Board,” and “Compliance with Section 16 Reporting” on pages 3, 4, 5, 6, 7, 8, 9, 10 and 21, respectively, of the Company’s 2007 Notice of Annual Shareholders Meeting and Proxy Statement, and is incorporated herein by reference.

     The Board of Directors of the Company has determined that Kenneth R. Elston, a director and member of the Audit Committee, qualifies as an “Audit Committee financial expert” as defined in rules adopted by the Securities and Exchange Commission pursuant to the Sarbanes-Oxley Act of 2002 and is independent pursuant to NASD listing standards.

     The Board of Directors of the Company has adopted a Code of Ethics, which details principles and responsibilities governing ethical conduct for all Company directors and executive officers. The Code of Ethics is filed as an Exhibit to this Annual Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

     The information required by this item appears under the captions “Director Compensation,” “Executive Compensation,” “Payments upon Termination/Change in Control” and “Compensation/ESOP Committee Interlocks,” on pages 11 through 20 of the Company’s 2007 Notice of Annual Shareholders Meeting and Proxy Statement, and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     The information required by this item appears under the caption “Stock Ownership of Directors, Executive Officers and Certain Major Shareholders” on pages 5 and 6 of the Company’s 2007 Notice of Annual Shareholders Meeting and Proxy Statement, and is incorporated herein by reference.

     Securities Authorized for Issuance Under Equity Compensation Plans. The Company had the following equity compensation plans at December 31, 2006:

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EQUITY COMPENSATION PLAN INFORMATION

					Number of securities
					remaining available for
					future issuance under
					equity compensation
	Number of securities to		Weighted-average		plans (excluding
	be issued upon exercise		exercise price of		securities reflected
	of outstanding options		outstanding options		in column (1))
Plan Category	(1)		(2)		(3)
Equity compensation plans approved by security holders		40,523	$	29.68		120,400
Equity compensation plans not approved by security holders		0		0		0
Total		40,523	$	29.68		120,400

     These equity compensation plans are more fully described in Note 11 to the Consolidated Financial Statements.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

     The information required by this item appears under the captions “Independence of Directors and Attendance at Meetings” and “Other Information — Transactions with Certain Interested Parties” on pages 7 and 21 and 22, respectively, of the Company’s 2007 Notice of Annual Shareholders Meeting and Proxy Statement, and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     The information required by this item appears under the caption “Relationship with Independent Public Accountants” on pages 20 and 21 of the Company’s 2007 Notice of Annual Shareholders Meeting and Proxy Statement and is incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)	1.	Financial Statements:
		The following consolidated financial statements of the Company and Report of Crowe Chizek and Company LLC, Independent Registered Public Accounting Firm, are incorporated by reference under Item 8 “Financial Statements and Supplementary Data” of this document:

Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial statements
Report of Crowe Chizek and Company LLC, Independent Registered Public Accounting Firm

19

2.	Financial Statement Schedules
	All schedules are omitted — see Item 15(c) below.
3.	Exhibits:
	The exhibits listed on the “Exhibit Index” following the signature page of this report are filed herewith and are incorporated herein by reference.

(b)	Exhibits:
	The “Exhibit Index” follows the signature page of this report and is incorporated herein by reference.
(c)	Financial Statement Schedules:
	All financial statement schedules normally required by Article 9 of Regulation S-X are omitted since they are either not applicable or the required information is shown in the consolidated financial statements or notes thereto.

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Signatures

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, dated March 15, 2007.

Fentura Financial, Inc.
(Registrant)
By	/s/Donald L. Grill
	Donald L. Grill
	On behalf of the registrant
	and as President & CEO
By	/s/Douglas J. Kelley
	Douglas J. Kelley
	Chief Financial Officer
	(Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Each director of the Registrant, whose signature appears below, hereby appoints Forrest A. Shook and Donald L. Grill, and each of them severally, as his or her attorney-in-fact, to sign his or her name and on his or her behalf, as a director of the Registrant, and to file with the Commission any and all amendments to this report on Form 10-K.

Signature	Capacity	Date
/s/Forrest A. Shook Forrest A. Shook	Chairman of the Board Director	March 15, 2007
/s/Donald L. Grill Donald L. Grill	Director	March 15, 2007
/s/Kenneth R. Elston Kenneth R. Elston	Director	March 15, 2007
/s/J. David Karr J. David Karr	Director	March 15, 2007
/s/Thomas P. McKenney Thomas P. McKenney	Director	March 15, 2007
/s/Thomas L. Miller Thomas L. Miller	Director	March 15, 2007
/s/Brian P. Petty Brian P. Petty	Director	March 15, 2007
/s/Ian W. Schonsheck Ian W. Schonsheck	Director	March 15, 2007

21

FENTURA FINANCIAL, INC.
2006 Annual Report on Form 10-K

EXHIBIT INDEX

Exhibit
No.	Exhibit
2	Agreement and Plan of Merger By and Among Fentura Financial, Inc., West Michigan Financial Corporation and West Michigan Community Bank dated as of October 14, 2003, and joined in by WMFC Acquisition Subsidiary, Inc. and Amendment No. 1 thereto (Incorporated by reference to Exhibits 2.1 and 2.2 to the Registrant’s Current Report on Form 8-K dated March 15, 2004).
3(i)	Articles of Incorporation of Fentura Financial, Inc. (Incorporated by reference to Form 10-SB Registration Number 0-23550)
3(ii)	Bylaws of Fentura Financial, Inc. (Incorporated by reference to Form 10-SB Registration Number 0-23550)
3(iii)	Amendment to the Articles of Incorporation of Fentura Financial, Inc. (Incorporated by reference to Exhibit 3(iii) to the Form 10-K Filed March 20, 2001)
3(iv)	Amendment to the Articles of Incorporation of Fentura Financial, Inc. (Incorporated by reference to Exhibit 3 filed with Form 10-Q for the quarter ended March 31, 2002)
4.1	Amended and Restated Automatic Dividend Reinvestment Plan (Incorporated by reference to Registration Statement on Form S-3 — Registration No. 333-75194)
10.1	Non-Employee Director Stock Option Plan (Incorporated by reference to Form 10K-SB filed on March 17, 1996)
10.2	Form of Non-Employee Director Stock Option Agreement (Incorporated by reference to Form 10Q-SB filed on May 2, 1996)
10.3	Retainer Stock Plan for Directors (Incorporated by reference to Form 10K-SB filed on March 17, 1996)
10.4	Employee Stock Option Plan(Incorporated by reference to Form 10K-SB filed on March 17, 1996)
10.5	Form of Employee Stock Option Plan Agreement (Incorporated by reference to Form 10K-SB filed on March 17, 1996)
10.6	Stock Purchase Plan between The State Bank and Donald E. Johnson, Jr., Mary Alice J. Heaton, and Linda J. LeMieux dated November 17, 1996 (Incorporated by reference to Exhibit 10.19 to the Form 10K-SB filed March 20, 1997)
10.7	Severance Compensation Agreement between the Registrant, The State Bank, and Donald L. Grill dated March 20, 1997 (Incorporated by reference to Exhibit 10.20 to the Form 10Q-SB filed May 12, 1997)
10.8	Stock Purchase Plan (Incorporated by reference to Exhibit 99.1 Form S-8 filed on August 10, 2004)

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Exhibit
No.	Exhibit
10.9	Form of Severance Compensation Agreement between the Registrant, The State Bank, and Ronald Justice. (Incorporated by reference to Exhibit 10.10 to the Form 10-K filed March 28, 2005)
10.10	Severance Compensation Agreement between the Registrant, West Michigan Community Bank, and Robert Sewick dated March 9, 2006. (Incorporated by reference to Exhibit 10.11 to the Form 10-K filed March 22, 2006)
10.11	Severance Compensation Agreement between the Registrant and Dennis Leyder dated March 9, 2006. (Incorporated by reference to Exhibit 99.1 to the Form 8-K filed March 10, 2006)
10.12	Severance Compensation Agreement between the Registrant and Douglas Kelley dated March 9, 2006. (Incorporated by reference to Exhibit 99.2 to the Form 8-K filed March 10, 2006)
10.13	Severance Compensation Agreement between the Registrant and Holly Pingatore dated March 9, 2006. (Incorporated by reference to Exhibit 99.3 to the Form 8-K filed March 10, 2006)
10.14	Amendment and Restatement of The State Bank Incentive Supplemental Executive Retirement Agreement dated May 20, 1999, for Donald L. Grill, dated March 10, 2006. (Incorporated by reference to Exhibit 10.15 to the Form 10-K filed March 22, 2006)
10.15	Amendment and Restatement of the Incentive Supplemental Executive Retirement Agreement dated August 13, 1999, for Robert Sewick, dated March 10, 2006. (Incorporated by reference to Exhibit 10.16 to the Form 10-K filed March 22, 2006)
10.16	Nonqualified Deferred Compensation Plan. (Incorporated by reference to Exhibit 10.12 to the Form 10-K filed March 28, 2005)
10.17	Fentura Bancorp, Inc. Employee Deferred Compensation and Stock Ownership Plan. (Incorporated by reference to Exhibit 10.13 to the Form 10-K filed March 28, 2005)
10.18	2006 Executive Stock Bonus Plan (Filed as Exhibit 10.1 Form 8-K filed on December 4, 2006)
13	Rule 14a-3 Annual Report to Security Holders (This report, except for those portions which are expressly incorporated by reference in this filing, is furnished for the information of the Securities and Exchange Commission and is not deemed filed as a part of this Report)
14	Code of Ethics for Directors and Executive Officers (Filed herewith)
21.1	Subsidiaries of the Registrant (Filed herewith)
23.1	Consent of Independent Registered Public Accounting Firm (Filed herewith)
24	Powers of Attorney. Contained on the signature page of this report.
31.1	Certificate of President and Chief Executive Officer of Fentura Financial, Inc. pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certificate of Chief Financial Officer of Fentura Financial, Inc. pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certificate of Chief Executive Office and Chief Financial Officer of Fentura Financial, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

23

EX-13

EXHIBIT 13

FENTURA FINANCIAL, INC.

FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
December 31, 2006 and 2005

and

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FENTURA FINANCIAL, INC.

Fenton, Michigan
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005

CONTENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	1
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS	2
CONSOLIDATED STATEMENTS OF INCOME	3
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY	5
CONSOLIDATED STATEMENTS OF CASH FLOWS	6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	7-37
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	38-59

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Fentura Financial, Inc.
Fenton, Michigan

We have audited the accompanying consolidated balance sheets of Fentura Financial, Inc. as of December 31, 2006 and 2005, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fentura Financial, Inc. as of December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006 in conformity with U.S. generally accepted accounting principles.

/s/ Crowe Chizek and Company LLC                    
Crowe Chizek and Company LLC

Grand Rapids, Michigan
March 3, 2007

FENTURA FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2006 and 2005
(000’s omitted except share and per share data)

	2006			2005
ASSETS
Cash and due from banks	$	19,946		$	21,327
Federal funds sold		9,500			9,750
Total cash and cash equivalents		29,446			31,077
Securities available for sale, at fair value		91,104			99,542
Securities held to maturity (fair value 2006 - $11,821; 2005 - $14,672)		11,899			14,851
Loans held for sale		2,226			1,042
Loans, net of allowance of 2006- $6,692, 2005- $6,301		444,301			433,055
Bank premises and equipment		16,854			14,617
Accrued interest receivable 2,676 2,676		2,985			2,676
Bank owned life insurance		6,815			6,579
Goodwill		7,955			7,955
Acquisition intangibles		759			1,075
Federal Home Loan Bank stock		2,032			2,300
Other assets		5,922			4,320
	$	622,298		$	619,089
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing deposits	$	74,886		$	76,792
Interest-bearing deposits		453,669			451,262
Total deposits		528,555			528,054
Short-term borrowings		1,500			1,537
Federal Home Loan Bank Advances		11,052			14,228
Repurchase Agreements		10,000			10,000
Subordinated debentures		14,000			14,000
Accrued taxes, interest and other liabilities		5,873			4,375
Total liabilities		570,980			572,194
Stockholders’ equity
Common stock — $0 par value, 5,000,000 shares authorized, shares issued 2,152,862 — 2006; 1,931,297 — 2005		42,158			34,491
Retained earnings		10,118			13,729
Accumulated other comprehensive income (loss)		(958	)		(1,325	)
		51,318			46,895
	$	622,298		$	619,089

See accompanying notes to consolidated financial statements. 2.

FENTURA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2006, 2005 and 2004
(000’s omitted except share and per share data)

	2006			2005			2004
Interest income
Loans, including fees	$	35,131		$	29,670		$	22,161
Securities:
Taxable		3,461			3,250			3,053
Tax-exempt		809			794			746
Short-term investments		515			164			134
Total interest income		39,916			33,878			26,094
Interest expense
Deposits		14,743			9,390			7,004
Other Borrowings		2,165			1,908			1,259
Total interest expense		16,908			11,298			8,263
Net interest income		23,008			22,580			17,831
Provision for loan losses		1,120			1,389			1,389
Net interest income after provision for loan losses		21,888			21,191			16,442
Noninterest income
Service charges on deposit accounts		3,708			3,445			3,738
Gain on sale of mortgage loans		615			842			510
Trust and investment services income		1,554			1,157			1,072
Gain (Loss) on sale of securities		(2	)		(149	)		0
Gain on sale of credit card and SBA loans		0			0			464
Other income and fees		1,768			1,587			1,508
Total noninterest income		7,643			6,882			7,292
Noninterest expense
Salaries and employee benefits		12,738			11,983			9,956
Occupancy		1,858			1,673			1,633
Furniture and equipment		2,140			2,080			2,153
Loan and collection		320			388			289
Advertising and promotional		624			627			499
Telephone and communication services		538			508			314
Other professional services		1,066			949			1,031
Other general and administrative		2,702			2,592			2,301
Total noninterest expense		21,986			20,800			18,176
Income before taxes		7,545			7,273			5,558
Federal income taxes		2,237			2,219			1,524
Net income	$	5,308		$	5,054		$	4,034
Per share:
Earnings — basic	$	2.48		$	2.41		$	1.95
Earnings — diluted		2.47			2.40			1.94

See accompanying notes to consolidated financial statements. 3.

FENTURA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2006, 2005 and 2004
(000’s omitted except share and per share data)

	2006			2005			2004
Net income	$	5,308		$	5,054		$	4,034
Other comprehensive income:
Unrealized holding gains (losses) on available for sale securities		558			(1,163	)		(803	)
Less: reclassification adjustment for (gains) and losses later recognized in income		2			149			0
Net unrealized gains (losses)		556			(1,014	)		(803	)
Tax effect		(189	)		344			273
Other comprehensive income (loss), net of tax		367			(670	)		(530	)
Comprehensive income	$	5,672		$	4,384		$	3,504

See accompanying notes to consolidated financial statements. 4.

FENTURA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years ended December 31, 2006, 2005 and 2004
(000’s omitted except share and per share data)

							Accumulated
							Other			Total
	Common			Retained			Comprehensive			Stockholders’
	Stock			Earnings			Income (Loss)			Equity
Balance, January 1, 2004	$	32,769		$	8,238		$	(125	)	$	40,882
Net Income		0			4,034			0			4,034
Cash Dividends ($0.84 per share)		0			(1,758	)		0			(1,758	)
Stock repurchase (3,621 shares)		(122	)		0			0			(122	)
Issuance of shares under stock purchase and dividend reinvestment plans (12,710 shares)		463			0			0			463
Other comprehensive loss (net of tax)		0			0			(530	)		(530	)
Balance, December 31, 2004		33,110			10,514			(655	)		42,969
Net Income		0			5,054			0			5,054
Cash Dividends ($0.88 per share)		0			(1,839	)		0			(1,839	)
Issuance of shares from common stock offering (23,119 shares)		758			0			0			758
Issuance of shares under stock purchase and dividend reinvestment plans (18,715 shares)		623			0			0			623
Other comprehensive loss (net of tax)		0			0			(670	)		(670	)
Balance, December 31, 2005		34,491			13,729			(1,325	)		46,895
Net Income		0			5,308			0			5,308
Cash Dividends ($0.94 per share)		0			(2,069	)		0			(2,069	)
Stock dividend (194,978 shares)		6,850			(6,850	)		0			0
Issuance of shares under stock purchase and Dividend reinvestment plans (22,541 shares)		742			0			0			742
Stock compensation expense		20			0			0			20
Issuance of shares under stock option exercise (4,046 shares — 2006)		55			0			0			55
Other comprehensive income (net of tax)		0			0			367			367
Balance, December 31, 2006	$	42,158		$	10,118		$	(958	)	$	51,318

See accompanying notes to consolidated financial statements. 5.

FENTURA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2006, 2005 and 2004
(000’s omitted except share and per share data)

	2006			2005			2004
OPERATING ACTIVITIES:
Net income	$	5,308		$	5,054		$	4,034
Adjustments to reconcile net income to cash Provided by Operating Activities:
Stock compensation expense		(20	)		0			0
Depreciation and amortization		2,008			1,560			2,336
Provision for loan losses		1,120			1,389			1,389
Loans originated for sale		(37,099	)		(52,093	)		(33,822	)
Proceeds from the sale of loans		36,530			53,481			34,540
(Gain) Loss on sale of securities		2			149			0
Gain on sales of loans		(615	)		(842	)		(974	)
Net (increase) decrease in bank owned life insurance		(236	)		282			(219	)
Net (increase) decrease in interest receivable & other assets		(470	)		213			(53	)
Net increase (decrease) in interest payable & other liabilities		1,329			465			1,853
Total Adjustments		2,549			4,604			5,050
Net Cash Provided By (Used In) Operating Activities		7,857			9,658			9,084
Cash Flows From Investing Activities:
Proceeds from maturities of securities — HTM		5,063			8,505			3,858
Proceeds from maturities of securities — AFS		15,178			1,410			2,625
Proceeds from calls of securities — HTM		925			109			7
Proceeds from calls of securities — AFS		975			19,943			48,813
Proceeds from sales of securities — AFS		1,103			18,144			0
Purchases of securities — HTM		(3,050	)		(4,701	)		(10,472	)
Purchases of securities — AFS		(8,568	)		(30,358	)		(23,865	)
Net increase in loans		(13,830	)		(46,515	)		(42,446	)
Purchase of FHLB stock		(132	)		0			0
FHLB stock buy back		400			0			0
Net cash from acquisition of WMFC		0			0			(1,112	)
Acquisition of premises and equipment, net		(3,744	)		(2,223	)		(867	)
Net Cash Provided By (Used in) Investing Activities		(5,680	)		(35,686	)		(23,459	)
Cash Flows From Financing Activities:
Net increase (decrease) in deposits		501			36,989			32,712
Net increase (decrease) in short term borrowings		(37	)		(3,663	)		382
Net increase (decrease) in repurchase agreements		0			0			(2,500	)
Issuance of subordinated debt		0			2,000			0
Proceeds from advances from FHLB		4,000			57,400			0
Repayments of advances from FHLB		(7,020	)		(62,418	)		(7,706	)
Proceeds from stock offering		0			758			0
Net proceeds from stock issuance and repurchase		817			623			341
Cash dividends		(2,069	)		(1,839	)		(1,758	)
Net Cash Provided By (Used In) Financing Activities		(3,808	)		29,850			21,471
NET INCREASE IN CASH AND CASH EQUIVALENTS		(1,631	)		3,822			7,096
CASH AND CASH EQUIVALENTS — BEGINNING		31,077			27,255			20,159
CASH AND CASH EQUIVALENTS — ENDING	$	29,446		$	31,077		$	27,255
CASH PAID FOR:
Interest	$	16,341		$	10,933		$	8,160
Income Taxes	$	1,781		$	2,935		$	730
NONCASH DISCLOSURES:
Transfers from loans to other real estate	$	1,567		$	564		$	201

See accompanying notes to consolidated financial statements. 6.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Noncash investing and financing activities:

          WMFC acquisition:

	2004
Securities acquired (including FHLB stock)	$	26,966
Loans acquired		97,277
Bank premises and equipment		4,782
Bank owned life insurance		184
Acquisition intangibles recorded		9,578
Other assets acquired		718
Deposits assumed		(109,828	)
Borrowings assumed		(27,369	)
Other liabilities assumed		(1,194	)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Principles of Consolidation: The consolidated financial statements include Fentura Financial, Inc. (the Corporation) and its wholly owned subsidiaries, The State Bank in Fenton, Michigan; Davison State Bank in Davison, Michigan; and West Michigan Community Bank in Hudsonville, Michigan (“the Banks”), as well as Fentura Mortgage Company, West Michigan Mortgage Company, LLC, and the other subsidiaries of the Banks. Intercompany transactions and balances are eliminated in consolidation.

The Corporation provides banking and trust services principally to individuals, small businesses and governmental entities through its eleven community banking offices in Genesee, Livingston, Oakland Counties in southeastern Michigan and four community banking offices in Ottawa and Kent Counties in west Michigan. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial, and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets and real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. Real estate loans are secured by both residential and commercial real estate. Other financial instruments which potentially represent concentrations of credit risk include deposit accounts in other financial institutions and federal funds sold.

Use of Estimates: To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, fair values of securities, fair values of financial instruments and carrying value of intangibles are particularly subject to change.

Cash Flows: Cash and cash equivalents, includes cash, deposits with other financial institutions under 90 days, and federal funds sold. Net cash flows are reported for customer loan and deposit transactions and short-term borrowings.

(Continued) 7.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Securities: Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income. Other securities such as Federal Home Loan Bank stock are carried at cost.

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments. Gains and losses on sales are based on the amortized cost of the security sold. Securities are written down to fair value when a decline in fair value is not temporary.

Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers: (1) the length of time and extent the fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, and (3) the Corporation’s ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.

Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses. Loans held for sale are reported at the lower of cost or market, on an aggregate basis and are sold with servicing rights released.

Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. Interest income is not reported when full loan repayment is in doubt, typically when the loan is impaired or payments are past due over 90 days (180 days for residential mortgages).

All interest accrued but not received for loans placed on nonaccrual are reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Consumer loans are typically charged off no later than 120 days past due.

(Continued) 8.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors.

A loan is impaired when full payment under the loan terms is not expected. Commercial and commercial real estate loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.

Foreclosed Assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value when acquired, establishing a new cost basis. If fair value declines, a valuation allowance is recorded through expense. Costs after acquisition are expensed.

Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 15 to 40 years. Furniture, fixtures and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 7 years.

Federal Home Loan Bank (FHLB) stock: The Banks are members of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

Long-term Assets: Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

Bank owned life insurance: The Banks have purchased life insurance policies on certain key executives. Bank owned life insurance is recorded at its cash surrender value, or the amount that can be realized.

Goodwill: Goodwill results from prior business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment will be recognized in the period identified.

Acquisition Intangibles: Acquisition intangibles consist of core deposit and acquired customer and trust relationship intangible assets arising from acquisitions. They are initially measured at fair value and then are amortized on an accelerated method over their estimated useful lives. Acquisition intangibles are assessed at least annually for impairment and any such impairment will be recognized in the period identified.

(Continued) 9.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock Based Compensation: Effective January 1, 2006, the Corporation adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-based Payment, using the modified prospective transition method. Accordingly, the Corporation has recorded stock-based employee compensation cost using the fair value method starting in 2006. For 2006, adopting this standard resulted in a reduction of income before income taxes of $19,800, a reduction in net income of $13,900 and a decrease in basic and diluted earnings per share of $0.01.

Prior to January 1, 2006, employee compensation expense under stock options was reported using the intrinsic value method; therefore, no stock-based compensation cost is reflected in net income for the years ending December 31, 2005 and 2004, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant.

The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, for the years ending December 31 (in thousands, except per share data, adjusted for the 10% stock dividend on August 4, 2006):

	2005			2004
Net income
As reported	$	5,054		$	4,034
Deduct: Stock-based compensation expense determined under a fair value based system		(8	)		(93	)
Proforma	$	5,046		$	3,941
Basic net income per share
As reported	$	2.41		$	1.95
Proforma		2.41			1.90
Diluted net income per share
As reported	$	2.40		$	1.94
Proforma		2.40			1.89

Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

Loan Commitments and Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

(Continued) 10.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Earnings Per Common Share: Basic earnings per common share are net income divided by the weighted average number of common shares outstanding during the period. Employee Stock Ownership Plan (ESOP) shares are considered outstanding for this calculation unless unearned. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options. Earnings and dividends per share are restated for all stock splits and dividends through the date of issue of the financial statements.

Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale, which are also recognized as separate components of equity.

Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.

Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank of $872,000 and $853,000 was required to meet regulatory reserve and clearing requirements at year-end 2006 and 2005 respectively. These balances do not earn interest.

Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Banks to the Corporation or by the Corporation to shareholders.

Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Operating Segments: While the Corporation’s chief decision-makers monitor the revenue streams of the various Corporation products and services, operations are managed and financial performance is evaluated on a Corporate-wide basis. Accordingly, all of the Corporation’s financial service operations are considered by management to be aggregated in one reportable operating segment.

Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation.

Adoption of New Accounting Standards:

Effective January 1, 2006, the Corporation adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-based Payment. See “Stock Compensation” above for further discussion of the effect of adopting this standard.

(Continued) 11.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

SAB 108:

In September 2006, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108), which is effective for fiscal years ending on or after November 15, 2006. SAB 108 provides guidance on how the effects of prior-year uncorrected financial statement misstatements should be considered in quantifying a current year misstatement. SAB 108 requires public companies to quantify misstatements using both an income statement (rollover) and balance sheet (iron curtain) approach and evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. If prior year errors that had been previously considered immaterial now are considered material based on either approach, no restatement is required so long as management properly applied its previous approach and all relevant facts and circumstances were considered. Adjustments considered immaterial in prior years under the method previously used, but now considered material under the dual approach required by SAB 108, are to be recorded upon initial adoption of SAB 108. The adoption of SAB 108 had no effect on the Corporation’s financial statements for the year ending December 31, 2006.

Effect of Newly Issued But Not Yet Effective Accounting Standards:

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (FIN 48), which prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Corporation has determined that the adoption of FIN 48 will not have a material effect on the financial statements.

(Continued) 12.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005

NOTE 2 — EARNINGS PER SHARE

The factors in the earnings per share computation follow (adjusted for 10% stock dividend paid on August 4, 2006).

$ in thousands except per share data	2006		2005		2004
Basic
Net income	$	5,308	$	5,054	$	4,034
Weighted average common shares outstanding		2,141,388		2,096,002		2,072,741
Basic earnings per common share	$	2.48	$	2.41	$	1.95
Diluted
Net income	$	5,308	$	5,054	$	4,034
Weighted average common shares outstanding for basic earnings per common share		2,141,388		2,096,002		2,072,741
Add: Dilutive effects of assumed exercises of stock options		4,674		6,434		9,197
Average shares and dilutive potential common shares		2,146,062		2,102,436		2,081,938
Diluted earnings per common share	$	2.47	$	2.40	$	1.94

Stock options for 14,255, 16,264 and 13,644 shares of common stock were not considered in computing diluted earnings per common share for 2006, 2005 and 2004 respectively, because they were antidilutive.

(Continued) 13.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005

NOTE 3 — SECURITIES

Year-end securities are as follows (in thousands):

Available for Sale

			Gross		Gross
	Fair		Unrealized		Unrealized
	Value		Gains		Losses
2006
U.S. Government and federal agency	$	20,985	$	0	$	(546	)
State and municipal		9,311		77		(27	)
Mortgage-backed		58,499		48		(1,189	)
Equity securities		2,309		191		(5	)
	$	91,104	$	316	$	(1,767	)
2005
U.S. Government and federal agency	$	22,886	$	0	$	(640	)
State and municipal		6,591		59		(47	)
Mortgage-backed		68,057		4		(1,481	)
Equity securities		2,008		100		(2	)
	$	99,542	$	163	$	(2,170	)

Held to Maturity

			Gross		Gross
	Amortized		Unrecognized		Unrecognized			Fair
	Cost		Gains		Losses			Value
2006
Mortgage-backed	$	9	$	0	$	0		$	9
State and municipal		11,890		36		(114	)		11,812
	$	11,899	$	36	$	(114	)	$	11,821
2005
Mortgage-backed	$	14	$	1	$	0		$	15
State and municipal		14,837		46		(226	)		14,657
	$	14,851	$	47	$	(226	)	$	14,672

Sales of available for sale securities were as follows (in thousands):

	2006			2005			2004
Proceeds	$	1,103		$	18,144		$	0
Gross gains		0			18			0
Gross losses		(2	)		(167	)		(0	)

(Continued) 14.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005

NOTE 3 — SECURITIES (Continued)

Contractual maturities of debt securities at year-end 2006 were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, and equity securities are shown separately (in thousands).

	Held to Maturity				Available for Sale
	Amortized		Fair		Fair
	Cost		Value		Value
Due in one year or less	$	3,061	$	3,053	$	4,687
Due from one to five years		4,912		4,867		14,973
Due from five to ten years		2,514		2,479		2,398
Due after ten years		1,403		1,413		8,238
Mortgage-backed securities		9		9		58,499
Equity securities		0		0		2,309
	$	11,899	$	11,821	$	91,104

Securities pledged at year-end 2006 and 2005 had a carrying amount of $38,775,000 and $47,923,000 and were pledged to secure public deposits and repurchase agreements.

At year-end 2006 and 2005, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.

Securities with unrealized losses at year-end 2006 and 2005, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows:

2006	Less than 12 Months					12 Months or More					Total
Description of	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Securities	Value		Loss			Value		Loss			Value		Loss
US Government & federal agency	$	2,964	$	(11	)	$	18,020	$	(535	)	$	20,984	$	(546	)
State & municipal		2,807		(14	)		6,863		(127	)		9,670		(141	)
Mortgage-backed		52,981		(1,189	)		0		0			52,981		(1,189	)
Equity securities		0		0			24		(5	)		24		(5	)
Total temporarily impaired	$	58,752	$	(1,214	)	$	24,907	$	(667	)	$	83,659	$	(1,881	)

(Continued) 15.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005

NOTE 3 — SECURITIES (Continued)

2005	Less than 12 Months					12 Months or More					Total
Description of	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Securities	Value		Loss			Value		Loss			Value		Loss
US Government & federal agency	$	0	$	0		$	22,886	$	(640	)	$	22,886	$	(640	)
State & municipal		5,218		(47	)		7,593		(226	)		12,811		(273	)
Mortgage-backed		67,231		(1,481	)		0		0			67,231		(1,481	)
Equity securities		0		0			19		(2	)		19		(2	)
Total temporarily impaired	$	72,449	$	(1,528	)	$	30,498	$	(868	)	$	102,947	$	(2,396	)

The Corporation evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and the ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Corporation may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of the reviews of the issuer’s financial condition.

Unrealized losses have not been recognized into income because the issuers are of high credit quality, management has the intent and ability to hold for the foreseeable future, and the decline in fair value is largely due to increased market interest rates. The fair value is expected to recover as the bonds approach their maturity date or if market rates decline prior to maturity.

NOTE 4 — LOANS

Major categories of loans at December 31, are as follows (in thousands):

	2006		2005
Commercial	$	272,402	$	254,498
Real estate — construction		78,927		76,386
Real estate — mortgage		36,867		37,627
Consumer		62,797		70,845
		450,993		439,356
Less allowance for loan losses		6,692		6,301
	$	444,301	$	433,055

(Continued) 16.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005

NOTE 4 — LOANS (Continued)

The Corporation originates primarily residential and commercial real estate loans, commercial, construction and installment loans. The Corporation estimates that the majority of their loan portfolio is based in Genesee, Oakland and Livingston counties within southeast Michigan and Kent and Ottawa counties in west Michigan with the remainder of the portfolio distributed throughout Michigan. The ability of the Corporation’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in these areas.

Certain directors and executive officers of the Corporation, including their affiliates are loan customers of the Banks. Total loans to these persons at December 31, 2006 and 2005 amounted to $11,571,000 and $10,752,000 respectively. During 2006, $3,621,000 of new loans were made to these persons, repayments totaled $2,802,000.

Activity in the allowance for loan losses for the years is as follows (in thousands)

	2006			2005			2004
Balance, beginning of year	$	6,301		$	5,501		$	3,414
Provision for loan losses		1,120			1,389			1,389
Addition from WMCB Acquisition		0			0			1,159
Loans charged off		(877	)		(765	)		(671	)
Loan recoveries		148			176			210
Balance, end of year	$	6,692		$	6,301		$	5,501

Loan impairment is measured by estimating the expected future cash flows and discounting them at the respective effective interest rate or by valuing the underlying collateral. The recorded investment in these loans is as follows at December 31, (in thousands):

	2006		2005
Year end loans not requiring allocation	$	1,365	$	1,092
Year end loans requiring allocation		3,397		2,714
	$	4,762	$	3,806
Amount of the allowance for loan losses allocated	$	606	$	684

Loans for which the accrual of interest has been discontinued at December 31, 2006 and 2005 amounted to $2,354,000 and $1,476,000, respectively, and are included in the impaired loans above. Loans past due, greater than 90 days and still accruing interest, amounted to $2,311,000 and $80,000 at December 31, 2006 and 2005. Of the December 31, 2006 total, $1,963,000 was paid off on January 31, 2007 and is no longer on the books of the Corporation.

(Continued) 17.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005

NOTE 4 — LOANS (Continued)

Interest income recognized on impaired loans based on cash collected in total is approximately $284,000, $293,000 and $192,000 for the years ended December 31, 2006, 2005 and 2004, respectively. If the impaired loans had performed in accordance with their contractual terms during the year, additional interest income of $130,000, $113,000 and $77,000 would have been recorded in 2006, 2005 and 2004, respectively. The average recorded investment in impaired loans was $4,439,000, $3,655,000 and $4,303,000 during the years ended December 31, 2006, 2005 and 2004, respectively.

NOTE 5 — PREMISES AND EQUIPMENT, NET

Bank premises and equipment is comprised of the following at December 31 (in thousands):

	2006		2005
Land and land improvements	$	5,219	$	4,375
Building and building improvements		12,948		11,199
Furniture and equipment		8,805		7,719
Construction in progress		776		735
		27,748		24,028
Less accumulated depreciation		10,894		9,411
	$	16,854	$	14,617

Depreciation expense was $1,507,000, $1,418,000 and $1,445,000 for 2006, 2005 and 2004, respectively.

The Corporation leases property for certain branches and ATM locations. Rent expense for 2006 was $325,000, for 2005 was $330,000 and for 2004 was $292,000. Rent commitments under noncancelable operating leases were as follows, before considering renewal options that generally are present (in thousands).

2007	$	268
2008		118
2009		118
2010		119
2011		112
Thereafter		0
	$	735

(Continued) 18.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005

NOTE 6 – GOODWILL AND INTANGIBLE ASSETS

Goodwill

Goodwill relates to the acquisition of West Michigan Financial Corporation during 2004. See Note 15.

Acquired Intangible Assets

Acquired intangible assets related to the 2004 acquisition of West Michigan Financial Corporation were as follows as of year-end:

			Accumulated
	Gross Carrying		Amortization
Amortized intangible assets	Amounts		2006		2005
Core deposit assets	$	1,509	$	818	$	556
Customer relationship intangibles		216		148		94
Total	$	1,725	$	966	$	650

Aggregate amortization expense was $316,000, $358,000 and $292,000 for 2006, 2005 and 2004, respectively.

Estimated amortization expense for each of the next five years:

2006	$	274
2007		192
2008		136
2009		94
2010		52

The weighted average remaining amortization period for the intangible assets is 2.36 years.

(Continued) 19.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005

NOTE 7 — DEPOSITS

The following is a summary of deposits at December 31 (in thousands):

	2006		2005
Noninterest-bearing:
Demand	$	74,886	$	76,792
Interest-bearing:
Savings		88,893		109,694
Money market demand		102,535		118,445
Time, $100,000 and over		136,978		115,452
Time, $100,000 and under		125,263		107,671
	$	528,555	$	528,054

Brokered deposits totaled approximately $49,658,000 and $29,260,000 at December 31, 2006 and 2005. At December 31, 2006 and 2005, brokered deposits had interest rates ranging from 3.85% to 5.40% and 2.70% to 4.55%, respectively, and maturities ranging from one month to fifty-six months.

Scheduled maturities of time deposits at December 31, were as follows (in thousands):

	2006		2005
In one year	$	174,147	$	153,404
In two years		42,855		36,497
In three years		20,117		13,495
In four years		10,312		10,764
In five years		14,513		8,767
Thereafter		297		196
	$	262,241	$	223,123

Deposits from principal officers, directors, and their affiliates at year-end December 31, 2006 and 2005 were $10,806,000 and $10,729,000.

(Continued) 20.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005

NOTE 8 — BORROWINGS

Short-Term Borrowings

Short-term borrowings consist of term federal funds purchased and treasury tax and loan deposits and generally are repaid within one to 120 days from the transaction date.

Federal Home Loan Bank Advances

At year-end, advance from the Federal Home Loan Bank were as follows (dollars in thousands):

	Advance
Principal Terms	Amount		Range of Maturities	Rate
December 31, 2006
Single Maturity fixed rate advances	$	11,052	January 2007 to May 2016		5.13	%
December 31, 2005
Single Maturity fixed rate advances	$	10,228	January 2006 to May 2016		4.27	%
Putable advances		4,000	January 2006 to January 2011		4.48	%
	$	14,228

Each advance is payable at its maturity date, a prepayment penalty is assessed with early payoffs of advances. The advances were collateralized by securities totaling $24,024,000 and $28,346,000 and first mortgage loans totaling $10,624,000 and $7,844,000 under a blanket lien arrangement at December 31, 2006 and 2005.

Maturities over the next five years are (dollars in thousands):

2007	$	3,022
2008		3,024
2009		26
2010		2,028
2011		2,030
Thereafter		922
	$	11,052

(Continued) 21.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005

NOTE 8 – BORROWINGS (Continued)

Repurchase Agreements

Repurchase agreements are secured by mortgage-backed securities held by a third party trustee with carrying amounts of $10.9 million and $13.9 million at year-end 2006 and 2005.

These agreements are fixed rate financing arrangements that, at year-end 2006, mature in 2007 ($5,000,000) and 2008 ($5,000,000). At maturity, the securities underlying the agreements are returned to the Corporation. Information concerning repurchase agreements is summarized as follows (in thousands):

	2006			2005
Average daily balance during the year	$	10,000		$	10,000
Average interest rate during the year		3.32	%		2.70	%
Maximum month-end balance during the year	$	10,000		$	10,000
Weighted average interest rate at year-end		3.32	%		3.32	%

Subordinated Debenture and Trust Preferred Securities

A trust formed by the Corporation issued $12,000,000 trust preferred securities in 2003 as part of a pooled offering of such securities. The interest rate is a floating rate (LIBOR plus 3.00%) and the current rate at December 31, 2006 is 8.39%. The Corporation issued subordinated debentures at the same terms as the trust preferred securities to the trust in exchange for the proceeds of the offering; the debentures and related debt issuance costs represent the sole assets of the trust. The Corporation may redeem the subordinated debentures, in whole but not in part, any time after 2008 at a price of 100% of face value. The subordinated debentures must be redeemed no later than 2033.

A trust formed by the Corporation issued $2,000,000 trust preferred securities in 2005 as part of a pooled offering of such securities. The interest rate is a floating rate (LIBOR plus 1.60%) and the current rate at December 31, 2006 is 6.97%. The Corporation issued subordinated debentures at the same terms as the trust preferred securities to the trust in exchange for the proceeds of the offering; the debentures and related debt issuance costs represent the sole assets of the trust. The Corporation may redeem the subordinated debentures, in whole but not in part, any time after 2010 at a price of 100% of face value. The subordinated debentures must be redeemed no later than 2035.

(Continued) 22.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005

NOTE 9 — INCOME TAXES

The provision for income taxes reflected in the consolidated statements of income for the years ended December 31, consists of the following (in thousands):

	2006			2005			2004
Current expense	$	2,749		$	2,704		$	1,524
Deferred (benefit) expense		(511	)		(485	)		0
	$	2,237		$	2,219		$	1,524

Income tax expense was less than the amount computed by applying the statutory federal income tax rate to income before income taxes. The reasons for the difference are as follows (in thousands):

	2006			2005			2004
Income tax at statutory rate	$	2,565		$	2,473		$	1,890
Tax exempt interest		(336	)		(307	)		(291	)
Other		8			53			(75	)
	$	2,237		$	2,219		$	1,524

The net deferred tax asset recorded includes the following amounts of deferred tax assets and liabilities (in thousands):

	2006			2005
Deferred tax assets
Allowance for loan losses	$	2,257		$	1,866
Unrealized loss on securities available for sale		493			682
Compensation		369			392
Other		18			168
		3,137			3,108
Deferred tax liabilities
Depreciation		(264	)		(265	)
Purchase accounting adjustments		(258	)		(577	)
Other		(100	)		(111	)
		(622	)		(953	)
	$	2,515		$	2,155

A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. Management has determined that no valuation allowance is required at December 31, 2006 or 2005.

(Continued) 23.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005

NOTE 10 — BENEFIT PLANS

The Corporation has a noncontributory discretionary employee stock ownership plan (Plan) covering substantially all of its employees. It is a requirement of the plan to invest principally in the Corporation’s common stock. The contribution to the Plan in 2006, 2005 and 2004 was $40,000, $50,000 and $40,000, respectively.

The Corporation has also established a 401(k) Plan in which 50% of the employees’ contribution can be matched with a discretionary contribution by the Corporation up to a maximum of 6% of gross wages. The contribution to the 401(k) Plan for 2006, 2005 and 2004 was $292,000, $242,000 and $180,000, respectively.

NOTE 11 — STOCK PURCHASE AND OPTION PLANS

Director and Employee Plans

The Directors Stock Purchase Plan permits directors of the Corporation to purchase shares of common stock made available for purchase under the plan at the fair market value on the fifteenth day prior to the annual issuance date. The total number of shares issuable under this plan is limited to 9,600 shares in any calendar year.

The Retainer Stock Plan allows directors to elect to receive shares of common stock in full or partial payment of the director’s retainer fees and fees for attending meetings. The number of shares is determined by dividing the dollar amount of fees to be paid in shares by the market value of the stock on the first business day prior to the payment date.

The Executive Stock Bonus Plan permits the administrator of the plan to grant shares of the Corporation’s common stock to eligible employees. Any executive or managerial level employee is eligible to receive grants under the plan. The Board of Directors administers the plan and the number of shares issued are at the sole discretion of the Board of Directors, with no shares granted as of December 31, 2006.

Dividend Investment Plan

The Automatic Dividend Reinvestment Plan (“DRIP”) permits enrolled shareholders to automatically use dividends paid on common stock to purchase additional shares of the Corporation’s common stock at the fair market value on the investment date. Any shareholder who is the beneficial or record owner of not more than 9.9% of the issued and outstanding shares of the Corporation’s common stock is eligible to participate in the plan.

(Continued) 24.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005

NOTE 11 — STOCK PURCHASE AND OPTION PLANS (Continued)

Pursuant to a separate agreement with a family who collectively holds more than 9.9% of the Corporation’s stock on or prior to January 31 of each year beginning January 31, 1997, the Corporation is to advise the family, in a written notice, of the number of shares sold under the DRIP. Each family member will have the option, until February 28 of the same year, to purchase from the Corporation one-third of the total number of shares that would be sufficient to prevent the dilution to all family members as a group that result solely as a result of the DRIP shares. The purchase price under this agreement is the fair market value on December 31 of the year immediately preceding the year in which the written notice is given. Similarly, a reverse agreement exists which allows the Corporation to redeem family shares to maintain the family ownership percentage in the event that stock repurchase activity more than offsets the shares available because of the DRIP.

The following summarizes shares issued under the various plans:

	2006		2005		2004
Automatic dividend reinvestment plan		13,337		11,586		10,452
Director stock purchase & retainer stock		7,892		6,384		3,529
Stock options		5,525		0		0
Other issuance of stock		2,890		2,616		0
		29,644		20,586		13,981

Stock Option Plans

The Nonemployee Director Stock Option Plan provides for granting options to nonemployee directors to purchase the Corporation’s common stock. No options have been granted in 2006. The purchase price of the shares is the fair market value at the date of the grant, and there is a three-year vesting period before options may be exercised. Options to acquire no more than 8,131 shares of stock may be granted under the Plan in any calendar year and options to acquire not more than 73,967 shares in the aggregate may be outstanding at any one time. The Corporation did repurchase 977 shares of stock due to a director exercising options and opted for cashless entries.

The Employee Stock Option Plan grants options to eligible employees to purchase the Corporation’s common stock at or above, the fair market value of the stock at the date of the grant. Awards granted under this plan are limited to an aggregate of 86,936 shares. The administrator of the plan is a committee of directors. The administrator has the power to determine the number of options to be granted, the exercise price of the options and other terms of the options, subject to consistency with the terms of the Plan.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Corporation’s common stock. The Corporation uses historical data to estimate option exercise and post-vesting termination behavior. (Employee and management options are tracked separately.) The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. Shares are issued upon option exercise come from authorized but unissued shares.

(Continued) 25.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005

NOTE 11 — STOCK PURCHASE AND OPTION PLANS (Continued)

The following table summarizes stock option activity (adjusted for the 10% stock dividend paid on August 4, 2006):

						Weighted
						Average
	Number			Weighted		Remaining		Aggregate
	of			Average		Contractual		Intrinsic
	Options			Price		Life		Value
Options outstanding at January 1, 2006		46,532		$	28.04
Options exercised 2006		(5,525	)		15.74
Options forfeited 2006		(484	)		30.88
Options outstanding at December 31, 2006		40,523		$	29.68		6.19	$	116,369
Exercisable at December 31, 2006		29,412		$	30.45		6.13	$	61,628

The fair value of options granted was determined using option-pricing models, using the following weighted-average assumptions as of grant date.

	2005			2004
Risk-free interest rate		4.28	%		3.78	%
Expected option life	6 years			6 years
Expected stock price volatility		26	%		23	%
Dividend yield		3.20	%		2.70	%
Fair value	$	6.13		$	6.29

Information related to the stock option plan during each year follows:

	2006
Intrinsic value of options exercised	$	85
Cash received from option exercises		55
Tax benefit realized from option exercises		0

As of December 31, 2006, there was $23,400 of total unrecognized compensation cost related to nonvested stock options granted under the Plan. The cost is expected to be recognized over a weighted-average period of 1.3 years.

(Continued) 26.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005

NOTE 12 — REGULATORY MATTERS

The Corporation (on a consolidated basis) and its Bank subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory — and possibly additional discretionary - - actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Banks must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items are calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Banks to maintain minimum amounts and ratios (set forth in the table below in thousands) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2006, that the Corporation and the Banks meet all capital adequacy requirements to which they are subject. As of December 31, 2006 and 2005, the most recent notifications from Federal Deposit Insurance Corporation categorized the Corporation and the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Corporation and the Banks must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since the notifications that management believes have changed the Corporation or the Banks’ category.

(Continued) 27.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005

NOTE 12 — REGULATORY MATTERS (Continued)

											To Be Well
						For Capital					Capitalized Under
						Adequacy					Prompt Corrective
	Actual					Purposes					Action Provisions
As of December 31, 2006	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to Risk Weighted Assets)
Consolidated	$	63,934		12.5	%	$	40,949		8.0	%	$	51,186		10.0	%
The State Bank		35,985		11.0			26,062		8.0			32,577		10.0
Davison State Bank		4,737		11.7			3,250		8.0			4,063		10.0
West Michigan Community Bank		16,236		11.3			11,446		8.0			14,307		10.0
Tier 1 Capital (to Risk Weighted Assets)
Consolidated		57,562		11.3			20,474		4.0			30,712		6.0
The State Bank		31,913		9.8			13,031		4.0			19,546		6.0
Davison State Bank		4,229		10.4			1,625		4.0			2,438		6.0
West Michigan Community Bank		14,444		10.1			5,723		4.0			8,584		6.0
Tier 1 Capital (to Average Assets)
Consolidated		57,562		8.6			26,897		4.0			33,622		5.0
The State Bank		31,913		8.2			15,481		4.0			19,352		5.0
Davison State Bank		4,229		8.2			2,068		4.0			2,585		5.0
West Michigan Community Bank		14,444		8.6			6,739		4.0			8,424		5.0

(Continued) 28.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005

NOTE 12 — REGULATORY MATTERS (Continued)

											To Be Well
						For Capital					Capitalized Under
						Adequacy					Prompt Corrective
	Actual					Purposes					Action Provisions
As of December 31, 2005	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to Risk Weighted Assets)
Consolidated	$	59,880		11.9	%	$	40,430		8.0	%	$	50,537		10.0	%
The State Bank		37,037		11.5			25,857		8.0			32,322		10.0
Davison State Bank		5,357		11.6			3,711		8.0			4,639		10.0
West Michigan Community Bank		13,970		10.5			10,602		8.0			13,252		10.0
Tier 1 Capital (to Risk Weighted Assets)
Consolidated		53,738		10.6			20,215		4.0			30,322		6.0
The State Bank		33,121		10.3			12,929		4.0			19,393		6.0
Davison State Bank		4,790		10.3			1,856		4.0			2,783		6.0
West Michigan Community Bank		12,311		9.3			5,301		4.0			7,951		6.0
Tier 1 Capital (to Average Assets)
Consolidated		53,738		8.9			24,069		4.0			30,086		5.0
The State Bank		33,121		8.6			15,453		4.0			19,317		5.0
Davison State Bank		4,790		8.6			2,212		4.0			2,764		5.0
West Michigan Community Bank		12,311		7.9			6,253		4.0			7,816		5.0

(Continued) 29.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005

NOTE 13 — FINANCIAL INSTRUMENTS

The estimated fair values of the Corporation’s financial instruments at December 31, are as follows (in thousands):

	2006				2005
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
Assets:
Cash and cash equivalents	$	29,446	$	29,446	$	31,077	$	31,077
Securities — available for sale		91,104		91,104		99,542		99,542
Securities — held to maturity		11,899		11,821		14,851		14,672
FHLB stock		2,032		2,032		2,300		2,300
Loans held for sale		2,226		2,231		1,042		1,045
Loans		444,301		435,743		433,055		436,060
Bank owned life insurance		6,815		6,815		6,579		6,579
Accrued interest receivable		2,985		2,985		2,676		2,676
Liabilities:
Deposits	$	528,555	$	521,440	$	528,054	$	524,745
Short-term borrowings		1,500		1,500		1,537		1,537
FHLB advances		11,052		11,052		14,228		14,072
Repurchase agreements		10,000		10,000		10,000		10,000
Subordinated debentures		14,000		14,000		14,000		14,000
Accrued interest payable		1,608		1,608		1,041		1,041

The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments:

Cash and cash equivalents

The carrying amounts reported in the balance sheet for cash and short-term instruments approximate their fair values.

Securities (including mortgage-backed securities)

Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Loans held for sale

The market value of these loans represents estimated fair value. The market value is determined in the aggregate on the basis of existing forward commitments or fair values attributable to similar loans.

Loans

For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair value for other loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest receivable approximates its fair value.

(Continued) 30.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005

NOTE 13 — FINANCIAL INSTRUMENTS (Continued)

Bank owned life insurance

The carrying amounts reported in the balance sheet for bank owned life insurance approximates their fair values.

Off-balance-sheet instruments

The Corporation’s off-balance-sheet instruments approximate their fair values.

Deposit liabilities

The fair values disclosed for demand deposits are, by definition equal to the amount payable on demand at the reporting date. The carrying amounts for variable rate, fixed term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed certificates of deposit are estimated using discounted cash flow calculation that applies interest rates currently being offered on similar certificates. The carrying amount of accrued interest payable approximates its fair value.

Short-term borrowings

The carrying amounts of federal funds purchased and other short-term borrowings approximate their fair values.

FHLB advances

Rates currently available for FHLB debt with similar terms and remaining maturities are used to estimate the fair value of the existing debt.

Repurchase agreements

Rates currently available for repurchase agreements with similar terms and remaining maturities are used to estimate the fair value of the existing repurchase agreements.

Subordinated Debentures

Rates currently available for subordinated debentures with similar terms and remaining maturities are used to estimate the fair value of the existing subordinated debentures.

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Corporation’s financial instruments, fair value estimates are based on management’s judgments regarding future expected loss experience, current economic conditions, risk characteristics and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

(Continued) 31.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005

NOTE 13 — FINANCIAL INSTRUMENTS (Continued)

Off-balance-sheet risk

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.

The contractual amount of financial instruments with off-balance-sheet risk was as follows at year-end (in thousands):

	2006		2005
Commitments to make loans (at market rates)	$	43,414	$	42,112
Unused lines of credit and letters of credit		72,869		75,014

Commitments to make loans are generally made for periods of 90 days or less. At December 31, 2006, $8,174,000 of the outstanding loan commitments had fixed interest rates ranging from 6.25% to 8.0% and maturities ranging from three years to seven years.

(Continued) 32.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005

NOTE 14 — PARENT ONLY CONDENSED FINANCIAL INFORMATION

The condensed financial information that follows presents the financial condition of Fentura Financial, Inc. (parent company only), along with the results of its operations and its cash flows.

CONDENSED BALANCE SHEETS
December 31 (in thousands)

	2006		2005
ASSETS
Cash and cash equivalents	$	5,396	$	1,664
Securities available for sale, at market		2,309		2,008
Other assets		143		211
Investment in subsidiaries		58,220		57,379
	$	66,068	$	61,262
LIABILITIES AND STOCKHOLDERS’ EQUITY
Other liabilities	$	750	$	367
Subordinated debt		14,000		14,000
Stockholders’ Equity		51,318		46,895
	$	66,068	$	61,262

CONDENSED STATEMENTS OF INCOME
Years ended December 31 (in thousands)

	2006			2005			2004
Interest on securities	$	0		$	0		$	1
Other income		1			3			2
Dividends from subsidiaries		6,849			2,158			2,697
Interest expense		(1,264	)		(898	)		(569	)
Operating expenses		(327	)		(270	)		(349	)
Equity in undistributed income of subsidiaries		(468	)		3,664			1,942
Income before income taxes		4,791			4,657			3,724
Federal income tax expense (benefit)		(517	)		(397	)		(310	)
Net income	$	5,308		$	5,054		$	4,034

(Continued) 33.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005

NOTE 14 — PARENT ONLY CONDENSED FINANCIAL INFORMATION (Continued)

CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31 (in thousands)

	2006			2005			2004
Cash flows from operating activities
Net income	$	5,308		$	5,054		$	4,034
Amortization		0			0			1
Change in other assets		38			429			(4,724	)
Change in other liabilities		383			(106	)		56
Equity in undistributed income of subsidiary		468			(3,664	)		(1,942	)
Net cash from operating activities		6,197			1,713			(2,575	)
Cash flows provided by investing activities
Purchase of equity securities		(213	)		(865	)		(650	)
Sales and maturities of securities – AFS		0			0			300
Purchases of securities – AFS		0			0			0
Purchase of West Michigan Financial Corp		0			0			(12,900	)
Investment in subsidiary		(1,000	)		(500	)		(1,700	)
Net cash from investing activities		(1,213	)		(1,365	)		(14,950	)
Cash flows used in financing activities
Issuance of subordinated debt		0			2,000			0
Net short-term borrowings		0			(750	)		750
Dividends paid		(2,069	)		(1,839	)		(1,758	)
Stock repurchase		0			0			(122	)
Proceeds from stock issuance		817			1,381			463
Net cash from financing net activities		(1,252	)		792			(667	)
Change in cash and cash equivalents		3,732			1,140			(18,192	)
Cash and cash equivalents at beginning of year		1,664			524			18,716
Cash and cash equivalents at end of year	$	5,396		$	1,664		$	524

(Continued) 34.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005

NOTE 15 – ACQUISITION

On October 15, 2003, the Corporation announced the signing of a definitive agreement to acquire West Michigan Financial Corporation (“WMFC”), a commercial bank headquartered in Hudsonville, Michigan. The purpose of the acquisition was, to establish a presence in the West Michigan market resulting in a foundation to grow the Corporations asset base, primarily loans, in the West Michigan market. Under the terms of the transaction, the Corporation acquired all of the outstanding stock of WMFC in exchange for cash. The total cost of the transaction was $12.9 million. The Corporation closed the transaction on March 15, 2004.

The acquisition has been accounted for using the purchase method of accounting, and accordingly, the purchase price has been allocated to the tangible and identified intangible assets purchased and the liabilities assumed based upon the estimated fair values at the date of acquisition. Identified intangible assets and purchase accounting fair value adjustments are being amortized under various methods over the expected lives of the corresponding assets and liabilities. Goodwill will not be amortized, but will be reviewed for impairment on an annual basis. Goodwill is tax deductible over 15 years. Identified intangible assets aggregate to $1.7 million and include a core deposit intangible and customer relationship value related to West Michigan Financial Corporation’s loan, deposit and wealth management customers. Goodwill aggregated to $7.9 million. Intangible assets recorded for the acquisition that are subject to amortization were computed as follows in thousands of dollars:

	Amount
Core deposits intangible	$	1,509
Customer relationships intangible		216
In conjunction with the acquisition, the fair values of significant assets and liabilities assumed at March 15, 2004 were as follows, stated in thousands of dollars:
Cash and cash equivalents	$	(1,112	)
Securities		26,966
Loans		97,277
Acquisition intangibles		9,578
Deposits		(109,828	)
Other borrowings		(27,369	)

The following table presents pro forma information stated in thousands of dollars for the year ended December 31, 2004 as if the acquisition of WMFC had occurred at the beginning of 2004. The pro forma information includes adjustments for the amortization of intangibles arising from the transaction, the elimination of acquisition related expenses, and the related income tax effects. WMFC has been included in results since March 15, 2004. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transaction been effected on the assumed date.

(Continued) 35.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005

NOTE 15 – ACQUISITION (Continued)

	2004
Interest income	$	27,485
Interest expense		8,691
Net interest income		18,794
Provision for loan losses		1,426
Net interest income after provision		17,368
Noninterest income		7,555
Noninterest expense		19,167
Income before federal income tax		5,756
Federal income tax expense		1,586
Net income	$	4,170
Basic earnings per share	$	2.21
Diluted earnings per share		2.20

NOTE 16 — SUMMARY OF QUARTERLY FINANCIAL DATA – UNAUDITED

The unaudited quarterly results of operations for 2006 and 2005 are as follows (in thousands except per share data):

	First		Second		Third		Fourth
2006	Quarter		Quarter		Quarter		Quarter
Interest income	$	9,614	$	9,979	$	10,212	$	10,111
Interest expense		3,748		4,134		4,510		4,516
Provision for loan losses		400		240		240		240
Noninterest income		1,797		1,888		1,940		2,018
Noninterest expenses		5,569		5,713		5,503		5,201
Income before income taxes		1,694		1,780		1,899		2,172
Provision for income taxes		487		522		563		665
Net income		1,207		1,258		1,336		1,507
Earnings per share
Basic		.57		.59		.62		.70
Diluted		.56		.59		.62		.70

(Continued) 36.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005

NOTE 16 — SUMMARY OF QUARTERLY FINANCIAL DATA – UNAUDITED (Continued)

	First		Second		Third		Fourth
2005	Quarter		Quarter		Quarter		Quarter
Interest income	$	7,647	$	8,278	$	8,813	$	9,140
Interest expense		2,258		2,590		3,036		3,414
Provision for loan losses		269		329		404		387
Noninterest income		1,586		1,767		1,884		1,645
Noninterest expenses		5,093		5,298		5,272		5,137
Income before income taxes		1,613		1,828		1,985		1,847
Provision for income taxes		461		535		686		537
Net income		1,152		1,293		1,299		1,310
Earnings per share
Basic		.55		.62		.62		.62
Diluted		.54		.62		.62		.62

(Continued) 37.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This section provides a narrative discussion and analysis of the consolidated financial condition and results of operations of Fentura Financial, Inc. (the Corporation), together with its subsidiaries, The State Bank, Davison State Bank, and West Michigan Community Bank (the Banks), as well as Fentura Mortgage Company and West Michigan Mortgage Company, LLC for the years ended December 31, 2006, 2005 and 2004 The supplemental financial data included throughout this discussion should be read in conjunction with the primary financial statements presented on pages 4 through 37 of this report. It provides a more detailed and comprehensive review of operating results and financial position than could be obtained from a reading of the financial statements alone. The financial data and results of operations for West Michigan Community Bank are included only from the date of acquisition on March 15, 2004.

TABLE 1 Selected Financial Data

$ in thousands except per share data and ratios	2006			2005			2004			2003			2002
Summary of Consolidated Statements of Income:
Interest Income	$	39,916		$	33,878		$	26,094		$	18,438		$	17,952
Interest Expense		16,908			11,298			8,263			5,601			5,722
Net Interest Income		23,008			22,580			17,831			12,837			12,230
Provision for Loan Losses		1,120			1,389			1,389			1,319			426
Net Interest Income after Provision		21,888			21,191			16,442			11,518			11,804
Total Other Operating Income		7,643			6,882			7,292			6,866			5,394
Total Other Operating Expense		21,986			20,800			18,176			13,276			12,253
Income Before Income Taxes		7,545			7,273			5,558			5,108			4,945
Provision for Income Taxes		2,237			2,219			1,524			1,320			1,479
Net Income	$	5,308		$	5,054		$	4,034		$	3,788		$	3,466
Net Income Per Share – Basic *	$	2.48		$	2.41		$	1.95		$	1.83		$	1.65
Net Income Per Share – Diluted *	$	2.47		$	2.40		$	1.94		$	1.83		$	1.65
Summary of Consolidated Balance Sheets:
Assets	$	622,298		$	619,089		$	584,890		$	419,966		$	340,483
Securities, including FHLB stock		105,035			116,693			131,429			126,856			63,525
Loans, including loans held for sale		453,219			440,398			395,017			254,340			229,730
Deposits		528,555			528,054			491,065			348,525			295,869
Borrowings and Other Fundings		36,552			39,765			46,602			29,057			2,624
Stockholders’ Equity		51,318			46,895			42,969			40,882			39,928
Other Financial and Statistical Data:
Tier 1 Capital to Risk Weighted Assets		11.30	%		10.60	%		10.20	%		16.90	%		14.10	%
Total Capital to Risk Weighted Assets		12.50	%		11.90	%		11.40	%		18.00	%		15.20	%
Tier 1 Capital to Average Assets		8.60	%		8.90	%		8.70	%		14.00	%		12.60	%
Total Cash Dividends	$	2,069		$	1,839		$	1,758		$	1,966		$	1,748
Book Value Per Share *	$	24.08		$	22.07		$	20.67		$	19.74		$	19.16
Cash Dividends Paid Per Share *	$	0.94		$	0.88		$	0.84		$	0.76		$	0.84
Period End Market Price Per Share *	$	32.75		$	29.77		$	33.41		$	28.59		$	28.72
Dividend Pay-out Ratio		38.98	%		36.39	%		43.58	%		51.90	%		50.43	%
Return on Average Stockholders’ Equity		10.82	%		11.09	%		9.72	%		9.32	%		8.78	%
Return on Average Assets		0.85	%		0.85	%		0.74	%		1.00	%		1.10	%
Net Interest Margin		4.11	%		4.23	%		3.70	%		3.88	%		4.46	%
Total Equity to Assets at Period End		8.25	%		7.57	%		7.34	%		9.73	%		11.73	%

* Per Share data calculated using average shares outstanding in each period. Per share amounts and average shares outstanding have been adjusted to reflect a 10% stock dividend paid on August 4, 2006 and February 13, 2004

(Continued) 38.

RESULTS OF OPERATIONS

The Corporation achieved net income of $5,308,000 for the year of 2006, an increase of $254,000 or 5.0%. Net income increased primarily due to the expansion of the Corporation’s footprint in Southeast and Western Michigan, higher loan balances and the increases in the prime rate during 2006. Noninterest income increased in 2006 by $761,000 or 11.1% from the noninterest income in the prior year. Non-interest expense increased by $1,186,000 or 5.7%. We expect that interest rates will remain steady or possibly decrease slightly in 2007, which should have a positive impact on our operations.

Standard performance indicators used in the banking industry help management evaluate the Corporation’s performance. Two of these performance indicators are return on average assets and return on average equity. For 2006, 2005, and 2004 respectively, the Corporation posted a return on average assets of 0.85%, 0.85%, and 0.74%. Return on average equity was 10.82% in 2006, 11.09% in 2005, and 9.72% in 2004. The Corporation has a very strong capital position, and provided a 9.43% increase in equity in 2006. Total assets increased $3 million in 2006, $34 million in 2005, and $165 million in 2004. Diluted earnings per share were $2.47 in 2006, $2.40 in 2005, and $1.94 in 2004 (adjusted for a 10% stock dividend paid on August 4, 2006). The large increases in the 2004 were the result of the West Michigan Community Bank acquisition in March 2004.

NET INTEREST INCOME

Net interest income, the principal source of income, is the amount of interest income generated by earning assets (principally securities and loans) less interest expense paid on interest bearing liabilities (largely deposits and other borrowings).

A critical task of management is to price assets and liabilities so that the spread between the interest earned on assets and the interest paid on liabilities is maximized without unacceptable risk. While interest rates on interest earning assets and interest bearing liabilities are subject to market forces, in general, the Corporation can exert more control over deposit costs than earning asset rates. Loan products carry either fixed rates of interest or rates tied to market indices which are determined independently. The Corporation sets its own rates on deposits, providing management with some flexibility in determining the timing and proportion of rate changes for the cost of its deposits.

Table 2 summarizes the changes in net interest income resulting from changes in volume and rates for the years ended December 31, 2006 and 2005. Net interest income (displayed with consideration of full tax equivalency), average balance sheet amounts, and the corresponding yields for the last three years are shown in Table 3. Tax equivalent net interest income increased by $421,000 in 2006 or 1.8% and increased by $4,779,000 or 26.1% in 2005. The primary factors contributing to the increase in net interest income in 2006 were the increase in loan volumes and the increases in the prime rate. These increases were slightly higher than the increases in interest expenses resulting in a higher net interest income but lower net interest margin.

As indicated in Table 3, for the year ended December 31, 2006, the Corporation’s net interest margin was 4.11% compared with 4.23% and 3.70% for the same period in 2005 and 2004, respectively. The decrease in 2006 could be attributed to the flat yield curve that existed during the year, which hindered income on loans, as well as escalating funding costs. The increase in 2005 was due to higher earning asset yields resulting from prime rate increases during the year, these were offset with measured increases in the deposit yields.

Average earning assets increased 4.7% in 2006, 10.3% in 2005, and increased 44.6% in 2004. Average earning assets increased due to higher loan balances, the highest yielding component of earning assets, representing 79.1% of earning assets in 2006, compared to 77.4% in 2005 and 72.9% in 2004. Average interest bearing liabilities increased 5.5% in 2006, 9.0% in 2005, and 52.1% in 2004. Non-interest bearing deposits amounted to 13.5% of average earning assets in 2006 compared with 14.9% in 2005 and 14.8% in 2004.

39

TABLE 2

Changes in Net Interest Income
Due to Changes in Average Volume
and Interest Rates
Years Ended December 31,

				INCREASE								INCREASE
				(DECREASE)								(DECREASE)
				2006								2005
				DUE								DUE
	TO:								TO:
				YIELD/								YIELD/
(000’s omitted)	VOL			RATE		TOTAL			VOL			RATE			TOTAL
TAXABLE SECURITIES	$	(226	)	$	448	$	222		$	(412	)	$	609		$	197
TAX-EXEMPT SECURITIES		(127	)		150		23			624			(551	)		73
FEDERAL FUNDS SOLD		215			124		339			(71	)		101			30
TOTAL LOANS		2,178			3,299		5,477			3,744			3,678			7,422
LOANS HELD FOR SALE		(37	)		7		(30	)		75			17			92
TOTAL EARNING ASSETS		2,003			4,028		6,031			3,960			3,854			7,814
INTEREST BEARING DEMAND DEPOSITS		(121	)		828		707			33			461			494
SAVINGS DEPOSITS		(284	)		141		(143	)		(370	)		(522	)		(892	)
TIME CDs $100,000 AND OVER		1,748			1,447		3,195			1,372			420			1,792
OTHER TIME DEPOSITS		685			909		1,594			230			762			992
OTHER BORROWINGS		(333	)		590		257			203			446			649
TOTAL INTEREST BEARING LIABILITIES		1,695			3,915		5,610			1,468			1,567			3,035
NET INTEREST INCOME	$	308		$	113	$	421		$	2,492		$	2,287		$	4,779

40

TABLE 3

	Summary of Net Interest Income
	Years Ended December 31,
	2006								2005								2004
	AVG								AVG								AVG
(000’s omitted)	BAL			INC/EXP		YIELD			BAL			INC/EXP		YIELD			BAL			INC/EXP		YIELD
ASSETS
Securities:
U.S. Treasury and Government Agencies	$	84,099		$	3,348		3.98	%	$	91,280		$	3,141		3.44	%	$	106,512		$	2,916		2.74	%
State and Political (1)		21,376			1,226		5.73	%		23,892			1,203		5.04	%		15,354			1,130		7.36	%
Other		4,304			124		2.88	%		3,733			109		2.89	%		3,053			137		4.49	%
Total Securities		109,779			4,698		4.28	%		118,905			4,453		3.74	%		124,919			4,183		3.35	%
Fed Funds Sold		10,045			503		5.01	%		4,347			164		3.77	%		9,308			134		1.44	%
Loans:
Commercial		343,702			26,820		7.80	%		307,746			21,527		7.00	%		259,016			15,632		6.04	%
Tax Free (1)		4,217			271		6.43	%		4,844			308		6.35	%		4,708			297		6.31	%
Real Estate-Mortgage		36,330			2,638		7.26	%		36,409			2,690		7.39	%		26,198			1,801		6.87	%
Consumer		66,526			5,382		8.09	%		72,064			5,109		7.09	%		70,408			4,482		6.37	%
Total loans		450,775			35,111		7.79	%		421,063			29,634		7.04	%		360,330			22,212		6.16	%
Allowance for Loan Loss		(6,632	)							(5,975	)							(4,779	)
Net Loans		444,143			35,111		7.91	%		415,088			29,634		7.14	%		355,551			22,212		6.16	%
Loans Held for Sale		1,626			112		6.89	%		2,215			142		6.41	%		884			50		5.66	%
TOTAL EARNING ASSETS		572,225			40,424		7.06	%		546,530			34,393		6.29	%		495,441			26,579		5.36	%
Cash Due from Banks		18,155								20,067								24,249
All Other Assets		39,663								36,823								31,990
TOTAL ASSETS	$	623,411							$	597,445							$	546,901
LIABILITIES & SHAREHOLDERS’ EQUITY:
Deposits:
Interest bearing – DDA	$	103,356		$	2,395		2.32	%	$	111,670		$	1,688		1.51	%	$	108,704		$	1,194		1.10	%
Savings Deposits		99,339			1,252		1.26	%		125,031			1,395		1.12	%		149,099			2,287		1.53	%
Time CD’s $100,000 and Over		130,860			6,215		4.75	%		83,120			3,020		3.63	%		39,260			1,228		3.13	%
Other Time CD’s		120,427			4,881		4.05	%		99,928			3,287		3.29	%		90,855			2,295		3.08	%
Total Interest Bearing Deposits		453,982			14,743		3.25	%		419,749			9,390		2.24	%		387,918			7,004		1.81	%
Other Borrowings		39,268			2,165		5.51	%		47,697			1,908		4.00	%		41,082			1,259		3.06	%
INTEREST BEARING LIABILITIES		493,250			16,908		3.43	%		467,446			11,298		2.42	%		429,000			8,263		1.93	%
Non-interest bearing — DDA		77,256								81,471								73,553
All Other Liabilities		3,832								2,935								2,618
Shareholders Equity		49,073								45,593								41,730
TOTAL LIABILITIES and S/H
EQUITY	$	623,411							$	597,445							$	546,901
Net Interest Rate Spread							3.64	%							3.88	%							3.44	%
Impact of Non-Interest Bearing Funds on Margin							0.47	%							0.35	%							0.26	%
Net Interest Income/Margin				$	23,516		4.11	%				$	23,095		4.23	%				$	18,316		3.70	%

(1) – Presented on a fully taxable equivalent basis using a federal income tax rate of 34%.

41

ALLOWANCE AND PROVISION FOR LOAN LOSSES

The allowance for loan losses reflects management’s judgment as to the level considered appropriate to absorb probable incurred losses in the loan portfolio. The Corporation’s methodology in determining the adequacy of the allowance is based on ongoing quarterly assessments and relies on several key elements, which include specific allowances for identified problem loans and a formula based risk allocated allowance for the remainder of the portfolio. This includes a review of individual loans, size and composition of the loan portfolio, historical loss experience, current economic conditions, financial condition of borrowers, the level and composition of non-performing loans, portfolio trends, estimated net charge-offs, and other pertinent factors. Although reserves have been allocated to various portfolio segments, the allowance is general in nature and is available for the portfolio in its entirety. At December 31, 2006, the allowance for loan losses was $6,692,000 or 1.48% of total loans. This compares with $6,301,000 or 1.43% at December 31, 2005 and $5,501,000, or 1.40%, at December 31, 2004. Management believes that the allowance for loan losses is appropriate given identified risk in the loan portfolio based on asset quality.

The provision for loan losses was $1,120,000 in 2006 and $1,389,000 and $1,389,000 in 2005 and 2004, respectively, with $457,000 of the 2004 provision attributable to West Michigan Community Bank. Provision for 2006 declined from the 2005 level by $269,000. The amount of provision taken for the year is a direct output of the calculation of loan loss adequacy. The Banks review loan loss adequacy on a quarterly basis. The decline for the year was due to loan breakout of specific allocations and general allocations in loan loss adequacy computation. The provision was also impacted by approximately $32,000,000 less in loan growth year to year, offset by increased net charge-off of about $140,000. The 2005 provision level reflects continued loan growth in the subsidiary banks coupled with a slight increase in nonperforming assets and higher net charge-offs. The provision for loan losses was consistent in 2005 with 2004, due to growth in the loan portfolios and slight increases in restructured loans.

Table 4 summarizes loan losses and recoveries from 2002 through 2006. During 2006, the Corporation experienced net charge-offs of $729,000, compared with net charge-offs of $589,000 and $461,000 in 2005 and 2004, respectively. The year to year increase in charge offs was due to an increase in commercial loan charge-offs by $149,000 year to year and a decrease in total recoveries of $28,000. The net charge-off ratio is the difference of charge-off loans minus the recoveries from loans divided by average gross loans. Accordingly, the net charge-off ratio for 2006 was 0.16% compared to 0.14% and 0.12% at the end of 2005 and 2004, respectively. The net charge-off ratio increased in 2006 due to higher charge offs in the commercial portfolio.

The Corporation maintains formal policies and procedures to control and monitor credit risk. Management believes the allowance for loan losses is adequate to meet normal credit risks in the loan portfolio. The Corporation’s loan portfolio has no significant concentrations in any one industry or any exposure in foreign loans. The Corporation has not extended credit to finance highly leveraged transactions nor does it intend to do so in the future. Employment levels and other economic conditions in the Corporation’s local markets may have a significant impact on the level of credit losses. Management continues to identify and devote attention to credits that may not be performing as agreed. Management does not expect the level of the allowance for loan losses as a percentage of gross loans to change significantly in 2007. Non-performing loans are discussed further in the section titled “Non-Performing Assets”.

42

TABLE 4

Analysis of the Allowance for Loan Losses

	Years Ended December 31,
(000’s omitted)	2006			2005			2004			2003			2002
Balance Beginning of Period	$	6,301		$	5,501		$	3,414		$	3,184		$	3,125
Charge-offs:
Commercial, Financial and Agricultural		(554	)		(405	)		(365	)		(940	)		(329	)
Real Estate-Construction		0			0			0			0			0
Real Estate-Mortgage		0			0			0			0			(7	)
Installment Loans to Individuals		(323	)		(360	)		(306	)		(455	)		(510	)
Total Charge-offs		(877	)		(765	)		(671	)		(1,395	)		(846	)
Recoveries:
Commercial and Financial		51			70			38			168			344
Real Estate-Construction		0			0			0			0			0
Real Estate-Mortgage		0			0			0			0			0
Installment Loans to Individuals		97			106			172			138			135
Total Recoveries		148			176			210			306			479
Net Charge-offs		(729	)		(589	)		(461	)		(1,089	)		(367	)
Provision		1,120			1,389			1,389			1,319			426
Addition from WMCB acquisition		0			0			1,159			0			0
Balance at End of Period	$	6,692		$	6,301		$	5,501		$	3,414		$	3,184
Ratio of Net Charge-Offs During the Period		0.16	%		0.14	%		0.12	%		0.43	%		0.16	%

NON-INTEREST INCOME

Non-interest income was $7,643,000 in 2006, $6,882,000 and $7,292,000 in 2005 and 2004, respectively. These amounts represent an increase of 11.1% in 2006 compared to 2005, and a decrease of 5.6% in 2005 compared to 2004.

The most significant category of non-interest income is service charges on deposit accounts. These fees were $3,708,000 in 2006, compared to $3,445,000 and $3,609,000 in 2005 and 2004, respectively. This was an increase of $263,000 or 7.6% in 2006 and decrease of $293,000 or 4.5% in 2005. The increase in 2006 was due to an increase in NSF and overdraft privilege fees. The decrease between 2005 and 2004 was due to a decline in NSF and overdraft privilege fees.

Gains on the sale of mortgage loans originated by the Banks and sold in the secondary market were $615,000 in 2006, $842,000 in 2005, and $510,000 in 2004. The decrease of 27.0% in 2006 is due to a stagnant to declining mortgage market. The Corporation sells the majority of the mortgage loans originated in the secondary market on a servicing released basis.

Trust and investment income increased $397,000 or 34.3% in 2006 to $1,554,000 compared with $1,157,000 in 2005 and $1,042,000 in 2004. The 34.3% increase is due to favorable changes in the market value of trust and investment assets as well as substantial growth in financial planning and brokerage assets. The increase in trust and investment income from 2004 to 2005 was partially due to a full year of West Michigan Community Bank’s trust and investment income.

In 2006, the Corporation recognized security losses of $2,000. In 2005, the Corporation recognized security losses of $149,000, which losses were incurred in order to reposition the security portfolio into higher yielding securities. In 2004, the Corporation did not recognize any securities gains.

43

In 2004, the Corporation recognized a gain on the sale of the credit card portfolio and the sale of some SBA loans, which totaled $464,000. The Corporation sold the credit card portfolio due to potential fraud risk in the future and sold the SBA loans due to processing issues with the loans.

Other income and fees includes income from the sale of checks, safe deposit box rent, merchant account income, ATM income, and other miscellaneous income items. Other income and fees were $1,768,000 in 2006 compared to $1,587,000 and $1,508,000 in 2005 and 2004, respectively. Other income increased 11.4%, due to an increase in merchant fee income, debit card income, official check commission, cash surrender value of bank owned life insurance and servicing income from non-corporate affiliates. The Corporation also recognized a loss of $21,000 on sale of Real Estate Owned. The increase of 5.2%, between 2005 and 2004, is due to a full year of other income from West Michigan Community Bank and an increase in ATM and debit card income.

NON-INTEREST EXPENSE

Total non-interest expense was $21,986,000 in 2006 compared to $20,800,000 in 2005 and $18,176,000 in 2004. This was an increase of 5.7% in 2006 and 14.4% in 2005.

Salaries and employee benefits, the Corporation’s largest operating expense category, were $12,738,000 in 2006, compared with $11,983,000 in 2005 and $9,956,000 in 2004. A portion of the increase between 2006 and 2005 was due to the opening of a new branch in Grand Blanc, along with annual salary increases and increases in health care expenses. The increase between 2005 and 2004 was primarily due to a full year of salaries for West Michigan Community Bank and bonus payouts for bank performance for employees during 2005.

Occupancy expenses associated with the Corporation’s facilities were $1,858,000 in 2006 compared to $1,673,000 in 2005 and $1,633,000 in 2004. In 2006, this was an increase of 11.1% and in 2005 an increase of 2.4%. The increase in 2006 was due to the opening of the Grand Blanc office and increases in lease expense at several branch locations. The slight increase in 2005 was due to a full year of occupancy expenses for West Michigan Community Bank and occupancy expenses of the three recently opened branches in 2004.

In 2006, equipment expenses were $2,140,000 compared to $2,080,000 in 2005 and $2,153,000 in 2004. These result in an increase of 2.9% in 2006 compared to a decrease of 3.4% in 2005. The increase in 2006 was due to the opening of a new branch office in Grand Blanc. The decrease in 2005 was due to a reduction in equipment maintenance on the mainframe computer. The Corporation purchased a new mainframe computer in early 2005, which will be amortized over three years.

Loan and collection expenses were $320,000 in 2006 compared to $388,000 in 2005 and $289,000 in 2004. There was a decrease of 17.5% comparing 2006 with 2005. The decrease can be attributed to management’s increased monitoring of troubled credits and taking action sooner. The increase of 34.3% for 2005 was due to an increase in ORE expenses.

Advertising expenses were $624,000 in 2006 compared to $627,000 in 2005 and $499,000 in 2004. Advertising expenses had a minor decline between 2006 and 2005. The Corporation continues to remain focused on advertising in all of its markets to continue growth. The increase of 25.7% in 2005 was due to more focused advertising efforts in all markets and a full year of advertising expenses for West Michigan Community Bank.

Other professional service fees include audit fees, consulting fees, legal fees, and various other professional services. Other professional services were $1,066,000 in 2006 compared to $949,000 in 2005 and $1,031,000 in 2004. The increase of 12.3% was comprised of increases in legal fees, audit and exam fees. The decrease of 8.0% in 2005 was due to lower legal and consulting fees.

44

Other general and administrative expenses were $3,620,000 in 2006 compared to $2,722,000 and $2,266,000 in 2004. The increase of 33.0% in 2006 was due to increases in communication costs, business development and other losses. In 2005, an increase of 20.1% was due to education and development of our staff, business development and a full year of West Michigan Community Bank expenses.

FINANCIAL CONDITION

Proper management of the volume and composition of the Corporation’s earning assets and funding sources is essential for ensuring strong and consistent earnings performance, maintaining adequate liquidity and limiting exposure to risks caused by changing market conditions. The Corporation’s securities portfolio is structured to provide a source of liquidity through maturities and to generate an income stream with relatively low levels of principal risk. The Corporation does not engage in securities trading. Loans comprise the largest component of earning assets and are the Corporation’s highest yielding assets. Client deposits are the primary source of funding for earning assets while short-term debt and other sources of funds could be utilized if market conditions and liquidity needs change.

The Corporation’s total assets averaged $623 million for 2006 exceeding the 2005 average of $597 million by $26 million or 4.3%. Average loans comprised 72.3% of total average assets during 2006 compared to 70.5% in 2005. Loans grew $29.7 million on average, with commercial loans leading the advance by $36.0 million or 11.7%. The ratio of average non-interest bearing deposits to total deposits was 14.5% in 2006 compared to 16.3% in 2005. Interest bearing deposits comprised 92.0% of total average interest bearing liabilities during 2006, down from 89.8% during 2005. The Corporation’s year-end total assets were $622 million for 2006 up from $619 million in 2005. The increase was due to continued loan demand in 2006.

SECURITIES PORTFOLIO

Securities totaled $103,003,000 at December 31, 2006 compared to $114,393,000 at December 31, 2005. This was a decrease of $11,390,000 or 10.0%. At December 31, 2006 these securities comprised 19.2% of earning assets, down from 21.8% at December 31, 2005. The Corporation considers all of its securities as available for sale except for Michigan tax-exempt securities and a few mortgage backed securities, which are classified as held to maturity. Increases in loan balances from new loan growth in 2006 exceeded the amount of deposit growth. The decrease in securities in 2006 funded the loan growth, along with $501,000 in deposit growth. Thus, federal funds sold were nearly flat from year to year. Fed funds sold were $9,500,000 at December 31, 2006 compared with $9,750,000 at December 31, 2005.

The Corporation’s present policies, with respect to the classification of securities, are discussed in Note 1 to the Consolidated Financial Statements. As of December 31, 2006, the estimated aggregate fair value of the Corporation’s securities portfolio was $1,529,000 below amortized cost. At December 31, 2006, gross unrealized gains were $352,000 and gross unrealized losses were $1,881,000. A summary of estimated fair values and unrealized gains and losses for the major components of the securities portfolio is provided in Note 3 to the Consolidated Financial Statements.

45

TABLE 5
Analysis and Maturities of Securities

	Amortized		Fair
(000’s omitted)	Cost		Value		Yield (1)
AVAILABLE FOR SALE
U.S. Agencies
One year or less	$	2,975	$	2,965		3.42	%
Over one through five years		14,382		14,010		3.63	%
Over five through ten years		1,630		1,593		4.50	%
Over ten years		2,544		2,417		3.75	%
Total		21,531		20,985
Mortgage-Backed One year or less	$	1	$	1		8.25	%
Over one through five years		21,308		20,691		3.89	%
Over five through ten years		5,546		5,382		4.45	%
Over ten years		32,785		32,425		4.44	%
Total		59,640		58,499
State and Political One year or less	$	1,725	$	1,722		4.96	%
Over one through five years		1,271		1,263		4.20	%
Over five through ten years		885		872		7.67	%
Over ten years		5,380		5,454		6.51	%
Total		9,261		9,311
Equity Securities	$	2,123	$	2,309
HELD TO MATURITY
Mortgage-Backed One year or less	$	0	$	0		0.00	%
Over one through five years		1		1		7.50	%
Over five through ten years		8		8		9.08	%
Over ten years		0		0		0.00	%
Total		9		9
State and Political One year or less	$	3,061	$	3,053		6.12	%
Over one through five years		4,912		4,867		6.07	%
Over five through ten years		2,903		2,866		6.41	%
Over ten years		1,014		1,026		6.33	%
Total		11,890		11,812
Total Securities	$	104,454	$	102,925

⁽¹⁾ Tax equivalent yield

46

LOAN PORTFOLIO

The Corporation extends credit primarily within in its local markets in Genesee, Oakland, Livingston, Kent and Ottawa counties. The Corporation’s commercial loan portfolio is widely diversified with no concentration within a single industry that exceeds 10% of total loans. The Corporation’s loan portfolio balances are summarized in Table 6.

Total loans increased $11,637,000 for the year ended December 31, 2006, with total loans comprising 78.8% of earning assets as compared to 77.0% of December 31, 2005 earning assets. There were many economic challenges in the State of Michigan in 2006. Continued declines in the automotive industry contributed to steepening unemployment rates and a declining population. Even with these burdening challenges, the Corporation continued some commercial loan growth. In 2006, commercial loans increased $17,904,000 to $272,402,000 or 7.0%. Also, real estate construction and mortgage loans increased $1,781,000 or 1.6% in 2006. Consumer loans decreased $8,048,000 or 11.4% in 2006. In 2005, commercial loans increased approximately $25,486,000 to $254,498,000 or 11.1%. Additionally, real estate construction and development loans increased $15,108,000 or 24.7% to $76,386,000 at December 31, 2005. Consumer loans increased $410,000 or 0.58% in 2005.

Management expects the economy to support continued growth and development in 2007 and will aggressively seek out new loan opportunities while continuing its efforts to maintain sound credit quality.

TABLE 6
Loan Portfolio

December 31,
(000’s omitted)	2006		2005		2004		2003		2002
Commercial	$	272,402	$	254,498	$	229,012	$	146,450	$	129,562
Real estate – construction		78,927		76,386		61,278		32,913		27,032
Real estate – mortgage		36,867		37,627		32,705		18,335		11,944
Consumer		62,797		70,845		70,435		55,547		55,683
Total	$	450,993	$	439,356	$	393,430	$	253,245	$	224,221

The Corporation originates primarily residential and commercial real estate loans, commercial, construction, and consumer loans. The Corporation estimates that the majority of the loan portfolio is based in Genesee, Oakland and Livingston counties within southeast Michigan and Kent and Ottawa counties in western Michigan. The ability of the Corporation’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in the areas.

TABLE 7
Maturities of the Loan Portfolio by Loan Type

	Within		One-		After
December 31, 2006	One		Five		Five
(000’s omitted)	Year		Years		Years		Total
Commercial	$	78,852	$	176,326	$	17,224	$	272,402
Real estate – construction		60,311		15,471		3,145		78,927
Real estate – mortgage		9,267		10,495		17,105		36,867
Consumer		8,198		33,321		21,278		62,797
	$	156,628	$	235,613	$	58,752	$	450,993

47

TABLE 8
Maturities of the Loan Portfolio by Rate Categories

	Within		One-		After
December 31, 2006	One		Five		Five
(000’s omitted)	Year		Years		Years		Total
Loans:
Fixed Rate	$	48,345	$	173,517	$	37,949	$	259,811
Variable Rate		108,283		62,096		20,803		191,182
	$	156,628	$	235,613	$	58,752	$	450,993

Credit risk is managed via specific credit approvals and monitoring procedures. The Corporation’s outside loan review function examines the loan portfolio on a periodic basis for compliance with credit policies and to assess the overall credit quality of the loan portfolio. These procedures provide management with information on an ongoing basis for setting appropriate direction and taking corrective action as needed.

The Corporation closely monitors its construction and commercial mortgage loan portfolios. Construction loans at December 31, 2006, which comprised 17.5% of total loans, totaled $78,927,000 as compared to $76,386,000 and $61,278,000 at the end of 2005 and 2004, respectively.

The construction and commercial real estate loan properties are located principally in the Corporation’s local markets. Included are loans to various industrial and professional organizations. The Corporation believes that these portfolios are well diversified and do not present a significant risk to the Banks.

NON-PERFORMING ASSETS

Non-performing assets include loans on which interest accruals have ceased, real estate acquired through foreclosure, loans past due 90 days or more and still accruing and renegotiated loans. Table 9 represents the levels of these assets at December 31, 2002 through 2006. Non-performing assets increased at December 31, 2006 as compared to 2005. Other Real Estate Owned increased $747,000 in 2006. The composition of Other Real Estate Owned is three commercial and one residential property totaling $1,247,000. Other Real Estate in Redemption increased to $216,000 at the end of 2006 from $0 at the end of 2005. Real Estate Owned in Redemption balance is comprised of one commercial property totaling $216,000. The majority of the properties are commercial and marketability is dependent on the real estate market. Non-performing loans increased by $2,145,000 as compared to December 31, 2005. Of that total $1,963,000 was paid off on January 31, 2007 and is no longer on the books of the Corporation. The increase in other non-performing assets is the result of taking possession of a single piece of equipment during the last quarter of 2006. Non-accrual loans and loans past due over 90 days and still accruing interest increased during this period. This increase was due to two commercial credits being nonaccrual in the subsidiary banks.

The level and composition of non-performing assets are affected by economic conditions in the Corporation’s local markets. Non-performing assets, charge-offs, and provisions for loan losses tend to decline in a strong economy and increase in a weak economy, potentially impacting the Corporation’s operating results. In addition to non-performing loans, management carefully monitors other credits that are current in terms of principal and interest payments but, in management’s opinion, may deteriorate in quality if economic conditions change.

48

TABLE 9
Non-Performing Assets and Past Due Loans (000’s omitted)

	December 31,
	2006			2005			2004			2003			2002
Non-Performing Loans:
Loans Past Due 90 Days or More & Still Accruing	$	2,311		$	80		$	91		$	47		$	72
Non-Accrual Loans		2,354			1,476			1,102			229			512
Renegotiated Loans		437			1,401			477			1,262			0
Total Non-Performing Loans		5,102			2,957			1,670			1,538			584
Other Non-Performing Assets:
Other Real Estate		1,247			500			208			1,081			110
Other Real Estate Owned in Redemption		216			0			856			184			164
Other Non-Performing Assets		155			6			4			79			92
Total Other Non-Performing Assets		1,618			506			1,068			1,344			366
Total Non-Performing Assets	$	6,720		$	3,463		$	2,738		$	2,882		$	950
Non-Performing Loans as a % of Total Loans		1.13	%		0.67	%		0.70	%		0.61	%		0.26	%
Non-Performing Assets as a % of Total Loans and Other Real Estate		1.48	%		0.79	%		0.69	%		1.13	%		0.42	%
Allowance for Loan Losses as a % of Non-Performing Loans		131.16	%		213.09	%		350.16	%		221.98	%		545.21	%
Accruing Loans Past Due 90 Days or More to Total Loans		0.51	%		0.02	%		0.02	%		0.20	%		0.03	%
Non-performing Assets as a % of Total Assets		1.08	%		0.56	%		0.47	%		0.69	%		0.28	%

Table 10 reflects the allocation of the allowance for loan losses and is based upon ranges of estimates and is not intended to imply either limitations on the usage of the allowance or precision of the specific amounts. The Corporation does not view the allowance for loan losses as being divisible among the various categories of loans. The entire allowance is available to absorb any future losses without regard to the category or categories in which the charged-off loans are classified. Table 10 also reflects the percentage ratio of outstanding loans by category to total loans at the end of each of the respective years.

TABLE 10
Allocation of the Allowance for Loan Losses

December 31,	2006					2005					2004					2003					2002
(000’s omitted)	Amount		Loan %			Amount		Loan %			Amount		Loan %			Amount		Loan %			Amount		Loan %
Commercial and construction	$	5,657		77.90	%	$	5,339		75.31	%	$	4,600		73.79	%	$	2,624		70.83	%	$	2,222		69.84	%
Real estate mortgage		328		8.17	%		263		8.56	%		312		8.31	%		207		7.24	%		65		5.33	%
Consumer		623		13.93	%		593		16.13	%		508		17.90	%		576		21.93	%		897		24.83	%
Unallocated		84					106					81					7					0
Total	$	6,692		100.00	%	$	6,301		100.00	%	$	5,501		100.00	%	$	3,414		100.00	%	$	3,184		100.00	%

49

The following describes the Corporation’s policy and related disclosures for impaired loans. The Corporation maintains an allowance for impaired loans. A loan is considered impaired when management determines it is probable that the principal and interest due under the contractual terms of the loan will not be collected. In most instances, impairment is measured based on the fair value of the underlying collateral. Impairment may also be measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate. Interest income on impaired non-accrual loans is recognized on a cash basis. Interest income on all other impaired loans is recorded on an accrual basis.

Certain of the Corporation’s non-performing loans included in Table 9 are considered impaired. The Corporation measures impairment on all large balance non-accrual commercial loans. Certain large balance accruing loans rated watch or lower are also measured for impairment. Impairment losses are believed to be adequately covered by the provision for loan losses. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment and include certain smaller balance commercial loans, consumer loans, residential real estate loans, and credit card loans, and are not included in the impaired loan data in the following paragraphs.

At December 31, 2006, loans considered to be impaired totaled $4,762,000. Specific allowances totaling $606,000 is required for $3,397,000 in loan balances; the remaining impaired loans do not require specific reserves. The average recorded investment in impaired loans was $4,439,000 in 2006. The interest income recognized on impaired loans based on cash collections totaled $284,000 during 2006.

At December 31, 2005, loans considered to be impaired totaled $3,806,000. Specific allowances totaling $684,000 is required for $2,714,000 in loan balances the remaining impaired loans do not require specific reserves. The average recorded investment in impaired loans was $3,655,000 in 2005. The interest income recognized on impaired loans based on cash collections totaled $293,000 during 2005.

The Corporation maintains policies and procedures to identify and monitor non-accrual loans. A loan is placed on non-accrual status when there is doubt regarding collection of principal or interest, or when principal or interest is past due 90 days or more. Interest accrued but not collected is reversed against income for the current quarter and charged to the allowance for loan losses for prior quarters when the loan is placed on non-accrual status.

DEPOSITS
TABLE 11
Average Deposits
Years Ended December 31,

	2006					2005					2004					2003					2002
	Average					Average					Average					Average					Average
(000’s omitted)	Balance		Rate			Balance		Rate			Balance		Rate			Balance		Rate			Balance		Rate
Non-int. bearing demand	$	77,256				$	81,471				$	73,553				$	52,853				$	43,908
Interest-bearing demand		103,356		2.15	%		111,670		1.51	%		108,704		1.10	%		53,897		0.94	%		42,637		0.95	%
Savings		99,339		1.26	%		125,031		1.12	%		149,099		1.53	%		117,138		1.17	%		85,746		1.37	%
Time		251,287		4.73	%		183,048		3.45	%		130,115		2.71	%		102,563		3.35	%		99,419		4.07	%
Total	$	531,238		2.89	%	$	501,220		1.87	%	$	461,471		1.52	%	$	326,451		1.63	%	$	271,710		2.07	%

The Corporation’s average deposit balances and rates for the past five years are summarized in Table 11. Total average deposits were 5.99% higher in 2006 as compared to 2005. Deposit growth was primarily in time deposit accounts, while declining averages resulted in non-interest bearing demand, interest bearing demand and savings accounts. Interest-bearing demand average deposits comprised 19.5% of total average deposits, savings average deposits comprised 18.7% of total average deposits, and time average deposits comprised 47.3% of total average deposits.

50

As of December 31, 2006 certificates of deposit of $100,000 or more accounted for approximately 25.9% of total deposits compared to 21.9% at December 31, 2005. The maturities of these deposits are summarized in Table 12.

TABLE 12
Maturity of Time Certificates of Deposit of $100,000 or More

	December 31,
(000’s omitted)	2006		2005
Three months or less	$	37,216	$	44,097
Over three through six months		29,661		18,470
Over six through twelve months		16,832		24,280
Over twelve months		53,269		28,605
Total	$	136,978	$	115,452

Repurchase agreements are secured by mortgage-backed securities held by a third party trustee with a carrying amount of $10.6 million at year-end 2006. These agreements are fixed rate financing arrangements that mature in 2007 ($5,000,000) and 2008 ($5,000,000). At maturity, the securities underlying the agreements are returned to the Corporation. These repurchase agreements were used as part of the securities leverage strategy to help enhance net interest income for the Corporation.

FEDERAL INCOME TAXES

The Corporation’s effective tax rate was 29.7% for 2006, 30.5% for 2005, and 27.4% for 2004. The principal difference between the effective tax rates and the statutory tax rate of 34% is the Corporation’s investment in securities and loans, which provide income exempt from federal income tax. The increase between 2005 and 2004 is due to the federal income tax assessed on bank owned life insurance policies surrendered on former employees during 2005. Additional information relating to federal income taxes is included in Note 8 to the Consolidated Financial Statements.

LIQUIDITY AND INTEREST RATE RISK MANAGEMENT

Asset/Liability management is designed to assure liquidity and reduce interest rate risks. The goal in managing interest rate risk is to maintain a strong and relatively stable net interest margin. It is the responsibility of the Asset/Liability Management Committee (ALCO) to set policy guidelines and to establish short-term and long-term strategies with respect to interest rate exposure and liquidity. The ALCO, which is comprised of key members of senior management, meets regularly to review financial performance and soundness, including interest rate risk and liquidity exposure in relation to present and prospective markets, business conditions, and product lines. Accordingly, the committee adopts funding and balance sheet management strategies that are intended to maintain earnings, liquidity, and growth rates consistent with policy and prudent business standards. Liquidity maintenance, together with a solid capital base and strong earnings performance are key objectives of the Corporation. The Corporation’s liquidity is derived from a strong deposit base comprised of individual and business deposits. Deposit accounts of customers in the mature market represent a substantial portion of deposits of individuals. The Corporation’s deposit base plus other funding sources (federal funds purchased, other liabilities and shareholders’ equity) provided primarily all funding needs in 2006, 2005, and 2004. While these sources of funds are expected to continue to be available to provide funds in the future, the mix and availability of funds will depend upon future economic and market conditions. The Corporation does not foresee any difficulty in meeting its funding requirements.

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Primary liquidity is provided through short-term investments or borrowings (including federal funds sold and purchased), while the security portfolio provides secondary liquidity along with FHLB advances. As of December 31, 2006, federal funds sold represented 1.5% of total assets, compared to 1.6% at the end of 2004. The Corporation regularly monitors liquidity to ensure adequate cash flows to cover unanticipated reductions in the availability of funding sources.

Interest rate risk is managed by controlling and limiting the level of earnings volatility arising from rate movements. The Corporation regularly performs reviews and analyses of those factors impacting interest rate risk. Factors include maturity and re-pricing frequency of balance sheet components, impact of rate changes on interest margin and prepayment speeds, market value impacts of rate changes, and other issues. Both actual and projected performance, are reviewed, analyzed, and compared to policy and objectives to assure present and future financial viability.

The Corporation had cash flows from financing activities resulting primarily from the inflow of demand and savings deposits and decrease of borrowings. In 2006, these deposits increased $501,000 and these borrowings decreased $3,020,000. Cash used by investing activities was $4,216,000 in 2006 compared to cash used of $35,686,000 in 2005. The change in investing activities was due to the slower loan demand in 2006 compared to 2005 and not as many securities purchases in 2006 compared with 2005.

The following table discloses information on the maturity of the Corporation’s contractual long-term obligations:

Table 13

			Less than 1						More than
	Total		year		1-3 years		3-5 years		5 years
Time Deposits	$	262,241	$	174,147	$	62,972	$	24,825	$	297
Short-term borrowings		1,500		1,500		—		—		—
FHLB advances		11,052		3,022		3,050		4,058		922
Repurchase agreements		10,000		5,000		5,000		—		—
Subordinated debt		14,000		—		14,000		—		—
Operating leases		735		268		236		231		—
Total	$	299,528	$	183,937	$	85,258	$	29,114	$	1,219

CAPITAL RESOURCES

Management closely monitors capital levels to provide for current and future business needs and to comply with regulatory requirements. Regulations prescribed under the Federal Deposit Insurance Corporation Improvement Act of 1991 have defined “well capitalized” institutions as those having total risk-based ratios, tier 1 risk-based capital ratios and tier 1 leverage ratios of at least 10%, 6%, and 5%, respectively. At December 31, 2006, the Corporation was in excess of the minimum capital and leverage requirements necessary to be considered a “well capitalized” banking company as defined by federal law.

Total shareholders’ equity rose 9.43% to $51,318,000 at December 31, 2006, compared with $46,895,000 at December 31, 2005. The Corporation’s equity to asset ratio was 8.25% at December 31, 2006, compared to 7.6% at December 31, 2005. The increase in equity in 2006 resulted from retained earnings (net income in excess of dividends). In 2006, the Corporation paid $0.94 per share in dividends, compared to $0.88 paid in 2005.

At December 31, 2006, the Corporation’s tier 1 and total risk-based capital ratios were 11.3% and 12.5%, respectively, compared with 10.6% and 11.9% in 2005. The increase in the risk-based capital ratios was largely due to growth in earnings at the Banks. The Corporation’s tier 1 leverage ratio was 8.6% at December 31, 2006 compared with 8.9% at December 31, 2005. This decrease in the leverage ratio was due to continued equity growth and the reduction in average assets.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Management’s Discussion and Analysis of financial condition and results of operations are based on the Corporation’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, income and expenses. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, and actual results could differ from those estimates.

The allowance for loan losses is maintained at a level we believe is adequate to absorb probable losses identified and inherent in the loan portfolio. Our evaluation of the adequacy of the allowance for loan losses is an estimate based on reviews of individual loans, assessments of the impact of current and anticipated economic conditions on the portfolio, and historical loss experience. The allowance for loan losses represents management’s best estimate, but significant downturns in circumstances relating to loan quality or economic conditions could result in a requirement for an increased allowance for loan losses in the near future. Likewise, an upturn in loan quality or improved economic conditions may result in a decline in the required allowance for loan losses. In either instance unanticipated changes could have a significant impact on operating earnings.

The allowance for loan losses is increased through a provision charged to operating expense. Uncollectible loans are charged-off through the allowance for loan losses. Recoveries of loans previously charged-off are added to the allowance for loan losses. A loan is considered impaired when it is probable that contractual interest and principal payments will not be collected either for the amounts or by the dates as scheduled in the loan agreement.

OFF-BALANCE-SHEET ITEMS

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment. Amount of commitments are included in Note 13 to the consolidated financial statements.

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Fentura Financial, Inc. faces market risk to the extent that both earnings and the fair value of its financial instruments are affected by changes in interest rates. The Corporation manages this risk with static GAP analysis and has begun simulation modeling. Throughout 2006, the results of these measurement techniques were within the Corporation’s policy guidelines. The Corporation does not believe that there has been a material change in the nature of the Corporation’s substantially influenced market risk exposures, including the categories of market risk to which the Corporation is exposed and the particular markets that present the primary risk of loss to the Corporation, or in how those exposures were managed in 2006 compared to 2005.

The Corporation’s market risk exposure is mainly comprised of its vulnerability to interest rate risk. Prevailing interest rates and interest rate relationships in the future will be primarily determined by market factors, which are outside of the Corporation’s control. All information provided in this section consists of forward-looking statements. Reference is made to the section captioned “Forward Looking Statements” in this annual report for a discussion of the limitations on the Corporation’s responsibility for such statements. The following table provides information about the Corporation’s financial instruments that are sensitive to changes in interest rates as of December 31, 2006. The table shows expected cash flows from market sensitive instruments for each of the next five years and thereafter. The expected maturity date values for loans and securities (at amortized cost) were calculated without adjusting the instruments’ contractual maturity dates for expected prepayments. Maturity date values for interest bearing core deposits were not based on estimates of the period over which the deposits would be outstanding, but rather the opportunity for re-pricing. The Corporation believes that re-pricing dates, as opposed to expected maturity dates, may be more relevant in analyzing the value of such instruments and are reported as such in the following table.

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TABLE 14

	Rate Sensitivity of Financial Instruments																				Fair
(000’s omitted)	2007			2008			2009			2010			2011			Thereafter			Total		Value
Rate Sensitive Assets:
Fixed interest rate loans	$	48,345		$	40,490		$	47,145		$	43,502		$	42,380		$	37,949		$	259,811	$	251,306
Average interest rate		6.80	%		6.98	%		6.90	%		6.80	%		7.30	%		6.58	%
Variable interest rate loans	$	108,283		$	27,059		$	13,817		$	16,256		$	4,964			20,803		$	191,182	$	191,129
Average interest rate		9.06	%		8.13	%		8.09	%		8.41	%		8.48	%		8.07	%
Fixed interest rate securities	$	18,366		$	9,950		$	14,671		$	11,368		$	3,649		$	17,383		$	75,387	$	77,617
Average interest rate		4.09	%		3.90	%		3.91	%		4.06	%		4.15	%		4.72	%
Variable Interest rate securities	$	12,534		$	10,095		$	0		$	3,184		$	343		$	1,460		$	27,616	$	25,308
Average interest rate		3.59	%		3.96	%		0	%		4.15	%		3.75	%		4.51	%
FHLB Stock	$	2,032																	$	2,032	$	2,032
Average interest rate		5.00	%
Other interest bearing assets	$	9,500																	$	9,500	$	9,500
Average interest rate		5.13	%
Rate Sensitive Liabilities:
Interest-bearing checking	$	102,535																	$	102,535	$	102,534
Average interest rate		2.10	%
Savings	$	88,893																	$	88,893	$	88,892
Average interest rate		0.61	%
Time	$	174,150		$	42,855		$	20,117		$	10,312		$	14,513		$	294		$	262,241	$	252,127
Average interest rate		4.73	%		4.57	%		4.71	%		4.69	%		5.13	%		3.11	%
Short term borrowings	$	1,500																	$	1,500	$	1,495
Average interest rate		1.25	%
FHLB advances	$	3,022		$	3,024		$	26		$	2,028		$	2,030		$	922		$	11,052	$	11,052
Average interest rate		3.59	%		4.76	%		7.34	%		4.60	%		4.91	%		7.34	%
Repurchase agreements	$	5,000		$	5,000														$	10,000	$	10,000
Average interest rate		2.61	%		4.02	%
Subordinated debt							$	12,000					$	2,000					$	14,000	$	14,000
Average interest rate								8.75	%					8.75	%

INTEREST RATE SENSITIVITY MANAGEMENT

Interest rate sensitivity management seeks to maximize net interest income as a result of changing interest rates, within prudent ranges of risk. The Corporation attempts to accomplish this objective by structuring the balance sheet so that re-pricing opportunities exist for both assets and liabilities in roughly equivalent amounts at approximately the same time intervals. Imbalances in these re-pricing opportunities at any point in time constitute a bank’s interest rate sensitivity. The Corporation currently does not utilize derivatives in managing interest rate risk.

An indicator of the interest rate sensitivity structure of a financial institution’s balance sheet is the difference between its interest rate sensitive assets and interest rate sensitive liabilities, and is referred to as “GAP”.

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Table 15 sets forth the distribution of re-pricing of the Corporation’s earning assets and interest bearing liabilities as of December 31, 2006, the interest rate sensitivity GAP, as defined above, the cumulative interest rate sensitivity GAP, the interest rate sensitivity GAP ratio (i.e. interest rate sensitive assets divided by interest rate sensitive liabilities) and the cumulative sensitivity GAP ratio. The table also sets forth the time periods in which earning assets and liabilities will mature or may re-price in accordance with their contractual terms.

TABLE 15

	Gap Analysis
	December 31, 2006
	Within			Three			One to		After
	Three			Months-			Five		Five
(000’s Omitted)	Months			One Year			Years		Years		Total
Federal Funds Sold	$	9,500		$	0		$	0	$	0	$	9,500
Securities		16,183			14,717			53,260		18,843		103,003
Loans		50,907			105,721			235,613		58,752		450,993
Loans Held for Sale		2,226			0			0		0		2,226
FHLB Stock		2,032			0			0		0		2,032
Total Earning Assets	$	80,848		$	120,438		$	288,873	$	77,595	$	567,754
Interest Bearing Liabilities:
Interest Bearing Demand Deposits	$	102,535		$	0		$	0	$	0	$	102,535
Savings Deposits		88,893			0			0		0		88,893
Time Deposits Less than $100,000		27,079			63,360			34,527		297		125,263
Time Deposits Greater than $100,000		37,219			46,491			53,268		0		136,978
Short-term Borrowings		1,500			0			0		0		1,500
FHLB Advances		1,000			2,022			7,108		922		11,052
Repurchase Agreements		0			5,000			5,000		0		10,000
Subordinated Debt		0			0			14,000		0		14,000
Total Interest Bearing Liabilities	$	258,226		$	116,873		$	113,903	$	1,219	$	490,221
Interest Rate Sensitivity GAP	($	177,378	)	$	3,565		$	174,970	$	76,376	$	77,533
Cumulative Interest Rate Sensitivity GAP	($	177,378	)	($	173,813	)	$	1,157	$	77,533
Interest Rate Sensitivity GAP		0.31			1.03			2.54		63.65
Cumulative Interest Rate Sensitivity GAP Ratio		0.31			0.54			1.00		1.16

As indicated in Table 15, the short-term (one year and less) cumulative interest rate sensitivity gap is negative. Accordingly, if market interest rates increase, this negative gap position could have a short- term negative impact on interest margin. Conversely, if market interest rates decrease, this negative gap position could have a short-term positive impact on interest margin. However, gap analysis is limited and may not provide an accurate indication of the impact of general interest rate movements on the net interest margin since the re-pricing of various categories of assets and liabilities is subject to the Corporation’s needs, competitive pressures, and the needs of the Corporation’s customers. In addition, various assets and liabilities indicated as re-pricing within the same period may in fact re-price at different times within such period and at different rate indices. The limitations of gap described above impacted financial performance in 2006. The Corporation’s gap position was negative, which indicates liability sensitivity to rate changes. In 2006 there were four increases in the Prime rate. These increases, along with growth in earning assets, contributed to the increase in interest income of $6.0 million or 17.8% over 2005. Counteractive to that growth in interest income, was the increase in deposit and borrowing interest expense. Market demand and competition minimized the Corporation’s ability to lag rate increases on deposits, therefore increasing interest expense by $5.6 million or 49.7% over 2005. Overall, net interest income only increased $428,000 or 1.9% over 2005. Liabilities, largely deposits, lagged market re-pricing

56

due to the maturity dates on time deposits or balances not being re-priced by the same amount as assets due to competitive pressures. Interest bearing checking and savings deposits are generally lower cost of funds products compared to time deposits. For example, certain asset products re-priced upward 1.00% with the movement of national prime rates in 2006, while most of interest bearing checking and savings were at rates lower than 0.50% during the year and accordingly, had a much lesser level of re-pricing opportunity. The Corporation expects to continue to make strides in managing interest rate sensitivity.

FORWARD LOOKING STATEMENTS

This discussion and analysis of financial condition and results of operations, and other sections of the Consolidated Financial Statements and this annual report, contain forward looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about the Corporation itself. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “projects,” variations of such words and similar expressions are intended to identify such forward looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“Future Factors”), which are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecast in such forward-looking statements. The Corporation undertakes no obligation to update, amend or clarify forward looking statements as a result of new information, future events, or otherwise.

Future Factors that could cause a difference between an ultimate actual outcome and a preceding forward looking statement include, but are not limited to, changes in interest rate and interest rate relationships, demands for products and services, the degree of competition by traditional and non-traditional competitors, changes in banking laws or regulations, changes in tax laws, change in prices, the impact of technological advances, government and regulatory policy changes, the outcome of pending and future litigation and contingencies, trends in customer behavior as well as their ability to repay loans, and the local and national economy.

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FENTURA FINANCIAL, INC. COMMON STOCK

Table 16 sets forth the high and low market information for each quarter of 2004 through 2006. These quotations reflect inter-dealer prices, without retail mark-up, markdown, or commission and may not represent actual transactions. As of February 1, 2007, there were 935 shareholders of record, not including participants in the Corporation’s employee stock option program.

TABLE 16
Common Stock Data

			Market				Dividends
			Information				Paid
Years		Quarter	High		Low		Per Share
	2004	First Quarter	$	35.45	$	28.23	$	0.210
		Second Quarter		40.91		28.42		0.210
		Third Quarter		40.91		35.82		0.210
		Fourth Quarter		37.00		35.41		0.210
							$	0.840
	2005	First Quarter	$	32.55	$	30.24	$	0.220
		Second Quarter		31.13		29.35		0.220
		Third Quarter		31.57		29.39		0.220
		Fourth Quarter		30.49		29.31		0.220
							$	0.880
	2006	First Quarter	$	31.55	$	29.77	$	0.230
		Second Quarter		33.41		31.14		0.230
		Third Quarter		33.64		30.00		0.230
		Fourth Quarter		34.00		32.55		0.250
							$	0.940

Note: Market and dividend per share figures have been adjusted to reflect a 10% stock dividend paid on August 4, 2006.

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SHAREHOLDER RETURN PERFORMANCE GRAPH

The graph compares the cumulative total shareholder return on the Corporation’s common stock for the last five years with the cumulative total return of the Midwest Quadrant Pink Bank Index, published by SNL Financial L.C., and the Nasdaq Market Index assuming a $100 investment at the end of 2000. The Nasdaq Market Index is a broad equity market index. The Midwest Quadrant Pink Bank Index is composed of 101 banks and bank holding companies located in the Midwest and whose shares primarily trade on the Over-the-Counter Bulletin Board.

Cumulative total return is measured by dividing (i) the sum of (A) the cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and (B) the difference between the share price at the end and the beginning of the measurement period; by (ii) the share price at the beginning of the measurement period. The graph assumes the investment of $100 in the Corporation’s common stock, the Nasdaq Market Index, and the Midwest Quadrant Pink Bank Index at the market close on December 31, 2001 and the reinvestment of all dividends through the period ending December 31, 2006.

COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG FENTURA FINANCIAL, INC., NASDAQ MARKET INDEX,
AND MIDWEST QUADRANT PINK BANK INDEX

	Period Ending
Index	12/31/01		12/31/02		12/31/03		12/31/04		12/31/05		12/31/06
Fentura Financial, Inc.		100.00		140.72		143.91		172.33		157.93		177.83
NASDAQ — Total US		100.00		68.76		103.67		113.16		115.57		127.58
SNL Midwest OTC-BB and Pink Banks		100.00		128.26		161.90		192.90		200.83		211.50

Source: SNL Financial LC, Charlottesville, VA

59

EX-14

EXHIBIT 14

FENTURA FINANCIAL, INC.
CODE OF ETHICS

In my role with Fentura Financial, Inc. and/or subsidiaries or affiliates (the “Company”), I certify to the Company and the Audit Committee of the Board of Directors of the Company, that I will adhere to and advocate the following principles and responsibilities governing my professional and ethical conduct to the best of my knowledge and ability:

1.	I will act with honesty and integrity, avoiding actual or apparent conflicts of interest in all personal and professional relationships.
2.	I will provide information that is accurate, complete, objective, relevant, timely and understandable.
3.	I will comply with the rules and regulations of federal, state, and local governments, and other appropriate private and public regulatory agencies.
4.	I will act in good faith, responsibly, and with due care. I will not misrepresent material facts or allow my independent judgment to be subordinated or otherwise compromised.
5.	I will respect and maintain the confidentiality of information reviewed or acquired in carrying out my duties except when authorized or otherwise legally obligated to disclose.
6.	I will share knowledge and maintain skills important and relevant to the needs of the Company.
7.	I will proactively practice and promote ethical behavior as a professional in my role with the Company.
8.	I will not solicit for myself or for a third party anything of value from anyone in return for any business, service or confidential information of the Company, nor will I accept anything of value from anyone (except for my wages and as otherwise permitted by law) in connection with the business of the Company, either before or after a transaction is discussed or completed.
9.	I will comply with and adhere to all of the Company’s policies and practices, including those policies governing accounting and financial reporting practices and corporate governance.
10.	I will respond honestly and candidly when dealing with the Company’s independent and internal auditors, regulators and attorneys.
11.	I will promptly disclose to an appropriate person or persons any transaction or relationship that reasonably could be expected to give rise to a conflict of interest, and/or violations of this Code.

  (Signature)   (Date)

(Rvsd 01/05)

EX-21.1

Exhibit 21.1

Subsidiaries of the Registrant

Company	Ownership			State of Incorporation
The State Bank		100	%	Michigan
Davison State Bank		100	%	Michigan
Community Bank Services, Inc.	100% by The State Bank			Michigan
Fentura Mortgage Company	100% by The State Bank			Michigan
West Michigan Community Bank		100	%	Michigan
West Michigan Mortgage, LLC	99.5% by West Michigan Community Bank 0.5% by Community Insurance Services, Inc.			Michigan
Community Insurance Services, Inc.	100% by West Michigan Community Bank			Michigan

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     We consent to the incorporation by reference in the Registration Statements of Fentura Financial, Inc. on Form S-3D (File No.333-120182) on Form S-8 (File No. 333-118085), on Form S-8 (File No. 333-137104) and on Form S-8 (File No. 333-137103) of our report dated March 3, 2007 on the 2006 Consolidated Financial Statements of Fentura Financial, Inc., which report is included in the 2006 Annual Report on Form 10-K of Fentura Financial, Inc.

/s/ CROWE CHIZEK AND COMPANY LLC  

Grand Rapids, Michigan
March 13, 2007

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Donald L. Grill, certify that:

1.	I have reviewed this Annual Report on Form 10-K of Fentura Financial, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 15, 2007

/s/Donald L. Grill  

Donald L. Grill 

Chief Executive Officer and President 

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Douglas J. Kelley, certify that:

1.	I have reviewed this Annual Report on Form 10-K of Fentura Financial, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 15, 2007

/s/Douglas J. Kelley  

Douglas J. Kelley 

Chief Financial Officer 

EX-32.1

Exhibit 32.1

     Each of Donald L. Grill, Chief Executive Officer and President, and Douglas J. Kelley, Chief Financial Officer, of Fentura Financial, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	the Annual Report on Form 10-K for the fiscal year ended December 31, 2006 which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
(2)	the information contained in the Annual Report on Form 10-K for the fiscal year ended December 31, 2006 fairly presents, in all material respects, the financial condition and results of operations of Fentura Financial, Inc.

Dated: March 15, 2007

/s/Donald L. Grill  

Donald L. Grill 

Chief Executive Officer and President 

/s/Douglas J. Kelley  

Douglas J. Kelley 

Chief Financial Officer