e10vk

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 the fiscal year ended December 31, 2006

Commission file number 0-25752

FNBH BANCORP, INC.

(Exact name of registrant as specified in its charter)


MICHIGAN		38-2869722
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

101 East Grand River, Howell, Michigan 48843
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code:(517) 546-3150

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)

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) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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 amendments to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Exchange Act Rule 12b-2).

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

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. The aggregate market value of common stock held by non-affiliates as of June 30, 2006, was $81,792,920.

The number of outstanding shares of common stock (no par value) as of March 1, 2007 was 3,045,954.

Documents Incorporated by Reference:
Portions of the Corporation’s Proxy Statement for the Annual Meeting of Shareholders to be held May 16, 2007, are incorporated by reference into Part III of this report.

PART I

Item 1. Business.

FNBH Bancorp, Inc. (the Corporation), a Michigan business corporation, is a one-bank holding company, which owns all of the outstanding capital stock of First National Bank in Howell (the “Bank”). The Corporation was formed in 1988 for the purpose of acquiring all of the stock of the Bank in a shareholder approved reorganization, which became effective in May 1989. The Corporation’s internet address is www.fnbsite.com. Through our internet website, we make available free of charge, as soon as reasonably practical after such information has been filed with the Securities and Exchange Commission, our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed with the Securities and Exchange Commission. Also available on our website are the respective Charters of the Board’s Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee, as well as the Company’s Code of Ethics for its Chief Executive Officer and other senior financial officers.

The Bank was originally organized in 1934 as a national banking association. As of January 31, 2007, the Bank had approximately 120 full-time and part-time employees. None of the Bank’s employees are subject to collective bargaining agreements. The Corporation does not directly employ any personnel. The Bank serves primarily five communities, Howell, Brighton, Green Oak Township, Hartland, and Fowlerville, all of which are located in Livingston County. The county has historically been rural in character but has a growing suburban population.

On November 26, 1997, H.B. Realty Co., a subsidiary of the Corporation, was established to purchase land for a future branch site of the Bank and to hold title to other Bank real estate when it is considered prudent to do so.

Bank Services

The Bank is a full-service bank offering a wide range of commercial and personal banking services. These services include checking accounts, savings accounts, certificates of deposit, commercial loans, real estate loans, installment loans, trust and investment services, collections, traveler’s checks, night depository, safe deposit box and U.S. Savings Bonds. The Bank maintains correspondent relationships with major banks in Detroit, pursuant to which the Bank engages in federal funds sale and purchase transactions, the clearance of checks and certain foreign currency transactions. The Bank also has a relationship with the Federal Home Loan Bank of Indianapolis where it makes short term investments and where it has a line of credit of $36,000,000 of which $22,500,000 is available, and $13,500,000 is funded as of year end. In addition, the Bank participates with other financial institutions to fund certain large loans which would exceed the Bank’s legal lending limit if made solely by the Bank.

The Bank’s deposits are generated in the normal course of business, and the loss of any one depositor would not have a materially adverse effect on the business of the Bank. As of December 31, 2006 and 2005, the Bank’s certificates of deposit of $100,000 or more constituted approximately 22% of total deposit liabilities. The Bank’s deposits are primarily from its service areas, and the Bank does not seek or encourage large deposits from outside the area.

The Corporation’s cash revenues are derived primarily from dividends paid by the Bank. The Bank’s principal sources of revenue are interest and fees on loans and interest on investment securities. Interest and fees on loans constituted approximately 81% of total revenues for the year ended December 31, 2006, and 79% for the year ended December 31, 2005. Interest and dividends on investment securities, including short-term investments and certificates of deposit, constituted approximately 8% of total revenues in 2006 and 9% of total revenues in 2005. Revenues were also generated from deposit service charges and other financial service fees.

The Bank provides real estate, consumer, and commercial loans to customers in its market. As of December 31, 2006, 33% of outstanding loans were for commercial, residential mortgages or residential construction and land development. Sixty-one percent of the Bank’s loan portfolio is in fixed rate loans. Most of these loans, approximately 95%, mature within five years of issuance. Approximately $12,900,000 of loans with fixed rates (or about 3.4% of the Bank’s total loan portfolio) have remaining balances that mature in five years or longer. Forty five percent of the Bank’s interest-bearing deposits are in savings, NOW, and MMDAs, all of which are variable rate products. As of December 31, 2006, certificates of deposits totaled approximately $188,000,000 with $167,000,000 maturing within a year, and the majority of the balance maturing within a five year period.

Requests to the Bank for credit are considered on the basis of credit worthiness of each applicant, without consideration to race, color, religion, national origin, sex, marital status, physical handicap, age, or the receipt of income from public assistance programs. Consideration is also given to the applicant’s capacity for repayment, collateral, capital and alternative sources of repayment. Loan applications are accepted at all the Bank’s offices and are approved under each

lending officer’s authority. Request for loans from borrowers with aggregate indebtedness in excess of $1,500,000 are required to be presented to the Board of Directors or the Executive Committee of the Board for its review and approval.

As described in more detail below, the Bank’s cumulative one year gap ratio of rate sensitive assets to rate sensitive liabilities at December 31, 2006, was 15% liability sensitive, compared to 17% asset sensitive at December 31, 2005. See discussion and table under “Quantitative and Qualitative Disclosures about Market Risk” in Item 7A below.

The Bank sells participations in commercial loans to other financial institutions approved by the Bank for the purpose of meeting legal lending limit requirements or loan concentration considerations. The Bank regularly sells fixed rate residential mortgages to the Federal Home Loan Mortgage Corporation (Freddie Mac) while retaining servicing on the sold loans. Those residential real estate mortgage loan requests that do not meet Freddie Mac criteria are reviewed by the Bank for approval and, if approved, are retained in the Bank’s loan portfolio or could be sold to investors other than Freddie Mac where servicing is also sold. The Bank also may purchase loans which meet its normal credit standards.

The Bank’s investment policy is designed to provide a framework within which the Bank may maximize earnings potential by acquiring assets designed to enhance profitability, absorb excess funds, provide liquidity, maintain a high credit quality, implement interest rate risk measures, provide collateral for pledging, generate a favorable return on investments, and provide tax-exempt income as appropriate. Safety, liquidity, and interest rate risk standards will not be compromised in favor of increased return. When making investment decisions, the Bank considers investment type, credit quality (including maximum credit exposure to one obligor at any one time) and maturity of investments. Consideration is also given to each investment’s risk-weight as determined by regulatory Risk-Based Capital Guidelines.

The portfolio must be coordinated with the overall asset/liability management of the balance sheet. The use of the investment portfolio for market oriented trading activities or speculative purposes are expressly prohibited unless otherwise approved by the Board of Directors. Investments are acquired for which the Bank has both the ability and intent to hold to maturity. Specific limits determine the types, maturities, and amounts of securities the Bank intends to hold. Guidelines on liquidity requirements, as well as an acknowledgement of the Bank’s credit profile and capital position may affect the Bank’s ability to hold securities to maturity. It is not the intention of management to profit from short-term securities price movements. Business reasons for securities purchases and sales will be noted at the time of the transaction. All securities dealers effecting transactions in securities held or purchased by the Bank must be approved by the Board of Directors.

Bank Competition

The Bank has nine offices within the five communities it serves, all of which are located in Livingston County, Michigan. Four of the offices, including the main office, are located in Howell. There are two facilities in Brighton, and one each in Green Oak Township, Hartland, and Fowlerville. See “Properties” below for more detail on these facilities. Within these communities, its principal competitors are Fifth Third Bank, National City Bank, Republic Bank, Comerica Bank and LaSalle Bank. Each of these financial institutions, which are headquartered in larger metropolitan areas, has significantly greater assets and financial resources than the Corporation. Among the principal competitors in the communities in which the Bank operates, the Bank is the only financial institution with a local community headquarters. Based on deposit information as of June 30, 2006, the Bank holds approximately 21.0% of local deposits, compared to approximately 14.8% held by Fifth Third Bank, approximately 11.4% held by National City, approximately 9.5% held by Republic Bank, approximately 8.7% held by Comerica Bank, and approximately 8.7% held by LaSalle Bank. Information as to asset size of competitor financial institutions is derived from publicly available reports filed by and with regulatory agencies. Within the Bank’s markets, Fifth Third Bank maintains five branch offices, National City Bank operates seven branch offices, Republic Bank has five branch offices, Comerica has six branch offices, and LaSalle Bank has three branch offices. Management is not aware of any plans by these financial institutions to expand their presence in the Bank’s market. The Bank also competes with savings and loan associations, credit unions, mortgage banking companies and various other financial service providers.

The financial services industry continues to become increasingly competitive. Principal methods of competition include loan and deposit pricing, advertising and marketing programs, and the types and quality of services provided. The deregulation of the financial services industry and the easing of restrictions on bank and holding company activities have led to increased competition among banks and other financial service providers for funds, loans, and a broad array of other financial services. There has been increased competition within the Bank’s market over the past few years as new branches are built to meet the needs of the growing population in the county. Management continues to evaluate the opportunities for the expansion of products and services.

Growth of Corporation

The following table sets forth certain information regarding the growth of the Corporation:


	Balances as of December 31,
	(in thousands)
	2006		2005		2004		2003		2002
Total Assets	$	473,896	$	477,225	$	456,910	$	450,342	$	420,686
Loans		384,581		372,855		357,377		347,086		327,117
Securities		54,214		62,373		64,348		55,435		44,611
Noninterest-Bearing Deposits		62,681		71,415		71,785		69,234		62,232
Interest-Bearing Deposits		342,863		350,670		327,478		329,839		311,840
Total Deposits		405,544		422,086		399,263		399,073		374,072
Shareholders’ Equity		49,992		49,446		45,716		41,235		37,580

Through 2006, the Bank operated nine branch facilities: one in downtown Howell, one at Lake Chemung (five miles east of downtown Howell), one is a grocery store branch located west of downtown Howell, two in Brighton (one on the east side and one on the west side), one in Hartland, one in the village of Fowlerville, one in Genoa Township, and one in Green Oak Township, which is 11 miles southwest of downtown Howell. In 2006 deposits were lower due to increased competition for deposits in our local markets. In 2002 through 2005 the Bank’s deposits grew due to general growth in the county and increased usage of the wholesale funding market.

Supervision and Regulation

The following is a summary of certain statutes and regulations affecting the Corporation and the Bank. 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 Corporation, the Bank and the business of the Corporation and the Bank.

General

Financial institutions and their holding companies are extensively regulated under federal and state law. Consequently, the growth and earnings performance of the Corporation and the Bank 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 Office of the Comptroller of the Currency (“OCC”), 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 Corporation and the Bank 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 Bank, and the public, rather than shareholders of the Corporation. Federal law and regulations establish supervisory standards applicable to the lending activities of the Bank, including internal controls, credit underwriting, loan documentation and loan-to-value ratios for loans secured by real property.

The Corporation

General. The Corporation is a bank holding company and, as such, 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 Corporation 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 Corporation is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances where the Corporation might not do so absent such policy. In addition, if the Bank’s capital becomes impaired, the OCC may require the Bank to restore its capital by a special assessment upon the Corporation as the Bank’s sole shareholder. If the Corporation were to fail to pay any such

assessment, the directors of the Bank would be required, under federal law, to sell the shares of the Bank’s stock owned by the Corporation at public auction and use the proceeds of the sale to restore the Bank’s capital.

Investments and Activities. In general, any direct or indirect acquisition by the Corporation of any voting shares of any bank which would result in the Corporation’s direct or indirect ownership or control of more than 5% of any class of voting shares of such bank, and any merger or consolidation of the Corporation with another bank company, will require the prior written approval of the Federal Reserve Board under the BHCA.

The merger or consolidation of an existing bank subsidiary of the Corporation 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 OCC, 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 Bank 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 Bank 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.

Eligible bank holding companies that elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance activities and any other activity that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature, incidental to any such financial activity or complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. The BHCA generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank or financial holding companies. While the Corporation believes it is eligible to elect to operate as a financial holding company, as of the date of this filing, it has not applied for approval to operate as a financial 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 bank or non-bank businesses. The Federal Reserve Board’s capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: (i) a leverage capital requirement expressed as a percentage of total average assets, and (ii) a risk-based requirement expressed as a percentage of total risk-weighted assets. The leverage capital requirement consists of a minimum ratio of Tier 1 capital (which consists principally of shareholders’ equity) to total average assets of 3% for the most highly rated companies, with minimum requirements of 4% to 5% for all others. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, of which at least one-half must be Tier 1 capital.

The risk-based and leverage standards presently used by the Federal Reserve Board are minimum requirements, and higher capital levels may be required if warranted by the particular circumstances or risk profiles of individual banking organizations. The Federal Reserve Board has not advised the Corporation of any specific minimum Tier 1 Capital leverage ratio applicable to it.

Dividends. The Corporation is an entity separate and distinct from the Bank. Most of the Corporation’s revenues are received by it in the form of dividends paid by the Bank. Thus, the Corporation’s ability to pay dividends to its shareholders is indirectly limited by statutory restrictions on the Bank’s ability to pay dividends as 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 Bank and bank holding companies. Similar enforcement powers over the Bank 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 Corporation 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 Corporation, 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. The Corporation’s Articles of Incorporation do not authorize the issuance of preferred stock and there are no current plans to seek such authorization.

The Corporation’s common stock is registered with the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As a result, the Corporation is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act. The Sarbanes-Oxley Act of 2002 provides 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 securities markets. The Corporation’s securities are not listed for trading on any national or regional securities exchange.

The Bank

General. The Bank is organized as a national banking association and is, therefore, regulated and supervised by the OCC. The deposit accounts of the Bank are insured by the Bank Insurance Fund (the “BIF”) of the FDIC. Consequently, the Bank is also subject to the provisions of the Federal Deposit Insurance Act. The Bank is subject to the examination, supervision, reporting and enforcement requirements of the OCC as its primary federal regulator. The OCC and the federal and state laws applicable to the Bank and its 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 an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. The federal deposit insurance system was overhauled in 2006 as a result of the enactment of The Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”), which was signed into law in February of 2006. Pursuant to the Reform Act, the FDIC has modified its risk-based assessment system for deposit insurance premiums. Under the new system, all insured depository institutions are placed into one of four categories and assessed insurance premiums based primarily on their level of capital and supervisory evaluations.

The Reform Act requires the FDIC to establish assessment rates for insured depository institutions at levels that will maintain the Deposit Insurance Fund at a Designated Reserve Ration (DRR) selected by the FDIC within a range of 1.15% to 1.50%. The Reform Act allows the FDIC to manage the pace at which the reserve ratio varies within this range. Effective January 1, 2007, the FDIC established the DRR at 1.25% and adopted new premium rates for 2007. Banks that have not been paying any deposit insurance premiums for the past 10 years will now be required to pay premiums of 5 to 7 basis points (calculated against the bank’s deposit base) in 2007. Under the new rate schedule, most well-capitalized banks will pay 5 to 7 basis points annually. That rate increases to 43 basis points for banks that pose significant supervisory concerns. Premiums will be assessed collected quarterly by the FDIC.

These premiums will be initially offset for certain eligible institutions by a one-time assessment credit granted in recognition of historical contributions made by the eligible institutions to the deposit fund. The Bank was notified of their one-time $247,000 credit against future premiums. The credit may be applied against the institution’s 2007 assessment, and for the three years thereafter, the institution may apply the credit against up to 90% of its assessment.

FICO Assessments. The Bank, as a member of the BIF, is 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, the predecessor to the FDIC’s Savings Association Insurance Fund (the “SAIF”) which insures the deposits of thrift institutions. From now until the maturity of the outstanding FICO obligations in 2019, BIF members and SAIF members will share the cost of the interest on the FICO bonds on a pro rata basis. It is estimated that FICO assessments during this period will be less than 0.025% of deposits.

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

Capital Requirements. The OCC has established the following minimum capital standards for national banks: a leverage requirement consisting of a minimum ratio of Tier 1 capital to total average assets of 3% for the most highly-rated Bank 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.

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 Bank’s 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 Bank; 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 federal law, the Bank is restricted as to the maximum amount of dividends it may pay on its common stock to the Corporation. The Bank may not pay dividends except out of undivided net profits then on hand after deducting its losses and bad debts. In addition, the Bank is required by federal law to obtain the prior approval of the OCC for the declaration or payment of a dividend, if the total of all dividends declared by the Bank’s Board of Directors in any year will exceed the total of (i) the Bank’s retained net income (as defined and interpreted by regulation) for that year plus (ii) the retained net income for the preceding two years, less any required transfers to surplus. 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. Further, federal regulatory agencies can prohibit a banking institution or bank holding company from engaging in unsafe and unsound business practices and could prohibit payment of dividends if such payment could be deemed an unsafe and unsound business practice.

Insider Transactions. The Bank is subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the Corporation or its subsidiaries, on investments in the stock or other securities of the Corporation or its subsidiaries and the acceptance of the stock or other securities of the Corporation or its subsidiaries as collateral for loans. Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its directors and officers, to directors and officers of the Corporation and its subsidiaries, to principal shareholders of the Corporation, and to “related interests” of such directors, officers and principal shareholders. In addition, federal law and regulations may affect the terms upon which any person becoming a director or officer of the Corporation or one of its subsidiaries or a principal shareholder of the Corporation may obtain credit from Bank with which the Bank maintains a correspondent relationship.

Safety and Soundness Standards. The federal banking agencies have 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.

Consumer Protection Laws. The Bank’s businesses include making a variety of types of loans to individuals. In making these loans, the Bank is 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 there under, 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 there under, which prohibit discrimination, specify disclosures to be made to borrowers regarding credit and settlement costs, and regulate the mortgage loan servicing activities of the Bank, including the maintenance and operation of escrow accounts and the transfer of mortgage loan servicing. In receiving deposits, the Bank is 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.

Item 1A. Risk Factors.

We are in the business of lending, which involves substantial credit risk, and our allowance for loan losses may not be sufficient to cover actual loan losses.

If our loan customers do not repay their loans according to their respective terms, and if we are unable to collect on the loans through foreclosure of any collateral securing repayment, we may experience significant credit losses, which could have a material adverse effect on our operating results. We have established an allowance for loan losses that is intended to approximate credit losses and prevent negative effects on our operating results as a result of loan losses. In determining the size of the allowance, we make various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In doing so, we rely primarily on our experience and our evaluation of current economic conditions. If our assumptions or judgments prove to be incorrect, our current allowance for loan losses may not be sufficient to cover certain loan losses inherent in our loan portfolio, and adjustments may be necessary to allow for

different economic conditions or adverse developments in our loan portfolio. Material additions to our allowance would materially decrease our net income.

As of December 31, 2006, approximately 85% of the Bank’s loan portfolio is commercial loans. Of these, approximately 54% are loans made for land development, single family home construction and leasing of commercial properties. Commercial loans are generally viewed as having more inherent risk of default than residential mortgages or consumer loans. Also, the commercial loan balance per borrower is generally greater then that of a residential mortgage loan or consumer loan, inferring higher potential losses on an individual loan basis.

In addition, federal regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize additional loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs required by these regulatory agencies could have a material adverse effect on our results of operations and financial condition.

Fluctuations in interest rates could reduce our profitability.

We realize income primarily from the difference between interest earned on loans and investments and the interest paid on deposits and borrowings. Our interest income and interest expense are affected by general economic conditions and by the policies of regulatory authorities. While we have 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. We expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to our position, this “gap” will work against us, and our earnings may be negatively affected.

We rely heavily on our management team, including our loan officers, and the unexpected loss of key employees may adversely affect our operations.

As a community bank, our success depends largely on our ability to attract and to retain key employees who are experienced in banking and financial services and who have developed relationships within the communities served by our Bank. Our ability to retain these key employees will continue to be important to our business and financial results. The unexpected loss of services of any key personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business and financial results.

Competition with other financial institutions and financial service providers could adversely affect our profitability.

We face vigorous competition from banks and other financial institutions, including savings and loan associations, savings banks, finance companies, and credit unions. Many 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, we also compete 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 bank holding companies. As a result, these non-bank competitors may have an advantage over us in providing certain services, and this competition may reduce or limit our margins on banking services, reduce our market share, and adversely affect our results of operations and financial condition.

As a community bank, our financial condition is dependent, in part, on the general economic condition of the communities we serve.

Our operations are primarily limited to Livingston County and surrounding areas; and, therefore, our success depends to a great extent upon the general economic conditions of such region. In general, the economy of the State of Michigan has suffered in recent years as a result of the struggling automotive industry and other factors. Unlike larger banks that are more geographically diversified, our loan portfolio, the ability of the borrowers to repay these loans and the value of the collateral securing these loans will be impacted, to a greater extent, by local economic conditions. In addition, a general downturn in the national economy may impact our operations.

We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations.

We are subject to extensive regulation, supervision, and examination by federal banking authorities. Any change in applicable legislation could have a substantial impact on us and our bank and its operations. Additional legislation may be enacted or adopted in the future that could significantly affect our powers, authority, and operations, which could increase our costs of doing business and, as a result, give an advantage to our 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 our results of operations and financial condition.

We may face challenges in managing our operational risks as we grow.

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

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

The Bank operates from nine facilities, located in five communities, in Livingston County, Michigan. The executive offices of the Corporation are located at the Bank’s main office, 101 East Grand River, Howell, Michigan. The Bank maintains three branches in Howell at 5990 East Grand River, 4299 East Grand River, and 2400 West Grand River. The Bank also maintains branch offices at 9911 East Grand River, Brighton, Michigan; 8080 Challis Road, Brighton, Michigan; 760 South Grand Avenue, Fowlerville, Michigan; 10700 Highland Road, Hartland, Michigan; and 9775 M-36, Whitmore Lake, Michigan. All of the offices have ATM machines and all except the West Grand River branch, which is in a grocery store, have drive up services. All of the properties are owned by the Bank except for the West Grand River branch which is leased. The lease is for 15 years, expiring September 2007. The average lease payment over the remaining life of the lease is $3,888 monthly.

Item 3. Legal Proceedings.

The Corporation is not involved in any material legal proceedings. The Bank is involved in ordinary routine litigation incident to its business; however, no such proceedings are expected to result in any material adverse effect on the operations or earnings of the Bank. Neither the Bank nor the Corporation is involved in any proceedings to which any director, principal officer, affiliate thereof, or person who owns of record or beneficially more than five percent (5%) of the outstanding stock of either the Corporation or the Bank, or any associate of the foregoing, is a party or has a material interest adverse to the Corporation or the Bank.

Item 4. Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of security holders during the fourth quarter of 2006.

Additional Item –Executive Officers

Executive officers of the Corporation are appointed annually by the Board of Directors. There are no family relationships among these officers and/or the directors of the Corporation, or any arrangement or understanding between any officer and any other person pursuant to which the officer was elected.

The Corporation’s executive officers as of March 1, 2007 are as follows:

Barbara Draper (age 60) President, Chief Executive Officer May 2006, and Director of the Corporation and the Bank since January 1984; in retirement from May 2004 to April 2006; Chief Executive Officer and Director of the Corporation and the Bank from January 1993 to April 2004; Senior Vice President of Loans of the Bank from September 1983 to December 1992.

Violet Gintsis (Age 47), Senior Vice President, Senior Lender, of the Bank since December 2005; and Vice President and Team Leader, Commercial and Business Banking, Fifth Third Bank from May 2000 to December 2005.

Nancy Morgan (Age 56), Senior Vice President, Human Resources, of the Bank since October 2001; and Vice President, Human Resources, of the Bank from June 1999 to October 2001.

Janice B. Trouba (Age 45), Senior Vice President, Chief Financial Officer, of the Bank since May 2003; Senior Vice President, Accounting, from October 2002 to May 2003 of the Bank; and Vice President, Accounting, Citizens Banking Corporation from 1997 to October 2002.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

There is not an established trading market for the Corporation’s Common Stock. Information regarding its market price can be obtained on the internet at nasdaq.com, symbol FNHM. There is one market maker for the stock. There are occasional direct sales by shareholders of which the Corporation’s management is generally aware. It is the understanding of the management of the Corporation that over the last two years the Corporation’s Common Stock has sold at a premium to book value. From January 1, 2005, through December 31, 2006, there were, so far as the Corporation’s management knows, a total of 615,983 shares of the Corporation’s Common Stock sold. The price was reported to management in some of these transactions; however, there may have been other transactions involving the Corporation’s stock at prices not reported to management. During 2006, the highest and lowest prices known to management involving sales of more than 200 shares were $27.00 and $25.25 per share, respectively. To the knowledge of management, the last sale of Common Stock occurred on March 2, 2007 at a price of $26.50 per share.

As of March 1, 2007, there were approximately 862 holders of record of the Corporation’s Stock. The following table sets forth the range of high and low sales prices of the Corporation’s Common Stock during 2005 and 2006, based on information made available to the Corporation, as well as per share cash dividends declared during those periods. Although management is not aware of any transactions exceeding 200 shares at higher or lower prices, there may have been transactions at prices outside the ranges listed in the table.

Sales prices, for sales involving more than 200 shares, and dividend information for the years 2005 and 2006 are as follows:


	Sale Prices				Cash Dividends Declared
2005	High		Low
First Quarter	$	31.75	$	28.05	$	0.19
Second Quarter	$	31.00	$	27.95	$	0.19
Third Quarter	$	31.00	$	27.85	$	0.21
Fourth Quarter	$	27.95	$	25.00	$	0.21


	Sale Prices				Cash Dividends Declared
2006	High		Low
First Quarter	$	26.25	$	25.25	$	0.21
Second Quarter	$	26.80	$	25.75	$	0.21
Third Quarter	$	26.55	$	25.30	$	0.21
Fourth Quarter	$	27.00	$	26.45	$	0.21

The holders of the Corporation’s Common Stock are entitled to dividends when, as, and if declared by the Board of Directors of the Corporation out of funds legally available for that purpose. Dividends have been paid on a quarterly basis. In determining dividends, the Board of Directors considers the earnings, capital requirements and financial condition of the Corporation and the Bank, along with other relevant factors. The Corporation’s principal source of funds for cash dividends is the dividends paid by the Bank. The ability of the Corporation and Bank to pay dividends is subject to statutory and regulatory restrictions and requirements.

The following table shows certain information relating to purchases of common stock for the three-months ended December 31, 2006:


					Total Number of Shares		Maximum Number That
	Total Number of		Average Price		Purchased as Part of a		May Yet Be Purchased
Period	Shares Purchased		Paid Per Share		Publicly Announced Program		Under the Program (1)(2)
October 2006		—	$	—		—		138,000
November 2006		—		—		—		138,000
December 2006		48,700		26.78		48,700		89,300

Total		48,700	$	26.78		48,700		89,300


(1)		On March 16, 2006, the Corporation’s Board of Directors authorized a new share repurchase program. The new repurchase program authorizes the repurchase of up to 100,000 shares of the Corporation’s common stock and expires March 16, 2007.

(2)		On August 17, 2006, the Corporation’s Board of Directors authorized a second share repurchase program. This repurchase program authorizes the repurchase of up to 100,000 additional shares of the Corporation’s common stock and expires August 17, 2007.

SHAREHOLDER RETURN PERFORMANCE GRAPH

Set forth below is a line graph comparing the yearly percentage change in the cumulative total shareholder return on the Corporation’s common stock with that of the cumulative total return on the NASDAQ Stock Market Index and the NASDAQ Bank Stocks Index for the five year period ended December 31, 2006. The following information is based on an investment of $100, on January 1, 2002, in the Corporation’s common stock, the NASDAQ Bank Stocks Index and the NASDAQ Stock Market Index, with dividends reinvested. There has been only limited trading in the Corporation’s common stock, and the Corporation’s stock does not trade on any stock exchange or the NASDAQ market. Accordingly, the returns reflected in the following graph and tables are based on sale prices of the Corporation’s stock of which management is aware. There may have been sales at higher or lower prices of which management is not aware.

COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN


	January 1		December 31
	2002		2002		2003		2004		2005		2006
FNBH Bancorp, Inc.		100		115.88		139.75		168.28		137.41		144.68
NASDAQ Stock Market Index		100		69.10		103.40		112.50		114.90		126.20
NASDAQ Bank Stocks Index		100		102.40		131.70		150.70		147.20		165.20

Item 6. Selected Financial Data.

SUMMARY FINANCIAL DATA
(in thousands, except per share data)


	2006			2005			2004			2003			2002
Income Statement Data:
Interest income	$	31,819		$	29,315		$	24,992		$	24,856		$	25,729
Interest expense		10,295			7,054			5,606			6,167			8,017
Net interest income		21,524			22,261			19,386			18,689			17,712
Provision for loan losses		2,639			3,037			1,190			1,270			625
Noninterest income		4,031			3,820			4,110			3,874			3,621
Noninterest expense		14,939			13,653			13,287			12,848			11,775
Income before tax		7,976			9,391			9,019			8,445			8,933
Net income		5,586			6,507			6,291			5,891			6,304
Per Share Data(1):
Basic net income per share	$	1.76		$	2.03		$	1.98		$	1.86		$	2.00
Diluted net income per share		1.76			2.03			1.97			1.86			2.00
Dividends paid		0.84			0.80			0.72			0.68			0.63
Weighted average basic shares outstanding		3,177,093			3,200,146			3,185,025			3,162,836			3,152,739
Weighted average diluted shares outstanding		3,177,146			3,200,518			3,186,142			3,162,836			3,152,739
Balance Sheet Data:
Total assets	$	473,896		$	477,225		$	456,910		$	450,342		$	420,686
Loans, gross		384,581			372,855			357,377			347,086			327,117
Allowance for loan losses		7,598			6,991			6,093			5,434			5,794
Deposits		405,544			422,086			399,263			399,073			374,072
Shareholders’ equity		49,992			49,446			45,716			41,235			37,580
Ratios:
Dividend payout ratio		47.55	%		39.15	%		36.34	%		36.51	%		31.40	%
Average Equity to asset ratio		10.86	%		10.18	%		9.71	%		9.32	%		8.80	%


(1)		Per share data for 2002 has been restated to give effect to the two-for-one stock split, payable as a dividend of one share for each share of the Corporation’s stock held of record July 1, 2002, paid July 10, 2002.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This discussion provides information about the consolidated financial condition and results of operations of FNBH Bancorp, Inc. (“Corporation”) and its subsidiaries, First National Bank in Howell (“Bank”) and HB Realty Co., and should be read in conjunction with the Consolidated Financial Statements.

Included or incorporated by reference in this document are certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are based on the beliefs of the Corporation’s management as well as on assumptions made by, and information currently available to, the Corporation at the times such statements were made. Actual results could differ materially from those included in such forward-looking statements as a result of, among other things, factors set forth below in this Report generally, and certain economic and business factors, some of which may be beyond the control of the Corporation. Investors are cautioned that all forward-looking statements involve risks and uncertainty.

FINANCIAL CONDITION

At year end 2006, total assets were $473,896,000 representing a 0.7% decrease from the prior year when assets were $477,225,000. Investment securities decreased $8 million (13.1%) to $54,214,000 while gross loans increased $11.7 million (3.1%) to $384,581,000. Deposits decreased $16.5 million (3.9%) to $405,544,000. Stockholders’ equity increased $0.5 million (1.1%) to $49,992,000.

Securities

During 2006, securities decreased due to a continual decline in deposits throughout the year and higher loan demand in the last two quarters of 2006. Purchased certificates of deposit decreased $2.5 million in 2006 compared to 2005. At year end, the Bank had $2,748,000 in short term investments, a decrease of $2,072,000 from the $4,820,000 reported the previous year.

The following table sets forth the book value of held to maturity securities and the fair value of available for securities at December 31:


	(in thousands)
	2006		2005		2004
Held to maturity:
States and political subdivisions	$	16,809	$	16,426	$	16,009

Available for sale:
U.S. Agencies	$	24,480	$	31,384	$	29,738
Corporate securities		—		1,005		1,038
Mortgage-backed securities		11,931		12,405		16,432
FRB Stock		44		44		44
FHLBI Stock		951		1,109		1,087

Total	$	37,406	$	45,947	$	48,339

The following table sets forth contractual maturities of securities (at amortized costs) at December 31, 2006 and the weighted average yield of such securities:


	(dollars in thousands)
						Maturing After					Maturing After
	Maturing Within					One But Within					Five But Within					Maturing After
	One Year					Five Years					Ten Years					Ten Years
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Held to maturity
States and political subdivisions	$	1,895		6.48	%	$	5,650		6.26	%	$	2,606		5.85	%	$	6,658		6.24	%

Tax equivalent adjustment for calculations of yield	$	34				$	102				$	47				$	121

Available for sale
U.S. Agencies	$	13,495		3.18	%	$	11,375		3.57	%	$	—		—		$	—		—
Mortgage-backed securities		33		5.50	%		1,964		4.83	%		1,262		4.00	%		8,834		5.65	%
FRB Stock		—		—			—		—			—		—			44		6.00	%
FHLBI Stock		—		—			—		—			—		—			951		5.42	%

Total	$	13,528		3.19	%	$	13,339		3.76	%	$	1,262		4.00	%	$	9,829		5.63	%

The rates set forth in the tables above for obligations of state and political subdivisions have been restated on a fully tax equivalent basis assuming a 34% marginal tax rate. The amount of the adjustment is as follows:


							Rate on Tax
	Tax-Exempt Rate			Adjustment			Equivalent Basis
Under 1 year		4.67	%		1.81	%		6.48	%
1-5 years		4.45	%		1.81	%		6.26	%
5-10 years		4.04	%		1.81	%		5.85	%
10 years or more		4.43	%		1.81	%		6.24	%

The following table shows the percentage composition of the securities portfolio as of December 31:


	2006			2005			2004
U.S. Treasury & agency securities		45.2	%		50.3	%		46.2	%
Agency mortgage backed securities		22.0	%		19.9	%		25.5	%
Tax exempt obligations of states and political subdivisions		31.0	%		26.3	%		24.9	%
Corporate bonds		0.0	%		1.6	%		1.6	%
Other		1.8	%		1.9	%		1.8	%

Total securities		100.0	%		100.0	%		100.0	%

Loans

The loan personnel of the Bank are committed to making quality loans that produce acceptable rates of return for the Bank and also serve the community by providing funds for home purchases, business purposes, and consumer needs. The overall loan portfolio grew $11,726,000 (3.1%) in 2006.

As a full service lender, the Bank offers a variety of home mortgage loan products. The Bank makes and subsequently sells fixed rate long-term mortgages, which conform to secondary market standards. This practice allows the Bank to meet the housing credit needs of its service area, while at the same time maintaining loan to deposit ratios and interest sensitivity and liquidity positions within Bank policy. The Bank retains servicing on the majority of sold mortgages, thereby furthering the customer relationship and adding to servicing income. During 2006, the Bank sold $3,608,000 in residential mortgages as compared to $4,297,000 in 2005.

The Bank has also been able to service customers with loan needs which do not conform to secondary market requirements by offering variable rate products which are retained in the mortgage portfolio. While not meeting secondary market requirements, these nonconforming mortgages do meet Bank loan guidelines. During 2006, the Bank made approximately $2,039,000 in variable rate mortgage loans which are retained in the mortgage portfolio.

The following table reflects the composition of the commercial and consumer loans in the Consolidated Financial Statements. Included in the residential first mortgage totals below are the “real estate mortgage” loans listed in the Consolidated Financial Statements and other loans to customers who pledge their homes as collateral for their borrowings. A portion of the loans listed in residential first mortgages represent commercial loans where the borrower has pledged his/her residence as collateral. In the majority of the loans to commercial customers, the Bank is relying on the borrower’s cash flow to service the loans. Commercial real estate loans at December 31, 2006 include $197,594,000 in loans secured by commercial and retail property, with the remaining $5,625,000 secured by multi-family units. The most significant loan growth was in commercial secured by real estate which increased $25,802,000 (14.5%) compared to the prior year. Loans secured by first mortgages on residential properties and consumer loans experienced a decrease of $13,018,000 (19.0%) due to weak demand from retail consumers as a result of increasing interest rates and a weak economy. Construction and land development loans also decreased $5,196,000 (7.2%) primarily due to conversion to end mortgages, which represents part of the increase in commercial loans secured by real estate. These decreases were only partially offset by an increase in other commercial loans, which increased $2,480,000 or 8.5% and home equity lines, which increased $1,233,000 (6.2%). At December 31, 2006, the Bank had $4.7 million of home equity interest-only loans; none of these loans are at low promotional rates. These interest-only loans represent 17.1% of total consumer loans and 1.2% of total loans.

The following table shows the balance and percentage composition of loans as of December 31:


	(dollars in thousands)
	2006						2005						2004						2003						2002
	Balances			Percent			Balances			Percent			Balances			Percent			Balances			Percent			Balances			Percent
Secured by real estate:
Residential first mortgage	$	39,768			10.3	%	$	46,391			12.4	%	$	53,059			14.8	%	$	46,845			13.5	%	$	37,202			11.3	%
Residential home equity/other junior liens		20,983			5.4	%		19,750			5.3	%		16,017			4.5	%		13,999			4.0	%		11,184			3.4	%
Construction, land development and farmland		67,376			17.5	%		72,572			19.4	%		59,873			16.7	%		54,554			15.7	%		49,516			15.1	%
Commercial		203,219			52.8	%		177,417			47.5	%		163,706			45.7	%		165,464			47.5	%		153,720			46.9	%
Consumer		15,852			4.1	%		22,247			6.0	%		26,965			7.5	%		25,842			7.4	%		25,261			7.7	%
Commercial		31,710			8.2	%		29,230			7.8	%		31,772			8.9	%		33,947			9.8	%		43,276			13.2	%
Other		6,343			1.7	%		6,104			1.6	%		6,991			1.9	%		7,366			2.1	%		7,801			2.4	%


Total gross loans		385,251			100.0	%		373,711			100.0	%		358,383			100.0	%		348,017			100.0	%		327,960			100.0	%
Net unearned fees		(670	)					(856	)					(1,006	)					(931	)					(843	)


Total Loans	$	384,581					$	372,855					$	357,377					$	347,086					$	327,117

The loan portfolio is periodically reviewed and the results of these reviews are reported to the Bank’s Board of Directors. The purpose of these reviews is to verify proper loan documentation, to provide for the early identification of potential problem loans, and to assist the Bank in evaluating the adequacy of the allowance for loan losses.

The following table shows the amount of commercial, financial, and agricultural loans outstanding as of December 31, 2006, which based on remaining scheduled repayments of principal, mature in the periods indicated:


			Maturing
			(dollars in thousands)
			After one
	Within One		but within		After five
	Year		five years		years		Total
Real estate construction and land development	$	38,078	$	27,614	$	1,153	$	66,845
Real estate other (secured by commercial and multi-family)		32,849		151,171		19,199		203,219
Commercial (secured by business assets or unsecured)		15,041		15,570		1,099		31,710
Other (loans to farmers, political subdivisions, and overdrafts)		1,819		2,885		1,639		6,343

Totals	$	87,787	$	197,240	$	23,090	$	308,117

Below is a schedule of amounts due after one year which are classified according to their sensitivity to changes in interest rates:


	Interest Sensitivity
	(dollars in thousands)
	Fixed Rate		Variable Rate
Due after one but within five years	$	154,635	$	42,605
Due after five years		22,139		951

The Bank’s loan personnel have endeavored to make high quality loans using well established policies and procedures and a thorough loan review process. Loans to a borrower with aggregate indebtedness in excess of $1,500,000 are approved by a committee of the Board or the entire Board. The Bank has hired an independent contractor to review the quality of the loan portfolio on a regular basis.

Nonperforming loans consist of loans accounted for on a nonaccrual basis and loans contractually past due 90 days or more as to interest or principal payments (but not included in nonaccrual loans). The aggregate amount of non-performing loans and other nonperforming assets, as of December 31, is presented in the table below:


	(dollars in thousands)
	2006			2005			2004			2003			2002
Nonperforming Loans and Assets:
Nonaccrual loans	$	12,199		$	5,234		$	1,146		$	4,293		$	3,288
Loans past due 90 days and still accruing		288			391			288			—			809

Total nonperforming loans		12,487			5,625			1,434			4,293			4,097
Other real estate		1,629			680			735			65			738

Total nonperforming assets	$	14,116		$	6,305		$	2,169		$	4,358		$	4,835


Nonperforming loans as a percent of total loans		3.25	%		1.51	%		0.40	%		1.24	%		1.25	%
Allowance for loan losses as a percent of nonperforming loans		61	%		124	%		425	%		127	%		141	%

There were no other interest bearing assets, at December 31, 2006, that would be required to be disclosed under Item III(C) of Guide 3 of the Securities Act Industry Guide, if such assets were loans.

The loan portfolio has no significant concentrations in any one industry. There were no foreign loans outstanding at December 31, 2006.

Nonperforming assets are comprised of loans for which the accrual of interest has been discontinued, accruing loans 90 days or more past due in payments, loans which have been renegotiated to less than market rates, and other real estate which has been acquired primarily through foreclosure and is awaiting disposition. Loans are generally placed on a nonaccrual basis when principal or interest is past due 90 days or more and when, in the opinion of management, full collection of principal and interest is unlikely. Nonperforming assets increased in 2006 due primarily to higher delinquencies as a result of economic conditions that impacted customers’ cash flows and property values. Nonperforming loans are reviewed regularly for collectability and any uncollectible balances are promptly charged off.

Nonperforming loans have increased substantially since December 31, 2005 due to the local weakened economy and slow housing sales. While there has been a significant increase in nonperforming loans, management believes the allowance is adequate based on our loan-by-loan analysis of the problem loans and considering the amount of collateral primarily related to loans secured by real estate. Management expects the work out of these loans to take some time, especially given the economic outlook for the state and the Bank’s relatively high balances of loans secured by real estate. These conditions are expected to result in the bank maintaining high balances of nonperforming loans and will continue to impact the provision for loan losses for the foreseeable future. Management continues to make oversight of these loans a priority and is working diligently to continue to proactively identify and manage problem credits.

Impaired loans, as defined by Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of Loan, totaled approximately $15,500,000 at December 31, 2006, and included non-accrual other than homogenous residential and consumer loans, and $5,200,000 of commercial loans separately identified as impaired. Impaired loans totaled $10,100,000 at December 31, 2005, and $5,900,000 at December 31, 2004. A loan is considered impaired when it is probable that all or part of amounts due according to the contractual terms of the loan agreement will not be collected on a timely basis. Impaired loans increased in 2006 due to higher nonaccrual loans.

During 2006, the Bank charged off loans totaling $2,664,000 and recovered $509,000 for a net charge off amount of $2,155,000. The Bank had net charge offs totaling $1,992,000 in 2005 and $748,000 in 2004. Charge offs increased in 2006 primarily as a result of the weakened local economy which had a negative impact on our borrowers’ cash flow which then impacted their ability to repay their loan(s) according to their contractual terms.

The allowance for loan losses totaled $7,598,000 at year end which was 1.98% of total loans, compared to $6,991,000 (1.88%) in 2005, and $6,093,000 (1.70%) in 2004. The adequacy of the allowance for loan losses is determined by management’s assessment of the composition of the loan portfolio, an evaluation of specific credits, and an analysis of the

following environmental factors: delinquency trends, delinquency levels, concentrations of credit, economic trends, loan growth, and management changes. Management continues to refine its techniques in this analysis. Economic factors considered in arriving at the loan loss reserve adequacy as of December 31, 2006, included an uncertain interest rate environment, and the unemployment rate and overall income conditions due largely to the auto industry. When all environmental factors were considered, management determined that the $2,762,000 provision and resulting $7,598,000 allowance were appropriate. Due to the current economic condition and the decline in real estate values, the provision for loan losses in 2006 was impacted by the Bank’s concentration in real estate secured lending. This impact on loan loss provision will continue in 2007 unless there is a significant recovery of real estate values. Although management evaluates the adequacy of the allowance for loan losses based on information known at a given time, as facts and circumstances change, the provision and resulting allowance may also change. Additional discussion regarding the provision for loan losses can be found under “Provision for Loan Losses” in this Item 7.

The following table sets forth loan balances and summarizes the changes in the allowance for loan losses and reserve for unfunded credit commitments, which is the Corporation’s critical accounting policy, for each of the years ended December 31:


	(dollars in thousands)
	2006			2005			2004			2003			2002
Loans:
Average daily balance of loans for the year	$	374,634		$	366,877		$	340,859		$	340,384		$	311,060
Amount of loans outstanding at end of year		384,581			372,855			357,377			347,086			327,117
Components:
Allowance for loan losses
Balance, beginning of year	$	6,991		$	6,093		$	5,434		$	5,794		$	5,668
Loans charged off:
Real estate mortgage		260			26			—			—			—
Commercial		1,785			1,436			379			1,014			598
Consumer		619			792			543			269			169

Total charge offs		2,664			2,254			922			1,283			767
Recoveries to loans previously charged off:
Real estate mortgage		—			—			—			—			—
Commercial		283			120			70			112			177
Consumer		226			142			104			65			91

Total recoveries		509			262			174			177			268

Net loans charged off		2,155			1,992			748			1,106			499
Additions to allowance charged to operations		2,762			2,890			1,407			746			625

Balance, end of year		7,598			6,991			6,093			5,434			5,794

Reserve for unfunded credit commitments
Balance, beginning of year		454			307			524			—			—
Additions (reductions) to reserve charged to operations		(123	)		147			(217	)		524			—

Balance, end of year		331			454			307			524			—

Total allowance for loan losses and reserve for unfunded credit commitments	$	7,929		$	7,445		$	6,400		$	5,958		$	5,794


Ratios:
Net loans charged off to average loans outstanding		0.58	%		0.54	%		0.22	%		0.32	%		0.16	%
Allowance for loan losses to loans outstanding		1.98	%		1.88	%		1.70	%		1.57	%		1.77	%

The following table presents the portion of the allowance for loan losses applicable to each loan category and the percent of loans in each category to total loans, as of December 31:


	(dollars in thousands)
	2006					2005					2004					2003					2002
	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
Commercial	$	6,675		85.5	%	$	5,864		81.9	%	$	4,877		80.3	%	$	5,027		80.1	%	$	5,166		80.2	%
Consumer		442		7.2	%		850		9.7	%		825		10.1	%		101		10.1	%		406		10.3	%
Real estate		481		7.3	%		277		8.4	%		391		9.6	%		306		9.8	%		222		9.5	%
Unallocated		—					—					—					—					—

Total	$	7,598		100.0	%	$	6,991		100.0	%	$	6,093		100.0	%	$	5,434		100.0	%	$	5,794		100.0	%

The following table presents the portion of the reserve for unfunded credit commitments applicable to each loan category and the percent of the credit commitments in each category to total credit commitments, as of December 31:


	(dollars in thousands)
	2006					2005					2004
	Amount		Percent			Amount		Percent			Amount		Percent
Commercial	$	207		80.1	%	$	199		76.7	%	$	148		85.0	%
Consumer		124		19.9	%		255		23.3	%		158		15.0	%
Real estate		—		—			—		—			1		—

Total	$	331		100.0	%	$	454		100.0	%	$	307		100.0	%

Deposits

Deposit balances of $405,544,000 at December 31, 2006 were approximately $16,500,000 lower than the previous year end. Because year end deposit balances can fluctuate, it is more meaningful to analyze changes in average balances. Average deposits decreased 2.25% in 2006 compared to 2005. Average demand deposits decreased $7.8 million (10.6%) while average NOW, savings and money market deposit account (MMDA) balances decreased $24.7 million (14.0%). Average certificates of deposit increased $23.1 million (14.2%). Management generated certificates of deposit in 2006 with various rate specials on selected certificates and by increased use of brokered certificates. Rates were also increased in 2006 on core deposits to slow the decline in these deposits as our rates had fallen below competitors’ rates. Average noninterest bearing deposits grew by 3.9% from 2004 to 2005, average NOW, savings, and MMDA balances fell 4.6% from 2004 to 2005, and average certificates of deposit grew 17.8% from 2004 to 2005.

The following table sets forth average deposit balances and the weighted average rates paid thereon for the years ended December 31:


	(dollars in thousands)
	2006					2005					2004
	Average					Average					Average
	Balance		Rate			Balance		Rate			Balance		Rate
Non-interest bearing demand	$	65,492		0.00	%	$	73,243		0.00	%	$	70,477		0.00	%
NOW		39,568		0.38	%		44,266		0.20	%		42,599		0.20	%
Savings		43,383		0.40	%		50,018		0.25	%		51,219		0.26	%
MMDA		68,739		2.35	%		82,062		1.44	%		90,974		1.05	%
Time deposits		186,192		4.26	%		163,065		3.30	%		138,463		2.92	%

Total	$	403,374		2.45	%	$	412,654		1.64	%	$	393,732		1.33	%

See Note 9, “Time Certificates of Deposits” in Notes to Consolidated Financial Statements for the maturities of negotiated rate time deposits of $100,000 or more outstanding at December 31, 2006.

The decline in NOW, savings, and MMDA was primarily in MMDAs which decreased 16.2% on average from 2005 to 2006. This decline is attributable to consumers’ and business’ preference for time certificates in this higher rate environment. Average personal MMDAs decreased 23.6% while business accounts decreased 21.3% on average, and

public MMDAs decreased 7.5% compared to the prior year. From 2004 to 2005, average personal MMDA accounts decreased 16.8%, business accounts decreased 14.2% and public accounts remained unchanged.

The majority of the Bank’s deposits are from core customer sources, representing long term relationships with local personal, business, and public customers. In some financial institutions, the presence of interest bearing certificates greater than $100,000 indicates reliance upon purchased funds. However, large certificates in the Bank’s portfolio consist primarily of core deposits of local customers. The Bank does issue brokered certificates of deposit in the market to meet liquidity needs with alternative funding sources and had an average balance of brokered certificates in 2006 of $27.4 million compared to $23.9 million in 2005. As of December 31, 2006, $9.8 million of these brokered certificates were over $100,000 as compared to $26.6 million as of December 31, 2005.

Capital

The Corporation’s capital at year end totaled $49,992,000, a $546,000 (1.1%) increase compared to capital of $49,446,000 at December 31, 2005 and $45,716,000 at December 31, 2004. Included in capital at December 31, 2006 is a $365,000 net of tax unrealized loss on investment securities available for sale.

During 2006, the Corporation repurchased 117,700 shares of its stock, 110,700 of which were under two share repurchase programs approved by the Board of Directors in 2006 authorizing the repurchase of up to 200,000 shares.

Banking regulators have established various ratios of capital to assets to assess a financial institution’s soundness. Tier 1 capital is equal to shareholders’ equity adjusted for unrealized gains or losses accumulated in other comprehensive income while Tier 2 capital also includes a portion of the allowance for loan losses. The regulatory agencies have set capital standards for “well capitalized” institutions. The leverage ratio, which divides Tier 1 capital by three months average assets, must be 5% for a well capitalized institution. The Bank’s leverage ratio was 10.80% at year end 2006. Tier 1 risk-based capital, which includes some off balance sheet items in assets and weights assets by risk, must be 6% for a well capitalized institution. The Bank’s was 12.31% at year end 2006. Total risk-based capital, which includes Tier 1 and Tier 2 capital, must be 10% for a well capitalized institution. The Bank’s total risk based capital ratio was 13.56% at year end 2006. The Bank’s strong capital ratios put it in the best classification on which the FDIC bases its assessment charge.

The following table lists various Bank capital ratios at December 31:


	Minimum Regulatory
	Ratio for Well Capitalized			2006			2005			2004
Average equity to average asset ratio		—			10.86	%		10.18	%		9.71	%
Tier 1 leverage ratio		5.00	%		10.80	%		10.58	%		9.65	%
Tier 1 risk-based capital		6.00	%		12.31	%		12.63	%		11.54	%
Total risk-based capital		10.00	%		13.56	%		13.89	%		12.80	%

The Corporation’s ability to pay dividends is subject to various regulatory and state law requirements. Management believes, however, that earnings will continue to generate adequate capital to continue the payment of dividends. In 2006, the Corporation paid dividends totaling $2,656,000, or 47.5% of earnings. Book value of the stock was $16.26 at year end.

Liquidity and Funds Management

Liquidity is monitored by the Bank’s Asset/Liability Management Committee (ALCO) which meets at least monthly. The Board of Directors has approved a liquidity policy which requires the Bank, while it is well capitalized as defined by the Federal Financial Institutions Examination Council (FFIEC), to maintain a current ratio of no less than 1:1 (core basic surplus liquidity equal to 0). Additional requirements of the policy are that when credit available from the Federal Home Loan Bank of Indianapolis (FHLBI) is added to core basic surplus liquidity, the Bank must have liquidity totaling 5% of assets; and when brokered CDs and Federal Funds (Fed Funds) lines are added, the Bank must have liquidity totaling 8% of assets. Should the Bank’s capital ratios fall below the “well capitalized” level, additional liquidity totaling 5% of assets will be required. As of December 31, 2006, the Bank had excess liquidity of at least 3.1% of assets under any of the above standards.

Deposits are the principal source of funds for the Bank. Management monitors rates at other financial institutions in the area to ascertain that its rates are competitive in the market. Management also attempts to offer a wide variety of products to meet the needs of its customers.

It is the intention of the Bank’s management to handle unexpected liquidity needs through its Fed Funds position with a correspondent bank and by FHLBI borrowings. The Bank has a $36,000,000 line of credit available at the FHLBI and the Bank has pledged certain commercial and consumer loans secured by residential real estate as collateral for this borrowing. At December 31, 2006, the Bank had $13,481,000 in borrowings against the line. The Bank also has a blanket repurchase agreement in place where it can borrow from a broker, pledging Treasury and Agency securities as collateral. In the event the Bank must borrow for an extended period, management may look to “available for sale” securities in the investment portfolio for liquidity.

Throughout the past year, Fed Funds Sold balances averaged approximately $3,202,000. Periodically, the Bank borrowed money through the Fed Funds market and through short term advances from the FHLBI. Fed Funds Purchased balances averaged $1,541,000 and short term FHLBI advances averaged $4,155,000 for 2006.

Contractual Obligations and Commitments
The following table lists significant fixed and determinable contractual obligations to third parties as of December 31, 2006:


	Within		One to		Three to		Over
(in thousands)	One Year		Three Years		Five Years		Five Years		Total
Deposits without a stated maturity⁽¹⁾	$	217,885	$	—	$	—	$	—	$	217,885
Consumer and brokered certificates of deposits⁽²⁾		168,677		16,867		4,442		18		190,004
Short term advances ^{(3) (5)}		12,000								12,000
Long term advances^{(4) (5)}		329		738		414		—		1,481
Operating leases⁽⁵⁾		35		—		—		—		35
Purchase obligations⁽⁶⁾		1,117		1		—		—		1,118


(1)		Excludes interest.

(2)		Includes interest on both fixed and variable rate obligations. The interest rate for variable rate obligations is based upon interest rates in effect at December 31, 2006. Future changes in market interest rates could materially affect the contractual amounts to be paid for variable rate obligations.

(3)		Does not include interest on short-term (overnight) variable rate obligations.

(4)		Includes interest on fixed rates obligations.

(5)		See Note 10, “Other Borrowings,” in Notes to Consolidated Financial Statements.

(6)		See Note 14, “Leases,” in Notes to Consolidated Financial Statements.

(7)		Purchase obligations amounts relate to certain contractual payments for services provided for information technology, data processing, advertising, and training consultants, as well as the purchase of software and hardware related to the core system conversion. See Note 6, “Premises and Equipment”, in Notes to the Consolidated Financial Statements.

The following table lists significant commitments by maturity date as of December 31, 2006:


	Within		One to		Three to		Over
(in thousands)	One Year		Three Years		Five Years		Five Years		Total
Commercial loans	$	42,911	$	5,804	$	691	$	—	$	49,406
Commercial construction loans		5,762		2,802		—		—		8,564
Consumer loans		7,622		3,603		465		—		11,690
Standby letters of credit		3,099		177		—		—		3,276

Commitments to extend credit, including loan commitments, standby letters of credit, and commercial letters of credit do not necessarily represent future cash requirements, in that these commitments often expire without being drawn upon.

Quantitative and Qualitative Disclosures about Market Risk

In addition to monitoring liquidity, ALCO reviews other areas of the Bank’s performance. This committee discusses the current economic outlook and its potential impact on the Bank and current interest rate forecasts. Actual results are

compared to budget in terms of growth and income. A yield and cost analysis is done to monitor interest margin. Various ratios are discussed including capital ratios and liquidity. Also, the quality of the loan portfolio is reviewed in light of the current allowance, and the Bank’s exposure to market risk is reviewed.

Interest rate risk is the potential for economic losses due to future rate changes and can be reflected as a loss of future net interest income and/or a loss of current market values. ALCO’s objective is to measure the affect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income. Tools used by management include the standard GAP report which reflects the repricing schedule for various asset and liability categories and an interest rate shock simulation report. The Bank has no market risk sensitive instruments held for trading purposes. However, the Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers including commitments to extend credit and letters of credit. A commitment or letter of credit is not recorded as an asset until the instrument is exercised (see Note 19, “Financial Instruments with Off-Balance-Sheet Risk” in Notes to Consolidated Financial Statements).

The table below shows the scheduled maturity and repricing of the Bank’s interest sensitive assets and liabilities as of December 31, 2006:


				(dollars in thousands)
	0-3			4-12			1-5		5+
	Months			Months			Years		Years			Total
Assets:
Loans	$	137,261		$	53,698		$	167,914	$	18,110		$	376,983
Securities		4,019			15,410			27,672		7,113			54,214
Certificates of deposit		1,080			2,257			1,374		—			4,711
Short term investments		2,748			—			—		—			2,748


Total assets	$	145,108		$	71,365		$	196,960	$	25,223		$	438,656


Liabilities:
NOW, savings, & MMDA	$	73,372		$	—		$	—	$	81,809		$	155,181
Time deposits		60,911			106,094			20,622		55			187,682
FHLBI advances		12,214			667			600		—			13,481


Total liabilities	$	146,497		$	106,761		$	21,222	$	81,864		$	356,344

Rate sensitivity GAP:
GAP for period	$	(1,389	)	$	(35,396	)	$	175,738	$	(56,641	)
Cumulative GAP		(1,389	)		(36,785	)		138,953		82,312

December 31, 2006 cumulative rate sensitive ratio		0.99			0.85			1.51		1.23
December 31, 2005 cumulative rate sensitive ratio		1.33			1.17			1.62		1.25

The preceding table sets forth the time periods in which earning assets and interest bearing liabilities will mature or may re-price in accordance with their contractual terms. The entire balance of NOW, savings, and MMDA are not categorized as 0-3 months, although they are variable rate products. Some of these balances are core deposits and are not considered rate sensitive. Allocations are made to time periods based on the Bank’s historical experience and management’s analysis of industry trends.

In the GAP table above, the short term (one year and less) cumulative interest rate sensitivity is 15% liability sensitive at year end, compared to 17% asset sensitive the previous year. The rate sensitivity in 2006 was impacted by higher balances in short term liability offset by lower balances in short term assets.

Because of the Bank’s liability sensitive position, if market interest rates decrease, this negative GAP position indicates that the interest margin would be positively affected. 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 repricing of various categories of assets and liabilities is subject to the Bank’s needs, competitive pressures, and the needs of the Bank’s customers. In addition, various assets and liabilities indicated as repricing within the same period may in fact reprice at different times

within the period and at different rate indices. Additionally, simulation modeling, which measures the impact of upward and downward movements of interest rates on interest margin, indicates that a 200 basis point decrease in interest rates would reduce net interest income by approximately 2% in the first year, while a 200 basis point increase in interest rates would increase net interest income by approximately 1% in the first year. This is influenced by the assumptions regarding how quickly and to what extent liabilities will reprice with a decline in interest rates.

The following table shows the fair market value for interest earning assets and interest bearing liabilities as of December 31, 2006 (on a taxable equivalent basis):


			(dollars in thousands)
	Carrying Value		Average Interest Rate			Estimated Fair Value
Assets:
Loans, net	$	376,983		7.77	%	$	376,688
Securities		54,214		4.49	%		54,436
Certificates of deposit		4,711		4.29	%		4,711
Short term investments		2,748		4.66	%		2,748

Liabilities:
NOW, savings, & MMDA	$	155,181		1.28	%	$	155,181
Time deposits		187,682		4.26	%		187,158
FHLBI advances		13,481		5.89	%		13,506

Estimated fair value for securities are based on quoted market prices. For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are generally based on carrying values. The fair value of other loans is estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities. Because they have a one day maturity, the carrying value is used as fair value for short term investments. The fair value of deposits with no stated maturity, such as NOW, savings, and money market accounts, is equal to the amount payable on demand. The fair value of certificates of deposit and FHLBI borrowings are estimated using rates currently offered for products with similar remaining maturities.

RESULTS OF OPERATIONS

Net income was $5,600,000 in 2006, a $900,000 (14.2%) decrease compared to net income of $6,500,000 in 2005. In 2005, our net income increased $200,000 (3.4%) from the $6,300,000 reported in 2004.

The ratio of net income to average shareholders’ equity and to average total assets, for the years ended December 31 follows:


	2006			2005			2004			2003			2002
Net income as a percent of:
Average common equity		11.06	%		13.63	%		14.51	%		14.90	%		17.97	%
Average total assets		1.20	%		1.39	%		1.41	%		1.39	%		1.58	%

Net Interest Income

Net interest income is the difference between interest earned on loans, securities and other earning assets and interest paid on deposits and borrowed funds. In the following tables, the interest earned on investments and loans is expressed on a fully taxable equivalent (FTE) basis. Tax exempt interest is increased to an amount comparable to interest subject to

federal income taxes in order to properly evaluate the effective yields earned on earning assets. The tax equivalent adjustment is based on a federal income tax rate of 34%. The following Yield Analysis shows that the Bank’s interest margin decreased 13 basis points in 2006 as a result of an increase of 60 basis points in yield on earning assets, offset by an increase of 93 basis points in the interest cost on deposits and borrowings. In 2005, the interest margin increased 36 basis points as a result of a increase of 61 basis points in yield on earning assets, partially offset by a increase of 35 basis points in the interest cost on deposits and borrowings.

The following table shows the daily average balances for major categories of interest earning assets and interest bearing liabilities, interest earned (on a taxable equivalent basis) or paid, and the effective rate or yield, for the three years ended December 31, 2006, 2005, and 2004.


						Yield Analysis of Consolidated Average Assets and Liabilities
						(dollars in thousands)
				2006								2005					2004
	Average					Yield/			Average					Yield/			Average					Yield/
	Balance			Interest		Rate			Balance			Interest		Rate			Balance			Interest		Rate
Assets
Interest earning assets:
Short term investments	$	3,253		$	151.7		4.66	%	$	9,930		$	309.5		3.12	%	$	14,587		$	166.0		1.14	%
Certificates of deposit		6,164			264.4		4.29	%		6,551			201.1		3.07	%		3,817			95.8		2.51	%
Securities: Taxable		43,361			1,665.7		3.84	%		48,272			1,821.4		3.77	%		46,914			1,843.6		3.93	%
Tax-exempt (1)		17,118			1,048.3		6.12	%		16,029			1,048.3		6.54	%		15,612			1,083.4		6.94	%
Commercial loans (2)(3)		312,308			24,572.5		7.87	%		297,423			21,673.2		7.29	%		270,349			17,666.2		6.53	%
Consumer loans (2)(3)		31,874			2,699.8		8.47	%		36,259			2,760.9		7.61	%		36,061			2,703.5		7.50	%
Mortgage loans (2)(3)		30,452			1,842.3		6.05	%		33,195			1,954.6		5.89	%		34,449			1,910.6		5.55	%

Total earning assets and total interest income		444,530		$	32,244.7		7.25	%		447,659		$	29,769.0		6.65	%		421,789		$	25,469.1		6.04	%
Cash and due from banks		10,703								11,352								12,508
All other assets		17,196								16,940								18,202
Allowance for loan losses		(7,324	)							(6,743	)							(5,921	)

Total assets	$	465,105							$	469,208							$	446,578

Liabilities and Shareholders’ Equity
Interest bearing deposits:
NOW	$	39,568		$	148.4		0.38	%	$	44,266		$	88.8		0.20	%	$	42,599		$	86.3		0.20	%
Savings		43,383			173.2		0.40	%		50,018			125.2		0.25	%		51,219			134.1		0.26	%
MMDA		68,739			1,613.5		2.35	%		82,062			1,184.5		1.44	%		90,974			955.4		1.05	%
Time deposits		186,192			7,936.0		4.26	%		163,065			5,374.4		3.30	%		138,463			4,041.8		2.92	%
Short term borrowings		5,696			313.5		5.50	%		2,611			78.0		2.98	%		626			12.2		1.95	%
FHLBI long term advances		1,496			110.4		7.38	%		2,688			203.1		7.56	%		5,080			376.1		7.40	%


Total interest bearing liabilities and total interest expense		345,074			10,295.0		2.98	%		344,710			7,054.0		2.05	%		328,961			5,605.9		1.70	%

Noninterest bearing deposits		65,492								73,243								70,477
All other liabilities		4,011								3,507								3,784
Shareholders’ Equity		50,528								47,748								43,356


Total liabilities and shareholders’ equity	$	465,105							$	469,208							$	446,578

Interest spread							4.27	%							4.60	%							4.34	%

Net interest income-FTE				$	21,949.7							$	22,715.0							$	19,863.2

Net interest margin							4.94	%							5.07	%							4.71	%


(1)		Average yields in the above table have been adjusted to a tax-equivalent basis using a 34% tax rate and exclude the effect of any market value adjustments recorded under Statement of Financial Accounting Standards No. 115.

(2)		For purposes of the computation above, non-accruing loans of $7,539,000 in 2006, $3,359,000 in 2005 and $2,462,000 in 2004 are included in the average daily loan balance.

(3)		Interest on loans includes origination fees totaling $507,000 in 2006, $644,000 in 2005 and $726,000 in 2004.

Tax equivalent interest income in each of the three years includes loan origination fees. A substantial portion of such fees is deferred for recognition in future periods or is considered in determining the gain or loss on the sale of real estate mortgage loans.

The following table sets forth the effects of volume and rate changes on net interest income on a taxable equivalent basis. The change in interest due to changes in both volume and rate has been allocated to the change due to volume and the change due to rate in proportion to the relationship of the absolute dollar amounts of the change in each:


	(dollars in thousands)
	Year ended December 31, 2006									Year ended December 31, 2005
	compared to									compared to
	Year ended December 31, 2005									Year ended December 31, 2004
				Amount of Increase (Decrease) Due to Change in
							Total Amount									Total Amount
				Average			of Increase/						Average			of Increase/
	Volume			Rate			Decrease			Volume			Rate			Decrease
Interest Income:
Short term investments	$	(208	)	$	50		$	(158	)	$	(53	)	$	197		$	144
Certificates of deposit		(12	)		75		$	63			69			36			105
Securities:
Taxable		(185	)		29		$	(156	)		53			(75	)		(22	)
Tax Exempt		75			(75	)	$	—			29			(64	)		(35	)
Loans		558			2,168		$	2,726			1,701			2,407			4,108

Total interest income	$	228		$	2,247		$	2,475		$	1,799		$	2,501		$	4,300

Interest Expense:
Interest bearing deposits:
NOW, savings & MMDA	$	(196	)	$	732		$	536		$	(54	)	$	276		$	222
Time deposits		762			1,800		$	2,562			718			615			1,333
Short term borrowings		92			144		$	236			39			27			66
FHLBI advances		(90	)		(3	)	$	(93	)		(177	)		4			(173	)

Total interest expense	$	568		$	2,673		$	3,241		$	526		$	922		$	1,448

Net interest income (FTE)	$	(340	)	$	(426	)	$	(766	)	$	1,273		$	1,579		$	2,852

Tax equivalent net interest income decreased $766,000 in 2006. The decrease was primarily the result of a $3,241,000 increase in interest expense, partially offset by a $2,475,000 increase in interest income. The increase in interest income is attributable to a decrease in average earning assets of $3,129,000 during the year and an increase of 60 basis points in the interest rate earned on assets. The increase in interest expense reflects both an increase in total interest bearing liabilities and an overall increase in rates paid.

Tax equivalent loan interest income was $2,726,000 higher in 2006 than the previous year. The increase was due to an increase of 58 basis points in the rate of interest earned on loans along with an increase in average balances $7,757,000 in 2006. The increase in rates is due to the prime rate increasing 100 basis points during 2006 offset by continued competitive loan pricing. In 2005, tax equivalent loan interest was $4,108,000 more than 2004 due to an increase of 65 basis points in the rate of interest earned on loans and an increase of $26,018,000 in the average loan balance.

Income on taxable securities decreased $156,000 in 2006 due to a $4,911,000 decrease in average balances partially offset by an increase of 7 basis points in the yield. Tax equivalent income on tax-exempt bonds remained the same in 2006 due to a decline of 42 basis points in yield offset by a $1,089,000 increase in average balances. The decrease in yields was the result of (i) the maturity and/or calls on bonds that were purchased at slightly higher rates than that of the average portfolio and (ii) the flatness of the yield curve during 2006. Interest income on short term investments decreased $158,000 due to an increase in yield of 154 basis points offset by a decrease of $6,677,000 in average balances. The average balance of purchased certificates decreased $387,000. The interest yield increased 122 basis points primarily the result of the certificates purchased in 2006, which had higher rates than those in 2005. The decrease in short term investments and taxable securities is due to the growth in loans being funded, in part by investment cash flow.

Interest expense increased $3,241,000 in 2006 because interest rates increased 93 basis points and average balances increased approximately $364,000. The interest cost for NOW, savings and MMDA accounts increased $537,000 because the interest rate paid was 49 basis points higher even though average balances decreased $24,656,000. Interest on time deposits increased $2,562,000 as a result of growth in average balances of $23,127,000 and increased interest rates of 96

basis points. Deposits shifted to time deposit in 2006 as rates increased during the year. Fed Funds and short term advances from the FHLBI were used throughout the year ended 2006. The Bank entered into a long term borrowing with the FHLBI in 2000. The loan, which had a balance of $1,481,000 at year end, is an amortizing loan.

During 2006, net interest margin fell from 5.22% for the quarter ended March 31, 2006 to 4.50% for the quarter ended December 31, 2006. The net interest margin fell due to the increase in the rate paid on interest-bearing liabilities, the result of competitive pricing and increased reliance on short-term borrowings. The increase in the rate paid on liabilities was only partially offset by an increase in the yield on earning assets. The increase in the yield on earning assets was reduced by the increased level of nonperforming loans in the latter half of 2006 as well as continued pricing pressures on commercial loan rates. Due to the flatness of the yield curve and the continued competitive pressures on loan and deposit pricing, net interest margin may experience further compression in 2007.

In 2005, net interest income had increased $2,852,000. The increase in net interest income was the result of a $4,300,000 increase in interest income partially offset by a increase in interest expense of $1,448,000. The increase in interest income in 2005 was due to higher average earning assets of $25,870,000 and an increase in yield of 61 basis points. The increase in interest expense was the result of a 35 basis increase in rates paid partially offset by an increase of $15,749,000 in average interest bearing liabilities.

The following table shows the composition of average earning assets and interest paying liabilities for the years ended December 31:


	2006			2005			2004
As a percent of average earning assets:
Loans		84.28	%		81.96	%		80.82	%
Securities		13.60	%		14.36	%		14.82	%
Certificates of deposit		1.39	%		1.46	%		0.90	%
Short term investments		0.73	%		2.22	%		3.46	%


Average earning assets		100.00	%		100.00	%		100.00	%

NOW, savings, & MMDA		34.12	%		39.39	%		43.81	%
Time deposits		41.89	%		36.43	%		32.83	%
Short term borrowing		1.28	%		0.58	%		0.15	%
FHLBI advances		0.34	%		0.60	%		1.20	%


Average interest bearing liabilities		77.63	%		77.00	%		77.99	%

Earning asset ratio		95.58	%		95.41	%		94.51	%
Free-funds ratio		22.37	%		23.00	%		22.01	%

Provision for Loan Losses

The provision for loan losses decreased to $2,639,000 in 2006 compared to $3,037,000 in 2005 and increased from $1,190,000 in 2004. At year end, the ratio of the allowance for loan loss to loans was 1.98%, compared to 1.88% in 2005 and 1.70% in 2004. Additional discussion regarding the provision for loan losses and the related allowance can be found under “Loans” in this Item 7.

Noninterest Income

Noninterest income, which includes service charges on deposit accounts, loan fees, trust income, security transactions, gain (loss) on sale of assets, and other operating income increased approximately $211,000 (5.5%) in 2006 compared to 2005 and decreased approximately $290,000 (7.1%) in 2005 compared to 2004. In 2006, the primary reason for the increase in noninterest income was due to an increase in service charges on deposit accounts and other fee income which increased $173,000 in 2006 from 2005. In 2005, the Bank experienced higher than normal losses on consumer loan repossessions, and in 2004 other income includes the recognition of a nonrecurring gain of $299,000 on the disposition of property held for sale. Also, in 2004, the Bank experienced higher than normal gains on the sale of foreclosed real estate. Service charges and other fee income increased to $3,637,000 (5.0%) in 2006 and $3,464,000 (4.4%) in 2005. In 2006,

there was an increase in service charges on business and other deposit accounts, commercial loan late fees, network and ATM fees partially offset by lower returned check fees and lower commercial loan prepayment fees. The 2005 increase was due primarily to increased NSF charges and network income. Trust income increased $50,000 in 2006 and increased $37,000 in 2005. Trust income in 2006 and 2005 included nonrecurring income of approximately $12,000 and $27,000, respectively. The $57,000 gain recognized on the sale of real estate mortgages loans in 2006 was $5,300 lower than the gains realized in 2005 which were $6,400 lower than the gains recognized in 2004. Mortgage loan sales decreased in 2006 by approximately $629,000 from sales in 2005, which were down approximately $498,000 from 2004 sales.

Noninterest Expense

Noninterest expense totaled $14,900,000, a 9.4% increase over expenses of $13,700,000 in 2005 which was a 2.8% increase over expenses of $13,300,000 in 2004. The most significant component of noninterest expense is salaries and employee benefits. In 2006, salaries and employee benefits expense increased to $7,900,000 from $7,200,000 in 2005, due to the open positions in 2005 that were filled in 2006, additions to the loan and credit staff in 2006 and the expense associated with the change in CEO’s in 2006. In 2005, salaries and employee benefit expense remained unchanged at $7,200,000 from 2004 due to timing of filling open positions in 2005. Occupancy expense decreased $39,000 (3.3%) due to lower facility service costs and property taxes. In 2005 occupancy expense increased $94,000 (8.4%) due to increased facility service costs, property taxes and utility costs. Equipment expense decreased $76,000 (9.2%) in 2006 due to lower equipment maintenance and depreciation expense. In 2005 equipment expense decreased $33,000 (3.9%) to $831,000 due primarily to lower equipment depreciation expense. In 2006, professional and service fees increased $180,000 (10.7%) due to increased recruiting fees associated with filling open positions and management consulting projects including strategic planning, a branch study, and compensation studies and increased legal fees related to nonperforming commercial loans. In 2005, professional and service fees increased $58,000 (3.6%) due to increased legal fees primarily due to services related to consumer loan collections. Printing and supplies expense decreased $47,000 (14.8%) in 2006 due to fewer customer mailings in 2006 and increased $16,000 (5.3%) in 2005 as a result of increased customer mailings for compliance and disclosure purposes. Computer service fees increased $20,000 (5.9%) in 2006 due to a conversion fee paid in 2006 related to the core system and increased $45,000 (15.0%) in 2005 due to an increase in outside computer services. Advertising expense increased $68,000 (28.5%) in 2006 due to the outsourcing of advertising to an agency in June 2006, which resulted in a decrease in salary expense for this position in the fourth quarter of 2006. In 2005, advertising expense increased $17,000 (7.5%) due to more loan and deposit campaigns on new products. Other expenses increased $486,000 (27.0%) in 2006 due to recording fair market adjustment write downs of $311,000 on properties included in other real estate owned and recording $128,000 related to a legal settlement. Other expenses increased $177,000 (10.9%) in 2005 due to increases in loan and collection costs offset by a decrease in NSF check and other losses. In 2007 there will be additional noninterest expense associated with the conversion of the core system as discussed in Note 6, “Premises and Equipment,” in Notes to the Consolidated Financial Statement.

Federal Income Tax Expense

Fluctuations in income taxes resulted primarily from changes in the level of profitability and in variations in the amount of tax-exempt income. Income tax expense decreased $493,000 (17.1%) to $2,390,000 in 2006 and increased $156,000 (5.7%) to $2,884,000 in 2005. Although income tax expense increased, the effective rate remained at approximately 30% in 2006, 2005 and 2004. For further information, see Note 12, “Federal Income Taxes,” in Notes to Consolidated Financial Statements.

Critical Accounting Policies

Our accounting and reporting policies are in accordance with accounting principles generally accepted within the United States of America and conform to general practices within the banking industry. Accounting and reporting policies for the allowance for loan losses is deemed critical since it involves the use of estimates and requires significant management judgments. Application of assumptions different from those that we have used could result in material changes in our financial position or results of operations.

Our methodology for determining the allowance and related provision for loan losses and reserve for unfunded credit commitments is described above in “Financial Condition – Loans”. In particular, this area of accounting requires a significant amount of judgment because a multitude of factors can influence the ultimate collection of a loan or other type of credit. Should the factors noted above and as described in Note 1, “Summary of Significant Accounting Policies,” in Notes to Consolidated Financial Statements, differ from our assumptions (for example, an increase in past due loans, deterioration of the economy), our allowance for loan losses would likely be adversely impacted. It is extremely difficult to precisely measure the amount of losses that may be inherent in our loan portfolio. We attempt to accurately quantify the necessary allowance and related provision for loan losses, but there can be no assurance that our modeling process will


		BDO Seidman, LLP Accountants and Consultants		99 Monroe Avenue N.W., Suite 800 Grand Rapids, Michigan 49503-2654 Telephone: (616) 774-7000 Fax: (616) 776-3680

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
FNBH Bancorp, Inc.
Howell, MI

We have audited the accompanying consolidated balance sheets of FNBH Bancorp, Inc. and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of income, stockholders’ equity and comprehensive income, 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, 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 FNBH Bancorp, Inc. and subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 12 to the consolidated financial statements, effective January 1, 2006, the Corporation changed its method of quantifying misstatements of prior year financial statements. The Corporation adopted the dual method as required by SEC Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of FNBH Bancorp, Inc.’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 1, 2007 expressed an unqualified opinion thereon.

Grand Rapids, Michigan
March 1, 2007


		BDO Seidman, LLP Accountants and Consultants		99 Monroe Avenue N.W., Suite 800 Grand Rapids, Michigan 49503-2654 Telephone: (616) 774-7000 Fax: (616) 776-3680

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
FNBH Bancorp, Inc.
Howell, MI

We have audited management’s assessment, included in Management’s Annual Report on Internal Control Over Financial Reporting, in Item 9A, that FNBH Bancorp, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). FNBH Bancorp, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Corporation’s internal control over financial reporting based on our audit.

We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that FNBH Bancorp, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also in our opinion, FNBH Bancorp, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (Unites States), the accompanying consolidated balance sheets as of December 31, 2006 and 2005, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2006, of FNBH Bancorp, Inc. and subsidiaries and our report dated March 1, 2007 expressed an unqualified opinion thereon.

Grand Rapids, Michigan
March 1, 2007

FNBH BANCORP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets
December 31, 2006 and 2005


	2006			2005
Assets
Cash and due from banks	$	16,373,845		$	19,281,982
Short term investments		2,747,642			4,819,709

Total cash and cash equivalents		19,121,487			24,101,691

Certificates of deposit		4,711,000			7,166,000
Investment Securities:
Investment securities held to maturity, net (fair value of $17,030,269
at December 31, 2006 and $16,763,204 at December 31, 2005)		16,808,685			16,425,674
Investment securities available for sale, at fair value		24,480,256			32,388,356
Mortgage-backed securities available for sale, at fair value		11,930,591			12,405,476
FHLBI and FRB stock, at cost		994,950			1,153,550

Total investment securities		54,214,482			62,373,056

Loans:
Commercial		328,665,048			305,387,518
Consumer		27,720,360			36,161,235
Real estate mortgage		28,195,754			31,306,493

Total loans		384,581,162			372,855,246
Less allowance for loan losses		(7,597,900	)		(6,991,125	)

Net loans		376,983,262			365,864,121

Premises and equipment, net		9,882,356			10,465,856
Other real estate owned, held for sale		1,629,250			679,733
Accrued interest and other assets		7,353,867			6,574,686

Total assets	$	473,895,704		$	477,225,143

Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Demand (non-interest bearing)	$	62,681,088		$	71,415,340
NOW		41,275,379			40,739,655
Savings and money market		113,906,147			133,865,335
Time deposits		170,126,892			145,927,984
Brokered certificates of deposit		17,554,785			30,137,273

Total deposits		405,544,291			422,085,587
Other borrowings		13,480,813			1,785,094
Accrued interest, taxes, and other liabilities		4,878,126			3,908,137

Total liabilities		423,903,230			427,778,818
Stockholders’ Equity
Common stock, no par value. Authorized 4,200,000 shares; 3,074,528
shares issued and outstanding at December 31, 2006 and 3,187,374 shares
issued and outstanding at December 31, 2005		6,005,835			6,088,540
Retained earnings		43,625,997			43,389,917
Deferred directors’ compensation		725,186			575,045
Accumulated other comprehensive loss, net		(364,544	)		(607,177	)

Total stockholders’ equity		49,992,474			49,446,325

Total liabilities and stockholders’ equity	$	473,895,704		$	477,225,143

See accompanying notes to consolidated financial statements.

FNBH BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Income
December 31, 2006, 2005, and 2004


	2006		2005		2004
Interest and dividend income:
Interest and fees on loans	$	28,986,420	$	26,247,716	$	22,137,252
Interest and dividends on investment securities:
U.S. Treasury and agency securities		1,592,919		1,711,402		1,667,506
Obligations of states and political subdivisions		743,800		729,222		747,483
Corporate bonds		17,560		59,959		125,381
Other securities		54,202		50,004		51,278
Interest on short term investments		159,633		315,528		166,978
Interest on certificates of deposit		264,410		201,076		95,832

Total interest and dividend income		31,818,944		29,314,907		24,991,710


		—		—		—
Interest expense:
Interest on deposits		9,871,304		6,772,924		5,217,598
Interest on other borrowings		423,970		281,073		388,268

Total interest expense		10,295,274		7,053,997		5,605,866


Net interest income		21,523,670		22,260,910		19,385,844

Provision for loan losses		2,639,000		3,037,000		1,190,000

Net interest income after provision for loan losses		18,884,670		19,223,910		18,195,844


Noninterest income:
Service charges and other fee income		3,636,856		3,464,122		3,318,666
Trust income		333,918		284,394		246,950
Gain on sale of loans		57,208		62,512		68,881
Other		2,986		8,612		475,560

Total noninterest income		4,030,968		3,819,640		4,110,057


Noninterest expense:
Salaries and employee benefits		7,925,738		7,230,103		7,236,801
Net occupancy expense		1,169,337		1,208,830		1,115,030
Equipment expense		755,195		831,299		864,604
Professional and service fees		1,859,736		1,680,037		1,622,399
Printing and supplies		271,167		318,091		302,032
Computer service fees		364,333		344,095		299,114
Advertising		306,211		238,323		221,618
Other		2,287,503		1,801,865		1,625,052

Total noninterest expense		14,939,220		13,652,643		13,286,650


Income before federal income taxes		7,976,418		9,390,907		9,019,251

Federal income taxes		2,390,422		2,883,921		2,728,156

Net income	$	5,585,996	$	6,506,986	$	6,291,095


Per share statistics:
Basic EPS	$	1.76	$	2.03	$	1.98
Diluted EPS	$	1.76	$	2.03	$	1.97
Dividends	$	0.84	$	0.80	$	0.72
Basic average shares outstanding		3,177,093		3,200,146		3,185,025
Diluted average shares outstanding		3,177,146		3,200,518		3,186,142

See accompanying notes to consolidated financial statements.

FNBH BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity and Comprehensive Income
December 31, 2006, 2005, and 2004


									Accumulated
							Deferred		Other
	Common						Directors’		Comprehensive
	Stock			Retained Earnings			Compensation		Income (Loss)			Total

Balances at December 31, 2003	$	5,503,246		$	35,425,699		$	—	$	306,536		$	41,235,481

Amortization of long term incentive plan		184,530											184,530
Issued 4,352 shares for employee stock purchase plan		109,521											109,521
Issued 794 shares for current directors’ fees		22,791											22,791
Issued 1,179 shares for directors’ variable fee plan		32,092											32,092
Issued 283 shares for deferred directors’ fees		5,953											5,953
Directors’ deferred compensation (590 stock units)								18,270					18,270
Reclassification of directors’ deferred compensation (19,321 stock units)								437,211					437,211
Comprehensive income:
Net income					6,291,095								6,291,095
Change in unrealized gain (loss) on investment
securities available for sale, net of tax effect										(334,723	)		(334,723	)

Total comprehensive income													5,956,372
Cash dividends ($0.72 per share)					(2,286,173	)							(2,286,173	)


Balances at December 31, 2004		5,858,133			39,430,621			455,481		(28,187	)		45,716,048

Amortization of long term incentive plan		83,880											83,880
Issued 3,687 shares for employee stock purchase plan		95,975											95,975
Issued 722 shares for current directors’ fees		20,765											20,765
Issued 986 shares for directors’ variable fee plan		29,787											29,787
Directors’ deferred compensation (4,105 stock units)								119,564					119,564
Comprehensive income:
Net income					6,506,986								6,506,986
Change in unrealized loss on investment securities available for sale, net of tax effect										(578,990	)		(578,990	)

Total comprehensive income													5,927,996
Cash dividends ($0.80 per share)					(2,547,690	)							(2,547,690	)


Balances at December 31, 2005		6,088,540			43,389,917			575,045		(607,177	)		49,446,325
Cumulative effect adjustment — initial application of SEC Staff Accounting Bulletin No. 108					180,000								180,000

Balances at January 1, 2006		6,088,540			43,569,917			575,045		(607,177	)		49,626,325

Amortization of long term incentive plan		81,199											81,199
Issued 1,234 shares for employee stock purchase plan		30,623											30,623
Issued 270 shares for current directors’ fees		6,999											6,999
Issued 1,244 shares for directors’ variable fee plan		32,257											32,257
Directors’ deferred compensation (5,750 stock units)								150,141					150,141
Comprehensive income:
Net income					5,585,996								5,585,996
Change in unrealized loss on investment securities available for sale, net of tax effect										242,633			242,633

Total Comprehensive income													5,828,629
Repurchase of common stock (117,700 shares)		(233,783	)		(2,873,512	)							(3,107,295	)
Cash dividends ($0.84 per share)					(2,656,404	)							(2,656,404	)

Balances at December 31, 2006	$	6,005,835		$	43,625,997		$	725,186	$	(364,544	)	$	49,992,474

See accompanying notes to consolidated financial statements.

FNBH BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows
December 31, 2006, 2005, and 2004


	2006			2005			2004
Cash flows from operating activities:
Net income	$	5,585,996		$	6,506,986		$	6,291,095
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		2,639,000			3,037,000			1,190,000
Depreciation and amortization		923,942			984,021			1,014,720
Deferred income tax expense (benefit)		(217,783	)		(503,802	)		159,167
Net amortization (accretion) on investment securities		8,830			15,183			(16,031	)
Earned portion of long term incentive plan		81,199			83,880			184,530
Shares issued for current directors’ compensation		39,256			50,552			54,883
Shares earned for deferred directors’ compensation		150,141			119,564			24,223
Gain on sale of loans		(57,208	)		(62,512	)		(68,881	)
Proceeds from sale of loans		5,050,710			6,102,540			11,285,139
Origination of loans held for sale		(5,005,968	)		(5,788,325	)		(10,541,000	)
(Gain) loss on the sale of other real estate owned, held for sale		292,101			(20,507	)		(98,850	)
(Gain) loss on sale of land and facilities held for sale		—			2,595			(42,716	)
Loss on disposal of equipment		—			19,990			—
Increase in accrued interest income and other assets		(686,391	)		(338,394	)		(135,314	)
Increase (decrease) in accrued interest, taxes, and other liabilities		1,272,989			(103,130	)		(29,240	)

Net cash provided by operating activities		10,076,814			10,105,641			9,271,725


Cash flows from investing activities:
Purchases of available for sale securities		(1,860,624	)		(5,119,280	)		(36,556,566	)
Purchases of held to maturity securities		(2,880,585	)		(2,091,712	)		(4,776,698	)
FHLBI (stock buybacks)/purchases/stock dividends		158,600			(22,900	)		(47,900	)
Proceeds from maturities and at-par calls of available for sale securities		8,285,762			3,000,000			24,500,000
Proceeds from mortgage-backed securities paydowns-available for sale		2,339,217			3,647,345			3,660,069
Proceeds from maturities and calls of held to maturity securities		2,475,000			1,666,000			3,820,125
Purchases of certificates of deposit		(2,944,000	)		(10,600,000	)		(5,993,000	)
Maturity of certificates of deposit		5,399,000			9,525,000			1,455,000
Purchase of loans		—			—			(6,279,807	)
Net increase in loans		(15,851,925	)		(18,690,040	)		(6,996,938	)
Proceeds from sale of other real estate owned, held for sale		741,632			1,043,955			990,652
Proceeds from sale of land and facilities held for sale		—			93,085			1,503,016
Capital expenditures		(340,442	)		(382,966	)		(346,912	)

Net cash used in investing activities		(4,478,365	)		(17,931,513	)		(25,068,959	)


Cash flows from financing activities:
Net increase (decrease) in deposits		(16,541,296	)		22,822,677			189,609
Payments on FHLBI note		(304,281	)		(3,281,742	)		(260,872	)
Proceeds from issuance of short term debt		42,500,000			11,000,000			3,000,000
Repayment of short term debt		(30,500,000	)		(14,000,000	)		—
Repurchase of common stock		(3,107,295	)		—			—
Dividends paid		(2,656,404	)		(2,547,690	)		(2,286,173	)
Shares issued for employee stock purchase plan		30,623			95,975			109,521

Net cash provided by (used in) financing activities		(10,578,653	)		14,089,220			752,085


Net increase (decrease) in cash and cash equivalents		(4,980,204	)		6,263,348			(15,045,149	)

Cash and cash equivalents at beginning of year		24,101,691			17,838,343			32,883,492

Cash and cash equivalents at end of year	$	19,121,487		$	24,101,691		$	17,838,343


Supplemental disclosures:
Interest paid	$	10,009,063		$	6,813,756		$	5,642,097
Federal income taxes paid		2,097,919			3,546,682			2,609,881
Loans transferred to other real estate		1,983,249			968,181			1,561,802
Properties transferred to land and facilities held for sale		—			—			155,690
Loans charged off		2,664,596			2,253,717			922,078

See accompanying notes to consolidated financial statements.

Notes to Consolidated Financial Statements

(1) Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of FNBH Bancorp, Inc. and its wholly owned subsidiaries, First National Bank in Howell (including its wholly owned subsidiary FNBH Mortgage Company, LLC) and H.B. Realty Co. All significant intercompany balances and transactions have been eliminated.

First National Bank in Howell (Bank) is a full-service bank offering a wide range of commercial and personal banking services. These services include checking accounts, savings accounts, certificates of deposit, commercial loans, real estate loans, installment loans, collections, traveler’s checks, night depository, safe deposit box, U.S. Savings Bonds, and trust services. The Bank serves primarily five communities — Howell, Brighton, Green Oak Township, Hartland, and Fowlerville — all of which are located in Livingston County, Michigan. The Bank is not dependent upon any single industry or business for its banking opportunities.

H.B. Realty Co. was established on November 26, 1997 to purchase land for a future branch site of the Bank and to hold title to other Bank real estate when it is considered prudent to do so.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The accounting and reporting policies of FNBH Bancorp, Inc. and subsidiaries (Corporation) conform to accounting principles generally accepted in the United States of America and to general practice within the banking industry. The following is a description of the more significant of these policies.

(a) Brokered Certificates of Deposit

Brokered certificates of deposit are purchased periodically from other financial institutions in denominations of less than $100,000. These investments are fully insured by the FDIC. Brokered CD’s are not marketable, and there is a penalty for early withdrawal.

(b) Investment and Mortgage-Backed Securities

The Bank classifies debt and equity investments and mortgage—backed securities as follows:

Investment securities held to maturity are those securities which management has the ability and positive intent to hold to maturity. Investment securities held to maturity are stated at cost, adjusted for amortization of premium and accretion of discount.

Investment securities the Bank may not hold until maturity are accounted for as securities available for sale and are stated at fair value, with unrealized gains and losses, net of income taxes, reported as a separate component of other comprehensive income until realized.

Trading account securities are carried at fair value. Realized and unrealized gains or losses on trading securities are included in noninterest income. The Bank holds no securities under the trading classification.

Gains or losses on the sale of securities are computed based on the adjusted cost of the specific security.

Management reviews all securities for impairment and records other-than-temporary impairments, if any, as a component of noninterest income.

(c) Loans

Loans are stated at their principal amount outstanding, net of an allowance for loan losses and unearned discount. Interest on loans is accrued daily based on the outstanding principal balance. Loan origination fees and certain direct loan origination costs are deferred and recognized over the lives of the related loans as an adjustment of the yield. Net unamortized deferred loan fees amounted to $670,000 and $856,000 at December 31, 2006 and 2005, respectively.

The Bank originates real estate mortgage loans for sale to the secondary market and sells the loans with servicing retained. Mortgage loans held for sale are carried at the lower of cost or market, determined on a net aggregate basis. Market is determined on the basis of delivery prices in the secondary mortgage market. When loans are sold, gains and losses are recognized based on the specific identification method.

The total cost of mortgage loans originated and sold is allocated between the loan servicing right and the mortgage loan, based on their relative fair values at the date of origination. The capitalized cost of loan servicing rights is amortized in proportion to, and over the period of, estimated net future servicing revenue. The Bank enters into interest rate lock commitments to originate loans at a rate determined prior to funding. Interest rate lock commitments on residential mortgage loans that are intended to be sold are considered to be derivatives. Fair value is based on fees currently charged to enter into similar agreements. At December 31, 2006 and 2005, the fair value of interest rate lock commitments was insignificant.

Mortgage servicing rights, which are included in other assets, are periodically evaluated for impairment. For purposes of measuring impairment, mortgage servicing rights are stratified based on predominant risk characteristics of the underlying serviced loans. These risk characteristics include loan type, term, year originated, and note rate. Impairment represents the excess of cost of an individual mortgage servicing right’s stratum over its fair value and is recognized through a valuation allowance.

Fair values for individual strata are based on quoted market prices for comparable transactions, if available, or estimated fair value. Estimates of fair value include assumptions about prepayment, default and interest rates, and other factors which are subject to change over time. Changes in these underlying assumptions could cause the fair value of mortgage servicing rights, and the related valuation allowance, to change significantly in the future.

(d) Allowance for Loan Losses and Credit Commitments

The allowance for loan losses is based on management’s periodic evaluation of the loan portfolio and reflects an amount that, in management’s opinion, is adequate to absorb probable losses in the existing portfolio. In evaluating the portfolio, management takes into consideration numerous factors, including current economic conditions, prior loan loss experience, nonperforming loan levels, the composition of the loan portfolio, and management’s evaluation of the collectibility of specific loans, which includes analysis of the value of the underlying collateral. Although the Bank evaluates the adequacy of the allowance for loan losses based on information known to management at a given time, various regulatory agencies, as part of their normal examination process, may require future additions to the allowance for loan losses.

The Bank also maintains a reserve for losses on unfunded credit commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The reserve is computed using the same methodology as that used to determine the allowance for loan losses. This reserve is reported as a liability on the balance sheet within accrued interest, taxes, and other liabilities, while the corresponding provision for these losses is recorded as a component of the provision for loan losses.

(e) Nonperforming Assets

The Bank charges off all or part of loans when amounts are deemed to be uncollectible, although collection efforts may continue and future recoveries may occur.

Nonperforming assets are comprised of loans for which the accrual of interest has been discontinued, loans for which the terms have been renegotiated to less than market rates due to a serious weakening of the borrower’s financial condition, loans 90 days past due and still accruing, and other real estate, which has been acquired primarily through foreclosure and is awaiting disposition.

Loans are generally placed on a nonaccrual status when principal or interest is past due 90 days or more and when, in the opinion of management, full collection of principal and interest is unlikely. At the time a loan is placed on nonaccrual status, interest previously accrued but not yet collected is charged against current income. Income on such loans is then recognized only to the extent that cash is received and where future collection of principal is probable.

The Bank considers a loan to be impaired when it is probable that it will be unable to collect all or part of amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present

value of expected cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at a loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. Interest income on impaired loans is accrued based on the principal amounts outstanding. The accrual of interest is generally discontinued when an impaired loan becomes 90 days past due.

(f) Real Estate

Other real estate owned at the time of foreclosure is recorded at the lower of the Bank’s cost of acquisition or the asset’s fair market value, net of estimated disposal costs. Any write-downs at date of acquisition are charged to the allowance for loan losses. Expenses incurred in maintaining assets and subsequent write-downs to reflect declines in value are charged to other noninterest expense.

Real estate held for sale is recorded at the lower of carrying amount or estimated fair value less estimated disposal costs. Subsequent declines in estimated fair value and adjustments to estimated disposal costs are recorded as a component of noninterest expense.

(g) Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization, computed on the straight-line method, are charged to operations over the estimated useful lives of the assets. Estimated useful lives range up to 40 years for buildings, up to 7 years for furniture and equipment and up to 15 years for land improvements. Leasehold improvements are generally depreciated over the shorter of the respective lease term or estimated useful life.

Premises and equipment are evaluated periodically for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. Impairment exists when the expected undiscounted future cash flows of a long-lived asset are less than its carrying value. In that event, the Bank recognizes a loss for the difference between the carrying amount and the estimated fair value of the asset based on a quoted market price, if applicable, or a discounted cash flow analysis. Impairment losses are recorded in other noninterest expense on the income statement.

(h) Advertising Costs

Advertising costs are generally expensed as incurred.

(i) Federal Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

(j) Stock-Based Compensation

At December 31, 2006 and 2005, the Corporation had two stock-based compensation plans, which are described more fully in notes 16 and 17.

(k) Common Stock Repurchases

The Corporation records common stock repurchases at cost. A portion of the repurchase is charged to common stock based on the ratio of common stock to total shares outstanding, with the remainder charged to retained earnings. Shares repurchased are retired. The Board of Directors authorized a share repurchase program on March 16, 2006 for 100,000 shares that expires March 16, 2007. The Board then authorized another program on August 17, 2006 for an additional 100,000 shares that expires on August 17, 2007. For the year ended December 31, 2006, 117,700 shares have been repurchased, 110,700 under the authorized plans with 89,300 shares remaining available for repurchase under the plans. The other 7,000 shares had been approved by the Board for repurchase prior to approving an authorized share repurchase program. The cost of the repurchases approximated $3,107,000 at monthy weighted average prices ranging from $25.80 to $26.78 per share.

(l) Statements of Cash Flows

For purposes of reporting cash flows, cash equivalents include amounts due from banks, federal funds sold and other short term investments with original maturities of 90 days or less.

(m) Comprehensive Income

Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income, established standards for the reporting and display of comprehensive income and its components (such as changes in unrealized gains and losses on securities available for sale) in a financial statement that is displayed with the same prominence as other financial statements. The Corporation reports comprehensive income within the statement of stockholders’ equity and comprehensive income. Comprehensive income includes net income and any changes in equity from nonowner sources that are not recorded in the income statement.

(n) Earnings Per Share

Basic earnings per common share is calculated by dividing net income by the average number of common shares and deferred director fee stock units outstanding during the year. Diluted earnings per common share is calculated by dividing net income by the average number of common shares and deferred director fee stock units outstanding during the year, plus the effect of common stock equivalents (for example, unvested restricted shares) that are dilutive.

(o) Reclassification

Certain reclassifications of 2005 and 2004 information have been made to conform to the current year presentation.

(2) Certificates of Deposit

At December 31, 2006 the scheduled maturities of certificates of deposit were:


Maturing in 2007	$	3,337,000
Maturing in 2008		981,000
Maturing in 2009		393,000

Total	$	4,711,000

(3) Investment and Mortgage-Backed Securities

A summary of the amortized cost and approximate fair value of investment and mortgage-backed securities at December 31, 2006 and 2005 follows:


	December 31, 2006									December 31, 2005
			Unrealized		Unrealized							Unrealized		Unrealized
	Amortized		gross		gross			Fair		Amortized		gross		gross			Fair
	cost		gains		losses			value		cost		gains		losses			value
Held to maturity:
Obligations of state and political subdivisions	$	16,808,685	$	256,662	$	(35,078	)	$	17,030,269	$	16,425,674	$	365,562	$	(28,032	)	$	16,763,204


Total held to maturity		16,808,685		256,662		(35,078	)		17,030,269		16,425,674		365,562		(28,032	)		16,763,204

Available for sale:
U.S. Treasury and agency securities		24,870,214		—		(389,958	)		24,480,256		32,095,107		6,068		(717,398	)		31,383,777
Corporate bonds		—		—		—			—		1,000,062		4,517		—			1,004,579
Mortgage-backed securities		12,092,973		25,483		(187,865	)		11,930,591		12,618,628		35,073		(248,225	)		12,405,476

Total available for sale		36,963,187		25,483		(577,823	)		36,410,847		45,713,797		45,658		(965,623	)		44,793,832

Total securities	$	53,771,872	$	282,145	$	(612,901	)	$	53,441,116	$	62,139,471	$	411,220	$	(993,655	)	$	61,557,036

There were 36 securities in a continuous loss position for 12 months or more at December 31, 2006, which consisted of 15 mortgage backed securities and 21 agency securities. Because the declines in fair value were due to changes in market interest rates, not in estimated cash flows, and the securities are bank qualified municipals, federal agencies, or mortgage-backed securities issued by federal agencies, no other-than-temporary impairment was recorded at December 31, 2006. The Corporation has both the intent and ability to hold these securities for the time necessary to recover the amortized cost.

The following is a summary of the unrealized losses and fair value of securities available for sale portfolio at December 31, 2006 and 2005, by length of time that individual securities in each category have been in a continuous loss position:


	December 31, 2006
	Less than 12 months					12 months or more					Total
	Unrealized					Unrealized					Unrealized
	gross			Fair		gross			Fair		gross			Fair
	losses			value		losses			value		losses			value
Held to Maturity:
Obligations of state and political subdivisions	$	(15,379	)	$	2,071,039	$	(19,699	)	$	1,817,883	$	(35,078	)	$	3,888,922


Available for sale:
U.S. Treasury and agency securities	$	—		$	—	$	(389,958	)	$	24,480,256	$	(389,958	)	$	24,480,256
Mortgage-backed securities		(2,137	)		651,764		(185,728	)		8,307,957		(187,865	)		8,959,721

Total available for sale	$	(2,137	)	$	651,764	$	(575,686	)	$	32,788,213	$	(577,823	)	$	33,439,977


	December 31, 2005
	Less than 12 months					12 months or more					Total
	Unrealized					Unrealized					Unrealized
	gross			Fair		gross			Fair		gross			Fan
	losses			value		losses			value		losses			value
Held to Maturity:
Obligations of state and political subdivisions	$	(23,143	)	$	2,366,880	$	(4,889	)	$	226,728	$	(28,032	)	$	2,593,608


Available for sale:
U.S. Treasury and agency securities	$	(188,952	)	$	10,414,796	$	(528,446	)	$	18,962,912	$	(717,398	)	$	29,377,708
Mortgage-backed securities		(89,078	)		7,146,899		(159,147	)		4,380,673		(248,225	)		11,527,572

											$
Total available for sale	$	(278,030	)	$	17,561,695	$	(687,593	)	$	23,343,585		(965,623	)	$	40,905,280

The amortized cost and approximate fair value of investment and mortgage-backed securities at December 31, 2006 and 2005, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	December 31, 2006				December 31, 2005
	Amortized		Approximate		Amortized		Approximate
	cost		fair value		cost		fair value
Held to maturity:
Due in one year or less	$	1,894,917	$	1,904,607	$	2,384,602	$	2,402,255
Due after one year through five years		5,650,096		5,729,168		7,307,216		7,495,656
Due after five years through ten years		2,606,373		2,617,116		1,881,449		1,871,800
Due after ten years		6,657,299		6,779,378		4,852,407		4,993,493

	$	16,808,685	$	17,030,269	$	16,425,674	$	16,763,204

Available for sale:
Due in one year or less	$	13,495,406	$	13,366,817	$	8,238,228	$	8,186,734
Due after one year through five years		11,374,808		11,113,439		24,856,941		24,201,622
Due after five years through ten years		—		—		—		—

		24,870,214		24,480,256		33,095,169		32,388,356
Mortgage-backed securities		12,092,973		11,930,591		12,618,628		12,405,476

	$	36,963,187	$	36,410,847	$	45,713,797	$	44,793,832

Proceeds from at-par calls of available for sale securities totaled approximately $0, $0, and $8,000,000 during 2006, 2005, and 2004, respectively; there have been no realized gains or losses recorded for 2006, 2005, or 2004.

The amortized cost and approximate fair value of investment securities of states (including all their political subdivisions) that individually exceeded 10% of stockholders’ equity at December 31, 2006 and 2005 are as follows:


	2006				2005
	Amortized		Approximate		Amortized		Approximate
	cost		fair value		cost		fair value
State of Michigan	$	11,035,793	$	11,164,560	$	11,673,789	$	11,877,846

Investment securities, with an amortized cost of approximately $1,476,000 at December 31, 2006 and $1,792,000 at December 31, 2005, were pledged to secure public deposits and for other purposes as required or permitted by law.

The Bank owns stock in both the Federal Home Loan Bank of Indianapolis (FHLBI) and the Federal Reserve Bank (FRB), both of which are recorded at cost. The Bank is required to hold stock in the FHLBI equal to 5% of the institution’s borrowing capacity with the FHLBI. The Bank’s investment in FHLBI stock amounted to $950,700 and $1,109,300 as of December 31, 2006 and 2005, respectively. The Bank’s investment in FRB stock, which totaled $44,250 at December 31, 2006 and 2005, is a requirement for the Bank’s membership in the Federal Reserve System. These investments can only be resold to, or redeemed, by the issuer.

(4) Loans

Loans on nonaccrual status amounted to $12,199,000, $5,234,000 and $1,146,000, at December 31, 2006, 2005, and 2004, respectively. If these loans had continued to accrue interest in accordance with their original terms, approximately $660,000, $270,000, and $98,000 of interest income would have been recognized in 2006, 2005, and 2004, respectively. The Bank had no troubled-debt restructured loans at December 31, 2006 and 2005.

Details of past-due and nonperforming loans follow:


	90 days past due
	and still accruing interest						Nonaccrual
	2006		2005		2004		2006		2005		2004
Commercial and mortgage loans secured by real estate	$	287,716	$	384,842	$	285,771	$	10,267,753	$	4,124,339	$	243,374
Consumer loans		—		5,756		2,541		86,986		91,599		92,285
Commercial and other loans		—		—		—		1,844,076		1,018,133		810,175

Total	$	287,716	$	390,598	$	288,312	$	12,198,815	$	5,234,071	$	1,145,834

Impaired loans totaled $15.5 million, $10.1 million, and $5.9 million at December 31, 2006, 2005, and 2004, respectively. Specific reserves relating to these loans were $2.0 million, $2.1 million, and $1.7 million at December 31, 2006, 2005, and 2004, respectively.

Cash received and recognized as income on impaired loans approximated $962,000, $655,000, and $428,000 for the years ended December 31, 2006, 2005, and 2004, respectively. Average impaired loans for the years ended December 31, 2006, 2005, and 2004 were approximately $11.9 million, $8.3 million, and $7.4 million, respectively.

Loans serviced for others including commercial participations sold, were approximately $45.7 million, $48.9 million, and $52.6 million at December 31, 2006, 2005, and 2004, respectively.

The Bank capitalized $12,000, $22,000, and $21,000, in mortgage servicing rights and incurred approximately $69,000, $82,000, and $94,000, in related amortization expense during 2006, 2005, and 2004, respectively. At December 31, 2006 and 2005, these mortgage servicing rights had a net book value of $192,000 and $248,000,

respectively, and fair value of approximately $360,000 and $404,000, respectively. The weighted average amortization period for mortgage servicing rights capitalized in 2006 is approximately 5.8 years. Mortgage loans with mortgage servicing rights capitalized totaled approximately $36.0 million at December 31, 2006 and $38.2 million at December 31, 2005. The valuation allowance for capitalized mortgage servicing rights was $39,000 at December 31, 2006, and $61,000 at December 31, 2005.

Future estimated aggregate amortization expense relating to the Bank’s mortgage servicing rights as of December 31, 2006 is as follows:


Year:
2007	$	58,000
2008		46,000
2009		32,000
2010		24,000
2011		11,000
2012 and thereafter		21,000

Total	$	192,000

Included in real estate loans at December 31, 2005 was approximately $172,000 of fixed-rate mortgage loans held for sale, there were no such loans held for sale as of December 31, 2006. The Bank enters into forward commitments to sell these loans into the secondary market prior to origination. Additionally, the Bank had 30-day forward commitments to sell mortgages as of December 31, 2006, which had not yet been funded. These commitments approximated $345,000.

(5) Allowance for Loan Losses and Reserve for Unfunded Credit Commitments

The following represents a summary of the activity in the allowance for loan losses and the reserve for unfunded credit commitments for the years ended December 31, 2006, 2005, and 2004:


	2006			2005		2004
Components:
Allowance for loan losses
Balance, beginning of year	$	6,991,125		$	6,092,949	$	5,434,375
Loans charged off:
Real estate mortgage		260,091			25,771		—
Commercial		1,785,573			1,436,463		378,914
Consumer		618,932			791,483		543,164

Total charge offs		2,664,596			2,253,717		922,078
Recoveries to loans previously charged off:
Real estate mortgage		—			—		—
Commercial		283,103			120,012		69,515
Consumer		226,268			141,881		104,137

Total recoveries		509,371			261,893		173,652

Net loans charged off		2,155,225			1,991,824		748,426
Additions to allowance charged to operations		2,762,000			2,890,000		1,407,000

Balance, end of year		7,597,900			6,991,125		6,092,949
Reserve for unfunded credit commitments
Balance, beginning of year		454,000			307,000		524,000
Additions (reductions) to reserve charged (credited) to operations		(123,000	)		147,000		(217,000	)

Balance, end of year		331,000			454,000		307,000

Total allowance for loan losses and reserve for unfunded credit commitments	$	7,928,900		$	7,445,125	$	6,399,949

(6) Premises and Equipment

A summary of premises and equipment, and related accumulated depreciation and amortization, at December 31, 2006 and 2005 follows:


	2006			2005
Land and land improvements	$	2,931,820		$	2,921,480
Premises		10,051,340			10,035,233
Furniture and equipment		5,699,571			5,397,742

		18,682,731			18,354,455
Less accumulated depreciation and amortization		(8,800,375	)		(7,888,599	)

Premises and equipment, net	$	9,882,356		$	10,465,856

In the third quarter of 2006, the Bank signed a contract for approximately $1.2 million to purchase a new core operating system. As of December 31, 2006, approximately $320,000 of this contract had been paid; $121,000 related to hardware which is recorded in furniture and equipment and $199,000 related to software which is recorded in other assets at December 31, 2006. The remaining contract amount will be paid over the first half of 2007.

(7) Land and Facilities Held for Sale

During the first quarter of 2004, the Bank transferred two pieces of property originally acquired for future expansion, and previously recorded as premises and equipment, to land and facilities held for sale. One of the properties was sold in the fourth quarter of 2004 and a gain of approximately $43,000 was recognized as a component of noninterest income. The remaining property was sold in the second quarter of 2005 and a loss of approximately $2,600 was recognized as a component of noninterest income.

(8)		Other Real Estate Owned

		At December 31, 2006, the Bank owned five foreclosed properties with a lower of cost or market value of $1,629,250. As of December 31, 2005, the Bank owned three foreclosed properties with a lower of cost or market value of $679,733. A gain or loss will be recognized upon the sale of the properties, which will be included as a component of noninterest income or expense.

(9)		Time Certificates of Deposit

		At December 31, 2006, the scheduled maturities of time deposits, including brokered certificates of deposit, with a remaining term of more than one year were:


Year of maturity:
2008	$	8,368,703
2009		7,911,369
2010		3,813,580
2011		597,285
2012 and thereafter		14,894

Total	$	20,705,831

Included in time deposits are certificates of deposit and brokered certificates of deposit in amounts of $100,000 or more. These certificates and their remaining maturities at December 31, 2006 and 2005 are as follows:


	2006		2005
Three months or less	$	30,307,369	$	29,599,143
Three through six months		22,630,989		16,225,630
Six through twelve months		27,572,446		24,527,040
Over twelve months		8,951,554		20,803,079

Total	$	89,462,358	$	91,154,892

Interest expense attributable to the above deposits amounted to approximately $3,967,000, $2,810,000, and $1,472,000 in 2006, 2005, and 2004, respectively.

(10)		Other Borrowings

		The Bank has a borrowing capacity of approximately $36,000,000 with the FHLBI and had an advance outstanding balance of approximately $13,481,000 and $1,785,000 at December 31, 2006 and 2005, respectively. Variable-or fixed-rate advances are available with terms ranging from one day to 10 years. An outstanding advance requires 125% collateral coverage by one-to-four family whole-mortgage loans. A summary of outstanding advances at December 31, 2006, follows:


	Weighted
	average
Maturity	interest rate			Amount
Short term advances:
Variable rate:
Within 6 months		(a	)	$	12,000,000

Long term advances:
Fixed rate:
Within one year		7.29	%		328,623
Two years		7.29	%		354,913
Three years		7.29	%		383,307
Four years		7.29	%		413,970

Total long term advance					1,480,813

				$	13,480,813


(a)		the rate on this advance at December 31, 2006 was 5.31%

(11)		Deferred Gain on the Sale of Real Estate

		In December 2003, the Bank sold a piece of real estate previously classified as facilities held for sale on the balance sheet and provided financing to the buyer. In accordance with SFAS No. 66, Accounting for Sales of Real Estate, the Bank deferred the gain of $299,000 on the sale under the installment method. In the first quarter of 2004, the Bank sold the loan associated with this transaction with no recourse and accordingly recognized the deferred gain as a component of noninterest income.

(12)		Federal Income Taxes

		Federal income tax expense (benefit) consists of:


	2006			2005			2004
Current	$	2,608,205		$	3,387,723		$	2,568,989
Deferred		(217,783	)		(503,802	)		159,167

Total federal income tax	$	2,390,422		$	2,883,921		$	2,728,156

Federal income tax expense differed from the amounts computed by applying the U.S. Federal income tax rate of 34% to pretax income as a result of the following:


	2006			2005			2004
Computed “expected” tax expense	$	2,711,982		$	3,192,908		$	3,066,545
Increase (reduction) in tax resulting from:
Tax-exempt interest and dividends, net		(318,109	)		(325,188	)		(331,745	)
Other, net		(3,451	)		16,201			(6,644	)

Total federal income tax	$	2,390,422		$	2,883,921		$	2,728,156

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2006 and 2005 are presented below:


	2006		2005
Deferred tax assets:
Allowance for loan losses	$	2,354,604	$	2,377,695
Unrealized loss on securities available for sale		187,795		312,788
Deferred directors’ fees		246,579		195,533
Other		482,152		290,218

Total gross deferred tax assets		3,271,130		3,176,234
Deferred tax liabilities:
Deferred loan fees		181,259		153,100
Other		177,361		203,414

Total gross deferred tax liabilities		358,620		356,514


Net deferred tax asset	$	2,912,510	$	2,819,720

		The deferred tax assets are subject to certain asset realization tests. Management believes no valuation allowance is required at December 31, 2006, due to the combination of potential recovery of tax previously paid and the reversal of certain deductible temporary differences.

		Effective January 1, 2006, the Corporation recorded a $180,000 adjustment to beginning retained earnings to correct misstatements recorded in prior years relating to federal income taxes payable. The misstatements were made over a period of years and were immaterial to the results of operations for each year. See Note 27, “Impact of New Accounting Standards” in Notes to the Consolidated Financial Statements for further discussion of SEC Staff Accounting Bulletin No. 108.

(13)		Related Party Transactions

		Certain directors and executive officers, including their immediate families and companies in which they are principal owners, were loan customers of the Bank during 2006 and 2005. Deposits from such individuals and their related interests totaled approximately $1.3 million at December 31, 2006 and $1.0 million at December 31, 2005. Loans were made to such individuals in the ordinary course of business, in accordance with the Bank’s normal lending policies, including the interest rate charged and collateralization, and do not represent more than a normal credit risk. Loans to related parties are summarized below for the periods indicated:


	2006			2005
Balance at beginning of year	$	6,075,400		$	5,179,300
New loans and related parties		1,225,200			2,167,800
Loan repayments		(2,701,800	)		(1,271,700	)

Balance at end of year	$	4,598,800		$	6,075,400

(14)		Leases

		The Bank has a noncancelable operating lease that provides for renewal options.

		Future minimum lease payments under the noncancelable lease as of December 31, 2006, all due in 2007, total $34,995.

		Rental expense charged to operations in 2006, 2005, and 2004 amounted to approximately $60,000, $59,000, and $60,000, respectively, including amounts paid under short term, cancelable leases.

(15)		Retirement Plan

		The Bank sponsors a defined contribution money purchase thrift plan covering all employees 21 years of age or older who have completed one year of service as defined in the plan agreement. Contributions are equal to 5% of total employee earnings plus 50% of employee contributions (limited to 10% of their earnings) or the maximum amount permitted by the Internal Revenue Code. The plan expense of the Bank for 2006, 2005, and 2004 was approximately $374,000, $370,000, and $376,000, respectively.

(16)		Long Term Incentive Plan

		Under its Long-Term Incentive Plan (the “Plan”) the Corporation grants stock options and restricted stock as compensation to key employees. The Corporation has not awarded any stock options under the plan to date. The restricted stock awards have a five year vesting period. The fair market value of the awards on the grant date are amortized into salary expense over the vesting period. The number of shares available for issuance under the Plan cannot exceed 200,000. A summary of the activity under the Plan for the year ended December 31, 2006 is presented below:


				Weighted-Average
Restricted Stock Awards	Shares			Fair Value
Nonvested at January 1, 2006		5,061		$	27.15
Granted		2,244			25.93
Vested		(3,067	)		26.48
Forfeited		(138	)		28.89

Nonvested at December 31, 2006		4,100		$	26.93

		The total fair value of awards granted during the years ended December 31, 2006 and 2005 was $58,200 and $70,200, respectively. The total fair value of the awards vested during the years ended at December 31, 2006 and 2005 were $81,200 and $83,880, respectively. As of December 31, 2006, there was $110,400 of total unrecognized compensation cost related to non-vested stock awards under the Plan. That cost is expected to be recognized over a weighted-average period of 3.13 years.

(17)		Directors’ Stock Fee Plan

		Each director of the Corporation who is not an officer or employee of any subsidiary of the Corporation is eligible to participate in the Compensation Plan for Nonemployee Directors. The plan fees consist of both a fixed and variable component. The fixed component equals the per-meeting fee paid for attendance at board meetings of both the Bank and the Corporation and any committees of their respective boards. The variable component of the plan is equal to the total fixed fees paid to a specific director for services performed during the preceding calendar year, multiplied by bonus amounts, (expressed as the percentage of base compensation payable to officers of the Bank for the preceding calendar year under the Bank’s Incentive Bonus Plan). Expenses related to both fixed and variable fees are recorded as noninterest expense in the year incurred regardless of payment method. Compensation costs related to both fixed and variable stock directors’ fees included in noninterest expense in 2006, 2005, and 2004 amounted to $150,000, $120,000, and $103,000, respectively.

		Fixed directors’ fees may be paid in cash, to a current stock purchase account, to a deferred cash investment account, or to a deferred stock account according to each eligible director’s payment election. Current stock is issued quarterly based on the average fair market value of the stock for the preceding quarter. When deferred stock is elected, payments are credited to a deferred stock account for each participating director, and stock units are computed quarterly based on the average fair market value of the stock for the preceding quarter. When dividends are declared, they are computed based on the stock units available in each director’s deferred account, are reinvested in stock units and charged to expense. The units are converted to shares and issued to participating directors upon retirement. As of December 31, 2006, there were approximately 23,800 shares earned and available for distribution in the fixed-fee deferred stock accounts.

		Variable directors’ fees may be paid to a current stock purchase account or to a deferred stock account. Current stock is issued based on the average fair market value of the stock for the preceding quarter. Deferred stock units are computed for directors electing to use a deferred stock account, and dividends are reinvested throughout the year as declared. As of December 31, 2006, there were approximately 6,000 shares earned and available for distribution in the variable-fee deferred stock accounts. In September 2004, the Corporation reclassified Deferred Directors’ Compensation related to fixed and variable fees associated with deferred stock accounts from a liability to a component of equity. Prior periods were not reclassified as the impact of this change was determined not to be significant.

(18)		Employees’ Stock Purchase Plan

		The Employees’ Stock Purchase Plan allows eligible employees to purchase shares of common stock, no par value, of FNBH Bancorp, Inc. at a price less than market price under Section 423 of the Internal Revenue Code of 1986 as amended. Eligible employees must have been continuously employed for one year, must work at least 20 hours per week, and must work at least five months in a calendar year. Since the adoption of the plan, the purchase price for each share of stock was 85% of fair market value of a share of stock on the purchase date. Effective April 1, 2005, the purchase price for each share of stock is 95% of fair market value of a share of stock on the purchase date.

(19)		Financial Instruments with Off-Balance-Sheet Risk

		The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are loan commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated balance sheets.

		The Bank’s exposure to credit loss in the event of the nonperformance by the other party to the financial instruments for loan commitments to extend credit and letters of credit is represented by the contractual amounts of these instruments. The Bank uses the same credit policies in making credit commitments as it does for on-balance-sheet loans.

		Financial instruments whose contract amounts represent credit risk at December 31, 2006 and 2005 are as follows:


	2006		2005
Consumer	$	11,690,317	$	16,258,000
Commercial construction		8,564,026		9,372,000
Commercial		49,405,506		41,398,000
Total credit commitments	$	69,659,849	$	67,028,000

Loan commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable; inventory; property, plant, and equipment; residential real estate; and income-producing commercial properties. Market risk may arise if interest rates move adversely subsequent to the extension of commitments.

As of December 31, 2006 and 2005, the Bank had outstanding irrevocable standby letters of credit, which carry a maximum potential commitment of approximately $3,276,000 and $3,200,000, respectively. These letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The majority of these letters of credit are short term guarantees of one year or less, although some have maturities which extend as long as two years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Bank primarily holds real estate as collateral supporting those commitments for which collateral is deemed necessary. The extent of collateral held on those commitments at December 31, 2006 and 2005, where there is collateral, is in excess of the committed amount. A letter of credit is not recorded on the balance sheet until a customer fails to perform.

(20)		Capital

		The Corporation and the Bank 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 Corporation’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Corporation’s and the Bank’s capital classification are also subject to qualitative judgments by regulators with regard to components, risk weightings, and other factors.

		Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital (as defined) to average assets (as defined).

		The most recent notification from the Office of the Comptroller of the Currency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the institution’s category.

		The Corporation’s and the Bank’s actual capital amounts and ratios are also presented in the following table as of December 31, 2006 and 2005:


											To be well capitalized
						Minimum for					under prompt corrective
	Actual					capital adequacy purposes					action provision
As of December 31, 2006	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to risk weighted assets) Bank	$	55,200,000		13.56	%	$	32,558,000		³ 8	%	$	40,697,000		³ 10	%
FNBH Bancorp		55,479,000		13.63	%		32,558,000		³ 8	%		N/A		N/A
Tier 1 Capital (to risk weighted assets) Bank		50,078,000		12.31	%		16,279,000		³ 4	%		24,418,000		³ 6	%
FNBH Bancorp		50,357,000		12.37	%		16,279,000		³ 4	%		N/A		N/A
Tier 1 Capital (to average assets) Bank		50,078,000		10.80	%		18,542,000		³ 4	%		23,177,000		³ 5	%
FNBH Bancorp		50,357,000		10.86	%		18,546,000		³ 4	%		N/A		N/A


As of December 31, 2005	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to risk weighted assets) Bank	$	54,723,000		13.89	%	$	31,520,000		³ 8	%	$	39,400,000		³ 10	%
FNBH Bancorp		55,009,000		13.96	%		31,521,000		³ 8	%		N/A		N/A
Tier 1 Capital (to risk weighted assets) Bank		49,767,000		12.63	%		15,760,000		³ 4	%		23,640,000		³ 6	%
FNBH Bancorp		50,053,000		12.70	%		15,760,000		³ 4	%		N/A		N/A
Tier 1 Capital (to average assets) Bank		49,767,000		10.58	%		18,810,000		³ 4	%		23,512,000		³ 5	%
FNBH Bancorp		50,053,000		10.64	%		18,810,000		³ 4	%		N/A		N/A

(21)		Net Income per Common Share

		Basic net income per common share is computed by dividing net income applicable to common stock by the weighted average number of shares of common stock and deferred director fee stock units outstanding during the period. Diluted net income per common share is computed by dividing net income applicable to common stock by the weighted average number of shares and deferred director fee stock units outstanding and potential common stock outstanding, such as shares of unvested restricted stock outstanding during the period, of which there were 53 shares as of December 31, 2006, and 372 shares as of December 31, 2005, calculated under the treasury stock method. The following table presents basic and diluted net income per share:


	2006		2005		2004
Weighted average basic shares outstanding		3,177,093		3,200,146		3,185,025
Effect of dilutive restricted stock		53		372		1,117

Weighted average diluted shares outstanding		3,177,146		3,200,518		3,186,142

Net income	$	5,585,996	$	6,506,986	$	6,291,095

Basic net income per share	$	1.76	$	2.03	$	1.98
Diluted net income per share	$	1.76	$	2.03	$	1.97

(22)		Contingent Liabilities

		The Corporation is subject to various claims and legal proceedings arising out of the normal course of business, none of which, in the opinion of management, based on the advice of legal counsel, is expected to have a material effect on the Corporation’s financial position or results of operations.

(23)		Fair Value of Financial Instruments

		SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires disclosure of fair-value information about financial instruments for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair-value estimates cannot be substantiated by comparison to independent markets and, in many cases, cannot be realized in immediate settlement of the instrument.

		Fair-value methods and assumptions for the Corporation’s financial instruments are as follows:

		*Cash and cash equivalents* — The carrying amounts reported in the consolidated balance sheet for cash and short term investments reasonably approximate those assets’ fair values.

		*Certificates of deposit* — The carrying amounts reported in the consolidated balance sheet for certificates of deposit reasonably approximate those assets’ fair values.

		*Investment and mortgage-backed securities* — Fair values for investment and mortgage-backed securities are based on quoted market prices.

		*FHLBI and FRB stock* — The carrying amounts reported in the consolidated balance sheet for FHLBI and FRB stock reasonably approximate those assets’ fair values.

		*Loans* — For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are generally based on carrying values. The fair value of fixed-rate loans is estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

		*Accrued interest income* — The carrying amount of accrued interest income is a reasonable estimate of fair value.

Deposit liabilities — The fair value of deposits with no stated maturity, such as demand deposit, NOW, savings, and money market accounts, is equal to the amount payable on demand. The fair value of certificates of deposit is estimated using rates currently offered for wholesale funds with similar remaining maturities.

Other borrowings — The fair value of other borrowings is estimated based on quoted market prices.

Accrued interest payable — The carrying amount of accrued interest payable is a reasonable estimate of fair value.

Off-balance-sheet instruments — The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of commitments to extend credit, including letters of credit, is estimated to approximate their aggregate book balance and is not considered material and therefore not included in the following table.

The estimated fair values of the Corporation’s financial instruments are as follows:


	2006				2005
	Carrying		Fair		Carrying		Fair
	value		value		value		value
Financial assets:
Cash and cash equivalents	$	19,121,000	$	19,121,000	$	24,102,000	$	24,102,000
Certificates of deposit		4,711,000		4,711,000		7,166,000		7,129,000
Investment and mortgage-backed securities		53,219,000		53,441,000		61,220,000		61,557,000
FHLBI and FRB stock		995,000		995,000		1,154,000		1,154,000
Loans, net		376,983,000		376,688,000		365,864,000		364,595,000
Accrued interest income		2,630,000		2,630,000		2,453,000		2,453,000

Financial liabilities:
Deposits:
Demand	$	62,681,000	$	62,681,000	$	71,415,000	$	71,415,000
NOW		41,275,000		41,275,000		40,740,000		40,740,000
Savings and money market accounts		113,906,000		113,906,000		133,865,000		133,865,000
Time deposits		170,127,000		169,644,000		145,928,000		144,868,000
Brokered certificates		17,555,000		17,514,000		30,137,000		29,985,000
Other borrowings		13,481,000		13,506,000		1,785,000		1,877,000
Accrued interest expense		1,099,000		1,099,000		813,000		813,000

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 discounts 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 judgments regarding future loss experience, current economic conditions, risk characteristics of various financial instruments, 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.

(24) Dividend Restrictions

On a parent company-only basis, the Corporation’s only source of funds is dividends paid by the Bank. The ability of the Bank to pay dividends is subject to limitations under various laws and regulations and to prudent and sound banking principles. The Bank may declare a dividend without the approval of the Office of the Comptroller of the Currency (OCC) unless the total dividends in a calendar year exceeds the total of its net profits for the year combined with its retained profits of the two preceding years. Under these provisions, approximately $9.4 million was available for dividends on December 31, 2006, without the approval of the OCC.

(25) Condensed Financial Information — Parent Company Only

The condensed balance sheets at December 31, 2006 and 2005, and the condensed statements of income and cash flows for the years ended December 31, 2006, 2005, and 2004, of FNBH Bancorp, Inc. follow:

Condensed Balance Sheets


	2006		2005
Assets:
Cash	$	22,216	$	52,955
Investment in subsidiaries:
First National Bank in Howell		48,908,786		48,354,429
H.B. Realty Co.		1,000		1,000
FNBH Mortgage Company, LLC		805,000		805,000
Other assets		255,472		235,962

Total assets	$	49,992,474	$	49,449,346


Liabilities and Stockholders’ Equity:
Other liabilities	$	—	$	3,021
Stockholders’ equity		49,992,474		49,446,325

Total liabilities and stockholders’ equity	$	49,992,474	$	49,449,346

Condensed Statements of Income


	Year ended December 31
	2006		2005		2004
Operating income:
Dividends from subsidiaries	$	5,548,912	$	1,975,313	$	1,680,000

Total operating income		5,548,912		1,975,313		1,680,000

Operating expenses:
Administrative and other expenses		94,640		88,014		97,032

Total operating expenses		94,640		88,014		97,032

Income before equity in undistributed net income of subsidiaries		5,454,272		1,887,299		1,582,968
Equity in undistributed net income of subsidiaries		131,724		4,619,687		4,708,127

Net income	$	5,585,996	$	6,506,986	$	6,291,095

Condensed Statements of Cash Flows


	Year ended December 31
	2006			2005			2004
Cash flows from operating activities:
Net income	$	5,585,996		$	6,506,986		$	6,291,095
Adjustments to reconcile net income to net cash provided by operating activities:
Decrease (increase) in other assets		(19,510	)		23,145			(1,256	)
Increase (decrease) in other liabilities		(3,021	)		3,021			(24,700	)
Change in long term incentive plan and deferred compensation		270,596			253,996			263,635
Equity in undistributed net income of subsidiaries		(131,724	)		(4,619,687	)		(4,708,127	)

		116,341			(4,339,525	)		(4,470,448	)

Net cash provided by operating activities		5,702,337			2,167,461			1,820,647

Cash flows from investing activities:
Investments in and advancements to subsidiary, net		—			188,624			(10,000	)

Net cash provided by (used in) investing activities		—			188,624			(10,000	)

Cash flows from financing activities:
Dividends paid		(2,656,404	)		(2,547,690	)		(2,286,173	)
Common stock issued		30,623			95,975			109,521
Repurchases of common stock		(3,107,295	)		—			—
Transfer from subsidiary for directors’ deferred compensation		—			—			437,211

Net cash used in financing activities		(5,733,076	)		(2,451,715	)		(1,739,441	)

Net increase (decrease) in cash		(30,739	)		(95,630	)		71,206
Cash at beginning of year		52,955			148,585			77,379

Cash at end of year	$	22,216		$	52,955		$	148,585

26) Quarterly Financial Data — Unaudited

The following table presents summarized quarterly data for each of the two years ended December 31:


	Quarters ended in 2006
	March 31		June 30		September 30		December 31
Selected operations data:
Interest and dividend income	$	7,878,354	$	7,939,134	$	8,005,475	$	7,995,981
Net interest income		5,785,978		5,535,772		5,213,490		4,988,430
Provision for loan losses		600,000		754,000		785,000		500,000
Income before federal income taxes		2,306,927		1,935,617		2,001,409		1,732,465
Net income		1,602,748		1,353,597		1,398,688		1,230,963

Basic net income per share		0.50		0.42		0.44		0.40
Diluted net income per share		0.50		0.42		0.44		0.40
Cash dividends per share		0.21		0.21		0.21		0.21


	Quarters ended in 2005
	March 31		June 30		September 30		December 31
Selected operations data:
Interest and dividend income	$	6,763,696	$	7,211,160	$	7,600,435	$	7,739,616
Net interest income		5,287,037		5,526,081		5,693,856		5,753,936
Provision for loan losses		366,000		1,178,000		500,000		993,000
Income before federal income taxes		2,396,046		1,625,570		2,810,160		2,559,131
Net income		1,660,950		1,158,670		1,924,460		1,762,906

Basic net income per share		0.52		0.36		0.60		0.55
Diluted net income per share		0.52		0.36		0.60		0.55
Cash dividends per share		0.19		0.19		0.21		0.21

(27) Impact of New Accounting Standards

During the first quarter of fiscal 2006, the Corporation adopted the provisions of the Financial Accounting Standards Board’s (FASB) Statement No. 123(R), Share-Based Payment. The Corporation has two plans affected by the issuance of this Statement. The Long Term Incentive Plan allows for the granting of stock options to certain employees; however, the Corporation has not, to date, issued any options under this plan. Consequently, the Statement has no impact on the Corporation’s results of operations or financial condition relating to stock options until such time as options are granted. The second plan affected is the Employee Stock Purchase Plan (ESPP). The Statement allows for ESPP shares to be issued at ninety-five percent of fair market value as of the grant date with no compensation expense recognized. Effective April 1, 2005, the Corporation’s plan allows for the purchase of shares at ninety-five percent of fair market value as of the grant date, thus no compensation expense was recognized upon the effectiveness of SFAS 123(R). Also, in accordance with the requirements of the pronouncement, the Corporation reclassified unearned long term incentive compensation to common stock in the Corporation’s consolidated balance sheet as of December 31, 2005. The adoption of SFAS 123(R) did not have a significant impact on the Corporation’s consolidated financial statements or results of operations.

In September 2006, the FASB issued Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, which is an amendment of Statement No. 87, Employers’ Accounting for Pensions, Statement No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pensions Plans and for Termination Benefits, Statement No. 106, Employers’ for Accounting for Postretirement Benefits Other Than Pensions, and Statement No. 132 (R), Employers’ Disclosures about Pensions and Other Postretirement Benefits. This statement requires an employer to recognize the over-funded or under-funded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. The employer must measure the funded status of a plan as of the date or its year-end statement of financial position. The statement is effective for the Corporation as of December 31, 2006. Management has completed its review of the new guidance and has concluded it has no impact on the Corporation’s results of operations or financial position as the Corporation has no defined benefit postretirement plans.

In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 108, Quantifying Misstatements in Financial Statements. The SAB was effective for the Corporation for the year ending December 31, 2006. The SAB outlines an approach registrants should use to quantify the misstatement of current year financial statements that results from misstatements of prior year financial statements. The SAB requires the registrant to use a combination of the two approaches for quantifying misstatements that are currently used. This “dual” approach requires the registrant to quantify and evaluate errors using both an income statement and a balance sheet assessment of any misstatement. Management has completed its review and adopted the new guidance effective January 1, 2006. The impact of the adoption was an increase in beginning retained earnings of $180,000, related to accrued federal income taxes.

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. The Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies to other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. This Statement does not require any new fair value measurements and is effective for the Corporation beginning January 1, 2008. Management has not completed its review of the new guidance; however, the effect of the Statement’s implementation is not expected to be material to the Corporation’s financial statements or results of operations.

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, which is an interpretation of FASB Statement No. 109, Accounting for Income Taxes. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Interpretation is effective for the Corporation beginning January 1, 2007. Management has completed its review of the new guidance and has concluded that there will be no effect of the Interpretation’s implementation on the Corporation’s results of operations or financial position.

In March 2006, the FASB issued Statement No. 156, Accounting for Servicing of Financial Assets, which is an amendment of Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. The Statement requires all separately recognized servicing assets and liabilities to be initially measured at fair value, if practicable. It permits entities to choose either the amortization method or the fair value measurement method subsequently measuring each class of separately recognized servicing assets and servicing liabilities. The Statement is intended to simplify the accounting for servicing assets and liabilities, particularly for those entities that use derivative instruments, which are required to be accounted for at fair value, to mitigate the risks inherent in servicing assets and servicing liabilities. The Statement is effective for the Corporation beginning January 1, 2007. Management has completed its review of the new guidance and has concluded that there will be no effect of the Statement’s implementation on the Corporation’s results of operations or financial position.

In February 2006, the FASB issued Statement No. 155, Accounting for Certain Hybrid Financial Instruments, which is an amendment of Statement No. 133, Accounting for Derivatives and Hedging Activities, and Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. This Statement permits fair value re-measurement for any hybrid financial instrument containing an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement No. 133; establishes a requirement to evaluate interests in securitized financial assets to identify them as freestanding derivatives or as hybrid financial instruments containing an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and amends Statement No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument pertaining to a beneficial interest other than another derivative financial instrument. Statement No. 155 is effective for all financial instruments acquired or issued after January 1, 2007. Management has completed its review of the new guidance and has concluded that there will be no effect of the Statement’s implementation on the Corporation’s results of operations or financial position.

In February 2007, the FASB issued Statement No. 159, The Fair value Option for Financial Assets and Financial Liabilities. This Statement permits entities to choose to measure eligible items at fair value at specified election dates. For items for which the fair value option has been elected, unrealized gains and losses are to be reported in earnings at

each subsequent reporting date. The fair value option is irrevocable unless a new election date occurs, may be applied instrument by instrument, with a few exceptions, and applies only to entire instruments and not to portions of instruments. This Statement provides an opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting. Statement No. 159 is effective for the Corporation beginning January 1, 2008. Management has not completed its review of the new guidance; however, the effect of the Statement’s implementation is not expected to be material to the Corporation’s results of operations or financial position.

Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

1. Evaluation of Disclosure Controls and Procedures. With the participation of management, the Corporation’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Corporation’s disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of December 31, 2006, have concluded that, as of such date, the Corporation’s disclosure controls and procedures were effective.

2. Management’s Annual Report on Internal Control Over Financial Reporting. The Corporation’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), for the Corporation. The Corporation’s internal control system was designed to provide reasonable assurance to the Corporation regarding the preparation and fair presentation of published financial statements. The Corporation’s management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Based on this assessment and those criteria, the Corporation’s management concluded that, as of December 31, 2006, the Corporation’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Corporation have been detected.

3. Attestation Report of the Registered Independent Public Accounting Firm. BDO Seidman, LLP, an independent registered public accounting firm that audited the consolidated financial statements of the Corporation for the year ended December 31, 2006, has issued an attestation report on management’s assessment of the effectiveness of the Corporation’s internal control over financial reporting. The report is set forth on page 32.

4. Change in Internal Control Over Financial Reporting. During the fourth quarter ended December 31, 2006, there were no changes in the Corporation’s Internal Control Over Financial Reporting that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

Item 9B. Other Information.

None

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

Directors

The information with respect to Directors and Nominees of the Registrant and compliance with Section 16(a) of the Exchange Act is set forth under the caption “Election of Directors” and Section 16(a) “Beneficial Ownership Reporting Compliance” in our definitive proxy statement, to be filed with the Commission relating to the May 16, 2007 Annual Meeting of Shareholders, is incorporated herein by reference.

Executive Officers

The information called for by this item is contained in Part I of this Form 10-K Report.

We have adopted a Code of Ethics for our chief executive officer and senior financial officers. A copy of our Code of Ethics is available upon request by writing to the Corporation’s Chief Financial Officer at 101 East Grand River, Howell, Michigan 48843 and is available on our website at www.fnbsite.com.

Corporate Governance

The information with respect to Corporate Governance set forth under the caption “Corporate Governance and Board Matters” in our definitive proxy statement, to be filed with the Commission relating to the May 16, 2007 Annual meeting of Shareholders, is incorporated herein by reference.

Item 11. Executive Compensation.

The information set forth under the caption “Executive Compensation Table” in our definitive proxy statement, to be filed with the Commission relating to the May 16, 2007 Annual Meeting of Shareholders, is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information set forth under the caption “Ownership of Common Stock” on page X of the Corporation’s definitive proxy statement, as filed with the Commission relating to the May 16, 2007 Annual Meeting of Shareholders, is incorporated herein by reference.

The following information is provided under Item 201(d):

Number of securities remaining

Number of securities to be

Weighted – average

available for future issuance

issued upon exercise of

exercise price of

under equity compensation

outstanding options,

plans (excluding securities

warrants, and rights

reflected in column (a))

Plan Category

(a)

(b)

(c)

Equity compensation plans approved by security holders

258,812

⁽¹⁾


(1)		Includes 162,062 shares available under the Long Term Incentive Plan, 60,346 shares available under the Compensation Plan for Nonemployee Directors and 36,404 shares included under the Employee Stock Purchase Plan.

Item 13. Certain Relationships, Related Transactions and Director Independence.

The information set forth under the caption “Certain Transactions with Management” and “Corporate Governance and Board Matters” in our definitive proxy statement, to be filed with the Commission relating to the May 16, 2007, Annual Meeting of Shareholders, is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services.

The information set forth under the caption “Audit Matters and Our Relationship with Our Independent Auditors” in our definitive proxy statement, to be filed with the Commission relating to the May 16, 2007, Annual Meeting of Shareholders, is incorporated herein by reference. Information under the caption “Report of Our Audit Committee” in our definitive proxy statement is not incorporated by reference herein and is also not deemed to be filed with the Securities and Exchange Commission.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, dated March 5, 2007.

FNBH BANCORP, INC.


/s/ Barbara Draper		Barbara Draper, President & Chief Executive Officer
		(Principal Executive Officer)

/s/ Janice B. Trouba		Janice B. Trouba, Chief Financial Officer
		(Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Each director of the Registrant, who’s signature appears below, hereby appoints Barbara Draper and Janice B. Trouba, and each of them severally, as his or her attorney-in-fact, to sign in 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	Date

W. Rickard Scofield, Chairman of the Board	/s/ W. Rickard Scofield	March 5, 2007


Randolph E. Rudisill, Vice Chairman of the Board	/s/ Randolph E. Rudisill	March 5, 2007


Athena Bacalis, Director	/s/ Athena Bacalis	March 5, 2007


Gary R. Boss, Director	/s/ Gary R. Boss	March 5, 2007


Barbara Draper, Director	/s/ Barbara Draper	March 5, 2007


Richard F. Hopper, Director	/s/ Richard F. Hopper	March 5, 2007


Dona Scott Laskey, Director	/s/ Dona Scott Laskey	March 5, 2007


James R. McAuliffe, Director	/s/ James R. McAuliffe	March 5, 2007


John M. Pfeffer, Director	/s/ John M. Pfeffer	March 5, 2007


R. Michael Yost, Director	/s/ R. Michael Yost	March 5, 2007

EXHIBIT INDEX

The following exhibits are filed herewith, indexed according to the applicable assigned number:


Exhibit
Number

(21)		Subsidiaries of the Registrant

(23)		Consent of BDO Seidman, LLP

(24)		Power of Attorney (included in signature section)

(31.1)		Certificate of the Chief Executive Officer of FNBH Bancorp, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

(31.2)		Certificate of the Chief Financial Officer of FNBH Bancorp, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

(32.1)		Certificate of the Chief Executive Officer of FNBH Bancorp, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

(32.2)		Certificate of the Chief Financial Officer of FNBH Bancorp, Inc. pursuant to Section 906 of the Sarbanes Oxley Act of 2002 (18 U.S.C. 1350).

The following exhibits, indexed according to the applicable assigned number, were previously filed by the Registrant and are incorporated by reference in this Form 10-K Annual Report.


Exhibit
Number		Original Filing Form and Date

(3.1)	Restated Articles of Incorporation of the Registrant	Exhibit 3.1 of Form 10, effective June 30, 1995 (“Form 10”)

(3.2)	Amendment to the Corporation’s Articles of Incorporation to Increase Authorized Shares	Appendix I of Proxy Statement dated March 17, 1998

(3.3)	Bylaws of the Registrant	Exhibit 3.2 of Form 10

(4)	Form of Registrant’s Stock Certificate	Exhibit 4 of Form 10
	Material Contracts:

(10.1)	Howell Branch Lease Agreement	Exhibit 10.2 to Form 10

(10.2)	Corporation’s Long Term Incentive Plan*	Appendix II of Proxy Statement dated March 17, 1998

(10.3)	FNBH Bancorp Inc. Employees’ Stock Purchase Plan	Exhibit 4 to Registration Statement on Form S-8 (Reg. No. 333-46244)

(10.4)	Amended and Restated Compensation Plan for Nonemployee Directors*	Appendix II of Proxy Statement dated March 15, 2002

(10.5)	FNBH Bancorp Inc Employees’ Stock Purchase Plan as amended January 20, 2005	Exhibit 10 to Form 10-K dated March 7, 2006


*		Represents a compensation plan


	Page
PART I
Item 1 – Business		3
Item 1A – Risk Factors		9
Item 1B – Unresolved Staff Comments		11
Item 2 – Properties		11
Item 3 – Legal Proceedings		11
Item 4 – Submission of Matters to a Vote of Security Holders		11
PART II
Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		12
Item 6 – Selected Financial Data		15
Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 7A – Quantitative and Qualitative Disclosures about Market Risk		30
Item 8 – Financial Statements and Supplementary Data		30
Item 9 – Change in and Disagreements with Accountants on Accounting and Financial Disclosure		58
Item 9A – Controls and Procedures		58
Item 9B – Other Information		58
PART III
Item 10 – Directors, Executive Officers and Corporate Governance		59
Item 11 – Executive Compensation		59
Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		59
Item 13 – Certain Relationships, Related Transactions and Director Independence		59
Item 14 – Principal Accountant Fees and Services		59
PART VI
Item 15 – Exhibits and Financial Statement Schedules		60
SIGNATURES		61
EXHIBIT INDEX		62
Subsidiaries of the Registrant		63
Consent of Independent Auditors		64
Sec 302 Certification of Chief Executive Officer		65
Sec 302 Certification of Chief Financial Officer		66
Sec 906 Certification of Chief Executive Officer		67
Sec 906 Certification of Chief Financial Officer		68


Index to Consolidated Financial Statements:	Page
Report of Independent Registered Public Accounting Firm		31
Consolidated Balance Sheets		33
Consolidated Statements of Income		34
Consolidated Statements of Stockholders’ Equity and Comprehensive Income		35
Consolidated Statements of Cash Flows		36
Notes to Consolidated Financial Statements		37


Name		Jurisdiction of Incorporation
First National Bank in Howell		Michigan
H.B. Realty Co		Michigan

1.		I have reviewed this annual report on Form 10-K of FNBH Bancorp, 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 officer 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we 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)		designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and

	c)		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

	d)		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

	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 controls over financial reporting.


Date: March 5, 2007

/s/ Barbara Draper
Barbara Draper
Chief Executive Officer


Date: March 5, 2007

/s/ Janice B. Trouba
Janice B. Trouba
Chief Financial Officer