##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2007
 Commission file number 0-25752
 FNBH
BANCORP, INC.
  MICHIGAN
    
    38-2869722(State or other jurisdiction of
 incorporation or organization)
    
    (I.R.S. Employer
 Identification No.)
 101 East Grand River, Howell, Michigan
48843
    Common Stock, no par value  (Title of Class)
 o þ
 o þ
 þ o
 o
  Rule 12b-2
 Large
    accelerated filer o
    Accelerated
    filer þ
    Non-accelerated
    filer o
    Smaller
    reporting company o   o þ
   Documents Incorporated by Reference:




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##### 



TABLE OF CONTENTS
 PART I
    

PageItem 1  Business
    
    
    3Item 1A  Risk Factors
    
    
    9Item 1B  Unresolved Staff Comments
    
    
    11Item 2  Properties
    
    
    11Item 3  Legal Proceedings
    
    
    11Item 4  Submission of Matters to a Vote of Security Holders
    
    
    11PART IIItem 5  Market for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
    
    
    12Item 6  Selected Financial Data
    
    
    15Item 7  Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    15Item 7A  Quantitative and Qualitative Disclosures about Market Risk
    
    
    32Item 8  Financial Statements and Supplementary Data
    
    
    32Item 9  Change in and Disagreements with Accountants on Accounting
and Financial Disclosure
    
    
    60Item 9A  Controls and Procedures
    
    
    60Item 9B  Other Information
    
    
    61PART IIIItem 10  Directors, Executive Officers and Corporate Governance
    
    
    61Item 11  Executive Compensation
    
    
    61Item 12  Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
    
    
    61Item 13  Certain Relationships, Related Transactions and Director Independence
    
    
    62Item 14  Principal Accountant Fees and Services
    
    
    62PART VIItem 15  Exhibits and Financial Statement Schedules
    
    
    62SIGNATURES
    
    
    63EXHIBIT INDEX
    
    
    64Subsidiaries of the Registrant
    
    
    65Consent of Independent Auditors
    
    
    66Sec 302 Certification of Chief Executive Officer
    
    
    67Sec 302 Certification of Chief Financial Officer
    
    
    68Sec 906 Certification of Chief Executive Officer
    
    
    69Sec 906 Certification of Chief Financial Officer
    
    
    70




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##### 



PART I
 
 Item 1. Business.
    Bank Services
    3




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##### 



Bank Competition
 4




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##### 



Condition of Corporation
 Balances as of December 31,(in thousands)2007
    
    2006
    
    2005
    
    2004
    
    2003Total Assets
    
    $
    432,894
    
    
    $
    473,896
    
    
    $
    477,225
    
    
    $
    456,910
    
    
    $
    450,342Loans
    
    
    347,876
    
    
    
    384,581
    
    
    
    372,855
    
    
    
    357,377
    
    
    
    347,086Securities
    
    
    38,632
    
    
    
    54,214
    
    
    
    62,373
    
    
    
    64,348
    
    
    
    55,435Noninterest-Bearing Deposits
    
    
    56,506
    
    
    
    62,681
    
    
    
    71,415
    
    
    
    71,785
    
    
    
    69,234Interest-Bearing Deposits
    
    
    323,072
    
    
    
    342,863
    
    
    
    350,670
    
    
    
    327,478
    
    
    
    329,839Total Deposits
    
    
    379,578
    
    
    
    405,544
    
    
    
    422,086
    
    
    
    399,263
    
    
    
    399,073Shareholders Equity
    
    
    40,627
    
    
    
    49,992
    
    
    
    49,446
    
    
    
    45,716
    
    
    
    41,235
  Supervision and Regulation
 General
  5




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##### 



The Corporation General
  Investments and Activities
  de novo
  Capital Requirements
 6




---



##### 



Dividends
   The Bank General
 Deposit Insurance
 7




---



##### 



FICO Assessments. pro rata
 OCC Assessments.
 Capital Requirements
  Total
    
    Tier 1Risk-Based
    
    Risk-BasedCapital Ratio
    
    Capital Ratio
    
    Leverage RatioWell capitalized
    
    10% or above
    
    6% or above
    
    5% or aboveAdequately capitalized
    
    8% or above
    
    4% or above
    
    4% or aboveUndercapitalized
    
    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 equityto total assets of 2% or less
    8




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##### 



Dividends
 Insider Transactions
 Safety and Soundness Standards
 Consumer Protection Laws
 
 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.
  9




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##### 



We are heavily weighted with loans secured by real estate and further declines in the real estate
market and the overall economy may result in higher loan losses
  Fluctuations in interest rates could reduce our profitability.
  We rely heavily on our management team, including our loan officers, and the unexpected loss of key
employees may adversely affect our operations.
  Competition with other financial institutions and financial service providers could adversely
affect our profitability.
  As a community bank, our financial condition is dependent, in part, on the general economic
condition of the communities we serve.
  10




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##### 



We operate in a highly regulated environment and may be adversely affected by changes in laws and
regulations.
  We may face challenges in managing our operational risks as we grow.
  
 Item 1B. Unresolved Staff Comments.
  
 Item 2. Properties.
  
 Item 3. Legal Proceedings.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  Additional Item Executive Officers
  11




---



##### 



PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
 
  12




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##### 



Sale Prices2006
    
    High
    
    Low
    
    Cash Dividends DeclaredFirst Quarter
    
    $
    26.25
    
    
    $
    25.25
    
    
    $
    0.21Second Quarter
    
    $
    26.80
    
    
    $
    25.75
    
    
    $
    0.21Third Quarter
    
    $
    26.55
    
    
    $
    25.30
    
    
    $
    0.21Fourth Quarter
    
    $
    27.00
    
    
    $
    26.45
    
    
    $
    0.21
 Sale Prices2007
    
    High
    
    Low
    
    Cash Dividends DeclaredFirst Quarter
    
    $
    26.75
    
    
    $
    26.00
    
    
    $
    0.21Second Quarter
    
    $
    25.80
    
    
    $
    23.10
    
    
    $
    0.21Third Quarter
    
    $
    23.05
    
    
    $
    18.50
    
    
    $
    0.21Fourth Quarter
    
    $
    18.75
    
    
    $
    13.25
    
    
    $
    0.21
   Total Number of Shares
    
    
    Maximum Number ThatTotal Number of
    
    
    Average Price
    
    
    Purchased as Part of a
    
    
    May Yet Be PurchasedPeriod
    
    Shares Purchased
    
    
    Paid Per Share
    
    
    Publicly Announced Program
    
    
    Under the Program (1)October 2007
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    100,000November 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000December 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000Total
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    100,000
 
 (1)
    
    On May 17, 2007, the Corporations Board of Directors authorized a share
repurchase program. This repurchase program authorizes the repurchase of up to 100,000 shares of the Corporations common stock after
August 17, 2007 and expires on August 17, 2008. No shares have yet been repurchased under this program. 13




---



##### 



SHAREHOLDER RETURN PERFORMANCE GRAPH
  
 January 1
    
    
    December 312003
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007FNBH Bancorp, Inc.
    
    
    
    100
    
    
    
    
    135.53
    
    
    
    
    163.21
    
    
    
    
    133.51
    
    
    
    
    144.68
    
    
    
    
    76.76NASDAQ Stock Market Index
    
    
    
    100
    
    
    
    
    149.52
    
    
    
    
    162.72
    
    
    
    
    166.18
    
    
    
    
    182.57
    
    
    
    
    197.98NASDAQ Bank Stocks Index
    
    
    
    100
    
    
    
    
    128.64
    
    
    
    
    147.22
    
    
    
    
    143.82
    
    
    
    
    161.41
    
    
    
    
    127.92
 14




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##### 



Item 6. Selected Financial Data.
 SUMMARY FINANCIAL DATA
 2007
    
    2006
    
    2005
    
    2004
    
    2003Income Statement Data:Interest income
    
    $
    30,173
    
    
    $
    31,818
    
    
    $
    29,315
    
    
    $
    24,992
    
    
    $
    24,856Interest expense
    
    
    11,884
    
    
    
    10,295
    
    
    
    7,054
    
    
    
    5,606
    
    
    
    6,167Net interest income
    
    
    18,289
    
    
    
    21,523
    
    
    
    22,261
    
    
    
    19,386
    
    
    
    18,689Provision for loan losses
    
    
    14,030
    
    
    
    2,639
    
    
    
    3,037
    
    
    
    1,190
    
    
    
    1,270Noninterest income (1)
    
    
    3,755
    
    
    
    4,031
    
    
    
    3,820
    
    
    
    4,110
    
    
    
    3,874Loss on available for sale securities (1)
    
    
    548
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Noninterest expense (2)
    
    
    13,493
    
    
    
    14,939
    
    
    
    13,653
    
    
    
    13,287
    
    
    
    12,848Loss on sale/writedown of commercial loans
held for sale (2)
    
    
    4,312
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) before tax
    
    
    (10,339
    )
    
    
    7,976
    
    
    
    9,391
    
    
    
    9,019
    
    
    
    8,445Net income (loss)
    
    
    (6,556
    )
    
    
    5,586
    
    
    
    6,507
    
    
    
    6,291
    
    
    
    5,891Per Share Data:Basic net income (loss) per share
    
    $
    (2.13
    )
    
    $
    1.76
    
    
    $
    2.03
    
    
    $
    1.98
    
    
    $
    1.86Diluted net income (loss) per share
    
    
    (2.13
    )
    
    
    1.76
    
    
    
    2.03
    
    
    
    1.97
    
    
    
    1.86Dividends paid
    
    
    0.84
    
    
    
    0.84
    
    
    
    0.80
    
    
    
    0.72
    
    
    
    0.68Weighted average basic shares outstanding
    
    
    3,074,732
    
    
    
    3,177,093
    
    
    
    3,200,146
    
    
    
    3,185,025
    
    
    
    3,162,836Weighted average diluted shares outstanding
    
    
    3,074,732
    
    
    
    3,177,146
    
    
    
    3,200,518
    
    
    
    3,186,142
    
    
    
    3,162,836Balance Sheet Data:Total assets
    
    $
    432,894
    
    
    $
    473,896
    
    
    $
    477,225
    
    
    $
    456,910
    
    
    $
    450,342Loans, gross
    
    
    347,876
    
    
    
    384,581
    
    
    
    372,855
    
    
    
    357,377
    
    
    
    347,086Allowance for loan losses
    
    
    10,314
    
    
    
    7,598
    
    
    
    6,991
    
    
    
    6,093
    
    
    
    5,434Deposits
    
    
    379,578
    
    
    
    405,544
    
    
    
    422,086
    
    
    
    399,263
    
    
    
    399,073Shareholders equity
    
    
    40,627
    
    
    
    49,992
    
    
    
    49,446
    
    
    
    45,716
    
    
    
    41,235Ratios:Dividend payout ratio
    
    
    N/A
    
    
    
    47.55
    %
    
    
    39.15
    %
    
    
    36.34
    %
    
    
    36.51
    %Average equity to average asset ratio
    
    
    10.47
    %
    
    
    10.86
    %
    
    
    10.18
    %
    
    
    9.71
    %
    
    
    9.32
    %
 
 (1)
    
    Included in noninterest income in the Consolidated Statements of Income and
discussed under the caption Noninterest Income under Item 7 Managements Discussion and Analysis of Financial
Condition and Results of Operations.(2)
    
    Included in noninterest expense in the Consolidated Statements of Income and
discussed under the caption Noninterest Expense under Item 7 Managements Discussion and Analysis of Financial
Condition and Results of Operations. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
   15




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##### 



FINANCIAL CONDITION
  Securities
  (in thousands)2007
    
    
    2006
    
    
    2005Held to maturity:States and political subdivisions
    
    $
    15,394
    
    
    $
    16,809
    
    
    $
    16,426Available for sale:U.S. Agencies
    
    $
    14,005
    
    
    $
    24,480
    
    
    $
    31,384Corporate securities
    
    
    
    
    
    
    
    
    
    
    1,005Mortgage-backed/CMO securities
    
    
    8,238
    
    
    
    11,931
    
    
    
    12,405FRB Stock
    
    
    44
    
    
    
    44
    
    
    
    44FHLBI Stock
    
    
    951
    
    
    
    951
    
    
    
    1,109Total
    
    $
    23,238
    
    
    $
    37,406
    
    
    $
    45,947
  (dollars in thousands)Maturing After
    
    
    Maturing AfterMaturing Within
    
    
    One But Within
    
    
    Five But Within
    
    
    Maturing AfterOne Year
    
    
    Five Years
    
    
    Ten Years
    
    
    Ten YearsAmount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    YieldHeld to maturityStates and political subdivisions
    
    $
    2,304
    
    
    
    6.07
    %
    
    $
    3,668
    
    
    
    6.15
    %
    
    $
    2,604
    
    
    
    5.75
    %
    
    $
    6,818
    
    
    
    6.14
    %Tax equivalent adjustment for
calculations of yield
    
    $
    39
    
    
    
    
    
    
    $
    62
    
    
    
    
    
    
    $
    44
    
    
    
    
    
    
    $
    116Available for saleU.S. Agencies
    
    $
    5,870
    
    
    
    3.65
    %
    
    $
    
    
    
    
    
    
    
    $
    8,135
    
    
    
    5.97
    %
    
    $
    
    
    
    
    Mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,238
    
    
    
    5.95
    %FRB Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44
    
    
    
    6.03
    %FHLBI Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    951
    
    
    
    4.67
    %Total
    
    $
    5,870
    
    
    
    3.65
    %
    
    $
    
    
    
    
    
    
    
    $
    8,135
    
    
    
    5.97
    %
    
    $
    9,233
    
    
    
    5.82
    %
 16




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##### 



Rate on TaxTax-Exempt Rate
    
    Adjustment
    
    Equivalent BasisUnder 1 year
    
    
    4.37
    %
    
    
    1.70
    %
    
    
    6.07
    %1-5 years
    
    
    4.45
    %
    
    
    1.70
    %
    
    
    6.15
    %5-10 years
    
    
    4.05
    %
    
    
    1.70
    %
    
    
    5.75
    %10 years or more
    
    
    4.44
    %
    
    
    1.70
    %
    
    
    6.14
    %
  2007
    
    2006
    
    2005U.S. Treasury & agency securities
    
    
    36.3
    %
    
    
    45.2
    %
    
    
    50.3
    %Agency mortgage backed/CMO securities
    
    
    21.3
    %
    
    
    22.0
    %
    
    
    19.9
    %Tax exempt obligations of states and political subdivisions
    
    
    39.8
    %
    
    
    31.0
    %
    
    
    26.3
    %Corporate bonds
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    1.6
    %Other
    
    
    2.6
    %
    
    
    1.8
    %
    
    
    1.9
    %Total securities
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Loans
    17




---



##### 



(dollars in thousands)2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Balances
    
    
    Percent
    
    
    Balances
    
    
    Percent
    
    
    Balances
    
    
    Percent
    
    
    Balances
    
    
    Percent
    
    
    Balances
    
    
    PercentSecured by real estate:Residential first mortgage
    
    $
    35,545
    
    
    
    10.2
    %
    
    $
    39,768
    
    
    
    10.3
    %
    
    $
    46,391
    
    
    
    12.4
    %
    
    $
    53,059
    
    
    
    14.8
    %
    
    $
    46,845
    
    
    
    13.5
    %Residential home equity/other junior liens
    
    
    19,353
    
    
    
    5.6
    %
    
    
    20,983
    
    
    
    5.4
    %
    
    
    19,750
    
    
    
    5.3
    %
    
    
    16,017
    
    
    
    4.5
    %
    
    
    13,999
    
    
    
    4.0
    %Construction, land development and
other land
    
    
    52,383
    
    
    
    15.0
    %
    
    
    67,376
    
    
    
    17.5
    %
    
    
    72,572
    
    
    
    19.4
    %
    
    
    59,873
    
    
    
    16.7
    %
    
    
    54,554
    
    
    
    15.7
    %Commercial (nonfarm, nonresidential)
    
    
    192,784
    
    
    
    55.3
    %
    
    
    203,219
    
    
    
    52.8
    %
    
    
    177,417
    
    
    
    47.5
    %
    
    
    163,706
    
    
    
    45.7
    %
    
    
    165,464
    
    
    
    47.5
    %Consumer
    
    
    11,113
    
    
    
    3.2
    %
    
    
    15,852
    
    
    
    4.1
    %
    
    
    22,247
    
    
    
    6.0
    %
    
    
    26,965
    
    
    
    7.5
    %
    
    
    25,842
    
    
    
    7.4
    %Commercial
    
    
    33,677
    
    
    
    9.7
    %
    
    
    31,710
    
    
    
    8.2
    %
    
    
    29,230
    
    
    
    7.8
    %
    
    
    31,772
    
    
    
    8.9
    %
    
    
    33,947
    
    
    
    9.8
    %Other
    
    
    3,510
    
    
    
    1.0
    %
    
    
    6,343
    
    
    
    1.7
    %
    
    
    6,104
    
    
    
    1.6
    %
    
    
    6,991
    
    
    
    1.9
    %
    
    
    7,366
    
    
    
    2.1
    %Total gross loans
    
    
    348,365
    
    
    
    100.0
    %
    
    
    385,251
    
    
    
    100.0
    %
    
    
    373,711
    
    
    
    100.0
    %
    
    
    358,383
    
    
    
    100.0
    %
    
    
    348,017
    
    
    
    100.0
    %Net unearned fees
    
    
    (489
    )
    
    
    
    
    
    
    (670
    )
    
    
    
    
    
    
    (856
    )
    
    
    
    
    
    
    (1,006
    )
    
    
    
    
    
    
    (931
    )Total Loans
    
    $
    347,876
    
    
    
    
    
    
    $
    384,581
    
    
    
    
    
    
    $
    372,855
    
    
    
    
    
    
    $
    357,377
    
    
    
    
    
    
    $
    347,086
        18




---



##### 



Maturing(dollars in thousands)After oneWithin One
    
    
    but within
    
    
    After fiveYear
    
    
    five years
    
    
    years
    
    
    TotalReal estate construction, land development and other land
loans
    
    $
    37,071
    
    
    $
    15,312
    
    
    $
    
    
    
    $
    52,383Real estate other (secured by commercial and multi-family)
    
    
    36,292
    
    
    
    134,724
    
    
    
    21,768
    
    
    
    192,784Commercial (secured by business assets or unsecured)
    
    
    16,464
    
    
    
    16,640
    
    
    
    573
    
    
    
    33,677Other (loans to farmers, political subdivisions, and
overdrafts)
    
    
    374
    
    
    
    2,151
    
    
    
    985
    
    
    
    3,510Totals
    
    $
    90,201
    
    
    $
    168,827
    
    
    $
    23,326
    
    
    $
    282,354
  Interest Sensitivity(dollars in thousands)Fixed Rate
    
    Variable RateDue after one but within five years
    
    $
    147,978
    
    
    $
    20,322Due after five years
    
    
    22,408
    
    
    
    918
   (dollars in thousands)2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Nonperforming Loans and Assets:Nonaccrual loans
    
    $
    14,459
    
    
    $
    12,199
    
    
    $
    5,234
    
    
    $
    1,146
    
    
    $
    4,293Loans past due 90 days and still accruing
    
    
    114
    
    
    
    288
    
    
    
    391
    
    
    
    288
    
    
    
    Total nonperforming loans
    
    
    14,573
    
    
    
    12,487
    
    
    
    5,625
    
    
    
    1,434
    
    
    
    4,293Other real estate
    
    
    1,523
    
    
    
    1,629
    
    
    
    680
    
    
    
    735
    
    
    
    65Total nonperforming assets
    
    $
    16,096
    
    
    $
    14,116
    
    
    $
    6,305
    
    
    $
    2,169
    
    
    $
    4,358Nonperforming loans as a percent of total loans
    
    
    4.19
    %
    
    
    3.25
    %
    
    
    1.51
    %
    
    
    0.40
    %
    
    
    1.24
    %Allowance for loan losses as a percent of
nonperforming loans
    
    
    71
    %
    
    
    61
    %
    
    
    124
    %
    
    
    425
    %
    
    
    127
    %
    19




---



##### 



Accounting by Creditors for Impairment of Loan,
    20




---



##### 



21




---



##### 



(dollars in thousands)2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Loans:Average daily balance of loans for the year
    
    $
    375,037
    
    
    $
    374,634
    
    
    $
    366,877
    
    
    $
    340,859
    
    
    $
    340,384Amount of loans outstanding at end of year
    
    
    347,876
    
    
    
    384,581
    
    
    
    372,855
    
    
    
    357,377
    
    
    
    347,086Components:Allowance for loan lossesBalance, beginning of year
    
    $
    7,598
    
    
    $
    6,991
    
    
    $
    6,093
    
    
    $
    5,434
    
    
    $
    5,794Loans charged off:Real estate mortgage
    
    
    243
    
    
    
    260
    
    
    
    26
    
    
    
    
    
    
    
    Commercial (1)
    
    
    5,519
    
    
    
    1,785
    
    
    
    1,436
    
    
    
    379
    
    
    
    1,014Consumer
    
    
    860
    
    
    
    619
    
    
    
    792
    
    
    
    543
    
    
    
    269Subtotal
    
    
    6,622
    
    
    
    2,664
    
    
    
    2,254
    
    
    
    922
    
    
    
    1,283Charge offs on loans transferred to held for sale (2)
    
    
    4,669
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total chargeoffs
    
    
    11,291
    
    
    
    2,664
    
    
    
    2,254
    
    
    
    922
    
    
    
    1,283Recoveries to loans previously charged off:Real estate mortgage
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial
    
    
    146
    
    
    
    283
    
    
    
    120
    
    
    
    70
    
    
    
    112Consumer
    
    
    239
    
    
    
    226
    
    
    
    142
    
    
    
    104
    
    
    
    65Total recoveries
    
    
    385
    
    
    
    509
    
    
    
    262
    
    
    
    174
    
    
    
    177Net loans charged off
    
    
    10,906
    
    
    
    2,155
    
    
    
    1,992
    
    
    
    748
    
    
    
    1,106Additions to allowance charged to operations
    
    
    13,622
    
    
    
    2,762
    
    
    
    2,890
    
    
    
    1,407
    
    
    
    746Balance, end of year
    
    
    10,314
    
    
    
    7,598
    
    
    
    6,991
    
    
    
    6,093
    
    
    
    5,434Reserve for unfunded credit commitmentsBalance, beginning of year
    
    
    331
    
    
    
    454
    
    
    
    307
    
    
    
    524
    
    
    
    Additions (reductions) to reserve
charged to operations
    
    
    408
    
    
    
    (123
    )
    
    
    147
    
    
    
    (217
    )
    
    
    524Balance, end of year
    
    
    739
    
    
    
    331
    
    
    
    454
    
    
    
    307
    
    
    
    524Total allowance for loan losses and
reserve for unfunded credit commitments
    
    $
    11,053
    
    
    $
    7,929
    
    
    $
    7,445
    
    
    $
    6,400
    
    
    $
    5,958Ratios:Net loans charged off to average loans outstanding
    
    
    2.91
    %
    
    
    0.58
    %
    
    
    0.54
    %
    
    
    0.22
    %
    
    
    0.32
    %Allowance for loan losses to loans outstanding
    
    
    2.96
    %
    
    
    1.98
    %
    
    
    1.88
    %
    
    
    1.70
    %
    
    
    1.57
    %
 
 (1)
    
    Partial charge offs of $2,934,831 are included in commercial charge offs to reduce the loans
transferred to held for sale to their impaired value prior to consideration of bid amounts in 2007(2)
    
    Represents charges to the allowance to reduce the investment in the loans to the estimated
fair values when the loans were transferred to held for sale.  (dollars in thousands)2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentCommercial
    
    $
    9,274
    
    
    
    89.9
    %
    
    $
    6,675
    
    
    
    85.5
    %
    
    $
    5,864
    
    
    
    81.9
    %
    
    $
    4,877
    
    
    
    80.3
    %
    
    $
    5,027
    
    
    
    80.1
    %Consumer
    
    
    609
    
    
    
    5.9
    %
    
    
    442
    
    
    
    7.2
    %
    
    
    850
    
    
    
    9.7
    %
    
    
    825
    
    
    
    10.1
    %
    
    
    101
    
    
    
    10.1
    %Real estate
    
    
    431
    
    
    
    4.2
    %
    
    
    481
    
    
    
    7.3
    %
    
    
    277
    
    
    
    8.4
    %
    
    
    391
    
    
    
    9.6
    %
    
    
    306
    
    
    
    9.8
    %Total
    
    $
    10,314
    
    
    
    100.0
    %
    
    $
    7,598
    
    
    
    100.0
    %
    
    $
    6,991
    
    
    
    100.0
    %
    
    $
    6,093
    
    
    
    100.0
    %
    
    $
    5,434
    
    
    
    100.0
    %
 22




---



##### 



(dollars in thousands)2007
    
    
    2006
    
    
    
    
    2005Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentCommercial
    
    $
    488
    
    
    
    77.3
    %
    
    $
    207
    
    
    
    80.1
    %
    
    $
    199
    
    
    
    76.7
    %Consumer
    
    
    251
    
    
    
    22.7
    %
    
    
    124
    
    
    
    19.9
    %
    
    
    255
    
    
    
    23.3
    %Real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    739
    
    
    
    100.0
    %
    
    $
    331
    
    
    
    100.0
    %
    
    $
    454
    
    
    
    100.0
    %
 Deposits
  (dollars in thousands)2007
    
    
    2006
    
    
    2005Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    RateNon-interest bearing demand
    
    $
    59,734
    
    
    
    0.00
    %
    
    $
    65,492
    
    
    
    0.00
    %
    
    $
    73,243
    
    
    
    0.00
    %NOW
    
    
    36,748
    
    
    
    0.49
    %
    
    
    39,568
    
    
    
    0.38
    %
    
    
    44,266
    
    
    
    0.20
    %Savings
    
    
    38,656
    
    
    
    0.50
    %
    
    
    43,383
    
    
    
    0.40
    %
    
    
    50,018
    
    
    
    0.25
    %MMDA
    
    
    67,473
    
    
    
    3.09
    %
    
    
    68,739
    
    
    
    2.35
    %
    
    
    82,062
    
    
    
    1.44
    %Time deposits
    
    
    184,938
    
    
    
    4.82
    %
    
    
    186,192
    
    
    
    4.26
    %
    
    
    163,065
    
    
    
    3.30
    %Total
    
    $
    387,549
    
    
    
    2.93
    %
    
    $
    403,374
    
    
    
    2.45
    %
    
    $
    412,654
    
    
    
    1.64
    %
    23




---



##### 



Capital
     Minimum RegulatoryRatio for Well Capitalized
    
    2007
    
    2006
    
    2005Average equity to average asset ratio
    
    
    
    
    
    
    10.42
    %
    
    
    10.86
    %
    
    
    10.18
    %Tier 1 leverage ratio
    
    
    5.00
    %
    
    
    9.60
    %
    
    
    10.80
    %
    
    
    10.58
    %Tier 1 risk-based capital
    
    
    6.00
    %
    
    
    10.61
    %
    
    
    12.31
    %
    
    
    12.63
    %Total risk-based capital
    
    
    10.00
    %
    
    
    11.88
    %
    
    
    13.56
    %
    
    
    13.89
    %
  Liquidity and Funds Management
    24




---



##### 



Contractual Obligations and Commitments
 Within
    
    One to
    
    Three to
    
    Over(in thousands)
    
    One Year
    
    Three Years
    
    Five Years
    
    Five Years
    
    TotalDeposits without a stated maturity(1)
    
    $
    213,229
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    213,229Consumer and brokered certificates of deposits(2)
    
    
    150,954
    
    
    
    14,976
    
    
    
    4,829
    
    
    
    21
    
    
    
    170,780Long term advances(3) (4)
    
    
    780
    
    
    
    8,875
    
    
    
    
    
    
    
    
    
    
    
    9,655Operating leases(5)
    
    
    42
    
    
    
    84
    
    
    
    74
    
    
    
    
    
    
    
    200Purchase obligations(6)
    
    
    129
    
    
    
    29
    
    
    
    29
    
    
    
    
    
    
    
    187
 
 (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, 2007. Future changes in market interest rates could
materially affect the contractual amounts to be paid for variable rate obligations.(3)
    
    Includes interest on fixed rates obligations.(4)
    
    See Note 9, Other Borrowings, in Notes to Consolidated Financial Statements.(5)
    
    See Note 12, Leases, in Notes to Consolidated Financial Statements.(6)
    
    Purchase obligations amounts relate to certain contractual payments for services provided for
information technology, data processing, advertising, and training consultants.  Within
    
    One to
    
    Three to
    
    Over(in thousands)
    
    One Year
    
    Three Years
    
    Five Years
    
    Five Years
    
    TotalCommercial loans
    
    $
    28,166
    
    
    $
    9,309
    
    
    $
    1,061
    
    
    $
    
    
    
    $
    38,536Commercial construction loans
    
    
    2,984
    
    
    
    1,208
    
    
    
    
    
    
    
    
    
    
    
    4,192Consumer loans
    
    
    2,204
    
    
    
    3,485
    
    
    
    1,673
    
    
    
    4,166
    
    
    
    11,528Standby letters of credit
    
    
    2,317
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    2,328
  Quantitative and Qualitative Disclosures about Market Risk
   25




---



##### 



(dollars in thousands)0-3
    
    
    4-12
    
    
    1-5
    
    
    5+Months
    
    
    Months
    
    
    Years
    
    
    Years
    
    
    TotalAssets:Loans
    
    $
    98,136
    
    
    $
    66,328
    
    
    $
    154,781
    
    
    $
    18,317
    
    
    $
    337,562Securities
    
    
    6,529
    
    
    
    7,748
    
    
    
    18,285
    
    
    
    6,070
    
    
    
    38,632Certificates of deposit
    
    
    687
    
    
    
    294
    
    
    
    3,044
    
    
    
    
    
    
    
    4,025Short term investments
    
    
    16,510
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,510Total assets
    
    $
    121,862
    
    
    $
    74,370
    
    
    $
    176,110
    
    
    $
    24,387
    
    
    $
    396,729Liabilities:NOW, savings, & MMDA
    
    $
    86,400
    
    
    $
    
    
    
    $
    
    
    
    $
    70,268
    
    
    $
    156,668Time deposits
    
    
    59,338
    
    
    
    88,430
    
    
    
    18,616
    
    
    
    20
    
    
    
    166,404FHLBI advances
    
    
    355
    
    
    
    
    
    
    
    8,797
    
    
    
    
    
    
    
    9,152Total liabilities
    
    $
    146,093
    
    
    $
    88,430
    
    
    $
    27,413
    
    
    $
    70,288
    
    
    $
    332,224Rate sensitivity GAP:GAP for period
    
    $
    (24,231
    )
    
    $
    (14,060
    )
    
    $
    148,697
    
    
    $
    (45,901
    )Cumulative GAP
    
    
    (24,231
    )
    
    
    (38,291
    )
    
    
    110,406
    
    
    
    64,505December 31, 2007
cumulative rate
sensitive ratio
    
    
    0.83
    
    
    
    0.84
    
    
    
    1.42
    
    
    
    1.19December 31, 2006
cumulative rate
sensitive ratio
    
    
    0.99
    
    
    
    0.85
    
    
    
    1.51
    
    
    
    1.23
    26




---



##### 



(dollars in thousands)Carrying Value
    
    
    Average Interest Rate

    
    Estimated Fair ValueAssets:Loans, net
    
    $
    337,562
    
    
    
    7.45
    %
    
    $
    342,907Securities
    
    
    38,632
    
    
    
    4.95
    %
    
    
    38,839Certificates of deposit
    
    
    4,025
    
    
    
    4.73
    %
    
    
    4,025Short term investments
    
    
    16,510
    
    
    
    4.87
    %
    
    
    16,510Liabilities:NOW, savings, & MMDA
    
    $
    156,668
    
    
    
    1.72
    %
    
    $
    156,668Time deposits
    
    
    166,404
    
    
    
    4.82
    %
    
    
    166,893FHLBI advances
    
    
    9,152
    
    
    
    5.50
    %
    
    
    9,229
 Fair Value of Financial Instruments
 RESULTS OF OPERATIONS
   2007
    
    2006
    
    2005
    
    2004
    
    2003Net income (loss) as a percent of:Average common equity
    
    
    -13.98
    %
    
    
    11.06
    %
    
    
    13.63
    %
    
    
    14.51
    %
    
    
    14.90
    %Average total assets
    
    
    -1.46
    %
    
    
    1.20
    %
    
    
    1.39
    %
    
    
    1.41
    %
    
    
    1.39
    %
 Net Interest Income
  27




---



##### 



Yield Analysis of Consolidated Average Assets and Liabilities
 (dollars in thousands)2007
    
    
    2006
    
    
    2005Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateAssetsInterest earning assets:Short term investments
    
    $
    3,091
    
    
    $
    150.6
    
    
    
    4.87
    %
    
    $
    3,253
    
    
    $
    151.7
    
    
    
    4.66
    %
    
    $
    9,930
    
    
    $
    309.5
    
    
    
    3.12
    %Certificates of deposit
    
    
    3,998
    
    
    
    189.2
    
    
    
    4.73
    %
    
    
    6,164
    
    
    
    264.4
    
    
    
    4.29
    %
    
    
    6,551
    
    
    
    201.1
    
    
    
    3.07
    %Securities: Taxable
    
    
    29,795
    
    
    
    1,324.8
    
    
    
    4.45
    %
    
    
    43,361
    
    
    
    1,665.7
    
    
    
    3.84
    %
    
    
    48,272
    
    
    
    1,821.4
    
    
    
    3.77
    %Tax-exempt (1)
    
    
    16,021
    
    
    
    941.5
    
    
    
    5.88
    %
    
    
    17,118
    
    
    
    1,048.3
    
    
    
    6.12
    %
    
    
    16,029
    
    
    
    1,048.3
    
    
    
    6.54
    %Commercial loans (2)(3)
    
    
    324,097
    
    
    
    23,988.5
    
    
    
    7.40
    %
    
    
    312,308
    
    
    
    24,572.5
    
    
    
    7.87
    %
    
    
    297,423
    
    
    
    21,673.2
    
    
    
    7.29
    %Consumer loans (2)(3)
    
    
    24,522
    
    
    
    2,160.4
    
    
    
    8.81
    %
    
    
    31,874
    
    
    
    2,699.8
    
    
    
    8.47
    %
    
    
    36,259
    
    
    
    2,760.9
    
    
    
    7.61
    %Mortgage loans (2)(3)
    
    
    26,418
    
    
    
    1,774.0
    
    
    
    6.71
    %
    
    
    30,452
    
    
    
    1,842.3
    
    
    
    6.05
    %
    
    
    33,195
    
    
    
    1,954.6
    
    
    
    5.89
    %Total earning assets and total
interest income
    
    
    427,942
    
    
    $
    30,529.0
    
    
    
    7.13
    %
    
    
    444,530
    
    
    $
    32,244.7
    
    
    
    7.25
    %
    
    
    447,659
    
    
    $
    29,769.0
    
    
    
    6.65
    %Cash and due from banks
    
    
    8,914
    
    
    
    
    
    
    
    
    
    
    
    10,703
    
    
    
    
    
    
    
    
    
    
    
    11,352All other assets
    
    
    19,845
    
    
    
    
    
    
    
    
    
    
    
    17,196
    
    
    
    
    
    
    
    
    
    
    
    16,940Allowance for loan losses
    
    
    (8,940
    )
    
    
    
    
    
    
    
    
    
    
    (7,324
    )
    
    
    
    
    
    
    
    
    
    
    (6,743
    )Total assets
    
    $
    447,761
    
    
    
    
    
    
    
    
    
    
    $
    465,105
    
    
    
    
    
    
    
    
    
    
    $
    469,208Liabilities and
Shareholders EquityInterest bearing deposits:NOW
    
    $
    36,748
    
    
    $
    181.5
    
    
    
    0.49
    %
    
    $
    39,568
    
    
    $
    148.4
    
    
    
    0.38
    %
    
    $
    44,266
    
    
    $
    88.8
    
    
    
    0.20
    %Savings
    
    
    38,656
    
    
    
    192.7
    
    
    
    0.50
    %
    
    
    43,383
    
    
    
    173.2
    
    
    
    0.40
    %
    
    
    50,018
    
    
    
    125.2
    
    
    
    0.25
    %MMDA
    
    
    67,473
    
    
    
    2,081.7
    
    
    
    3.09
    %
    
    
    68,739
    
    
    
    1,613.5
    
    
    
    2.35
    %
    
    
    82,062
    
    
    
    1,184.5
    
    
    
    1.44
    %Time deposits
    
    
    184,938
    
    
    
    8,910.4
    
    
    
    4.82
    %
    
    
    186,192
    
    
    
    7,936.0
    
    
    
    4.26
    %
    
    
    163,065
    
    
    
    5,374.4
    
    
    
    3.30
    %Short term borrowings
    
    
    6,918
    
    
    
    371.3
    
    
    
    5.37
    %
    
    
    5,696
    
    
    
    313.5
    
    
    
    5.50
    %
    
    
    2,611
    
    
    
    78.0
    
    
    
    2.98
    %FHLBI long term advances
    
    
    2,504
    
    
    
    147.1
    
    
    
    5.88
    %
    
    
    1,496
    
    
    
    110.4
    
    
    
    7.38
    %
    
    
    2,688
    
    
    
    203.1
    
    
    
    7.56
    %Total interest bearing
liabilities and total interest
expense
    
    
    337,237
    
    
    
    11,884.7
    
    
    
    3.52
    %
    
    
    345,074
    
    
    
    10,295.0
    
    
    
    2.98
    %
    
    
    344,710
    
    
    
    7,054.0
    
    
    
    2.05
    %Noninterest bearing deposits
    
    
    59,734
    
    
    
    
    
    
    
    
    
    
    
    65,492
    
    
    
    
    
    
    
    
    
    
    
    73,243All other liabilities
    
    
    3,905
    
    
    
    
    
    
    
    
    
    
    
    4,011
    
    
    
    
    
    
    
    
    
    
    
    3,507Shareholders equity
    
    
    46,885
    
    
    
    
    
    
    
    
    
    
    
    50,528
    
    
    
    
    
    
    
    
    
    
    
    47,748Total liabilities and
shareholders equity
    
    $
    447,761
    
    
    
    
    
    
    
    
    
    
    $
    465,105
    
    
    
    
    
    
    
    
    
    
    $
    469,208Interest spread
    
    
    
    
    
    
    
    
    
    
    3.61
    %
    
    
    
    
    
    
    
    
    
    
    4.27
    %
    
    
    
    
    
    
    
    
    
    
    4.60
    %Net interest income-FTE
    
    
    
    
    
    $
    18,644.3
    
    
    
    
    
    
    
    
    
    
    $
    21,949.7
    
    
    
    
    
    
    
    
    
    
    $
    22,715.0Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.36
    %
    
    
    
    
    
    
    
    
    
    
    4.94
    %
    
    
    
    
    
    
    
    
    
    
    5.07
    %
 
 (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, average non-accruing loans of $14,159,000 in 2007, $7,539,000 in 2006
and $3,359,000 in 2005 are included in the average daily loan balance.(3)
    
    Interest on loans includes origination fees totaling $328,000 in 2007, $507,000 in 2006, and $644,000 in 2005.  28




---



##### 



(dollars in thousands)Year ended December 31, 2007
    
    
    Year ended December 31, 2006compared to
    
    
    compared toYear ended December 31, 2006
    
    
    Year ended December 31, 2005Amount of Increase (Decrease) Due to Change inTotal Amount
    
    
    
    
    
    
    
    
    
    
    Total AmountAverage
    
    
    of Increase/
    
    
    
    
    
    
    Average
    
    
    of Increase/Volume
    
    
    Rate
    
    
    Decrease
    
    
    Volume
    
    
    Rate
    
    
    DecreaseInterest Income:Short term investments
    
    $
    (8
    )
    
    $
    6
    
    
    $
    (2
    )
    
    $
    (208
    )
    
    $
    50
    
    
    $
    (158
    )Certificates of deposit
    
    
    (93
    )
    
    
    18
    
    
    
    (75
    )
    
    
    (12
    )
    
    
    75
    
    
    
    63Securities:Taxable
    
    
    (521
    )
    
    
    181
    
    
    
    (340
    )
    
    
    (185
    )
    
    
    29
    
    
    
    (156
    )Tax exempt
    
    
    (67
    )
    
    
    (40
    )
    
    
    (107
    )
    
    
    75
    
    
    
    (75
    )
    
    
    0Loans
    
    
    31
    
    
    
    (1,223
    )
    
    
    (1,192
    )
    
    
    558
    
    
    
    2,168
    
    
    
    2,726Total interest income
    
    $
    (658
    )
    
    $
    (1,058
    )
    
    $
    (1,716
    )
    
    $
    228
    
    
    $
    2,247
    
    
    $
    2,475Interest Expense:Interest bearing deposits:NOW, savings & MMDA
    
    $
    (112
    )
    
    $
    633
    
    
    $
    521
    
    
    $
    (196
    )
    
    $
    732
    
    
    $
    536Time deposits
    
    
    (53
    )
    
    
    1,028
    
    
    
    975
    
    
    
    762
    
    
    
    1,800
    
    
    
    2,562Short term borrowings
    
    
    67
    
    
    
    (10
    )
    
    
    57
    
    
    
    92
    
    
    
    144
    
    
    
    236FHLBI advances
    
    
    74
    
    
    
    (38
    )
    
    
    36
    
    
    
    (90
    )
    
    
    (3
    )
    
    
    (93
    )Total interest expense
    
    $
    (24
    )
    
    $
    1,613
    
    
    $
    1,589
    
    
    $
    568
    
    
    $
    2,673
    
    
    $
    3,241Net interest income (FTE)
    
    $
    (634
    )
    
    $
    (2,671
    )
    
    $
    (3,305
    )
    
    $
    (340
    )
    
    $
    (426
    )
    
    $
    (766
    )
     29




---



##### 



2007
    
    2006
    
    2005As a percent of average earning assets:Loans
    
    
    87.64
    %
    
    
    84.28
    %
    
    
    81.96
    %Securities
    
    
    10.71
    %
    
    
    13.60
    %
    
    
    14.36
    %Certificates of deposit
    
    
    0.93
    %
    
    
    1.39
    %
    
    
    1.46
    %Short term investments
    
    
    0.72
    %
    
    
    0.73
    %
    
    
    2.22
    %Average earning assets
    
    
    100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %NOW, savings, & MMDA
    
    
    33.38
    %
    
    
    34.12
    %
    
    
    39.39
    %Time deposits
    
    
    43.21
    %
    
    
    41.89
    %
    
    
    36.43
    %Short term borrowing
    
    
    1.62
    %
    
    
    1.28
    %
    
    
    0.58
    %FHLBI advances
    
    
    0.59
    %
    
    
    0.34
    %
    
    
    0.60
    %Average interest bearing liabilities
    
    
    78.80
    %
    
    
    77.63
    %
    
    
    77.00
    %Earning asset ratio
    
    
    95.57
    %
    
    
    95.58
    %
    
    
    95.41
    %Free-funds ratio
    
    
    21.20
    %
    
    
    22.37
    %
    
    
    23.00
    %
 Provision for Loan Losses
  Noninterest Income
  30




---



##### 



Noninterest Expense
  Federal Income Tax Expense
  Critical Accounting Policies
  31




---



##### 



Impact of New Accounting Standards
  
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 8. Financial Statements and Supplementary Data.
  PageReport of Independent Registered Public Accounting Firm
    
    33Consolidated Balance Sheets
    
    35Consolidated Statements of Income
    
    36Consolidated Statements of Stockholders Equity and Comprehensive Income
    
    37Consolidated Statements of Cash Flows
    
    38Notes to Consolidated Financial Statements
    
    39
 32




---



##### 



(BDO LOGO)
    
    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
 
      
 
 33




---



##### 



(BDO LOGO)
    
    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
 
       
 
 34




---



##### 



FNBH BANCORP, INC. AND SUBSIDIARIES
 
   2007
    
    
    2006AssetsCash and due from banks
    
    $
    13,400,674
    
    
    $
    16,373,845Short term investments
    
    
    16,509,953
    
    
    
    2,747,642Total cash and cash equivalents
    
    
    29,910,627
    
    
    
    19,121,487Certificates of deposit
    
    
    4,025,000
    
    
    
    4,711,000Investment securities:Investment securities held to maturity, net (fair value of $15,600,812
at December 31, 2007 and $17,030,269 at December 31, 2006)
    
    
    15,394,165
    
    
    
    16,808,685Investment securities available for sale, at fair value
    
    
    14,005,338
    
    
    
    24,480,256Mortgage-backed/CMO securities available for sale, at fair value
    
    
    8,237,772
    
    
    
    11,930,591FHLBI and FRB stock, at cost
    
    
    994,950
    
    
    
    994,950Total investment securities
    
    
    38,632,225
    
    
    
    54,214,482Loans held for investment:Commercial
    
    
    301,027,391
    
    
    
    328,665,048Consumer
    
    
    21,887,904
    
    
    
    27,720,360Real estate mortgage
    
    
    24,960,574
    
    
    
    28,195,754Total loans held for investment
    
    
    347,875,869
    
    
    
    384,581,162Less allowance for loan losses
    
    
    (10,314,161
    )
    
    
    (7,597,900
    )Net loans held for investment
    
    
    337,561,708
    
    
    
    376,983,262Premises and equipment, net
    
    
    9,138,784
    
    
    
    9,704,111Other real estate owned, held for sale
    
    
    1,523,079
    
    
    
    1,629,250Accrued interest and other assets
    
    
    12,103,045
    
    
    
    7,532,112Total assets
    
    $
    432,894,468
    
    
    $
    473,895,704Liabilities and Stockholders EquityLiabilitiesDeposits:Demand (non-interest bearing)
    
    $
    56,505,803
    
    
    $
    62,681,088NOW
    
    
    35,027,009
    
    
    
    41,275,379Savings and money market
    
    
    121,641,368
    
    
    
    113,906,147Time deposits
    
    
    159,357,927
    
    
    
    170,126,892Brokered certificates of deposit
    
    
    7,046,389
    
    
    
    17,554,785Total deposits
    
    
    379,578,496
    
    
    
    405,544,291Other borrowings
    
    
    9,152,190
    
    
    
    13,480,813Accrued interest, taxes, and other liabilities
    
    
    3,536,600
    
    
    
    4,878,126Total liabilities
    
    
    392,267,286
    
    
    
    423,903,230Stockholders EquityCommon stock, no par value. Authorized 4,200,000 shares; 3,045,153
shares issued and outstanding at December 31, 2007 and 3,074,528 shares
issued and outstanding at December 31, 2006
    
    
    6,141,835
    
    
    
    6,005,835Retained earnings
    
    
    33,545,396
    
    
    
    43,625,997Deferred directors compensation
    
    
    859,609
    
    
    
    725,186Accumulated other comprehensive income (loss), net
    
    
    80,342
    
    
    
    (364,544
    )Total stockholders equity
    
    
    40,627,182
    
    
    
    49,992,474Total liabilities and stockholders equity
    
    $
    432,894,468
    
    
    $
    473,895,704
  35




---



##### 



FNBH BANCORP, INC. AND SUBSIDIARIES
 
   2007
    
    
    2006
    
    
    2005Interest and dividend income:Interest and fees on loans
    
    $
    27,819,663
    
    
    $
    28,986,420
    
    
    $
    26,247,716Interest and dividends on investment securities:U.S. Treasury, agency securities and CMOs
    
    
    1,277,759
    
    
    
    1,592,919
    
    
    
    1,711,402Obligations of states and political subdivisions
    
    
    680,515
    
    
    
    743,800
    
    
    
    729,222Corporate bonds
    
    
    
    
    
    
    17,560
    
    
    
    59,959Other securities
    
    
    47,070
    
    
    
    54,202
    
    
    
    50,004Interest on certificates of deposit
    
    
    189,233
    
    
    
    264,410
    
    
    
    201,076Interest on short term investments
    
    
    159,074
    
    
    
    159,633
    
    
    
    315,528Total interest and dividend income
    
    
    30,173,314
    
    
    
    31,818,944
    
    
    
    29,314,907Interest expense:Interest on deposits
    
    
    11,366,317
    
    
    
    9,871,304
    
    
    
    6,772,924Interest on other borrowings
    
    
    518,395
    
    
    
    423,970
    
    
    
    281,073Total interest expense
    
    
    11,884,712
    
    
    
    10,295,274
    
    
    
    7,053,997Net interest income
    
    
    18,288,602
    
    
    
    21,523,670
    
    
    
    22,260,910Provision for loan losses
    
    
    14,029,666
    
    
    
    2,639,000
    
    
    
    3,037,000Net interest income after provision for loan losses
    
    
    4,258,936
    
    
    
    18,884,670
    
    
    
    19,223,910Noninterest income:Service charges and other fee income
    
    
    3,308,113
    
    
    
    3,636,856
    
    
    
    3,464,122Trust income
    
    
    401,768
    
    
    
    333,918
    
    
    
    284,394Gain on sale of mortgage loans
    
    
    39,345
    
    
    
    57,208
    
    
    
    62,512Loss on available for sale securities
    
    
    (547,571
    )
    
    
    
    
    
    
    Other
    
    
    5,422
    
    
    
    2,986
    
    
    
    8,612Total noninterest income
    
    
    3,207,077
    
    
    
    4,030,968
    
    
    
    3,819,640Noninterest expense:Loss on sale/writedown of commercial loans
held for sale
    
    
    4,311,528
    
    
    
    
    
    
    
    Salaries and employee benefits
    
    
    6,644,273
    
    
    
    7,925,738
    
    
    
    7,230,103Net occupancy expense
    
    
    1,218,720
    
    
    
    1,169,337
    
    
    
    1,208,830Equipment expense
    
    
    487,532
    
    
    
    523,726
    
    
    
    588,251Professional and service fees
    
    
    2,035,141
    
    
    
    1,859,736
    
    
    
    1,680,037Computer service fees
    
    
    575,452
    
    
    
    364,333
    
    
    
    344,095Printing and supplies
    
    
    312,256
    
    
    
    271,167
    
    
    
    318,091Director fees
    
    
    300,428
    
    
    
    335,087
    
    
    
    286,660Advertising
    
    
    160,601
    
    
    
    306,211
    
    
    
    238,323Other
    
    
    1,759,179
    
    
    
    2,183,885
    
    
    
    1,758,253Total noninterest expense
    
    
    17,805,110
    
    
    
    14,939,220
    
    
    
    13,652,643Income (loss) before federal income taxes (credit)
    
    
    (10,339,097
    )
    
    
    7,976,418
    
    
    
    9,390,907Federal income taxes (credit)
    
    
    (3,782,909
    )
    
    
    2,390,422
    
    
    
    2,883,921Net income (loss)
    
    $
    (6,556,188
    )
    
    $
    5,585,996
    
    
    $
    6,506,986Per share statistics:Basic EPS
    
    $
    (2.13
    )
    
    $
    1.76
    
    
    $
    2.03Diluted EPS
    
    $
    (2.13
    )
    
    $
    1.76
    
    
    $
    2.03Dividends
    
    $
    0.84
    
    
    $
    0.84
    
    
    $
    0.80Basic average shares outstanding
    
    
    3,074,732
    
    
    
    3,177,093
    
    
    
    3,200,146Diluted average shares outstanding
    
    
    3,074,732
    
    
    
    3,177,146
    
    
    
    3,200,518
  36




---



##### 



FNBH BANCORP, INC. AND SUBSIDIARIES
 
   AccumulatedDeferred
    
    
    OtherCommon
    
    
    
    
    
    
    Directors
    
    
    ComprehensiveStock
    
    
    Retained Earnings
    
    
    Compensation
    
    
    Income (Loss)
    
    
    TotalBalances at December 31, 2004
    
    $
    5,858,133
    
    
    $
    39,430,621
    
    
    $
    455,481
    
    
    $
    (28,187
    )
    
    $
    45,716,048Earned portion of long term incentive plan, net
    
    
    83,880
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    83,880Issued 3,687 shares for employee stock purchase
plan
    
    
    95,975
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    95,975Issued 722 shares for current directors fees
    
    
    20,765
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,765Issued 986 shares for directors variable fee plan
    
    
    29,787
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,787Directors deferred compensation (4,105 stock
units)
    
    
    
    
    
    
    
    
    
    
    119,564
    
    
    
    
    
    
    
    119,564Comprehensive income:Net income
    
    
    
    
    
    
    6,506,986
    
    
    
    
    
    
    
    
    
    
    
    6,506,986Change in unrealized loss on investment
securities available for sale, net of tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (578,990
    )
    
    
    (578,990
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,927,996Cash 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
    )
    
    
    49,446,325Cumulative effect adjustment  initial
application of
SEC Staff Accounting Bulletin No. 108
    
    
    
    
    
    
    180,000
    
    
    
    
    
    
    
    
    
    
    
    180,000Balances at January 1, 2006
    
    
    6,088,540
    
    
    
    43,569,917
    
    
    
    575,045
    
    
    
    (607,177
    )
    
    
    49,626,325Earned portion of long term incentive plan, net
    
    
    81,199
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81,199Issued 1,234 shares for employee stock purchase
plan
    
    
    30,623
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,623Issued 270 shares for current directors fees
    
    
    6,999
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,999Issued 1,244 shares for directors variable fee
plan
    
    
    32,257
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,257Directors deferred compensation (5,750 stock
units)
    
    
    
    
    
    
    
    
    
    
    150,141
    
    
    
    
    
    
    
    150,141Comprehensive income:Net income
    
    
    
    
    
    
    5,585,996
    
    
    
    
    
    
    
    
    
    
    
    5,585,996Change in unrealized loss on investment
securities available for sale, net of
tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    242,633
    
    
    
    242,633Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,828,629Repurchase 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
    )
    
    
    49,992,474Earned portion of long term incentive plan, net
    
    
    130,832
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    130,832Issued 1,186 shares for employee stock purchase
plan
    
    
    25,211
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,211Issued 653 shares for current directors fees
    
    
    12,998
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,998Issued 1,141 shares for directors variable fee
plan
    
    
    30,020
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,020Issued 685 shares for deferred directors fees
    
    
    14,549
    
    
    
    
    
    
    
    (14,549
    )
    
    
    
    
    
    
    Directors deferred compensation (6,560 stock
units)
    
    
    
    
    
    
    
    
    
    
    148,972
    
    
    
    
    
    
    
    148,972Comprehensive income:Net loss
    
    
    
    
    
    
    (6,556,188
    )
    
    
    
    
    
    
    
    
    
    
    (6,556,188
    )Change in unrealized gain (loss) on
investment securities
available for sale, net of tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    83,489
    
    
    
    83,489Less reclassification adjustment for
realized securities
net loss included in net loss, net of tax
effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    361,397
    
    
    
    361,397Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,111,302
    )Repurchase of common stock (39,000 shares)
    
    
    (77,610
    )
    
    
    (960,995
    )
    
    
    
    
    
    
    
    
    
    
    (1,038,605
    )Cash dividends ($0.84 per share)
    
    
    
    
    
    
    (2,563,418
    )
    
    
    
    
    
    
    
    
    
    
    (2,563,418
    )Balances at December 31, 2007
    
    $
    6,141,835
    
    
    $
    33,545,396
    
    
    $
    859,609
    
    
    $
    80,342
    
    
    $
    40,627,182
  37




---



##### 



FNBH BANCORP, INC. AND SUBSIDIARIES
 
   2007
    
    
    2006
    
    
    2005Cash flows from operating activities:Net income (loss)
    
    $
    (6,556,188
    )
    
    $
    5,585,996
    
    
    $
    6,506,986Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Provision for loan losses
    
    
    14,029,666
    
    
    
    2,639,000
    
    
    
    3,037,000Loss on sale/writedown of commercial loans held for sale
    
    
    4,311,528
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    935,722
    
    
    
    923,942
    
    
    
    984,021Deferred income tax benefit
    
    
    (192,769
    )
    
    
    (217,783
    )
    
    
    (503,802
    )Net amortization on investment securities
    
    
    13,806
    
    
    
    8,830
    
    
    
    15,183Earned portion of long time incentive plan, net
    
    
    130,832
    
    
    
    81,199
    
    
    
    83,880Shares issued for current and variable directors compensation
    
    
    43,018
    
    
    
    39,256
    
    
    
    50,552Shares earned for deferred directors compensation
    
    
    148,972
    
    
    
    150,141
    
    
    
    119,564Loss on available for sale securities
    
    
    547,571
    
    
    
    
    
    
    
    Gain on sale of loans originated for sale
    
    
    (39,346
    )
    
    
    (57,208
    )
    
    
    (62,512
    )Proceeds from sale of loans originated for sale
    
    
    2,712,726
    
    
    
    5,050,710
    
    
    
    6,102,540Origination of loans held for sale
    
    
    (2,673,380
    )
    
    
    (5,005,968
    )
    
    
    (5,788,325
    )(Gain) loss on the sale of other real estate owned, held for sale
    
    
    201,390
    
    
    
    292,101
    
    
    
    (20,507
    )Loss on sale of land and facilities held for sale
    
    
    
    
    
    
    
    
    
    
    2,595Loss on disposal of equipment
    
    
    18,951
    
    
    
    
    
    
    
    19,990Increase in accrued interest income and other assets
    
    
    (3,998,342
    )
    
    
    (686,391
    )
    
    
    (338,394
    )Increase (decrease) in accrued interest, taxes, and other liabilities
    
    
    (1,749,526
    )
    
    
    1,272,989
    
    
    
    (103,130
    )Net cash provided by operating activities
    
    
    7,884,631
    
    
    
    10,076,814
    
    
    
    10,105,641Cash flows from investing activities:Purchases of available for sale securities
    
    
    (16,412,592
    )
    
    
    (1,860,624
    )
    
    
    (5,119,280
    )Purchases of held to maturity securities
    
    
    (505,500
    )
    
    
    (2,880,585
    )
    
    
    (2,091,712
    )Purchases of FHLBI stock
    
    
    
    
    
    
    158,600
    
    
    
    (22,900
    )Proceeds from sales of available for sale securities
    
    
    15,995,814
    
    
    
    
    
    
    
    Proceeds from maturities and at-par calls of available for sale
securities
    
    
    13,532,844
    
    
    
    8,285,762
    
    
    
    3,000,000Proceeds from mortgage-backed securities paydowns-available for sale
    
    
    1,189,383
    
    
    
    2,339,217
    
    
    
    3,647,345Proceeds from maturities and calls of held to maturity securities
    
    
    1,895,000
    
    
    
    2,475,000
    
    
    
    1,666,000Proceeds from sale of loans held for sale
    
    
    8,763,632
    
    
    
    
    
    
    
    Purchases of certificates of deposit
    
    
    (2,651,000
    )
    
    
    (2,944,000
    )
    
    
    (10,600,000
    )Maturity of certificates of deposit
    
    
    3,337,000
    
    
    
    5,399,000
    
    
    
    9,525,000Net (increase) decrease in loans
    
    
    10,521,671
    
    
    
    (15,851,925
    )
    
    
    (18,690,040
    )Proceeds from sale of other real estate owned, held for sale
    
    
    2,107,838
    
    
    
    741,632
    
    
    
    1,043,955Proceeds from sale of land and facilities held for sale
    
    
    
    
    
    
    
    
    
    
    93,085Capital expenditures
    
    
    (998,351
    )
    
    
    (340,442
    )
    
    
    (382,966
    )Net cash provided by (used in) investing activities
    
    
    36,775,739
    
    
    
    (4,478,365
    )
    
    
    (17,931,513
    )Cash flows from financing activities:Net increase (decrease) in deposits
    
    
    (25,965,795
    )
    
    
    (16,541,296
    )
    
    
    22,822,677Proceeds from issuance of FHLBI note
    
    
    8,000,000
    
    
    
    
    
    
    
    Payments on FHLBI note
    
    
    (328,623
    )
    
    
    (304,281
    )
    
    
    (3,281,742
    )Proceeds from issuance of short term debt
    
    
    53,000,000
    
    
    
    42,500,000
    
    
    
    11,000,000Repayment of short term debt
    
    
    (65,000,000
    )
    
    
    (30,500,000
    )
    
    
    (14,000,000
    )Repurchase of common stock
    
    
    (1,038,605
    )
    
    
    (3,107,295
    )
    
    
    Dividends paid
    
    
    (2,563,418
    )
    
    
    (2,656,404
    )
    
    
    (2,547,690
    )Shares issued for employee stock purchase plan
    
    
    25,211
    
    
    
    30,623
    
    
    
    95,975Net cash provided by (used in) financing activities
    
    
    (33,871,230
    )
    
    
    (10,578,653
    )
    
    
    14,089,220Net increase (decrease) in cash and cash equivalents
    
    
    10,789,140
    
    
    
    (4,980,204
    )
    
    
    6,263,348Cash and cash equivalents at beginning of year
    
    
    19,121,487
    
    
    
    24,101,691
    
    
    
    17,838,343Cash and cash equivalents at end of year
    
    $
    29,910,627
    
    
    $
    19,121,487
    
    
    $
    24,101,691Supplemental disclosures:Interest paid
    
    $
    11,736,225
    
    
    $
    10,009,063
    
    
    $
    6,813,756Federal income taxes paid
    
    
    1,672,230
    
    
    
    2,097,919
    
    
    
    3,546,682Loans transferred to other real estate
    
    
    2,203,057
    
    
    
    1,983,249
    
    
    
    968,181Loans charged off
    
    
    11,290,640
    
    
    
    2,664,596
    
    
    
    2,253,717Loans, net of reserves, transferred to held for sale
    
    
    17,194,017
    
    
    
    
    
    
    
    Loans, net of reserves transferred to held for investment from held
for sale
    
    
    3,689,159
    
    
    
    
    
    
    
    
  38




---



##### 



Notes to Consolidated Financial Statements
 (1) Summary of Significant Accounting Policies
 Principles of Consolidation
      (a)
    
    Brokered Certificates of DepositBrokered 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/CMO SecuritiesThe 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.
 39




---



##### 



(c)
    
    LoansLoans are classified within loans held for investment when management has the intent and
ability to hold the loan for the foreseeable future, or until maturity or payoff. The
foreseeable future is a management judgment which is determined based upon the type of loan,
business strategies, current market conditions, balance sheet management and liquidity needs.
Managements view of the foreseeable future may change based on changes in these conditions.
When a decision is made to sell or securitize a loan that was not originated or initially
acquired with the intent to sell or securitize, the loan is reclassified from loans held for
investment into held for sale. Loans are classified as held for sale when management has the
intent and ability to sell or securitize. Due to changing market conditions or other
strategic initiatives, managements intent with respect to the disposition of the loan may
change, and accordingly, loans previously classified as held for sale may be reclassified into
loans held for investment. Loans transferred between loans held for sale and loans held for
investment classifications are recorded at the lower of cost or market at the date of
transfer.Loans held for investment are carried at the principal amount outstanding net of unearned
income, unamortized premiums or discounts, deferred loan origination fees and costs, the
allowance for loan losses, and fair value adjustments, if any. Commercial loans included in
loans held for sale are carried at the lower of cost or fair value applied on a loan by loan
basis by type of loan. Mortgage loans in loans held for sale are carried at the lower of cost
or fair market value applied on a net aggregate basis. Fair value is measured based on
purchase commitments, bids received from potential purchasers, quoted prices for the same or
similar loans, or prices of recent sales or securitizations. Management considers in its
assessment the probability that buyer commitments may not close. In the absence of an active
market, fair value is based upon a discounted cash flow model which utilizes inputs and
assumptions which are believed to be consistent with market participants views.When the Corporation sells a loan or group of loans which qualify as a sale pursuant to
Financial Accounting Standards Board (FASB) Statement No. 140, Accounting for Transfers and
Serving of Financial Assets and Extinguishments of Liabilities, the loans are removed from the
balance sheet and a gain or loss is recognized in loan sale revenue.During the second quarter of 2007, the Corporation reclassified certain nonperforming loans
originated for investment to the held for sale classification at their then estimated lower of
cost or fair value due to its intent, at the time, to package and sell the loans in the
secondary market. Certain of these loans were sold in the third quarter. Due to the
prevailing secondary market conditions, which worsened during the third quarter when the final
bids were received, the remaining balance of these loans, previously identified as held for
sale, were determined by management to no longer be offered for sale. Based on the intent and
ability of the Corporation to no longer sell these loans, they were transferred back to loans
held for investment at their then estimated fair values based on the bids received. For
purposes of reporting cash flows, the proceeds from the sale of the reclassified loans are
included in cash flows from investing activities in the consolidated statement of cash flows
in accordance with the requirements of FASB Statement No. 102, Statement of Cash Flows 
Exemption of Certain Enterprises and Classification of Cash Flows from Certain Securities
Acquired for Resale  An Amendment of FASB Statement No. 95, such that these cash inflows are
categorized consistent with the initial cash outflows related to these loans.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 $489,000 and $670,000 at December 31, 2007 and 2006, respectively.Prior to December 2007, the Bank originated real estate mortgage loans for sale to the
secondary market and sold the loans with servicing retained. Mortgage loans held for sale were
carried at the lower of cost or market, determined on a net aggregate basis. Market was
determined on the basis of delivery prices in the secondary mortgage market. When loans were
sold, gains and losses were recognized based on the specific identification method. For
purposes of reporting cash flows, cash outflows and inflows related to the origination and
sale of loans originated for sale are classified as operating activities in the consolidated
statement of cash flows.The total cost of mortgage loans originated and sold was 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 entered into interest rate lock
commitments to originate loans at a rate determined prior to funding. Interest rate lock
 40




---



##### 



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 the fair value of interest rate lock commitments was
insignificant. There were no interest rate lock commitments at December 31, 2007 as the Bank
no longer originates mortgage loans for sale.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 CommitmentsThe 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 AssetsThe 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 owned, 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 interest 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)
    
    Other Real Estate OwnedOther real estate owned at the time of foreclosure is
recorded at the assets estimated fair market value, net
of estimated disposal costs, establishing a new cost basis. Any write-downs at the time
of foreclosure are charged to the
 41




---



##### 



allowance for loan losses. Expenses incurred in maintaining assets, adjustments to estimated
disposal costs, and subsequent write-downs to reflect declines in value are charged to other
noninterest expense.(g)
    
    Premises and EquipmentPremises 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 CostsAdvertising costs are generally expensed as incurred.(i)
    
    Federal Income TaxesDeferred 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.The Corporation adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48), on January 1, 2007. The adoption of FIN 48 had no
affect on the consolidated financial statements as there were no unrecognized tax benefits at
the time of adoption or during 2007. Interest or penalties related to unrecognized tax
benefits will be recorded in income tax expense. The Corporation files U.S. federal income
tax returns which are subject to final examination for all years after 2003.(j)
    
    Stock-Based CompensationAt December 31, 2007 and 2006, the Corporation had two stock-based compensation plans, which
are described more fully in notes 14 and 15.(k)
    
    Common Stock RepurchasesThe Corporation records common stock repurchases at cost. A portion of the repurchase is
charged to common stock based on the average per share dollar amount of stock outstanding,
multiplied by the number of shares repurchased, 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 expired on March 16, 2007. The
Board authorized another program on August 17, 2006 for an additional 100,000 shares that
expired on August 17, 2007. For the year ended December 31, 2007, 39,000 shares were
repurchased under the authorized plans. The cost of the repurchases approximated $1,039,000
at monthly weighted average prices ranging from $26.55 to $26.70 per share. For the year
ended December 31, 2006, 117,700 shares were repurchased, 110,700 under the authorized 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
monthly weighted average prices ranging from $25.80 to $26.78 per share.The Board of Directors authorized an additional share repurchase program on May 17, 2007 for
100,000 shares that expires on August 17, 2008. No shares have yet been repurchased under
this program.(l)
    
    Statements of Cash FlowsFor 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.
 42




---



##### 



(m)
    
    Comprehensive IncomeStatement 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 ShareBasic 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)
    
    ReclassificationsCertain reclassifications in the prior years financial statements have been made to conform
to the current year presentation.(p)
    
    Operating SegmentWhile the Corporation monitors revenue streams of the various products and services offered,
the Corporation manages its business on the basis of one operating segment, banking, in
accordance with the qualitative and quantitative criteria established by FASB Statement No.
131, Disclosures about Segments of an Enterprise and Related Information.
 (2) Certificates of Deposit
  Maturing in 2008
    
    $
    981,000Maturing in 2009
    
    
    885,000Maturing in 2010
    
    
    1,962,000Maturing in 2012
    
    
    197,000Total
    
    $
    4,025,000
 43




---



##### 



(3) Investment and Mortgage-Backed/CMO Securities
  December 31, 2007
    
    
    December 31, 2006Unrealized
    
    
    Unrealized
    
    
    
    
    
    
    
    
    
    
    Unrealized
    
    
    UnrealizedAmortized
    
    
    gross
    
    
    gross
    
    
    Fair
    
    
    Amortized
    
    
    gross
    
    
    gross
    
    
    Faircost
    
    
    gains
    
    
    losses
    
    
    value
    
    
    cost
    
    
    gains
    
    
    losses
    
    
    valueHeld to maturity:Obligations of state and
political subdivisions
    
    $
    15,394,165
    
    
    $
    238,510
    
    
    $
    (31,863)
    
    
    $
    15,600,812
    
    
    $
    16,808,685
    
    
    $
    256,662
    
    
    $
    (35,078)
    
    
    $
    17,030,269Total held to maturity
    
    
    15,394,165
    
    
    
    238,510
    
    
    
    (31,863
    )
    
    
    15,600,812
    
    
    
    16,808,685
    
    
    
    256,662
    
    
    
    (35,078
    )
    
    
    17,030,269Available for sale:U.S. Treasury and
agency securities
    
    
    13,889,560
    
    
    
    134,767
    
    
    
    (18,989
    )
    
    
    14,005,338
    
    
    
    24,870,214
    
    
    
    
    
    
    
    (389,958
    )
    
    
    24,480,256Mortgage-backed/CMO
securities
    
    
    8,231,820
    
    
    
    35,748
    
    
    
    (29,796
    )
    
    
    8,237,772
    
    
    
    12,092,973
    
    
    
    25,483
    
    
    
    (187,865
    )
    
    
    11,930,591Total available for sale
    
    
    22,121,380
    
    
    
    170,515
    
    
    
    (48,785
    )
    
    
    22,243,110
    
    
    
    36,963,187
    
    
    
    25,483
    
    
    
    (577,823
    )
    
    
    36,410,847Total securities
    
    $
    37,515,545
    
    
    $
    409,025
    
    
    $
    (80,648)
    
    
    $
    37,843,922
    
    
    $
    53,771,872
    
    
    $
    282,145
    
    
    $
    (612,901
    )
    
    $
    53,441,116
  44




---



##### 



December 31, 2007Less than 12 months
    
    
    12 months or more
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    Unrealizedgross
    
    
    Fair
    
    
    gross
    
    
    Fair
    
    
    gross
    
    
    Fairlosses
    
    
    value
    
    
    losses
    
    
    value
    
    
    losses
    
    
    valueHeld to maturity:Obligations of state and
political subdivisions
    
    $
    (26,805
    )
    
    $
    1,801,920
    
    
    $
    (5,058
    )
    
    $
    1,303,774
    
    
    $
    (31,863
    )
    
    $
    3,105,694Available for sale:U.S. Treasury and agency securities
    
    $
    (2,420
    )
    
    $
    887,580
    
    
    $
    (16,569
    )
    
    $
    4,982,991
    
    
    $
    (18,989
    )
    
    $
    5,870,571Mortgage-backed securities
    
    
    (29,796
    )
    
    
    4,346,994
    
    
    
    
    
    
    
    
    
    
    
    (29,796
    )
    
    
    4,346,994Total available for sale
    
    $
    (32,216
    )
    
    $
    5,234,574
    
    
    $
    (16,569
    )
    
    $
    4,982,991
    
    
    $
    (48,785
    )
    
    $
    10,217,565
 December 31, 2006Less than 12 months
    
    
    12 months or more
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedGross
    
    
    Fair
    
    
    gross
    
    
    Fair
    
    
    gross
    
    
    FairLosses
    
    
    value
    
    
    losses
    
    
    value
    
    
    losses
    
    
    valueHeld to maturity:Obligations of state and
political subdivisions
    
    $
    (15,379
    )
    
    $
    2,071,039
    
    
    $
    (19,699
    )
    
    $
    1,817,883
    
    
    $
    (35,078
    )
    
    $
    3,888,922Available for sale:U.S. Treasury and agency securities
    
    $
    
    
    
    $
    
    
    
    $
    (389,958
    )
    
    $
    24,480,256
    
    
    $
    (389,958
    )
    
    $
    24,480,256Mortgage-backed securities
    
    
    (2,137
    )
    
    
    651,764
    
    
    
    (185,728
    )
    
    
    8,307,957
    
    
    
    (187,865
    )
    
    
    8,959,721Total available for sale
    
    $
    (2,137
    )
    
    $
    651,764
    
    
    $
    (575,686
    )
    
    $
    32,788,213
    
    
    $
    (577,823
    )
    
    $
    33,439,977
  December 31, 2007
    
    
    December 31, 2006Amortized
    
    
    Approximate
    
    
    Amortized
    
    
    Approximatecost
    
    
    fair value
    
    
    cost
    
    
    fair valueHeld to maturity:Due in one year or less
    
    $
    2,303,497
    
    
    $
    2,320,837
    
    
    $
    1,894,917
    
    
    $
    1,904,607Due after one year through five years
    
    
    3,668,097
    
    
    
    3,726,734
    
    
    
    5,650,096
    
    
    
    5,729,168Due after five years through
ten years
    
    
    2,604,102
    
    
    
    2,625,732
    
    
    
    2,606,373
    
    
    
    2,617,116Due after ten years
    
    
    6,818,469
    
    
    
    6,927,509
    
    
    
    6,657,299
    
    
    
    6,779,378$
    15,394,165
    
    
    $
    15,600,812
    
    
    $
    16,808,685
    
    
    $
    17,030,269Available for sale:Due in one year or less
    
    $
    5,889,560
    
    
    $
    5,870,571
    
    
    $
    13,495,406
    
    
    $
    13,366,817Due after one year through five years
    
    
    
    
    
    
    
    
    
    
    11,374,808
    
    
    
    11,113,439Due after five years through
ten years
    
    
    8,000,000
    
    
    
    8,134,767
    
    
    
    
    
    
    
    13,889,560
    
    
    
    14,005,338
    
    
    
    24,870,214
    
    
    
    24,480,256Mortgage-backed securities
    
    
    8,231,820
    
    
    
    8,237,772
    
    
    
    12,092,973
    
    
    
    11,930,591$
    22,121,380
    
    
    $
    22,243,110
    
    
    $
    36,963,187
    
    
    $
    36,410,847
 45




---



##### 



2007
    
    2006Amortized
    
    Approximate
    
    Amortized
    
    Approximatecost
    
    fair value
    
    cost
    
    fair valueState of Michigan
    
    $
    10,506,107
    
    
    $
    10,641,057
    
    
    $
    11,035,793
    
    
    $
    11,164,500
   (4) Loans
   90 days past dueand still accruing interest
    
    
    Nonaccrual2007
    
    
    2006
    
    
    2005
    
    
    2007
    
    
    2006
    
    
    2005Commercial and mortgage
loans secured by real estate
    
    $
    86,484
    
    
    $
    275,077
    
    
    $
    298,247
    
    
    $
    14,271,517
    
    
    $
    10,999,196
    
    
    $
    5,072,970Consumer loans
    
    
    
    
    
    
    
    
    
    
    5,756
    
    
    
    38,389
    
    
    
    33,810
    
    
    
    91,599Commercial and other loans
    
    
    27,451
    
    
    
    12,639
    
    
    
    86,595
    
    
    
    149,307
    
    
    
    1,165,809
    
    
    
    69,502Total
    
    $
    113,935
    
    
    $
    287,716
    
    
    $
    390,598
    
    
    $
    14,459,213
    
    
    $
    12,198,815
    
    
    $
    5,234,071
    46




---



##### 



Year:2008
    
    $
    47,0002009
    
    
    34,0002010
    
    
    25,0002011
    
    
    12,0002012
    
    
    8,0002013 and thereafter
    
    
    13,000Total
    
    $
    139,000
 (5) Allowance for Loan Losses and Reserve for Unfunded Credit Commitments
  2007
    
    
    2006
    
    
    2005Components:Allowance for loan lossesBalance, beginning of year
    
    $
    7,597,900
    
    
    $
    6,991,125
    
    
    $
    6,092,949Loans charged off:Real estate mortgage
    
    
    242,727
    
    
    
    260,091
    
    
    
    25,771Commercial (1)
    
    
    5,519,109
    
    
    
    1,785,573
    
    
    
    1,436,463Consumer
    
    
    859,754
    
    
    
    618,932
    
    
    
    791,483Subtotal
    
    
    6,621,590
    
    
    
    2,664,596
    
    
    
    2,253,717Charge-offs on loans transferred to held for sale (2)
    
    
    4,669,050
    
    
    
    
    
    
    
    Total charge offs
    
    
    11,290,640
    
    
    
    2,664,596
    
    
    
    2,253,717Recoveries to loans previously charged off:Real estate mortgage
    
    
    
    
    
    
    
    
    
    
    Commercial
    
    
    146,100
    
    
    
    283,103
    
    
    
    120,012Consumer
    
    
    239,135
    
    
    
    226,268
    
    
    
    141,881Total recoveries
    
    
    385,235
    
    
    
    509,371
    
    
    
    261,893Net loans charged off
    
    
    10,905,405
    
    
    
    2,155,225
    
    
    
    1,991,824Additions to allowance charged to operations
    
    
    13,621,666
    
    
    
    2,762,000
    
    
    
    2,890,000Balance, end of year
    
    
    10,314,161
    
    
    
    7,597,900
    
    
    
    6,991,125Reserve for unfunded credit commitmentsBalance, beginning of year
    
    
    331,000
    
    
    
    454,000
    
    
    
    307,000Additions (reductions) to reserve charged (credited) to operations
    
    
    408,000
    
    
    
    (123,000
    )
    
    
    147,000Balance, end of year
    
    
    739,000
    
    
    
    331,000
    
    
    
    454,000Total allowance for loan losses and reserve for unfunded
credit commitments
    
    $
    11,053,161
    
    
    $
    7,928,900
    
    
    $
    7,445,125
 
 (1)
    
    Partial charge offs of $2,934,831 are included in commercial charge offs to reduce the loans
transferred to held for sale to their impaired value prior to consideration of bid amounts in 2007.(2)
    
    Represents charges to the allowance to reduce the investment in the loans to the estimated fair
values when the loans were transferred to held for sale. 47




---



##### 



(6) Premises and Equipment
  2007
    
    
    2006Land and land improvements
    
    $
    2,937,115
    
    
    $
    2,931,820Premises
    
    
    10,058,300
    
    
    
    10,051,340Furniture and equipment
    
    
    4,036,723
    
    
    
    3,980,91417,032,138
    
    
    
    16,964,074Less accumulated depreciation and amortization
    
    
    (7,893,354
    )
    
    
    (7,259,963
    )Premises and equipment, net
    
    $
    9,138,784
    
    
    $
    9,704,111
 (7) Other Real Estate Owned
  (8) Time Certificates of Deposit
  Year of maturity:2009
    
    $
    9,733,5032010
    
    
    4,318,9642011
    
    
    638,8412012
    
    
    3,924,5072013 and thereafter
    
    
    19,269Total
    
    $
    18,635,084
  2007
    
    
    2006Three months or less
    
    $
    23,969,487
    
    
    $
    30,307,369Three through six months
    
    
    24,207,776
    
    
    
    22,630,989Six through twelve months
    
    
    15,310,444
    
    
    
    27,572,446Over twelve months
    
    
    8,056,613
    
    
    
    8,951,554Total
    
    $
    71,544,320
    
    
    $
    89,462,358
  48




---



##### 



(9) Other Borrowings
  WeightedaverageMaturity
    
    interest rate
    
    
    AmountLong term advances:Fixed rate:Within one year
    
    
    7.29
    %
    
    $
    354,913Two years
    
    
    4.61
    %
    
    
    8,383,307Three years
    
    
    7.29
    %
    
    
    413,970Total advances
    
    
    
    
    
    $
    9,152,190
  (10) Federal Income Taxes
  2007
    
    
    2006
    
    
    2005Current
    
    $
    (3,975,678
    )
    
    $
    2,608,205
    
    
    $
    3,387,723Deferred
    
    
    192,769
    
    
    
    (217,783
    )
    
    
    (503,802
    )Total federal income tax
    
    $
    (3,782,909
    )
    
    $
    2,390,422
    
    
    $
    2,883,921
  2007
    
    
    2006
    
    
    2005Computed expected tax expense
    
    $
    (3,515,293
    )
    
    $
    2,711,982
    
    
    $
    3,192,908Increase (reduction) in tax resulting from:Tax-exempt interest and dividends, net
    
    
    (275,995
    )
    
    
    (318,109
    )
    
    
    (325,188
    )Other, net
    
    
    8,379
    
    
    
    (3,451
    )
    
    
    16,201Total federal income tax
    
    $
    (3,782,909
    )
    
    $
    2,390,422
    
    
    $
    2,883,921
 49




---



##### 



2007
    
    
    2006Deferred tax assets:Allowance for loan losses
    
    $
    1,946,046
    
    
    $
    2,354,604Deferred directors fees
    
    
    292,286
    
    
    
    246,579Premises and equipment
    
    
    222,568
    
    
    
    148,104Supplemental retirement plan
    
    
    215,186
    
    
    
    145,964Unrealized loss on securities available for sale
    
    
    
    
    
    
    187,795Other
    
    
    85,969
    
    
    
    188,084Total gross deferred tax assets
    
    
    2,762,055
    
    
    
    3,271,130Deferred tax liabilities:Deferred loan fees
    
    
    (90,842
    )
    
    
    (181,259
    )Unrealized gain on securites available for sale
    
    
    (41,388
    )
    
    
    Other
    
    
    (139,267
    )
    
    
    (177,361
    )Total gross deferred tax liabilities
    
    
    (271,497
    )
    
    
    (358,620
    )Net deferred tax asset
    
    $
    2,490,558
    
    
    $
    2,912,510
  Quantifying Misstatements in Financial Statements
 (11) Related Party Transactions
  2007
    
    
    2006Balance at beginning of year
    
    $
    4,598,800
    
    
    $
    6,075,400New loans and related parties
    
    
    557,509
    
    
    
    1,225,200Loan repayments
    
    
    (253,059
    )
    
    
    (2,701,800
    )Balance at end of year
    
    $
    4,903,250
    
    
    $
    4,598,800
 50




---



##### 



(12) Leases
   Year ending December 31:2008
    
    $
    42,0002009
    
    
    42,0002010
    
    
    42,0002011
    
    
    42,0002012
    
    
    31,500Total lease payments
    
    $
    199,500
  (13) Retirement Plan
  (14) Long Term Incentive Plan
  2007Weighted-AverageGrant DateRestricted Stock Awards
    
    Shares
    
    
    Fair ValueOutstanding at January 1,
    
    
    4,100
    
    
    $
    26.93Granted
    
    
    7,353
    
    
    
    25.95Vested
    
    
    (4,953
    )
    
    
    26.41Forfeited
    
    
    (1,393
    )
    
    
    25.80Outstanding at December 31,
    
    
    5,107
    
    
    $
    26.32
  (15) Directors Stock Fee Plan
  51




---



##### 



(16) Employees Stock Purchase Plan
  (17) Financial Instruments with Off-Balance-Sheet Risk
    2007
    
    
    2006Consumer
    
    $
    11,527,801
    
    
    $
    11,690,317Commercial construction
    
    
    4,192,251
    
    
    
    8,564,026Commercial
    
    
    38,536,279
    
    
    
    49,405,506Total credit commitments
    
    $
    54,256,331
    
    
    $
    69,659,849
  52




---



##### 



(18) Capital
    53




---



##### 



To be well capitalizedMinimum for
    
    under prompt correctiveActual
    
    capital adequacy purposes
    
    action provisionAs of December 31, 2007
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTotal Capital (to risk weighted assets)Bank
    
    $
    45,306,000
    
    
    
    11.88
    %
    
    $
    30,497,000
    
    
    
    8
    %
    
    $
    38,122,000
    
    
    
    10
    %FNBH Bancorp
    
    
    45,390,000
    
    
    
    11.91
    %
    
    
    30,497,000
    
    
    
    8
    %
    
    
    N/A
    
    
    
    N/ATier 1 Capital (to risk weighted assets)Bank
    
    
    40,463,000
    
    
    
    10.61
    %
    
    
    15,249,000
    
    
    
    4
    %
    
    
    22,873,000
    
    
    
    6
    %FNBH Bancorp
    
    
    40,547,000
    
    
    
    10.64
    %
    
    
    15,249,000
    
    
    
    4
    %
    
    
    N/A
    
    
    
    N/ATier 1 Capital (to average assets)Bank
    
    
    40,463,000
    
    
    
    9.60
    %
    
    
    16,858,000
    
    
    
    4
    %
    
    
    21,073,000
    
    
    
    5
    %FNBH Bancorp
    
    
    40,547,000
    
    
    
    9.62
    %
    
    
    16,858,000
    
    
    
    4
    %
    
    
    N/A
    
    
    
    N/A
 As of December 31, 2006
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTotal Capital (to risk weighted assets)Bank
    
    $
    55,200,000
    
    
    
    13.56
    %
    
    $
    32,558,000
    
    
    
    8
    %
    
    $
    40,697,000
    
    
    
    10
    %FNBH Bancorp
    
    
    55,479,000
    
    
    
    13.63
    %
    
    
    32,558,000
    
    
    
    8
    %
    
    
    N/A
    
    
    
    N/ATier 1 Capital (to risk weighted assets)Bank
    
    
    50,078,000
    
    
    
    12.31
    %
    
    
    16,279,000
    
    
    
    4
    %
    
    
    24,418,000
    
    
    
    6
    %FNBH Bancorp
    
    
    50,357,000
    
    
    
    12.37
    %
    
    
    16,279,000
    
    
    
    4
    %
    
    
    N/A
    
    
    
    N/ATier 1 Capital (to average assets)Bank
    
    
    50,078,000
    
    
    
    10.80
    %
    
    
    18,542,000
    
    
    
    4
    %
    
    
    23,177,000
    
    
    
    5
    %FNBH Bancorp
    
    
    50,357,000
    
    
    
    10.86
    %
    
    
    18,546,000
    
    
    
    4
    %
    
    
    N/A
    
    
    
    N/A
 (19) Net Income per Common Share
   2007
    
    2006
    
    2005Weighted average basic shares outstanding
    
    
    3,074,372
    
    
    
    3,177,093
    
    
    
    3,200,146Effect of dilutive restricted stock
    
    
    
    
    
    
    53
    
    
    
    372Weighted average diluted shares outstanding
    
    
    3,074,372
    
    
    
    3,177,146
    
    
    
    3,200,518Net income (loss)
    
    $
    (6,556,188
    )
    
    $
    5,585,996
    
    
    $
    6,506,986Basic net income (loss) per share
    
    $
    (2.13
    )
    
    $
    1.76
    
    
    $
    2.03Diluted net income (loss) per share
    
    $
    (2.13
    )
    
    $
    1.76
    
    
    $
    2.03Anti-dilutive shares excluded from diluted
calculation
    
    
    5,107
    
    
    
    1,722
    
    
    
    2,015
 (20) Contingent Liabilities
  54




---



##### 



(21) Fair Value of Financial Instruments
 Disclosures About Fair Value of Financial Instruments,
  Cash and cash equivalents
 Certificates of deposit
 Investment and mortgage backed securities
 FHLBI and FRB stock
 Loans
 Accrued interest income
 Deposit liabilities
 Other borrowings
 Accrued interest payable
 Off balance sheet instruments
 55




---



##### 



2007
    
    2006Carrying
    
    Fair
    
    Carrying
    
    Fairvalue
    
    value
    
    value
    
    valueFinancial assets:Cash and cash equivalents
    
    $
    29,911,000
    
    
    $
    29,911,000
    
    
    $
    19,121,000
    
    
    $
    19,121,000Certificates of deposit
    
    
    4,025,000
    
    
    
    4,025,000
    
    
    
    4,711,000
    
    
    
    4,711,000Investment and mortgage-backed securities
    
    
    37,637,000
    
    
    
    37,844,000
    
    
    
    53,219,000
    
    
    
    53,441,000FHLBI and FRB stock
    
    
    995,000
    
    
    
    995,000
    
    
    
    995,000
    
    
    
    995,000Loans, net
    
    
    337,562,000
    
    
    
    342,907,000
    
    
    
    376,983,000
    
    
    
    376,688,000Accrued interest income
    
    
    2,164,000
    
    
    
    2,164,000
    
    
    
    2,630,000
    
    
    
    2,630,000Financial liabilities:Deposits:Demand
    
    $
    56,506,000
    
    
    $
    56,506,000
    
    
    $
    62,681,000
    
    
    $
    62,681,000NOW
    
    
    35,027,000
    
    
    
    35,027,000
    
    
    
    41,275,000
    
    
    
    41,275,000Savings and money market accounts
    
    
    121,641,000
    
    
    
    121,641,000
    
    
    
    113,906,000
    
    
    
    113,906,000Time deposits
    
    
    159,358,000
    
    
    
    159,824,000
    
    
    
    170,127,000
    
    
    
    169,644,000Brokered certificates
    
    
    7,046,000
    
    
    
    7,069,000
    
    
    
    17,555,000
    
    
    
    17,514,000Other borrowings
    
    
    9,152,000
    
    
    
    9,229,000
    
    
    
    13,481,000
    
    
    
    13,506,000Accrued interest expense
    
    
    1,248,000
    
    
    
    1,248,000
    
    
    
    1,099,000
    
    
    
    1,099,000
 Limitations
  (22) Dividend Restrictions
  56




---



##### 



(23) Condensed Financial Information  Parent Company Only
  Condensed Balance Sheets
 2007
    
    
    2006Assets:Cash
    
    $
    53,571
    
    
    $
    22,216Investment in subsidiaries:First National Bank in Howell
    
    
    40,543,394
    
    
    
    48,908,786H.B. Realty Co.
    
    
    1,000
    
    
    
    1,000FNBH Mortgage Company, LLC
    
    
    
    
    
    
    805,000Other assets
    
    
    29,999
    
    
    
    255,472Total assets
    
    $
    40,627,964
    
    
    $
    49,992,474Liabilities and Stockholders Equity:Other liabilities
    
    $
    782
    
    
    $
    Stockholders equity
    
    
    40,627,182
    
    
    
    49,992,474Total liabilities and stockholders equity
    
    $
    40,627,964
    
    
    $
    49,992,474
 Condensed Statements of Income
 Year ended December 312007
    
    
    2006
    
    
    2005Operating income:Dividends from subsidiaries
    
    $
    3,144,850
    
    
    $
    5,548,912
    
    
    $
    1,975,313Total operating income
    
    
    3,144,850
    
    
    
    5,548,912
    
    
    
    1,975,313Operating expenses:Administrative and other expenses
    
    
    85,759
    
    
    
    94,640
    
    
    
    88,014Total operating expenses
    
    
    85,759
    
    
    
    94,640
    
    
    
    88,014Income before equity in
undistributed net income
of subsidiaries
    
    
    3,059,091
    
    
    
    5,454,272
    
    
    
    1,887,299Equity in undistributed net income of
subsidiaries (net loss of subsidiaries and
dividends declared from subsidiaries)
    
    
    (9,615,279
    )
    
    
    131,724
    
    
    
    4,619,687Net income (loss)
    
    $
    (6,556,188
    )
    
    $
    5,585,996
    
    
    $
    6,506,986
 57




---



##### 



Condensed Statements of Cash Flows
 Year ended December 312007
    
    
    2006
    
    
    2005Cash flows from operating activities:Net income (loss)
    
    $
    (6,556,188
    )
    
    $
    5,585,996
    
    
    $
    6,506,986Adjustments to reconcile net income to
net cash provided by operating activities:Decrease (increase) in other assets
    
    
    225,473
    
    
    
    (19,510
    )
    
    
    23,145Increase (decrease) in other liabilities
    
    
    782
    
    
    
    (3,021
    )
    
    
    3,021Change in long term incentive plan and
deferred compensation
    
    
    322,822
    
    
    
    270,596
    
    
    
    253,996Equity in undistributed net income of
subsidiaries (net loss of subsidiaries and
dividends declared from subsidiaries)
    
    
    9,615,278
    
    
    
    (131,724
    )
    
    
    (4,619,687
    )10,164,355
    
    
    
    116,341
    
    
    
    (4,339,525
    )Net cash provided by
operating activities
    
    
    3,608,167
    
    
    
    5,702,337
    
    
    
    2,167,461Cash flows from investing activities:Investments in and advancements to
subsidiary, net
    
    
    
    
    
    
    
    
    
    
    188,624Net cash provided by (used in) investing
activities
    
    
    
    
    
    
    
    
    
    
    188,624Cash flows from financing activities:Dividends paid
    
    
    (2,563,418
    )
    
    
    (2,656,404
    )
    
    
    (2,547,690
    )Common stock issued
    
    
    25,211
    
    
    
    30,623
    
    
    
    95,975Repurchases of common stock
    
    
    (1,038,605
    )
    
    
    (3,107,295
    )
    
    
    Net cash used in financing
activities
    
    
    (3,576,812
    )
    
    
    (5,733,076
    )
    
    
    (2,451,715
    )Net increase (decrease) in cash
    
    
    31,355
    
    
    
    (30,739
    )
    
    
    (95,630
    )Cash at beginning of year
    
    
    22,216
    
    
    
    52,955
    
    
    
    148,585Cash at end of year
    
    $
    53,571
    
    
    $
    22,216
    
    
    $
    52,955
 58




---



##### 



(24) Quarterly Financial Data  Unaudited
  Quarters ended in 2007March 31
    
    June 30(1) (3)
    
    September 30(2) (3)
    
    December 31Selected operations data:Interest and dividend income
    
    $
    7,877,499
    
    
    $
    7,862,175
    
    
    $
    7,439,273
    
    
    $
    6,994,367Net interest income
    
    
    4,828,395
    
    
    
    4,768,239
    
    
    
    4,495,415
    
    
    
    4,196,553Provision for loan losses
    
    
    939,000
    
    
    
    6,534,666
    
    
    
    4,364,000
    
    
    
    2,192,000Income (loss) before federal income taxes
    
    
    1,368,813
    
    
    
    (4,967,250
    )
    
    
    (6,443,699
    )
    
    
    (296,961
    )Net income (loss)
    
    
    979,124
    
    
    
    (3,212,874
    )
    
    
    (4,117,147
    )
    
    
    (205,291
    )Basic net income (loss) per share
    
    
    0.32
    
    
    
    (1.05
    )
    
    
    (1.34
    )
    
    
    (0.07
    )Diluted net income (loss) per share
    
    
    0.32
    
    
    
    (1.05
    )
    
    
    (1.34
    )
    
    
    (0.07
    )Cash dividends per share
    
    
    0.21
    
    
    
    0.21
    
    
    
    0.21
    
    
    
    0.21
 Quarters ended in 2006March 31
    

June 30
    

September 30
    

December 31Selected operations data:Interest and dividend income
    
    $
    7,878,354
    
    
    $
    7,939,134
    
    
    $
    8,005,475
    
    
    $
    7,995,981Net interest income
    
    
    5,785,978
    
    
    
    5,535,772
    
    
    
    5,213,490
    
    
    
    4,988,430Provision for loan losses
    
    
    600,000
    
    
    
    754,000
    
    
    
    785,000
    
    
    
    500,000Income before federal income taxes
    
    
    2,306,927
    
    
    
    1,935,617
    
    
    
    2,001,409
    
    
    
    1,732,465Net income
    
    
    1,602,748
    
    
    
    1,353,597
    
    
    
    1,398,688
    
    
    
    1,230,963Basic net income per share
    
    
    0.50
    
    
    
    0.42
    
    
    
    0.44
    
    
    
    0.40Diluted net income per share
    
    
    0.50
    
    
    
    0.42
    
    
    
    0.44
    
    
    
    0.40Cash dividends per share
    
    
    0.21
    
    
    
    0.21
    
    
    
    0.21
    
    
    
    0.21
 
 (1)
    
    Includes $553,000 of impairment on securities available for sale subsequently sold
in the third quarter of 2007 at a loss.(2)
    
    Includes $4,312,000 of loss on sale/writedown of commercial loans held for sale
related to loans sold in the third quarter as well as loans transferred from the held for sale
classification back to held for investment at their current bid prices in the third quarter.(3)
    
    Includes partial chargedowns and fair market value adjustments of $7,537,000 on
loans transferred to held for sale during the second and third quarters of 2007 recorded
through the provision for loan losses. (25) Impact of New Accounting Standards
 Fair Value Measurements
 The Fair value Option for Financial Assets and
Financial Liabilities.
 59




---



##### 



Business Combinations
 
 Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 Item 9A. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
 Managements Annual Report on Internal Control Over Financial Reporting. Internal
Control  Integrated Framework
  Attestation Report of the Registered Independent Public Accounting Firm.
 Change in Internal Control Over Financial Reporting.
 60




---



##### 



Item 9B. Other Information.
  
 PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance.
 Directors
  Executive Officers
  www.fnbsite.com.
 Corporate Governance
  
 Item 11. Executive Compensation.
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
  61




---



##### 



Number of securities remainingNumber of securities to be
    
    Weighted - average
    
    available for future issuanceissued upon exercise of
    
    exercise price of
    
    under equity compensationoutstanding options,
    
    outstanding options,
    
    plans (excluding securitieswarrants, and rights
    
    warrants, and rights
    
    reflected in column (a))Plan Category

    
    (a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
    
    
    0
    
    
    
    0
    
    
    
    243,312
    (1)Equity compensation
plans not approved
by shareholders
    
    None
    
    None
    
    None
 
 (1)
    
    Includes 156,102 shares available under the Long Term Incentive Plan, 51,992 shares
available under the Compensation Plan for Nonemployee Directors and 35,218 shares included under
the Employee Stock Purchase Plan. 
 Item 13. Certain Relationships, Related Transactions and Director Independence.
  
 Item 14. Principal Accountant Fees and Services
  
 PART IV
 
 Item 15. Exhibits and Financial Statement Schedules.
 (a)
    
    Documents filed as part of this report on Form 10-K.1.
    
    Financial StatementsThe financial statements are set forth under Item 8 of this report of 10-K.2.
    
    Financial Statement SchedulesNot applicable.3.
    
    Exhibits (Numbered in accordance with Item 601 of Regulation S-K)The Exhibit Index is located on the final page of this report on Form 10-K.
 62




---



##### 



SIGNATURES
  FNBH BANCORP, INC.
 /s/ James R. McAuliffe
    
    James R. McAuliffe, President & Chief Executive Officer(Principal Executive Officer)/s/ Janice B. Trouba
    
    Janice B. Trouba, Chief Financial Officer(Principal Financial and Accounting Officer)
  Signature
    
    DateW. Rickard Scofield, Chairman of the Board
    
    /s/W. Rickard Scofield
    
    March 10, 2007Randolph E. Rudisill, Vice Chairman of the Board
    
    /s/Randolph E. Rudisill
    
    March 10, 2007Athena Bacalis, Director
    
    /s/Athena Bacalis
    
    March 10, 2007Gary R. Boss, Director
    
    /s/Gary R. Boss
    
    March 10, 2007Barbara Draper, DirectorRichard F. Hopper, Director
    
    /s/Richard F. Hopper
    
    March 10, 2007Dona Scott Laskey, Director
    
    /s/Dona Scott Laskey
    
    March 10, 2007James R. McAuliffe, Director
    
    /s/James R. McAuliffe
    
    March 10, 2007Dagmar K. Moore, Director
    
    /s/Dagmar K. Moore
    
    March 10, 2007John M. Pfeffer, Director
    
    /s/John M. Pfeffer
    
    March 10, 2007R. Michael Yost, Director
    
    /s/R. Michael Yost
    
    March 10, 2007
 63




---



##### 



EXHIBIT INDEX
 The following exhibits are filed herewith, indexed according to the applicable assigned
number:
 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).
  ExhibitNumber
    
    
    
    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 10Material 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)
    
    Amended and Restated Compensation
Plan for Nonemployee Directors*
    
    Appendix II of Proxy Statement
dated March 15, 2002(10.4)
    
    FNBH Bancorp Inc Employees Stock
Purchase Plan as amended January 20, 2005*
    
    Exhibit 10 to Form 10-K
dated March 7, 2006(10.5)
    
    Management Continuity Agreement
For Casey Kondel*
    
    Exhibit 10 to Form 10-Q
dated August 9, 2007(10.6)
    
    Management Continuity Agreement
For Robin C. Naudi*
    
    Exhibit 10 to Form 8-K
dated February 27, 2008(10.7)
    
    Management Continuity Agreements
For Nancy Morgan and Janice B. Trouba*
    
    Exhibit 10 to Form 8-K
dated March 5, 2008
 
  64