# UNITED STATESSECURITIES AND
EXCHANGE COMMISSION Washington, D.C. 20549

# Form 10-Q

[X] QUARTERLY REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period
ended September 30, 2006

OR

[__] TRANSITION REPORT
PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition
period from ________ to _______

Commission file number
0-25752

FNBH BANCORP, INC.(Exact name of
registrant as specified in its charter)

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

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

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

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.         
Yes [X]     No [__]

|Indicate  by
check mark whether the registrant is a large accelerated filer, an accelerated filer, or
a non-accelerated filer. See definition or accelerated filer and large accelerated
filer Rule 12b-2 of the Exchange Act. (Check one):
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Large accelerated filer [__]       Accelerated filer [X]        Non-accelerated filer [__]                                                                                                                                                   

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

The number of shares outstanding of
each of the issuers classes of common stock, as of the latest practicable date:
3,122,963 shares of the Corporations Common Stock (no par value) were outstanding as
of October 31, 2006.

---



# TABLE OF CONTENTS

|                                                                                             
|---------------------------------------------------------------------------------------------
|Part I. Financial Information (unaudited)                                                    
|Item 1. Financial Statements:                                                                
|Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005                   
|Consolidated Statements of Income for the three months and nine months ended                 
|September 30, 2006 and 2005                                                                  
|Consolidated Statements of Stockholders' Equity and Comprehensive Income                     
|for the three months ended September 30, 2006 and 2005                                       
|Consolidated Statements of Stockholders' Equity and Comprehensive                            
|Income for the nine months ended September 30, 2006 and 2005                                 
|Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005  
|Notes to Consolidated Financial Statements                                                   
|                                                                                             
|Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|Item 4. Controls and Procedures                                                              
|                                                                                             
|Part II. Other Information                                                                   
|Item 1A. Risk Factors                                                                        
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                          
|Item 6. Exhibits                                                                             
|                                                                                             
|Signatures                                                                                   
|                                                                                             

---



PART I 
FINANCIAL INFORMATIONItem 1. Financial
Statements

# FNBH BANCORP, INC. AND
SUBSIDIARIES Consolidated Balance Sheets (Unaudited)

|                                                                       | September 302006 | December 312005
|---------------------------------------------------------------------- | ---------------- | ---------------
|                                                                       |                  |                
|Assets                                                                 |                  |                
|Cash and due from banks                                                |                  |                
|Short term investments                                                 |                  |                
|                                                                       |                  |                
|Total cash and cash equivalents                                        |                  |                
|Certificates of deposit                                                |                  |                
|Investment Securities:                                                 |                  |                
|Investment securities held to maturity, net (fair value of $17,350,244 |                  |                
|at September 30, 2006 and $16,763,204 at December 31, 2005)            |                  |                
|Investment securities available for sale, at fair value                |                  |                
|Mortgage-backed securities available for sale, at fair value           |                  |                
|FHLBI and FRB stock, at cost                                           |                  |                
|                                                                       |                  |                
|Total investment securities                                            |                  |                
|Loans:                                                                 |                  |                
|Commercial                                                             |                  |                
|Consumer                                                               |                  |                
|Real estate mortgage                                                   |                  |                
|                                                                       |                  |                
|Total loans                                                            |                  |                
|Less allowance for loan losses                                         |                  |                
|                                                                       |                  |                
|Net loans                                                              |                  |                
|Premises and equipment, net                                            |                  |                
|Other real estate owned, held for sale                                 |                  |                
|Accrued interest and other assets                                      |                  |                
|                                                                       |                  |                
|Total assets                                                           |                  |                
|                                                                       |                  |                
|Liabilities and Stockholders' Equity                                   |                  |                
|Liabilities                                                            |                  |                
|Deposits:                                                              |                  |                
|Demand (non-interest bearing)                                          |                  |                
|NOW                                                                    |                  |                
|Savings and money market                                               |                  |                
|Time deposits                                                          |                  |                
|Brokered certificates of deposit                                       |                  |                
|                                                                       |                  |                
|Total deposits                                                         |                  |                
|Other borrowings                                                       |                  |                
|Accrued interest, taxes, and other liabilities                         |                  |                
|                                                                       |                  |                
|Total liabilities                                                      |                  |                
|Stockholders' Equity                                                   |                  |                
|Common stock, no par value. Authorized 4,200,000 shares; 3,122,963     |                  |                
|shares issued and outstanding at September 30, 2006 and 3,187,374      |                  |                
|shares issued and outstanding at December 31, 2005                     |                  |                
|Retained earnings                                                      |                  |                
|Deferred directors' compensation                                       |                  |                
|Accumulated other comprehensive loss, net                              |                  |                
|                                                                       |                  |                
|Total stockholders' equity                                             |                  |                
|                                                                       |                  |                
|Total liabilities and stockholders' equity                             |                  |                
|                                                                       |                  |                

See notes to consolidated financial
statements.

1

---



FNBH BANCORP, INC.
AND SUBSIDIARIESConsolidated
Statements of Income (Unaudited)

|                                                    | Three months ended September 30 | Nine months ended September 30
|--------------------------------------------------- | ------------------------------- | ------------------------------
|                                                    |                                 |                               
|                                                    |                                 |                               
|Interest and dividend income:                       |                                 |                               
|Interest and fees on loans                          |                                 |                               
|Interest and dividends on investment securities:    |                                 |                               
|U.S. Treasury and agency securities                 |                                 |                               
|Obligations of states and political subdivisions    |                                 |                               
|Corporate bonds                                     |                                 |                               
|Other securities                                    |                                 |                               
|Interest on short term investments                  |                                 |                               
|Interest on certificates of deposit                 |                                 |                               
|                                                    |                                 |                               
|Total interest and dividend income                  |                                 |                               
|                                                    |                                 |                               
|                                                    |                                 |                               
|Interest expense:                                   |                                 |                               
|Interest on deposits                                |                                 |                               
|Interest on other borrowings                        |                                 |                               
|                                                    |                                 |                               
|Total interest expense                              |                                 |                               
|                                                    |                                 |                               
|                                                    |                                 |                               
|Net interest income                                 |                                 |                               
|                                                    |                                 |                               
|Provision for loan losses                           |                                 |                               
|                                                    |                                 |                               
|Net interest income after provision for loan losses |                                 |                               
|                                                    |                                 |                               
|                                                    |                                 |                               
|Noninterest income:                                 |                                 |                               
|Service charges and other fee income                |                                 |                               
|Trust income                                        |                                 |                               
|Gain on sale of loans                               |                                 |                               
|Other                                               |                                 |                               
|                                                    |                                 |                               
|Total noninterest income                            |                                 |                               
|                                                    |                                 |                               
|                                                    |                                 |                               
|Noninterest expense:                                |                                 |                               
|Salaries and employee benefits                      |                                 |                               
|Net occupancy expense                               |                                 |                               
|Equipment expense                                   |                                 |                               
|Professional and service fees                       |                                 |                               
|Computer service fees                               |                                 |                               
|Printing and supplies                               |                                 |                               
|Advertising                                         |                                 |                               
|Other                                               |                                 |                               
|                                                    |                                 |                               
|Total noninterest expense                           |                                 |                               
|                                                    |                                 |                               
|Income before federal income taxes                  |                                 |                               
|Federal income taxes                                |                                 |                               
|                                                    |                                 |                               
|Net income                                          |                                 |                               
|                                                    |                                 |                               
|                                                    |                                 |                               
|Per share statistics:                               |                                 |                               
|Basic EPS                                           |                                 |                               
|Diluted EPS                                         |                                 |                               
|Dividends                                           |                                 |                               
|Basic average shares outstanding                    |                                 |                               
|Diluted average shares outstanding                  |                                 |                               

See notes to consolidated financial
statements.

2

---



FNBH BANCORP, INC.
AND SUBSIDIARIES Consolidated
Statements of Stockholders Equity and Comprehensive IncomeFor the Three Months
Ended September 30, 2006 and 2005(Unaudited)

|                                                   | Common Stock | Retained Earnings | Deferred Directors' Compensation | Accumulated Other Comprehensive Loss | Total    
|-------------------------------------------------- | ------------ | ----------------- | -------------------------------- | ------------------------------------ | ---------
|                                                   |              |                   |                                  |                                      |          
|Balances at June 30, 2005                          |              |                   | $                                | 6,001,393                            |          
|Amortization of long term incentive plan           |              |                   |                                  | 39,453                               |          
|Issued 415 shares for employee stock purchase plan |              |                   |                                  | 11,379                               |          
|Issued 175 shares for current directors' fees      |              |                   |                                  | 5,050                                |          
|Deferred compensation (798 stock units)            |              |                   |                                  |                                      |          
|Comprehensive income:                              |              |                  
|Net income                                         |              |                   |                                  |                                      | 1,924,460
|Change in unrealized loss on debt securities       |              |                  
|available for sale, net of tax effect              |              |                   |                                  |                                      |          
|                                                   |              |                   |                                  |                                      |          
|Total comprehensive income                         |              |                   |                                  |                                      |          
|Cash dividends ($.21 per share)                    |              |                   |                                  |                                      | (669,090 
|                                                   |              |                  
|Balances at September 30, 2005                     |              |                   | $                                | 6,057,275                            |          
|                                                   |              |                  
|                                                   |              |                  
|Balances at June 30, 2006                          |              |                   | $                                | 6,143,636                            |          
|Amortization of long term incentive plan           |              |                   |                                  | 11,495                               |          
|Issued 273 shares for employee stock purchase plan |              |                   |                                  | 6,741                                |          
|Deferred compensation (1,113 stock units)          |              |                   |                                  |                                      |          
|Comprehensive income:                              |              |                  
|Net income                                         |              |                   |                                  |                                      | 1,398,688
|Change in unrealized loss on debt securities       |              |                  
|available for sale, net of tax effect              |              |                   |                                  |                                      |          
|                                                   |              |                   |                                  |                                      |          
|Total comprehensive income                         |              |                   |                                  |                                      |          
|Repurchase of shares (39,000 shares)               |              |                   |                                  | (77,610                              | )        
|Cash dividends ($.21 per share)                    |              |                   |                                  |                                      | (663,955 
|                                                   |              |                  
|Balances at September 30, 2006                     |              |                   | $                                | 6,084,262                            |          
|                                                   |              |                  

See notes to consolidated financial
statements.

3

---



FNBH BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders Equity and Comprehensive Income
For the Nine Months Ended September 30, 2006 and 2005(Unaudited)

|                                                     | Common Stock | Retained Earnings | Deferred Directors' Compensation | Accumulated Other Comprehensive Loss | Total     
|---------------------------------------------------- | ------------ | ----------------- | -------------------------------- | ------------------------------------ | ----------
|                                                     |              |                   |                                  |                                      |           
|Balances at December 31, 2004                        |              |                   | $                                | 5,858,133                            |           
|Amortization of long term incentive plan             |              |                   |                                  | 69,024                               |           
|Issued 3,244 shares for employee stock purchase plan |              |                   |                                  | 84,331                               |           
|Issued 542 shares for current directors' fees        |              |                   |                                  | 16,000                               |           
|Issued 986 shares for variable directors' fees       |              |                   |                                  | 29,787                               |           
|Deferred compensation (3,340 stock units)            |              |                   |                                  |                                      |           
|Comprehensive income:                                |              |                  
|Net income                                           |              |                   |                                  |                                      | 4,744,080 
|Change in unrealized loss on debt securities         |              |                  
|available for sale, net of tax effect                |              |                   |                                  |                                      |           
|                                                     |              |                   |                                  |                                      |           
|Total comprehensive income                           |              |                   |                                  |                                      |           
|Cash dividends ($.59 per share)                      |              |                   |                                  |                                      | (1,878,477
|                                                     |              |                  
|Balances at September 30, 2005                       |              |                   | $                                | 6,057,275                            |           
|                                                     |              |                  
|                                                     |              |                  
|Balances at December 31, 2005                        |              |                   | $                                | 6,088,540                            |           
|Amortization of long term incentive plan             |              |                   |                                  | 69,420                               |           
|Issued 969 shares for employee stock purchase plan   |              |                   |                                  | 23,916                               |           
|Issued 270 shares for current directors' fees        |              |                   |                                  | 6,999                                |           
|Issued 1,244 shares for variable directors' fees     |              |                   |                                  | 32,257                               |           
|Deferred compensation (4,624 stock units)            |              |                   |                                  |                                      |           
|Comprehensive income:                                |              |                  
|Net income                                           |              |                   |                                  |                                      | 4,355,033 
|Change in unrealized loss on debt securities         |              |                  
|available for sale, net of tax effect                |              |                   |                                  |                                      |           
|                                                     |              |                   |                                  |                                      |           
|Total comprehensive income                           |              |                   |                                  |                                      |           
|Repurchase of shares (69,000 shares)                 |              |                   |                                  | (136,870                             | )         
|Cash dividends ($.63 per share)                      |              |                   |                                  |                                      | (2,000,583
|                                                     |              |                  
|Balances at September 30, 2006                       |              |                   | $                                | 6,084,262                            |           
|                                                     |              |                  

See notes to consolidated financial
statements.

4

---



FNBH BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows(Unaudited)

|                                                                                  | Nine months ended September 30
|--------------------------------------------------------------------------------- | ------------------------------
|                                                                                 
|                                                                                  |                               
|Cash flows from operating activities:                                             |                               
|Net income                                                                        |                               
|Adjustments to reconcile net income to net cash provided by operating activities: |                               
|Provision for loan losses                                                         |                               
|Depreciation and amortization                                                     |                               
|Deferred income tax benefit                                                       |                               
|Net amortization on investment securities                                         |                               
|Earned portion of long term incentive plan                                        |                               
|Shares issued for current directors' compensation                                 |                               
|Shares earned for deferred directors' compensation                                |                               
|Loss on disposal of equipment                                                     |                               
|Gain on sale of loans                                                             |                               
|Proceeds from sale of loans                                                       |                               
|Origination of loans held for sale                                                |                               
|(Gain) loss on the sale of other real estate owned, held for sale                 |                               
|Loss on sale of land and facilities held for sale                                 |                               
|Increase in accrued interest income and other assets                              |                               
|Increase(decrease) in accrued interest, taxes, and other liabilities              |                               
|                                                                                  |                               
|Net cash provided by operating activities                                         |                               
|                                                                                  |                               
|Cash flows from investing activities:                                             |                               
|Purchases of available for sale securities                                        |                               
|Purchases of held to maturity securities                                          |                               
|Purchases/Stock dividend FHLBI stock                                              |                               
|Proceeds from maturities and calls of available for sale securities               |                               
|Proceeds from mortgage-backed securities paydowns-available for sale              |                               
|Proceeds from maturities and calls of held to maturity securities                 |                               
|Proceeds from sale of other real estate owned, held for sale                      |                               
|Proceeds from sale of land and facilities held for sale                           |                               
|Purchases of certificates of deposit                                              |                               
|Maturity of certificates of deposit                                               |                               
|Net increase in loans                                                             |                               
|43                                                                                |                               
|                                                                                  |                               
|Net cash provided by (used in) investing activities                               |                               
|                                                                                  |                               
|Cash flows from financing activities:                                             |                               
|Net increase (decrease) in deposits                                               |                               
|Payments on FHLBI note                                                            |                               
|Proceeds from issuance of short term debt                                         |                               
|Repayment of short term debt                                                      |                               
|Repurchase of common stock                                                        |                               
|Dividends paid                                                                    |                               
|Shares issued for employee stock purchase                                         |                               
|                                                                                  |                               
|Net cash provided by (used in) financing activities                               |                               
|                                                                                  |                               
|Net increase (decrease) in cash and cash equivalents                              |                               
|Cash and cash equivalents at beginning of year                                    |                               
|                                                                                  |                               
|Cash and cash equivalents at end of period                                        |                               
|                                                                                  |                               
|Supplemental disclosures:                                                         |                               
|Interest paid                                                                     |                               
|Federal income taxes paid                                                         |                               
|Loans transferred to other real estate                                            |                               
|Loans charged off                                                                 |                               

See notes to consolidated financial
statements.

5

---



Notes to Consolidated
Financial Statements (unaudited)

The accompanying unaudited
consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP) for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by GAAP for
complete financial statements.

1.    
          In the opinion of management of FNBH Bancorp, Inc. (the Corporation), the
          unaudited consolidated financial statements filed with this Form 10-Q contain
          all adjustments (consisting of only normal recurring accruals) necessary to
          present fairly the consolidated financial position of the Corporation as of
          September 30, 2006, and consolidated results of operations and cash flows for
          the nine months ended September 30, 2006 and 2005.

2.    
          The results of operations for the nine months ended September 30, 2006 are not
          necessarily indicative of the results to be expected for the full year.

3.    
          The accompanying unaudited consolidated financial statements should be read in
          conjunction with the Consolidated Financial Statements in the 2005 Annual Report
          contained in the Corporations report on Form 10-K filing.

4.    
          The provision for income taxes represents federal income tax expense calculated
          using estimated annualized rates on taxable income generated during the
          respective periods.

5.    
          Investment and Mortgage-Backed Securities. A summary of the amortized cost and
          approximate fair value of investment and mortgage-backed securities at September
          30, 2006 and December 31, 2005 follows:

|                           | September 30, 2006 | December 31, 2005
|-------------------------- | ------------------ | -----------------
|                           |                    |                  
|                           |                    |                  
|                           |                    |                  
|Held to maturity:          |                    |                  
|Obligations of state and   |                    |                  
|political subdivisions     |                    |                  
|                           |                    |                  
|Total held to maturity     |                    |                  
|                           |                    |                  
|Available for sale:        |                    |                  
|U.S Treasury and agency    |                    |                  
|securities                 |                    |                  
|Corporate bonds            |                    |                  
|Mortgage-backed securities |                    |                  
|                           |                    |                  
|Total available for sale   |                    |                  
|                           |                    |                  
|                           |                    |                  
|Total securities           |                    |                  
|                           |                    |                  

There were six held to maturity
obligations and 37 available for sale securities in a continuous loss position for 12
months or more at September 30, 2006. The available for sale securities consist of 22
asset-backed securities and 15 agency securities. Because the declines in fair value were
due to changes in market interest rates, not in estimated cash flows, and the securities
are bank qualified municipals, federal agencies or mortgage-backed securities issued by
federal agencies, no other-than-temporary impairment was recorded at September 30, 2006.
The Corporation has both the intent and ability to hold these securities for the time
necessary to recover the amortized cost.

6

---



The following is a summary of the
unrealized losses and fair value of the securities available for sale at September 30,
2006, by length of time that individual securities in each category have been in a
continuous loss position:

|                           | Less than 12 months | September 30, 200612 months or more | Total
|-------------------------- | ------------------- | ----------------------------------- | -----
|                           |                     |                                     |      
|                           |                     |                                     |      
|                           |                     |                                     |      
|Held to maturity:          |                     |                                     |      
|Obligations of state and   |                     |                                    
|political subdivisions     |                     |                                     | $    
|                           |                     |                                     |      
|Available for sale:        |                     |                                    
|U.S. Treasury and agency   |                     |                                    
|securities                 |                     |                                     | $    
|Mortgage-backed securities |                     |                                     |      
|                           |                     |                                     |      
|Total available for sale   |                     |                                     | $    
|                           |                     |                                     |      

As of December 31, 2005, there were
24 investments that had been in a continuous loss position for 12 months or more and no
impairment was recorded.

6.    
          Managements assessment of the allowance for loan losses is based on an
          evaluation of the loan portfolio, recent loss experience, current economic
          conditions, and other pertinent factors. Loans on non-accrual status and those
          past due more than 90 days amounted to $12,255,000 at September 30, 2006,
          $5,625,000 at December 31, 2005, and $6,876,000 at September 30, 2005. (See
          Managements Discussion and Analysis of Financial Condition and Results of
          Operations).

7.    
          Basic net income per common share is computed by dividing net income applicable
          to common stock by the weighted average number of shares of common stock and
          deferred director fee stock units outstanding during the period. Diluted net
          income per common share is computed by dividing net income applicable to common
          stock by the weighted average number of shares and deferred director fee stock
          units outstanding and potential common stock outstanding, such as shares of
          unvested restricted stock outstanding during the period calculated under the
          treasury stock method.

The following table presents basic
and diluted net income per share:

|                                            | Third Quarter | Year-to-Date
|------------------------------------------- | ------------- | ------------
|                                            |               |             
|                                            |               |             
|Weighted average basic shares outstanding   |               |             
|Effect of dilutive restricted stock         |               |             
|                                            |               |             
|Weighted average diluted shares outstanding |               |             
|                                            |               |             
|Net income                                  |               |             
|Basic net income per share                  |               |             
|Diluted net income per share                |               |             

7

---



8.    
          Under its Long-Term Incentive Plan (the Plan) the Corporation grants
          stock options and restricted stock as compensation to key employees. The
          Corporation has not awarded any stock options under the plan to date. The
          restricted stock awards have a five year vesting period. The awards are recorded
          at fair market value on the grant date and are amortized into salary expense
          over the vesting period. The number of shares available for issuance under this
          plan can not exceed 200,000. A summary of the activity under the plan for the
          nine months ended September 30, 2006 is presented below:

|Restricted Stock Awards           | Shares | Weighted-Average Grant Date Fair Value
|--------------------------------- | ------ | --------------------------------------
|                                  |        |                                       
|Outstanding at January 1, 2006    |        |                                       
|Granted                           |        |                                       
|Vested                            |        |                                       
|Forfeited                         |        |                                       
|                                  |        |                                       
|Outstanding at September 30, 2006 |        |                                       
|                                  |        |                                       

The total fair value of awards
granted during the nine months ended September 30, 2006 and 2005 was $58,200 and $70,200,
respectively. The total fair value of the awards vested during the nine months ended at
September 30, 2006 and 2005 was $69,420 and $69,024, respectively. As of September 30,
2006, there was $122,200 of total unrecognized compensation cost related to nonvested
stock awards under the Plan. That cost is expected to be recognized over a
weighted-average period of 1.99 years.

9.    
          Certain amounts included in the 2005 Consolidated Financial Statements have been
          reclassified to conform to the 2006 presentation.

Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations

This report includes certain forward-looking
statements, within the meaning of the Private Securities Litigation Reform Act of 1995,
that involve inherent risks and uncertainties. A number of important factors could cause
actual results to differ materially from those in the forward-looking statements. Those
factors include the economic environment, competition, products and pricing in business
areas in which the Corporation operates, prevailing interest rates, changes in government
regulations and policies affecting financial service companies, credit quality and credit
risk management, acquisitions and integration of acquired businesses.

The Corporation, a Michigan business
corporation, is a one bank holding company which owns all of the outstanding capital stock
of First National Bank in Howell (the Bank) and all of the outstanding stock of HB Realty
Co., a subsidiary which owns real estate. The following is a discussion of the
Corporations results of operations for the three and nine months ended September 30,
2006 and 2005, and also provides information relating to the Corporations financial
condition, focusing on its liquidity and capital resources.

|Earnings                             | Third Quarter | Year-to-Date
|------------------------------------ | ------------- | ------------
|(in thousands except per share data) |               |             
|                                     |               |             
|Net income                           |               |             
|Basic net income per share           |               |             
|Diluted net income per share         |               |             

Net income for the three months ended
September 30, 2006 as compared to the same period last year was negatively affected by
higher interest expense on deposits and the increased provision for loan losses. These
unfavorable variances were only partially offset by increased interest income due to
higher average commercial loan balances.

8

---



Net income for the three months ended
September 30, 2006 decreased $526,000 (27.3%) compared to the same period last year. In
the third quarter of 2006, net interest income decreased $480,000 (8.4%), and the
provision for loan losses increased $285,000 (57.0%), along with a decrease in noninterest
income of $5,000 (0.5%), and an increase in noninterest expense of $38,000 (1.1%).
Partially offsetting these unfavorable variances was a decrease in federal income taxes of
$283,000 (31.9%).

Net income for the nine months ended
September 30, 2006 decreased $389,000 (8.2%) compared to the same period last year. Net
interest income increased $28,000 (0.2%), noninterest income increased $140,000 (4.8%),
and there was a decrease in federal income tax expense of $199,000 (9.5%). Offsetting
these favorable variances were an increase in the provision for loan losses of $95,000
(4.6%) and an increase in noninterest expenses of $661,000 (6.3%).

|Net Interest Income           | Third Quarter | Year-to-Date
|----------------------------- | ------------- | ------------
|(in thousands)                |               |             
|                              |               |             
|Interest and dividends income |               |             
|Interest expense              |               |             
|                              |               |             
|Net interest income           |               |             

9

---



The following tables illustrate some
of the significant factors contributing to the changes in net interest income (fully tax
equivalent basis) for the quarter and the nine months ended September 30:

# INTEREST YIELDS AND
COSTS (in thousands)September 30, 2006 and
2005

|                                               | ----------Third Quarter Averages----------
|---------------------------------------------- | ------------------------------------------
|                                              
|                                               |                                           
|                                               |                                           
|Assets:                                        |                                           
|Interest earning assets:                       |                                           
|Short term investments                         |                                           
|Certificates of deposit                        |                                           
|Securities:  Taxable                           |                                           
|Tax-exempt (1)                                 |                                           
|Commercial loans (2)(3)                        |                                           
|Consumer loans (2)(3)                          |                                           
|Mortgage loans (2)(3)                          |                                           
|                                               |                                           
|                                               |                                           
|Total earning assets and total interest income |                                           
|                                               |                                           
|Cash and due from banks                        |                                           
|All other assets                               |                                           
|Allowance for loan losses                      |                                           
|                                               |                                           
|Total Assets                                   |                                           
|                                               |                                           
|                                               |                                           
|Liabilities and Stockholders' Equity:          |                                           
|Interest bearing liabilities:                  |                                           
|NOW, Savings & MMDA                            |                                           
|Time                                           |                                           
|Short term borrowings                          |                                           
|FHLBI advances                                 |                                           
|                                               |                                           
|Total interest bearing liabilities and         |                                           
|Total interest expense                         |                                           
|                                               |                                           
|                                               |                                           
|Non-interest bearing deposits                  |                                           
|All other liabilities                          |                                           
|Stockholders' Equity                           |                                           
|                                               |                                           
|Total Liabilities and Shareholders' Equity     |                                           
|                                               |                                           
|Interest spread                                |                                           
|                                               |                                           
|Net interest income-FTE                        |                                           
|                                               |                                           
|Net interest margin                            |                                           
|                                               |                                           

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

|(2) | For purposes of the computation above, non-accruing loans are included in the
          average daily loan balances.
|--- | --------------------------------------------------------------------------------------------------------------------

|(3) | Interest on loans includes origination fees totaling $120,000 in 2006 and
          $164,000 in 2005.
|--- | -----------------------------------------------------------------------------------------------------

10

---



# INTEREST YIELDS AND
COSTS (in thousands)September 30, 2006 and
2005

|                                               | ----------Year-to-Date Averages----------
|---------------------------------------------- | -----------------------------------------
|                                              
|                                               |                                          
|                                               |                                          
|Assets:                                        |                                          
|Interest earning assets:                       |                                          
|Short term investments                         |                                          
|Certificates of deposit                        |                                          
|Securities:  Taxable                           |                                          
|Tax-exempt (1)                                 |                                          
|Commercial loans (2)(3)                        |                                          
|Consumer loans (2)(3)                          |                                          
|Mortgage loans (2)(3)                          |                                          
|                                               |                                          
|                                               |                                          
|Total earning assets and total interest income |                                          
|                                               |                                          
|Cash and due from banks                        |                                          
|All other assets                               |                                          
|Allowance for loan losses                      |                                          
|                                               |                                          
|Total Assets                                   |                                          
|                                               |                                          
|                                               |                                          
|Liabilities and Stockholders' Equity:          |                                          
|Interest bearing liabilities:                  |                                          
|NOW, Savings & MMDA                            |                                          
|Time                                           |                                          
|Short term borrowings                          |                                          
|FHLBI advances                                 |                                          
|                                               |                                          
|Total interest bearing liabilities and         |                                          
|Total interest expense                         |                                          
|                                               |                                          
|                                               |                                          
|Non-interest bearing deposits                  |                                          
|All other liabilities                          |                                          
|Stockholders' Equity                           |                                          
|                                               |                                          
|Total Liabilities and Shareholders' Equity     |                                          
|                                               |                                          
|Interest spread                                |                                          
|                                               |                                          
|Net interest income-FTE                        |                                          
|                                               |                                          
|Net interest margin                            |                                          
|                                               |                                          

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

|(2) | For purposes of the computation above, non-accruing loans are included in the
          average daily loan balances.
|--- | --------------------------------------------------------------------------------------------------------------------

|(3) | Interest on loans includes origination fees totaling $399,000 in 2006 and
          $444,000 in 2005.
|--- | -----------------------------------------------------------------------------------------------------

11

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Interest Earning
Assets/Interest IncomeOn a tax equivalent basis, interest
income increased $399,000 (5.2%) in the third quarter of 2006 compared to the third
quarter of 2005. The yields on average earning assets increased by 56 basis points which
was partially offset by a decrease of $14,239,000 (3.1%) in average earning assets. The
increase in yield is primarily the result of increases in the prime interest rate.

The quarterly average balance of
short term investments, certificates of deposit and securities decreased approximately
$17,144,000 (19.8%) in the third quarter of 2006 as compared with the same period in 2005.
Short-term investments have decreased due to the lower deposit balances in 2006 as
compared to 2005. Partially offsetting the decrease in average balances was an increase in
the yield on these investments of 30 basis points due primarily to higher yields on the
majority of these investments. Loans, which earn a higher yield than investments, had an
increase in average balances of $2,905,000 (0.8%) in the third quarter of 2006 compared to
the same period last year along with a 49 basis point increase in yield. While yields on
loans have improved from the prior year, continued competition in loan pricing is
preventing the Bank from realizing the full impact of the prime rate increases.
Competition is expected to continue to impact loan pricing throughout 2006. Due to
competitive pricing pressures on loans and deposits, and to a lesser extent, the high
nonperforming loan balances, we expect that net interest margin will continue to
experience compression in 2006.

For the first nine months of the
year, tax equivalent interest income increased $2,225,000 (10.1%). Loan interest income
increased $2,329,000 (12.0%) due to higher average balances of $7,096,000 (1.9%) combined
with the average yield increasing 79 basis points. The increase in loan growth occurred in
commercial loans as the average commercial loan balances increased $13,220,000 (4.5%).
Short term investment and securities interest income decreased by $104,000 (4.1%) due to a
decrease in the average balances of $8,988,000 (11.0%) partially offset by the average
yield increasing 33 basis points.

Interest Bearing
Liabilities/Interest ExpenseInterest expense on deposits for the
third quarter of 2006 increased $833,000 (45.1%) compared to the third quarter of 2005.
This was the result of higher cost of funds due to higher interest rates paid on deposits
of 105 basis points offset by lower average balances of $10,399,000 (3.0%).

Interest expense on deposits for the
first nine months of 2006 increased $2,279,000 (47.3%) compared to the same period of
2005. This was the result of higher average balances of $2,011,000 (0.6%) in 2006 compared
to 2005 combined with an increase in the average interest rate paid on deposits of 88
basis points. Deposits have shifted to relatively higher cost time deposits as rates
increased. Rate increases on deposit products are expected to impact the yield paid on
deposits for the remainder of 2006.

Borrowed funds average balance
increased $2,754,000 in the third quarter of 2006 compared to 2005 due to a increase in
short term advances from the Federal Home Loan Bank of Indianapolis (FHLBI). At period
end, borrowed funds balances were slightly lower than December 31, 2005 balances. As
of September 30, 2006, the Bank has a $1,481,000 loan advance outstanding that was entered
into in 2000. FHLBI borrowings are available to fund future loan growth if needed.

LiquidityLiquidity is monitored by the
Banks Asset/Liability Management Committee (ALCO) which meets at least monthly. The
Board of Directors has approved a liquidity policy which requires the Bank, while it is
well capitalized as defined by the Federal Financial Institutions Examination Council
(FFIEC), to maintain a current ratio of no less than 1:1 (core basic surplus liquidity
equal to 0), representing that the Banks contingency for unexpected funding outflows
is being primarily met by short term investments and unencumbered treasury and agency
securities. Additional requirements of the policy are that when FHLBI available credit is
added to core basic surplus liquidity, the Bank must have liquidity totaling 5% of assets;
and when brokered CDs and Federal Funds lines are added, the Bank must have liquidity
totaling 8% of assets. Should the Banks capital ratios fall below the well
capitalized level, additional liquidity totaling 5% of assets will be required.

12

---



Deposits are the principal source of
funds for the Bank. Management monitors rates at other financial institutions in the area
to ascertain that its rates are competitive in the market. Management also attempts to
offer a wide variety of products to meet the needs of its customers. The breakdown of the
Banks Large Certificates, which are generally considered to be more
volatile and sensitive to changes in rates, consist principally of local depositors known
to the Bank. As of September 30, 2006, the Bank had Large Certificates totaling
approximately $90,000,000 compared to $65,000,000 at December 31, 2005. At September 30,
2006, the Bank had $25,000,000 in brokered certificates compared to $30,000,000 at
December 31, 2005. Brokered certificates include $17,000,000 of certificates over $100,000
as of September 30, 2006.

It is the intention of the
Banks management to handle unexpected liquidity needs through its Federal Funds
position with a correspondent bank and by FHLBI borrowings. The Bank has a line of credit
of approximately $38,000,000 available at the FHLBI. As of September 30, 2006,
approximately $1,500,000 of the line had been used for long term advances, as previously
described. The Bank has pledged certain mortgage loans as collateral for this borrowing.
The Bank also has a repurchase agreement in place where it can borrow from a broker who
will lend money against certain securities of the Bank. Finally, management may look to
available for sale securities in the investment portfolio to meet additional
liquidity needs.

Interest Rate RiskInterest rate risk is also addressed
by ALCO. Interest rate risk is the potential for economic losses due to future rate
changes and can be reflected as a loss of future net interest income and/or loss of
current market values. The objective is to measure the effect on net interest income and
to adjust the balance sheet to minimize the inherent risk while, at the same time,
maximizing income. Tools used by management include the standard GAP report which lays out
the repricing schedule for various asset and liability categories and an interest rate
simulation report. The Bank has no market risk sensitive instruments held for trading
purposes. The Bank has not entered into futures, forwards, swaps, or options to manage
interest rate risk. However, the Bank is party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing needs of its
customers including commitments to extend credit and letters of credit. A commitment or
letter of credit is not recorded as an asset until the instrument is exercised.

In addition to liquidity and interest
rate risk management issues, ALCO discusses the Banks performance and the current
economic outlook and its impact on the Bank and current interest rate forecasts. Actual
results are compared to budget in terms of growth and income. A yield and cost analysis is
done to monitor interest margin. Various ratios are discussed including capital ratios,
other balance sheet ratios, and profitability ratios.

|Interest Rate Sensitivity as of September 30, 2006
|--------------------------------------------------
|(in thousands)                                    
|                                                  
|Assets:                                           
|Loans                                             
|Securities                                        
|Certificates of deposit                           
|Short term investments                            
|Total rate sensitive assets                       
|                                                  
|Liabilities:                                      
|NOW, savings & MMDA                               
|Time deposits                                     
|Other borrowings                                  
|Total rate sensitive liabilities                  
|                                                  
|Rate sensitivity gap and ratios:                  
|Gap for period                                    
|Cumulative gap                                    
|                                                  
|Cumulative rate sensitive ratio                   

13

---



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

In the gap table above, the short
term (one year and less) cumulative interest rate sensitivity is asset sensitive as of
September 30, 2006. An asset sensitive position would normally indicate increased net
interest income in a rising rate environment. Gap analysis is limited and may not provide
an accurate indication of the impact of general interest rate movements on the net
interest margin since repricing of various categories of assets and liabilities is subject
to the Banks needs, competitive pressures, and the needs of the Banks
customers. In addition, various assets and liabilities indicated as repricing within the
same period may in fact reprice at different times within the period and at different rate
indices. Additionally, simulation modeling, which measures the impact of upward and
downward movements of interest rates on interest margin, provides meaningful insight into
strategies management can take to help mitigate the movement of interest rates.

|Third Quarter | Year-to-Date
|------------- | ------------
|              |             
|              |             
|Total         |             

The Corporation recorded a loan loss
provision of $785,000 in the third quarter of 2006 compared to a provision of $500,000 in
the same period last year. The provision is based upon an analysis of estimated losses
inherent in the portfolio and other economic factors. Non-performing loans at September
30, 2006 have increased $6,630,000, from December 31, 2005, and increased $5,379,000 from
September 30, 2005. Net charge offs for the third quarter of 2006 were $956,000 compared
to $303,000 in the same period in 2005.

Year to date the provision is
$2,139,000 compared to $2,044,000 in the prior year. Management has determined that the
allowance is adequate based on potential losses in the portfolio. At September 30, 2006
the allowance for loan losses as a percent of loans was 1.92% compared to 1.88% at
December 31, 2005 and 1.97% at September 30, 2005. For the first nine months of 2006 the
Bank had net charge offs of $1,808,000 compared to $829,000 for 2005. Non-accrual, past
due 90 days, and renegotiated loans were 3.25% of total loans at September 30, 2006,
compared to 1.51% at December 31, 2005 and 1.86% at September 30, 2005.

Impaired loans, as defined by
Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for
Impairment of a Loan, totaled approximately $13,500,000 at September 30, 2006, and
included non-accrual and past due 90 days other than homogenous residential and consumer
loans, and $3,700,000 of commercial loans separately identified as impaired. Impaired
loans totaled $10,100,000 at December 31, 2005 and $9,800,000 at September 30, 2005. A
loan is considered impaired when it is probable that all or part of amounts due according
to the contractual terms of the loan agreement will not be collectable on a timely basis.
Nonperforming loans are reviewed regularly for collectability. Any uncollectable balances
are promptly charged off.

The adequacy of the allowance for
loan losses is determined by managements assessment of the composition of the loan
portfolio, an evaluation of specific credits, an analysis of the value of the underlying
collateral for those loans, historical loss experience, relevant economic factors, the
level of nonperforming loans, loans that have been identified as impaired, and the overall
credit quality of the portfolio. Management continues to refine its techniques in this
analysis. Impaired commercial loans had specific reserves calculated in accordance with
SFAS No. 114 of $1,350,000 at September 30, 2006, $2,400,000 at June 30, 2006, $2,093,000
at December 31, 2005, and $2,839,000 at September 30, 2005.

14

---



Nonperforming assets are loans for
which the accrual of interest has been discontinued, accruing loans 90 days or more past
due in payments, and other real estate which has been acquired primarily through
foreclosure and is waiting disposition.

Loans are generally placed on a
nonaccrual basis when principal or interest is past due 90 days or more and when, in the
opinion of management, full collection of principal and interest is unlikely. Loans
categorized as 90 days past due and still accruing are well secured and in the process of
collection. The following table reflects nonperforming assets.

|Nonperforming Assets
(in thousands)              | September 30,2006 | June 30,2006 | December 31,        2005
|------------------------------------------------ | ----------------- | ------------ | ------------------------
|                                                 |                   |              |                         
|Nonaccrual loans                                 |                   |              | $                       
|90 days or more past due and still accruing      |                   |              |                         
|                                                 |                   |              |                         
|Total nonperforming loans                        |                   |              |                         
|Other real estate owned                          |                   |              |                         
|                                                 |                   |              |                         
|Total nonperforming assets                       |                   |              | $                       
|                                                 |                   |             
|Nonperforming loans as a percent of total loans  |                   |              |                         
|Allowance for loan losses as a percent of        |                   |             
|nonperforming loans                              |                   |              |                         
|Nonperforming assets as a percent of total loans |                   |             
|and other real estate owned                      |                   |              |                         

Nonperforming loans have increased
substantially since June 30, 2006 due to the local weakened economy and slow housing
sales. While there has been a significant increase in nonperforming loans, management
believes the allowance is adequate based on our loan-by-loan analysis of the problem loans
and the heavy concentration of real estate secured loans. Management expects the work out
of these loans to take some time, especially given the economic outlook for the state and
the Banks relatively high balances of loans secured by real estate. These conditions
are expected to maintain high balances of nonperforming loans and will continue to impact
the provision for loan losses for the foreseeable future. Management continues to make
oversight of these loans a priority and is working diligently to continue to proactively
identify and manage problem credits.

15

---



The following table summarizes the
changes in the allowance for loan losses and reserve for unfunded credit commitments for
the first nine months of 2006 and 2005 (in thousands):

|2006                                                                             | 2005
|-------------------------------------------------------------------------------- | ----
|                                                                                 |     
|Allowance for loan losses                                                        |     
|Balance, beginning of year                                                       |     
|Loans charged off:                                                               |     
|Real estate mortgage                                                             |     
|Commerical                                                                       |     
|Consumer                                                                         |     
|                                                                                 |     
|Total charge-offs                                                                |     
|Recoveries to loans previously charged off:                                      |     
|Real estate mortgage                                                             |     
|Commerical                                                                       |     
|Consumer                                                                         |     
|                                                                                 |     
|Total recoveries                                                                 |     
|                                                                                 |     
|Net loans charged off                                                            |     
|Additions to allowance charged to operations                                     |     
|                                                                                 |     
|Balance, end of quarter                                                          |     
|Reserve for unfunded credit commitments                                          |     
|Balance, beginning of year                                                       |     
|Additions (reductions) to reserve charged to operations                          |     
|                                                                                 |     
|Balance, end of quarter                                                          |     
|                                                                                 |     
|Total allowance for loan losses and reserve for
     unfunded credit commitments |     
|                                                                                 |     
|Ratios:                                                                          |     
|Net loans charged off (annualized) to average loans outstanding                  |     
|Allowance for loan losses to loans outstanding                                   |     

|Noninterest Income | Third Quarter | Year-to-Date
|------------------ | ------------- | ------------
|(in thousands)     |               |             
|                   |               |             
|Total              |               |             

Noninterest income which includes
service charges and other fee income, trust income, gain on sale of loans and other
miscellaneous income decreased $5,000 (0.5%) during the third quarter of 2006 compared to
the same quarter in 2005. Service charges and other fee income increased $4,000 (0.5%)
during the third quarter of 2006 from the third quarter of 2005 due to increases in
service charges on deposit accounts, loan late fees, ATM fees and network fees partially
offset by a decrease in returned check fees. Trust income decreased $1,000 (1.5%) in the
third quarter 2006 compared to the same period last year. Gain on the sale of loans
decreased $6,000 (35.9%) due to lower volume of mortgage loans originated for sale. During
the third quarter of 2006, $926,000 of loans were sold compared to $1,039,000 in the same
quarter of 2005. Miscellaneous income decreased $3,000 (56.7%) during the third quarter of
2006 compared to the same quarter in 2005 due to gain on sale of other real estate in
2005.

For the nine months ending September
30, 2006, noninterest income increased $140,000 (4.8%). Service charges and other fee
income increased $183,000 (7.2%) due to primarily to higher deposit service charges,
commercial loan late fees and service charges, increases in cashier check and wire
transfer fees, ATM fees and network income. Trust income increased $33,000 (15.0%)
primarily due to nonrecurring consulting fees. Gain on sale of loans decreased $18,000
(32.7%) due to fewer mortgages originated for sale in 2006. Other income decreased $57,000
(95.6%) due to gains realized on other real estate owned in 2005.

16

---



|Noninterest Expense | Third Quarter | Year-to-Date
|------------------- | ------------- | ------------
|(in thousands)      |               |             
|                    |               |             
|Total               |               |             

Noninterest expense increased $38,000
(1.1%) in the third quarter of 2006 compared to the same period in 2005. Salaries and
benefits decreased $69,000 (3.8%) in the third quarter of 2006 compared to the third
quarter of 2005 due to decreased profit sharing expense of $181,000 (60.3%) offset by
annual salary increases and filling of open positions. Net occupancy cost decreased
$16,000 (5.4%) in 2006 compared to 2005 primarily due to the lower building service
expenses and building maintenance expenses. Equipment expenses decreased $25,000 (12.1%)
due to lower equipment maintenance, other equipment expense and depreciation expense in
2006. Professional and service fees are $14,000 (3.3%) higher in 2006 than in 2005 due to
recruiting fees. Computer service fees decreased $8,000 (8.9%) due to timing of expense.
Printing and supplies costs decreased $6,000 (7.6%) due to timing of expense. Advertising
costs increased $4,000 (5.1%) due to a new product introduced in the third quarter of
2006. Other expenses increased $143,000 (35.0%) primarily due to increases in other real
estate expense, increased sales tax and the timing of contributions expense, which were
partially offset by lower loan and collection expense.

For the nine months of the year,
noninterest expense increased $661,000 (6.3%) compared to the prior year. Salaries and
employee benefits increased $485,000 (8.6%) due to annual salary increases, filling of
positions, and increased payroll tax expense. Occupancy costs decreased $25,000 (2.8%) due
to increased building maintenance costs offset by lower building service expenses.
Equipment expense decreased $54,000 (8.6%) due to lower equipment maintenance and
depreciation expense. Professional service fees increased $159,000 (12.8%) due to
recruitment fees and various strategic projects. Computer service fees decreased $18,000
(6.9%) due to timing of expense. Printing and supplies decreased $29,000 (11.3%) due to
timing of expense. Advertising expense increased $18,000 (8.4%) due to increased
promotional efforts. Other expenses increased $125,000 (9.0%) due to reasons stated above.

|2006  | 2005 | 2006 | 2005
|----- | ---- | ---- | ----
|      |      |      |     
|Total |      |      | $   

Fluctuations in income taxes resulted
primarily from changes in the level of profitability and in variations in the amount of
tax-exempt income.

|September 30, 2006              | December 31, 2005
|------------------------------- | -----------------
|                                |                  
|Stockholders' Equity            |                  
|Ratio of Equity to Total Assets |                  

The Federal Reserve Board provides
guidelines for the measurement of capital adequacy. The Banks capital, as adjusted
under these guidelines, is referred to as risk-based capital. The Banks Tier 1
risk-based capital ratio at September 30, 2006 was 12.71% and the total risk-based capital
ratio was 13.97%. At September 30, 2005, these ratios were 12.38% and 13.64%,
respectively. Minimum regulatory Tier 1 risk-based and total risk-based capital ratios
under the Federal Reserve Board guidelines are 4% and 8%, respectively. The capital
guidelines also provide for a standard to measure risk-based capital to total assets which
is called the leverage ratio. The Banks leverage ratio was 10.89% at September 30,
2006, and 10.14% in 2005. The minimum standard leverage ratio is 3% but financial
institutions are expected to maintain a leverage ratio of 1 to 2 percentage points above
the 3% minimum.

17

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Critical Accounting
PoliciesThe Corporation maintains critical
accounting policies for the allowance for loan losses. Refer to notes 1c and 1d of the
Notes to Consolidated Financial Statements for additional information included in Form
10-K for the year ended December 31, 2005.

Contractual ObligationsAs of September 30, 2006, December
31, 2005, and September 30, 2005, the Bank had outstanding irrevocable standby letters of
credit, which carry a maximum potential commitment of approximately $4,100,000, $3,200,000
and $3,500,000, respectively. These letters of credit are conditional commitments issued
by the Bank to guarantee the performance of a customer to a third party. The majority of
these letters of credit are short-term guarantees of one year or less, although some have
maturities which extend as long as two years. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loans to customers. The
Bank primarily holds real estate as collateral supporting those commitments for which
collateral is deemed necessary. The extent of collateral held on those commitments at
September 30, 2006, December 31, 2005 and June 30, 2005, where there is collateral, is in
excess of the committed amount. A letter of credit is not recorded on the balance sheet
until a customer fails to perform.

During the third quarter of 2006, the
Corporation signed a contract for the purchase of a new core operating system for
approximately $1,300,000, which consists of software and hardware which will be amortized
and depreciated. The system will be placed in service in 2007. There were no other
significant changes to the Corporations contractual obligations and commitments as
reported in the Corporations Form 10-K for the year ended December 31, 2005.

Impact of New
Accounting StandardsDuring the first quarter of fiscal
2006, the Corporation adopted the provisions of the Financial Accounting Standards
Boards (FASB) Statement No. 123(R),Share-Based Payment. The Corporation has
two plans affected by the issuance of this Statement. The Long Term Incentive Plan allows
for the granting of stock options to certain employees; however, the Corporation has not,
to date, issued any options under this plan. Consequently, the Statement has no impact on
the Corporations results of operations or financial condition relating to stock
options until such time as options are granted. The second plan affected is the Employee
Stock Purchase Plan (ESPP). The Statement allows for ESPP shares to be issued at
ninety-five percent of fair market value as of the grant date with no compensation expense
recognized. Effective April 1, 2005, the Corporations plan allows for the purchase
of shares at ninety-five percent of fair market value as of the grant date, thus no
compensation expense was recognized upon the effectiveness of SFAS 123(R). Also, in
accordance with the requirements of the pronouncement, the Corporation reclassified
unearned long term incentive compensation to common stock in the Corporations
consolidated balance sheet as of September 30, 2006 and December 31, 2005. The adoption of
SFAS 123(R) did not have a significant impact on the Corporations consolidated
financial statements or results of operations.

In September 2006, the Securities and
Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 108, Quantifying
Misstatements in Financial Statements. The SAB is effective for the Corporation for
the year ending December 31, 2006. The SAB outlines an approach registrants should use to
quantify the misstatement of current year financial statements that results from
misstatements of prior year financial statements. The SAB requires the registrant to use a
combination of the two approaches for quantifying misstatements that are currently used.
This dual approach requires the registrant to quantify and evaluate errors
using both an income statement and a balance sheet assessment of any misstatement.
Management has not completed its review of the new guidance; however, the effect of the
SABs implementation is not expected to be material to the Corporations
consolidated financial statements or results of operations.

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

18

---



In July 2006, the FASB issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, which is an
interpretation of FASB Statement No. 109, Accounting for Income Taxes. This
Interpretation clarifies the accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with FASB Statement No. 109.This Interpretation prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or expected to
be taken in a tax return. This Interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure, and
transition. The Interpretation is effective for the Corporation beginning January 1, 2007.
Management has not completed its review of the new guidance; however, the effect of the
Interpretations implementation is not expected to be material to the
Corporations results of operations or financial position.

In March 2006, the FASB issued
Statement No. 156, Accounting for Servicing of Financial Assets, which is an
amendment of Statement No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities. The Statement requires all separately
recognized servicing assets and liabilities to be initially measured at fair value, if
practicable. It permits entities to choose either the amortization method or the fair
value measurement method subsequently measuring each class of separately recognized
servicing assets and servicing liabilities. The Statement is intended to simplify the
accounting for servicing assets and liabilities, particularly for those entities that use
derivative instruments, which are required to be accounted for at fair value, to mitigate
the risks inherent in servicing assets and servicing liabilities. The Statement is
effective for the Corporation beginning January 1, 2007. Management has not completed its
review of the new guidance; however, the effect of the Statements implementation in
not expected to be material to the Corporations results of operations or financial
position.

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

Item 3. Quantitative
and Qualitative Disclosures About Market Risk

There has been no material change in
the market risk faced by the Corporation since December 31, 2005.

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Item 4. Controls and
Procedures

| | (a) | Evaluation
of Disclosure Controls and Procedures. 
With
the participation of management, the Corporations chief executive officer and chief
financial officer, after evaluating the effectiveness of the Corporations disclosure
controls and procedures (as defined in Exchange Act Rules 13a  15(e) and 15d 
15(e)) for the period ended September 30, 2006, have concluded that, as of such date, the
Corporations disclosure controls and procedures were effective.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Changes
in Internal Control Over Financial Reporting. 
During
the quarter ended September 30, 2006, there were no changes in the Corporations
internal control over financial reporting that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

PART II  OTHER
INFORMATION

Item 1A. Risk Factors

There have been no material changes
from the risk factors previously disclosed in Part I, Item 1A of the Corporations
Form 10-K.

Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds

The following table shows certain
information relating to purchases of common stock for the three-months ended September 30,
2006:

|Period         | Total Number of
Shares Purchased | Average Price
Paid Per Share | Total Number of Shares
  Purchased as Part of a
Publicly Announced Program | Maximum Number That
  May Yet Be Purchased
Under the Program (1)(2)
|-------------- | -------------------------------- | ---------------------------- | -------------------------------------------------------------------------- | -------------------------------------------------------------------
|               |                                  |                              |                                                                            |                                                                    
|July 2006      |                                  |                              | $                                                                          | --                                                                 
|August 2006    |                                  |                              |                                                                            | 35,000                                                             
|September 2006 |                                  |                              |                                                                            | 4,000                                                              
|               |                                  |                              |                                                                            |                                                                    
|Total          |                                  |                              |                                                                            | 39,000                                                             
|               |                                  |                              |                                                                            |                                                                    

|(1) | On March 16, 2006, the Corporations Board of Directors authorized a new
          share repurchase program. The new repurchase program authorizes the repurchase
          of up to one hundred thousand shares of the Corporations common stock and
          expires March 16, 2007.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | On August 17, 2006, the Corporations Board of Directors authorized a
          second share repurchase program. This repurchase program authorizes the
          repurchase of up to one hundred thousand additional shares of the
          Corporations common stock and expires August 17, 2007.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Item 6. ExhibitsThe
following exhibits (listed by number corresponding to the Exhibit Table as Item 601 in
Regulation S-K) are filed with this report:

| | 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).
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------

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SIGNATURES

Pursuant to the requirements of the
Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on
Form 10-Q for the quarter ended September 30, 2006 to be signed on its behalf by the
undersigned hereunto duly authorized.

| |  | FNBH BANCORP, INC./s/ Barbara Draper
Barbara Draper
Its: President and Chief Executive Officer
/s/ Janice B. Trouba
Janice B. TroubaChief Financial Officer
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

DATE: November 9, 2006

22

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