exv13

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

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

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

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

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

Grand Rapids, Michigan
March 3, 2007

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


	2006			2005
ASSETS
Cash and due from banks	$	19,946		$	21,327
Federal funds sold		9,500			9,750

Total cash and cash equivalents		29,446			31,077

Securities available for sale, at fair value		91,104			99,542
Securities held to maturity (fair value 2006 - $11,821; 2005 - $14,672)		11,899			14,851

Loans held for sale		2,226			1,042
Loans, net of allowance of 2006- $6,692, 2005- $6,301		444,301			433,055

Bank premises and equipment		16,854			14,617
Accrued interest receivable 2,676 2,676		2,985			2,676
Bank owned life insurance		6,815			6,579
Goodwill		7,955			7,955
Acquisition intangibles		759			1,075
Federal Home Loan Bank stock		2,032			2,300
Other assets		5,922			4,320


	$	622,298		$	619,089


LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing deposits	$	74,886		$	76,792
Interest-bearing deposits		453,669			451,262

Total deposits		528,555			528,054

Short-term borrowings		1,500			1,537
Federal Home Loan Bank Advances		11,052			14,228
Repurchase Agreements		10,000			10,000
Subordinated debentures		14,000			14,000
Accrued taxes, interest and other liabilities		5,873			4,375

Total liabilities		570,980			572,194

Stockholders’ equity
Common stock — $0 par value, 5,000,000 shares authorized, shares issued 2,152,862 — 2006; 1,931,297 — 2005		42,158			34,491
Retained earnings		10,118			13,729
Accumulated other comprehensive income (loss)		(958	)		(1,325	)

		51,318			46,895


	$	622,298		$	619,089


		See accompanying notes to consolidated financial statements.			2.

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


	2006			2005			2004
Interest income
Loans, including fees	$	35,131		$	29,670		$	22,161
Securities:
Taxable		3,461			3,250			3,053
Tax-exempt		809			794			746
Short-term investments		515			164			134

Total interest income		39,916			33,878			26,094

Interest expense
Deposits		14,743			9,390			7,004
Other Borrowings		2,165			1,908			1,259

Total interest expense		16,908			11,298			8,263


Net interest income		23,008			22,580			17,831

Provision for loan losses		1,120			1,389			1,389


Net interest income after provision for loan losses		21,888			21,191			16,442

Noninterest income
Service charges on deposit accounts		3,708			3,445			3,738
Gain on sale of mortgage loans		615			842			510
Trust and investment services income		1,554			1,157			1,072
Gain (Loss) on sale of securities		(2	)		(149	)		0
Gain on sale of credit card and SBA loans		0			0			464
Other income and fees		1,768			1,587			1,508

Total noninterest income		7,643			6,882			7,292

Noninterest expense
Salaries and employee benefits		12,738			11,983			9,956
Occupancy		1,858			1,673			1,633
Furniture and equipment		2,140			2,080			2,153
Loan and collection		320			388			289
Advertising and promotional		624			627			499
Telephone and communication services		538			508			314
Other professional services		1,066			949			1,031
Other general and administrative		2,702			2,592			2,301

Total noninterest expense		21,986			20,800			18,176


Income before taxes		7,545			7,273			5,558

Federal income taxes		2,237			2,219			1,524


Net income	$	5,308		$	5,054		$	4,034


Per share:
Earnings — basic	$	2.48		$	2.41		$	1.95
Earnings — diluted		2.47			2.40			1.94


		See accompanying notes to consolidated financial statements.			3.

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


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


		See accompanying notes to consolidated financial statements.			5.

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


	2006			2005			2004
OPERATING ACTIVITIES:
Net income	$	5,308		$	5,054		$	4,034
Adjustments to reconcile net income to cash Provided by Operating Activities:
Stock compensation expense		(20	)		0			0
Depreciation and amortization		2,008			1,560			2,336
Provision for loan losses		1,120			1,389			1,389
Loans originated for sale		(37,099	)		(52,093	)		(33,822	)
Proceeds from the sale of loans		36,530			53,481			34,540
(Gain) Loss on sale of securities		2			149			0
Gain on sales of loans		(615	)		(842	)		(974	)
Net (increase) decrease in bank owned life insurance		(236	)		282			(219	)
Net (increase) decrease in interest receivable & other assets		(470	)		213			(53	)
Net increase (decrease) in interest payable & other liabilities		1,329			465			1,853

Total Adjustments		2,549			4,604			5,050

Net Cash Provided By (Used In) Operating Activities		7,857			9,658			9,084


Cash Flows From Investing Activities:
Proceeds from maturities of securities — HTM		5,063			8,505			3,858
Proceeds from maturities of securities — AFS		15,178			1,410			2,625
Proceeds from calls of securities — HTM		925			109			7
Proceeds from calls of securities — AFS		975			19,943			48,813
Proceeds from sales of securities — AFS		1,103			18,144			0
Purchases of securities — HTM		(3,050	)		(4,701	)		(10,472	)
Purchases of securities — AFS		(8,568	)		(30,358	)		(23,865	)
Net increase in loans		(13,830	)		(46,515	)		(42,446	)
Purchase of FHLB stock		(132	)		0			0
FHLB stock buy back		400			0			0
Net cash from acquisition of WMFC		0			0			(1,112	)
Acquisition of premises and equipment, net		(3,744	)		(2,223	)		(867	)

Net Cash Provided By (Used in) Investing Activities		(5,680	)		(35,686	)		(23,459	)

Cash Flows From Financing Activities:
Net increase (decrease) in deposits		501			36,989			32,712
Net increase (decrease) in short term borrowings		(37	)		(3,663	)		382
Net increase (decrease) in repurchase agreements		0			0			(2,500	)
Issuance of subordinated debt		0			2,000			0
Proceeds from advances from FHLB		4,000			57,400			0
Repayments of advances from FHLB		(7,020	)		(62,418	)		(7,706	)
Proceeds from stock offering		0			758			0
Net proceeds from stock issuance and repurchase		817			623			341
Cash dividends		(2,069	)		(1,839	)		(1,758	)

Net Cash Provided By (Used In) Financing Activities		(3,808	)		29,850			21,471

NET INCREASE IN CASH AND CASH EQUIVALENTS		(1,631	)		3,822			7,096
CASH AND CASH EQUIVALENTS — BEGINNING		31,077			27,255			20,159

CASH AND CASH EQUIVALENTS — ENDING	$	29,446		$	31,077		$	27,255


CASH PAID FOR:
Interest	$	16,341		$	10,933		$	8,160
Income Taxes	$	1,781		$	2,935		$	730
NONCASH DISCLOSURES:
Transfers from loans to other real estate	$	1,567		$	564		$	201


		See accompanying notes to consolidated financial statements.			6.

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

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Noncash investing and financing activities:

WMFC acquisition:


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

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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



		(Continued)		7.

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

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

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

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

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

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

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



		(Continued)		8.

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

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

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

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

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

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

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

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

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



		(Continued)		9.

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

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

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


	2005			2004
Net income
As reported	$	5,054		$	4,034
Deduct: Stock-based compensation expense determined under a fair value based system		(8	)		(93	)

Proforma	$	5,046		$	3,941


Basic net income per share
As reported	$	2.41		$	1.95
Proforma		2.41			1.90

Diluted net income per share
As reported	$	2.40		$	1.94
Proforma		2.40			1.89

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

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



		(Continued)		10.

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

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

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

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

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

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

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

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

Adoption of New Accounting Standards:

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



		(Continued)		11.

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

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

SAB 108:

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

Effect of Newly Issued But Not Yet Effective Accounting Standards:

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



		(Continued)		12.

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

NOTE 2 — EARNINGS PER SHARE

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


$ in thousands except per share data	2006		2005		2004
Basic
Net income	$	5,308	$	5,054	$	4,034

Weighted average common shares outstanding		2,141,388		2,096,002		2,072,741

Basic earnings per common share	$	2.48	$	2.41	$	1.95


Diluted
Net income	$	5,308	$	5,054	$	4,034
Weighted average common shares outstanding for basic earnings per common share		2,141,388		2,096,002		2,072,741
Add: Dilutive effects of assumed exercises of stock options		4,674		6,434		9,197

Average shares and dilutive potential common shares		2,146,062		2,102,436		2,081,938

Diluted earnings per common share	$	2.47	$	2.40	$	1.94

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



		(Continued)		13.

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

NOTE 3 — SECURITIES

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

Available for Sale


			Gross		Gross
	Fair		Unrealized		Unrealized
	Value		Gains		Losses
2006
U.S. Government and federal agency	$	20,985	$	0	$	(546	)
State and municipal		9,311		77		(27	)
Mortgage-backed		58,499		48		(1,189	)
Equity securities		2,309		191		(5	)


	$	91,104	$	316	$	(1,767	)

2005
U.S. Government and federal agency	$	22,886	$	0	$	(640	)
State and municipal		6,591		59		(47	)
Mortgage-backed		68,057		4		(1,481	)
Equity securities		2,008		100		(2	)


	$	99,542	$	163	$	(2,170	)

Held to Maturity


			Gross		Gross
	Amortized		Unrecognized		Unrecognized			Fair
	Cost		Gains		Losses			Value
2006
Mortgage-backed	$	9	$	0	$	0		$	9
State and municipal		11,890		36		(114	)		11,812

	$	11,899	$	36	$	(114	)	$	11,821

2005
Mortgage-backed	$	14	$	1	$	0		$	15
State and municipal		14,837		46		(226	)		14,657

	$	14,851	$	47	$	(226	)	$	14,672

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


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



		(Continued)		14.

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

NOTE 3 — SECURITIES (Continued)

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


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

	$	11,899	$	11,821	$	91,104

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

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

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


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

Total temporarily impaired	$	58,752	$	(1,214	)	$	24,907	$	(667	)	$	83,659	$	(1,881	)



		(Continued)		15.

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

NOTE 3 — SECURITIES (Continued)


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

Total temporarily impaired	$	72,449	$	(1,528	)	$	30,498	$	(868	)	$	102,947	$	(2,396	)

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

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

NOTE 4 — LOANS

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


	2006		2005
Commercial	$	272,402	$	254,498
Real estate — construction		78,927		76,386
Real estate — mortgage		36,867		37,627
Consumer		62,797		70,845

		450,993		439,356
Less allowance for loan losses		6,692		6,301

	$	444,301	$	433,055



		(Continued)		16.

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

NOTE 4 — LOANS (Continued)

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

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

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


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

Balance, end of year	$	6,692		$	6,301		$	5,501

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


	2006		2005
Year end loans not requiring allocation	$	1,365	$	1,092
Year end loans requiring allocation		3,397		2,714

	$	4,762	$	3,806


Amount of the allowance for loan losses allocated	$	606	$	684

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



		(Continued)		17.

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

NOTE 4 — LOANS (Continued)

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

NOTE 5 — PREMISES AND EQUIPMENT, NET

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


	2006		2005
Land and land improvements	$	5,219	$	4,375
Building and building improvements		12,948		11,199
Furniture and equipment		8,805		7,719
Construction in progress		776		735

		27,748		24,028
Less accumulated depreciation		10,894		9,411

	$	16,854	$	14,617

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

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


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

	$	735



		(Continued)		18.

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

NOTE 6 – GOODWILL AND INTANGIBLE ASSETS

Goodwill

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

Acquired Intangible Assets

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


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

Total	$	1,725	$	966	$	650

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

Estimated amortization expense for each of the next five years:


2006	$	274
2007		192
2008		136
2009		94
2010		52

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



		(Continued)		19.

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

NOTE 7 — DEPOSITS

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


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

	$	528,555	$	528,054

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

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


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

	$	262,241	$	223,123

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



		(Continued)		20.

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

NOTE 8 — BORROWINGS

Short-Term Borrowings

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

Federal Home Loan Bank Advances

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


	Advance
Principal Terms	Amount		Range of Maturities	Rate
December 31, 2006
Single Maturity fixed rate advances	$	11,052	January 2007 to May 2016		5.13	%

December 31, 2005
Single Maturity fixed rate advances	$	10,228	January 2006 to May 2016		4.27	%
Putable advances		4,000	January 2006 to January 2011		4.48	%

	$	14,228

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

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


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

	$	11,052



		(Continued)		21.

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

NOTE 8 – BORROWINGS (Continued)

Repurchase Agreements

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

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


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

Subordinated Debenture and Trust Preferred Securities

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

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



		(Continued)		22.

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

NOTE 9 — INCOME TAXES

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


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

	$	2,237		$	2,219		$	1,524

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


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

	$	2,237		$	2,219		$	1,524

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


	2006			2005
Deferred tax assets
Allowance for loan losses	$	2,257		$	1,866
Unrealized loss on securities available for sale		493			682
Compensation		369			392
Other		18			168

		3,137			3,108

Deferred tax liabilities
Depreciation		(264	)		(265	)
Purchase accounting adjustments		(258	)		(577	)
Other		(100	)		(111	)

		(622	)		(953	)

	$	2,515		$	2,155

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



		(Continued)		23.

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

NOTE 10 — BENEFIT PLANS

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

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

NOTE 11 — STOCK PURCHASE AND OPTION PLANS

Director and Employee Plans

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

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

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

Dividend Investment Plan

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



		(Continued)		24.

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

NOTE 11 — STOCK PURCHASE AND OPTION PLANS (Continued)

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

The following summarizes shares issued under the various plans:


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

		29,644		20,586		13,981

Stock Option Plans

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

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

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



		(Continued)		25.

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

NOTE 11 — STOCK PURCHASE AND OPTION PLANS (Continued)

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


						Weighted
						Average
	Number			Weighted		Remaining		Aggregate
	of			Average		Contractual		Intrinsic
	Options			Price		Life		Value
Options outstanding at January 1, 2006		46,532		$	28.04
Options exercised 2006		(5,525	)		15.74
Options forfeited 2006		(484	)		30.88

Options outstanding at December 31, 2006		40,523		$	29.68		6.19	$	116,369


Exercisable at December 31, 2006		29,412		$	30.45		6.13	$	61,628

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


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

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


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

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



		(Continued)		26.

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

NOTE 12 — REGULATORY MATTERS

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

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



		(Continued)		27.

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

NOTE 12 — REGULATORY MATTERS (Continued)


											To Be Well
						For Capital					Capitalized Under
						Adequacy					Prompt Corrective
	Actual					Purposes					Action Provisions
As of December 31, 2006	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to Risk Weighted Assets)
Consolidated	$	63,934		12.5	%	$	40,949		8.0	%	$	51,186		10.0	%
The State Bank		35,985		11.0			26,062		8.0			32,577		10.0
Davison State Bank		4,737		11.7			3,250		8.0			4,063		10.0
West Michigan Community Bank		16,236		11.3			11,446		8.0			14,307		10.0

Tier 1 Capital (to Risk Weighted Assets)
Consolidated		57,562		11.3			20,474		4.0			30,712		6.0
The State Bank		31,913		9.8			13,031		4.0			19,546		6.0
Davison State Bank		4,229		10.4			1,625		4.0			2,438		6.0
West Michigan Community Bank		14,444		10.1			5,723		4.0			8,584		6.0

Tier 1 Capital (to Average Assets)
Consolidated		57,562		8.6			26,897		4.0			33,622		5.0
The State Bank		31,913		8.2			15,481		4.0			19,352		5.0
Davison State Bank		4,229		8.2			2,068		4.0			2,585		5.0
West Michigan Community Bank		14,444		8.6			6,739		4.0			8,424		5.0



		(Continued)		28.

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

NOTE 12 — REGULATORY MATTERS (Continued)


											To Be Well
						For Capital					Capitalized Under
						Adequacy					Prompt Corrective
	Actual					Purposes					Action Provisions
As of December 31, 2005	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to Risk Weighted Assets)
Consolidated	$	59,880		11.9	%	$	40,430		8.0	%	$	50,537		10.0	%
The State Bank		37,037		11.5			25,857		8.0			32,322		10.0
Davison State Bank		5,357		11.6			3,711		8.0			4,639		10.0
West Michigan Community Bank		13,970		10.5			10,602		8.0			13,252		10.0

Tier 1 Capital (to Risk Weighted Assets)
Consolidated		53,738		10.6			20,215		4.0			30,322		6.0
The State Bank		33,121		10.3			12,929		4.0			19,393		6.0
Davison State Bank		4,790		10.3			1,856		4.0			2,783		6.0
West Michigan Community Bank		12,311		9.3			5,301		4.0			7,951		6.0

Tier 1 Capital (to Average Assets)
Consolidated		53,738		8.9			24,069		4.0			30,086		5.0
The State Bank		33,121		8.6			15,453		4.0			19,317		5.0
Davison State Bank		4,790		8.6			2,212		4.0			2,764		5.0
West Michigan Community Bank		12,311		7.9			6,253		4.0			7,816		5.0



		(Continued)		29.

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

NOTE 13 — FINANCIAL INSTRUMENTS

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


	2006				2005
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
Assets:
Cash and cash equivalents	$	29,446	$	29,446	$	31,077	$	31,077
Securities — available for sale		91,104		91,104		99,542		99,542
Securities — held to maturity		11,899		11,821		14,851		14,672
FHLB stock		2,032		2,032		2,300		2,300
Loans held for sale		2,226		2,231		1,042		1,045
Loans		444,301		435,743		433,055		436,060
Bank owned life insurance		6,815		6,815		6,579		6,579
Accrued interest receivable		2,985		2,985		2,676		2,676

Liabilities:
Deposits	$	528,555	$	521,440	$	528,054	$	524,745
Short-term borrowings		1,500		1,500		1,537		1,537
FHLB advances		11,052		11,052		14,228		14,072
Repurchase agreements		10,000		10,000		10,000		10,000
Subordinated debentures		14,000		14,000		14,000		14,000
Accrued interest payable		1,608		1,608		1,041		1,041

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

Cash and cash equivalents

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

Securities (including mortgage-backed securities)

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

Loans held for sale

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

Loans

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



		(Continued)		30.

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

NOTE 13 — FINANCIAL INSTRUMENTS (Continued)

Bank owned life insurance

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

Off-balance-sheet instruments

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

Deposit liabilities

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

Short-term borrowings

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

FHLB advances

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

Repurchase agreements

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

Subordinated Debentures

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

Limitations

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



		(Continued)		31.

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

NOTE 13 — FINANCIAL INSTRUMENTS (Continued)

Off-balance-sheet risk

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

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


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

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



		(Continued)		32.

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

NOTE 14 — PARENT ONLY CONDENSED FINANCIAL INFORMATION

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

CONDENSED BALANCE SHEETS
December 31 (in thousands)


	2006		2005
ASSETS
Cash and cash equivalents	$	5,396	$	1,664
Securities available for sale, at market		2,309		2,008
Other assets		143		211
Investment in subsidiaries		58,220		57,379

	$	66,068	$	61,262


LIABILITIES AND STOCKHOLDERS’ EQUITY
Other liabilities	$	750	$	367
Subordinated debt		14,000		14,000
Stockholders’ Equity		51,318		46,895

	$	66,068	$	61,262

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


	2006			2005			2004
Interest on securities	$	0		$	0		$	1
Other income		1			3			2
Dividends from subsidiaries		6,849			2,158			2,697
Interest expense		(1,264	)		(898	)		(569	)
Operating expenses		(327	)		(270	)		(349	)
Equity in undistributed income of subsidiaries		(468	)		3,664			1,942

Income before income taxes		4,791			4,657			3,724
Federal income tax expense (benefit)		(517	)		(397	)		(310	)

Net income	$	5,308		$	5,054		$	4,034



		(Continued)		33.

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

NOTE 14 — PARENT ONLY CONDENSED FINANCIAL INFORMATION (Continued)

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


	2006			2005			2004
Cash flows from operating activities
Net income	$	5,308		$	5,054		$	4,034
Amortization		0			0			1
Change in other assets		38			429			(4,724	)
Change in other liabilities		383			(106	)		56
Equity in undistributed income of subsidiary		468			(3,664	)		(1,942	)

Net cash from operating activities		6,197			1,713			(2,575	)

Cash flows provided by investing activities
Purchase of equity securities		(213	)		(865	)		(650	)
Sales and maturities of securities – AFS		0			0			300
Purchases of securities – AFS		0			0			0
Purchase of West Michigan Financial Corp		0			0			(12,900	)
Investment in subsidiary		(1,000	)		(500	)		(1,700	)

Net cash from investing activities		(1,213	)		(1,365	)		(14,950	)

Cash flows used in financing activities
Issuance of subordinated debt		0			2,000			0
Net short-term borrowings		0			(750	)		750
Dividends paid		(2,069	)		(1,839	)		(1,758	)
Stock repurchase		0			0			(122	)
Proceeds from stock issuance		817			1,381			463

Net cash from financing net activities		(1,252	)		792			(667	)


Change in cash and cash equivalents		3,732			1,140			(18,192	)

Cash and cash equivalents at beginning of year		1,664			524			18,716


Cash and cash equivalents at end of year	$	5,396		$	1,664		$	524



		(Continued)		34.

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

NOTE 15 – ACQUISITION

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

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


	Amount
Core deposits intangible	$	1,509
Customer relationships intangible		216

In conjunction with the acquisition, the fair values of significant assets and liabilities assumed at March 15, 2004 were as follows, stated in thousands of dollars:

Cash and cash equivalents	$	(1,112	)
Securities		26,966
Loans		97,277
Acquisition intangibles		9,578
Deposits		(109,828	)
Other borrowings		(27,369	)

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



		(Continued)		35.

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

NOTE 15 – ACQUISITION (Continued)


	2004
Interest income	$	27,485
Interest expense		8,691

Net interest income		18,794
Provision for loan losses		1,426

Net interest income after provision		17,368
Noninterest income		7,555
Noninterest expense		19,167

Income before federal income tax		5,756
Federal income tax expense		1,586

Net income	$	4,170


Basic earnings per share	$	2.21
Diluted earnings per share		2.20

NOTE 16 — SUMMARY OF QUARTERLY FINANCIAL DATA – UNAUDITED

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


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

Earnings per share
Basic		.57		.59		.62		.70
Diluted		.56		.59		.62		.70



		(Continued)		36.

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

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



TABLE 1		Selected Financial Data

$ in thousands except per share data and ratios

2006

2005

2004

2003

2002

Summary of Consolidated Statements of Income:

Interest Income

39,916

33,878

26,094

18,438

17,952

Interest Expense

16,908

11,298

8,263

5,601

5,722

Net Interest Income

23,008

22,580

17,831

12,837

12,230

Provision for Loan Losses

1,120

1,389

1,319

426

Net Interest Income after Provision

21,888

21,191

16,442

11,518

11,804

Total Other Operating Income

7,643

6,882

7,292

6,866

5,394

Total Other Operating Expense

21,986

20,800

18,176

13,276

12,253

Income Before Income Taxes

7,545

7,273

5,558

5,108

4,945

Provision for Income Taxes

2,237

2,219

1,524

1,320

1,479

Net Income

5,308

5,054

4,034

3,788

3,466

Net Income Per Share – Basic *

2.48

2.41

1.95

1.83

1.65

Net Income Per Share – Diluted *

2.47

2.40

1.94

1.83

1.65

Summary of Consolidated Balance Sheets:

Assets

622,298

619,089

584,890

419,966

340,483

Securities, including FHLB stock

105,035

116,693

131,429

126,856

63,525

Loans, including loans held for sale

453,219

440,398

395,017

254,340

229,730

Deposits

528,555

528,054

491,065

348,525

295,869

Borrowings and Other Fundings

36,552

39,765

46,602

29,057

2,624

Stockholders’ Equity

51,318

46,895

42,969

40,882

39,928

Other Financial and Statistical Data:

Tier 1 Capital to Risk Weighted Assets

11.30

10.60

10.20

16.90

14.10

Total Capital to Risk Weighted Assets

12.50

11.90

11.40

18.00

15.20

Tier 1 Capital to Average Assets

8.60

8.90

8.70

14.00

12.60

Total Cash Dividends

2,069

1,839

1,758

1,966

1,748

Book Value Per Share *

24.08

22.07

20.67

19.74

19.16

Cash Dividends Paid Per Share *

0.94

0.88

0.84

0.76

0.84

Period End Market Price Per Share *

32.75

29.77

33.41

28.59

28.72

Dividend Pay-out Ratio

38.98

36.39

43.58

51.90

50.43

Return on Average Stockholders’ Equity

10.82

11.09

9.72

9.32

8.78

Return on Average Assets

0.85

0.74

1.00

1.10

Net Interest Margin

4.11

4.23

3.70

3.88

4.46

Total Equity to Assets at Period End

8.25

7.57

7.34

9.73

11.73


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



		(Continued)		38.

RESULTS OF OPERATIONS

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

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

NET INTEREST INCOME

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

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

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

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

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

TABLE 2

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

INCREASE

(DECREASE)

2006

2005

DUE

TO:

YIELD/

(000’s omitted)

VOL

RATE

TOTAL

VOL

RATE

TOTAL

TAXABLE SECURITIES

(226

)

448

222

(412

)

609

197

TAX-EXEMPT SECURITIES

(127

)

150

624

(551

)

FEDERAL FUNDS SOLD

215

124

339

(71

)

101

TOTAL LOANS

2,178

3,299

5,477

3,744

3,678

7,422

LOANS HELD FOR SALE

(37

)

(30

)

TOTAL EARNING ASSETS

2,003

4,028

6,031

3,960

3,854

7,814

INTEREST BEARING DEMAND DEPOSITS

(121

)

828

707

461

494

SAVINGS DEPOSITS

(284

)

141

(143

)

(370

)

(522

)

(892

)

TIME CDs $100,000 AND OVER

1,748

1,447

3,195

1,372

420

1,792

OTHER TIME DEPOSITS

685

909

1,594

230

762

992

OTHER BORROWINGS

(333

)

590

257

203

446

649

TOTAL INTEREST BEARING LIABILITIES

1,695

3,915

5,610

1,468

1,567

3,035

NET INTEREST INCOME

308

113

421

2,492

2,287

4,779

TABLE 3


	Summary of Net Interest Income
	Years Ended December 31,
	2006								2005								2004
	AVG								AVG								AVG
(000’s omitted)	BAL			INC/EXP		YIELD			BAL			INC/EXP		YIELD			BAL			INC/EXP		YIELD

ASSETS
Securities:
U.S. Treasury and Government Agencies	$	84,099		$	3,348		3.98	%	$	91,280		$	3,141		3.44	%	$	106,512		$	2,916		2.74	%
State and Political (1)		21,376			1,226		5.73	%		23,892			1,203		5.04	%		15,354			1,130		7.36	%
Other		4,304			124		2.88	%		3,733			109		2.89	%		3,053			137		4.49	%


Total Securities		109,779			4,698		4.28	%		118,905			4,453		3.74	%		124,919			4,183		3.35	%
Fed Funds Sold		10,045			503		5.01	%		4,347			164		3.77	%		9,308			134		1.44	%
Loans:
Commercial		343,702			26,820		7.80	%		307,746			21,527		7.00	%		259,016			15,632		6.04	%
Tax Free (1)		4,217			271		6.43	%		4,844			308		6.35	%		4,708			297		6.31	%
Real Estate-Mortgage		36,330			2,638		7.26	%		36,409			2,690		7.39	%		26,198			1,801		6.87	%
Consumer		66,526			5,382		8.09	%		72,064			5,109		7.09	%		70,408			4,482		6.37	%


Total loans		450,775			35,111		7.79	%		421,063			29,634		7.04	%		360,330			22,212		6.16	%
Allowance for Loan Loss		(6,632	)							(5,975	)							(4,779	)
Net Loans		444,143			35,111		7.91	%		415,088			29,634		7.14	%		355,551			22,212		6.16	%

Loans Held for Sale		1,626			112		6.89	%		2,215			142		6.41	%		884			50		5.66	%


TOTAL EARNING ASSETS		572,225			40,424		7.06	%		546,530			34,393		6.29	%		495,441			26,579		5.36	%

Cash Due from Banks		18,155								20,067								24,249
All Other Assets		39,663								36,823								31,990

TOTAL ASSETS	$	623,411							$	597,445							$	546,901

LIABILITIES & SHAREHOLDERS’ EQUITY:

Deposits:
Interest bearing – DDA	$	103,356		$	2,395		2.32	%	$	111,670		$	1,688		1.51	%	$	108,704		$	1,194		1.10	%
Savings Deposits		99,339			1,252		1.26	%		125,031			1,395		1.12	%		149,099			2,287		1.53	%
Time CD’s $100,000 and Over		130,860			6,215		4.75	%		83,120			3,020		3.63	%		39,260			1,228		3.13	%
Other Time CD’s		120,427			4,881		4.05	%		99,928			3,287		3.29	%		90,855			2,295		3.08	%


Total Interest Bearing Deposits		453,982			14,743		3.25	%		419,749			9,390		2.24	%		387,918			7,004		1.81	%
Other Borrowings		39,268			2,165		5.51	%		47,697			1,908		4.00	%		41,082			1,259		3.06	%

INTEREST BEARING LIABILITIES		493,250			16,908		3.43	%		467,446			11,298		2.42	%		429,000			8,263		1.93	%


Non-interest bearing — DDA		77,256								81,471								73,553
All Other Liabilities		3,832								2,935								2,618
Shareholders Equity		49,073								45,593								41,730

TOTAL LIABILITIES and S/H
EQUITY	$	623,411							$	597,445							$	546,901


Net Interest Rate Spread							3.64	%							3.88	%							3.44	%
Impact of Non-Interest Bearing Funds on Margin							0.47	%							0.35	%							0.26	%


Net Interest Income/Margin				$	23,516		4.11	%				$	23,095		4.23	%				$	18,316		3.70	%


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

ALLOWANCE AND PROVISION FOR LOAN LOSSES

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

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

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

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

TABLE 4

Analysis of the Allowance for Loan Losses


	Years Ended December 31,
(000’s omitted)	2006			2005			2004			2003			2002

Balance Beginning of Period	$	6,301		$	5,501		$	3,414		$	3,184		$	3,125

Charge-offs:
Commercial, Financial and Agricultural		(554	)		(405	)		(365	)		(940	)		(329	)
Real Estate-Construction		0			0			0			0			0
Real Estate-Mortgage		0			0			0			0			(7	)
Installment Loans to Individuals		(323	)		(360	)		(306	)		(455	)		(510	)

Total Charge-offs		(877	)		(765	)		(671	)		(1,395	)		(846	)

Recoveries:
Commercial and Financial		51			70			38			168			344
Real Estate-Construction		0			0			0			0			0
Real Estate-Mortgage		0			0			0			0			0
Installment Loans to Individuals		97			106			172			138			135

Total Recoveries		148			176			210			306			479

Net Charge-offs		(729	)		(589	)		(461	)		(1,089	)		(367	)

Provision		1,120			1,389			1,389			1,319			426

Addition from WMCB acquisition		0			0			1,159			0			0

Balance at End of Period	$	6,692		$	6,301		$	5,501		$	3,414		$	3,184

Ratio of Net Charge-Offs During the Period		0.16	%		0.14	%		0.12	%		0.43	%		0.16	%

NON-INTEREST INCOME

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

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

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

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

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

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

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

NON-INTEREST EXPENSE

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

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

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

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

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

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

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

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

FINANCIAL CONDITION

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

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

SECURITIES PORTFOLIO

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

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

TABLE 5
Analysis and Maturities of Securities

Amortized

Fair

(000’s omitted)

Cost

Value

Yield ⁽¹⁾

AVAILABLE FOR SALE

U.S. Agencies

One year or less

2,975

2,965

3.42

Over one through five years

14,382

14,010

3.63

Over five through ten years

1,630

1,593

4.50

Over ten years

2,544

2,417

3.75

Total

21,531

20,985

Mortgage-Backed One year or less

8.25

Over one through five years

21,308

20,691

3.89

Over five through ten years

5,546

5,382

4.45

Over ten years

32,785

32,425

4.44

Total

59,640

58,499

State and Political One year or less

1,725

1,722

4.96

Over one through five years

1,271

1,263

4.20

Over five through ten years

885

872

7.67

Over ten years

5,380

5,454

6.51

Total

9,261

9,311

Equity Securities

2,123

2,309

HELD TO MATURITY

Mortgage-Backed One year or less

0.00

Over one through five years

7.50

Over five through ten years

9.08

Over ten years

0.00

Total

State and Political One year or less

3,061

3,053

6.12

Over one through five years

4,912

4,867

6.07

Over five through ten years

2,903

2,866

6.41

Over ten years

1,014

1,026

6.33

Total

11,890

11,812

Total Securities

104,454

102,925


⁽¹⁾		Tax equivalent yield

LOAN PORTFOLIO

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

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

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

TABLE 6
Loan Portfolio

December 31,

(000’s omitted)

2006

2005

2004

2003

2002

Commercial

272,402

254,498

229,012

146,450

129,562

Real estate – construction

78,927

76,386

61,278

32,913

27,032

Real estate – mortgage

36,867

37,627

32,705

18,335

11,944

Consumer

62,797

70,845

70,435

55,547

55,683

Total

450,993

439,356

393,430

253,245

224,221

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

TABLE 7
Maturities of the Loan Portfolio by Loan Type

Within

One-

After

December 31, 2006

One

Five

(000’s omitted)

Year

Years

Total

Commercial

78,852

176,326

17,224

272,402

Real estate – construction

60,311

15,471

3,145

78,927

Real estate – mortgage

9,267

10,495

17,105

36,867

Consumer

8,198

33,321

21,278

62,797

156,628

235,613

58,752

450,993

TABLE 8
Maturities of the Loan Portfolio by Rate Categories

Within

One-

After

December 31, 2006

One

Five

(000’s omitted)

Year

Years

Total

Loans:

Fixed Rate

48,345

173,517

37,949

259,811

Variable Rate

108,283

62,096

20,803

191,182

156,628

235,613

58,752

450,993

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

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

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

NON-PERFORMING ASSETS

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

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

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

December 31,

2006

2005

2004

2003

2002

Non-Performing Loans:

Loans Past Due 90 Days or More & Still Accruing

2,311

Non-Accrual Loans

2,354

1,476

1,102

229

512

Renegotiated Loans

437

1,401

477

1,262

Total Non-Performing Loans

5,102

2,957

1,670

1,538

584

Other Non-Performing Assets:

Other Real Estate

1,247

500

208

1,081

110

Other Real Estate Owned in Redemption

216

856

184

164

Other Non-Performing Assets

155

Total Other Non-Performing Assets

1,618

506

1,068

1,344

366

Total Non-Performing Assets

6,720

3,463

2,738

2,882

950

Non-Performing Loans as a % of Total Loans

1.13

0.67

0.70

0.61

0.26

Non-Performing Assets as a % of Total Loans and Other Real Estate

1.48

0.79

0.69

1.13

0.42

Allowance for Loan Losses as a % of Non-Performing Loans

131.16

213.09

350.16

221.98

545.21

Accruing Loans Past Due 90 Days or More to Total Loans

0.51

0.02

0.20

0.03

Non-performing Assets as a % of Total Assets

1.08

0.56

0.47

0.69

0.28

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

TABLE 10
Allocation of the Allowance for Loan Losses

December 31,

2006

2005

2004

2003

2002

(000’s omitted)

Amount

Loan %

Amount

Loan %

Amount

Loan %

Amount

Loan %

Amount

Loan %

Commercial and construction

5,657

77.90

5,339

75.31

4,600

73.79

2,624

70.83

2,222

69.84

Real estate mortgage

328

8.17

263

8.56

312

8.31

207

7.24

5.33

Consumer

623

13.93

593

16.13

508

17.90

576

21.93

897

24.83

Unallocated

106

Total

6,692

100.00

6,301

100.00

5,501

100.00

3,414

100.00

3,184

100.00

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

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

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

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

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

DEPOSITS
TABLE 11
Average Deposits
Years Ended December 31,

2006

2005

2004

2003

2002

Average

(000’s omitted)

Balance

Rate

Balance

Rate

Balance

Rate

Balance

Rate

Balance

Rate

Non-int. bearing demand

77,256

81,471

73,553

52,853

43,908

Interest-bearing demand

103,356

2.15

111,670

1.51

108,704

1.10

53,897

0.94

42,637

0.95

Savings

99,339

1.26

125,031

1.12

149,099

1.53

117,138

1.17

85,746

1.37

Time

251,287

4.73

183,048

3.45

130,115

2.71

102,563

3.35

99,419

4.07

Total

531,238

2.89

501,220

1.87

461,471

1.52

326,451

1.63

271,710

2.07

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

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

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


	December 31,
(000’s omitted)	2006		2005

Three months or less	$	37,216	$	44,097
Over three through six months		29,661		18,470
Over six through twelve months		16,832		24,280
Over twelve months		53,269		28,605

Total	$	136,978	$	115,452

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

FEDERAL INCOME TAXES

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

LIQUIDITY AND INTEREST RATE RISK MANAGEMENT

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

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

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

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

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

Table 13

Less than 1

More than

Total

year

1-3 years

3-5 years

5 years

Time Deposits

262,241

174,147

62,972

24,825

297

Short-term borrowings

1,500

—

FHLB advances

11,052

3,022

3,050

4,058

922

Repurchase agreements

10,000

5,000

—

Subordinated debt

14,000

—

14,000

—

Operating leases

735

268

236

231

—

Total

299,528

183,937

85,258

29,114

1,219

CAPITAL RESOURCES

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

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

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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

OFF-BALANCE-SHEET ITEMS

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

TABLE 14


	Rate Sensitivity of Financial Instruments																				Fair
(000’s omitted)	2007			2008			2009			2010			2011			Thereafter			Total		Value

Rate Sensitive Assets:
Fixed interest rate loans	$	48,345		$	40,490		$	47,145		$	43,502		$	42,380		$	37,949		$	259,811	$	251,306
Average interest rate		6.80	%		6.98	%		6.90	%		6.80	%		7.30	%		6.58	%
Variable interest rate loans	$	108,283		$	27,059		$	13,817		$	16,256		$	4,964			20,803		$	191,182	$	191,129
Average interest rate		9.06	%		8.13	%		8.09	%		8.41	%		8.48	%		8.07	%
Fixed interest rate securities	$	18,366		$	9,950		$	14,671		$	11,368		$	3,649		$	17,383		$	75,387	$	77,617
Average interest rate		4.09	%		3.90	%		3.91	%		4.06	%		4.15	%		4.72	%
Variable Interest rate securities	$	12,534		$	10,095		$	0		$	3,184		$	343		$	1,460		$	27,616	$	25,308
Average interest rate		3.59	%		3.96	%		0	%		4.15	%		3.75	%		4.51	%
FHLB Stock	$	2,032																	$	2,032	$	2,032
Average interest rate		5.00	%
Other interest bearing assets	$	9,500																	$	9,500	$	9,500
Average interest rate		5.13	%

Rate Sensitive Liabilities:
Interest-bearing checking	$	102,535																	$	102,535	$	102,534
Average interest rate		2.10	%
Savings	$	88,893																	$	88,893	$	88,892
Average interest rate		0.61	%
Time	$	174,150		$	42,855		$	20,117		$	10,312		$	14,513		$	294		$	262,241	$	252,127
Average interest rate		4.73	%		4.57	%		4.71	%		4.69	%		5.13	%		3.11	%
Short term borrowings	$	1,500																	$	1,500	$	1,495
Average interest rate		1.25	%
FHLB advances	$	3,022		$	3,024		$	26		$	2,028		$	2,030		$	922		$	11,052	$	11,052
Average interest rate		3.59	%		4.76	%		7.34	%		4.60	%		4.91	%		7.34	%
Repurchase agreements	$	5,000		$	5,000														$	10,000	$	10,000
Average interest rate		2.61	%		4.02	%
Subordinated debt							$	12,000					$	2,000					$	14,000	$	14,000
Average interest rate								8.75	%					8.75	%

INTEREST RATE SENSITIVITY MANAGEMENT

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

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

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

TABLE 15

Gap Analysis

December 31, 2006

Within

Three

One to

After

Three

Months-

Five

(000’s Omitted)

Months

One Year

Years

Total

Federal Funds Sold

9,500

Securities

16,183

14,717

53,260

18,843

103,003

Loans

50,907

105,721

235,613

58,752

450,993

Loans Held for Sale

2,226

FHLB Stock

2,032

Total Earning Assets

80,848

120,438

288,873

77,595

567,754

Interest Bearing Liabilities:

Interest Bearing Demand Deposits

102,535

Savings Deposits

88,893

Time Deposits Less than $100,000

27,079

63,360

34,527

297

125,263

Time Deposits Greater than $100,000

37,219

46,491

53,268

136,978

Short-term Borrowings

1,500

FHLB Advances

1,000

2,022

7,108

922

11,052

Repurchase Agreements

5,000

10,000

Subordinated Debt

14,000

Total Interest Bearing Liabilities

258,226

116,873

113,903

1,219

490,221

Interest Rate Sensitivity GAP

177,378

)

3,565

174,970

76,376

77,533

Cumulative Interest Rate Sensitivity GAP

177,378

)

173,813

)

1,157

77,533

Interest Rate Sensitivity GAP

0.31

1.03

2.54

63.65

Cumulative Interest Rate Sensitivity GAP Ratio

0.31

0.54

1.00

1.16

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

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

FORWARD LOOKING STATEMENTS

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

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

FENTURA FINANCIAL, INC. COMMON STOCK

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

TABLE 16
Common Stock Data

Market

Dividends

Information

Paid

Years

Quarter

High

Low

Per Share

2004

First Quarter

35.45

28.23

0.210

Second Quarter

40.91

28.42

0.210

Third Quarter

40.91

35.82

0.210

Fourth Quarter

37.00

35.41

0.210

0.840

2005

First Quarter

32.55

30.24

0.220

Second Quarter

31.13

29.35

0.220

Third Quarter

31.57

29.39

0.220

Fourth Quarter

30.49

29.31

0.220

0.880

2006

First Quarter

31.55

29.77

0.230

Second Quarter

33.41

31.14

0.230

Third Quarter

33.64

30.00

0.230

Fourth Quarter

34.00

32.55

0.250

0.940


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

SHAREHOLDER RETURN PERFORMANCE GRAPH

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

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

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


	*Period Ending*
*Index*	12/31/01		12/31/02		12/31/03		12/31/04		12/31/05		12/31/06

Fentura Financial, Inc.		100.00		140.72		143.91		172.33		157.93		177.83
NASDAQ — Total US		100.00		68.76		103.67		113.16		115.57		127.58
SNL Midwest OTC-BB and Pink Banks		100.00		128.26		161.90		192.90		200.83		211.50

Source: SNL Financial LC, Charlottesville, VA


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM			1

CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS			2

CONSOLIDATED STATEMENTS OF INCOME			3

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME			4

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY			5

CONSOLIDATED STATEMENTS OF CASH FLOWS			6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS			7-37

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			38-59