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, 2007 and 2006, 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, 2007. 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. The Corporation is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporation’s internal control over financial reporting. Accordingly, we express no such opinion. 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, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007 in conformity with U.S. generally accepted accounting principles.




		Crowe Chizek and Company LLC

Grand Rapids, Michigan
March 7, 2008

FENTURA FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2007 and 2006
(000’s omitted except share and per share data)


	2007			2006
ASSETS
Cash and due from banks	$	22,734		$	19,946
Federal funds sold		7,300			9,500

Total cash and cash equivalents		30,034			29,446

Securities available for sale, at fair value		71,792			91,104
Securities held to maturity (fair value 2007 - $8,714; 2006 - $11,821)		8,685			11,899

Loans held for sale		1,655			2,226
Loans, net of allowance of 2007- $8,554; 2006- $6,692		462,849			444,301

Bank premises and equipment		20,101			16,854
Accrued interest receivable		2,813			2,985
Bank owned life insurance		7,042			6,815
Goodwill		7,955			7,955
Acquisition intangibles		485			759
Federal Home Loan Bank stock		2,032			2,032
Equity Investment		3,089			0
Other assets		9,487			5,922


Total Assets	$	628,019		$	622,298


LIABILITIES AND STOCKHOLDERS EQUITY
Deposits:
Non-interest-bearing deposits	$	75,148		$	74,886
Interest-bearing deposits		468,355			453,669

Total deposits		543,503			528,555

Short-term borrowings		649			1,500
Federal Home Loan Bank advances		11,030			11,052
Repurchase agreements		5,000			10,000
Subordinated debentures		14,000			14,000
Accrued taxes, interest and other liabilities		4,341			5,873

Total liabilities		578,523			570,980

Stockholders’ equity
Common stock — $0 par value, 5,000,000 shares authorized, shares issued and outstanding 2,163,385 – 2007; 2,152,862 – 2006		42,478			42,158
Retained earnings		7,488			10,118
Accumulated other comprehensive income (loss)		(470	)		(958	)

Total stockholders equity		49,496			51,318


Total liabilities and stockholders equity	$	628,019		$	622,298

See accompanying notes to consolidated financial statements.

FENTURA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2007, 2006 and 2005
(000’s omitted except share and per share data)


	2007			2006			2005
Interest income
Loans, including fees	$	34,964		$	35,131		$	29,670
Securities:
Taxable		3,217			3,461			3,250
Tax-exempt		722			809			794
Short-term investments		311			515			164

Total interest income		39,214			39,916			33,878

Interest expense
Deposits		16,404			14,743			9,390
Other borrowings		2,217			2,165			1,908

Total interest expense		18,621			16,908			11,298


Net interest income		20,593			23,008			22,580

Provision for loan losses		7,466			1,120			1,389


Net interest income after provision for loan losses		13,127			21,888			21,191

Non-interest income
Service charges on deposit accounts		3,421			3,708			3,445
Gain on sale of mortgage loans		402			615			842
Trust and investment services income		1,901			1,554			1,157
Gain (Loss) on sale of securities		2			(2	)		(149	)
Other income and fees		1,853			1,768			1,587

Total non-interest income		7,579			7,643			6,882

Non-interest expense
Salaries and employee benefits		12,183			12,738			11,983
Occupancy		2,090			1,858			1,673
Furniture and equipment		2,139			2,140			2,080
Loan and collection		753			320			388
Advertising and promotional		486			624			627
Telephone and communication services		570			538			508
Other professional services		1,143			1,066			949
Other general and administrative		2,470			2,702			2,592

Total non-interest expense		21,834			21,986			20,800


Income (loss) before taxes		(1,128	)		7,545			7,273

Federal income taxes (benefit)		(661	)		2,237			2,219


Net income (loss)	$	(467	)	$	5,308		$	5,054


Per share:
Earnings – basic	$	(0.22	)	$	2.48		$	2.41
Earnings – diluted		(0.22	)		2.47			2.40

See accompanying notes to consolidated financial statements.

FENTURA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
Years ended December 31, 2007, 2006 and 2005
(000’s omitted except share and per share data)


							Accumulated
							Other			Total
	Common			Retained			Comprehensive			Stockholders
	Stock			Earnings			Income (Loss)			Equity

Balance, January 1, 2005	$	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)		55			0			0			55

Other comprehensive loss (net of tax)		0			0			367			367


Balance, December 31, 2006		42,158			10,118			(958	)		51,318

Net loss		0			(467	)		0			(467	)

Cash Dividends ($1.00 per share)		0			(2,163	)		0			(2,163	)

Issuance of shares under stock purchase and Dividend reinvestment plans (27,412 shares)		818			0			0			818

Stock repurchase (17,184 shares)		(520	)		0			0			(520	)

Stock compensation expense		16			0			0			16

Issuance of shares under stock option exercise (295 shares)		6			0			0			6

Other comprehensive income (net of tax)		0			0			488			488


Balance, December 31, 2007	$	42,478		$	7,488		$	(470	)	$	49,496

See accompanying notes to consolidated financial statements.

FENTURA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2007, 2006 and 2005
(000’s omitted except share and per share data)


	2007			2006			2005
OPERATING ACTIVITIES:
Net income (loss)	$	(467	)	$	5,308		$	5,054
Adjustments to reconcile net income to cash Provided by Operating Activities:
Stock compensation expense		(16	)		(20	)		0
Depreciation and amortization		1,863			2,008			1,560
Provision for loan losses		7,466			1,120			1,389
Loans originated for sale		(21,709	)		(37,099	)		(52,093	)
Proceeds from the sale of loans		22,682			36,530			53,481
(Gain) Loss on sale of securities		(2	)		2			149
(Gain) Loss on sale of fixed assets		(11	)		0			0
Gain on sales of loans		(402	)		(615	)		(842	)
(Gain) Loss on equity investment		199			0			0
Earnings from bank owned life insurance		(227	)		(236	)		282
Net (increase) decrease in interest receivable & other assets		(2,534	)		(470	)		213
Net increase (decrease) in interest payable & other liabilities		(1,780	)		1,329			465

Total Adjustments		5,529			2,549			4,604

Net Cash Provided By (Used In) Operating Activities		5,062			7,857			9,658

Cash Flows From Investing Activities:
Proceeds from maturities of securities – HTM		1,819			5,063			8,505
Proceeds from maturities of securities – AFS		15,040			15,178			1,410
Proceeds from calls of securities – HTM		140			925			109
Proceeds from calls of securities – AFS		4,700			975			19,943
Proceeds from sales of securities – AFS		3,000			1,103			18,144
Purchases of securities – HTM		0			(3,050	)		(4,701	)
Purchases of securities – AFS		(1,482	)		(8,568	)		(30,358	)
Equity investment purchase		(3,288	)		0			0
Net increase in loans		(26,872	)		(13,830	)		(46,515	)
Purchase of FHLB stock		0			(132	)		0
FHLB stock buy back		0			400			0
Acquisition of premises and equipment, net		(4,779	)		(3,744	)		(2,223	)

Net Cash Provided By (Used in) Investing Activities		(11,722	)		(5,680	)		(35,686	)

Cash Flows From Financing Activities:
Net increase (decrease) in deposits		14,948			501			36,989
Net increase (decrease) in short term borrowings		(851	)		(37	)		(3,663	)
Net increase (decrease) in repurchase agreements		(5,000	)		0			0
Issuance of subordinated debt		0			0			2,000
Proceeds from FHLB advances		9,000			4,000			57,400
Repayments of FHLB advances		(9,022	)		(7,020	)		(62,418	)
Proceeds from stock offering		0			0			758
Net proceeds from stock issuance and repurchase		336			817			623
Cash dividends		(2,163	)		(2,069	)		(1,839	)

Net Cash Provided By (Used In) Financing Activities		7,248			(3,808	)		29,850


NET INCREASE IN CASH AND CASH EQUIVALENTS		588			(1,631	)		3,822
CASH AND CASH EQUIVALENTS – BEGINNING		29,446			31,077			27,255

CASH AND CASH EQUIVALENTS – ENDING	$	30,034		$	29,446		$	31,077


CASH PAID FOR:
Interest	$	18,964		$	16,341		$	10,933
Income taxes	$	(418	)	$	1,781		$	2,935
NONCASH DISCLOSURES:
Transfers from loans to other real estate	$	858		$	1,567		$	564

See accompanying notes to consolidated financial statements.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

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, and 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 and the fair values of securities and other financial instruments 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)

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

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.

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: the length of time and extent the fair value has been less than cost, the financial condition and near term prospects of the issuer, and 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)

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

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 less estimated selling costs 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.

Equity Investment: The Corporation made an investment in 2007 of 24.99% ownership in Valley Capital Bank headquartered in Mesa, Arizona. This investment is recorded utilizing the equity method of accounting. Gains or losses on the investment are recorded through the income statement and the balance sheet value of this investment is adjusted for the gains or losses resulting from the equity method of accounting.

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. Upon adoption of EITF 06-5, which is discussed further below, Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Prior to adoption of EITF 06-5, the Banks recorded owned life insurance at its cash surrender value.

In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-5, Accounting for Purchases of Life Insurance — Determining the Amount That Could Be Realized in Accordance with FASB

(Continued)

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

Technical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance){Issue}. This Issue requires that a policyholder consider contractual terms of a life insurance policy in determining the amount that could be realized under the insurance contract. It also requires that if the contract provides for a greater surrender value if all individual policies in a group are surrendered at the same time, that the surrender value be determined based on the assumption that policies will be surrendered on an individual basis. Lastly, the Issue requires disclosure when there are contractual restrictions on the Banks’ ability to surrender a policy. The adoption of EITF 06-5 on January 1, 2007 had no impact on the Corporation’s financial condition or results of operation.

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.

10.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

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. For 2007, stock-based employee compensation costs resulted in a reduction of income before income taxes of $15,780, a reduction of net income of $11,050 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 year ending December 31, 2005 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 year ending December 31, 2005

(in thousands, except per share data, adjusted for the 10% stock dividend on August 4, 2006):


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

Proforma	$	5,046

Basic net income per share
As reported	$	2.41
Proforma		2.41
Diluted net income per share
As reported	$	2.40
Proforma		2.40

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.

The Corporation adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), as of January 1, 2007. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The adoption had no effect on the Corporation’s financial statements.

The Corporation recognizes interest and/or penalties related to income tax matters in income tax expense.

(Continued)

11.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

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 (loss) 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 $753,000 and $872,000 was required to meet regulatory reserve and clearing requirements at year-end 2007 and 2006 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.

(Continued)

12.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Effect of Newly Issued But Not Yet Effective Accounting Standards:

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective on January 1, 2008. The impact of adoption on January 1, 2008 was not material.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. The standard provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The new standard is effective for the Corporation on January 1, 2008. The Corporation did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008.

In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. This issue requires that a liability be recorded during the service period when a split-dollar life insurance agreement continues after participants’ employment or retirement. The required accrued liability will be based on either the post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. This issue is effective on January 1, 2008. The impact of adoption was not material.

On November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair Value through Earnings (“SAB 109”). Previously, SAB 105, Application of Accounting Principles to Loan Commitments, stated that in measuring the fair value of a derivative loan commitment, a company should not incorporate the expected net future cash flows related to the associated servicing of the loan. SAB 109 supersedes SAB 105 and indicates that the expected net future cash flows related to the associated servicing of the loan should be included in measuring fair value for all written loan commitments that are accounted for at fair value through earnings. SAB 105 also indicated that internally-developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment, and SAB 109 retains that view. SAB 109 is effective for derivative loan commitments issued or modified in fiscal quarters in 2008. The Corporation does not expect the impact of this standard to be material.

(Continued)

13.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

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	2007			2006		2005
Basic
Net income (loss)	$	(467	)	$	5,308	$	5,054

Weighted average common shares outstanding		2,159,586			2,141,388		2,096,002

Basic earnings per common share	$	(0.22	)	$	2.48	$	2.41


Diluted
Net income (loss)	$	(467	)	$	5,308	$	5,054
Weighted average common shares outstanding for basic earnings per common share		2,159,586			2,141,388		2,096,002
Add: Dilutive effects of assumed exercises of stock options		0			4,674		6,434

Average shares and dilutive potential common shares		2,159,586			2,146,062		2,102,436

Diluted earnings per common share	$	(0.22	)	$	2.47	$	2.40

Stock options for 24,447, 14,255 and 16,264 shares of common stock were not considered in computing diluted earnings per common share for 2007, 2006 and 2005 respectively, because they were antidilutive.

(Continued)

14.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

NOTE 3 — SECURITIES

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

Available for Sale


			Gross		Gross
	Fair		Unrealized		Unrealized
	Value		Gains		Losses
2007
U.S. Government and federal agency	$	21,152	$	41	$	(37	)
Mortgage-backed		40,562		140		(662	)
State and municipal		6,823		25		(61	)
Equity securities		3,255		47		(207	)

	$	71,792	$	253	$	(967	)


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

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

Held to Maturity


			Gross		Gross
	Amortized		Unrecognized		Unrecognized			Fair
	Cost		Gains		Losses			Value
2007
Mortgage-backed	$	6	$	0	$	0		$	6
State and municipal		8,679		61		(32	)		8,708

	$	8,685	$	61	$	(32	)	$	8,714


2006
Mortgage-backed	$	9	$	0	$	0		$	9
State and municipal		11,890		36		(114	)		11,812

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

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


	2007		2006			2005
Proceeds	$	3,000	$	1,103		$	18,144
Gross gains		2		0			18
Gross losses		0		(2	)		(167	)

(Continued)

15.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

NOTE 3 — SECURITIES (Continued)

Contractual maturities of securities at year-end 2007 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	$	1,471	$	1,472	$	6,259
Due from one to five years		3,728		3,747		13,016
Due from five to ten years		2,860		2,866		5,508
Due after ten years		620		623		3,192
Mortgage-backed securities		6		6		40,562
Equity securities		0		0		3,255

	$	8,685	$	8,714	$	71,792

Securities pledged at year-end 2007 and 2006 had a carrying amount of $33,380,000 and $38,775,000 and were pledged to secure public deposits and repurchase agreements.

At year-end 2007 and 2006, 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 2007, 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:


2007	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	$	5,985	$	(15	)	$	6,978	$	(22	)	$	12,963	$	(37	)
State & municipal		509		(2	)		5,601		(91	)		6,110		(93	)
Mortgage-backed		27,849		(662	)		0		0			27,849		(662	)
Equity securities		1,034		(192	)		18		(15	)		1,052		(207	)

Total temporarily impaired	$	35,377	$	(871	)	$	12,597	$	(128	)	$	47,974	$	(999	)


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)

16.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

NOTE 3 — SECURITIES (Continued)

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. With respect to equity securities, management believes that the unrealized losses on these instruments are temporary. This is due to the nature of the companies invested in being primarily DeNovo banks which are expected to have net losses during their first few years of operation. Management works directly with these institutions and, is kept abreast of their financial status on a regular basis in some cases participating in their Board meetings. Management anticipates that each of these institutions will improve their performance in the near future and their market value will improve.

NOTE 4 — LOANS

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


	2007		2006
Commercial	$	318,555	$	272,402
Real estate — construction		54,892		78,927
Real estate — mortgage		39,817		36,867
Consumer		58,139		62,797

		471,403		450,993
Less allowance for loan losses		8,554		6,692

	$	462,849	$	444,301

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, 2007 and 2006 amounted to $13,398,000 and $11,571,000 respectively. During 2007, $4,919,000 of new loans were made to these persons, repayments totaled $2,457,000. With changes of directors in 2007, an additional $635,000 of existing loans was included in the loan totals at year end.

(Continued)

17.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

NOTE 4 — LOANS (Continued)

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


	2007			2006			2005
Balance, beginning of year	$	6,692		$	6,301		$	5,501
Provision for loan losses		7,466			1,120			1,389
Loans charged off		(5,859	)		(877	)		(765	)
Loan recoveries		255			148			176

Balance, end of year	$	8,554		$	6,692		$	6,301

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):


	2007		2006
Year end loans not requiring allocation	$	11,197	$	1,365
Year end loans requiring allocation		18,186		3,397

	$	29,383	$	4,762

Amount of the allowance for loan losses allocated	$	2,751	$	606

Loans for which the accrual of interest has been discontinued at December 31, 2007 and 2006 amounted to $13,056,000 and $2,354,000, respectively, and are included in the impaired loans above. Loans past due, greater than 90 days and still accruing interest, amounted to $54,000 and $2,311,000 at December 31, 2007 and 2006.

Interest income recognized on impaired loans based on cash collected in total is approximately $2,120,000, $284,000 and $293,000 for the years ended December 31, 2007, 2006 and 2005, respectively. If the impaired loans had performed in accordance with their contractual terms during the year, additional interest income of $599,000, $130,000 and $113,000 would have been recorded in 2007, 2006 and 2005, respectively. The average recorded investment in impaired loans was $17,073,000, $4,439,000 and $3,655,000 during the years ended December 31, 2007, 2006 and 2005, respectively.

(Continued)

18.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

NOTE 5 — PREMISES AND EQUIPMENT, NET

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


	2007		2006
Land and land improvements	$	5,721	$	5,219
Building and building improvements		16,043		12,948
Furniture and equipment		9,568		8,805
Construction in progress		1,169		776

		32,501		27,748
Less accumulated depreciation		12,400		10,894

	$	20,101	$	16,854

Depreciation expense was $1,543,000, $1,507,000 and $1,418,000 for 2007, 2006 and 2005, respectively.

The Corporation leases property for certain branches and ATM locations. Rent expense for 2007 was $300,000, for 2006 was $325,000 and for 2005 was $330,000. Rent commitments under non-cancelable operating leases were as follows, before considering renewal options that generally are present (in thousands).


2008	$	230
2009		179
2010		183
2011		156
2012		129
Thereafter		0

	$	877

(Continued)

19.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

NOTE 7 — DEPOSITS

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


	2007		2006
Noninterest-bearing:
Demand	$	75,148	$	74,886
Interest-bearing:
Savings		86,778		88,893
Money market demand		98,362		102,535
Time, $100,000 and over		160,633		136,978
Time, $100,000 and under		122,582		125,263

	$	543,503	$	528,555

Brokered deposits totaled approximately $76,261,000 and $49,658,000 at December 31, 2007 and 2006. At December 31, 2007 and 2006, brokered deposits had interest rates ranging from 4.70% to 5.40% and 3.85% to 5.40%, respectively, and maturities ranging from two months to fifty-seven months.

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


	2007		2006
In one year	$	178,369	$	174,147
In two years		36,338		42,855
In three years		26,530		20,117
In four years		21,460		10,312
In five years		20,351		14,513
Thereafter		167		297

	$	283,215	$	262,241

Deposits from principal officers, directors, and their affiliates at year-end December 31, 2007 and 2006 were $12,758,000 and $10,806,000.

(Continued)

21.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

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, advances from the FHLB were as follows (dollars in thousands):


	Advance
Principal Terms	Amount		Range of Maturities
December 31, 2007
Single Maturity fixed rate advances, fixed rate at rates from 4.55%-7.34%, averaging 5.02%	$	11,030	January 2008 to May 2016


December 31, 2006
Single Maturity fixed rate advances fixed rate at rates from 3.21%-7.34%, averaging 5.13%	$	11,052	January 2007 to May 2016

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 $21,615,000 and $24,024,000 and first mortgage loans totaling $12,111,000 and $10,624,000 under a blanket lien arrangement at December 31, 2007 and 2006.

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


2008	$	6,024
2009		26
2010		2,028
2011		2,030
2012		33
Thereafter		889

	$	11,030

(Continued)

22.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

NOTE 8 — BORROWINGS (Continued)

Repurchase Agreements

Repurchase agreements are secured by mortgage-backed securities held by a third party trustee with carrying amounts of $9.7 million and $10.9 million at year-end 2007 and 2006.

These agreements are fixed rate financing arrangements that, at year-end 2007, mature 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):


	2007			2006
Average daily balance during the year	$	7,356		$	10,000
Average interest rate during the year		3.11	%		3.32	%
Maximum month-end balance during the year	$	10,000		$	10,000
Weighted average interest rate at year-end		2.61	%		3.32	%

Subordinated Debenture and Trust Preferred Securities

A trust formed by the Corporation issued $12,000,000 of 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, 2007 is 8.69%. 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 of 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, 2007 is 7.09%. 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)

23.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

NOTE 9 — INCOME TAXES

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


	2007			2006			2005
Current expense	$	434		$	2,552		$	2,704
Deferred (benefit) expense		(1,095	)		(315	)		(485	)

	$	(661	)	$	2,237		$	2,219

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


	2007			2006			2005
Income tax at statutory rate	$	(384	)	$	2,565		$	2,473
Tax exempt interest		(242	)		(284	)		(307	)
Other		(35	)		(44	)		53

	$	(661	)	$	2,237		$	2,219

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


	2007			2006
Deferred tax assets
Allowance for loan losses	$	2,909		$	2,117
Unrealized loss on securities available for sale		244			493
Compensation		416			404
Non-accrual Interest		216			79
Other		176			53

		3,961			3,146
Deferred tax liabilities
Depreciation		(367	)		(309	)
Purchase accounting adjustments		(397	)		(502	)
Other		(125	)		(109	)

		(889	)		(920	)

	$	3,072		$	2,226

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, 2007 or 2006.

(Continued)

24.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

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 2007, 2006 and 2005 was $25,000, $40,000 and $50,000, 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 2007, 2006 and 2005 was $313,000, $292,000 and $242,000, respectively.

The Corporation has entered into Supplemental Executive Retirement Agreements (SERP Agreements) with certain executives. The SERP Agreements are designed to encourage executives to remain long term employees of the Corporation, and to provide specified benefits to certain key executives who contribute materially to the continued growth, development and future business success of the Corporation. The retirement benefits are an unsecured obligation of the Corporation. The Corporation has purchased certain prepaid life insurance policies and expects to apply investment earnings on the policies to pay for all or a portion of the annual costs for the SERP Agreements. The Corporation and the Affiliate Banks have established other Non-Qualified Deferred Compensation arrangements for employees not covered under the SERP. The arrangements are designed to encourage certain officers to remain long term employees of the Corporation and the Affiliate Banks, and to provide the officers with supplemental retirement income. At year end 2007 and 2006, accumulated liability for these plans totaled $1,168,940 and $1,233,128. The Corporation’s contributions to the plans in 2007, 2006 and 2005 were $119,512, $124,339 and $61,408.

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, 2007.

(Continued)

25.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

NOTE 11 — STOCK PURCHASE AND OPTION PLANS (Continued)

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.

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:


	2007	2006	2005
Automatic dividend reinvestment plan	13,418	13,337	11,586
Director stock purchase & retainer stock	10,754	7,892	6,384
Stock options	295	5,525	0
Other issuance of stock	3,240	2,890	2,616

	27,707	29,644	20,586

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 2007. 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 in 2006. The Corporation did repurchase 17,184 shares as part of the Stock Repurchase Plan in 2007.

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.

(Continued)

26.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

NOTE 11 — STOCK PURCHASE AND OPTION PLANS (Continued)

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. 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.

The following table summarizes stock option activity :


						Weighted
						Average
				Weighted		Remaining		Aggregate
	Number of			Average		Contractual		Intrinsic
	Options			Price		Life		Value

Options outstanding at January 1, 2007		40,523		$	29.68
Options exercised 2007		(295	)		21.90
Options forfeited 2007		0			0

Options outstanding at December 31, 2007		40,228		$	29.74		5.08	$	6,470


Exercisable at December 31, 2007		35,267		$	29.94		5.02	$	6,441

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


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

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


(in thousands)	2007		2006
Intrinsic value of options exercised	$	3	$	85
Cash received from option exercises		6		55
Tax benefit realized from option exercises		0		0

As of December 31, 2007, there was $7,600 of total unrecognized compensation cost related to non-vested stock options granted under the Plan. The cost is expected to be recognized over a weighted-average period of 1 year.

(Continued)

27.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

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 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, 2007, that the Banks meet all capital adequacy requirements to which they are subject. As of December 31, 2007 and 2006, the most recent notifications from Federal Deposit Insurance Corporation categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized 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 Banks’ category.

The Corporation’s principal source of funds for dividend payments is dividends received from the Banks. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. During 2008, the Corporation could, without prior approval, declare dividends of approximately $1,500,000 plus any 2008 net profits retained to the date of dividend declaration.

(Continued)

28.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

NOTE 12 — REGULATORY MATTERS (Continued)


											To Be Well
						For Capital					Capitalized Under
						Adequacy					Prompt Corrective
	Actual					Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2007
Total Capital
(to Risk Weighted Assets)
Consolidated	$	61,993		11.6	%	$	42,738		8.0	%	NA		NA
The State Bank		36,342		10.7			27,164		8.0			33,955		10.0
Davison State Bank		4,408		11.2			3,160		8.0			3,950		10.0
West Michigan Community Bank		15,280		10.3			11,908		8.0			14,884		10.0

Tier 1 Capital
(to Risk Weighted Assets)
Consolidated		55,370		10.4			21,369		4.0		NA		NA
The State Bank		32,087		9.4			13,582		4.0			20,373		6.0
Davison State Bank		3,908		9.9			1,580		4.0			2,370		6.0
West Michigan Community Bank		13,409		9.0			5,954		4.0			8,931		6.0

Tier 1 Capital
(to Average Assets)
Consolidated		55,370		9.0			24,573		4.0		NA		NA
The State Bank		32,087		8.3			15,403		4.0			19,253		5.0
Davison State Bank		3,908		8.0			1,945		4.0			2,432		5.0
West Michigan Community Bank		13,409		7.9			6,767		4.0			8,459		5.0

(Continued)

29.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

NOTE 12 — REGULATORY MATTERS (Continued)


											To Be Well
						For Capital					Capitalized Under
						Adequacy					Prompt Corrective
	Actual					Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2006
Total Capital
(to Risk Weighted Assets)
Consolidated	$	63,934		12.5	%	$	40,949		8.0	%	NA		NA
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		NA		NA
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		NA		NA
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)

30.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

NOTE 13 — FINANCIAL INSTRUMENTS

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


	2007				2006
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
Assets:
Cash and cash equivalents	$	30,034	$	30,034	$	29,446	$	29,446
Securities — available for sale		71,792		71,792		91,104		91,104
Securities — held to maturity		8,685		8,714		11,899		11,821
FHLB stock		2,032		2,032		2,032		2,032
Loans held for sale		1,655		1,655		2,226		2,231
Loans		462,849		457,693		444,301		435,743
Accrued interest receivable		2,813		2,813		2,985		2,985

Liabilities:
Deposits	$	543,503	$	536,969	$	528,555	$	521,440
Short-term borrowings		649		649		1,500		1,500
FHLB advances		11,030		10,907		11,052		11,052
Repurchase agreements		5,000		5,000		10,000		10,000
Subordinated debentures		14,000		13,934		14,000		14,000
Accrued interest payable		921		921		1,608		1,608

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 re-price 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)

31.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

NOTE 13 — FINANCIAL INSTRUMENTS (Continued)

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)

32.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

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):


	2007		2006
Commitments to make loans (at market rates)	$	35,633	$	43,414
Unused lines of credit and letters of credit		74,506		72,869

Commitments to make loans are generally made for periods of 90 days or less. At December 31, 2007, $7,886,000 of the outstanding loan commitments had fixed interest rates ranging from 6.25% to 7.50% and maturities ranging from one year to fifteen years.

(Continued)

33.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

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)


	2007		2006
ASSETS
Cash and cash equivalents	$	842	$	5,396
Securities available for sale, at market		2,738		2,309
Equity Investment		3,089		0
Other assets		63		143
Investment in subsidiaries		57,479		58,220

	$	64,211	$	66,068

LIABILITIES AND STOCKHOLDERS EQUITY
Other liabilities	$	715	$	750
Subordinated debt		14,000		14,000
Stockholders equity		49,496		51,318

	$	64,211	$	66,068

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


	2007			2006			2005
Interest on securities	$	0		$	0		$	0
Other income		(198	)		1			3
Dividends from subsidiaries		2,208			6,849			2,158
Interest expense		(1,256	)		(1,264	)		(898	)
Operating expenses		(352	)		(327	)		(270	)
(Equity in undistributed income of subsidiaries) dividends in excess of earnings		(1,462	)		(468	)		3,664

Income/(loss) before income taxes		(1,060	)		4,791			4,657
Federal income tax expense (benefit)		(593	)		(517	)		(397	)

Net income (loss)	$	(467	)	$	5,308		$	5,054

(Continued)

34.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

NOTE 14 — PARENT ONLY CONDENSED FINANCIAL INFORMATION (Continued)

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


	2007			2006			2005
Cash flows from operating activities
Net income (loss)	$	(467	)	$	5,308		$	5,054
Change in other assets		201			38			429
Change in other liabilities		(35	)		383			(106	)
(Equity in undistributed income of subsidiary) dividends in excess of earnings		1,462			468			(3,664	)
Net loss of equity investment		199			0			0

Net cash from operating activities		1,360			6,197			1,713

Cash flows provided by investing activities
Equity Investment		(3,288	)		0			0
Sales and maturities of securities-AFS		0			0			0
Purchases of securities-AFS		(783	)		(213	)		(865	)
Investment in subsidiary		0			(1,000	)		(500	)

Net cash from investing activities		(4,071	)		(1,213	)		(1,365	)

Cash flows used in financing activities
Issuance of subordinated debt		0			0			2,000
Net short-term borrowings		0			0			(750	)
Dividends paid		(2,163	)		(2,069	)		(1,839	)
Stock repurchase		(520	)		0			0
Proceeds from stock issuance		840			817			1,381

Net cash from financing activities		(1,843	)		(1,252	)		792


Change in cash and cash equivalents		(4,554	)		3,732			1,140

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


Cash and cash equivalents at end of year	$	842		$	5,396		$	1,664

(Continued)

35.

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006

NOTE 15 — SUMMARY OF QUARTERLY FINANCIAL DATA — UNAUDITED

The unaudited quarterly results of operations for 2007 and 2006 are as follows (in thousands except per share data):


	First		Second		Third			Fourth
	Quarter		Quarter		Quarter			Quarter

2007
Interest income	$	9,946	$	9,942	$	9,791		$	9,535
Interest expense		4,546		4,550		4,694			4,831
Provision for loan losses		439		649		5,144			1,234
Non-interest income		1,865		2,028		1,970			1,716
Non-interest expense		5,496		5,598		5,236			5,504
Income before income taxes		1,330		1,173		(3,313	)		(318	)

Provision for income taxes		382		329		(1,206	)		(166	)

Net Income (Loss)	$	948	$	844	$	(2,107	)	$	(152	)


Earnings per share
Basic		0.44		0.39		(0.98	)		(0.07	)
Diluted		0.44		0.39		(0.98	)		(0.07	)

Net income for the third and fourth quarters of 2007 includes the impact of $5,144,000 ($3,395,000 after tax or $1.57 per share) and $1,234,000 ($814,000 after tax, or $0.38 per share), respectively, of charges against earnings for additional provisions for loan losses primarily to address risks associated with loans to residential developers.


	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter

2006
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
Non-interest income		1,797		1,888		1,940		2,018
Non-interest expense		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, 2007, 2006 and 2005. The supplemental financial data included throughout this discussion should be read in conjunction with the primary financial statements presented on pages 4 through 36 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

2007

2006

2005

2004

2003

Summary of Consolidated Statements of Income:

Interest Income

39,214

39,916

33,878

26,094

18,438

Interest Expense

18,621

16,908

11,298

8,263

5,601

Net Interest Income

20,593

23,008

22,580

17,831

12,837

Provision for Loan Losses

7,466

1,120

1,389

1,319

Net Interest Income after Provision

13,127

21,888

21,191

16,442

11,518

Total Other Operating Income

7,579

7,643

6,882

7,292

6,866

Total Other Operating Expense

21,834

21,986

20,800

18,176

13,276

Income (loss) Before Income Taxes

(1,128

)

7,545

7,273

5,558

5,108

Federal Income Taxes (Benefit)

(661

)

2,237

2,219

1,524

1,320

Net Income

(467

)

5,308

5,054

4,034

3,788

Earnings Per Share — Basic*

(0.22

)

2.48

2.41

1.95

1.83

Earnings Per Share — Diluted*

(0.22

)

2.47

2.40

1.94

1.83

Summary of Consolidated Balance Sheets:

Assets

628,019

622,298

619,089

584,890

419,966

Securities, including FHLB stock

80,477

105,035

116,693

131,429

126,856

Loans, including loans held for sale

473,058

453,219

440,398

395,017

254,340

Deposits

543,503

528,555

528,054

491,065

348,525

Borrowings

30,679

36,552

39,765

46,602

29,057

Stockholders’ Equity

49,496

51,318

46,895

42,969

40,882

Other Financial and Statistical Data:

Tier 1 Capital to Risk Weighted Assets

10.40

11.30

10.60

10.20

16.90

Total Capital to Risk Weighted Assets

11.60

12.50

11.90

11.40

18.00

Tier 1 Capital to Average Assets

9.00

8.60

8.90

8.70

14.00

Total Cash Dividends

2,163

2,069

1,839

1,758

1,966

Book Value Per Share*

22.88

24.08

22.07

20.67

19.74

Cash Dividends Paid Per Share*

1.00

0.94

0.88

0.84

0.76

Period End Market Price Per Share*

22.00

32.75

29.77

33.41

28.59

Dividend Pay-out Ratio

-463.17

38.98

36.39

43.58

51.90

Return on Average Stockholders’ Equity

-0.89

10.82

11.09

9.72

9.32

Return on Average Assets

-0.08

0.85

0.74

1.00

Net Interest Margin

3.72

4.11

4.23

3.70

3.88

Total Equity to Assets at Period End

7.88

8.25

7.57

7.34

9.73


*		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.

RESULTS OF OPERATIONS

The Corporation had a net loss of ($467,000) for the year of 2007, a decrease of $5,775,000 or 108.8%. Net income decreased primarily due to loan losses and provision expense in connection with the decline in the Michigan economy and the resulting need for additional loan loss provision and charge-offs. As a result of the decline, several construction and land development commercial loan borrowers became unable to repay their obligations. This will be further discussed in the section on allowance and provision for loan losses. A decrease of net-interest income in 2007 of $2,400,000, was due to loans being placed on non-accrual status as well as an increase in the cost of deposits. These contributed to the decline in net income. Non-interest income decreased in 2007 by $64,000 or 0.8% from the non-interest income in the prior year. Non-interest expense decreased by $152,000 or 0.7%. We expect that interest rates will decrease in 2008, which could have a negative 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 2007, 2006, and 2005 respectively, the Corporation posted a return on average assets of (0.08%), 0.85%, and 0.85%. Return on average equity was (0.89%) in 2007, 10.82% in 2006, and 11.09% in 2005. While the Corporation maintained a strong capital position it had a decrease in equity of $1.8 million or 3.6% in 2007. Total assets increased $5.7 million in 2007, $3.2 million in 2006, and $34.2 million in 2005. Diluted earnings per share was of ($0.22) in 2007, $2.47 in 2006, and $2.40 in 2005 (adjusted for a 10% stock dividend paid on August 4, 2006).

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. Deposit costs are somewhat limited though due to the timing of repricing of time deposits. 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, 2007 and 2006. 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 decreased by $2,472,000 in 2007 or 10.5% and increased by $421,000 or 1.8% in 2006. The primary factors contributing to the decrease in net interest income in 2007 were an increase in loan volume at lower rates, caused by the decreases in the prime rate. The income from increased loan volume was reduced by increases in interest expenses, from higher costing deposits and borrowings, as a result the Corporation had a lower net interest income and lower net interest margin. Net interest income was also reduced by reversal of accrued interest income on loans that were re-classified to non-accrual status throughout the year.

As indicated in Table 3, for the year ended December 31, 2007, the Corporation’s net interest margin was 3.72% compared with 4.11% and 4.23% for the same period in 2006 and 2005, respectively. The decrease in 2007 could be attributed to declining interest income on loans due to non-performing loans and increasing deposit yields. The decrease in 2006 was due to higher earning asset yields resulting from prime rate increases during the year, these were more than offset with measured increases in the deposit yields.

Average earning assets decreased 1.1% in 2007, increased 4.7% in 2006, and increased 10.3% in 2005. Average earning assets decreased due to lower securities and fed funds sold. Loan balances, the highest yielding component of earning assets, represented 81.7% of earning assets in 2007, compared to 79.1% in 2006 and increased 77.4% in 2005. Average interest bearing liabilities decreased 0.8% in 2007, increased 5.5% in 2006, and increased 9.0% in 2005. Non-interest bearing deposits amounted to 13.3% of average earning assets in 2007 compared with 13.5% in 2006 and 14.9% in 2005.

TABLE 2

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

INCREASE

(DECREASE)

2007

2006

DUE

TO:

YIELD/

(000’s omitted)

VOL

RATE

TOTAL

VOL

RATE

TOTAL

TAXABLE SECURITIES

(372

)

125

(247

)

(226

)

448

222

TAX-EXEMPT SECURITIES

(210

)

(132

)

(127

)

150

FEDERAL FUNDS SOLD

(198

)

(200

)

215

124

339

TOTAL LOANS

790

(968

)

(178

)

2,178

3,299

5,477

LOANS HELD FOR SALE

)

(37

)

(30

)

TOTAL EARNING ASSETS

(771

)

(759

)

2,003

4,028

6,031

INTEREST BEARING DEMAND DEPOSITS

(120

)

(37

)

(121

)

828

707

SAVINGS DEPOSITS

(131

)

(62

)

(284

)

141

(143

)

TIME CDs $100,000 AND OVER

1,018

(103

)

915

1,748

1,447

3,195

OTHER TIME DEPOSITS

(253

)

1,098

845

685

909

1,594

OTHER BORROWINGS

(187

)

239

(333

)

590

257

TOTAL INTEREST BEARING LIABILITIES

327

1,386

1,713

1,695

3,915

5,610

NET INTEREST INCOME

(315

)

(2,157

)

(2,472

)

308

113

421

TABLE 3

Summary of Net Interest Income
Years Ended December 31,

2007

2006

2005

AVG

(000’s omitted)

BAL

INC/EXP

YIELD

BAL

INC/EXP

YIELD

BAL

INC/EXP

YIELD

ASSETS

Securities:

U.S. Treasury and Government

Agencies

73,051

3,120

4.27

84,099

3,348

3.98

91,280

3,141

3.44

State and Political (1)

17,716

1,094

6.17

21,376

1,226

5.73

23,892

1,203

5.04

Other

6,641

105

1.58

4,304

124

2.88

3,733

109

2.89

Total Securities

97,408

4,319

4.43

109,779

4,698

4.28

118,905

4,453

3.74

Fed Funds Sold

6,082

303

4.98

10,045

503

5.01

4,347

164

3.77

Loans:

Commercial

359,262

27,276

7.59

343,702

26,820

7.80

307,746

21,527

7.00

Tax Free (1)

3,552

233

6.57

4,217

271

6.43

4,844

308

6.35

Real Estate-Mortgage

38,047

2,531

6.65

36,330

2,638

7.26

36,409

2,690

7.39

Consumer

60,057

4,893

8.15

66,526

5,382

8.09

72,064

5,109

7.09

Total loans

460,918

34,933

7.58

450,775

35,111

7.79

421,063

29,634

7.04

Allowance for Loan Loss

(8,014

)

(6,632

)

(5,975

)

Net Loans

452,904

34,933

7.71

444,143

35,111

7.91

415,088

29,634

7.14

Loans Held for Sale

1,662

110

6.62

1,626

112

6.89

2,215

142

6.41

TOTAL EARNING ASSETS

566,070

39,665

7.01

572,225

40,424

7.06

546,530

34,393

6.29

Cash Due from Banks

17,321

18,155

20,067

All Other Assets

45,500

39,663

36,823

TOTAL ASSETS

620,877

623,411

597,445

LIABILITIES & SHAREHOLDERS’ EQUITY:

Deposits:

Interest bearing — DDA

98,172

2,358

2.40

103,356

2,395

2.32

111,670

1,688

1.51

Savings Deposits

88,943

1,190

1.34

99,339

1,252

1.26

125,031

1,395

1.12

Time CD’s $100,000 and Over

152,305

7,130

4.68

130,860

6,215

4.75

83,120

3,020

3.63

Other Time CD’s

114,182

5,726

5.01

120,427

4,881

4.05

99,928

3,287

3.29

Total Interest Bearing Deposits

453,602

16,404

3.62

453,982

14,743

3.25

419,749

9,390

2.24

Other Borrowings

35,868

2,217

6.18

39,268

2,165

5.51

47,697

1,908

4.00

INTEREST BEARING LIABILITIES

489,470

18,621

3.80

493,250

16,908

3.43

467,446

11,298

2.42

Non-interest bearing — DDA

75,177

77,256

81,471

All Other Liabilities

4,008

3,832

2,935

Shareholders Equity

52,222

49,073

45,593

TOTAL LIABILITIES and S/H EQUITY

620,877

623,411

597,445

Net Interest Rate Spread

3.20

3.64

3.88

Impact of Non-Interest Bearing Funds on Margin

0.51

0.47

0.35

Net Interest Income/Margin

21,044

3.72

23,516

4.11

23,095

4.23

(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, 2007, the allowance for loan losses was $8,554,000 or 1.81% of total loans. This compares with $6,692,000 or 1.48% at December 31, 2006 and $6,301,000, or 1.43%, at December 31, 2005. 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 $7,466,000 in 2007 and $1,120,000 and $1,389,000 in 2006 and 2005, respectively. Provision for 2007 increased from the 2006 level by $6,346,000. 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 increase for the year was due to approximately $20,410,000 in loan growth year to year, and the downgrading of a number of loans, which required additional, substantial provision be provided for them. The substantial climb in the 2007 provision for loan loss was to provide specific reserves for non-performing construction and land development loans, increased charge-offs and continuing decline in the Michigan economy. In addition, the Banks had substantial charge-offs of non-performing assets of $5,859,000 for 2007. The 2006 provision for loan losses reflected the normal course of business for that year.

In 2007, the Corporation continued commercial loan growth. Commercial loans increased $46,153,000 from 2006 year end. Real estate construction and mortgage loans decreased $21,085,000 from year end 2006. The decline in real estate construction and mortgage loans was primarily due to management efforts to reduce exposure and the diminishing demand for these types of loans given the surplus of available homes in the market. In 2007, the Corporation also recognized the need to charge-off several construction and land development loans. The construction and land development classified loans are further broken into their various stages of completion. The Corporation has $59,805,000 of these loans on the books. Of that $48,799,000 are loans still accruing interest, while $11,006,000 is no longer accruing interest. In the construction and land development portfolio, 23% of the loans are vacant land or infrastructure in process, 26% have had construction commence and the remaining 51% are completed projects. With the concentration of loans the Corporation has in construction and land development, it has elected to form a Special Asset Group to monitor this line of lending. The Special Asset Group (SAG) was also developed to act as an action group for watch credits and in the collection of credits that have already been classified as loss or doubtful. While there was a sharp rise in non-performing loans in 2007, management believes that the creation of the SAG will assist in mitigating non-performing loan impact in 2008. Additionally, with the establishment of the SAG and the nature of its focus, the Corporation expects an increase in loan and collection expenses in 2008 as this group works through troubled credits.

Table 4 summarizes loan losses and recoveries from 2003 through 2007. During 2007, the Corporation experienced net charge-offs of $5,604,000, compared with net charge-offs of $729,000 and $589,000 in 2006 and 2005, respectively. The year to year increase in charge offs was due to an increase in commercial loan charge-offs by $4,437,000 year to year. Of that, $3,816,000 was construction and land development loans. Also, consumer loan charge-offs increased by $359,000, and a mortgage charge-offs by $186,000. Total recoveries increased by $107,000 comparing 2007 with 2006. The net charge-off ratio is the difference of charged-off loans minus the recoveries from loans divided by average gross loans. Accordingly, the net charge-off ratio for 2007 was 1.19% compared to 0.16% and 0.14% at the end of 2006 and 2005, respectively. The net charge-off ratio increased in 2007 due to higher charge offs, primarily in the commercial portfolio, however other increases occurred in the mortgage and consumer loan portfolios.

The Corporation is evaluating a re-definition of certain loan grades that, if implemented, may impact the provision for loan losses in the first quarter of 2008. This change in loan grade definitions will result in some loans falling into different loan grades, and as a result, may impact the general allocation component of the allowance for loan losses. Management has not yet completed its analysis of the loan grade changes, but has concluded the impact of any such changes would not have a material impact on the calculation if it were applied at December 31, 2007.

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 has identified a concentration level connected with construction and land development loans. Specific strategies have been developed to reduce the concentration level and limit exposure to this type of lending in the future. The Corporation’s loan portfolio has no 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. The Michigan economy, 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. 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)	2007			2006			2005			2004			2003

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

Charge-offs:
Commercial, Financial and Agricultural		(4,991	)		(554	)		(405	)		(365	)		(940	)
Real Estate-Construction		0			0			0			0			0
Real Estate-Mortgage		(186	)		0			0			0			0
Installment Loans to Individuals		(682	)		(323	)		(360	)		(306	)		(455	)

Total Charge-offs		(5,859	)		(877	)		(765	)		(671	)		(1,395	)

Recoveries:
Commercial and Financial		155			51			70			38			168
Real Estate-Construction		0			0			0			0			0
Real Estate-Mortgage		1			0			0			0			0
Installment Loans to Individuals		99			97			106			172			138

Total Recoveries		255			148			176			210			306

Net Charge-offs		(5,604	)		(729	)		(589	)		(461	)		(1,089	)

Provision for loan losses		7,466			1,120			1,389			1,389			1,319

Addition from WMCB acquisition		0			0			0			1,159			0

Balance at End of Period	$	8,554		$	6,692		$	6,301		$	5,501		$	3,414

Ratio of Net Charge-Offs During the Period		1.19	%		0.16	%		0.14	%		0.12	%		0.43	%

NON-INTEREST INCOME

Non-interest income was $7,579,000 in 2007, $7,643,000 and $6,882,000 in 2006 and 2005, respectively. These amounts represent a decrease of 0.8% in 2007 compared to 2006, and an increase of 11.1% in 2006 compared to 2005.

The most significant category of non-interest income is service charges on deposit accounts. These fees were $3,421,000 in 2007, compared to $3,708,000 and $3,445,000 in 2006 and 2005, respectively. This was a decrease of $287,000 or 7.7% in 2007 and increase of $263,000 or 7.6% in 2006. The decrease in 2007 was due to a decrease in NSF and overdraft privilege fees. The increase in 2006 was due to an increase in NSF and overdraft privilege fees.

Gains on the sale of mortgage loans originated by the Banks and sold in the secondary market were $402,000 in 2007, $615,000 in 2006, and $842,000 in 2005. The decrease of 34.8% in 2007 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. For 2008, Management anticipates gains on the sale of mortgage loans to remain steady. This is due to declining interest rates, which could provide consumers the ability to refinance their mortgage and the Corporation to collect additional fee income from the sale of such loans.

Trust and investment income increased $347,000 or 22.3% in 2007 to $1,901,000 compared with $1,554,000 in 2006 and $1,157,000 in 2005. The 22.3% 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. Management is anticipating continued growth in trust and investment income in 2008.

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 $1,853,000 in 2007 compared to $1,768,000 and $1,587,000 in 2006 and 2005, respectively. Other income increased 4.9%, due to an increase in gains on sale of fixed assets, servicing income from non-corporate affiliates and an increase in building rental income due to the buy-out of a lease. This resulted in significant one-time non-interest income of approximately $100,000.

NON-INTEREST EXPENSE

In 2007, the Corporation sought ways to be more efficient and manage overhead costs. As a result, total non-interest expense was $21,834,000 in 2007 compared to $21,986,000 in 2006 and $20,800,000 in 2005. This was a decrease of 0.7% in 2007 and an increase of 5.7% in 2006.

Salaries and employee benefits, the Corporation’s largest operating expense category, were $12,183,000 in 2007, compared with $12,738,000 in 2006 and $11,983,000 in 2005. The decrease between 2007 and 2006 was a result of limited performance payments to employees and decreases in staff. 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.

Occupancy expenses associated with the Corporation’s facilities were $2,090,000 in 2007 compared to $1,858,000 in 2006 and $1,673,000 in 2005. In 2007, this was an increase of 12.5% and in 2006 an increase of 11.1%. The increase in 2007 was due to the acquisition of a new bank building in Livingston County and the opening of a new office in Holland and their related depreciation expense, as well as increases in general utility and property tax expenses. These were partially offset by decreases in lease payment expenses with the closure of an office of West Michigan Community Bank at the end of September 2007.

In 2007, equipment expenses were $2,139,000 compared to $2,140,000 in 2006 and $2,080,000 in 2005. These result in a decrease of 0.1% in 2007 compared to an increase of 2.9% in 2006. The 2007 expense

was nearly flat compared to 2006. This was due to an increase in equipment depreciation, rental and lease expenses, which were nearly offset by decreases in leasehold improvement expenses as several leased properties came to the end of their lease contract periods. The increase in 2006 was due to the opening of a new branch office in Grand Blanc.

Loan and collection expenses were $753,000 in 2007 compared to $320,000 in 2006 and $388,000 in 2005. The increase was due to significant increases in relation to other real estate owned resulting from the declining Michigan economy. Several properties were taken into ORE and additional valuation adjustments totaling $299,100 were made during the fourth quarter, as real estate prices continued to decline during 2007. These valuation adjustments along with other maintenance and property taxes for these properties accounted for $408,000 of the additional expense from 2007 to 2006. The decrease from 2006 to 2005 can be attributed to management’s increased monitoring of troubled credits and taking prompt action.

Advertising expenses were $486,000 in 2007 compared to $624,000 in 2006 and $627,000 in 2005. While maintaining market presence, the Corporation was able to reduce advertising expense. Advertising expenses had a minor decline between 2006 and 2005. The Corporation continues to remain focused on targeted advertising in all of its markets to continue growth.

Other professional service fees include audit fees, consulting fees, legal fees, and various other professional services. Other professional services were $1,143,000 in 2007 compared to $1,066,000 in 2006 and $949,000 in 2005. The increase of 7.2% was comprised of increases in legal fees and audit fees. They were partially offset by decreases in state exam fees and other professional services. The increase of 12.3% in 2006 was due to higher legal, audit and exam fees.

Other general and administrative expenses, including telephone and communication services, were $3,040,000 in 2007 compared to $3,240,000 in 2006 and $2,722,000 in 2005. The decrease of 6.2% in 2007 was due to decreases in state business tax, ATM network expense and other losses and operating expenses. These were partially offset by increases in FDIC assessment expenses, supply and communication 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 $621 million for 2007 declining from the 2006 average of $623 million by $2.5 million or 0.4%. Average loans comprised 74.2% of total average assets during 2007 compared to 72.3% in 2006. Loans grew $10.1 million on average, with commercial and tax-exempt loans leading the advance by $14.9 million or 4.1%. The ratio of average non-interest bearing deposits to total deposits was 14.2% in 2007 compared to 14.5% in 2006. Interest bearing deposits comprised 92.7% of total average interest bearing liabilities during 2007, up from 92.0% during 2006. The Corporation’s year-end total assets were $628 million for 2007 up from $622 million in 2006. The increase was due to continued loan demand in 2007.

SECURITIES PORTFOLIO

Securities totaled $80,477,000 at December 31, 2007 compared to $103,003,000 at December 31, 2006. This was a decrease of $22,526,000 or 21.9%. At December 31, 2007 these securities comprised 14.3% of earning assets, down from 19.2% at December 31, 2006. 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 2007 exceeded the amount of deposit growth. The decrease in securities in 2007 funded the loan growth, along with $14,948,000 in deposit growth. Thus, federal funds sold decreased $2,200,000 comparing year—end 2007 to year-end 2006. Federal funds sold were $7,300,000 at December 31, 2007 compared with $9,500,000 at December 31, 2006.

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, 2007, the estimated aggregate fair value of the Corporation’s securities portfolio was $685,000 below amortized cost. At December 31, 2007, gross unrealized gains were $314,000 and gross unrealized losses were $999,000. A summary of estimated fair values and unrealized gains and losses for the major components of the securities portfolio is provided in Item 1 of the 10-K.

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

6,000

5,984

3.94

Over one through five years

13,000

13,016

4.45

Over five through ten years

2,148

2,152

5.00

Over ten years

0.00

Total

21,148

21,152

Mortgage-Backed

One year or less

0.00

Over one through five years

9,083

8,859

4.11

Over five through ten years

3,930

3,840

4.25

Over ten years

28,071

27,863

5.05

Total

41,084

40,562

State and Political

One year or less

276

275

6.89

Over one through five years

0.00

Over five through ten years

3,363

3,356

6.72

Over ten years

3,220

3,192

5.93

Total

6,859

6,823

Equity Securities

3,406

3,255

HELD TO MATURITY

Mortgage-Backed

One year or less

0.00

Over one through five years

9.13

Over five through ten years

0.00

Over ten years

0.00

Total

State and Political

One year or less

1,471

1,472

5.73

Over one through five years

3,728

3,747

6.11

Over five through ten years

2,860

2,866

6.61

Over ten years

620

623

6.25

Total

8,679

8,708

Total Securities

81,182

80,506


⁽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 but includes a concentration in construction and land development, as discussed previously and in the following paragraph. The Corporation’s loan portfolio balances are summarized in Table 6.

Total loans increased $20,410,000 for the year ended December 31, 2007, with total loans comprising 81.4% of earning assets as compared to 78.8% of December 31, 2006 earning assets. There were many economic challenges in the State of Michigan in 2007. Continued declines in the automotive industry contributed to steepening unemployment rates and a declining population. Even with these burdening challenges, the Corporation achieved substantial commercial loan growth. In 2007, commercial loans increased $46,153,000 or 16.9% to $318,555,000. Real estate construction and mortgage loans decreased $21,085,000 or 18.2% in 2007. The decline was primarily in the real estate construction portfolio as this type of loan demand diminished given the surplus of homes available in the housing market. Additional decreases in loans were due to charge-offs of several construction and land development loans in 2007. Consumer loans decreased $4,658,000 or 7.4% in 2007. In 2006, commercial loans increased $17,904,000 to $272,402,000 or 7.0%. Additionally, real estate construction and development loans increased $2,541,000 or 3.3% to $78,927,000 at December 31, 2006. Consumer loans decreased $8,048,000 or 11.4% in 2006.

Management expects the economy to remain soft during 2008 and the banks will continue to seek out new loan opportunities while continuing its efforts to maintain sound credit quality.

TABLE 6
Loan Portfolio

December 31,

(000’s omitted)

2007

2006

2005

2004

2003

Commercial

318,555

272,402

254,498

229,012

146,450

Real estate — construction

54,892

78,927

76,386

61,278

32,913

Real estate — mortgage

39,817

36,867

37,627

32,705

18,335

Consumer

58,139

62,797

70,845

70,435

55,547

Total

471,403

450,993

439,356

393,430

253,245

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 general economic conditions in the markets we serve.

TABLE 7
Maturities of the Loan Portfolio by Loan Type

Within

One-

After

December 31, 2007

One

Five

(000’s omitted)

Year

Years

Total

Commercial

92,467

190,084

36,004

318,555

Real estate — construction

48,244

5,379

1,269

54,892

Real estate — mortgage

6,010

10,750

23,057

39,817

Consumer

7,862

33,441

16,836

58,139

154,583

239,654

77,166

471,403

TABLE 8
Maturities of the Loan Portfolio by Rate Categories

Within

One-

After

December 31, 2007

One

Five

(000’s omitted)

Year

Years

Total

Loans:

Fixed Rate

60,864

199,931

50,725

311,520

Variable Rate

93,719

39,723

26,441

159,883

154,583

239,654

77,166

471,403

Credit risk is managed via specific credit approvals and monitoring procedures. The Corporation’s outside loan review function examines the loan portfolio on a quarterly 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, 2007, which comprised 11.6% of total loans, totaled $54,892,000 as compared to $78,927,000 and $76,386,000 at the end of 2006 and 2005, 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 the portfolio is reasonably well diversified.

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, 2003 through 2007. Non-performing assets increased substantially at December 31, 2007 as compared to 2006. Other Real Estate Owned increased $756,000 in 2007. The composition of Other Real Estate Owned is eleven commercial and three residential properties totaling $2,003,000. Other Real Estate in Redemption increased to $1,829,000 at the end of 2007 from $216,000 at the end of 2006. Real Estate Owned in Redemption balance is comprised of five commercial and four residential properties. Non-performing loans increased by $8,439,000 as compared to December 31, 2006. This was due to a substantial increase in non-accrual loans of $10,702,000 as compared to December 31, 2006. The composition of the added non-accrual loans was largely from commercial real estate and development loans. Loans past due over 90 days and still accruing interest decreased $2,257,000 during this period. The decrease was due to a payoff of a $1,963,000 account on January 31, 2007.

The level and composition of non-performing assets are both 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,

2007

2006

2005

2004

2003

Non-Performing Loans:

Loans Past Due 90 Days or More & Still Accruing

2,311

Non-Accrual Loans

13,056

2,354

1,476

1,102

229

Renegotiated Loans

431

437

1,401

477

1,262

Total Non-Performing Loans

13,541

5,102

2,957

1,670

1,538

Other Non-Performing Assets:

Other Real Estate

2,003

1,247

500

208

1,081

Other Real Estate Owned in Redemption

1,829

216

856

184

Other Non-Performing Assets

155

Total Other Non-Performing Assets

3,987

1,618

506

1,068

1,344

Total Non-Performing Assets

17,528

6,720

3,463

2,738

2,882

Non-Performing Loans as a % of

Total Loans

2.86

1.13

0.67

0.70

0.61

Non-Performing Assets as a % of

Total Loans and Other Real Estate

3.70

1.48

0.79

0.69

1.13

Allowance for Loan Losses as a % of

Non-Performing Loans

63.18

131.16

213.09

350.16

221.98

Accruing Loans Past Due 90 Days or More to Total Loans

0.01

0.51

0.02

0.20

Non-performing Assets as a % of

Total Assets

2.79

1.08

0.56

0.47

0.69

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,

2007

2006

2005

2004

2003

(000’s omitted)

Amount

Loan %

Amount

Loan %

Amount

Loan %

Amount

Loan %

Amount

Loan %

Commercial and construction

7,321

79.22

5,657

77.90

5,339

75.31

4,600

73.79

2,624

70.83

Real estate mortgage

389

8.45

328

8.17

263

8.56

312

8.31

207

7.24

Consumer

767

12.33

623

13.93

593

16.13

508

17.90

576

21.93

Unallocated

106

Total

8,554

100.00

6,692

100.00

6,301

100.00

5,501

100.00

3,414

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, 2007, loans considered to be impaired totaled $29,293,000. Specific allowances totaling $2,751,000 were required for $18,186,000 in loan balances, and the remaining impaired loans do not require specific reserves. The average balance in impaired loans was $17,073,000 in 2007. The interest income recognized on impaired loans based on cash collections totaled $2,120,000 during 2007.

At December 31, 2006, loans considered to be impaired totaled $4,762,000. Specific allowances totaling $606,000 were required for $3,397,000 in loan balances, and the remaining impaired loans do not require specific reserves. The average balance 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.

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

2007

2006

2005

2004

2003

Years Ended December 31,

Average

(000’s omitted)

Balance

Rate

Balance

Rate

Balance

Rate

Balance

Rate

Balance

Rate

Non-int. bearing demand

75,177

77,256

81,471

73,553

52,853

Interest-bearing demand

98,172

2.40

103,356

2.32

111,670

1.51

108,704

1.10

53,897

0.94

Savings

88,943

1.34

99,339

1.26

125,031

1.12

149,099

1.53

117,138

1.17

Time

266,487

4.82

251,287

4.73

183,048

3.45

130,115

2.71

102,563

3.35

Total

528,779

3.10

531,238

2.89

501,220

1.87

461,471

1.52

326,451

1.63

The Corporation’s average deposit balances and rates for the past five years are summarized in Table 11. Total average deposits were 0.5% lower in 2007 as compared to 2006. 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 18.6% of total average deposits, savings average deposits comprised 16.8% of total average deposits, and time average deposits comprised 50.4% of total average deposits.

As of December 31, 2007 certificates of deposit of $100,000 or more accounted for approximately 29.6% of total deposits compared to 25.9% at December 31, 2006. 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)	2007		2006
Three months or less	$	41,891	$	37,216
Over three through six months		22,833		29,661
Over six through twelve months		19,451		16,832
Over twelve months		76,458		53,269

Total	$	160,633	$	136,978

Repurchase agreements are secured by mortgage-backed securities held by a third party trustee with a carrying amount of $9.7 million at year-end 2007. These agreements are fixed rate financing arrangements that mature in 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 (58.6%) for 2007, 29.7% for 2006, and 30.5% for 2005. 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. Additional information relating to federal income taxes is included in Note 9 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 2007, 2006, and 2005. 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, 2007, federal funds sold represented 1.2% of total assets, compared to 1.5% at the end of 2006. 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 2007, these deposits increased $14,948,000 and these borrowings decreased $5,022,000. Cash used by investing activities was $11,722,000 in 2007 compared to cash used of $5,680,000 in 2006. The change in investing activities was due increased loan demand in 2007 compared to 2006 and a lower volume of securities purchases in 2007 compared with 2006.

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

283,215

178,369

62,868

41,811

167

Short-term borrowings

649

FHLB advances

11,030

6,024

2,054

2,063

889

Repurchase agreements

5,000

Subordinated debt

14,000

Operating leases

877

230

362

285

Total

314,771

190,272

67,284

44,159

15,056

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, 2007, the Corporation was in excess of the minimum capital and leverage requirements as defined by federal law.

Total shareholders’ equity declined 3.55% to $49,496,000 at December 31, 2007, compared with $51,318,000 at December 31, 2006. The Corporation’s equity to asset ratio was 7.88% at December 31, 2007, compared to 8.25% at December 31, 2006. The decrease in equity in 2007 resulted from negative earnings and payment of dividends (in excess of earnings). In 2007, the Corporation paid $1.00 per share in dividends, compared to $0.94 paid in 2006.

At December 31, 2007, the Corporation’s tier 1 and total risk-based capital ratios were 10.4% and 11.6%, respectively, compared with 11.3% and 12.5% in 2006. The decrease in the risk-based capital ratios was due to the decline in equity, while average assets continued to increase at the Banks. The Corporation’s tier 1 leverage ratio was 9.00% at December 31, 2007 compared with 8.6% at December 31, 2006. This increase in the leverage ratio was due to the decline in equity and the increase 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 2007, 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 2007 compared to 2006.

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, 2007. 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)	2008			2009			2010			2011			2012			Thereafter			Total		Value

Rate Sensitive Assets:
Fixed interest rate loans	$	60,864		$	51,591		$	53,509		$	46,626		$	48,205		$	50,725		$	311,520	$	306,363
Average interest rate		7.08	%		6.88	%		6.90	%		6.83	%		7.26	%		6.69	%
Variable interest rate loans	$	93,719		$	16,012		$	13,665		$	4,111		$	5,935		$	26,441		$	159,883	$	159,884
Average interest rate		7.55	%		7.19	%		7.38	%		7.52	%		7.30	%		7.39	%
Fixed interest rate securities	$	18,283		$	11,051		$	11,910		$	3,533		$	1,288		$	8,233		$	54,298	$	54,302
Average interest rate		4.64	%		3.74	%		3.78	%		3.85	%		3.92	%		4.79	%
Variable Interest rate securities	$	7,571		$	3,182		$	2,123		$	1,469		$	1,350		$	10,484		$	26,179	$	22,949
Average interest rate		1.81	%		3.96	%		4.32	%		4.15	%		3.75	%		5.25	%
FHLB Stock	$	2,032																	$	2,032	$	2,032
Average interest rate		5.00	%
Other interest bearing assets	$	7,300																	$	7,300	$	7,300
Average interest rate		3.30	%

Total rate sensitive assets	$	189,769		$	81,836		$	81,207		$	55,739		$	56,778		$	95,883		$	561,212	$	522,830

Rate Sensitive Liabilities:
Interest-bearing checking	$	98,362																	$	98,362	$	98,360
Average interest rate		1.95	%
Savings	$	86,778																	$	86,778	$	86,765
Average interest rate		0.58	%
Time	$	178,369		$	36,338		$	26,530		$	21,460		$	20,351		$	167		$	283,215	$	276,697
Average interest rate		4.73	%		4.80	%		4.88	%		5.07	%		4.92	%		2.82	%
Short term borrowings	$	649																	$	649	$	649
Average interest rate		1.25	%
FHLB advances	$	6,024		$	26		$	2,028		$	2,030		$	33		$	889		$	11,030	$	10,907
Average interest rate		5.19	%		7.34	%		5.52	%		5.72	%		7.34	%		7.34	%
Repurchase agreements	$	5,000																	$	5,000	$	5,000
Average interest rate		2.61	%
Subordinated debt	$	14,000																	$	14,000	$	13,934
Average interest rate		8.46	%

Total rate sensitive liabilities	$	389,182		$	36,364		$	28,558		$	23,490		$	20,384		$	1,056		$	499,034	$	492,312

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, 2007, 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, 2007

Within

Three

One to

After

Three

Months-

Five

(000’s Omitted)

Months

One Year

Years

Total

Federal Funds Sold

7,300

Securities

18,439

7,415

35,906

18,717

80,477

Loans

46,417

106,517

250,997

67,472

471,403

Loans Held for Sale

1,655

FHLB Stock

2,032

Total Earning Assets

78,424

113,932

286,903

86,697

565,956

Interest Bearing Liabilities:

Interest Bearing Demand Deposits

98,362

Savings Deposits

86,778

Time Deposits Less than $100,000

29,018

65,176

28,221

167

122,582

Time Deposits Greater than $100,000

41,891

42,284

76,458

160,633

Short-term Borrowings

649

FHLB Advances

5,000

1,024

4,116

890

11,030

Repurchase Agreements

5,000

Subordinated Debt

14,000

Total Interest Bearing Liabilities

275,698

113,484

108,795

1,057

499,034

Interest Rate Sensitivity GAP

199,855

)

442

168,420

94,826

63,833

Cumulative Interest Rate Sensitivity GAP

199,855

)

199,413

)

30,993

)

63,833

Interest Rate Sensitivity GAP

0.28

1.00

2.55

90.71

Cumulative Interest Rate Sensitivity GAP Ratio

0.28

0.49

0.94

1.13

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 2007. The Corporation’s gap position was negative, which indicates liability sensitivity to rate changes. In 2007 there were three decreases in the Prime rate. While loan volume continued to grow, the rate decreases contributed to the decline in interest income of $702,000 or 1.8% over 2006. 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. Market demand and competition minimized the Corporation’s ability to decrease rates on deposits quickly, therefore increasing interest expense by $1.7 million or 10.1% over 2006. Overall, net interest income decreased $2,415,000 or 10.5% over 2006. As an example, certain asset products re-priced downward 1.00% with the movement of national prime rates in 2007, while most of interest bearing checking and savings were already 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 2005 through 2007. These quotations reflect inter-dealer prices, without retail mark-up, markdown, or commission and may not represent actual transactions. As of February 1, 2008, there were 993 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

First Quarter

32.55

30.24

0.220

2005

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

First Quarter

31.55

29.77

0.230

2006

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

First Quarter

34.00

29.25

0.250

2007

Second Quarter

31.50

29.50

0.250

Third Quarter

31.50

26.05

0.250

Fourth Quarter

26.05

21.05

0.250

1.000


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, 2002 and the reinvestment of all dividends through the period ending December 31, 2007.

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


	*Period Ending*
*Index*	12/31/02		12/31/03		12/31/04		12/31/05		12/31/06		12/31/07

Fentura Financial, Inc.		100.00		102.26		122.46		112.23		126.37		88.31

NASDAQ Composite		100.00		150.01		162.89		165.13		180.85		198.60

SNL Midwest OTC-BB and Pink Banks		100.00		126.23		150.40		156.59		164.90		160.97

Fentura Financial Peer Group*		100.00		133.65		154.47		141.68		146.31		89.98


Source: SNL Financial LC, Charlottesville, VA

*		Fentura Financial Peer Group consists of Banks in Michigan (MI)


	Gross Carrying			Accumulated
	Amounts		Amortization
Amortized intangible assets			2007		2006
Core deposit assets	$	1,509	$	1,037	$	818
Customer relationship intangibles		216		203		148

Total	$	1,725	$	1,240	$	966


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