SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K

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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

Commission file number 0-25752

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

MICHIGAN
(State or other jurisdiction of
incorporation or organization)

38-2869722
(I.R.S. Employer
Identification No.)

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

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

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

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [__]

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes [X] No [__]
The aggregate market value of common stock held by nonaffiliates as of June 30, 2003, was $78,325,013.
As of March 1, 2004 there were outstanding 3,169,204 shares of the Company’s common stock (no par value).

Documents Incorporated by Reference: Portions of the Company’s Proxy Statement and appendix for the Annual Meeting of Shareholders to be held April 21, 2004 are incorporated by reference into Parts I, II and III of this report.

PART I

Included or incorporated by reference in this Form 10-K are certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21 E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are based on the beliefs of the Company’s management as well as on assumptions made by and information currently available to the Company at the times such statements were made. Actual results could differ materially from those included in such forward-looking statements as a result of, among other things, factors set forth below in this Report generally, and certain economic and business factors, some of which may be beyond the control of the Company. Investors are cautioned that all forward-looking statements involve risks and uncertainty.

Item 1 — Business

FNBH Bancorp, Inc. (the Company), a Michigan business corporation, is a one bank holding company, which owns all of the outstanding capital stock of First National Bank in Howell (the “Bank”). The Company was formed in 1988 for the purpose of acquiring all of the stock of the Bank in a shareholder approved reorganization, which became effective May, 1989. The Company’s internet address is www.fnbsite.com.

The Bank was originally organized in 1934 as a national banking association. As of March 1, 2004, the Bank had approximately 135 full-time and part-time employees. None of the Bank’s employees is subject to collective bargaining agreements. The Company does not directly employ any personnel. The Bank serves primarily five communities, Howell, Brighton, Green Oak Township, Hartland, and Fowlerville, all of which are located in Livingston County. The county has historically been rural in character but has a growing suburban population especially in the southeast quadrant of the county, primarily attributable to growth around the City of Brighton.

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

Bank Services

The Bank is a full service bank offering a wide range of commercial and personal banking services. These services include checking accounts, savings accounts, certificates of deposit, commercial loans, real estate loans, installment loans, trust and investment services, collections, traveler’s checks, night depository, safe deposit box and U.S. Savings Bonds. The Bank maintains correspondent relationships with major banks in Detroit, pursuant to which the Bank engages in federal funds sale and purchase transactions, the clearance of checks and certain foreign currency transactions. The Bank also has a relationship with the Federal Home Loan Bank of Indianapolis where it makes short term investments and where it has a line of credit of $37,400,000, of which $32,100,000 is available, and $5,300,000 is funded as of year end. In addition, the Bank participates with other financial institutions to fund certain large loans which would exceed the Bank’s legal lending limit if made solely by the Bank.

The Bank’s deposits are generated in the normal course of business and the loss of any one depositor would not have a materially adverse effect on the business of the Bank. As of December 31, 2003, the Bank’s certificates of deposit of $100,000 or more constituted approximately 14% of total deposit liabilities. The Bank’s deposits are primarily from its service area and the Bank does not seek or encourage large deposits from outside the area.

The Company’s cash revenues are derived primarily from dividends paid by the Bank. The Bank’s principal sources of revenue are interest and fees on loans and interest on investment securities. Interest and fees on loans constituted approximately 79% of total revenues for the period ended December 31, 2003 and for the period ended December 31, 2002. Interest on investment securities, including short-term investments and federal funds sold, constituted approximately 8% of total revenues in 2003 and 9% of total revenues in 2002. Revenues were also generated from deposit service charges and other financial service fees.

The Bank provides real estate, consumer, and commercial loans to customers in its market. As of December 31, 2003, 33% of outstanding loans were for either commercial or residential construction or development. Forty-six percent of the Bank’s loan portfolio is in fixed rate loans. Most of these loans, approximately 97%, mature within five years of issuance. Approximately $4,400,000 in loans (or about 3% of the Bank’s total loan portfolio) have fixed rates with maturities exceeding five years. Fifty-seven percent of the Bank’s interest-bearing deposits are in savings, NOW, and MMDAs, all of which are variable rate products. Of the approximately $143,100,000 in certificates, $98,000,000 mature within a year, with the majority of the balance maturing within a five year period.

Requests to the Bank for credit are considered on the basis of credit worthiness of each applicant, without consideration to race, color, religion, national origin, sex, marital status, physical handicap, age, or the receipt of income from public assistance programs. Consideration is also given to the applicant’s capacity for repayment, collateral, capital and alternative sources of repayment. Loan applications are accepted at all the Bank’s offices and are approved under each lending officer’s authority. Loan requests in excess of $500,000 are required to be presented to the Board of Directors or the Executive Committee of the Board for its review and approval.

As described in more detail below, the Bank’s cumulative one year gap ratio of rate sensitive assets to rate sensitive liabilities for the period ended December 31, 2003, was 34% asset sensitive, compared to 43% asset sensitive at December 31, 2002. See discussion and table under “Quantitative and Qualitative Disclosures about Market Risk” in Item 7a below.

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

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

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

Bank Competition

The Bank has nine offices within the five communities it serves, all of which are located in Livingston County, Michigan. Four of the offices, including the main office, are located in Howell. There are two facilities in Brighton, and one each in Green Oak Township, Hartland, and Fowlerville. See “Properties” below for more detail on these facilities. Within these communities, its principal competitors are Fifth Third Bank, National City Bank, Republic Bank, and Standard Federal. Each of these financial institutions, which are headquartered in larger metropolitan areas, has significantly greater assets and financial resources than the Company. Among the principal competitors in the communities in which the Bank operates, the Bank is the only locally owned financial institution. Based on deposit information as of June 30, 2003, the Bank holds approximately 23.32% of local deposits, compared to approximately 15.57% held by Fifth Third Bank, approximately 11.06% held by National City, approximately 10.18% held by Republic Bank, and approximately 7.95% held by Standard Federal. Information as to asset size of competitor financial institutions is derived from publicly available reports filed by and with regulatory agencies. Within the Bank’s markets, Fifth Third Bank maintains six branch offices, National City Bank operates seven branch offices, Republic Bank has five branch offices, and Standard Federal has three branch offices. Management is not aware of any plans by these financial institutions to expand their presence in the Bank’s market.

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

Growth of Company

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

	Balances as of December 31, (in thousands)
		2003		2002		2001		2000		1999

Total Assets	$	449,818	$	420,686	$	392,978	$	348,363	$	296,419
Loans, Net of Unearned Income		347,086		327,117		286,280		255,414		209,952
Securities		55,435		44,611		55,989		39,311		50,598
Noninterest-Bearing Deposits		69,234		62,232		62,938		55,253		47,980
Interest-Bearing Deposits		329,839		311,840		288,731		254,961		221,210
Total Deposits		399,073		374,072		351,669		310,214		269,190
Shareholders' Equity		41,235		37,580		32,404		28,887		25,312

Through 2003, the Bank operated seven branch facilities: one in downtown Howell, one at Lake Chemung (five miles east of downtown Howell), two in Brighton (one on the east side and one on the west side), one in Hartland, one in the village of Fowlerville, and the sixth is a grocery store branch, located west of downtown Howell. In December of 2003, the Bank opened a new branch in Green Oak Township, which is 11 miles south west of downtown Howell. As of December 31, 2003, this new branch had approximately $1,700,000 in deposits. In the time period presented, all of the Bank’s branches grew due to general growth in the county.

SUPERVISION AND REGULATION

The following is a summary of certain statutes and regulations affecting the Company and the Bank. This summary is qualified in its entirety by such statutes and regulations. A change in applicable laws or regulations may have a material effect on the Company, the Bank and the business of the Company and the Bank.

General

Financial institutions and their holding companies are extensively regulated under federal and state law. Consequently, the growth and earnings performance of the Company and the Bank can be affected not only by management decisions and general economic conditions, but also by the statutes administered by, and the regulations and policies of, various governmental regulatory authorities. Those authorities include, but are not limited to, the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), the FDIC, the Office of the Comptroller of the Currency (“OCC”), the Internal Revenue Service, and state taxing authorities. The effect of such statutes, regulations and policies can be significant, and cannot be predicted with a high degree of certainty.

Federal and state laws and regulations generally applicable to financial institutions and their holding companies regulate, among other things, the scope of business, investments, reserves against deposits, capital levels relative to operations, lending activities and practices, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. The system of supervision and regulation applicable to the Company and the Bank establishes a comprehensive framework for their respective operations and is intended primarily for the protection of the FDIC’s deposit insurance funds, the depositors of the Bank, and the public, rather than shareholders of the Bank or the Company.

Federal law and regulations establish supervisory standards applicable to the lending activities of the Bank, including internal controls, credit underwriting, loan documentation and loan-to-value ratios for loans secured by real property.

The Company

General. The Company is a bank holding company and, as such, is registered with, and subject to regulation by, the Federal Reserve Board under the Bank Holding Company Act, as amended (the “BHCA”). Under the BHCA, the Company is subject to periodic examination by the Federal Reserve Board, and is required to file with the Federal Reserve Board periodic reports of its operations and such additional information as the Federal Reserve Board may require.

In accordance with Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances where the Company might not do so absent such policy. In addition, if the Bank’s capital becomes impaired, the OCC may require the Bank to restore its capital by a special assessment upon the Company as the Bank’s sole shareholder. If the Company were to fail to pay any such assessment, the directors of the Bank would be required, under federal law, to sell the shares of the Bank’s stock owned by the Company at public auction and use the proceeds of the sale to restore the Bank’s capital.

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

The merger or consolidation of an existing bank subsidiary of the Company with another bank, or the acquisition by such a subsidiary of assets of another bank, or the assumption of liability by such a subsidiary to pay any deposits in another bank, will require the prior written approval of the responsible Federal depository institution regulatory agency under the Bank Merger Act. In addition, in certain such cases an application to, and the prior approval of, the Federal Reserve Board under the BHCA and/or the OCC, may be required.

With certain limited exceptions, the BHCA prohibits any bank company from engaging, either directly or indirectly through a subsidiary, in any activity other than managing or controlling Bank unless the proposed non-banking activity is one that the Federal Reserve Board has determined to be so closely related to banking or managing or controlling Bank as to be a proper incident thereto. Under current Federal Reserve Board regulations, such permissible non-banking activities include such things as mortgage banking, equipment leasing, securities brokerage, and consumer and commercial finance company operations. Well-capitalized and well-managed bank holding companies may engage de novo in certain types of non-banking activities without prior notice to, or approval of, the Federal Reserve Board, provided that written notice of the new activity is given to the Federal Reserve Board within 10 business days after the activity is commenced. If a bank holding company wishes to engage in a non-banking activity by acquiring a going concern, prior notice and/or prior approval will be required, depending upon the activities in which the company to be acquired is engaged, the size of the company to be acquired and the financial and managerial condition of the acquiring bank holding company.

Eligible bank holding companies that elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance activities and any other activity that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature, incidental to any such financial activity or complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. The Bank Holding Company Act generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank or financial holding companies. While the Company believes it is eligible to elect to operate as a financial holding company, as of the date of this filing, it has not applied for approval to operate as a financial holding company.

Capital Requirements.The Federal Reserve Board uses capital adequacy guidelines in its examination and regulation of bank holding companies. If capital falls below minimum guidelines, a bank company may, among other things, be denied approval to acquire or establish additional Bank or non-bank businesses.

The Federal Reserve Board’s capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: (i) a leverage capital requirement expressed as a percentage of total average assets, and (ii) a risk-based requirement expressed as a percentage of total risk-weighted assets. The leverage capital requirement consists of a minimum ratio of Tier 1 capital (which consists principally of shareholders’ equity) to total average assets of 3% for the most highly rated companies, with minimum requirements of 4% to 5% for all others. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, of which at least one-half must be Tier 1 capital.

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

Dividends. The Company is a corporation separate and distinct from the Bank. Most of the Company’s revenues are received by it in the form of dividends paid by the Bank. Thus, the Company’s ability to pay dividends to its shareholders is indirectly limited by statutory restrictions on the Bank’s ability to pay dividends described below. Further, in a policy statement, the Federal Reserve Board has expressed its view that a bank holding company experiencing earnings weaknesses should not pay cash dividends exceeding its net income or which can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. Additionally, the Federal Reserve Board possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by Bank and bank holding companies. Similar enforcement powers over the Bank are possessed by the FDIC. The “prompt corrective action” provisions of federal law and regulation authorizes the Federal Reserve Board to restrict the payment of dividends by the Company for an insured bank which fails to meet specified capital levels.

In addition to the restrictions on dividends imposed by the Federal Reserve Board, the Michigan Business Corporation Act provides that dividends may be legally declared or paid only if after the distribution a corporation, such as the Company, can pay its debts as they come due in the usual course of business and its total assets equal or exceed the sum of its liabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of any holders of preferred stock whose preferential rights are superior to those receiving the distribution. The Company’s Articles of Incorporation do not authorize the issuance of preferred stock and there are no current plans to seek such authorization.

The Company’s common stock is registered with the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As a result, the Company is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act provides for numerous changes to the reporting, accounting, corporate governance and business practices of companies as well as financial and other professionals who have involvement with the U.S. public securities markets. The SEC continues to issue new and proposed rules implementing various provisions of the Sarbanes-Oxley Act. The Company’s securities are not listed for trading on any national or regional securities exchange.

The Bank

General. The Bank is organized as a national banking association and is, therefore, regulated and supervised by the OCC. The deposit accounts of the Bank are insured by the Bank Insurance Fund (the “BIF”) of the FDIC. Consequently, the Bank is also subject to the provisions of the Federal Deposit Insurance Act. The Bank is subject to the examination, supervision, reporting and enforcement requirements of the OCC as its primary federal regulator. The OCC and the federal and state laws applicable to the Bank and its operations, extensively regulate various aspects of the banking business including, among other things, permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and on deposits, the maintenance of non-interest bearing reserves on deposit accounts, and the safety and soundness of banking practices.

Deposit Insurance.As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums, based upon their respective levels of capital and results of supervisory evaluation. Institutions classified as well-capitalized (as defined by the FDIC) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (as defined by the FDIC) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period.

The Federal Deposit Insurance Act (“FDIA”) requires the FDIC to establish assessment rates at levels which will maintain the Deposit Insurance Fund at a mandated reserve ratio of not less than 1.25% of estimated insured deposits. For several years, the BIF reserve ratio has been at or above the mandated ratio and assessments have ranged from 0% of deposits for institutions in the lowest risk category, such as the Bank, to .27% of deposits in the highest risk category.

FICO Assessments.The Bank, as a member of the BIF, is subject to assessments to cover the payments on outstanding obligations of the Financing Corporation (“FICO”). FICO was created to finance the recapitalization of the Federal Savings and Loan Insurance Corporation, the predecessor to the FDIC’s Savings Association Insurance Fund (the “SAIF”) which insures the deposits of thrift institutions. From now until the maturity of the outstanding FICO obligations in 2019, BIF members and SAIF members will share the cost of the interest on the FICO bonds on a pro rata basis. It is estimated that FICO assessments during this period will be less than 0.02% of deposits.

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

Capital Requirements.The OCC has established the following minimum capital standards for national banks: a leverage requirement consisting of a minimum ratio of Tier 1 capital to total average assets of 3% for the most highly-rated Bank with minimum requirements of 4% to 5% for all others, and a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. Tier 1 capital consists principally of shareholders’ equity. These capital requirements are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions.

Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators’ powers depends on whether the institution in question is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized.” Federal regulations define these capital categories as follows:

	Total Risk-Based Capital Ratio	Tier 1 Risk-Based Capital Ratio	Leverage Ratio

Well capitalized Adequately capitalized Undercapitalized Significantly undercapitalized Critically undercapitalized	10% or above 8% or above Less than 8% Less than 6% --	6% or above 4% or above Less than 4% Less than 3% --	5% or above 4% or above Less than 4% Less than 3% A ratio of tangible equity to total assets of 2% or less

As of December 31, 2003, each of the Bank’s ratios exceeded minimum requirements for the well capitalized category.

Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include: requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent Bank; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution.

In general, a depository institution may be reclassified to a lower category than is indicated by its capital levels if the appropriate federal depository institution regulatory agency determines the institution to be otherwise in an unsafe or unsound condition or to be engaged in an unsafe or unsound practice. This could include a failure by the institution, following receipt of a less-than-satisfactory rating on its most recent examination report, to correct the deficiency.

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

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

Safety and Soundness Standards.The federal banking agencies have adopted guidelines to promote the safety and soundness of federally insured depository institutions. These guidelines establish standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.

Consumer Protection Laws.The Bank’s businesses include making a variety of types of loans to individuals. In making these loans, the Bank is subject to State usury and regulatory laws and to various federal statutes, including the privacy of consumer financial information provisions of the Gramm-Leach-Bliley Act and regulations promulgated thereunder, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Real Estate Settlement Procedures Act, and the Home Mortgage Disclosure Act, and the regulations promulgated thereunder, which prohibit discrimination, specify disclosures to be made to borrowers regarding credit and settlement costs, and regulate the mortgage loan servicing activities of the Bank, including the maintenance and operation of escrow accounts and the transfer of mortgage loan servicing. In receiving deposits, the Bank is subject to extensive regulation under State and federal law and regulations, including the Truth in Savings Act, the Expedited Funds Availability Act, the Bank Secrecy Act, the Electronic Funds Transfer Act, and the Federal Deposit Insurance Act. Violation of these laws could result in the imposition of significant damages and fines upon the Bank and its directors and officers.

I SELECTED STATISTICAL INFORMATION

(A) Distribution of Assets, Liabilities, and Shareholders’ Equity:

(B) Interest Rates and Interest Differential:

The table on the following page shows the daily average balances for major categories of interest earning assets and interest bearing liabilities, interest earned (on a taxable equivalent basis) or paid, and the effective rate or yield, for the three years ended December 31, 2003, 2002, and 2001.

Net interest income is the difference between interest earned on loans, securities and other earning assets and interest paid on deposits and borrowed funds. In the following tables, the interest earned on investments and loans is expressed on a fully taxable equivalent (FTE) basis. Tax exempt interest is increased to an amount comparable to interest subject to federal income taxes in order to properly evaluate the effective yields earned on earning assets. The tax equivalent adjustment is based on a federal income tax rate of 34%. The following Yield Analysis shows that the Bank’s interest margin decreased 9 basis points in 2003 as a result of a decrease of 69 basis points in yield on earning assets, partially offset by a decrease of 72 basis points in the interest cost on deposits. In 2002 the interest margin decreased 11 basis points due to an 121 basis point decrease in yield on earning assets offset by a 141 basis point decrease in interest cost.

Yield Analysis of Consolidated Average Assets and Liabilities (dollars in thousands)

				2003								2002								2001
	Average Balance			Interest		Yield/ Rate			Average Balance			Interest		Yield/ Rate			Average Balance			Interest		Yield/ Rate

Assets:
Interest earning assets:
Short term investments	$	9,625		$	103.4		1.07	%	$	3,522		$	57.4		1.63	%	$	19,924		$	770.6		3.87	%
Certificates of deposit		3,135			109.2		3.48	%		5,424			177.7		3.28	%		929			26.9		2.90	%
Securities:
Taxable		29,550			1,205.2		4.08	%		34,869			1,614.7		4.63	%		24,075			1,372.0		5.70	%
Tax-exempt		15,845			1,109.0		7.00	%		17,109			1,186.9		6.94	%		18,415			1,246.4		6.77	%
Loans(1)(2)		340,384			22,805.8		6.70	%		311,060			23,197.8		7.46	%		270,776			24,182.3		8.93	%

Total earning assets and total
interest income		398,539		$	25,332.7		6.36	%		371,984		$	26,234.5		7.05	%		334,119		$	27,598.2		8.26	%

Cash & due from banks		13,018								14,641								13,634
All other assets		6,591								17,723								15,320
Allowance for loan loss		5,871								(5,436	)							(5,614	)

Total assets	$	424,019							$	398,912							$	357,459

Liabilities and
Shareholders' Equity
Interest bearing deposits:
Savings, money market, NOW	$	172,611		$	1,468.5		.85	%	$	153,651		$	2,286.0		1.49	%	$	128,257		$	3,007.8		2.35	%
Time		135,842			4,288.9		3.16	%		131,019			5,154.8		3.93	%		131,527			7,427.4		5.65	%
Short term borrowings		1,300			17.7		1.37	%		8,430			167.6		1.99	%		-			-		-
FHLB advances		5,337			391.7		7.34	%		5,578			408.8		7.23	%		5,801			425.9		7.23	%

Total interest bearing
liabilities and total interest
expense	$	315,090		$	6,166.9		1.96	%		298,678		$	8,017.2		2.68	%		265,585		$	10,861.1		4.09	%

Non-interest bearing deposits		65,719								61,223								57,166
All other liabilities		3,671								3,925								3,641
Shareholders' Equity		39,539								35,086								31,067

Total liabilities and
shareholders' equity	$	424,019							$	398,912							$	357,459

Interest spread							4.40	%							4.37	%							4.17	%

Net interest income-FTE			$		19,165.9							$	18,217.3							$	16,737.1

Net interest margin							4.81	%							4.90	%							5.01	%

(1)	Included in average daily loan balances are non-accruing loans with average balances of $4,751,000 in 2003, $2,322,000 in 2002, and $1,612,000 in 2001.

(2)	Interest on loans includes origination fees totaling $720,000 in 2003, $750,000 in 2002, and $790,000 in 2001.

(C) The following table sets forth the effects of volume and rate changes on net interest income on a taxable equivalent basis. All figures are stated in thousands of dollars.

	Year ended December 31, 2003 compared to Year ended December 31, 2002 Amount of Increase/(Decrease) due to change in									Year ended December 31, 2002 compared to Year ended December 31, 2001 Amount of Increase/(Decrease) due to change in
	Volume			Average Rate			Total Amount of Increase/ (Decrease)			Volume			Average Rate			Total Amount of Increase/ (Decrease)
Interest Income:
Short term investments	$	99		$	(53	)	$	46		$	(634	)	$	(79	)	$	(713	)
Certificates of deposit		(75	)		6			(69	)		130			20			150
Securities:
Taxable		(246	)		(163	)		(409	)		615			(372	)		243
Tax Exempt		(88	)		10			(78	)		(88	)		29			(59	)
Loans		2,187			(2,579	)		(392	)		3,597			(4,582	)		(985	)

Total interest income	$	1,877		$	(2,779	)	$	(902	)	$	3,620		$	(4,984	)	$	(1,364	)
Interest Expense:
Interest bearing deposits:
Savings/NOW accounts .	$	282		$	(1,100	)	$	(818	)	$	595		$	(1,317	)	$	(722	)
Time		190			(1,055	)		(865	)		(29	)		(2,244	)		(2,273	)
Short term borrowings		(142	)		(8	)		(150	)		168			0			168
FHLB & other borrowings		(18	)		1			(17	)		(16	)		(1	)		(17	)

Total interest expense	$	312		$	(2,162	)	$	(1,850	)	$	718		$	(3,562	)	$	(2,844	)

Net interest income (FTE)	$	1,565		$	(616	)	$	948		$	2,902		$	(1,422	)	$	1,480

The change in interest due to changes in both balance and rate has been allocated to change due to balance and change due to rate in proportion to the relationship of the absolute dollar amounts of change in each.

II INVESTMENT PORTFOLIO

(A) The following table sets forth the book value of securities at December 31:

	2003		2002		2001
	(in thousands)

Held to maturity:
States and political subdivisions		15,051		16,863		17,979
Mortgage-backed securities		0		26		78

Total	$	15,051	$	16,889	$	18,057
Available for sale:
U.S. Treasury	$	0	$	0	$	2,019
U.S. Government agencies		22,151		12,032		9,569
Corporate securities		4,637		4,721		12,828
Mortgage-backed securities		12,513		9,925		12,683
FRB Stock		44		44		44
FHLB Stock		1,039		1,000		789

Total	$	40,384	$	27,722	$	37,932

(B) The following table sets forth contractual maturities of securities at December 31, 2003 and the weighted average yield of such securities:

	Maturing Within One Year					Maturing After One But Within Five Years					Maturing After Five But Within Ten Years					Maturing After Ten Years
	(dollars in thousands)
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield

Held to maturity
States and political
subdivisions	$	3,115		7.46	%	$	9,148		7.01	%	$	2,788		6.79	%


Tax equivalent adjustment
for calculations of yield	$	70				$	206				$	63


Available for sale
U.S. Agency	$	8,104		4.01	%	$	13,089		3.40	%	$	958		4.40	%
Corporate bonds		3,556		3.62	%		1,081		6.00	%
Mortgage backed securities							3,814		5.13	%		5,853		4.22	%		2,846		3.74	%
FRB Stock																	44		6.00	%
FHLB Stock																	1,039		3.76	%

Total	$	11,660		3.89	%	$	17,984		3.92	%	$	6,811		4.25	%	$	5,939		3.77	%

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


Under 1 year	5.21	%	2.25	%	7.46	%
1-5 years	4.76	%	2.25	%	7.01	%
5-10 years	4.54	%	2.25	%	6.79	%

Additional statistical information concerning the Bank’s securities portfolio is incorporated by reference in Note 3 of the Company’s Consolidated Financial Statements for the year ended December 31, 2003 included in the Appendix to the Company’s definitive proxy statement, relating to the April 21, 2004, Annual Meeting of Shareholders (as filed with the Commission as exhibit 13 to the Report).

III LOAN PORTFOLIO

(A) The table below shows loans outstanding at December 31:

	2003		2002		2001		2000		1999
	(dollars in thousands)

Secured by real estate:
Residential first mortgage	$	46,845	$	37,202	$	27,456	$	31,328	$	29,904
Residential home equity/other junior liens		13,999		11,184		8,066		9,999		7,822
Construction and land development		54,554		49,516		42,221		35,020		23,375
Commercial		165,464		153,720		118,191		105,041		89,809
Consumer		25,842		25,261		22,719		20,700		16,811
Commercial		33,947		43,276		59,602		45,239		38,891
Other		7,366		7,801		8,870		8,897		4,043

Total Loans (Gross)	$	348,017	$	327,960	$	287,125	$	256,224	$	210,655

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

(B) The following table shows the amount of commercial, financial, and agricultural loans outstanding as of December 31, 2003 which, based on remaining scheduled repayments of principal, are in the periods indicated.

	Maturing (dollars in thousands)
	Within one year		After one but within five years		After five years		Total
Real estate construction & land development	$	25,207	$	28,536	$	733	$	54,477
Real estate other (secured by commercial &
multi-family)		24,914		130,456		10,094		165,464
Commercial (secured by business assets or
Unsecured)		14,373		16,843		2,732		33,948
Other (loans to farmers, political
Subdivisions, & overdrafts)		1,852		1,780		3,734		7,366

Totals	$	66,347	$	177,615	$	17,293	$	261,255

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

	Interest Sensitivity (dollars in thousands)
	Fixed Rate		Variable Rate
Due after one but within five years	$	97,580	$	80,035
Due after five years		8,516		8,777

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

	2003			2002			2001			2000			1999
	(dollars in thousands)

Nonperforming Loans:
Nonaccrual loans	$	4,293		$	3,288		$	2,636		$	608		$	173
Loans past due 90 days or more		0			809			361			209			4

Total nonperforming loans	$	4,293		$	4,097		$	2,997		$	817		$	177

Percent of total loans		1.24	%		1.25	%		1.04	%		.32	%		.08	%

Additional information concerning nonperforming loans, the Bank’s nonaccrual policy, loan impairment, and loan concentrations is incorporated by reference to Note 4 of the Company’s Consolidated Financial Statements for the year ended December 31, 2003 included in the Appendix III to the Company’s definitive proxy statement, relating to the April 21, 2004, Annual Meeting of Shareholders (as filed with the Commission as exhibit 13 to this Report).

There were no other interest bearing assets, at December 31, 2003, that would be required to be disclosed under Item III(C), if such assets were loans.

The loan portfolio has no significant concentrations in any one industry. There were no foreign loans outstanding at December 31, 2003.

IV SUMMARY OF LOAN LOSS EXPERIENCE

(A) The following table sets forth loan balances and summarizes the changes in the allowance for loan losses, which is the Company’s critical accounting policy, for each of the years ended December 31:

	(dollars in thousands)
	2003			2002			2001			2000			1999

Loans:
Average daily balance of loans for the year	$	340,384		$	311,060		$	270,776		$	238,697		$	198,448
Amount of loans (gross) outstanding at end
of the year		348,017			327,960			287,125			256,224			210,655
Allowance for loan losses:
Balance at beginning of year		5,794			5,668			5,193			4,483			3,958
Loans charged off:
Real estate		0			0			0			0			0
Commercial		1,014			598			322			526			322
Consumer		269			169			195			83			164

Total charge-offs		1,283			767			517			609			486
Recoveries of loans previously charged off:
Real estate		0			0			0			0			35
Commercial		112			177			47			79			98
Consumer		65			91			45			40			38

Total recoveries		177			268			92			119			171

Net loans charged off		1,106			499			425			490			315
Additions to allowance charged to operations		1,270			625			900			1,200			840

Balance at end of year	$	5,958		$	5,794		$	5,668		$	5,193		$	4,483
Ratios:
Net loans charged off to average loans
outstanding		.32	%		.16	%		.16	%		.21	%		.16	%
Allowance for loan losses to loans
outstanding		1.72	%		1.77	%		1.97	%		2.03	%		2.13	%

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

	(dollars in thousands)
	2003					2002					2001					2000					1999
	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent

Commercial	$	5,520		80.1	%	$	5,166		80.2	%	$	2,244		79.1	%	$	4,725		77.0	%	$	3,803		77.6	%
Consumer		335		10.1	%		406		10.3	%		160		11.3	%		315		12.2	%		441		11.8	%
Real Estate		103		9.8	%		222		9.5	%		26		9.6	%		153		10.8	%		239		10.6	%

Unallocated												3,238

Total	$	5,958		100	%	$	5,794		100	%	$	5,668		100	%	$	5,193		100	%	$	4,483		100	%

V DEPOSITS

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

	2003					2002					2001
	(dollars in thousands)
	Average Balance		Rate			Average Balance		Rate			Average Balance		Rate

Non-interest bearing demand	$	65,719				$	61,223				$	57,166
Savings, money market and NOW		172,611		.85	%		153,651		1.49	%		128,257		2.35	%
Time deposits		135,842		3.16	%		131,019		3.93	%		131,527		5.65	%

Total	$	374,172		1.54	%	$	345,893		2.15	%	$	316.950		3.29	%

The table for maturities of negotiated rate time deposits of $100,000 or more outstanding at December 31, 2003 is incorporated by reference to Note 9 of the Company’s Consolidated Financial Statements for the year ended December 31, 2003 included in the Appendix to the Company’s definitive proxy statement, relating to the April 21, 2004, Annual Meeting of Shareholders (as filed with the Commission as exhibit 13 to this Report).

VI RETURN ON EQUITY AND ASSETS

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

	2003		2002		2001		2000		1999

Net income as a percent of:
Average common equity	14.90	%	17.97	%	16.80	%	18.76	%	15.05	%
Average total assets	1.39	%	1.58	%	1.46	%	1.63	%	1.33	%

Additional performance ratios are set forth in “Selected Financial Data” included in the Appendix to the Company’s definitive proxy statement, relating to the April 21, 2004, Annual Meeting of Shareholders and is incorporated herein by reference. Any significant changes in the current trend of the above ratios are reviewed in Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Appendix to the Company’s definitive proxy statement, relating to the April 21, 2004, Annual Meeting of Shareholders (as filed with the Commission as exhibit 13 to this Report).

VII SHORT-TERM BORROWING

The information required in this item is not applicable for this Company.

Item 2 — Properties

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

Item 3 — Legal Proceedings

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

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

No matters were submitted to a vote of security holders during the fourth quarter of 2003.

Additional Item —Executive Officers

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

The following table sets forth certain information with respect to the Company’s executive officers as of December 31, 2003:

Name (Age)		Position with Company		First Selected as an Officer of the Company
Barbara Draper (57) Herbert W. Bursch (51) Nancy Morgan (53) Janice B.Trouba (42) James Wibby (53)		President, Chief Executive Officer, and Director of the Company and the Bank Senior Vice President, Chief Operating Officer, of the Company and the Bank Senior Vice President, Human Resources of the Bank Senior Vice President, Chief Financial Officer, of the Bank Senior Vice President, Senior Lender, of the Bank		1983 1999 1988 2002 1997

PART II

Item 5 — Market for Registrant’s Common Equity and Related Stockholder Matters

There is not an established trading market for the Company’s Common Stock. Information regarding its market price can be obtained on the internet at nasdaq.com, symbol FNHM. There is one market maker for the stock. There are occasional direct sales by shareholders of which the Company’s management is generally aware. It is the understanding of the management of the Company that over the last two years, the Company’s Common Stock has sold at a premium to book value. From January 1, 2002, through December 31, 2003, there were, so far as the Company’s management knows, a total of 351,484 shares of the Company’s Common Stock sold. The price was reported to management in some of these transactions; however there may have been other transactions involving the Company stock at prices not reported to management. During 2003, the highest and lowest prices known to management involving sales of more than 200 shares were $31.00 and $23.00 per share, respectively. To the knowledge of management, the last sale of Common Stock occurred on March 2, 2004 at a price of $27.00 per share.

As of March 1, 2004, there were approximately 955 holders of record of the Company’s Stock. The following table sets forth the range of high and low sales prices of the Company’s Common Stock during 2002 and 2003, based on information made available to the Company, as well as per share cash dividends declared during those periods. Although management is not aware of any transactions exceeding 200 shares at higher or lower prices, there may have been transactions at prices outside the ranges listed in the table.

Sales price, for sales involving more than 200 shares, and dividend information for the years 2002 and 2003:

	Sales Prices				Cash Dividends Declared
2002	High		Low
First Quarter	$	22.50	$	21.50	$	0.13
Second Quarter	$	21.50	$	19.50	$	0.16
Third Quarter	$	23.00	$	21.25	$	0.17
Fourth Quarter	$	25.00	$	22.49	$	0.17

2003	High		Low
First Quarter	$	25.00	$	23.00	$	0.17
Second Quarter	$	25.00	$	24.00	$	0.17
Third Quarter	$	31.00	$	24.00	$	0.17
Fourth Quarter	$	27.50	$	25.25	$	0.17

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

Item 6 – Selected Financial Data

The information set forth under the caption “Summary Financial Data” on page 62 of Appendix III to the Company’s definitive proxy statement, as filed with the Commission relating to the April 21, 2004 Annual Meeting of Shareholders, is incorporated herein by reference.

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

The information set forth under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 51 through 62 of Appendix III to the Company’s definitive proxy statement, as filed with the Commission and relating to the April 21, 2004 Annual Meeting of Shareholders, is incorporated herein by reference.

Item 7a – Quantitative and Qualititative Disclosures about Market Risk

Included in Management’s Discussion and Analysis

Item 8 – Financial Statements and Supplementary Data

The following consolidated financial statements and supplementary data of the Company appear on pages 20 through 50 of Appendix III to the Company’s definitive Proxy Statement, relating to the April 21, 2004 Annual Meeting of shareholders, as filed with the Commission. This Appendix is incorporated herein by reference and included as Exhibit 13 to this report on Form 10-K:

         Consolidated Balance Sheets
         Consolidated Statements of Income
         Consolidated Statements of Stockholders’ Equity and Comprehensive Income
         Consolidated Statements of Cash Flows
         Notes to Consolidated Financial Statement Independent Auditors’ Report
         Quarterly financial data relating to results of operations for the years ended December 31, 2003 and 2002 are reported on page 48 of Appendix III

Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

By letter dated December 30, 2003, KPMG LLP (“KPMG”) declined to stand for re-election as the Registrant’s independent auditors, following the completion by KPMG of the audit of the Registrant’s financial statements as of and for the year ended December 31, 2003, and the issuance of its report thereon. The Registrant’s Audit Committee was informed of the decision, but the Audit Committee did not recommend or approve that decision by KPMG. The Registrant has not yet engaged a new independent auditor.

KPMG’s reports on the Registrant’s consolidated financial statements for the past two fiscal years did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. During the past two fiscal years and through the date of Registrant’s receipt of the above-referenced letter from KPMG (the “Reporting Period”), there were no disagreements with KPMG on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to KPMG’s satisfaction, would have caused KPMG to make reference to the subject matter of the disagreement(s) in connection with its reports on the Registrant’s consolidated financial statements. Also, during the Reporting Period, there were no reportable events as described in Item 304(a)(1)(v) of the Securities and Exchange Commission’s Regulation S-K.

The Company has provided a copy of the foregoing statements to KPMG. A copy of KPMG’s letter to the Securities and Exchange Commission stating its agreement with such statements was filed as Exhibit 16 to the Registrant’s Current Report dated December 30, 2003, as amended.

Item 9A – Controls and Procedures

With the participation of management, the Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31,2003, have concluded that, as of such date, the Company’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities in connection with the filing of the Company’s Annual Report on Form 10-K for the annual period ended December 31, 2003.

There were no significant changes to the Company’s internal controls over financial reporting during the fiscal quarter ended December 31, 2003, that have materially affected, or reasonably likely to materially affect, our internal controls over financial reporting.

PART III

Item 10 – Directors and Executive Officers of the Registrant

Directors

The information with respect to Directors and Nominees of the Registrant, set forth under the caption “Election of Directors” on pages 1 and 2 of the Company’s definitive proxy statement, as filed with the Commission relating to the April 21, 2004 Annual Meeting of Shareholders, is incorporated herein by reference.

Executive Officers

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

We have adopted a Code of Ethics for our chief executive officer and senior financial officers. A copy of our Code of Ethics is available upon request by writing to the Company’s chief financial officer at 101 East Grand River, Howell, Michigan 48843.

Item 11 – Executive Compensation

The information set forth under the caption “Summary Compensation Table” on pages 6 and 7 of the Company’s definitive proxy statement, as filed with the Commission relating to the April 21, 2004 Annual Meeting of Shareholders, is incorporated herein by reference. Information under the caption “Committee Report on Executive Compensation” on page 5 and 6 and “Shareholder Return Performance Graph” on page 9 of the definitive proxy statement is not incorporated by reference herein and is not deemed to be filed with the Securities and Exchange Commission.

Item 12 – Security Ownership of Certain Beneficial Owners and Management

The information set forth under the caption “Ownership of Common Stock” on pages 8 of the Company’s definitive proxy statement, as filed with the Commission relating to the April 21, 2004 Annual Meeting of Shareholders, is incorporated herein by reference.

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

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants, and rights	Weighted - average exercise price of outstanding options, warrants, and rights	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)	(b)	(c)
Equity compensation plans approved by security holders	0	0	295,225 (1)

(1) Includes 170,776 shares available under the Long Term Incentive Plan, 78,751shares available under the Compensation Plan for Nonemployee Directors and 45,698 shares included under the Employee Stock Purchase Plan.

Item 13 – Certain Relationships and Related Transactions

The information set forth under the caption “Certain Transactions with Management” on page 7 and 8 of the Company’s definitive proxy statement, as filed with the Commission relating to the April 21, 2004 Annual Meeting of Shareholders, is incorporated herein by reference.

Item 14 – Principal Accounting Fees and Services

The information set forth under the caption “Audit Matters and Our Relationship with Our Independent Public Accountants” on page 5 of the Company’s definitive proxy statement, as filed with the Commission relating to the April 21, 2004 Annual Meeting of Shareholders, is incorporated herein by reference.

PART IV

Item 15 — Exhibits, Financial Statement Schedules and Report on Form 8-K

(a)

Financial Statements

All financial statements of the Registrant are incorporated herein by reference as set forth in Appendix III to the Registrant’s Definitive Proxy Statement, relating to the April 21, 2004 Annual Meeting of Shareholders, a copy of which is filed as Exhibit 13 to this Report on Form 10-K.

Financial Statement Schedules

Not applicable.

Exhibits (Numbered in accordance with Item 601 of Regulation S-K)

The Exhibit Index is located on the final page of this report on Form 10-K.

(b)	Reports on Form 8-K

The Company filed a report 8-K on October 3, 2003 under Item 9 regarding the retirement of the Company’s CEO, Barbara Draper. The Company also filed a report 8-K on October 20, 2003 under Item 12 regarding the Company’s Third Quarter 2003 Earnings Press Release.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, dated March 13, 2004.

FNBH BANCORP, INC.

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

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Each director of the Registrant, who’s signature appears below, hereby appoints Barbara Draper and Janice B. Trouba, and each of them severally, as his or her attorney-in-fact, to sign in his or her name and on his or her behalf, as a director of the Registrant, and to file with the Commission any and all Amendments to this Report on Form 10-K.

/s/ W. Rickard Scofield
———————————————
W. Rickard Scofield, Chairman of the Board

/s/ Donald K. Burkel
———————————————
Donald K. Burkel, Vice Chairman of the Board

/s/ Athena Bacalis
———————————————
Athena Bacalis, Director

/s/ Gary R. Boss
———————————————
Gary R. Boss, Director

/s/ Herbert W. Bursch
———————————————
Herbert W. Bursch, Director

/s/ Barbara Draper
———————————————
Barbara Draper, Director

/s/ Harry E. Griffith
———————————————
Harry E. Griffith, Director

/s/ Richard F. Hopper
———————————————
Richard F. Hopper, Director

/s/ Dona Scott Laskey
———————————————
Dona Scott Laskey, Director

/s/ James R. McAuliffe
———————————————
James R. McAuliffe, Director

/s/ Randolph E. Rudisill
———————————————
Randolph E. Rudisill, Director

/s/ R. Michael Yost
———————————————
R. Michael Yost, Director

EXHIBIT INDEX

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

Exhibit
Number

(13)	Appendix III to the Company's Proxy Statement, for the Annual Meeting of Shareholders to be held April 21, 2004, representing pages 19-62 of that Appendix III to that Proxy Statement incorporated by reference in this report. This Appendix will also be filed with the Commission as part of the Company's Proxy Statement and will be delivered to Company shareholders in compliance with Rule 14(a)-3 of the Securities Exchange Act of 1934, as amended

(21)	Subsidiaries of the Registrant

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

(31.1)

Certificate of the Chief Executive Officer of FNBH Bancorp, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

(31.2)

Certificate of the Chief Financial Officer of FNBH Bancorp, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

(32.1)

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

(32.2)

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

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


Exhibit Number 3.1 3.2 3.3 4 10.1 10.2 10.3 10.4	Restated Articles of Incorporation of the Registrant Amendment to the Company's Articles of Incorporation to Increase Authorized Shares Bylaws of the Registrant Form of Registrant's Stock Certificate Material Contracts: Howell Branch Lease Agreement Company's Long Term Incentive Plan* FNBH Bancorp Inc. Employees' Stock Purchase Plan Amended and Restated Compensation Plan for Nonemployee Directors*		Original Filing Form and Date Exhibit 3.1 of Form 10, effective June 30, 1995 ("Form 10") Appendix I of Proxy Statement dated March 17, 1998 Exhibit 3.2 of Form 10 Exhibit 4 of Form 10 Exhibit 10.2 to Form 10 Appendix II of Proxy Statement dated March 17, 1998 Exhibit 4 to Registration Statement on Form S-8 (Reg. No. 333-46244) Appendix II of Proxy Statement dated March 15, 2002

*Represents a compensation plan

Exhibit 13

FNBH BANCORP, INC. AND SUBSIDIARIES

Consolidated Financial Statements

Period Ended December 31, 2003

(With Independent Auditors’ Report Thereon)

FNBH BANCORP, INC. AND SUBSIDIARIES

	Page

Independent Auditors' Report		1

Consolidated Balance Sheets		2

Consolidated Statements of Income		4

Consolidated Statements of Stockholders' Equity and Comprehensive Income		5

Consolidated Statements of Cash Flows		6

Notes to Consolidated Financial Statements		8

Management's Discussion and Analysis		32

Summary Financial Data		43

KPMG LLP
Suite 1200
150 West Jefferson
Detroit, MI 48226-4429

Independent Auditors’ Report

The Board of Directors and Stockholders
FNBH Bancorp, Inc.:

We have audited the consolidated balance sheets of FNBH Bancorp, Inc. and subsidiaries (Corporation) as of December 31, 2003 and 2002, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FNBH Bancorp, Inc. and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

/s/ KPMG LLP

January 16, 2004

FNBH BANCORP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2003 and 2002


Assets	2003			2002

Cash and cash equivalents:
Cash and due from banks	$	16,035,121			13,389,226
Short-term investments		16,848,371			19,649,178

Total cash and cash equivalents		32,883,492			33,038,404
Certificates of deposit		1,553,000			3,880,000
Investment securities held to maturity, net (fair value of
$16,006,625 in 2003 and $18,010,672 in 2002)		15,051,293			16,863,210
Investment securities available for sale, at fair value		26,787,863			16,753,001
Mortgage-backed securities held to maturity, net (fair value
of $26,173 in 2002)		--			26,033
Mortgage-backed securities available for sale, at fair value		12,513,486			9,924,802
FHLBI and FRB stock, at cost		1,082,750			1,044,250

Total investment and mortgage-backed securities		55,435,392			44,611,296
Loans:
Commercial		278,637,521			263,002,466
Consumer		35,002,556			33,666,705
Real estate mortgage		34,377,031			31,291,141

Total loans		348,017,108			327,960,312
Less unearned income		(931,453	)		(843,052	)
Less allowance for loan losses		(5,958,375	)		(5,794,399	)

Net loans		341,127,280			321,322,861
Bank premises and equipment, net		11,910,399			10,256,828
Land held for sale, net		1,400,290			1,530,290
Other real estate owned, held for sale		65,000			738,206
Accrued interest income and other assets		5,443,555			5,308,124

Total assets	$	449,818,408			420,686,009

See accompanying notes to consolidated financial statements.

Liabilities and Stockholders' Equity	2003

Deposits:
Demand (non-interest bearing)	$	69,233,515		62,231,909
NOW		46,056,749		41,423,298
Savings and money market accounts		140,639,653		138,961,869
Time		137,174,926		131,455,135
Brokered certificates of deposit		5,968,458		--

Total deposits		399,073,301		374,072,211

Other borrowings		5,327,708		5,569,255
Accrued interest, taxes, and other liabilities		4,181,918		3,464,929

Total liabilities		408,582,927		383,106,395

Commitments and contingencies

Stockholders' equity:
Common stock, $0 par value. Authorized 4,200,000 shares;
issued and outstanding 3,168,931 shares and 3,157,798 shares
at December 31, 2003 and 2002, respectively		5,725,898		5,465,089
Retained earnings		35,425,699		31,685,849
Unearned long term incentive plan		(222,652	)	(247,282	)
Accumulated other comprehensive income, net		306,536		675,958

Total stockholders' equity		41,235,481		37,579,614


Total liabilities and stockholders' equity	$	449,818,408		420,686,009

FNBH BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Income

Years ended December 31, 2003, 2002, and 2001

	2003
Interest and dividend income:
Interest and fees on loans	$	22,666,583	23,040,432		24,018,140
Interest and dividends on investment and mortgage-backed
securities:
U.S. Treasury and agency securities		975,069	1,188,802		1,167,648
Obligations of state and political subdivisions		770,269	836,703		904,026
Corporate bonds		188,463	365,785		143,071
Other securities		41,759	61,650		61,269
Interest on certificates of deposit and other bank deposits		109,201	177,677		30,300
Interest on short-term investments		104,818	58,618		770,588

Total interest and dividend income		24,856,162	25,729,667		27,095,042

Interest expense:
Interest on deposits		5,757,465	7,440,794		10,435,255
Interest on other borrowings		409,389	576,449		425,859

Total interest expense		6,166,854	8,017,243		10,861,114

Net interest income		18,689,308	17,712,424		16,233,928

Provision for loan losses		1,270,000	625,000		900,000

Net interest income after provision
for loan losses		17,419,308	17,087,424		15,333,928

Noninterest income:
Service charges and other fee income		3,136,077	2,973,691		2,642,886
Trust income		287,344	202,595		176,729
Gain on sale of loans		373,516	415,454		228,111
Gain on sale/call of investments		3,823	36,570		--
Other		73,376	(7,710	)	71,989

Total noninterest income		3,874,136	3,620,600		3,119,715

Noninterest expenses:
Salaries and employee benefits		7,048,376	6,445,184		5,955,251
Net occupancy expense		957,710	890,605		776,503
Equipment expense		1,008,275	866,409		830,322
Professional and service fees		1,240,923	1,276,489		1,357,989
Printing and supplies		275,999	327,284		255,892
Advertising		304,588	348,572		249,293
Other		2,012,239	1,621,000		1,635,481

Total noninterest expenses		12,848,110	11,775,543		11,060,731

Income before Federal income taxes		8,445,334	8,932,481		7,392,912

Federal income taxes		2,554,437	2,628,650		2,173,300

Net income	$	5,890,897	6,303,831		5,219,612

Basic and diluted net income per share	$	1.86	2.00		1.66

Cash dividends per share		0.680	0.628		0.60


See accompanying notes to consolidated financial statements

FNBH BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity
and Comprehensive Income

Years ended December 31, 2003, 2002, and 2001

	Common stock			Retained earnings			Unearned long term incentive plan			Accumulated other comprehensive income (loss)			Total

Balances at December 31, 2000	$	5,025,476			24,027,158			(183,188	)		17,189			28,886,635
Issued 6,438 shares for long term incentive plan		135,198			--			(135,198	)		--			--
Retired 790 shares from long term incentive plan		(16,450	)		--			16,450			--			--
Issued 5,606 shares for employee stock purchase plan		102,546			--			--			--			102,546
Amortization of long term incentive plan		--			--			70,793			--			70,793
Comprehensive income:
Net income		--			5,219,612			--			--			5,219,612
Changes in unrealized gain on securities
available for sale, net of tax		--			--			--			9,772			9,772

Total comprehensive income		5,229,384
Cash dividends ($0.60 per share)		--			(1,885,555	)		--			--			(1,885,555	)

Balances at December 31, 2001		5,246,770			27,361,215			(231,143	)		26,961			32,403,803
Issued 5,246 shares for long term incentive plan		109,799			--			(109,799	)		--			--
Issued 686 shares for current directors' fees		14,483			--			--			--			14,483
Issued 3,988 shares for employee stock purchase plan		70,428			--			--			--			70,428
Issued 1,128 shares for directors' variable fee plan		23,609			--			--			--			23,609
Amortization of long term incentive plan		--			--			93,660			--			93,660
Comprehensive income:
Net income		--			6,303,831			--			--			6,303,831
Changes in unrealized gain on securities
available for sale, net of tax		--			--			--			648,997			648,997

Total comprehensive income		6,952,828
Cash dividends ($0.628 per share)		--			(1,979,197	)		--			--			(1,979,197	)

Balances at December 31, 2002		5,465,089			31,685,849			(247,282	)		675,958			37,579,614
Issued 4,482 shares for long term incentive plan		110,137			--			(110,137	)		--			--
Issued 907 shares for current directors' fees		21,954			--			--			--			21,954
Issued 4,055 shares for employee stock purchase plan		88,722			--			--			--			88,722
Issued 1,689 shares for directors' variable fee plan		39,996			--			--			--			39,996
Amortization of long term incentive plan		--			--			134,767			--			134,767
Comprehensive income:
Net income		--			5,890,897			--			--			5,890,897
Changes in unrealized gain on securities
available for sale, net of tax		--			--			--			(369,422	)		(369,422	)

Total comprehensive income		5,521,475
Cash dividends ($0.68 per share)		--			(2,151,047	)		--			--			(2,151,047	)

Balances at December 31, 2003	$	5,725,898			35,425,699			(222,652	)		306,536			41,235,481

See accompanying notes to consolidated financial statements.

FNBH BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended December 31, 2003, 2002, and 2001

	2003

Cash flows from operating activities:
Net income	$	5,890,897		6,303,831		5,219,612
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses		1,270,000		625,000		900,000
Depreciation and amortization		992,986		897,800		863,911
Deferred Federal income tax benefit		(118,597	)	(1,300	)	(89,400	)
Net amortization on investment securities		126,508		239,341		68,024
Earned portion of long term incentive plan		134,767		93,660		70,793
Loss on disposal of equipment		8,958		4,518		554
Gain on sale/call of investments		(3,823	)	(36,570	)	--
Gain on sale of other real estate owned		(22,710	)	--		--
Gain on sale of loans		(373,516	)	(415,454	)	(228,111	)
Proceeds from sale of loans		23,486,120		30,465,662		16,869,945
Origination of loans held for sale		(22,524,120	)	(30,948,790	)	(17,945,804	)
Proceeds from sale of other real estate		760,916		546,812		--
(Increase) decrease in accrued interest
income and other assets		48,167		(672,538	)	76,923
Increase (decrease) in accrued interest,
taxes, and other liabilities		906,988		17,599		(155,045	)

Net cash provided by operating
activities		10,583,541		7,119,571		5,651,402

Cash flows from investing activities:
Purchases of available-for-sale securities		(22,783,210	)	(6,035,081	)	(33,024,189	)
Proceeds from sales of available-for-sale
securities		--		7,788,508		--
Proceeds from maturities of available-for-sale
securities		3,500,000		4,390,000		14,000,000
Repayments from mortgage-backed securities
available for sale		5,977,649		5,061,306		901,553
Purchases of held-to-maturity securities		(234,270	)	(203,250	)	--
Proceeds from maturities and calls of held-to-
maturity securities		2,046,100		1,316,175		892,000
Repayments from mortgage-backed securities
held to maturity		26,028		51,835		499,872
Purchases of certificates of deposit		(1,187,000	)	--		(5,917,000	)
Maturity of certificates of deposit		3,514,000		2,037,000		--
Purchase of FHLBI stock		(38,500	)	(211,500	)	--
Purchase of loans		(3,000,000	)	(3,116,728	)	(1,192,540	)
Net increase in loans		(18,662,903	)	(38,059,057	)	(28,145,232	)
Capital expenditures		(2,655,515	)	(2,052,498	)	(1,732,370	)

Net cash used in investing activities		(33,497,621	)	(29,033,290	)	(53,717,906	)

FNBH BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended December 31, 2003, 2002, and 2001

	2003

Cash flows from financing activities:
Net increase in deposits	$	19,032,632		22,403,461		41,454,932
Increase in brokered certificates of deposit		5,968,458		--		--
Payments on other borrowings		(241,547	)	(223,656	)	(207,089	)
Dividends paid		(2,151,047	)	(1,979,197	)	(1,885,555	)
Shares issued for employee stock purchase
plan and directors' compensation		150,672		108,520		102,546

Net cash provided by financing
activities		22,759,168		20,309,128		39,464,834

Net decrease in cash and
cash equivalents		(154,912	)	(1,604,591	)	(8,601,670	)

Cash and cash equivalents at beginning of year		33,038,404		34,642,995		43,244,665

Cash and cash equivalents at end of year	$	32,883,492		33,038,404		34,642,995

Supplemental disclosures:
Interest paid	$	6,168,253		8,239,097		11,064,961
Federal income taxes paid		2,460,000		2,628,000		2,357,000
Supplemental schedule of noncash investing
and financing activities:
Loans transferred to other real estate		95,000		1,285,018		--
Loans charged off		1,282,563		767,302		517,165

See accompanying notes to consolidated financial statements.

FNBH BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

(1)

Summary of Significant Accounting Policies

Principles of Consolidation

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

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

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

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The accounting and reporting policies of FNBH Bancorp, Inc. and subsidiaries (Corporation) conform to accounting principles generally accepted in the United States of America and to general practice within the banking industry. The following is a description of the more significant of these policies.

(a)

Cerrtificates of Deposit

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

(b)

Investment and Mortgage-Backed Securities

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

Investment securities that fail to meet the ability and positive-intent criteria are accounted for as securities available for sale and stated at fair value, with unrealized gains and losses, net of income taxes, reported as a separate component of other comprehensive income until realized.

Trading account securities are carried at fair value. Realized and unrealized gains or losses on trading securities are included in noninterest income.

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

8	(Continued)

FNBH BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

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

(c)

Loans

Loans are stated at their principal amount outstanding, net of an allowance for loan losses and unearned discount. Interest on loans is accrued daily based on the outstanding principal balance. Loan origination fees and certain direct loan origination costs are deferred and recognized over the lives of the related loans as an adjustment of the yield. Mortgage loans held for sale are carried at the lower of cost or market, determined on a net aggregate basis. Market is determined on the basis of delivery prices in the secondary mortgage market. When loans are sold, gains and losses are recognized based on the specific identification method.

The Bank originates mortgage loans for sale to the secondary market and sells the loans with servicing retained.

The total cost of mortgage loans originated with the intent to sell is allocated between the loan servicing right and the mortgage loan without servicing, based on their relative fair value at the date of origination. The capitalized cost of loan servicing rights is amortized in proportion to, and over the period of, estimated net future servicing revenue.

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

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

(d)

Allowance for Loan Losses

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

9	(Continued)

FNBH BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

Impaired loans have been identified in accordance with provisions of Statement of Financial Accounting Standards (SFAS) No. 114. The Bank considers a loan to be impaired when it is probable that it will be unable to collect all or part of amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at a loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.

(e)

Nonperforming Assets

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

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

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

Interest income on impaired loans is accrued based on the principal amounts outstanding. The accrual of interest is discontinued when an impaired loan becomes 90 days past due. The Bank utilized the “fair value of collateral” method to measure impairment, as virtually all of the loans considered to be impaired are commercial mortgage loans.

(f)

Real Estate

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

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

(g)

Bank Premises and Equipment

Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization, computed on the straight-line method, are charged to operations over the estimated useful lives of the assets.

10	(Continued)

FNBH BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

(h)

Federal Income Taxes

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

(i)

Stock-Based Compensation

At December 31, 2003 and 2002, the Bank has two stock-based compensation plans, which are described more fully in notes 16 and 17.

(j)

Statements of Cash Flows

For purposes of reporting cash flows, cash equivalents include amounts due from banks and federal funds sold and other short-term investments.

(k)

Comprehensive Income

SFAS No. 130, Reporting Comprehensive Income, established standards for the reporting and display of comprehensive income and its components (such as changes in unrealized gains and losses on securities available for sale) in a financial statement that is displayed with the same prominence as other financial statements. The Bank reports comprehensive income within the statement of stockholders’ equity. Comprehensive income includes net income and any changes in equity from nonowner sources that bypass the income statement.

(l)

Earnings Per Share

Earnings per share of common stock are based on the weighted average number of common shares outstanding during the year.

(m)

Stock Split

The Corporation issued a 2-for-1 stock split, payable as a dividend of one share for each share of its stock held of record July 1, 2002 paid July 10, 2002. The 2-for-1 split has been retroactively applied to all share and per-share information for 2001.

(o)

Reclassification

Certain reclassifications of 2002 and 2001 information have been made to conform to the current year presentation.

(2)

Certificates of Deposit

At December 31, 2003, the scheduled maturities of brokered certificates were:


Maturing in 2004	$	1,553,000

	$	1,553,000

11	(Continued)

FNBH BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

(3)

Investment and Mortgage-Backed Securities

A summary of the amortized cost and approximate fair value of investment and mortgage-backed securities at December 31, 2003 follows:

	Held to maturity				Available for sale
	Amortized cost		Approximate fair value		Amortized cost		Approximate fair value

U.S. Treasury and agency
securities $		--		--		21,985,556		22,151,003
Obligations of state and
political subdivisions		15,051,293		16,006,625		--		--
Corporate bonds		--		--		4,514,599		4,636,860

		15,051,293		16,006,625		26,500,155		26,787,863
Mortgage-backed securities		--		--		12,336,459		12,513,486

	$	15,051,293		16,006,625		38,836,614		39,301,349

A summary of unrealized gains and losses on investment and mortgage-backed securities at December 31, 2003 follows:

	Held to maturity				Available for sale
	Gross unrealized gains		Gross unrealized losses		Gross unrealized gains		Gross unrealized losses

U.S. Treasury and agency
securities $		--		--		325,413		159,966
Obligations of state and
political subdivisions		957,246		1,914		--		--
Corporate bonds		--		--		122,261		--
Mortgage-backed securities		--		--		183,728		6,701

	$	957,246		1,914		631,402		166,667

As of and for the year ended December 31, 2003, the Corporation had no other-than-temporary impairments. The securities held by the Corporation at December 31, 2003 with unrealized losses were all collateralized by the U.S. Government and its agencies. The unrealized loss has existed for less than 12 months and is caused by market interest rate movements.

12	(Continued)

FNBH BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

The amortized cost and approximate fair value of investment and mortgage-backed securities at December 31, 2003, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Held to maturity				Available for sale
	Amortized cost		Approximate fair value		Amortized cost		Approximate fair value

Due in one year or less	$	3,115,340		3,174,341		11,505,883		11,660,092
Due after one year through
five years		9,147,796		9,798,561		14,017,621		14,170,240
Due after five years through
ten years		2,788,157		3,033,723		976,650		957,531

		15,051,293		16,006,625		26,500,154		26,787,863
Mortgage-backed securities		--		--		12,336,459		12,513,486

	$	15,051,293		16,006,625		38,836,613		39,301,349

A summary of the amortized cost and approximate fair value of investment and mortgage-backed securities at December 31, 2002 follows:

	Held to maturity				Available for sale
	Amortized cost		Approximate fair value		Amortized cost		Approximate fair value

U.S. Treasury and agency
securities $		--		--		11,489,812		12,031,911
Obligations of state and
political subdivisions		16,863,210		18,010,672		--		--
Corporate bonds		--		--		4,560,635		4,721,090

		16,863,210		18,010,672		16,050,447		16,753,001
Mortgage-backed securities		26,033		26,173		9,603,198		9,924,802

	$	16,889,243		18,036,845		25,653,645		26,677,803

13	(Continued)

FNBH BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

A summary of unrealized gains and losses on investment and mortgage-backed securities at December 31, 2002 follows:

	Held to maturity				Available for sale
	Gross unrealized gains		Gross unrealized losses		Gross unrealized gains		Gross unrealized losses

U.S. Treasury and agency
securities	$	--		--		542,099		--
Obligations of state and
political subdivisions		1,148,157		695		--		--
Corporate bonds		--		--		160,455		--
Mortgage-backed securities		140		--		321,604		--

	$	1,148,297		695		1,024,158		--

The amortized cost and approximate fair value of investment and mortgage-backed securities at December 31, 2002, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Held to maturity				Available for sale
	Amortized cost		Approximate fair value		Amortized cost		Approximate fair value

Due in one year or less	$	1,398,117		1,414,819		1,503,448		1,547,791
Due after one year through
five years		10,147,958		10,853,259		14,546,999		15,205,210
Due after five years through
ten years		5,317,135		5,742,594		--		--

		16,863,210		18,010,672		16,050,447		16,753,001
Mortgage-backed securities		26,033		26,173		9,603,198		9,924,802

	$	16,889,243		18,036,845		25,653,645		26,677,803

Proceeds on sale/calls of available-for-sale securities totaled approximately $3,500,000, $7,789,000, and $0 during 2003, 2002, and 2001, respectively; gross realized gains of $4,587, $38,000, and $0 and gross realized losses of $764, $6,000, and $0 were recorded as a result of sales of available-for-sale securities during 2003, 2002, and 2001.

14	(Continued)

FNBH BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

The amortized cost and approximate fair value of investment securities of states (including all their political subdivisions) that individually exceeded 10% of stockholders’equity at December 31, 2003 and 2002 are as follows:

	2003				2002
	Amortized cost		Approximate fair value		Amortized cost		Approximate fair value

State of Michigan	$	9,183,802		9,738,000		9,803,413		10,457,000

Investment securities, with an amortized cost of approximately $1,848,000 at December 31, 2003 and $1,803,000 at December 31, 2002, were pledged to secure public deposits and for other purposes as required or permitted by law.

The Bank owns stock in both the Federal Home Loan Bank of Indianapolis (FHLBI) and the Federal Reserve Bank (FRB). The Bank is required to hold stock in the FHLBI equal to 5% of the institution’s borrowing capacity with the FHLBI. The Bank’s investment in FHLBI stock amounted to $1,038,500 and $1,000,000 as of December 31, 2003 and 2002, respectively. The Bank’s investment in FRB stock, which totaled $44,250 at December 31, 2003 and 2002, respectively, is a requirement for the Bank’s membership in the Federal Reserve System.

(4)

Loans

Loans on nonaccrual amounted to $4,292,889, $3,288,000, and $2,636,000, at December 31, 2003, 2002, and 2001, respectively. If these loans had continued to accrue interest in accordance with their original terms, approximately $320,000, $181,000, and $220,000 of interest income would have been recognized in 2003, 2002, and 2001, respectively. The Bank had no troubled-debt restructured loans at December 31, 2003 and 2002.

Details of past-due and nonperforming loans follow:

	2003			2003
	90 days past due and still accruing			Nonaccrual

Commercial and mortgage
loans secured by real estate	$	--	763,000		4,253,075	2,931,000
Consumer loans		--	3,000		24,882	70,000
Commercial and other loans		--	43,000		14,932	287,000

	$	--	809,000		4,292,889	3,288,000

Impaired loans totaled $9.6 million, $9.3 million, and $8.7 million at December 31, 2003, 2002, and 2001, respectively. Specific reserves relating to these loans were $1.6 million, $2.0 million, and $1.6 million at December 31, 2003, 2002, and 2001, respectively. These reserves were calculated in accordance with SFAS No. 114.

15	(Continued)

FNBH BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

Cash receipts received and recognized as income on impaired loans approximated $308,000, $409,000, and $550,000 for the years ended December 31, 2003, 2002, and 2001, respectively. Average impaired loans for the years ended December 31, 2003, 2002, and 2001 were approximately $9.6 million, $8.8 million, and $6.8 million, respectively.

Loans serviced for others were approximately $59.4 million, $64.5 million, and $58.3 million at December 31, 2003, 2002, and 2001, respectively.

The Bank capitalized $140,000, $171,000, and $92,000 in mortgage servicing rights and incurred approximately $94,000, $70,000, and $52,000 in related amortization expense during 2003, 2002, and 2001, respectively. At December 31, 2003 and 2002, these mortgage servicing rights had a gross book value of $380,000 and $335,000 and fair value of approximately $375,000 and $350,000, respectively. The weighted average amortization period for mortgage servicing rights capitalized in 2003 is approximately 10 years. Mortgage loans with mortgage servicing rights capitalized totaled approximately $43.2 million at December 31, 2003 and $43.7 million at December 31, 2002. The valuation allowance for capitalized mortgage servicing rights was $137,000 at December 31, 2003, and no valuation allowance was considered necessary as of December 31, 2002.

Estimated aggregate amortization expense relating to the Bank’s mortgage servicing rights as of December 31, 2003 is as follows:

Year
2004	$	90,000
2005		72,000
2006		56,000
2007		46,000
�� 2008		38,000
2009 and thereafter		78,000

	$	380,000

Included in real estate loans at December 31, 2003 and 2002 were approximately $0 and $728,000, respectively, of fixed-rate mortgage loans held for sale. The Bank enters into forward commitments to sell these loans into the secondary market prior to origination. Additionally, the Bank had 45-day forward commitments to sell mortgages as of December 31, 2003, which had not yet been funded. These commitments approximated $200,000.

16	(Continued)

FNBH BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

(5)

Allowance for Loan Losses

The following represents a summary of the activity in the allowance for loan losses for the years ended December 31, 2003, 2002, and 2001:

	2003

Balance at beginning of year	$	5,794,399		5,667,906
Provision charged to operations		1,270,000		625,000
Loans charged off		(1,282,563	)	(767,302	)
Recoveries of loans charged off		176,539		268,795

Balance at end of year	$	5,958,375		5,794,399

(6)

Bank Premises and Equipment

A summary of bank premises and equipment, and related accumulated depreciation and amortization, at December 31, 2003 and 2002 follows:

	2003

Land and land improvements	$	3,041,082		2,642,691
Bank premises		10,008,044		8,675,995
Furniture and equipment		6,263,188		5,623,251

		19,312,314		16,941,937
Less accumulated depreciation and amortization		(7,401,915	)	(6,685,109	)

	$	11,910,399		10,256,828

(7)

Land Held for Sale

In 1997, the Bank purchased an option for $900,000 and, in 1998, exercised that option for approximately $3 million for a tract of land. Subsequent improvements to the land were made amounting to approximately $200,000.

During 1998, the Bank allocated approximately $800,000 of the carrying value of the property to land for a branch site. During 2000, one parcel of the property was sold. The remaining property is held for sale.

The Bank also reduced the carrying cost of the land held for sale by approximately $130,000, $0, and $0, during 2003, 2002, and 2001, respectively, to provide for estimated disposal costs and/or decline in estimated market value. This charge was included as a component of noninterest expense.

(8)

Other Real Estate Owned

At December 31, 2003, the Bank owned two foreclosed properties with a lower of cost or market value of $65,000. Costs to maintain the properties are included as a component of noninterest expense. A gain or loss will be recognized upon the sale of the properties, which will be included as a component of noninterest income or expense.

17	(Continued)

FNBH BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

In February 2002, the Bank foreclosed on real estate containing partially completed condominiums, which the Bank held as collateral for a $1.4 million commercial loan. At the time of foreclosure, approximately $100,000 was charged off against the allowance for loan losses to bring the property to its estimated fair market value less estimated disposal costs. During 2003 and 2002, the collateral was completely sold, and a gain of $23,000 was included as a component of noninterest income in 2003.

(9)

Time Certificates of Deposit

At December 31, 2003, the scheduled maturities of time deposits with a remaining term of more than one year were:



Year of maturity:
2005	$	27,689,309
2006		2,952,074
2007		8,728,454
2008		3,061,853
2009 and thereafter		436,972

	$	42,868,662

Included in time deposits are certificates of deposit in amounts of $100,000 or more. These certificates and their remaining maturities at December 31, 2003, 2002, and 2001 are as follows:

	2003

Three months or less	$	16,246,970	10,445,148	21,009,465
Three through six months		9,652,578	3,361,174	14,435,441
Six through twelve months		16,862,463	3,499,887	5,355,211
Over twelve months		11,349,341	26,646,664	3,907,542

	$	54,111,352	43,952,873	44,707,659

Interest expense attributable to the above deposits amounted to approximately $1,472,000, $1,436,000, and $2,209,000 in 2003, 2002, and 2001, respectively.

18	(Continued)

FNBH BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

(10)

Other Borrowings

The Bank has a borrowing capacity of approximately $32,100,000 with the FHLBI and had advances outstanding of approximately $5,328,000 and $5,569,000 at December 31, 2003 and 2002, respectively. Variable- or fixed-rate advances are available with terms ranging from one day to 10 years. An outstanding advance requires 125% collateral coverage by one-to-four family whole-mortgage loans. A summary of outstanding advances at December 31, 2003 follows:

Maturity	Weighted average interest rate			Amount

Fixed rate:
Within one year		7.29	%	$	260,872
Two years		7.18	%		3,281,742
Three years		7.29	%		304,281
Four years		7.29	%		328,623
Five years		7.29	%		354,913
Thereafter		7.29	%		797,277

				$	5,327,708

(11)

Deferred Gain on the Sale of Real Estate

In December 2003, the Bank sold a piece of real estate previously classified as facilities held for sale on the balance sheet and provided financing to the buyer. In accordance with SFAS No. 66, Accounting for Sales of Real Estate, the Bank deferred the gain of $299,000 on the sale under the installment method. This liability is included in other liabilities as of December 31, 2003.

(12)

Federal Income Taxes

Federal income tax expense (benefit) consists of:

	2003

Current	$	2,673,034		2,629,950		2,262,700
Deferred		(118,597	)	(1,300	)	(89,400	)

	$	2,554,437		2,628,650		2,173,300

19	(Continued)

FNBH BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

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

	2003

Computed "expected" tax expense	$	2,871,414		3,037,043		2,513,600
Increase (reduction) in tax resulting from:
Tax-exempt interest and dividends, net		(336,850	)	(367,786	)	(380,800	)
Other, net		19,873		(40,607	)	40,500

	$	2,554,437		2,628,650		2,173,300

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2003 and 2002 are presented below:

	2003

Deferred tax assets:
Allowance for loan losses	$	1,872,201	1,816,449
Other		717,818	581,605

Total gross deferred tax assets		2,590,019	2,398,054
Deferred tax liabilities:
Deferred loan fees		121,608	139,424
Unrealized gain on securities available for sale		158,200	348,200
Other		306,114	214,930

Total gross deferred tax liabilities		585,922	702,554

Net deferred tax asset	$	2,004,097	1,695,500

The deferred tax assets are subject to certain asset realization tests. Management believes no valuation allowance is required at December 31, 2003, due to the combination of potential recovery of tax previously paid and the reversal of certain deductible temporary differences.

(13)

Related Party Transactions

Certain directors and executive officers, including their immediate families and companies in which they are principal owners, were loan customers of the Bank during 2003 and 2002. Such loans were made in the ordinary course of business, in accordance with the Bank’s normal lending policies, including the interest rate charged and collateralization, and do not represent more than a normal credit risk.

20	(Continued)

FNBH BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

Loans to related parties are summarized below for the periods indicated:

	2003

Balance at beginning of year	$	4,410,000		4,658,000

New loans and related parties		166,000		247,000
Loan repayments		(349,900	)	(495,000	)

Balance at end of year	$	4,226,100		4,410,000

(14)

Leases

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

Future minimum lease payments under the noncancelable lease as of December 31, 2003 are as follows:



Year ending December 31:
2004	$	46,660
2005		46,660
2006		46,660
2007		34,995

	$	174,975

Rental expense charged to operations in 2003, 2002, and 2001 amounted to approximately $60,000, $47,000, and $40,000, respectively, including amounts paid under short-term, cancelable leases.

(15)

Pension Plan

The Bank sponsors a defined contribution money purchase thrift plan covering all employees 21 years of age or older who have completed one year of service as defined in the plan agreement. Contributions are equal to 5% of total employee earnings plus 50% of employee contributions (limited to 10% of their earnings) or the maximum amount permitted by the Internal Revenue Code. The pension plan expense of the Bank for 2003, 2002, and 2001 was approximately $344,000, $247,000, and $302,000, respectively.

(16)

Long Term Incentive Plan

The Corporation maintains a Long Term Incentive Plan under which stock options and restricted stock may be granted to employees. To date, no stock options have been granted under the plan. Restricted stock was awarded to key employees, beginning in 1998, providing for the immediate award of the Corporation’s stock, subject to a vesting period, which takes place over five years. The awards are recorded at fair market value and amortized into salary expense over the vesting period. Compensation costs related to restricted stock awards included in salary expense in 2003, 2002, and 2001 amounted to $134,767, $93,660, and $70,793, respectively.

21	(Continued)

FNBH BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

(17)

Directors’ Stock Fee Plan

Each director of the Corporation who is not an officer or employee of any subsidiary of the Corporation is eligible to participate in the Compensation Plan for Nonemployee Directors. The plan fees consist of both a fixed and variable component. The fixed component equals the per-meeting fee paid for attendance at board meetings of both the Bank and the Corporation and any committees of their respective boards. The variable component of the plan, which was added in 2002, is equal to the total fixed fees paid to a specific director for services performed the preceding calendar year, multiplied by the percentage of base compensation payable to officers of the Bank for the preceding calendar year under the Bank’s Profit Sharing Plan. Expenses related to both fixed and variable fees are recorded as noninterest expense in the year incurred regardless of payment method. Compensation costs related to both fixed and variable stock directors’ fees included in noninterest expense in 2003, 2002, and 2001 amounted to $80,584, $101,667, and $59,817, respectively.

Fixed directors’ fees may be paid in cash, to a current stock purchase account, to a deferred cash investment account, or to a deferred stock account according to each eligible director’s payment election. Current stock is issued quarterly based on the fair market value of the stock for the preceding quarter. When deferred stock is elected, payments are credited to a deferred stock account for each participating director, and stock units are computed quarterly based on the fair market value of the stock for the preceding quarter. When dividends are declared, they are computed based on the stock units available in each director’s deferred account and are reinvested in stock units. The units will be converted to shares and will be issued to participating directors upon retirement. As of December 31, 2003, there were approximately 14,300 shares earned and available for distribution in the fixed-fee deferred stock accounts.

Variable directors’ fees may be paid to a current stock purchase account or to a deferred stock account. Current stock is issued based on the average fair market value of the stock for the preceding quarter. Deferred stock units are computed for directors electing to use a deferred stock account, and dividends were reinvested throughout the year as declared. As of December 31, 2003, there were approximately 2,300 shares earned and available for distribution in the variable-fee deferred stock accounts.

(18)

Employees’Stock Purchase Plan

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

(19)

Financial Instruments with Off-Balance-Sheet Risk

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

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

22	(Continued)

FNBH BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

Financial instruments whose contract amounts represent credit risk at December 31, 2003 and 2002 are as follows:

	2003

Consumer	$	13,743,000	14,145,000
Commercial construction		11,055,000	10,523,000
Commercial		34,617,000	43,810,000

Total credit commitments	$	59,415,000	68,478,000

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

As of December 31, 2003 and 2002, the Bank has outstanding irrevocable standby letters of credit, which carry a maximum potential commitment of approximately $2,551,000 and $3,077,000, respectively. These letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The majority of these letters of credit are short-term guarantees of one year or less, although some have maturities which extend as long as two years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Bank primarily holds real estate as collateral supporting those commitments for which collateral is deemed necessary. The extent of collateral held on those commitments at December 31, 2003 and 2002, where there is collateral, is in excess of the committed amount. A letter of credit is not recorded on the balance sheet until a customer fails to perform.

(20)

Capital

The Bank is 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 Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital classification is also subject to qualitative judgments by regulators with regard to components, risk weightings, and other factors.

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

23	(Continued)

FNBH BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

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

The Bank’s actual capital amounts and ratios are also presented in the following table as of December 31, 2003 and 2002:

	Actual					For capital adequacy purposes			To be well capitalized under prompt corrective action provisions
	Amount		Ratio			Amount		Ratio	Amount		Ratio

As of December 31, 2003:
Total capital (to risk-
weighted assets)	$	43,054,000		11.68	%	$	29,483,000	>=8%	$	36,854,000	>=10%
Tier 1 capital (to risk-
weighted assets)		38,447,000		10.43	%		14,742,000	>=4%		22,113,000	>=6%
Tier 1 capital (to
average assets)		38,447,000		8.95	%		17,187,000	>=4%		21,483,000	>=5%

As of December 31, 2002:
Total capital (to risk-
weighted assets)		38,838,000		11.08	%		28,038,000	>=8%		35,048,000	>=10%
Tier 1 capital (to risk-
weighted assets)		34,457,000		9.83	%		14,019,000	>=4%		21,029,000	>=6%
Tier 1 capital (to
average assets)		34,457,000		8.47	%		16,273,000	>=4%		20,341,000	>=5%

(21)

Net Income Per Common Share

Basic net income per common share is computed by dividing net income applicable to common stock by the weighted average number of shares of common stock outstanding during the period. Diluted net income per common share is computed by dividing net income applicable to common stock by the weighted average number of shares and potential common stock, such as stock options outstanding during the period, of which there were none.

	Year ended December 31
	2003		2002		2001

Basic:
Average shares outstanding		3,162,836		3,152,739		3,141,118

Net income	$	5,890,897		6,303,831		5,219,612

Net income applicable to common stock		5,890,897		6,303,831		5,219,612

Basic and diluted net income per share		1.86		2.00		1.66

24	(Continued)

FNBH BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

(22)

Contingent Liabilities

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

(23)

Fair Value of Financial Instruments

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

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

Cash and cash equivalents – The carrying amounts reported in the consolidated balance sheet for cash federal funds and short-term investments sold reasonably approximate those assets’ fair values.

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

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

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

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

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

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

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

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

Off-balance-sheet instruments – The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of commitments to extend credit, including letters of credit, is estimated to approximate their aggregate book balance.

25	(Continued)

FNBH BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

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

	2003				2003
	Carrying value		Fair value		Carrying value		Fair value

Financial assets:
Cash and cash equivalents	$	32,883,000		32,900,000		33,038,000		33,000,000
Certificates of deposit		1,553,000		1,600,000		3,880,000		3,900,000
Investment and mortgage-backed securities		54,352,000		55,300,000		43,567,000		44,700,000
FHLBI and FRB stock		1,083,000		1,100,000		1,044,000		1,000,000
Loans, net		341,127,000		344,300,000		321,323,000		327,400,000
Accrued interest income		1,240,000		1,200,000		1,985,000		2,000,000

Financial liabilities:
Deposits:
Demand		69,234,000		69,200,000		62,232,000		62,200,000
NOW		46,057,000		46,100,000		41,423,000		41,400,000
Savings and money market accounts		140,640,000		140,600,000		138,962,000		139,000,000
Time		137,175,000		139,000,000		131,455,000		134,200,000
Brokered certificates		5,968,000		6,000,000		--		--
Other borrowings		5,328,000		5,800,000		5,569,000		6,200,000
Accrued interest		609,000		600,000		611,000		600,000

Limitations

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

(24)

Dividend Restrictions

On a parent company-only basis, the Corporation’s only source of funds is dividends paid by the Bank. The ability of the Bank to pay dividends is subject to limitations under various laws and regulations and to prudent and sound banking principles. The Bank may declare a dividend without the approval of the Office of Comptroller of the Currency (OCC) unless the total dividend in a calendar year exceeds the total of its net profits for the year combined with its retained profits of the two preceding years. Under these provisions, approximately $12.1 million was available for dividends on December 31, 2003 without the approval of the OCC.

26	(Continued)

FNBH BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

(25)

Condensed Financial Information – Parent Company Only

The condensed balance sheets at December 31, 2003 and 2002, and the condensed statements of income and cash flows for the years ended December 31, 2003, 2002, and 2001, of FNBH Bancorp, Inc. follow:

Condensed Balance Sheets

	2003

Assets:
Cash	$	77,379	33,096
Investment in subsidiaries:
First National Bank in Howell		37,948,788	34,332,709
H.B. Realty Co.		2,171,163	2,168,853
FNBH Mortgage Company, LLC		805,000	800,000
Other assets		257,851	266,156

	$	41,260,181	37,600,814

Liabilities and stockholders' equity:
Other liabilities	$	24,700	21,200
Stockholders' equity		41,235,481	37,579,614

Total liabilities and stockholders' equity	$	41,260,181	37,600,814

Condensed Statements of Income

	Year ended December 31
	2003		2002		2001

Operating income:
Dividends from subsidiaries	$	2,014,688		1,813,875		1,920,050

Total operating income		2,014,688		1,813,875		1,920,050

Operating expenses:
Administrative and other expenses		46,602		46,944		33,084

Total operating expenses		46,602		46,944		33,084

Income before equity in undistributed net income
of subsidiaries		1,968,086		1,766,931		1,886,966
Equity in undistributed net income of subsidiaries		3,922,811		4,536,900		3,332,646

Net income	$	5,890,897		6,303,831		5,219,612

27	(Continued)

FNBH BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

Condensed Statements of Cash Flows

	Year ended December 31
	2003			2002			2001

Net income	$	5,890,897			6,303,831			5,219,612
Adjustments to reconcile net income to
net cash from operating activities:
Decrease (increase) in other assets		8,305			16,361			(166,799	)
Increase in other liabilities		3,500			4,700			3,750
Change in long term incentive plan		24,630			(16,139	)		(47,955	)
Equity in undistributed net income of subsidiaries		(3,922,811	)		(4,536,900	)		(3,332,646	)

Total adjustments		(3,886,376	)		(4,531,978	)		(3,543,650	)

Net cash provided by operating activities		2,004,521			1,771,853			1,675,962

Cash flow from investing activities:
Investments in and advancements to subsidiary, net		(70,000	)		(3,500	)		(18,000	)

Net cash used in investing activities		(70,000	)		(3,500	)		(18,000	)

Cash flow from financing activities:
Dividends paid		(2,151,047	)		(1,979,197	)		(1,885,555	)
Common stock issued		260,809			218,319			221,294

Net cash used in financing activities		(1,890,238	)		(1,760,878	)		(1,664,261	)

Net increase (decrease) in cash		44,283			7,475			(6,299	)

Cash at beginning of year		33,096			25,621			31,920

Cash at end of year	$	77,379			33,096			25,621

28	(Continued)

FNBH BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

(26)

Quarterly Financial Data – Unaudited

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

	Quarters ended in 2003
	March 31		June 30		September 30		December 31

Selected operations data:
Interest income	$	6,218,947		6,181,657		6,255,806		6,199,752
Net interest income		4,497,121		4,630,089		4,786,999		4,775,099
Provision for loan losses		325,000		275,000		200,000		470,000
Income before income taxes		1,891,174		1,908,863		2,713,429		1,931,868
Net income		1,317,649		1,327,413		1,871,729		1,374,106
Basic and diluted net income
per share		0.42		0.42		0.59		0.43
Cash dividends per share		0.17		0.17		0.17		0.17

	Quarters ended in 2002
	March 31		June 30		September 30		December 31

Selected operations data:
Interest income	$	6,397,381		6,518,594		6,433,960		6,379,732
Net interest income		4,264,102		4,493,223		4,449,512		4,505,587
Provision for loan losses		--		--		325,000		300,000
Income before income taxes		2,259,352		2,298,231		2,199,421		2,175,477
Net income		1,575,552		1,589,131		1,537,321		1,601,827
Basic and diluted net income
per share		0.50		0.50		0.49		0.51
Cash dividends per share		0.13		0.16		0.17		0.17

(27)

Impact of New Accounting Standards

In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This Statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers, and amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002, with early adoption of the provisions related to the rescission of FASB Statement No. 4 encouraged. Upon adoption, enterprises must reclassify prior-period items that do not meet the extraordinary-item classification criteria in Accounting Principles Bulletin (APB) 30. Adoption of this Statement did not have a significant impact on the Bank’s results of operations or financial condition.

29	(Continued)

FNBH BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring) (EITF 94-3). The principal difference between SFAS No. 146 and EITF 94-3 relates to their requirements for recognition of a liability for a cost associated with an exit or disposal activity. This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. Under EITF 94-3, the liability was recognized at the date of an entity’s commitment to an exit plan. SFAS No. 146 is effective for exit or disposal activities (including restructuring) that are initiated after December 31, 2002, with early adoption encouraged. Adoption of this Statement did not have a significant impact on the Bank’s results of operations or financial condition.

On December 31, 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, which amends SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 148 amends the disclosure requirements in SFAS No. 123 for stock-based compensation for annual periods ending after December 15, 2002 and for interim periods beginning after December 15, 2002. These disclosure requirements apply to all companies, including those that continue to recognize stock-based compensation under APB Opinion No. 25, Accounting for Stock Issued to Employees. Effective for financial statements for fiscal years ending after December 15, 2002, SFAS No. 148 also provides three alternative transition methods for companies that choose to adopt the fair-value measurement provisions of SFAS No. 123. Earlier application of those transition methods is permitted for entities with a fiscal year ending prior to December 15, 2002 provided that financial statements for the 2002 fiscal year have not been issued as of December 31, 2002. Adoption of this Statement did not have a significant impact on the Bank’s results of operations or financial condition.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, to clarify the definition of a derivative and expand the nature of exemptions from FASB Statement No. 133. This Statement also clarifies the application of hedge accounting when using certain instruments and the application of paragraph 13 of FASB Statement No. 133 to embedded derivative instruments in which the underlying is an interest rate. Finally, the Statement modifies the cash flow presentation of derivative instruments that contain financing elements. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, with early adoption encouraged. Adoption of this Statement did not have a significant impact on the Bank’s results of operations or financial condition.

30	(Continued)

FNBH BANCORP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2002, and 2001

In May 2003, the FASB issued SFAS No. 150 Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. Statement No. 150 applies to three categories of freestanding financial instruments: mandatorily redeemable instruments, instruments with repurchase obligations, and instruments with obligations to issue a variable number of shares. Instruments within the scope of SFAS No. 150 must be classified as liabilities in the statement of financial position. SFAS No. 150 was effective for all freestanding financial instruments entered into or modified after May 31, 2003 and was otherwise effective at the beginning of the first interim period beginning after June 15, 2003. On October 29, 2003, the FASB voted to defer, for an indefinite period, the application of the guidance in SFAS No. 150 to noncontrolling interests that are classified as equity in the financial statements of a subsidiary but would be classified as a liability on the parent’s financial statements. The adoption of the sections of this Statement that have not been deferred did not have a significant impact on the Bank’s results of operations or financial condition. The section noted above that has been deferred indefinitely is not expected to have a significant impact on the Bank’s financial condition or results of operations.

In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (Interpretation), which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, regardless of the guarantor’s fiscal year-end. The guarantor may not revise or restate its previous accounting for guarantees issued before the date of the Interpretation’s initial application to reflect the effect of the recognition and measurement provisions of the Interpretation. The disclosure requirements in this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. Adoption of the measurement requirements of this Interpretation did not have a significant impact on the Bank’s results of operations or financial condition.

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

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

FINANCIAL CONDITION

At year end 2003 total assets were $449,818,000 representing a 6.9% increase from the prior year when assets were $420,686,000. Investment securities increased $10.8 million (24.3%) to $55,435,000 while gross loans increased $20.1 million (6.1%) to $348,017,000. Deposits increased $25.0 million (6.7%) to $399,073,000. Stockholders’ equity increased $3.7 million (9.7%) to $41,235,000.

Securities

During 2003, securities increased as funds made available through the maturity of certificates of deposit purchased in the prior years of $2,327,000, decreased short term investments of $2,801,000, and the issuance of brokered certificates of deposit of $5,968,000 in 2003 were used to purchase additional agency securities. At year end the Company had $16,848,000 in short term investments, a 14.3% decrease from the $19,649,000 reported the previous year. Although this left the Company quite liquid at year end, approximately $25,000,000 in deposits came in the last month of the year and approximately $9,000,000 were withdrawn by January 31, 2004.

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



U.S. Treasury & agency securities	39.9	%	27.0	%
Agency mortgage backed securities	22.6	%	22.3	%
Tax exempt obligations of states and political subdivisions	27.1	%	37.8	%
Corporate bonds	8.4	%	10.6	%
Other	2.0	%	2.3	%

Total securities	100.0	%	100.0	%

Loans

The loan personnel of the Bank are committed to making quality loans that produce a good rate of return for the Bank and also serve the community by providing funds for home purchases, business purposes, and consumer needs. The overall loan portfolio grew $20,100,000 (6.1%) in 2003.

As a full service lender, the Bank offers a variety of home mortgage loan products. The Bank makes, and subsequently sells fixed rate long-term mortgages, which conform to secondary market standards. This practice allows the Bank to meet the housing credit needs of its service area, while at the same time maintaining loan to deposit ratios and interest sensitivity and liquidity positions within Bank policy. The Bank retains servicing on sold mortgages thereby furthering the customer relationship and adding to servicing income. During 2003 the Bank sold $23,200,000 in residential mortgages. As the refinancing market slowed the Bank sold $900,000 less in mortgages in 2003 than in 2002 and expects to have even fewer sales in 2004.

The Bank has also been able to service customers with loan needs which do not conform to secondary market requirements by offering variable rate products which are retained in the mortgage portfolio. While not meeting secondary market requirements, these nonconforming mortgages do meet bank loan guidelines and have a good payment record. During 2003 the Bank made approximately $12,389,000 in variable rate mortgage loans which it retained in the mortgage portfolio.

The Bank continued to experience reasonable loan demand throughout 2003. Growth in Livingston County resulted in a need for financing commercial projects including the development of residential housing. Commercial loans ended the year at $278,638,000, a 5.9% increase for the year. Additionally, the Bank originated $2,700,000 in commercial loans which it sold in part or total to other banks due to legal lending limits. Consumer loans increased $1,336,000, or about 4.0%, from the preceding year.

The following table reflects the makeup of the commercial and consumer loans in the Consolidated Financial Statements. Included in the residential first mortgage totals below are the “real estate mortgage” loans listed in the Consolidated Financial Statements and other loans to customers who pledge their homes as collateral for their borrowings. A portion of the loans listed in residential first mortgages represent commercial loans where the borrower has pledged his/her residence as collateral. In the majority of the loans to commercial customers, the Bank is relying on the borrower’s cash flow to service the loans. “Commercial” real estate loans include $161,908,000 in loans secured by commercial property, with the remaining $3,556,000 secured by multi-family units. The most significant loan growth was in commercial loans secured by business property which increased $11,744,000, 7.6% compared to the prior year and in residential first mortgage loans which increased $9,643,000, 25.9% compared to the prior year. The most significant decrease was in commercial loans not secured by real estate which decreased $9,329,000, 21.6% compared to the prior year. The shift from commercial loans not secured by real estate to commercial loans secured by real estate results from the continued growth of real estate development in Livingston County.

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

	(dollars in thousands)
	2003					2002
	Balances		Percentage			Balances		Percentage

Secured by real estate:
Residential first mortgage	$	46,845		13.5	%	$	37,202		11.3	%
Residential home equity/other junior liens		13,999		4.0	%		11,184		3.4	%
Construction and land development		54,554		15.7	%		49,516		15.1	%
Commercial		165,464		47.5	%		153,720		46.9	%
Consumer		25,842		7.4	%		25,261		7.7	%
Commercial		33,947		9.8	%		43,276		13.2	%
Other, primarily to political subdivisions		7,366		2.1	%		7,801		2.4	%

Total Loans (Gross)	$	348,017		100.0	%	$	327,960		100.0	%

The Bank’s loan personnel have endeavored to make high quality loans using well established policies and procedures and a thorough loan review process. Loans to a borrower with aggregate indebtedness in excess of $500,000 are approved by a committee of the Board or the Board. The Bank has hired an independent contractor to review the quality of the loan portfolio on a regular basis. The quality of the loan portfolio is illustrated in the table below for December 31:

	(dollars in thousands)
	2003		2002		2001

Nonperforming Loans:
Nonaccrual loans	$	4,293	$	3,288	$	2,636
Loans past due 90 days and still accruing		0		809		361

Total nonperforming loans		4,293		4,097		2,997
Other real estate		65		738		0

Total nonperforming assets	$	4,358	$	4,835	$	2,997


Nonperforming loans as a percent of total loans		1.24%		1.25%		1.04%
Loan loss reserve as a percent of nonperforming loans		139%		141%		189%

Nonperforming assets are comprised of loans for which the accrual of interest has been discontinued, accruing loans 90 days or more past due in payments, and other real estate which has been acquired primarily through foreclosure and is waiting disposition. Loans are generally placed on a nonaccrual basis when principal or interest is past due 90 days or more and when, in the opinion of management, full collection of principal and interest is unlikely.

Impaired loans totaled $9,600,000 at December 31, 2003, compared to $9,300,000 at the prior year end, and $8,700,000 at December 31, 2001. Included in impaired loans are nonperforming loans from the above table, except for homogenous residential mortgage and consumer loans, and an additional $5,500,000 of commercial loans separately identified as impaired. Nonperforming loans are reviewed regularly for collectability. Any uncollectable balances are promptly charged off.

During 2003 the Bank charged off loans totaling $1,283,000 and recovered $177,000 for a net charge off amount of $1,106,000. Charged off loans included $439,000 of charge offs on two loans in the fourth quarter of 2003. In the previous year, the Bank had net charge offs totaling $499,000 and $425,000 in 2001.

The allowance for loan losses totaled $5,958,000 at year end which was 1.71% of total loans, compared to $5,794,000 (1.77%) in 2002, and $5,668,000 (1.97%) in 2001. The adequacy of the allowance for loan losses is determined by management's assessment of the composition of the loan portfolio, an evaluation of specific credits, and an analysis of the following environmental factors: delinquency trends, delinquency levels, loss trends, concentrations of credit, economic trends, loan growth, and management changes. Management continues to refine its techniques in this analysis. Economic factors considered in arriving at the loan loss reserve adequacy as of December 31, 2003 included low levels of consumer confidence, historically low interest rates, increased bankruptcies and the unemployment rate. When all environmental factors were considered, management determined that the $1,270,000 provision and resulting $5,958,000 allowance was appropriate. Although management evaluates the adequacy of the allowance for loan losses based on information known at a given time, as facts and circumstances change the provision and resulting allowance may also change.

The following table shows changes in the loan loss reserve for the years ended December 31:

	(dollars in thousands)
	2003			2002			2001

Balance at beginning of the year	$	5,794		$	5,668		$	5,193
Additions (deduction):
Loans charged off		(1,283	)		(767	)		(517	)
Recoveries of loans previously charged off		177			268			92
Provision charged to operations		1,270			625			900

Balance at end of the year	$	5,958		$	5,794		$	5,668

Allowance for loan losses to loans outstanding		1.72%			1.77%			1.97%

Deposits

Deposit balances of $399,073,000 at December 31, 2003 were approximately $25.0 million (6.7%) higher than the previous year end. Because year end deposit balances can fluctuate in unusual ways, it is more meaningful to analyze changes in average balances. Average deposits increased 8.2% in 2003. Average demand deposits increased $4.5 million (7.3%) while average savings and NOW balances increased $19.0 million (12.3%). Certificates of deposit increased $4.8 million (3.7%). Management has generated deposits in 2003 with various rate specials on selected certificates, a gift giveaway promotion that was started in 2002 and completed in the first half of 2003, opening of branches, and the issuance of brokered certificates of deposit. Deposits grew by similar percentages from 2001 to 2002, with the exception of savings and NOW balances which grew 20% from 2001 to 2002, compared to 12.3% from 2002 to 2003.

The following table sets forth average deposit balances for the years ended December 31:

	(dollars in thousands)
	2003		2002		2001

Non-interest bearing demand	$	65,719	$	61,223	$	57,166
Savings, NOW and money market		172,611		153,651		128,257
Time deposits		135,842		131,019		131,527

Total average deposits	$	374,172	$	345,893	$	316,950

The growth in savings, NOW and money market deposits was primarily in the money market deposit account (MMDA) which increased 17.7% on average. This growth is attributable to consumers, both retail and business consumers, preference for more liquidity in this low rate environment. Average personal MMDAs increased 6.9% while business accounts decreased 5.3% on average, and public MMDAs increased 62.5% on average. Average personal MMDA accounts increased 43%, business accounts 25% and public accounts 18% from 2001 to 2002. Management does not expect public fund money to continue this growth trend in 2004 due to changes by the State of Michigan in how and when taxes are collected and disbursed.

The majority of the Bank’s deposits are from core customer sources-long term relationships with local personal, business, and public customers. In some financial institutions, the presence of interest bearing certificates greater than $100,000 indicates a reliance upon purchased funds. However, large certificates in the Bank’s portfolio consist primarily of core deposits of local customers. See Note 9 of the Consolidated Financial Statements for a maturity schedule of over $100,000 certificates. The Bank does issue brokered certificates of deposit in the market to meet liquidity needs with alternative funding sources and had an average balance of brokered certificates in 2003 of $1.8 million compared to $1.5 million in 2002.

Capital

The Company’s capital at year end totaled $41,235,000, a $3,656,000 (9.7%) increase compared to capital of $37,580,000 at December 31, 2002 and $32,404,000 at December 31, 2001; an increase of 16.0%. Included in year end capital is $307,000 which is an unrealized gain on debt securities available for sale.

Banking regulators have established various ratios of capital to assets to assess a financial institution’s soundness. Tier 1 capital is equal to shareholders’ equity while Tier 2 capital includes a portion of the allowance for loan losses. The regulatory agencies have set capital standards for “well capitalized” institutions. The leverage ratio, which divides Tier 1 capital by three months average assets, must be 5% for a well capitalized institution. The Bank’s leverage ratio was 8.95% at year end 2003. Tier 1 risk-based capital, which includes some off balance sheet items in assets and weights assets by risk, must be 6% for a well capitalized institution. The Bank’s was 10.47% at year end 2003. Total risk-based capital, which includes Tier 1 and Tier 2 capital, must be 10% for a well capitalized institution. The Bank’s total risk based capital ratio was 11.73% at year end. The Bank’s strong capital ratios put it in the best classification on which the FDIC bases its assessment charge.

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

	2003		2002		2001

Equity to asset ratio	9	.32%	8	.80%	8	.08%
Tier 1 leverage ratio	8	.95%	8	.45%	7	.90%
Tier 1 risk-based capital	10	.43%	9	.81%	9	.33%
Total risk-based capital	11	.68%	11	.06%	10	.58%

The Company’s ability to pay dividends is subject to various regulatory requirements. Management believes, however, that earnings will continue to generate adequate capital to continue the payment of dividends. In 2003 the Company paid dividends totaling $2,151,000, or 36.5% of earnings. Book value of the stock was $13.01 at year end.

In 1999, the Bank opened a new branch in the northwest part of Brighton. Adjoining the building site are three parcels of vacant land. The Company has sold one parcel, and intends to sell the remaining two pieces which are valued at approximately $1.4 million. Subsequent to year end, in February 2004, the Company did complete the sale of the remaining parcels for the carrying value.

Liquidity and Funds Management

Liquidity is monitored by the Bank’s Asset/Liability Management Committee (ALCO) which meets at least monthly. The Board of Directors has approved a liquidity policy which requires the Bank, while it is well capitalized as defined by the Federal Financial Institutions Examination Council (FFIEC), to maintain a current ratio of no less than 1:1 (core basic surplus liquidity equal to 0). Additional requirements of the policy are that when credit available from the Federal Home Loan Bank is added to core basic surplus liquidity, the Bank must have liquidity totaling 5% of assets and when brokered CDs and Federal Funds (Fed Funds) lines are added, the Bank must have liquidity totaling 8% of assets. Should the Bank’s capital ratios fall below the “well capitalized” level, additional liquidity totaling 5% of assets will be required. As of December 31, 2003, the Bank had excess liquidity of at least 5.5% of assets under any of the above standards.

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

It is the intention of the Bank’s management to handle unexpected liquidity needs through its Fed Funds position with a correspondent bank and by FHLBI borrowings. The Bank has a $32,100,000 line of credit available at the FHLBI and the Bank has pledged certain mortgage loans as collateral for this borrowing. At December 31, 2003, the Company had $5,300,000 in borrowings against the line. The Bank also has a blanket repurchase agreement in place where it can borrow from a broker pledging Treasury and Agency securities as collateral. In the event the Bank must borrow for an extended period, management may look to “available for sale” securities in the investment portfolio for liquidity.

Throughout the past year, Fed Funds Sold balances averaged approximately $8,900,000. Periodically the Bank borrowed money through the Fed Funds market and through short term advances from the Federal Home Loan Bank (FHLB). Fed Funds Purchased balances averaged $39,000 for the year and FHLB advances averaged $1,300,000 for 2003.

Quantitative and Qualitative Disclosures about Market Risk

ALCO reviews other areas of the Bank’s performance. The committee discusses the current economic outlook and its impact on the Bank and current interest rate forecasts. Actual results are compared to budget in terms of growth and income. A yield and cost analysis is done to monitor interest margin. Various ratios are discussed including capital ratios and liquidity. The quality of the loan portfolio is reviewed in light of the current allowance. The Bank’s exposure to market risk is reviewed.

Interest rate risk is the potential for economic losses due to future rate changes and can be reflected as a loss of future net interest income and/or a loss of current market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income. Tools used by management include the standard GAP report which lays out the repricing schedule for various asset and liability categories and an interest rate shock simulation report. The Bank has no market risk sensitive instruments held for trading purposes. However, the Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers including commitments to extend credit and letters of credit. A commitment or letter of credit is not recorded as an asset until the instrument is exercised (see Note 18 of the Consolidated Financial Statements).

The table below shows the scheduled maturity and repricing of the Bank’s interest sensitive assets and liabilities as of December 31, 2003:

	(dollars in thousands)
	0-3 Months		4-12 Months		1-5 Years		5+ Years			Total

Assets:
Loans, net	$	163,606	$	49,103	$	125,151	$	9,226		$	347,086
Securities		3,500		20,192		23,726		8,017			55,435
Certificates of Deposit		--		1,553		--		--			1,553
Short-term investments		16,848		--		--		--			16,848

Total assets	$	183,954	$	70,848	$	148,877	$	17,243		$	420,922

Liabilities & Shareholders' Equity:
MMDA, Savings & NOW	$	91,615		--		--	$	95,081		$	186,696
Time		28,852		69,158		44,697		436			143,143
FHLB advances		75		231		4,469		553			5,328

Total liabilities and equity	$	120,542	$	69,389	$	49,166	$	96,070		$	335,167

Rate sensitivity gap and ratios:
Gap for period	$	63,412	$	1,459	$	99,711	$	(78,827	)
Cumulative gap		63,412		64,871		164,582		85,755

Cumulative rate sensitive ratio		1.53		1.34		1.69		1.26
December 31, 2002 rate sensitive ratio		1.35		1.43		1.67		1.25

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

In the gap table above, the short term (one year and less) cumulative interest rate sensitivity is 34% asset sensitive at year end, compared to 43% asset sensitive the previous year. In the low rate environment of 2003 the following changes have occurred which impact rate sensitivity. In the loan portfolio 61% of loans mature or reprice in one year compared to 57% in 2002. Short term investments are 14% lower than last year, the result of an $11,000,000 growth in securities in 2003. Saving and NOW deposits which are classified in the 5+ year time frame, increased 10% over the balance reported in 2002. Money market deposit accounts, which are classified in the 0-3 month time frame, decreased 3% over the 2002 balance. Finally, certificates maturing in one year made up 69% of 2003 year end CD balances compared with 42% the year before. Management believes that those customers who have elected to keep their balances in certificates have chosen shorter terms based on the anticipation of an increase in rates.

Because of the Company’s asset sensitive position, if market interest rates decrease, this positive gap position indicates that the interest margin would be negatively affected. However, gap analysis is limited and may not provide an accurate indication of the impact of general interest rate movements on the net interest margin since repricing of various categories of assets and liabilities is subject to the Bank’s needs, competitive pressures, and the needs of the Bank’s customers. In addition, various assets and liabilities indicated as repricing within the same period may in fact reprice at different times within the period and at different rate indices. Additionally, simulation modeling, which measures the impact of upward and downward movements of interest rates on interest margin, indicates that a 100 basis point decrease in interest rates would reduce net interest income by approximately 5% in the first year and a 100 basis point increase in interest rates would increase net interest income by approximately 3% in the first year.

	(dollars in thousands)
	Total		Average Interest Rate			Estimated Fair Value
Assets:
Loans, net	$	341,127		7.46	%	$	344,300
Securities		55,435		5.39	%		56,400
Certificates of deposit		1,553		3.28	%		1,600
Short-term investments		16,848		1.63	%		16,800

Liabilities:
Savings, NOW, MMDA	$	186,696		1.49	%		186,700
Time		143,143		3.93	%		145,000
FHLB advances		5,328		7.33	%		5,800

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

RESULTS OF OPERATIONS

Net income was $5,900,000 in 2003 a $400,000 (6.5%) decrease compared to net income of $6,304,000 in 2002 an increase of 20.8% from 2001 net income of $5,220,000. The Company’s earnings resulted in a return on average assets (ROA) of 1.39% and a return on average stockholders’ equity (ROE) of 14.90%. Basic and diluted net income per share was $1.86 in 2003 compared with $2.00 in 2002 and $1.66 in 2001. Per share data has been restated for all years to reflect a two for one stock split payable as a dividend of one share for each share of company stock held of record July 1, 2002, paid July 10, 2002.

The following table contains key performance ratios for years ended December 31:

	2003			2002			2001

Net income to:
Average stockholders' equity		14.90	%		17.97	%		16.80	%
Average assets		1.39	%		1.58	%		1.46	%
Basic and diluted earnings per common share:	$	1.86		$	2.00		$	1.66

Net Interest Income

Net interest income is the difference between interest earned on earning assets and interest paid on deposits. It is the major component of the Company’s earnings. For analytical purposes, the interest earned on investments and loans is expressed on a fully taxable equivalent (FTE) basis. Tax-exempt interest is increased to an amount comparable to interest subject to federal income taxes in order to properly evaluate the effective yields earned on earning assets. The tax equivalent adjustment is based on a federal income tax rate of 34%.

The following table shows the average balance and percentage earned or paid on key components of earning assets and paying liabilities for the year ended December 31:

	(dollars in thousands)
	2003					2002					2001
	Average Balance		Yield/ Rate			Average Balance		Yield/ Rate			Average Balance		Yield/ Rate

Interest earning assets:
Short term investments	$	9,625		1.07	%	$	3,522		1.63	%	$	19,924		3.87	%
Certificates of deposit		3,135		3.48	%		5,424		3.28	%		929		2.90	%
Taxable securities		29,550		4.08	%		34,869		4.63	%		24,075		5.70	%
Tax-exempt securities		15,845		7.00	%		17,109		6.94	%		18,415		6.77	%
Loans		340,384		6.70	%		311,060		7.46	%		270,776		8.93	%

Total earning assets	$	398,539		6.36	%	$	371,984		7.05	%	$	334,119		8.26	%
Interest bearing funds:
Savings/NOW accounts	$	172,611		.85	%	$	153,651		1.49	%	$	128,257		2.35	%
Time deposits		135,842		3.16	%		131,019		3.93	%		131,527		5.65	%
Short-term borrowings		1,300		1.37	%		8,430		1.99	%
FHLB advances		5,337		7.34	%		5,578		7.23	%		5,801		7.23	%

Total interest bearing funds:	$	315,090		1.96	%	$	298,678		2.68	%	$	265,585		4.09	%

Interest spread				4.40	%				4.37	%				4.17	%
Net interest margin				4.81	%				4.90	%				5.01	%

Tax equivalent interest income in each of the three years includes loan origination fees. A substantial portion of such fees is deferred for recognition in future periods or is considered in determining the gain or loss on the sale of real estate mortgage loans. Tax equivalent interest income includes net loan origination fees totaling $720,000 in 2003, $750,000 in 2002, and $790,000 in 2001.

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

	(dollars in thousands)
	Year ended December 31, 2003 compared to Year ended December 31, 2002									Year ended December 31, 2002 compared to Year ended December 31, 2001
	Amount of Increase/(Decrease) Due to change in									Amount of Increase/(Decrease) Due to change in
	Volume			Average Rate			Total Amount Of Increase/ (Decrease)			Volume			Average Rate			Total Amount Of Increase/ (Decrease)
Interest Income:
Federal funds sold	$	99		$	(53	)	$	46		$	(634	)	$	(79	)	$	(713	)
Certificates of deposit		(75	)		6			(69	)		130			20			150
Securities:
Taxable		(246	)		(163	)		(409	)		615			(372	)		243
Tax Exempt		(88	)		10			(78	)		(88	)		29			(59	)
Loans		2,187			(2,579	)		(392	)		3,597			(4,582	)		(985	)

Total interest income	$	1,877		$	(2,779	)	$	(902	)	$	3,620		$	(4,984	)	$	(1,364	)

Interest Expense:
Interest bearing deposits:
Savings/NOW accounts	$	282		$	(1,100	)	$	(818	)	$	595		$	(1,317	)	$	(722	)
Time		190			(1,055	)		(865	)		(29	)		(2,244	)		(2,273	)
Short-term borrowings		(142	)		(8	)		(150	)		168			0			168
FHLB advance		(18	)		1			(17	)		(16	)		(1	)		(17	)

Total interest expense	$	312		$	(2,162	)		(1,850	)	$	718		$	(3,562	)	$	(2,844	)

Net interest income (FTE)	$	1,565		$	(616	)	$	948		$	2,902		$	(1,422	)	$	1,480

Tax equivalent net interest income increased $948,000 in 2003. The increase was the result of a $1,850,000 decrease in interest expense partially offset by a $902,000 decrease in interest income. The decrease in interest income is attributable to a decrease of 69 basis points in the interest rate earned on assets while average earning assets increased $26,600,000 during the year. Tax equivalent loan interest income was $392,000 less in 2003 than the previous year. The decrease was due to a decrease of 76 basis points in the rate of interest earned on loans although average balances increased $29,300,000 in 2003. Loan growth was fueled by general growth in Livingston County which created a demand for consumer and commercial building projects. The low interest rate environment enabled new borrowers to enter the housing market.

Income on taxable securities decreased $409,000 in 2003 due to a $5,300,000 decrease in average balances and a declined of 55 basis points in yield. With loan growth outpacing deposit growth in 2003 and 2002, (excluding brokered certificates of deposit), there were limited funds available for investment securities. Instead, funds were put to work in the higher yielding loan portfolio. Tax equivalent income on tax-exempt bonds decreased $78,000 in 2003. The average balance of these securities decreased $1,300,000 while the rate decreased 6 basis points. The decrease in balances with the subsequent decrease in yields was the result of the maturity/ and or calls of bonds that were purchased at slightly higher interest rates than that of the average portfolio. Interest income on short term investments decreased $46,000 due to an increase in average balances of $6,100,000 offset by a decline in interest rates of 56 basis points. The full impact of the falling short term rates in the fourth quarter of 2002 was felt in 2003, as well as an additional 25 basis point drop in the second quarter of 2003. The average balance of purchased brokered certificates decreased $2,300,000 while the interest yield increased 20 basis points, primarily the result of the certificates purchased in 2001 and 2002 maturing in 2003. Interest income on brokered certificates decreased $69,000

Interest expense decreased $1,850,000 in 2003 because interest rates decreased 72 basis points although average balances increased approximately $16,400,000. The interest cost for savings and NOW accounts decreased $818,000 because the interest rate paid declined 64 basis points although average balances increased $19,000,000. Interest on time deposits decreased $865,000 because average time deposits increased $4,800,000 while interest rates decreased 77 basis points. Growth in savings and NOW deposits appears to be a preference for liquidity on the part of depositors as they stayed away from certificates of deposit. Fed Funds and short-term advances from the FHLB were not utilized in 2003 to the extent they were needed in 2002; therefore the average balance in short-term borrowings decreased $7,100,000 in 2003 and interest yield also decreased by 62 basis points. As a result, the Company incurred $150,000 less of interest expense in 2003 compared to 2002 on these borrowings. The Company entered into two long term borrowings with the Federal Home Loan Bank of Indianapolis in 2000. One of the loans amortizes and had a balance of $2,329,000 at year end while the other loan, for $3,000,000 matures in its entirety in April 2005. The loans have an average interest rate of 7.34%.

In the previous year, net interest income had increased $1,480,000. The increase in net interest income was the result of a decrease in interest income of $1,364,000 offset by a decrease in interest expense of approximately $2,844,000. The decrease in interest income in 2002 was the result of a $37,900,000 increase in earning assets while interest earned on these balances declined 121 basis points during the year. The decrease in interest expense was the result of average balances growing $33,100,000 although interest rates decreased 141 basis points.

In the coming year, management expects growth to continue in both loans and deposits although at a slower pace. Lack of an economic growth could, however, adversely affect loan and deposit growth. The decline in the net interest margin is expected to stabilize as the outlook for future rate cuts is minimal but the effect of last year’s rate drop will continue to playout through 2004 adding pressure until interest rates begin to increase.

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

	2003			2002			2001

As a percent of average earning assets:
Loans		85.41	%		83.62	%		81.04	%
Securities		11.39	%		13.97	%		12.72	%
Certificates of Deposit		.80	%		1.46	%		.28	%
Short term investments		2.4	%		.95	%		5.96	%

Average earning assets		100.0	%		100.00	%		100.00	%

Savings and NOW		43.31	%		41.31	%		38.39	%
Time deposits		34.08	%		35.22	%		39.37	%
Short-term borrowing		.33	%		2.27	%
FHLB advances		1.34	%		1.50	%		1.74	%

Average interest bearing liabilities		79.06	%		80.30	%		79.50	%

Earning asset ratio		93.99	%		93.25	%		93.47	%
Free-funds ratio		20.94	%		19.70	%		20.50	%

Provision for Loan Losses

The provision for loan losses increased to $1,270,000 in 2003 compared to $625,000 in 2002 and $900,000 in 2001. At year end the ratio of allowance for loan loss to loans was 1.72%, compared to 1.77% in 2002 and 1.97% in 2001. The slight decrease in 2003 was deemed appropriate considering the allowance adequacy analysis which showed that the balance in the loan loss reserve was adequate to cover anticipated losses.

Noninterest Income

Non-interest income, which includes service charges on deposit accounts, loan fees, other operating income, and gain (loss) on sale of assets and securities transactions, increased approximately $254,000 (7.0%) in 2003 compared to 2002 and increased $501,000 (16.1%) in 2002 compared to 2001. Service charge income increased to $3,136,000 (5.5%) in 2003 and to $2,974,000 (12.5%) in 2002, primarily due to growth in deposits and loans. Trust fees increased $85,000 in 2003 and $26,000 in 2002. The addition of a second trust officer in 2002 helped increase trust assets through the addition of new accounts and a general increase in the market value of trust assets. Trust income included non-recurring income of approximately $42,000 that was recognized in 2003. The $374,000 gain realized on the sale of real estate mortgage loans was $42,000 lower than the gains recognized in 2002, which were $187,000 higher than the gains recognized in 2001. Sales volume was down approximately $900,000 as mortgage rates began to rise in the latter part of 2003 and refinancing activity decreased. Sales volume in 2002 was approximately $10,000,000 higher than 2001. Management expects the volume of loans sold and the corresponding gain on sold loans to continue to decline in 2004 as a result of lower refinancing activity. There were no security sales in 2003; only a call which resulted in a small gain of $4,000. From time to time securities were sold in 2002 to improve the Company’s liquidity position. Included in noninterest income were gains totaling $37,000 related to those sales.

Noninterest Expense

Non-interest expense totaled $12,800,000 in 2003, a 9.1% increase over expenses of $11,800,000 in 2002, a 6.5% increase over expenses of $11,061,000 in 2001. The most significant component of non-interest expense was salaries and benefits expense. In 2003, salaries and benefits expense increased 9.4% to $7,000,000, due to salary increases, new positions and increased benefit costs, primarily health care and pension. In 2002, salaries and benefits expense increased 8.2% to $6,445,000 due to the combined effects of salary increases, increased cost of medical insurance, and an increase in the employee profit sharing expense. Occupancy expense increased $67,000 (7.5%) primarily due to the costs of an operations center opened in January 2003 and a new branch opened in December 2003. In 2002, occupancy expense increased 14.7% to $891,000 the result of costs associated with a branch opened in 2002, expansion of a grocery store branch and costs associated with snow removal. Equipment expense also increased $142,000 (16.4%) in 2003 over 2002. The increase is attributable to higher equipment maintenance costs and increased software amortization charges. In 2002, equipment expense increased 4.3% to $866,000 the result of equipping the new branch. Printing and supplies decreased $51,000 (15.7%) as efficiencies from imaging and other process improvements took full effect in 2003. In 2002, printing and supplies increased 27.9% to $327,000 the result of the new branch opening and converting to an imaging system. Advertising expense also decreased $44,000 (12.6%) in 2003 due to fewer loan and deposit marketing campaigns. In 2002, advertising expense increased 39.8% to $349,000 due to efforts to generate deposit growth. Other expense increased $391,000 (24.1%) partially due to a $130,000 write down of the Challis road property held for sale and increased loan and collection expenses in 2003. In 2002, other expenses were virtually unchanged from 2001. As a result of the aforementioned new branch that opened late in 2003, management expects higher noninterest expenses in 2004, which will include increased salaries, marketing initiatives, occupancy, and furniture and equipment costs.

Federal Income Tax Expense

Fluctuations in income taxes resulted primarily from changes in the level of profitability and in variations in the amount of tax-exempt income. Income tax expense decreased $74,000 to $2,554,000 (2.8%) in 2003 and increased $455,000 to $2,629,000 (21.0%) in 2002. Although income tax expense decreased, the rate remained increased slightly to 30% from 29% in 2002. For further information see Note 12 “Federal Income Taxes” in the Company’s Consolidated Financial Statements.

Critical Accounting Policies

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

Our methodology for determining the allowance and related provision for loan losses is described above in “Financial Condition – Loans”. In particular, this area of accounting requires a significant amount of judgment because a multitude of factors can influence the ultimate collection of a loan or other type of credit. It is extremely difficult to precisely measure the amount of losses that may be inherent in our loan portfolio. We attempt to accurately quantify the necessary allowance and related provision for loan losses, but there can be no assurance that our modeling process will successfully identify all of the losses inherent in our loan portfolio. As a result, we could record future provisions for loan losses that may be significantly different from the levels that we have recorded.

Impact of New Accounting Standards

See Note 27 “Impact of New Accounting Standards” in the Company’s Consolidated Financial Statements for discussion of new accounting standards and their impact.

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

	2003			2002			2001			2000			1999

Income Statement Data:
Interest income	$	24,856		$	25,729		$	27,095		$	26,047		$	21,597
Interest expense		6,166			8,017			10,861			10,042			7,967
Net interest income		18,689			17,712			16,234			16,005			13,630
Provision for loan losses		1,270			625			900			1,200			840
Non-interest income		3,874			3,621			3,120			2,604			2,015
Non-interest expense		12,848			11,775			11,061			10,188			9,543
Income before tax		8,445			8,933			7,393			7,221			5,262
Net income		5,891			6,304			5,220			5,106			3,715
Basic Per Share Data(1):
Net income	$	1.86		$	2.00		$	1.66		$	1.63		$	1.19
Dividends paid		.68			.63			.60			.58			.55
Weighted average shares
outstanding		3,162,836			3,152,739			3,141,118			3,132,780			3,127,992
Balance Sheet Data:
Total assets		449,818			420,686			392,978			348,363			296,419
Loans, net		347,086			327,117			286,280			255,414			209,952
Allowance for loan losses		5,958			5,794			5,668			5,193			4,483
Deposits		399,073			374,072			351,669			310,214			269,193
Shareholders' equity		41,235			37,580			32,404			28,887			25,312
Ratios:
Dividend payout ratio		36.51	%		31.40	%		36.12	%		35.29	%		46.31	%
Equity to asset ratio		9.32	%		8.80	%		8.69 %			8.68	%		8.84	%

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

EXHIBIT 21

SUBSIDIARIES

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

EXHIBIT 31.1

CERTIFICATE OF THE
CHIEF EXECUTIVE OFFICER OF
FNBH BANCORP, INC.

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350):

I, Barbara Draper, certify that:

1.	I have reviewed this annual report on Form 10-K of FNBH Bancorp, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of (or persons performing the equivalent functions):

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: March 12, 2004

/s/ Barbara Draper
———————————————
Barbara Draper
Chief Executive Officer

EXHIBIT 31.2

CERTIFICATE OF THE
CHIEF FINANCIAL OFFICER OF
FNBH BANCORP, INC.

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350):

I, Janice B. Trouba, certify that:

1.	I have reviewed this annual report on Form 10-K of FNBH Bancorp, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of (or persons performing the equivalent functions):

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting

Date: March 12, 2004

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

EXHIBIT 32.1

CERTIFICATE OF THE
CHIEF EXECUTIVE OFFICER
OF FNBH BANCORP, INC.

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350):

I, Barbara Draper, Chief Executive Officer of FNBH Bancorp, Inc., certify, to the best of my knowledge and belief, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) that:

(1) The annual report on Form 10-K for the annual period ended December 31, 2003, which this statement accompanies, fully complies with requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and;

(2) The information contained in this quarterly report on Form 10-K for the annual period ended December 31, 2003, fairly presents, in all material respects, the financial condition and results of operations of FNBH Bancorp, Inc.

Date: March 12, 2004

FNBH BANCORP, INC.

By: /s/ Barbara Draper
——————————————
Barbara Draper
Its: Chief Executive Officer

The signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to FNBH Bancorp, Inc. and will be retained by FNBH Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EXHIBIT 32.2

CERTIFICATE OF THE
CHIEF FINANCIAL OFFICER
OF FNBH BANCORP, INC.

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350):

I, Janice B. Trouba, Chief Financial Officer of FNBH Bancorp, Inc., certify, to the best of my knowledge and belief, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) that:

(2) The information contained in this quarterly report on Form 10-K for the annualy period ended December 31, 2003, fairly presents, in all material respects, the financial condition and results of operations of FNBH Bancorp, Inc.

Date: March 12, 2004

FNBH BANCORP, INC.

By: /s/ Janice B. Trouba
——————————————
Janice B. Trouba
Its: Chief Financial Officer

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Avg

FNBH Bancorp Inactive 10-K2003 FY Annual report

Content analysis

SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549Form 10-K

For the fiscal year ended December 31, 2003

Commission file number 0-25752

PART I

SUPERVISION AND REGULATION

Yield Analysis of Consolidated Average Assets and Liabilities (dollars in thousands)

Additional Item —Executive Officers

PART II

PART III

PART IV

Exhibit 13

FNBH BANCORP, INC. AND SUBSIDIARIES

FNBH BANCORP, INC. AND SUBSIDIARIES

Table of Contents

Independent Auditors’ Report

FNBH BANCORP, INC. AND SUBSIDIARIES

FNBH BANCORP, INC. AND SUBSIDIARIES

FNBH BANCORP, INC. AND SUBSIDIARIES

FNBH BANCORP, INC. AND SUBSIDIARIES

FNBH BANCORP, INC. AND SUBSIDIARIES

FNBH BANCORP, INC. AND SUBSIDIARIES

FNBH BANCORP, INC. AND SUBSIDIARIES

FNBH BANCORP, INC. AND SUBSIDIARIES

FNBH BANCORP, INC. AND SUBSIDIARIES

FNBH BANCORP, INC. AND SUBSIDIARIES

FNBH BANCORP, INC. AND SUBSIDIARIES

FNBH BANCORP, INC. AND SUBSIDIARIES

FNBH BANCORP, INC. AND SUBSIDIARIES

FNBH BANCORP, INC. AND SUBSIDIARIES

FNBH BANCORP, INC. AND SUBSIDIARIES

FNBH BANCORP, INC. AND SUBSIDIARIES

FNBH BANCORP, INC. AND SUBSIDIARIES

FNBH BANCORP, INC. AND SUBSIDIARIES

FNBH BANCORP, INC. AND SUBSIDIARIES

FNBH BANCORP, INC. AND SUBSIDIARIES

FNBH BANCORP, INC. AND SUBSIDIARIES

FNBH BANCORP, INC. AND SUBSIDIARIES

FNBH BANCORP, INC. AND SUBSIDIARIES

FNBH BANCORP, INC. AND SUBSIDIARIES

FNBH BANCORP, INC. AND SUBSIDIARIES

Condensed Balance Sheets

Condensed Statements of Income

FNBH BANCORP, INC. AND SUBSIDIARIES

Condensed Statements of Cash Flows

FNBH BANCORP, INC. AND SUBSIDIARIES

FNBH BANCORP, INC. AND SUBSIDIARIES

FNBH BANCORP, INC. AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Conditionand Results of Operations

EXHIBIT 21

SUBSIDIARIES

EXHIBIT 31.1

CERTIFICATE OF THECHIEF EXECUTIVE OFFICER OFFNBH BANCORP, INC.

EXHIBIT 31.2

CERTIFICATE OF THECHIEF FINANCIAL OFFICER OFFNBH BANCORP, INC.

EXHIBIT 32.1

CERTIFICATE OF THECHIEF EXECUTIVE OFFICEROF FNBH BANCORP, INC.

CERTIFICATE OF THECHIEF FINANCIAL OFFICEROF FNBH BANCORP, INC.

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K

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

CERTIFICATE OF THE
CHIEF EXECUTIVE OFFICER OF
FNBH BANCORP, INC.

CERTIFICATE OF THE
CHIEF FINANCIAL OFFICER OF
FNBH BANCORP, INC.

CERTIFICATE OF THE
CHIEF EXECUTIVE OFFICER
OF FNBH BANCORP, INC.

CERTIFICATE OF THE
CHIEF FINANCIAL OFFICER
OF FNBH BANCORP, INC.