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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
 
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2008
 Commission file number 0-25752
 FNBH BANCORP, INC.
  MICHIGAN
(State or other jurisdiction of 
incorporation or organization)
    
    No. 38-2869722
(I.R.S. Employer Identification No.)
 101 East Grand River, Howell, Michigan 48843  (Address of principal executive offices) (Zip Code)
   Common Stock, no par value  (Title of Class)
 o þ
 o þ
 þ o
 þ
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ
   Documents Incorporated by Reference:




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##### 



TABLE OF CONTENTS
 PagePART IItem 1  Business
    
    
    3Item 1A  Risk Factors
    
    
    11Item 1B  Unresolved Staff Comments
    
    
    14Item 2  Properties
    
    
    14Item 3  Legal Proceedings
    
    
    14Item 4  Submission of Matters to a Vote of Security Holders
    
    
    15PART IIItem 5  Market for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
    
    
    15Item 6  Selected Financial Data
    
    
    18Item 7  Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    18Item 7A  Quantitative and Qualitative Disclosures about Market Risk
    
    
    38Item 8  Financial Statements and Supplementary Data
    
    
    38Item 9  Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
    
    
    70Item 9A  Controls and Procedures
    
    
    70Item 9B  Other Information
    
    
    70PART IIIItem 10  Directors, Executive Officers and Corporate Governance
    
    
    71Item 11  Executive Compensation
    
    
    71Item 12  Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
    
    
    71Item 13  Certain Relationships, Related Transactions and Director Independence
    
    
    72Item 14  Principal Accountant Fees and Services
    
    
    72PART VIItem 15  Exhibits and Financial Statement Schedules
    
    
    72SIGNATURES
    
    
    73EXHIBIT INDEX
    
    
    74EX-21  Subsidiaries of the Registrant
    
    
    76EX-23.1  Consent of Independent Registered Public Accounting Firm
    
    
    77EX-31.1  Sec 302 Certification of Chief Executive Officer
    
    
    78EX-31.2  Sec 302 Certification of Chief Financial Officer
    
    
    79EX-32.1  Sec 906 Certification of Chief Executive Officer
    
    
    80EX-32.2  Sec 906 Certification of Chief Financial Officer
    
    
    81




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PART I
 
 Item 1. Business.
    Bank Services
     3




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Bank Competition
  4




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Condition of Corporation
  Balances as of December 31,(in thousands)2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Total Assets
    
    $
    388,783
    
    
    $
    432,894
    
    
    $
    473,896
    
    
    $
    477,225
    
    
    $
    456,910Loans
    
    
    315,817
    
    
    
    347,876
    
    
    
    384,581
    
    
    
    372,855
    
    
    
    357,377Securities
    
    
    42,516
    
    
    
    38,632
    
    
    
    54,214
    
    
    
    62,373
    
    
    
    64,348Noninterest-Bearing Deposits
    
    
    56,405
    
    
    
    56,506
    
    
    
    62,681
    
    
    
    71,415
    
    
    
    71,785Interest-Bearing Deposits
    
    
    293,122
    
    
    
    323,072
    
    
    
    342,863
    
    
    
    350,670
    
    
    
    327,478Total Deposits
    
    
    349,527
    
    
    
    379,578
    
    
    
    405,544
    
    
    
    422,086
    
    
    
    399,263Stockholders Equity
    
    
    27,525
    
    
    
    40,627
    
    
    
    49,992
    
    
    
    49,446
    
    
    
    45,716
  Supervision and Regulation
  General
   5




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##### Table of Contents



Regulatory Developments
 Emergency Economic Stabilization Act of 2008.
 Troubled Assets Relief Program (TARP).
 Federal Deposit Insurance Coverage.
 Financial Stability Plan.
  American Recovery and Reinvestment Act of 2009.
 Homeowner Affordability and Stability Plan.
 6




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The Corporation
 General
  Investments and Activities
  de novo
  Capital Requirements
 7




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Dividends
   The Bank
 General
 Deposit Insurance
  8




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FICO Assessments. pro rata
 OCC Assessments.
 Capital Requirements
  Total
    
    Tier 1Risk-Based
    
    Risk-BasedCapital Ratio
    
    Capital Ratio
    
    Leverage RatioWell capitalized
    
    10% or above
    
    6% or above
    
    5% or aboveAdequately capitalized
    
    8% or above
    
    4% or above
    
    4% or aboveUndercapitalized
    
    Less than 8%
    
    Less than 4%
    
    Less than 4%Significantly undercapitalized
    
    Less than 6%
    
    Less than 3%
    
    Less than 3%Critically undercapitalized
    
    
    
    
    
    A ratio of tangible equity to total assets of 2% or less
   9




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Dividends
 Insider Transactions
 Safety and Soundness Standards
 Consumer Protection Laws
 10




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Item 1A. Risk Factors.
 Our Banks failure to comply with the provisions of its formal agreement with the OCC could subject
the Bank to enforcement action and further reputational damage.
 .
 We will likely need to raise additional capital in the near future and such capital may not be
available on favorable terms or at all.
  Our
deposit insurance premiums have risen significantly in the recent
past and may continue to rise both as a result of our risk assessment
category and increased assessment rates imposed by the FDIC.
  We are in the business of lending, which involves substantial credit risk, and our allowance for
loan losses may not be sufficient to cover actual loan losses.
    We are heavily weighted with loans secured by real estate and further declines in the real estate
market and the overall economy may result in higher loan losses
  11




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Fluctuations in interest rates could reduce our profitability.
  Competition with other financial institutions and financial service providers could adversely
affect our profitability.
  As a community bank, our financial condition is dependent, in part, on the general economic
condition of the communities we serve.
    We operate in a highly regulated environment and may be adversely affected by changes in laws and
regulations.
  12




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We may face challenges in managing our operational risk.
  Difficult market conditions have adversely affected our industry.
  Current levels of market volatility are unprecedented.
  There can be no assurance that recently enacted legislation will stabilize the U.S. financial
system.
   The impact on us of recently enacted legislation, in particular the Emergency Economic
Stabilization Act of 2008 and its implementing regulations, and actions by the FDIC, cannot be
predicted at this time.
  13




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We have credit risk inherent in our securities portfolio
  Changes in accounting standards could impact our reported earnings.
  We may not pay dividends on our common stock.
  We rely heavily on our management team, including our loan officers, and the unexpected loss of key
employees may adversely affect our operations.
  
 Item 1B. Unresolved Staff Comments.
  
 Item 2. Properties.
  
 Item 3. Legal Proceedings.
  14




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Item 4. Submission of Matters to a Vote of Security Holders.
  Abstentions andVotes For
    
    Votes Against
    
    Broker Non-Votes1,386,626
    
    275,110
    
    47,556
  Abstentions andVotes For
    
    Votes Against
    
    Broker Non-Votes1,181,626
    
    542,994
    
    26,143
  Abstentions andVotes For
    
    Votes Against
    
    Broker Non-Votes1,736,244
    
    674,056
    
    22,200
 Additional Item Executive Officers of Registrant
      
 PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
  15




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Sale Prices2007
    
    High
    
    Low
    
    Cash Dividends DeclaredFirst Quarter
    
    $
    26.75
    
    
    $
    26.00
    
    
    $
    0.21Second Quarter
    
    $
    25.80
    
    
    $
    23.10
    
    
    $
    0.21Third Quarter
    
    $
    23.05
    
    
    $
    18.50
    
    
    $
    0.21Fourth Quarter
    
    $
    18.75
    
    
    $
    13.25
    
    
    $
    0.21
 Sale Prices2008
    
    High
    
    Low
    
    Cash Dividends DeclaredFirst Quarter
    
    $
    13.60
    
    
    $
    12.00
    
    
    $
    0.08Second Quarter
    
    $
    13.40
    
    
    $
    9.07
    
    
    $
    0.08Third Quarter
    
    $
    9.07
    
    
    $
    4.50
    
    
    $
    0.00Fourth Quarter
    
    $
    4.85
    
    
    $
    4.00
    
    
    $
    0.00
    16




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STOCKHOLDER RETURN PERFORMANCE GRAPH
  COMPARISON
OF FIVE YEAR CUMULATIVE TOTAL RETURN
 
 January 1
    
    December 312004
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008FNBH Bancorp, Inc.
    
    
    
    100
    
    
    
    
    163.21
    
    
    
    
    133.51
    
    
    
    
    144.68
    
    
    
    
    76.76
    
    
    
    
    25.36NASDAQ Stock Market Index
    
    
    
    100
    
    
    
    
    108.84
    
    
    
    
    111.16
    
    
    
    
    122.11
    
    
    
    
    132.42
    
    
    
    
    63.80NASDAQ Bank Stocks Index
    
    
    
    100
    
    
    
    
    114.44
    
    
    
    
    111.80
    
    
    
    
    125.47
    
    
    
    
    99.45
    
    
    
    
    72.51
 17




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Item 6. Selected Financial Data.
 SUMMARY FINANCIAL DATA
 2008
    
    2007
    
    2006
    
    2005
    
    2004Income Statement Data:Interest income
    
    $
    24,307
    
    
    $
    30,173
    
    
    $
    31,818
    
    
    $
    29,315
    
    
    $
    24,992Interest expense
    
    
    8,118
    
    
    
    11,884
    
    
    
    10,295
    
    
    
    7,054
    
    
    
    5,606Net interest income
    
    
    16,189
    
    
    
    18,289
    
    
    
    21,523
    
    
    
    22,261
    
    
    
    19,386Provision for loan losses
    
    
    14,855
    
    
    
    14,030
    
    
    
    2,639
    
    
    
    3,037
    
    
    
    1,190Noninterest income (1)
    
    
    3,341
    
    
    
    3,755
    
    
    
    4,031
    
    
    
    3,820
    
    
    
    4,110Loss on available for sale securities (1)
    
    
    3,237
    
    
    
    548
    
    
    
    
    
    
    
    
    
    
    
    Noninterest expense (2)
    
    
    14,979
    
    
    
    13,493
    
    
    
    14,939
    
    
    
    13,653
    
    
    
    13,287Loss on sale/writedown
of commercial loans held for sale (2)
    
    
    
    
    
    
    4,312
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) before tax
    
    
    (13,541
    )
    
    
    (10,339
    )
    
    
    7,976
    
    
    
    9,391
    
    
    
    9,019Net income (loss)
    
    
    (13,413
    )
    
    
    (6,556
    )
    
    
    5,586
    
    
    
    6,507
    
    
    
    6,291Per Share Data:Basic net income (loss) per share
    
    $
    (4.33
    )
    
    $
    (2.13
    )
    
    $
    1.76
    
    
    $
    2.03
    
    
    $
    1.98Diluted net income (loss) per share
    
    
    (4.33
    )
    
    
    (2.13
    )
    
    
    1.76
    
    
    
    2.03
    
    
    
    1.97Dividends paid
    
    
    0.16
    
    
    
    0.84
    
    
    
    0.84
    
    
    
    0.80
    
    
    
    0.72Weighted average basic shares outstanding
    
    
    3,096,332
    
    
    
    3,074,732
    
    
    
    3,177,093
    
    
    
    3,200,146
    
    
    
    3,185,025Weighted average diluted shares outstanding
    
    
    3,096,332
    
    
    
    3,074,732
    
    
    
    3,177,146
    
    
    
    3,200,518
    
    
    
    3,186,142Balance Sheet Data:Total assets
    
    $
    388,783
    
    
    $
    432,894
    
    
    $
    473,896
    
    
    $
    477,225
    
    
    $
    456,910Loans, gross
    
    
    315,817
    
    
    
    347,876
    
    
    
    384,581
    
    
    
    372,855
    
    
    
    357,377Allowance for loan losses
    
    
    14,122
    
    
    
    10,314
    
    
    
    7,598
    
    
    
    6,991
    
    
    
    6,093Deposits
    
    
    349,527
    
    
    
    379,578
    
    
    
    405,544
    
    
    
    422,086
    
    
    
    399,263Stockholders equity
    
    
    27,525
    
    
    
    40,627
    
    
    
    49,992
    
    
    
    49,446
    
    
    
    45,716Ratios:Dividend payout ratio
    
    
    N/A
    
    
    
    N/A
    
    
    
    47.55
    %
    
    
    39.15
    %
    
    
    36.34
    %Average equity to average asset ratio
    
    
    9.24
    %
    
    
    10.47
    %
    
    
    10.86
    %
    
    
    10.18
    %
    
    
    9.71
    %
 
 (1)
    
    Included in noninterest income in the Consolidated Statements of Income and
discussed under the caption
Noninterest Income under Item 7 Managements Discussion and Analysis of Financial
Condition and Results of
Operations.(2)
    
    Included in noninterest expense in the Consolidated Statements of Income and
discussed under the caption Noninterest Expense under
Item 7 Managements Discussion and Analysis of Financial
Condition and Results of Operations. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
   18




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FINANCIAL CONDITION
  Securities
   (in thousands)2008
    
    
    2007
    
    
    2006Held to maturity:States and political subdivisions
    
    $
    
    
    
    $
    15,394
    
    
    $
    16,809Available for sale:States and political subdivisions
    
    $
    14,704
    
    
    $
    
    
    
    $
    U.S. agencies
    
    
    9,693
    
    
    
    14,005
    
    
    
    24,480Preferred stock
    
    
    49
    
    
    
    
    
    
    
    Mortgage-backed/CMO securities
    
    
    17,074
    
    
    
    8,238
    
    
    
    11,931Total available for sale
    
    $
    41,520
    
    
    $
    22,243
    
    
    $
    36,411Other securities:FRB stock
    
    $
    44
    
    
    $
    44
    
    
    $
    44FHLBI stock
    
    
    951
    
    
    
    951
    
    
    
    951Total other securities
    
    $
    995
    
    
    $
    995
    
    
    $
    995
 19




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(in thousands)Maturing After
    
    
    Maturing AfterMaturing Within
    
    
    One but Within
    
    
    Five but Within
    
    
    Maturing AfterOne Year
    
    
    Five Years
    
    
    Ten Years
    
    
    Ten YearsAmount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    YieldStates and
political subdivisions
    
    $
    2,074
    
    
    
    4.53
    %
    
    $
    2,240
    
    
    
    4.28
    %
    
    $
    2,338
    
    
    
    3.98
    %
    
    $
    8,052
    
    
    
    4.36
    %U.S. agencies
    
    
    
    
    
    
    
    
    
    
    2,062
    
    
    
    3.84
    %
    
    
    7,131
    
    
    
    5.48
    %
    
    
    500
    
    
    
    5.25
    %Mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,074
    
    
    
    5.74
    %Preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49
    
    
    
    5.80
    %FRB stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44
    
    
    
    6.03
    %FHLBI stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    951
    
    
    
    5.00
    %Total
    
    $
    2,074
    
    
    
    4.53
    %
    
    $
    4,302
    
    
    
    4.07
    %
    
    $
    9,469
    
    
    
    5.11
    %
    
    $
    26,670
    
    
    
    5.54
    %Tax equivalent adjustment
for calculations of yield
    
    $
    38
    
    
    
    
    
    
    $
    40
    
    
    
    
    
    
    $
    42
    
    
    
    
    
    
    $
    148
  Tax-Exempt Rate
    
    
    Adjustment
    
    
    Equivalent BasisUnder 1 year
    
    
    4.53
    %
    
    
    1.83
    %
    
    
    6.36
    %1-5 years
    
    
    4.28
    %
    
    
    1.83
    %
    
    
    6.11
    %5-10 years
    
    
    3.98
    %
    
    
    1.83
    %
    
    
    5.81
    %10 years or more
    
    
    4.36
    %
    
    
    1.83
    %
    
    
    6.19
    %
  2008
    
    2007
    
    2006U.S. Treasury & agency securities
    
    
    22.8
    %
    
    
    36.3
    %
    
    
    45.2
    %Agency mortgage backed/CMO securities
    
    
    40.2
    %
    
    
    21.3
    %
    
    
    22.0
    %Tax exempt obligations of states and political subdivisions
    
    
    34.6
    %
    
    
    39.8
    %
    
    
    31.0
    %Preferred stock
    
    
    0.1
    %
    
    
    0.0
    %
    
    
    0.0
    %Other
    
    
    2.3
    %
    
    
    2.6
    %
    
    
    1.8
    %Total securities
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Loans
  20




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(in thousands)2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Balances
    
    
    Percent
    
    
    Balances
    
    
    Percent
    
    
    Balances
    
    
    Percent
    
    
    Balances
    
    
    Percent
    
    
    Balances
    
    
    PercentSecured by real estate:Residential first mortgage
    
    $
    31,332
    
    
    
    9.9
    %
    
    $
    35,545
    
    
    
    10.2
    %
    
    $
    39,768
    
    
    
    10.3
    %
    
    $
    46,391
    
    
    
    12.4
    %
    
    $
    53,059
    
    
    
    14.8
    %Residential home equity/other junior liens
    
    
    20,511
    
    
    
    6.5
    %
    
    
    19,353
    
    
    
    5.6
    %
    
    
    20,983
    
    
    
    5.4
    %
    
    
    19,750
    
    
    
    5.3
    %
    
    
    16,017
    
    
    
    4.5
    %Construction, land development and
other land
    
    
    42,712
    
    
    
    13.5
    %
    
    
    52,383
    
    
    
    15.0
    %
    
    
    67,376
    
    
    
    17.5
    %
    
    
    72,572
    
    
    
    19.4
    %
    
    
    59,873
    
    
    
    16.7
    %Commercial (nonfarm, nonresidential)
    
    
    179,674
    
    
    
    56.9
    %
    
    
    192,784
    
    
    
    55.3
    %
    
    
    203,219
    
    
    
    52.8
    %
    
    
    177,417
    
    
    
    47.5
    %
    
    
    163,706
    
    
    
    45.7
    %Consumer
    
    
    7,627
    
    
    
    2.4
    %
    
    
    11,113
    
    
    
    3.2
    %
    
    
    15,852
    
    
    
    4.1
    %
    
    
    22,247
    
    
    
    6.0
    %
    
    
    26,965
    
    
    
    7.5
    %Commercial
    
    
    31,628
    
    
    
    10.0
    %
    
    
    33,677
    
    
    
    9.7
    %
    
    
    31,710
    
    
    
    8.2
    %
    
    
    29,230
    
    
    
    7.8
    %
    
    
    31,772
    
    
    
    8.9
    %Other
    
    
    2,629
    
    
    
    0.8
    %
    
    
    3,510
    
    
    
    1.0
    %
    
    
    6,343
    
    
    
    1.7
    %
    
    
    6,104
    
    
    
    1.6
    %
    
    
    6,991
    
    
    
    1.9
    %Total gross loans
    
    
    316,113
    
    
    
    100.0
    %
    
    
    348,365
    
    
    
    100.0
    %
    
    
    385,251
    
    
    
    100.0
    %
    
    
    373,711
    
    
    
    100.0
    %
    
    
    358,383
    
    
    
    100.0
    %Net unearned fees
    
    
    (296
    )
    
    
    
    
    
    
    (489
    )
    
    
    
    
    
    
    (670
    )
    
    
    
    
    
    
    (856
    )
    
    
    
    
    
    
    (1,006
    )Total Loans
    
    $
    315,817
    
    
    
    
    
    
    $
    347,876
    
    
    
    
    
    
    $
    384,581
    
    
    
    
    
    
    $
    372,855
    
    
    
    
    
    
    $
    357,377
     21




---



##### Table of Contents



Maturing(in thousands)After OneWithin One
    
    
    but Within
    
    
    After FiveYear
    
    
    Five Years
    
    
    Years
    
    
    TotalReal estate construction, land development and other land loans
    
    $
    30,596
    
    
    $
    11,925
    
    
    $
    191
    
    
    $
    42,712Real estate other (secured by commercial and multi-family)
    
    
    45,919
    
    
    
    114,429
    
    
    
    19,326
    
    
    
    179,674Commercial (secured by business assets or unsecured)
    
    
    20,760
    
    
    
    10,281
    
    
    
    587
    
    
    
    31,628Other (loans to farmers, political subdivisions, and overdrafts)
    
    
    430
    
    
    
    1,726
    
    
    
    473
    
    
    
    2,629Totals
    
    $
    97,705
    
    
    $
    138,361
    
    
    $
    20,577
    
    
    $
    256,643
  Interest Sensitivity(in thousands)Fixed Rate
    
    Variable RateDue after one but within five years
    
    $
    124,252
    
    
    $
    14,109Due after five years
    
    
    19,721
    
    
    
    856
  22




---



##### Table of Contents



(in thousands)2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Nonperforming Loans and Assets:Nonaccrual loans
    
    $
    37,096
    
    
    $
    14,459
    
    
    $
    12,199
    
    
    $
    5,234
    
    
    $
    1,146Loans past due 90 days and still accruing
    
    
    1,560
    
    
    
    114
    
    
    
    288
    
    
    
    391
    
    
    
    288Total nonperforming loans
    
    
    38,656
    
    
    
    14,573
    
    
    
    12,487
    
    
    
    5,625
    
    
    
    1,434Other real estate
    
    
    2,678
    
    
    
    1,523
    
    
    
    1,629
    
    
    
    680
    
    
    
    735Total nonperforming assets
    
    $
    41,334
    
    
    $
    16,096
    
    
    $
    14,116
    
    
    $
    6,305
    
    
    $
    2,169Nonperforming loans as a percent of total loans
    
    
    12.24
    %
    
    
    4.19
    %
    
    
    3.25
    %
    
    
    1.51
    %
    
    
    0.40
    %Allowance for loan losses as a percent of
nonperforming loans
    
    
    37
    %
    
    
    71
    %
    
    
    61
    %
    
    
    124
    %
    
    
    425
    %
    (in thousands)2008
    
    
    2007
    
    
    2006Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentNonperforming LoansSecured by real estate:Residential first mortgage
    
    $
    2,994
    
    
    
    7.7
    %
    
    $
    1,565
    
    
    
    10.8
    %
    
    $
    3,480
    
    
    
    27.9
    %Residential home equity/other junior liens
    
    
    2,486
    
    
    
    6.4
    %
    
    
    736
    
    
    
    5.0
    %
    
    
    490
    
    
    
    3.9
    %Construction
and land development and farmland
    
    
    18,904
    
    
    
    48.9
    %
    
    
    6,227
    
    
    
    42.7
    %
    
    
    1,542
    
    
    
    12.4
    %Commercial real estate
    
    
    12,053
    
    
    
    31.2
    %
    
    
    5,831
    
    
    
    40.0
    %
    
    
    5,762
    
    
    
    46.1
    %Consumer
    
    
    22
    
    
    
    0.1
    %
    
    
    38
    
    
    
    0.3
    %
    
    
    34
    
    
    
    0.3
    %Commercial
    
    
    2,197
    
    
    
    5.7
    %
    
    
    176
    
    
    
    1.2
    %
    
    
    1,179
    
    
    
    9.4
    %Total nonperforming loans
    
    $
    38,656
    
    
    
    100.0
    %
    
    $
    14,573
    
    
    
    100.0
    %
    
    $
    12,487
    
    
    
    100.0
    %
   23




---



##### Table of Contents



Accounting by Creditors for Impairment of Loan, Accounting for Contingencies
     24




---



##### Table of Contents



(in thousands)2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Loans:Average daily balance of loans for the year
    
    $
    336,637
    
    
    $
    375,037
    
    
    $
    374,634
    
    
    $
    366,877
    
    
    $
    340,859Amount of loans outstanding at end of year
    
    
    315,817
    
    
    
    347,876
    
    
    
    384,581
    
    
    
    372,855
    
    
    
    357,377Components:Allowance for loan lossesBalance, beginning of year
    
    $
    10,314
    
    
    $
    7,598
    
    
    $
    6,991
    
    
    $
    6,093
    
    
    $
    5,434Loans charged off:Real estate mortgage
    
    
    261
    
    
    
    243
    
    
    
    260
    
    
    
    26
    
    
    
    Commercial (1)
    
    
    11,170
    
    
    
    5,519
    
    
    
    1,785
    
    
    
    1,436
    
    
    
    379Consumer
    
    
    674
    
    
    
    860
    
    
    
    619
    
    
    
    792
    
    
    
    543Subtotal
    
    
    12,105
    
    
    
    6,622
    
    
    
    2,664
    
    
    
    2,254
    
    
    
    922Charge offs on
loans transferred to held for sale (2)
    
    
    
    
    
    
    4,669
    
    
    
    
    
    
    
    
    
    
    
    Total charge offs
    
    
    12,105
    
    
    
    11,291
    
    
    
    2,664
    
    
    
    2,254
    
    
    
    922Recoveries to loans previously charged off:Real estate mortgage
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial
    
    
    370
    
    
    
    146
    
    
    
    283
    
    
    
    120
    
    
    
    70Consumer
    
    
    251
    
    
    
    239
    
    
    
    226
    
    
    
    142
    
    
    
    104Total recoveries
    
    
    635
    
    
    
    385
    
    
    
    509
    
    
    
    262
    
    
    
    174Net loans charged off
    
    
    11,470
    
    
    
    10,906
    
    
    
    2,155
    
    
    
    1,992
    
    
    
    748Additions to allowance charged to operations
    
    
    15,278
    
    
    
    13,622
    
    
    
    2,762
    
    
    
    2,890
    
    
    
    1,407Balance, end of year
    
    
    14,122
    
    
    
    10,314
    
    
    
    7,598
    
    
    
    6,991
    
    
    
    6,093Reserve for unfunded credit commitmentsBalance, beginning of year
    
    
    739
    
    
    
    331
    
    
    
    454
    
    
    
    307
    
    
    
    524Additions (reductions) to reserve
charged to operations
    
    
    (423
    )
    
    
    408
    
    
    
    (123
    )
    
    
    147
    
    
    
    (217
    )Balance, end of year
    
    
    316
    
    
    
    739
    
    
    
    331
    
    
    
    454
    
    
    
    307Total allowance for loan losses and
reserve for unfunded credit commitments
    
    $
    14,438
    
    
    $
    11,053
    
    
    $
    7,929
    
    
    $
    7,445
    
    
    $
    6,400Ratios:Net loans charged off to average loans outstanding
    
    
    3.41
    %
    
    
    2.91
    %
    
    
    0.58
    %
    
    
    0.54
    %
    
    
    0.22
    %Allowance for loan losses to loans outstanding
    
    
    4.47
    %
    
    
    2.96
    %
    
    
    1.98
    %
    
    
    1.88
    %
    
    
    1.70
    %
 
 (1)
    
    Partial charge offs of $2,934,831 are included in commercial charge offs to reduce the loans transferred to held for sale to their
impaired value prior to consideration of bid amounts in 2007(2)
    
    Represents charges to the allowance to reduce the investment in the loans to the estimated fair values when the loans were
transferred to held for sale in 2007. 25




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##### Table of Contents



(in thousands)2008
    
    
    2007
    
    
    2006Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentCharge offsSecured by real estateResidential first mortgage
    
    $
    775
    
    
    
    6.4
    %
    
    $
    1,150
    
    
    
    10.2
    %
    
    $
    508
    
    
    
    19.1
    %Residential home equity/other junior liens
    
    
    413
    
    
    
    3.4
    %
    
    
    338
    
    
    
    3.0
    %
    
    
    312
    
    
    
    11.7
    %Construction and land development and farmland
    
    
    7,647
    
    
    
    63.2
    %
    
    
    4,709
    
    
    
    41.7
    %
    
    
    180
    
    
    
    6.8
    %Commercial real estate
    
    
    1,357
    
    
    
    11.2
    %
    
    
    2,533
    
    
    
    22.4
    %
    
    
    949
    
    
    
    35.6
    %Consumer
    
    
    450
    
    
    
    3.7
    %
    
    
    881
    
    
    
    7.8
    %
    
    
    619
    
    
    
    23.2
    %Commercial
    
    
    1,463
    
    
    
    12.1
    %
    
    
    1,680
    
    
    
    14.9
    %
    
    
    96
    
    
    
    3.6
    %Total charge offs
    
    $
    12,105
    
    
    
    100.0
    %
    
    $
    11,291
    
    
    
    100.0
    %
    
    $
    2,664
    
    
    
    100.0
    %
  (in thousands)2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentCommercial
    
    $
    13,064
    
    
    
    86.4
    %
    
    $
    9,274
    
    
    
    86.5
    %
    
    $
    6,675
    
    
    
    85.5
    %
    
    $
    5,864
    
    
    
    81.9
    %
    
    $
    4,877
    
    
    
    80.3
    %Consumer
    
    
    613
    
    
    
    6.9
    %
    
    
    609
    
    
    
    6.3
    %
    
    
    442
    
    
    
    7.2
    %
    
    
    850
    
    
    
    9.7
    %
    
    
    825
    
    
    
    10.1
    %Real estate mortgage
    
    
    445
    
    
    
    6.7
    %
    
    
    431
    
    
    
    7.2
    %
    
    
    481
    
    
    
    7.3
    %
    
    
    277
    
    
    
    8.4
    %
    
    
    391
    
    
    
    9.6
    %Total
    
    $
    14,122
    
    
    
    100.0
    %
    
    $
    10,314
    
    
    
    100.0
    %
    
    $
    7,598
    
    
    
    100.0
    %
    
    $
    6,991
    
    
    
    100.0
    %
    
    $
    6,093
    
    
    
    100.0
    %
  (in thousands)2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentCommercial
    
    $
    76
    
    
    
    62.5
    %
    
    $
    488
    
    
    
    79.6
    %
    
    $
    207
    
    
    
    80.1
    %
    
    $
    199
    
    
    
    81.9
    %
    
    $
    148
    
    
    
    80.3
    %Consumer
    
    
    240
    
    
    
    37.5
    %
    
    
    251
    
    
    
    20.4
    %
    
    
    124
    
    
    
    19.9
    %
    
    
    255
    
    
    
    9.7
    %
    
    
    158
    
    
    
    10.1
    %Real estate mortgage
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.4
    %
    
    
    1
    
    
    
    9.6
    %Total
    
    $
    316
    
    
    
    100.0
    %
    
    $
    739
    
    
    
    100.0
    %
    
    $
    331
    
    
    
    100.0
    %
    
    $
    454
    
    
    
    100.0
    %
    
    $
    307
    
    
    
    100.0
    %
 Deposits
  26




---



##### Table of Contents



(in thousands)2008
    
    
    2007
    
    
    2006Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    RateNon-interest bearing demand
    
    $
    55,077
    
    
    
    0.00
    %
    
    $
    59,734
    
    
    
    0.00
    %
    
    $
    65,492
    
    
    
    0.00
    %NOW
    
    
    35,845
    
    
    
    0.24
    %
    
    
    36,748
    
    
    
    0.49
    %
    
    
    39,568
    
    
    
    0.38
    %Savings
    
    
    38,033
    
    
    
    0.49
    %
    
    
    38,656
    
    
    
    0.50
    %
    
    
    43,383
    
    
    
    0.40
    %MMDA
    
    
    72,762
    
    
    
    2.01
    %
    
    
    67,473
    
    
    
    3.09
    %
    
    
    68,739
    
    
    
    2.35
    %Time deposits
    
    
    163,211
    
    
    
    3.64
    %
    
    
    184,938
    
    
    
    4.82
    %
    
    
    186,192
    
    
    
    4.26
    %Total
    
    $
    364,928
    
    
    
    2.10
    %
    
    $
    387,549
    
    
    
    2.93
    %
    
    $
    403,374
    
    
    
    2.45
    %
    Capital
   27




---



##### Table of Contents



MinimumRegulatory
    
    MinimumRegulatory RatioRatio for Well
    
    for Adequately
    

Bank
RatiosCapitalized
    
    Capitalized
    
    2008
    
    2007
    
    2006Average equity to average asset ratio
    
    
    
    
    
    
    
    
    
    
    9.24
    %
    
    
    10.42
    %
    
    
    10.86
    %Tier 1 leverage ratio
    
    
    5.00
    %
    
    
    4.00
    %
    
    
    6.89
    %
    
    
    9.60
    %
    
    
    10.80
    %Tier 1 risk-based capital
    
    
    6.00
    %
    
    
    4.00
    %
    
    
    8.27
    %
    
    
    10.61
    %
    
    
    12.31
    %Total risk-based capital
    
    
    10.00
    %
    
    
    8.00
    %
    
    
    9.56
    %
    
    
    11.88
    %
    
    
    13.56
    %
   Liquidity and Funds Management
      28




---



##### Table of Contents



Contractual Obligations and Commitments
  (in thousands)Within
    
    One to
    
    Three to
    
    OverOne Year
    
    Three Years
    
    Five Years
    
    Five Years
    
    TotalDeposits without a stated maturity(1)
    
    $
    193,367
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    193,367Consumer and brokered certificates of deposits(2)
    
    
    136,903
    
    
    
    19,746
    
    
    
    2,986
    
    
    
    4
    
    
    
    159,639Long term advances(3) (4)
    
    
    8,550
    
    
    
    415
    
    
    
    
    
    
    
    
    
    
    
    8,965Operating leases(5)
    
    
    42
    
    
    
    84
    
    
    
    32
    
    
    
    
    
    
    
    158Purchase obligations(6)
    
    
    291
    
    
    
    416
    
    
    
    316
    
    
    
    44
    
    
    
    1,067
 
 (1)
    
    Excludes interest.(2)
    
    Includes interest on both fixed and variable rate obligations. The interest rate
for variable rate obligations is based upon interest
rates in effect at December 31, 2008. Future changes in market interest rates could
materially affect the contractual amounts to
be paid for variable rate obligations; there were no variable rate obligations outstanding at December 31, 2008.(3)
    
    Includes interest on fixed rate obligations.(4)
    
    See Note 9, Other Borrowings, in Notes to Consolidated Financial Statements.(5)
    
    See Note 12, Leases, in Notes to Consolidated Financial Statements.(6)
    
    Purchase obligations  relate to certain contractual payments for services
provided for information technology and data processing.  Within
    
    One to
    
    Three to
    
    Over(in thousands)
    
    One Year
    
    Three Years
    
    Five Years
    
    Five Years
    
    TotalCommercial loans
    
    $
    14,276
    
    
    $
    2,379
    
    
    $
    22
    
    
    $
    
    
    
    $
    16,677Commercial construction loans
    
    
    558
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    558Consumer loans
    
    
    1,226
    
    
    
    2,442
    
    
    
    2,822
    
    
    
    4,068
    
    
    
    10,558Standby letters of credit
    
    
    332
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    332
  29




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##### Table of Contents



Quantitative and Qualitative Disclosures about Market Risk
    (in thousands)0-3
    
    
    4-12
    
    
    1-5
    
    
    5+Months
    
    
    Months
    
    
    Years
    
    
    Years
    
    
    TotalAssets:Loans
    
    $
    85,168
    
    
    $
    55,504
    
    
    $
    127,371
    
    
    $
    33,652
    
    
    $
    301,695Securities
    
    
    5,078
    
    
    
    14,424
    
    
    
    14,644
    
    
    
    8,369
    
    
    
    42,515Certificates of deposit
    
    
    
    
    
    
    885
    
    
    
    3,434
    
    
    
    
    
    
    
    4,319Short term investments
    
    
    11,904
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,904Total assets
    
    $
    102,150
    
    
    $
    70,813
    
    
    $
    145,449
    
    
    $
    42,021
    
    
    $
    360,433LiabilitiesNOW, savings, and MMDA
    
    $
    62,980
    
    
    $
    
    
    
    $
    
    
    
    $
    73,982
    
    
    $
    136,962Time deposits
    
    
    32,766
    
    
    
    101,433
    
    
    
    21,958
    
    
    
    4
    
    
    
    156,161FHLBI advances & other borrowings
    
    
    8,483
    
    
    
    
    
    
    
    414
    
    
    
    
    
    
    
    8,897Total liabilities
    
    $
    104,229
    
    
    $
    101,433
    
    
    $
    22,372
    
    
    $
    73,986
    
    
    $
    302,020Rate sensitivity GAP:GAP for period
    
    $
    (2,079
    )
    
    $
    (30,620
    )
    
    $
    123,077
    
    
    $
    (31,965
    )Cumulative GAP
    
    
    (2,079
    )
    
    
    (32,699
    )
    
    
    90,378
    
    
    
    58,413December 31, 2008 cumulative sensitive ratio
    
    
    0.98
    
    
    
    0.84
    
    
    
    1.40
    
    
    
    1.19December 31, 2007 cumulative sensitive ratio
    
    
    0.83
    
    
    
    0.84
    
    
    
    1.42
    
    
    
    1.19
    30




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##### Table of Contents



Fair
Value of Financial Instruments
  Fair Value Measurements
      31




---



##### Table of Contents



RESULTS OF OPERATIONS
   2008
    
    2007
    
    2006
    
    2005
    
    2004Net income (loss) as a percent of:Average common equity
    
    
    -34.92
    %
    
    
    -13.98
    %
    
    
    11.06
    %
    
    
    13.63
    %
    
    
    14.51
    %Average total assets
    
    
    -3.23
    %
    
    
    -1.46
    %
    
    
    1.20
    %
    
    
    1.39
    %
    
    
    1.41
    %
 Net Interest Income
  32




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##### Table of Contents



Yield Analysis of
Consolidated Average Assets and Liabilities
 2008
    
    
    2007
    
    
    2006Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateAssetsInterest earning assets:Short term investments
    
    $
    18,186
    
    
    $
    382.3
    
    
    
    2.10
    %
    
    $
    3,091
    
    
    $
    150.6
    
    
    
    4.87
    %
    
    $
    3,253
    
    
    $
    151.7
    
    
    
    4.66
    %Certificates of deposit
    
    
    4,503
    
    
    
    219.5
    
    
    
    4.87
    %
    
    
    3,998
    
    
    
    189.2
    
    
    
    4.73
    %
    
    
    6,164
    
    
    
    264.4
    
    
    
    4.29
    %Securities: Taxable
    
    
    24,714
    
    
    
    1,397.0
    
    
    
    5.65
    %
    
    
    29,795
    
    
    
    1,324.8
    
    
    
    4.45
    %
    
    
    43,361
    
    
    
    1,665.7
    
    
    
    3.84
    %Tax-exempt(1)
    
    
    15,412
    
    
    
    912.7
    
    
    
    5.92
    %
    
    
    16,021
    
    
    
    941.5
    
    
    
    5.88
    %
    
    
    17,118
    
    
    
    1,048.3
    
    
    
    6.12
    %Commercial loans (2)(3)
    
    
    292,103
    
    
    
    18,632.6
    
    
    
    6.38
    %
    
    
    324,097
    
    
    
    23,988.5
    
    
    
    7.40
    %
    
    
    312,308
    
    
    
    24,572.5
    
    
    
    7.87
    %Consumer loans (2)(3)
    
    
    21,671
    
    
    
    1,620.3
    
    
    
    7.48
    %
    
    
    24,522
    
    
    
    2,160.4
    
    
    
    8.81
    %
    
    
    31,874
    
    
    
    2,699.8
    
    
    
    8.47
    %Mortgage loans (2)(3)
    
    
    22,863
    
    
    
    1,488.9
    
    
    
    6.51
    %
    
    
    26,418
    
    
    
    1,774.0
    
    
    
    6.71
    %
    
    
    30,452
    
    
    
    1,842.3
    
    
    
    6.05
    %Total earning assets and total
interest income
    
    
    399,452
    
    
    $
    24,653.3
    
    
    
    6.17
    %
    
    
    427,942
    
    
    $
    30,529.0
    
    
    
    7.13
    %
    
    
    444,530
    
    
    $
    32,244.7
    
    
    
    7.25
    %Cash and due from banks
    
    
    7,959
    
    
    
    
    
    
    
    
    
    
    
    8,914
    
    
    
    
    
    
    
    
    
    
    
    10,703All other assets
    
    
    20,869
    
    
    
    
    
    
    
    
    
    
    
    19,845
    
    
    
    
    
    
    
    
    
    
    
    17,196Allowance for loan losses
    
    
    (12,751
    )
    
    
    
    
    
    
    
    
    
    
    (8,940
    )
    
    
    
    
    
    
    
    
    
    
    (7,324
    )Total assets
    
    $
    415,529
    
    
    
    
    
    
    
    
    
    
    $
    447,761
    
    
    
    
    
    
    
    
    
    
    $
    465,105Liabilities and
Stockholders EquityInterest bearing deposits:NOW
    
    $
    35,845
    
    
    $
    87.7
    
    
    
    0.24
    %
    
    $
    36,748
    
    
    $
    181.5
    
    
    
    0.49
    %
    
    $
    39,568
    
    
    $
    148.4
    
    
    
    0.38
    %Savings
    
    
    38,033
    
    
    
    185.9
    
    
    
    0.49
    %
    
    
    38,656
    
    
    
    192.7
    
    
    
    0.50
    %
    
    
    43,383
    
    
    
    173.2
    
    
    
    0.40
    %MMDA
    
    
    72,762
    
    
    
    1,465.3
    
    
    
    2.01
    %
    
    
    67,473
    
    
    
    2,081.7
    
    
    
    3.09
    %
    
    
    68,739
    
    
    
    1,613.5
    
    
    
    2.35
    %Time deposits
    
    
    163,211
    
    
    
    5,941.2
    
    
    
    3.64
    %
    
    
    184,938
    
    
    
    8,910.4
    
    
    
    4.82
    %
    
    
    186,192
    
    
    
    7,936.0
    
    
    
    4.26
    %Short term borrowings
    
    
    273
    
    
    
    13.8
    
    
    
    5.06
    %
    
    
    6,918
    
    
    
    371.3
    
    
    
    5.37
    %
    
    
    5,696
    
    
    
    313.5
    
    
    
    5.50
    %FHLBI long term advances
    
    
    8,812
    
    
    
    424.5
    
    
    
    4.82
    %
    
    
    2,504
    
    
    
    147.1
    
    
    
    5.88
    %
    
    
    1,496
    
    
    
    110.4
    
    
    
    7.38
    %Total interest bearing
liabilities and total interest
expense
    
    
    318,936
    
    
    
    8,118.4
    
    
    
    2.55
    %
    
    
    337,237
    
    
    
    11,884.7
    
    
    
    3.52
    %
    
    
    345,074
    
    
    
    10,295.0
    
    
    
    2.98
    %Noninterest bearing deposits
    
    
    55,077
    
    
    
    
    
    
    
    
    
    
    
    59,734
    
    
    
    
    
    
    
    
    
    
    
    65,492All other liabilities
    
    
    3,104
    
    
    
    
    
    
    
    
    
    
    
    3,905
    
    
    
    
    
    
    
    
    
    
    
    4,011Stockholders equity
    
    
    38,412
    
    
    
    
    
    
    
    
    
    
    
    46,885
    
    
    
    
    
    
    
    
    
    
    
    50,528Total liabilities and
stockholders equity
    
    $
    415,529
    
    
    
    
    
    
    
    
    
    
    $
    447,761
    
    
    
    
    
    
    
    
    
    
    $
    465,105Interest spread
    
    
    
    
    
    
    
    
    
    
    3.63
    %
    
    
    
    
    
    
    
    
    
    
    3.61
    %
    
    
    
    
    
    
    
    
    
    
    4.27
    %Net interest income-FTE
    
    
    
    
    
    $
    16,534.9
    
    
    
    
    
    
    
    
    
    
    $
    18,644.3
    
    
    
    
    
    
    
    
    
    
    $
    21,949.7Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.14
    %
    
    
    
    
    
    
    
    
    
    
    4.36
    %
    
    
    
    
    
    
    
    
    
    
    4.94
    %
 
 (1)
    
    Average yields in the above table have been adjusted to a tax-equivalent basis using a 34% tax rate and exclude the effect of any unrealized market value adjustments included in other
comprehensive income recorded under Statement of Financial Accounting Standards No. 115.(2)
    
    For purposes of the computation above, average non-accruing loans of $27,823,000 in 2008, $13,691,000 in 2007 and $7,539,000 in 2006 are included in the average daily loan balance.(3)
    
    Interest on loans includes origination fees totaling $243,000 in 2008, $328,000 in 2007, and $507,000 in 2006.  33




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##### Table of Contents



(in thousands)Year ended December 31, 2008
    
    
    Year ended December 31, 2007compared to
    
    
    compared toYear ended December 31, 2007
    
    
    Year ended December 31, 2006Amount of Increase (Decrease) Due to Change inTotal
    
    
    
    
    
    
    
    
    
    
    TotalAmount
    
    
    
    
    
    
    
    
    
    
    AmountAverage
    
    
    of Increase/
    
    
    
    
    
    
    Average
    
    
    of Increase/Volume
    
    
    Rate
    
    

(Decrease)
    
    
    Volume
    
    
    Rate
    
    

(Decrease)Interest Income:Short term investments
    
    $
    736
    
    
    $
    (503
    )
    
    $
    233
    
    
    $
    (8
    )
    
    $
    6
    
    
    $
    (2
    )Certificates of deposit
    
    
    24
    
    
    
    6
    
    
    
    30
    
    
    
    (93
    )
    
    
    18
    
    
    
    (75
    )Securities:Taxable
    
    
    (226
    )
    
    
    298
    
    
    
    72
    
    
    
    (521
    )
    
    
    181
    
    
    
    (340
    )Tax exempt
    
    
    (36
    )
    
    
    7
    
    
    
    (29
    )
    
    
    (67
    )
    
    
    (40
    )
    
    
    (107
    )Loans
    
    
    (2,859
    )
    
    
    (3,322
    )
    
    
    (6,181
    )
    
    
    31
    
    
    
    (1,223
    )
    
    
    (1,192
    )Total interest income
    
    $
    (2,361
    )
    
    $
    (3,514
    )
    
    $
    (5,875
    )
    
    $
    (658
    )
    
    $
    (1,058
    )
    
    $
    (1,716
    )Interest Expense:Interest bearing deposits:NOW, savings & MMDA
    
    $
    65
    
    
    $
    (782
    )
    
    $
    (717
    )
    
    $
    (112
    )
    
    $
    633
    
    
    $
    521Time deposits
    
    
    (1,047
    )
    
    
    (1,922
    )
    
    
    (2,969
    )
    
    
    (53
    )
    
    
    1,028
    
    
    
    975Short term borrowings
    
    
    (357
    )
    
    
    (1
    )
    
    
    (358
    )
    
    
    67
    
    
    
    (10
    )
    
    
    57FHLBI advances
    
    
    371
    
    
    
    (93
    )
    
    
    278
    
    
    
    74
    
    
    
    (38
    )
    
    
    36Total interest expense
    
    $
    (968
    )
    
    $
    (2,798
    )
    
    $
    (3,766
    )
    
    $
    (24
    )
    
    $
    1,613
    
    
    $
    1,589Net interest income (FTE)
    
    $
    (1,393
    )
    
    $
    (716
    )
    
    $
    (2,109
    )
    
    $
    (634
    )
    
    $
    (2,671
    )
    
    $
    (3,305
    )
     34




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##### Table of Contents



2008
    
    2007
    
    2006As a percent of average earning assets:Loans
    
    
    84.27
    %
    
    
    87.64
    %
    
    
    84.28
    %Securities
    
    
    10.05
    %
    
    
    10.71
    %
    
    
    13.60
    %Certificates of deposit
    
    
    1.13
    %
    
    
    0.93
    %
    
    
    1.39
    %Short term investments
    
    
    4.55
    %
    
    
    0.72
    %
    
    
    0.73
    %Average earning assets
    
    
    100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %NOW, savings, & MMDA
    
    
    36.71
    %
    
    
    33.38
    %
    
    
    34.12
    %Time deposits
    
    
    40.86
    %
    
    
    43.21
    %
    
    
    41.89
    %Short term borrowing
    
    
    0.07
    %
    
    
    1.62
    %
    
    
    1.28
    %FHLBI advances
    
    
    2.21
    %
    
    
    0.59
    %
    
    
    0.34
    %Average interest bearing liabilities
    
    
    79.85
    %
    
    
    78.80
    %
    
    
    77.63
    %Earning asset ratio
    
    
    96.13
    %
    
    
    95.57
    %
    
    
    95.58
    %Free-funds ratio
    
    
    20.16
    %
    
    
    21.20
    %
    
    
    22.37
    %
 Provision for Loan Losses
  Noninterest Income
  35




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##### Table of Contents



Noninterest Expense
   Federal Income Tax Expense
  36




---



##### Table of Contents



Critical Accounting Policies
  Valuation of Investment Securities
  Allowance for Loan Losses
  Accounting for Income Taxes
 Accounting for Income Taxes Accounting for Uncertainty in Income Taxes
  37




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##### Table of Contents



Impact of New Accounting Standards
  
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 8. Financial Statements and Supplementary Data.
 PageIndex to Consolidated Financial Statements:Reports of Independent Registered Public Accounting Firm
    
    
    39Consolidated Balance Sheets
    
    
    41Consolidated Statements of Income
    
    
    42Consolidated Statements of Stockholders Equity and Comprehensive Income
    
    
    43Consolidated Statements of Cash Flows
    
    
    44Notes to Consolidated Financial Statements
    
    
    45
 38




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##### Table of Contents



(BDO LOGO)
    
    BDO Seidman, LLP
Accountants and Consultants
    
    99 Monroe Avenue N.W., Suite 800
Grand Rapids, Michigan 49503-2654
Telephone: (616) 774-7000
Fax: (616) 776-3680
 
 Report of Independent Registered Public Accounting Firm
 
    Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements.
 Internal Control  Integrated Framework
 
 
 39




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##### Table of Contents



(BDO LOGO)
    
    BDO Seidman, LLP
Accountants and Consultants
    
    99 Monroe Avenue N.W., Suite 800
Grand Rapids, Michigan 49503-2654
Telephone: (616) 774-7000
Fax: (616) 776-3680
 Report of Independent Registered Public Accounting Firm
 
 Internal Control  Integrated Framework
      
 
 40




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##### Table of Contents



FNBH BANCORP, INC. AND SUBSIDIARIES
 
   2008
    
    
    2007AssetsCash and due from banks
    
    $
    10,175,999
    
    
    $
    13,400,674Short term investments
    
    
    11,904,019
    
    
    
    16,509,953Total cash and cash equivalents
    
    
    22,080,018
    
    
    
    29,910,627Certificates of deposit
    
    
    4,319,000
    
    
    
    4,025,000Investment securities:Investment securities held to maturity, net (fair value of $15,600,812
at December 31, 2007)
    
    
    
    
    
    
    15,394,165Investment securities available for sale, at fair value
    
    
    41,520,572
    
    
    
    22,243,110FHLBI and FRB stock, at cost
    
    
    994,950
    
    
    
    994,950Total investment securities
    
    
    42,515,522
    
    
    
    38,632,225Loans held for investment:Commercial
    
    
    272,945,793
    
    
    
    301,027,391Consumer
    
    
    21,711,696
    
    
    
    21,887,904Real estate mortgage
    
    
    21,159,504
    
    
    
    24,960,574Total loans held for investment
    
    
    315,816,993
    
    
    
    347,875,869Less allowance for loan losses
    
    
    (14,122,291
    )
    
    
    (10,314,161
    )Net loans held for investment
    
    
    301,694,702
    
    
    
    337,561,708Premises and equipment, net
    
    
    8,626,526
    
    
    
    9,138,784Other real estate owned, held for sale
    
    
    2,678,444
    
    
    
    1,523,079Deferred tax assets, net
    
    
    819,557
    
    
    
    2,490,558Accrued interest and other assets
    
    
    6,048,757
    
    
    
    9,612,487Total assets
    
    $
    388,782,526
    
    
    $
    432,894,468Liabilities and Stockholders EquityLiabilitiesDeposits:Demand (non-interest bearing)
    
    $
    56,404,701
    
    
    $
    56,505,803NOW
    
    
    35,539,239
    
    
    
    35,027,009Savings and money market
    
    
    101,422,737
    
    
    
    121,641,368Time deposits
    
    
    142,286,835
    
    
    
    159,357,927Brokered certificates of deposit
    
    
    13,873,571
    
    
    
    7,046,389Total deposits
    
    
    349,527,083
    
    
    
    379,578,496Other borrowings
    
    
    8,897,277
    
    
    
    9,152,190Accrued interest, taxes, and other liabilities
    
    
    2,833,064
    
    
    
    3,536,600Total liabilities
    
    
    361,257,424
    
    
    
    392,267,286Stockholders EquityCommon stock, no par value. Authorized 4,200,000 shares; 3,119,620
shares issued and outstanding at December 31, 2008 and 3,045,153
shares issued and outstanding at December 31, 2007
    
    
    6,583,158
    
    
    
    6,141,835Retained earnings
    
    
    19,643,976
    
    
    
    33,545,396Deferred directors compensation
    
    
    902,333
    
    
    
    859,609Accumulated other comprehensive income, net
    
    
    395,635
    
    
    
    80,342Total stockholders equity
    
    
    27,525,102
    
    
    
    40,627,182Total liabilities and stockholders equity
    
    $
    388,782,526
    
    
    $
    432,894,468
  41




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##### Table of Contents



FNBH BANCORP, INC. AND SUBSIDIARIES
 
   2008
    
    
    2007
    
    
    2006Interest and dividend income:Interest and fees on loans
    
    $
    21,662,130
    
    
    $
    27,819,663
    
    
    $
    28,986,420Interest and dividends on investment securities:U.S. Treasury, agency securities and CMOs
    
    
    1,276,017
    
    
    
    1,277,759
    
    
    
    1,592,919Obligations of states and political subdivisions
    
    
    644,588
    
    
    
    680,515
    
    
    
    743,800Corporate bonds
    
    
    
    
    
    
    
    
    
    
    17,560Preferred stock
    
    
    70,727
    
    
    
    
    
    
    
    Other securities
    
    
    50,208
    
    
    
    47,070
    
    
    
    54,202Interest on certificates of deposit
    
    
    219,489
    
    
    
    189,233
    
    
    
    264,410Interest on short term investments
    
    
    384,077
    
    
    
    159,074
    
    
    
    159,633Total interest and dividend income
    
    
    24,307,236
    
    
    
    30,173,314
    
    
    
    31,818,944Interest expense:Interest on deposits
    
    
    7,680,058
    
    
    
    11,366,317
    
    
    
    9,871,304Interest on other borrowings
    
    
    438,307
    
    
    
    518,395
    
    
    
    423,970Total interest expense
    
    
    8,118,365
    
    
    
    11,884,712
    
    
    
    10,295,274Net interest income
    
    
    16,188,871
    
    
    
    18,288,602
    
    
    
    21,523,670Provision for loan losses
    
    
    14,854,900
    
    
    
    14,029,666
    
    
    
    2,639,000Net interest income after provision for loan losses
    
    
    1,333,971
    
    
    
    4,258,936
    
    
    
    18,884,670Noninterest income:Service charges and other fee income
    
    
    2,957,150
    
    
    
    3,308,113
    
    
    
    3,636,856Trust income
    
    
    374,886
    
    
    
    401,768
    
    
    
    333,918Gain on sale of mortgage loans
    
    
    
    
    
    
    39,345
    
    
    
    57,208Loss on available for sale securities
    
    
    (3,236,635
    )
    
    
    (547,571
    )
    
    
    Other
    
    
    8,694
    
    
    
    5,422
    
    
    
    2,986Total noninterest income
    
    
    104,095
    
    
    
    3,207,077
    
    
    
    4,030,968Noninterest expense:Loss on sale/writedown of commercial loans held for sale
    
    
    
    
    
    
    4,311,528
    
    
    
    Salaries and employee benefits
    
    
    6,788,477
    
    
    
    6,644,273
    
    
    
    7,925,738Net occupancy expense
    
    
    1,192,987
    
    
    
    1,218,720
    
    
    
    1,169,337Equipment expense
    
    
    471,309
    
    
    
    487,532
    
    
    
    523,726Professional and service fees
    
    
    2,264,882
    
    
    
    2,035,141
    
    
    
    1,859,736Loan collection and foreclosed property expenses
    
    
    1,104,654
    
    
    
    233,768
    
    
    
    305,866Computer service fees
    
    
    498,878
    
    
    
    575,452
    
    
    
    364,333Computer software amortization expense
    
    
    285,911
    
    
    
    265,343
    
    
    
    231,469FDIC assessment fees
    
    
    600,058
    
    
    
    47,197
    
    
    
    52,010Printing and supplies
    
    
    275,840
    
    
    
    312,256
    
    
    
    271,167Director fees
    
    
    219,357
    
    
    
    300,428
    
    
    
    335,087Other
    
    
    1,276,229
    
    
    
    1,373,472
    
    
    
    1,900,751Total noninterest expense
    
    
    14,978,582
    
    
    
    17,805,110
    
    
    
    14,939,220Income (loss) before federal income taxes (credit)
    
    
    (13,540,516
    )
    
    
    (10,339,097
    )
    
    
    7,976,418Federal income taxes (credit)
    
    
    (127,276
    )
    
    
    (3,782,909
    )
    
    
    2,390,422Net income (loss)
    
    $
    (13,413,240
    )
    
    $
    (6,556,188
    )
    
    $
    5,585,996Per share statistics:Basic EPS
    
    $
    (4.33
    )
    
    $
    (2.13
    )
    
    $
    1.76Diluted EPS
    
    $
    (4.33
    )
    
    $
    (2.13
    )
    
    $
    1.76Dividends
    
    $
    0.16
    
    
    $
    0.84
    
    
    $
    0.84Basic average shares outstanding
    
    
    3,096,332
    
    
    
    3,074,732
    
    
    
    3,177,093Diluted average shares outstanding
    
    
    3,096,332
    
    
    
    3,074,732
    
    
    
    3,177,146
  42




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##### Table of Contents



FNBH BANCORP, INC. AND SUBSIDIARIES
 
   Accumulated OtherDeferred Directors
    
    
    ComprehensiveCommon Stock
    
    
    Retained Earnings
    
    
    Compensation
    
    
    Income (Loss)
    
    
    TotalBalances at December 31, 2005
    
    $
    6,088,540
    
    
    $
    43,389,917
    
    
    $
    575,045
    
    
    $
    (607,177
    )
    
    $
    49,446,325Cumulative effect adjustment-initial application of
SEC Staff Accounting Bulletin No. 108
    
    
    
    
    
    
    180,000
    
    
    
    
    
    
    
    
    
    
    
    180,000Balances at January 1, 2006
    
    
    6,088,540
    
    
    
    43,569,917
    
    
    
    575,045
    
    
    
    (607,177
    )
    
    
    49,626,325Earned portion of long term incentive plan, net
    
    
    81,199
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81,199Issued 1,234 shares for employee stock purchase plan
    
    
    30,623
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,623Issued 270 shares for current directors fees
    
    
    6,999
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,999Issued 1,244 shares for directors variable fee plan
    
    
    32,257
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,257Directors deferred compensation (5,750 stock units)
    
    
    
    
    
    
    
    
    
    
    150,141
    
    
    
    
    
    
    
    150,141Comprehensive income:Net income
    
    
    
    
    
    
    5,585,996
    
    
    
    
    
    
    
    
    
    
    
    5,585,996Change in unrealized loss on investment
securities available for sale, net of tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    242,633
    
    
    
    242,633Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,828,629Repurchase of common stock (117,700 shares)
    
    
    (233,783
    )
    
    
    (2,873,512
    )
    
    
    
    
    
    
    
    
    
    
    (3,107,295
    )Cash dividends ($0.84 per share)
    
    
    
    
    
    
    (2,656,404
    )
    
    
    
    
    
    
    
    
    
    
    (2,656,404
    )Balances at December 31, 2006
    
    
    6,005,835
    
    
    
    43,625,997
    
    
    
    725,186
    
    
    
    (364,544
    )
    
    
    49,992,474Earned portion of long term incentive plan, net
    
    
    130,832
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    130,832Issued 1,186 shares for employee stock purchase plan
    
    
    25,211
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,211Issued 653 shares for current directors fees
    
    
    12,998
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,998Issued 1,141 shares for directors variable fee plan
    
    
    30,020
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,020Issued 685 shares for deferred directors fees
    
    
    14,549
    
    
    
    
    
    
    
    (14,549
    )
    
    
    
    
    
    
    Directors deferred compensation (6,560 stock units)
    
    
    
    
    
    
    
    
    
    
    148,972
    
    
    
    
    
    
    
    148,972Comprehensive income:Net loss
    
    
    
    
    
    
    (6,556,188
    )
    
    
    
    
    
    
    
    
    
    
    (6,556,188
    )Change in unrealized gain (loss) on investment
securities available for sale, net of tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    83,489
    
    
    
    83,489Less reclassification adjustment for realized securities
net loss included in net loss, net of tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    361,397
    
    
    
    361,397Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,111,302
    )Repurchase of common stock (39,000 shares)
    
    
    (77,610
    )
    
    
    (960,995
    )
    
    
    
    
    
    
    
    
    
    
    (1,038,605
    )Cash dividends ($0.84 per share)
    
    
    
    
    
    
    (2,563,418
    )
    
    
    
    
    
    
    
    
    
    
    (2,563,418
    )Balances at December 31, 2007
    
    
    6,141,835
    
    
    
    33,545,396
    
    
    
    859,609
    
    
    
    80,342
    
    
    
    40,627,182Earned portion of long term incentive plan, net
    
    
    139,652
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    139,652Issued 1,356 shares for employee stock purchase plan
    
    
    10,367
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,367Issued 57,556 shares for a stock subscription
    
    
    259,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    259,000Issued 2,242 shares for current directors fees
    
    
    17,196
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,196Issued 712 shares for deferred directors fees
    
    
    15,108
    
    
    
    
    
    
    
    (15,108
    )
    
    
    
    
    
    
    Directors deferred compensation (7,287 stock units)
    
    
    
    
    
    
    
    
    
    
    57,832
    
    
    
    
    
    
    
    57,832Comprehensive income:Net loss
    
    
    
    
    
    
    (13,413,240
    )
    
    
    
    
    
    
    
    
    
    
    (13,413,240
    )Change in unrealized gain on investment securities
available for sale, net of tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,572,071
    )
    
    
    (2,572,071
    )Less reclassification adjustment for other-than-temporary
impairment charge on securities included in net loss,
net of tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,887,364
    
    
    
    2,887,364Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,097,947
    )Cash dividends ($0.16 per share)
    
    
    
    
    
    
    (488,180
    )
    
    
    
    
    
    
    
    
    
    
    (488,180
    )Balances at December 31, 2008
    
    $
    6,583,158
    
    
    $
    19,643,976
    
    
    $
    902,333
    
    
    $
    395,635
    
    
    $
    27,525,102
  43




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##### Table of Contents



FNBH BANCORP, INC. AND SUBSIDIARIES
 
   2008
    
    
    2007
    
    
    2006Cash flows from operating activities:Net income (loss)
    
    $
    (13,413,240
    )
    
    $
    (6,556,188
    )
    
    $
    5,585,996Adjustments to reconcile net income (loss) to net cash provided by operating
activities:Provision for loan losses
    
    
    14,854,900
    
    
    
    14,029,666
    
    
    
    2,639,000Depreciation and amortization
    
    
    906,363
    
    
    
    935,722
    
    
    
    923,942Deferred income tax benefit
    
    
    (1,508,577
    )
    
    
    (192,769
    )
    
    
    (217,783
    )Net amortization on investment securities
    
    
    26,725
    
    
    
    13,806
    
    
    
    8,830Earned portion of long-term incentive plan, net
    
    
    139,652
    
    
    
    130,832
    
    
    
    81,199Shares issued for current and variable directors compensation
    
    
    17,196
    
    
    
    43,018
    
    
    
    39,256Shares earned for deferred directors compensation
    
    
    57,832
    
    
    
    148,972
    
    
    
    150,141(Gain) loss on sale/disposal of equipment
    
    
    (3,972
    )
    
    
    18,951
    
    
    
    Proceeds from sale of equipment
    
    
    15,000
    
    
    
    
    
    
    
    Loss on available for sale securities
    
    
    3,236,635
    
    
    
    547,571
    
    
    
    Gain on sale of loans originated for sale
    
    
    
    
    
    
    (39,345
    )
    
    
    (57,208
    )Loss on sale/writedown of commercial loans held for sale
    
    
    
    
    
    
    4,311,528
    
    
    
    Proceeds from sale of loans originated for sale
    
    
    
    
    
    
    2,712,725
    
    
    
    5,050,710Origination of loans held for sale
    
    
    
    
    
    
    (2,673,380
    )
    
    
    (5,005,968
    )Loss on the sale of other real estate owned, held for sale
    
    
    264,226
    
    
    
    201,390
    
    
    
    292,101Decrease (increase) in accrued interest income and other assets
    
    
    6,349,621
    
    
    
    (3,998,342
    )
    
    
    (686,391
    )(Decrease) increase in accrued interest, taxes, and other liabilities
    
    
    (280,536
    )
    
    
    (1,749,526
    )
    
    
    1,272,989Net cash provided by operating activities
    
    
    10,661,825
    
    
    
    7,884,631
    
    
    
    10,076,814Cash flows from investing activities:Purchases of available for sale securities
    
    
    (16,507,770
    )
    
    
    (16,412,592
    )
    
    
    (1,860,624
    )Purchases of held to maturity securities
    
    
    (1,574,840
    )
    
    
    (505,500
    )
    
    
    (2,880,585
    )Purchases of FHLBI stock
    
    
    
    
    
    
    
    
    
    
    158,600Proceeds from sales of available for sale securities
    
    
    
    
    
    
    15,995,814
    
    
    
    Proceeds from maturities and at-par calls of available for sale securities
    
    
    7,890,000
    
    
    
    13,532,844
    
    
    
    8,285,762Proceeds from mortgage-backed securities paydowns-available for sale
    
    
    1,218,672
    
    
    
    1,189,383
    
    
    
    2,339,217Proceeds from maturities and calls of held to maturity securities
    
    
    2,305,000
    
    
    
    1,895,000
    
    
    
    2,475,000Proceeds from sale of loans originated for investment, held for sale
    
    
    
    
    
    
    8,763,632
    
    
    
    Purchases of certificates of deposit
    
    
    (1,373,000
    )
    
    
    (2,651,000
    )
    
    
    (2,944,000
    )Maturity of certificates of deposit
    
    
    1,079,000
    
    
    
    3,337,000
    
    
    
    5,399,000Net decrease (increase) in loans
    
    
    17,069,279
    
    
    
    10,521,671
    
    
    
    (15,851,925
    )Proceeds from sale of other real estate owned, held for sale
    
    
    2,100,236
    
    
    
    2,107,838
    
    
    
    741,632Capital expenditures
    
    
    (173,872
    )
    
    
    (998,351
    )
    
    
    (340,442
    )Net cash provided by (used in) investing activities
    
    
    12,032,705
    
    
    
    36,775,739
    
    
    
    (4,478,365
    )Cash flows from financing activities:Net decrease in deposits
    
    
    (30,051,413
    )
    
    
    (25,965,795
    )
    
    
    (16,541,296
    )Payments on FHLBI note
    
    
    (354,913
    )
    
    
    (328,623
    )
    
    
    (304,281
    )Proceeds from issuance of FHLBI note
    
    
    
    
    
    
    8,000,000
    
    
    
    Proceeds from issuance of short term debt
    
    
    1,445,000
    
    
    
    53,000,000
    
    
    
    42,500,000Repayment of short term debt
    
    
    (1,345,000
    )
    
    
    (65,000,000
    )
    
    
    (30,500,000
    )Repurchase of common stock
    
    
    
    
    
    
    (1,038,605
    )
    
    
    (3,107,295
    )Dividends paid
    
    
    (488,180
    )
    
    
    (2,563,418
    )
    
    
    (2,656,404
    )Shares issued for stock subscription
    
    
    259,000
    
    
    
    
    
    
    
    Shares issued for employee stock purchase plan
    
    
    10,367
    
    
    
    25,211
    
    
    
    30,623Net cash used in financing activities
    
    
    (30,525,139
    )
    
    
    (33,871,230
    )
    
    
    (10,578,653
    )Net (decrease) increase in cash and cash equivalents
    
    
    (7,830,609
    )
    
    
    10,789,140
    
    
    
    (4,980,204
    )Cash and cash equivalents at beginning of year
    
    
    29,910,627
    
    
    
    19,121,487
    
    
    
    24,101,691Cash and cash equivalents at end of year
    
    $
    22,080,018
    
    
    $
    29,910,627
    
    
    $
    19,121,487Supplemental disclosures:Interest paid
    
    $
    8,662,730
    
    
    $
    11,736,225
    
    
    $
    10,009,063Federal income taxes (refunded) paid
    
    
    (559,000
    )
    
    
    1,672,230
    
    
    
    2,097,919Transfer of held to maturity securities to available for sale securities, at
amortized cost
    
    
    14,639,423
    
    
    
    
    
    
    
    Loans transferred to other real estate
    
    
    3,519,827
    
    
    
    2,203,057
    
    
    
    1,983,249Loans charged off
    
    
    12,105,101
    
    
    
    11,290,640
    
    
    
    2,664,596Loans, net of reserves, transferred to held for investment from held for sale
    
    
    
    
    
    
    3,689,159
    
    
    
    Loans, net of reserves, transferred to held for sale
    
    
    
    
    
    
    17,194,017
    
    
    
    
  44




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##### Table of Contents



Notes to Consolidated Financial Statements
 (1) Summary of Significant Accounting Policies
 Principles of Consolidation
      (a)
    
    Brokered Certificates of DepositBrokered certificates of deposit are purchased periodically from other financial institutions
in denominations of less than $100,000. These investments are fully insured by the FDIC.
Brokered CDs are not marketable, and there is a penalty for early withdrawal.(b)
    
    Investment SecuritiesThe Bank classifies debt and equity investments as follows:Investment securities held to maturity are those securities which management has the positive
intent and ability to hold to maturity. Investment securities held to maturity are stated at
cost, adjusted for amortization of premium and accretion of discount.Investment securities the Bank may not hold until maturity are accounted for as securities
available for sale and are stated at fair value, with unrealized gains and losses, net of
income taxes, reported as a separate component of other comprehensive income until realized.
Fair value measurement is based upon quoted prices, if available. If quoted prices are not
available, fair values are measured using independent pricing models or other model-based
valuation techniques such as present value of future cash flows, adjusted for the securitys
credit rating, prepayment assumptions and other factors such as credit loss assumptions.Other-than-temporary impairment analyses are conducted on a quarterly basis if a potential
loss-triggering event occurs. The Bank recognizes other-than-temporary impairment when it is
probable that it will be unable to collect all amounts due according to the contractual terms
of the security and the fair value of the security is less than its amortized cost. The
other-than-temporary impairment loss is recorded in noninterest income. The initial indicator
of other-than-temporary impairment for both debt and equity securities is a decline in market
value below the
amount recorded for an investment, and the severity and duration of the decline. In
determining whether an impairment is other than temporary, the Bank considers the length of
time and the extent to which the fair value has been less than amortized cost, any recent
events specific to the issuer and economic conditions of its industry, our intent and ability
to hold the investment for a period of time, including maturity,
sufficient to allow for any anticipated recovery in the fair value of the security,
 45




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##### Table of Contents



and for debt securities, external
credit ratings and recent downgrades.Trading account securities are carried at fair value. Realized and unrealized gains or losses
on trading securities are included in noninterest income. The Bank holds no securities under
the trading classification.Gains or losses on the sale of securities are computed based on the adjusted cost of the
specific security.(c)
    
    LoansOn October 16, 2008, the Bank entered into a formal agreement with the Office of the
Comptroller of the Currency (OCC). Pursuant to the agreement, the Bank has agreed to take
certain actions intended to address various issues that have impacted the Banks financial
condition and performance. The agreement primarily pertains to actions regarding asset quality
and overall administration of the Banks credit functions. The Bank has implemented a new loan
policy, completed additional evaluations of the loans portfolio (using both internal and
external resources) and obtained updated appraisals on the majority of adversely rated
credits. The Bank also has obtained a new outside independent loan review service for 2009.
The Corporation believes that the Bank has made progress in
addressing the issues set forth in the formal agreement; however, to
date, the Bank remains subject to the terms of that agreement.Loans are classified within loans held for investment when management has the intent and
ability to hold the loan for the foreseeable future, or until maturity or payoff. The
foreseeable future is a management judgment which is determined based upon the type of loan,
business strategies, current market conditions, balance sheet management and liquidity needs.
Managements view of the foreseeable future may change based on changes in these conditions.
When a decision is made to sell or securitize a loan that was not originated or initially
acquired with the intent to sell or securitize, the loan is reclassified from loans held for
investment into held for sale. Loans are classified as held for sale when management has the
intent and ability to sell or securitize. Due to changing market conditions or other
strategic initiatives, managements intent with respect to the disposition of the loan may
change, and accordingly, loans previously classified as held for sale may be reclassified into
loans held for investment. Loans transferred between loans held for sale and loans held for
investment classifications are recorded at the lower of cost or market at the date of
transfer.Loans held for investment are carried at the principal amount outstanding net of unearned
income, unamortized premiums or discounts, deferred loan origination fees and costs, the
allowance for loan losses, and fair value adjustments, if any. Commercial loans included in
loans held for sale are carried at the lower of cost or fair value applied on a loan by loan
basis by type of loan. Mortgage loans included in loans held for sale are carried at the
lower of cost or fair value applied on a net aggregate basis. Fair value is measured based on
purchase commitments, bids received from potential purchasers, quoted prices for the same or
similar loans, or prices of recent sales or securitizations. Management considers in its
assessment the probability that buyer commitments may not close. In the absence of an active
market, fair value is based upon a discounted cash flow model which utilizes inputs and
assumptions which are believed to be consistent with market participants views.During the second quarter of 2007, the Bank reclassified certain nonperforming loans
originated for investment to the held for sale classification at their then estimated lower of
cost or fair value due to its intent, at the time, to package and sell the loans in the
secondary market. Certain of these loans were sold in the third quarter of 2007. Due to the
prevailing secondary market conditions, which worsened during the third quarter when the final
bids were received, the remaining balance of these loans, previously identified as held for
sale, were determined by management to no longer be offered for sale. Based on the intent and
ability of the Corporation to no longer sell these loans, they were transferred back to loans
held for investment at their then estimated fair values based on the bids received. For
purposes of reporting cash flows, the proceeds from the sale of the reclassified loans are
included in cash flows from investing activities in the consolidated statement of cash flows
in accordance with the requirements of FASB Statement No. 102, Statement of Cash Flows 
Exemption of Certain Enterprises andClassification of Cash Flows from Certain Securities Acquired for Resale  An Amendment of
FASB Statement No. 95, such that these cash inflows are categorized consistent with the
initial cash outflows related to these loans.Interest on loans is accrued daily based on the outstanding principal balance. Loan
origination fees and certain direct loan origination costs are deferred and recognized over
the lives of the related loans as an adjustment of the yield. Net unamortized deferred loan
fees amounted to $296,000 and $489,000 at December 31, 2008 and 2007, respectively.
 46




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##### Table of Contents



Prior to December 2007, the Bank originated real estate mortgage loans for sale to the
secondary market and sold the loans with servicing retained. Mortgage loans held for sale were
carried at the lower of cost or market, determined on a net aggregate basis. Market was
determined on the basis of delivery prices in the secondary mortgage market. When loans were
sold, gains and losses were recognized based on the specific identification method. For
purposes of reporting cash flows, cash outflows and inflows related to the origination and
sale of loans originated for sale are classified as operating activities in the consolidated
statement of cash flows.The total cost of mortgage loans originated and sold was allocated between the loan servicing
right and the mortgage loan, based on their relative fair values at the date of origination.
The capitalized cost of loan servicing rights is amortized in proportion to, and over the
period of, estimated net future servicing revenue. The Bank entered into interest rate lock
commitments to originate loans at a rate determined prior to funding. Interest rate lock
commitments on residential mortgage loans that are intended to be sold are considered to be
derivatives. Fair value is based on fees currently charged to enter into similar agreements.
There were no interest rate lock commitments at December 31, 2008 or 2007 as the Bank no
longer originates mortgage loans for sale.Mortgage servicing rights, which are included in other assets, are periodically evaluated for
impairment. For purposes of measuring impairment, mortgage servicing rights are stratified
based on predominant risk characteristics of the underlying serviced loans. These risk
characteristics include loan type, term, year originated, and note rate. Impairment represents
the excess of cost of an individual mortgage servicing rights stratum over its fair value and
is recognized through a valuation allowance.Fair values for individual strata are based on quoted market prices for comparable
transactions, if available, or estimated fair value. Estimates of fair value include
assumptions about prepayment, default and interest rates, and other factors which are subject
to change over time. Changes in these underlying assumptions could cause the fair value of
mortgage servicing rights, and the related valuation allowance, to change significantly in the
future.(d)
    
    Allowance for Loan Losses and Credit CommitmentsThe allowance for loan losses is based on managements periodic evaluation of the loan
portfolio and reflects an amount that, in managements opinion, is adequate to absorb probable
losses in the existing portfolio. In evaluating the portfolio, management takes into
consideration numerous factors, including current economic conditions, prior loan loss
experience, nonperforming loan levels, the composition of the loan portfolio, and managements
evaluation of the collectability of specific loans, which includes analysis of the value of
the underlying collateral. Although the Bank evaluates the adequacy of the allowance for loan
losses based on information known to management at a given time, various regulatory agencies,
as part of their normal examination process, may require future additions to the allowance for
loan losses.The Bank also maintains a reserve for losses on unfunded credit commitments and letters of
credit to provide for the risk of loss inherent in these arrangements. The reserve is computed
using the same methodology as that used to determine the allowance for loan losses. This
reserve is reported as a liability on the balance sheet within accrued interest, taxes, and
other liabilities, while the corresponding provision for these losses is recorded as a
component of the provision for loan losses.(e)
    
    Nonperforming AssetsThe Bank charges off all or part of loans when amounts are deemed to be uncollectible,
although collection efforts may continue and future recoveries may occur.Nonperforming assets are comprised of loans for which the accrual of interest has been
discontinued, loans for which the terms have been renegotiated to less than market rates due
to a serious weakening of the borrowers financial condition, loans 90 days past due and still
accruing, and other real estate owned, which has been acquired primarily through foreclosure
and is awaiting disposition.Loans are generally placed on a nonaccrual status when principal or interest is past due 90
days or more and when, in the opinion of management, full collection of principal and interest
is unlikely. At the time a loan is placed on nonaccrual status, interest previously accrued
but not yet collected is charged against current interest income. Income on such loans is then
recognized only to the extent that cash is received and where future collection of principal
is probable.
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The Bank considers a loan to be impaired when it is probable that it will be unable to collect
all or part of amounts due according to the contractual terms of the loan agreement. Impaired
loans are measured based on the present value of expected cash flows discounted at the loans
effective interest rate or, as a practical expedient, at a loans observable market price, or
the fair value of the collateral if the loan is collateral dependent. Interest income on
impaired loans is accrued based on the principal amounts outstanding. The accrual of interest
is generally discontinued when an impaired loan becomes 90 days past due.(f)
    
    Other Real Estate OwnedOther real estate owned at the time of foreclosure is recorded at the assets estimated fair
value, net of estimated disposal costs, establishing a new cost basis. Any write-downs at the
time of foreclosure are charged to the allowance for loan losses. Expenses incurred in
maintaining assets, adjustments to estimated disposal costs, and subsequent write-downs to
reflect declines in value are charged to other noninterest expense.(g)
    
    Transfer of Financial AssetsTransfers of financial assets are accounted for as sales when control over the assets has been
surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets
have been isolated from the Bank, (2) the transferee obtains the right (free of conditions
that constrain it from taking advantage of that right) to pledge or exchange the transferred
assets, and (3) the Bank does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity. The Banks transfers of
financial assets are limited to (1) commercial loan participations sold, which were
insignificant for 2008, 2007 and 2006, (2) the 2007 sale of loans originated for investment
and (3) the 2007 and 2006 sale of residential mortgage loans in the secondary market. Amounts
for the last two described transfers are disclosed in the consolidated statements of cash
flows.(h)
    
    Premises and EquipmentPremises and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation and amortization, computed on the straight-line method, are charged to operations
over the estimated useful lives of the assets. Estimated useful lives range up to 40 years for
buildings, up to 7 years for furniture and equipment and up to 15 years for land improvements.
Leasehold improvements are generally depreciated over the shorter of the respective lease
term or estimated useful life.Premises and equipment are evaluated periodically for impairment when events or changes in
circumstances indicate the carrying amount may not be recoverable. Impairment exists when the
expected undiscounted future cash flows of a long-lived asset are less than its carrying
value. In that event, the Bank recognizes a loss for the difference between the carrying
amount and the estimated fair value of the asset based on a quoted market price, if
applicable, or a discounted cash flow analysis. Impairment losses are recorded in other
noninterest expense on the income statement.(i)
    
    Advertising CostsAdvertising costs are generally expensed as incurred and approximated $89,000, $161,000 and
$306,000 for the years ended December 31, 2008, 2007 and 2006, respectively.(j)
    
    Federal Income TaxesDeferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.A valuation allowance, if needed, reduces deferred tax assets to the expected amount more
likely than not that is to be realized. Realization of the Corporations deferred tax assets
is primarily dependent upon the generation of a sufficient level of future taxable income. It
is Corporations policy to evaluate the realizability of deferred tax assets related to
unrealized losses on available for sale debt securities separately from its other deferred tax
assets when it has the intent and ability to hold the security to recovery (maturity, if
necessary). Because the future taxable income implicit in the recovery of the basis of
available for sale debt securities for financial reporting purposes will offset the deductions
underlying the deferred tax asset, a valuation allowance would generally not be necessary,
even in cases where a valuation allowance might be necessary related to the Corporations
other deferred tax assets.
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Should an other-than-temporary impairment of a debt security be
incurred, current accounting guidance requires that a related charge be recorded in earnings
for the difference between the securitys amortized cost and its fair value, which could
exceed the Corporations estimate of the actual credit loss based on managements assumptions
regarding future cash flows related to the security. In that case, the Corporations policy
is to record a deferred tax asset, without a valuation allowance, for the tax effects of the
difference between the estimated credit loss and the fair value of the security. At December
31, 2008, management did not believe it was more likely than not that all of the deferred tax
assets would be realized and, accordingly, recorded a $4,750,000 valuation allowance leaving a
net deferred tax asset recorded of $820,000. A valuation allowance was not recorded related
to the tax effects of the $1,039,000 difference between the estimated credit loss and the fair
value of the CMO security for which the Corporation recorded an other-than-temporary
impairment charge at December 31, 2008. See Note 3, Investment Securities.The Corporation adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes(FIN 48), on January 1, 2007. The adoption of FIN 48 had no
affect on the consolidated financial statements as there were no unrecognized tax benefits at
the time of adoption or during 2007 or 2008. Interest or penalties related to unrecognized
tax benefits will be recorded in income tax expense. The Corporation files U.S. federal
income tax returns which are subject to final examination for all years after 2004.(k)
    
    Stock-Based CompensationAt December 31, 2008 and 2007, the Corporation had two stock-based compensation plans, which
are described more fully in notes 14 and 15.(l)
    
    Common Stock RepurchasesThe Corporation records common stock repurchases at cost. A portion of the repurchase is
charged to common stock based on the average per share dollar amount of stock outstanding,
multiplied by the number of shares repurchased, with the remainder charged to retained
earnings. Shares repurchased are retired. The Board of Directors authorized a share
repurchase program on March 16, 2006, for 100,000 shares that expired on March 16, 2007. The
Board authorized another program on August 17, 2006, for an additional 100,000 shares that
expired on August 17, 2007. The Board of Directors authorized an additional share repurchase
program on May 17, 2007, for 100,000 shares that expired on August 17, 2008. No shares were
repurchased under the program. For the year ended December 31, 2008, there were no shares
repurchased. For the year ended December 31, 2007, 39,000 shares were repurchased under the
authorized plans. The cost of the repurchases approximated $1,039,000 at monthly weighted
average prices ranging from $26.55 to $26.70 per share. For the year ended December 31, 2006,
117,700 shares were repurchased, 110,700 under the authorized plans. The other 7,000 shares
had been approved by the Board for repurchase prior to approving an authorized share
repurchase program. The cost of the repurchases approximated $3,107,000 at monthly average
prices ranging from $25.80 to $26.78 per share.(m)
    
    Statements of Cash FlowsFor purposes of reporting cash flows, cash equivalents include amounts due from banks, federal
funds sold and other short term investments with original maturities of 90 days or less.(n)
    
    Comprehensive IncomeStatement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income,
established standards for the reporting and display of comprehensive income and its components
(such as changes in unrealized gains and losses on securities available for sale) in a
financial statement that is displayed with the same prominence as other financial statements.
The Corporation reports comprehensive income within the statement of stockholders equity and
comprehensive income. Comprehensive income includes net income and any changes in equity from
nonowner sources that are not recorded in the income statement.(o)
    
    Earnings Per ShareBasic earnings per common share is calculated by dividing net income by the average number of
common shares and deferred director fee stock units outstanding during the year. Diluted
earnings per common share is calculated by dividing net income by the average number of common
shares and deferred director fee stock units outstanding during the year, plus the effect of
common stock equivalents (for example, unvested restricted shares) that are dilutive.
 49




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(p)
    
    ReclassificationsCertain reclassifications in the prior years financial statements have been made to conform
to the current year presentation.(q)
    
    Operating SegmentWhile the Corporation monitors revenue streams of the various products and services offered,
the Corporation manages its business on the basis of one operating segment, banking, in
accordance with the qualitative and quantitative criteria established by FASB Statement No.
131, Disclosures about Segments of an Enterprise and Related Information.
 (2) Certificates of Deposit
  Maturing in 2009
    
    $
    885,000Maturing in 2010
    
    
    1,864,000Maturing in 2011
    
    
    294,000Maturing in 2012
    
    
    589,000Maturing in 2013
    
    
    687,000Total
    
    $
    4,319,000
 (3) Investment Securities
  December 31, 2008
    
    
    December 31, 2007Unrealized
    
    
    Unrealized
    
    
    
    
    
    
    
    
    
    
    Unrealized
    
    
    UnrealizedAmortized
    
    
    Gross
    
    
    Gross
    
    
    Fair
    
    
    Amortized
    
    
    Gross
    
    
    Gross
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value
    
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueHeld to maturity:Obligations of state and
political subdivisions
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    15,394,165
    
    
    $
    238,510
    
    
    $
    (31,863
    )
    
    $
    15,600,812Total held to maturity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,394,165
    
    
    
    238,510
    
    
    
    (31,863
    )
    
    
    15,600,812Available for sale:Obligations of state and
political subdivisions
    
    
    14,639,423
    
    
    
    233,833
    
    
    
    (168,840
    )
    
    
    14,704,416
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    U.S. agency securities
    
    
    9,510,468
    
    
    
    182,546
    
    
    
    
    
    
    
    9,693,014
    
    
    
    13,889,560
    
    
    
    134,767
    
    
    
    (18,989
    )
    
    
    14,005,338Mortgage-backed/CMO
securities
    
    
    16,722,434
    
    
    
    351,908
    
    
    
    
    
    
    
    17,074,342
    
    
    
    8,231,820
    
    
    
    35,748
    
    
    
    (29,796
    )
    
    
    8,237,772Preferred stock
securities
    
    
    48,800
    
    
    
    
    
    
    
    
    
    
    
    48,800
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total available for
sale
    
    
    40,921,125
    
    
    
    768,287
    
    
    
    (168,840
    )
    
    
    41,520,572
    
    
    
    22,121,380
    
    
    
    170,515
    
    
    
    (48,785
    )
    
    
    22,243,110Total securities
    
    $
    40,921,125
    
    
    $
    768,287
    
    
    $
    (168,840
    )
    
    $
    41,520,572
    
    
    $
    37,515,545
    
    
    $
    409,025
    
    
    $
    (80,648
    )
    
    $
    37,843,922
  50




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December 31, 2008Less than 12 months
    
    
    12 months or more
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
        
        
    
    
    UnrealizedGross
    
    
    Fair
    
    
    Gross
    
    
    Fair
    
    
    Gross
    
    
    FairLosses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    ValueAvailable for sale:Obligations of state and
political subdivisions
    
    $
    (168,840
    )
    
    $
    4,320,554
    
    
    $
    
    
    
    $
    
    
    
    $
    (168,840
    )
    
    $
    4,320,554U.S. Treasury and agency
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Preferred stock securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total available for sale
    
    $
    (168,840
    )
    
    $
    4,320,554
    
    
    $
    
    
    
    $
    
    
    
    $
    (168,840
    )
    
    $
    4,320,554
 December 31, 2007Less than 12 months
    
    
    12 months or more
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
        
        
    
    
    UnrealizedGross
    
    
    Fair
    
    
    Gross
    
    
    Fair
    
    
    Gross
    
    
    FairLosses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    ValueHeld to maturity:Obligations of state and
political subdivisions
    
    $
    (26,805
    )
    
    $
    1,801,920
    
    
    $
    (5,058
    )
    
    $
    1,303,774
    
    
    $
    (31,863
    )
    
    $
    3,105,694Available for sale:U.S. Treasury and agency
securities
    
    $
    (2,420
    )
    
    $
    887,580
    
    
    $
    (16,569
    )
    
    $
    4,982,991
    
    
    $
    (18,989
    )
    
    $
    5,870,571Mortgage-backed securities
    
    
    (29,796
    )
    
    
    4,346,994
    
    
    
    
    
    
    
    
    
    
    
    (29,796
    )
    
    
    4,346,994Total available for sale
    
    $
    (32,216
    )
    
    $
    5,234,574
    
    
    $
    (16,569
    )
    
    $
    4,982,991
    
    
    $
    (48,785
    )
    
    $
    10,217,565
  December 31, 2008
    
    
    December 31, 2007Amortized
    
    
    Approximate
    
    
    Amortized
    
    
    ApproximateCost
    
    
    Fair value
    
    
    Cost
    
    
    Fair ValueHeld to maturity:Due in one year or less
    
    $
    
    
    
    $
    
    
    
    $
    2,303,497
    
    
    $
    2,320,837Due after one year through five years
    
    
    
    
    
    
    
    
    
    
    3,668,097
    
    
    
    3,726,734Due after five years through
ten years
    
    
    
    
    
    
    
    
    
    
    2,604,102
    
    
    
    2,625,732Due after ten years
    
    
    
    
    
    
    
    
    
    
    6,818,469
    
    
    
    6,927,509$
    
    
    
    $
    
    
    
    $
    15,394,165
    
    
    $
    15,600,812Available for sale:Due in one year or less
    
    $
    2,054,745
    
    
    $
    2,074,256
    
    
    $
    5,889,560
    
    
    $
    5,870,571Due after one year through five years
    
    
    4,207,023
    
    
    
    4,301,499
    
    
    
    
    
    
    
    Due after five years through
ten years
    
    
    9,303,504
    
    
    
    9,469,427
    
    
    
    8,000,000
    
    
    
    8,134,767Due after ten years
    
    
    8,633,420
    
    
    
    8,601,048
    
    
    
    
    
    
    
    24,198,692
    
    
    
    24,446,230
    
    
    
    13,889,560
    
    
    
    14,005,338Mortgage-backed securities
    
    
    16,722,433
    
    
    
    17,074,342
    
    
    
    8,231,820
    
    
    
    8,237,772Totals
    
    $
    40,921,125
    
    
    $
    41,520,572
    
    
    $
    22,121,380
    
    
    $
    22,243,110
 52




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##### Table of Contents



2008
    
    2007Amortized
    
    Approximate
    
    Amortized
    
    ApproximateCost
    
    Fair Value
    
    Cost
    
    Fair ValueState of Michigan
    
    $
    10,570,123
    
    
    $
    10,614,209
    
    
    $
    10,506,107
    
    
    $
    10,641,057
   (4) Loans
   90 days past dueand still accruing interest
    
    
    Nonaccrual2008
    
    
    2007
    
    
    2006
    
    
    2008
    
    
    2007
    
    
    2006Commercial and mortgage
loans secured by real
estate
    
    $
    1,343,647
    
    
    $
    86,484
    
    
    $
    275,077
    
    
    $
    35,093,010
    
    
    $
    14,271,517
    
    
    $
    10,999,196Consumer loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,117
    
    
    
    38,389
    
    
    
    33,810Commercial and other loans
    
    
    216,310
    
    
    
    27,451
    
    
    
    12,639
    
    
    
    1,980,890
    
    
    
    149,307
    
    
    
    1,165,809Total
    
    $
    1,559,957
    
    
    $
    113,935
    
    
    $
    287,716
    
    
    $
    37,096,017
    
    
    $
    14,459,213
    
    
    $
    12,198,815
     53




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##### Table of Contents



(5) Allowance for Loan Losses and Reserve for Unfunded Credit Commitments
  2008
    
    
    2007
    
    
    2006Components:Allowance for loan lossesBalance, beginning of year
    
    $
    10,314,161
    
    
    $
    7,597,900
    
    
    $
    6,991,125Loans charged off:Real estate mortgage
    
    
    260,710
    
    
    
    242,727
    
    
    
    260,091Commercial
    
    
    11,170,028
    
    
    
    5,519,109
    (1)
    
    
    1,785,573Consumer
    
    
    674,363
    
    
    
    859,754
    
    
    
    618,932Subtotal
    
    
    12,105,101
    
    
    
    6,621,590
    
    
    
    2,664,596Charge offs on loans transferred to held for sale
    
    
    
    
    
    
    4,669,050
    (2)
    
    
    Total charge offs
    
    
    12,105,101
    
    
    
    11,290,640
    
    
    
    2,664,596Recoveries to loans previously charged off:Real estate mortgage
    
    
    14,545
    
    
    
    
    
    
    
    Commercial
    
    
    369,863
    
    
    
    146,100
    
    
    
    283,103Consumer
    
    
    250,923
    
    
    
    239,135
    
    
    
    226,268Total recoveries
    
    
    635,331
    
    
    
    385,235
    
    
    
    509,371Net loans charged off
    
    
    11,469,770
    
    
    
    10,905,405
    
    
    
    2,155,225Additions to allowance charged to operations
    
    
    15,277,900
    
    
    
    13,621,666
    
    
    
    2,762,000Balance, end of year
    
    
    14,122,291
    
    
    
    10,314,161
    
    
    
    7,597,900Reserve for unfunded credit commitmentsBalance, beginning of year
    
    
    739,000
    
    
    
    331,000
    
    
    
    454,000Additions (reductions) to reserve charged (credited)
to operations
    
    
    (423,000
    )
    
    
    408,000
    
    
    
    (123,000
    )Balance, end of year
    
    
    316,000
    
    
    
    739,000
    
    
    
    331,000Total allowance for loan losses and reserve for unfunded
credit commitments
    
    $
    14,438,291
    
    
    $
    11,053,161
    
    
    $
    7,928,900
 
 (1)
    
    Partial charge offs of $2,934,831 are included in commercial charge offs to reduce the loans transferred to held for sale
to their impaired value prior to consideration of bid amounts in 2007.(2)
    
    Represents charges to the allowance to reduce the investment in the loans to the estimated fair values when the loans
were transferred to held for sale in 2007. (6) Premises and Equipment
  2008
    
    
    2007Land and land improvements
    
    $
    2,937,115
    
    
    $
    2,937,115Premises
    
    
    10,058,300
    
    
    
    10,058,300Furniture and equipment
    
    
    4,117,607
    
    
    
    4,036,72317,113,022
    
    
    
    17,032,138Less accumulated depreciation and amortization
    
    
    (8,486,496
    )
    
    
    (7,893,354
    )Premises and equipment, net
    
    $
    8,626,526
    
    
    $
    9,138,784
 54




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##### Table of Contents



(7) Other Real Estate Owned
  (8) Time Certificates of Deposit
  Year of maturity:2010
    
    $
    17,449,3772011
    
    
    1,584,9152012
    
    
    2,036,5612013
    
    
    887,7762014
    
    
    4,000Total
    
    $
    21,962,629
  2008
    
    
    2007Three months or less
    
    $
    18,450,699
    
    
    $
    23,969,487Three through six months
    
    
    14,859,648
    
    
    
    24,207,776Six through twelve months
    
    
    19,162,264
    
    
    
    15,310,444Over twelve months
    
    
    8,971,885
    
    
    
    8,056,613Total
    
    $
    61,444,496
    
    
    $
    71,544,320
  (9) Other Borrowings
  WeightedAverageMaturity
    
    Interest Rate
    
    
    AmountLong term advances:Fixed rate:Within one year
    
    
    4.61
    %
    
    $
    8,383,307Two years
    
    
    7.29
    %
    
    
    413,970Total advances
    
    
    
    
    
    $
    8,797,277
    55




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##### Table of Contents



(10) Federal Income Taxes
  2008
    
    
    2007
    
    
    2006Current
    
    $
    (1,635,853
    )
    
    $
    (3,975,678
    )
    
    $
    2,608,205Deferred
    
    
    1,508,577
    
    
    
    192,769
    
    
    
    (217,783
    )Total federal income tax
    
    $
    (127,276
    )
    
    $
    (3,782,909
    )
    
    $
    2,390,422
  2008
    
    
    2007
    
    
    2006Computed expected tax expense
    
    $
    (4,603,775
    )
    
    $
    (3,515,293
    )
    
    $
    2,711,982Increase (reduction) in tax resulting from:Tax-exempt interest and dividends, net
    
    
    (253,841
    )
    
    
    (275,995
    )
    
    
    (318,109
    )Change in valuation allowance
    
    
    4,750,000
    
    
    
    
    
    
    
    Other, net
    
    
    (19,660
    )
    
    
    8,379
    
    
    
    (3,451
    )Total federal income tax
    
    $
    (127,276
    )
    
    $
    (3,782,909
    )
    
    $
    2,390,422
 56




---



##### Table of Contents



2008
    
    
    2007Deferred tax assets:Allowance for loan losses
    
    $
    2,531,562
    
    
    $
    1,946,046Net operating loss carryforward
    
    
    1,000,244
    
    
    
    Other-than-temporary impairment on securities available for sale
    
    
    1,100,456
    
    
    
    Alternative minimum tax credit carryforward
    
    
    387,350
    
    
    
    Deferred directors fees
    
    
    306,813
    
    
    
    292,286Premises and equipment
    
    
    281,624
    
    
    
    222,568Supplemental retirement plan
    
    
    257,769
    
    
    
    215,186Other
    
    
    80,358
    
    
    
    85,969Total gross deferred tax assets
    
    
    5,946,176
    
    
    
    2,762,055Deferred tax liabilities:Deferred loan fees
    
    
    (61,113
    )
    
    
    (90,842
    )Unrealized gain on securites available for sale
    
    
    (203,812
    )
    
    
    (41,388
    )Other
    
    
    (111,694
    )
    
    
    (139,267
    )Total gross deferred tax liabilities
    
    
    (376,619
    )
    
    
    (271,497
    )Net deferred tax asset before valuation allowance
    
    
    5,569,557
    
    
    
    2,490,558Valuation allowance
    
    
    (4,750,000
    )
    
    
    Net deferred tax asset
    
    $
    819,557
    
    
    $
    2,490,558
   Quantifying Misstatements in Financial Statements
 (11) Related Party Transactions
  2008
    
    
    2007Balance at beginning of year
    
    $
    4,903,250
    
    
    $
    4,598,800New loans and related parties
    
    
    222,900
    
    
    
    557,509Loan repayments
    
    
    (1,626,418
    )
    
    
    (253,059
    )Balance at end of year
    
    $
    3,499,732
    
    
    $
    4,903,250
 57




---



##### Table of Contents



(12) Leases
   Year ending December 31:2009
    
    $
    42,0002010
    
    
    42,0002011
    
    
    42,0002012
    
    
    31,500Total lease payments
    
    $
    157,500
  (13) Retirement Plan
  (14) Long Term Incentive Plan
  2008Weighted-AverageGrant DateShares
    
    
    Fair ValueRestricted Stock AwardsOutstanding at January 1,
    
    
    5,107
    
    
    $
    26.32Granted
    
    
    14,026
    
    
    
    12.64Vested
    
    
    (9,381
    )
    
    
    14.89Forfeited
    
    
    (1,425
    )
    
    
    16.09Outstanding at December 31,
    
    
    8,327
    
    
    $
    17.90
  (15) Directors Stock Fee Plan
  58




---



##### Table of Contents



(16) Employees Stock Purchase Plan
  (17) Financial Instruments with Off-Balance-Sheet Risk
    2008
    
    
    2007Consumer
    
    $
    10,558,208
    
    
    $
    11,527,801Commercial construction
    
    
    557,917
    
    
    
    4,192,251Commercial
    
    
    16,677,245
    
    
    
    38,536,279Total credit commitments
    
    $
    27,793,370
    
    
    $
    54,256,331
  59




---



##### Table of Contents



(18) Capital
    60




---



##### Table of Contents



To be Well CapitalizedMinimum for
    
    Under Prompt CorrectiveActual
    
    Capital Adequacy Purposes
    
    Action ProvisionAs of December 31, 2008
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTotal Capital (to risk weighted assets)Bank
    
    $
    31,419,000
    
    
    
    9.56
    %
    
    $
    26,293,000
    
    
    
    8
    %
    
    $
    32,866,000
    
    
    
    10
    %FNBH Bancorp
    
    
    31,365,000
    
    
    
    9.54
    %
    
    
    26,293,000
    
    
    
    8
    %
    
    
    N/A
    
    
    
    N/ATier 1 Capital (to risk weighted assets)Bank
    
    
    27,183,000
    
    
    
    8.27
    %
    
    
    13,146,000
    
    
    
    4
    %
    
    
    19,720,000
    
    
    
    6
    %FNBH Bancorp
    
    
    27,129,000
    
    
    
    8.25
    %
    
    
    13,146,000
    
    
    
    4
    %
    
    
    N/A
    
    
    
    N/ATier 1 Capital (to average assets)Bank
    
    
    27,183,000
    
    
    
    6.89
    %
    
    
    15,774,000
    
    
    
    4
    %
    
    
    19,717,000
    
    
    
    5
    %FNBH Bancorp
    
    
    27,129,000
    
    
    
    6.88
    %
    
    
    15,774,000
    
    
    
    4
    %
    
    
    N/A
    
    
    
    N/AAs of December 31, 2007
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTotal Capital (to risk weighted assets)Bank
    
    $
    45,306,000
    
    
    
    11.88
    %
    
    $
    30,497,000
    
    
    
    8
    %
    
    $
    38,122,000
    
    
    
    10
    %FNBH Bancorp
    
    
    45,390,000
    
    
    
    11.91
    %
    
    
    30,497,000
    
    
    
    8
    %
    
    
    N/A
    
    
    
    N/ATier 1 Capital (to risk weighted assets)Bank
    
    
    40,463,000
    
    
    
    10.61
    %
    
    
    15,249,000
    
    
    
    4
    %
    
    
    22,873,000
    
    
    
    6
    %FNBH Bancorp
    
    
    40,547,000
    
    
    
    10.64
    %
    
    
    15,249,000
    
    
    
    4
    %
    
    
    N/A
    
    
    
    N/ATier 1 Capital (to average assets)Bank
    
    
    40,463,000
    
    
    
    9.60
    %
    
    
    16,858,000
    
    
    
    4
    %
    
    
    21,073,000
    
    
    
    5
    %FNBH Bancorp
    
    
    40,547,000
    
    
    
    9.62
    %
    
    
    16,858,000
    
    
    
    4
    %
    
    
    N/A
    
    
    
    N/A
    (19) Net Income per Common Share
  61




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##### Table of Contents



2008
    
    
    2007
    
    
    2006Weighted average basic shares outstanding
    
    
    3,096,332
    
    
    
    3,074,372
    
    
    
    3,177,093Effect of dilutive restricted stock
    
    
    
    
    
    
    
    
    
    
    53Weighted average diluted shares outstanding
    
    
    3,096,332
    
    
    
    3,074,372
    
    
    
    3,177,146Net income (loss)
    
    $
    (13,413,240
    )
    
    $
    (6,556,188
    )
    
    $
    5,585,996Basic net income (loss) per share
    
    $
    (4.33
    )
    
    $
    (2.13
    )
    
    $
    1.76Diluted net income (loss) per share
    
    $
    (4.33
    )
    
    $
    (2.13
    )
    
    $
    1.76Anti-dilutive shares excluded from diluted calculation
    
    
    8,327
    
    
    
    5,107
    
    
    
    1,722
 (20) Contingent Liabilities
  21) Fair Value
 Fair Value
Measurements,
     62




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##### Table of Contents



Securities available for sale
  Securities held to maturity
 Loans
 Mortgage servicing rights (MSRs).
 Assets and Liabilities Measured at Fair Value on a Recurring Basis
  Quoted Prices
    
    Significantin Active
    
    OtherMarkets for
    
    Observable
    
    SignificantIdentical Assets
    
    Inputs
    
    Unobservable InputsTotal
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Securities available for sale
    
    $
    41,520,572
    
    
    $
    
    
    
    $
    38,747,894
    
    
    $
    2,772,678
 63




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##### Table of Contents



Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
  Fair Value Measurements Using 
Significant Unobservable Inputs(Level 3)Fair value of CMO, January 1, 2008(1)(2)
    
    $
    Total gains (losses) realized/unrealized:Included in earnings(3)
    
    
    (1,338,938
    )Included in other comprehensive income
    
    
    29,796Purchases, issuances, and other settlements
    
    
    (265,174
    )Transfers into Level 3(4)
    
    
    4,346,994Fair value of CMO, December 31, 2008
    
    $
    2,772,678Total amount of losses for the period included
in earnings attributable to the change in
unrealized losses relating to assets still
held
at December 31, 2008
    
    $
    (1,338,938
    )
 
 (1)
    
    Non-agency CMO classified as available for sale is valued using internal valuation
models and pricing information from third parties.(2)
    
    Management had anticipated that the non-agency security would be classified under
Level 2 of the valuation hierarchy. However, due to illiquidity in the markets, the fair value
of this security is now determined using an internal model based on
pricing information from third parties and therefore is classified
within Level 3 of the valuation hierarchy.(3)
    
    Realized gains (losses), including unrealized losses deemed other-than-temporary,
are reported in noninterest income. Unrealized gains (losses) are reported in accumulated
other comprehensive income (loss).(4)
    
    Transfers in or out are based on the carrying amount of the security at the
beginning of the period. Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
  QuotedPrices inActive
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total GainsMarkets
    
    Significant
    
    
    
    
    
    Total Gains
    
    (Losses)for
    
    Other
    
    Significant
    
    (Losses) Three
    
    Twelve MonthsIdentical
    
    Observable
    
    Unobservable
    
    Months Ended
    
    EndedAssets
    
    Inputs
    
    Inputs
    
    December 31,
    
    December 31,Total
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)
    
    2008
    
    2008Impaired
loans (1)
    
    $
    23,578,000
    
    
    $
    
    
    
    $
    23,405,000
    
    
    $
    173,000
    
    
    $
    (4,715,000
    )(2)
    
    $
    (12,917,000
    )(2)
 
 (1)
    
    Represents carrying value and related write-downs and specific reserves pertaining
to collateral dependent loans for which adjustments are based on the appraised value of the
collateral or by other unobservable inputs.(2)
    
    Represents changes in specific reserves on impaired loans net
of charge offs which
impacts the allowance for loan losses. 64




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##### Table of Contents



Nonfinancial Assets and Liabilities Subject to FSP FAS 157-2 Deferral Provisions
  Disclosures About Fair Value of Financial Instruments,
  Cash and cash equivalents
 Certificates of deposit
 Investment securities
 FHLBI and FRB stock
 Loans
 Accrued interest income
 Deposit liabilities
 Other borrowings
 Accrued interest payable
 Off balance sheet instruments
 65




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##### Table of Contents



2008
    
    2007Carrying
    
    Fair
    
    Carrying
    
    FairValue
    
    Value
    
    Value
    
    ValueFinancial assets:Cash and cash equivalents
    
    $
    22,080,000
    
    
    $
    22,080,000
    
    
    $
    29,911,000
    
    
    $
    29,911,000Certificates of deposit
    
    
    4,319,000
    
    
    
    4,319,000
    
    
    
    4,025,000
    
    
    
    4,025,000Investment and mortgage-backed securities
    
    
    41,521,000
    
    
    
    41,521,000
    
    
    
    37,637,000
    
    
    
    37,844,000FHLBI and FRB stock
    
    
    995,000
    
    
    
    995,000
    
    
    
    995,000
    
    
    
    995,000Loans, net
    
    
    301,695,000
    
    
    
    306,087,000
    
    
    
    337,562,000
    
    
    
    342,907,000Accrued interest income
    
    
    1,584,000
    
    
    
    1,584,000
    
    
    
    2,164,000
    
    
    
    2,164,000Financial liabilities:Deposits:Demand
    
    $
    56,405,000
    
    
    $
    56,405,000
    
    
    $
    56,506,000
    
    
    $
    56,506,000NOW
    
    
    35,539,000
    
    
    
    35,539,000
    
    
    
    35,027,000
    
    
    
    35,027,000Savings and money market accounts
    
    
    101,423,000
    
    
    
    101,423,000
    
    
    
    121,641,000
    
    
    
    121,641,000Time deposits
    
    
    142,287,000
    
    
    
    144,177,000
    
    
    
    159,358,000
    
    
    
    159,824,000Brokered certificates
    
    
    13,874,000
    
    
    
    14,087,000
    
    
    
    7,046,000
    
    
    
    7,069,000Other borrowings
    
    
    8,897,000
    
    
    
    8,958,000
    
    
    
    9,152,000
    
    
    
    9,229,000Accrued interest expense
    
    
    704,000
    
    
    
    704,000
    
    
    
    1,248,000
    
    
    
    1,248,000
  Limitations
  (22) Dividend Restrictions
  66




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##### Table of Contents



(23) Condensed Financial Information  Parent Company Only
  Condensed Balance Sheets
 2008
    
    
    2007Assets:Cash
    
    $
    31,197
    
    
    $
    53,571Investment in subsidiaries:First National Bank in Howell
    
    
    27,579,092
    
    
    
    40,543,394H.B. Realty Co.
    
    
    1,000
    
    
    
    1,000Other assets
    
    
    19,190
    
    
    
    29,999Total assets
    
    $
    27,630,479
    
    
    $
    40,627,964Liabilities and Stockholders Equity:Other borrowings
    
    $
    100,000
    
    
    $
    Other liabilities
    
    
    5,377
    
    
    
    782Stockholders equity
    
    
    27,525,102
    
    
    
    40,627,182Total liabilities and stockholders equity
    
    $
    27,630,479
    
    
    $
    40,627,964
 Condensed Statements of Income
 Year ended December 312008
    
    
    2007
    
    
    2006Operating income:Dividends from subsidiaries
    
    $
    
    
    
    $
    3,144,850
    
    
    $
    5,548,912Total operating income
    
    
    
    
    
    
    3,144,850
    
    
    
    5,548,912Operating expenses:Interest expense-other borrowings
    
    
    13,771
    
    
    
    
    
    
    
    Administrative and other expenses
    
    
    119,874
    
    
    
    85,759
    
    
    
    94,640Total operating expenses
    
    
    133,645
    
    
    
    85,759
    
    
    
    94,640Income (loss) before equity in
undistributed net income
of subsidiaries
    
    
    (133,645
    )
    
    
    3,059,091
    
    
    
    5,454,272Equity in undistributed net income of
subsidiaries (net loss of subsidiaries and
dividends declared from subsidiaries)
    
    
    (13,279,595
    )
    
    
    (9,615,279
    )
    
    
    131,724Net income (loss)
    
    $
    (13,413,240
    )
    
    $
    (6,556,188
    )
    
    $
    5,585,996
 67




---



##### Table of Contents



Condensed Statements of Cash Flows
 Year ended December 312008
    
    
    2007
    
    
    2006Cash flows from operating activities:Net income (loss)
    
    $
    (13,413,240
    )
    
    $
    (6,556,188
    )
    
    $
    5,585,996Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:Decrease (increase) in other assets
    
    
    10,809
    
    
    
    225,473
    
    
    
    (19,510
    )Increase (decrease) in other liabilities
    
    
    4,595
    
    
    
    781
    
    
    
    (3,021
    )Change in long term incentive plan and
deferred compensation
    
    
    214,680
    
    
    
    322,822
    
    
    
    270,596Equity in undistributed net income of
subsidiaries (net loss of subsidiaries and
dividends declared from subsidiaries)
    
    
    13,279,595
    
    
    
    9,615,279
    
    
    
    (131,724
    )13,509,679
    
    
    
    10,164,355
    
    
    
    116,341Net cash provided by
operating activities
    
    
    96,439
    
    
    
    3,608,167
    
    
    
    5,702,337Cash flows from investing activities
    
    
    
    
    
    
    
    
    
    
    Cash flows from financing activities:Common stock issued
    
    
    269,367
    
    
    
    25,211
    
    
    
    30,623Proceeds from issuance of short-term debt
    
    
    445,000
    
    
    
    
    
    
    
    Repayment of short-term debt
    
    
    (345,000
    )
    
    
    
    
    
    
    Repurchases of common stock
    
    
    
    
    
    
    (1,038,605
    )
    
    
    (3,107,295
    )Dividends paid
    
    
    (488,180
    )
    
    
    (2,563,418
    )
    
    
    (2,656,404
    )Net cash provided by (used in)
financing activities
    
    
    (118,813
    )
    
    
    (3,576,812
    )
    
    
    (5,733,076
    )Net increase (decrease) in cash
    
    
    (22,374
    )
    
    
    31,355
    
    
    
    (30,739
    )Cash at beginning of year
    
    
    53,571
    
    
    
    22,216
    
    
    
    52,955Cash at end of year
    
    $
    31,197
    
    
    $
    53,571
    
    
    $
    22,216
 68




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##### Table of Contents



(24) Quarterly Financial Data  Unaudited
  Quarters ended in 2008March 31
    
    June 30
    
    September 30
    
    December 31Selected operations data:Interest and dividend income
    
    $
    6,695,747
    
    
    $
    6,244,565
    
    
    $
    6,034,546
    
    
    $
    5,332,378Net interest income
    
    
    4,084,011
    
    
    
    4,230,175
    
    
    
    4,145,348
    
    
    
    3,729,337Provision for loan losses
    
    
    688,900
    
    
    
    8,211,000
    
    
    
    1,145,000
    
    
    
    4,810,000Income (loss) before federal income taxes
    
    
    773,493
    
    
    
    (7,116,624
    )
    
    
    (1,649,277
    )
    
    
    (5,548,108
    )Net income (loss)
    
    
    579,871
    
    
    
    (4,623,474
    )
    
    
    (1,624,795
    )
    
    
    (7,744,842
    )Basic net income (loss) per share
    
    
    0.19
    
    
    
    (1.50
    )
    
    
    (0.53
    )
    
    
    (2.47
    )Diluted net income (loss) per share
    
    
    0.19
    
    
    
    (1.50
    )
    
    
    (0.53
    )
    
    
    (2.47
    )Cash dividends per share
    
    
    0.08
    
    
    
    0.08
    
    
    
    
    
    
    
    
 Quarters ended in 2007March 31
    
    June 30
    
    September 30
    
    December 31Selected operations data:Interest and dividend income
    
    $
    7,877,499
    
    
    $
    7,862,175
    
    
    $
    7,439,273
    
    
    $
    6,994,367Net interest income
    
    
    4,828,395
    
    
    
    4,768,239
    
    
    
    4,495,415
    
    
    
    4,196,553Provision for loan losses
    
    
    939,000
    
    
    
    6,534,666
    
    
    
    4,364,000
    
    
    
    2,192,000Income (loss) before federal income taxes
    
    
    1,368,813
    
    
    
    (4,967,250
    )
    
    
    (6,443,699
    )
    
    
    (296,961
    )Net income (loss)
    
    
    979,124
    
    
    
    (3,212,874
    )
    
    
    (4,117,147
    )
    
    
    (205,291
    )Basic net income (loss) per share
    
    
    0.32
    
    
    
    (1.05
    )
    
    
    (1.34
    )
    
    
    (0.07
    )Diluted net income (loss) per share
    
    
    0.32
    
    
    
    (1.05
    )
    
    
    (1.34
    )
    
    
    (0.07
    )Cash dividends per share
    
    
    0.21
    
    
    
    0.21
    
    
    
    0.21
    
    
    
    0.21
 (25) Impact of New Accounting Standards
 Fair
Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities.
 69




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##### Table of Contents



Business Combinations,
 
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 Item 9A. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
 Managements Annual Report on Internal Control Over Financial Reporting. Internal
Control  Integrated Framework
  Attestation Report of the Registered Independent Public Accounting Firm.
 Change in Internal Control Over Financial Reporting.
 
 Item 9B. Other Information.
  70




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##### Table of Contents



PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance.
 Directors
  Executive Officers
  www.fnbh.com
 Corporate Governance
  
 Item 11. Executive Compensation.
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
   Number of securities remainingNumber of securities to be
    
    Weighted  average
    
    available for future issuanceissued upon exercise of
    
    exercise price of
    
    under equity compensationoutstanding options,
    
    outstanding options,
    
    plans (excluding securitiesPlan Category
    
    warrants, and rights
    
    warrants, and rights
    
    reflected in column (a))(a)
    
    (b)
    
    (c)Equity compensation
plans approved by
stockholders
    
    0
    
    0
    
    223,580(1)Equity compensation
plans not approved
by stockholders
    
    None
    
    None
    
    None
 
 (1)
    
    Includes 147,255 shares available under the Long Term Incentive Plan, 42,463 shares
available under the Compensation Plan for Nonemployee Directors and 33,862 shares included under the Employee Stock Purchase Plan. 71




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##### Table of Contents



Item 13. Certain Relationships, Related Transactions and Director Independence.
  
 Item 14. Principal Accountant Fees and Services
  
 PART IV
 
 Item 15. Exhibits and Financial Statement Schedules.
  1.
    
    Financial StatementsThe financial statements are set forth under Item 8 of this report on 10-K.2.
    
    Financial Statement SchedulesNot applicable.3.
    
    Exhibits (Numbered in accordance with Item 601 of Regulation S-K)The Exhibit Index is located on the final page of this report on Form 10-K.
 72




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##### Table of Contents



SIGNATURES
  FNBH BANCORP, INC.
 /s/ Ronald L. Long
    
    Ronald L. Long, President and Chief Financial Officer(Principal Executive Officer)/s/ Janice B. Trouba
    
    Janice B. Trouba, Chief Financial Officer(Principal Financial and Accounting Officer)
  Signature
    
    DateRandolph E. Rudisill, Chairman of the Board
    
    /s/ Randolph E. Rudisill
    
    March 30, 2009Barbara Draper, Vice Chairman of the Board
    
    /s/ Barbara Draper
    
    March 30, 2009Gary R. Boss, Director
    
    /s/ Gary R. Boss
    
    March 30, 2009Richard F. Hopper, Director
    
    /s/ Richard F. Hopper
    
    March 30, 2009Dona Scott Laskey, Director
    
    /s/ Dona Scott Laskey
    
    March 30, 2009Ronald L. Long, Director
    
    /s/ Ronald L. Long
    
    March 30, 2009R. Michael Yost, Director
    
    /s/ R. Michael Yost
    
    March 30, 2009
 73




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##### Table of Contents



EXHIBIT INDEX
  ExhibitNumber(21)
    
    Subsidiaries of the Registrant(23)
    
    Consent of BDO Seidman, LLP(24)
    
    Power of Attorney (included in signature section)(31.1)
    
    Certificate of the Chief Executive Officer of FNBH Bancorp, Inc. pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.(31.2)
    
    Certificate of the Chief Financial Officer of FNBH Bancorp, Inc. pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.(32.1)
    
    Certificate of the Chief Executive Officer of FNBH Bancorp, Inc. pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).(32.2)
    
    Certificate of the Chief Financial Officer of FNBH Bancorp, Inc. pursuant to Section 906 of
the Sarbanes Oxley Act of 2002 (18 U.S.C. 1350).
  ExhibitNumber
    
    
    
    Original Filing Form and Date(3.1)
    
    Restated Articles of Incorporation of the
Registrant
    
    Exhibit 3.1 of Form 10,
effective June 30, 1995 (Form 10)(3.2)
    
    Amendment to the Corporations Articles of
Incorporation to Increase Authorized Shares
    
    Appendix I of Proxy Statement dated March 17, 1998(3.3)
    
    Amendment to the Corporations Articles of
Incorporation to Authorize the Issuance of
Preferred Shares
    
    Exhibit to Form 8-K dated February 19, 2009(3.4)
    
    Bylaws of the Registrant
    
    Exhibit 3.2 of Form 10(4)
    
    Form of Registrants Stock Certificate
    
    Exhibit 4 of Form 10Material Contracts:(10.1)
    
    Howell Branch Lease Agreement
    
    Exhibit 10.2 to Form 10(10.2)
    
    Corporations Long Term Incentive Plan*
    
    Appendix II of Proxy
Statement  dated March 17, 1998(10.3)
    
    Second Amended and Restated Compensation
Plan for Nonemployee Directors*
    
    Exhibit 10.2 to Form 8-K dated October 16, 2008(10.4)
    
    FNBH Bancorp Inc Employees Stock
Purchase Plan as amended January 20, 2005*
    
    Exhibit 10 to Form 10-K dated March 7, 2006(10.5)
    
    Management Continuity Agreement
For Casey Kondel (Mr. Kondel is no longer
employed by the Registrant)*
    
    Exhibit 10 to Form 10-Q dated August 9, 2007
 74




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##### Table of Contents



ExhibitNumber
    
    
    
    Original Filing Form and Date(10.6)
    
    Management Continuity Agreement
For Robin C. Naudi (Mr. Naudi is no longer
employed by the Registrant)*
    
    Exhibit 10 to Form 8-K dated February 27, 2008(10.7)
    
    Management Continuity Agreement for Nancy Morgan *
    
    Exhibit 10.1 to Form 8-K dated March 3, 2008(10.8)
    
    Management Continuity Agreement
for Janice B. Trouba*
    
    Exhibit 10.2 to Form 8-K dated March 3, 2008(10.9)
    
    Management Continuity Agreement
for Ronald L. Long*
    
    Exhibit 10.1 to Form 8-K dated May 6, 2008(10.10)
    
    Agreement by and between First National Bank
in Howell (Howell, Michigan) and The Comptroller
of the Currency, dated October 16, 2008
    
    Exhibit 10.1 to Form 8-K  dated October 16, 2008
 
 *
    
    Represents a compensation plan 75