# UNITED STATESSECURITIES
AND EXCHANGE COMMISSIONWashington, D.C. 20549

# Form 10-Q

|[X]  QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the
quarterly period ended September 30, 2008  
|------------------------------------------------------------------------------------------------------------------------------------------------
|OR                                                                                                                                              
|[__] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _______

Commission file number
0-25752

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

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

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

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

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

Indicate  by  check
 mark  whether  the  registrant  is  a  large  accelerated   filer,  an  accelerated
 filer,  a non-accelerated filer, or a smaller reporting company (as defined in Exchange
Act Rule 12b-2). Large accelerated filer [__]      Accelerated filer [X]         Non-accelerated filer [__]
      Smaller Reporting Company [X]

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

The number of shares outstanding of
each of the issuers classes of common stock, as of the latest practicable date:
3,118,325 shares of the Corporations Common Stock (no par value) were outstanding as
of October 31, 2008.

---



# TABLE OF CONTENTS

|                                                                                                 
|-------------------------------------------------------------------------------------------------
|Part I. Financial Information (unaudited)                                                        
|Item 1. Financial Statements:                                                                    
|Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007                       
|Consolidated Statements of Income for the three and nine months ended September 30, 2008 and 2007
|Consolidated Statements of Stockholders' Equity and Comprehensive Income                         
|for the three months ended September 30, 2008 and 2007                                           
|Consolidated Statements of Stockholders' Equity and Comprehensive Income                         
|for the nine months ended September 30, 2008 and 2007                                            
|Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007      
|Notes to Consolidated Financial Statements                                                       
|                                                                                                 
|Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations    
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                               
|Item 4. Controls and Procedures                                                                  
|                                                                                                 
|Part II. Other Information                                                                       
|Item 1A. Risk Factors                                                                            
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                              
|Item 6. Exhibits                                                                                 
|                                                                                                 
|Signatures                                                                                       

---



# PART I  FINANCIAL
INFORMATION Item 1. Financial
Statements

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

|Assets                                                                 | September 30,2008 | December 31,2007
|---------------------------------------------------------------------- | ----------------- | ----------------
|Cash and due from banks                                                |                   |                 
|Short term investments                                                 |                   |                 
|Total cash and cash equivalents                                        |                   |                 
|Certificates of deposit                                                |                   |                 
|Investment securities:                                                 |                   |                 
|Investment securities held to maturity, net (fair value of $14,961,820 |                   |                 
|at September 30, 2008 and $15,600,812 at December 31, 2007)            |                   |                 
|Investment securities available for sale, at fair value                |                   |                 
|Mortgage-backed/CMO securities available for sale, at fair value       |                   |                 
|Preferred stock available for sale, at fair value                      |                   |                 
|FHLBI and FRB stock, at cost                                           |                   |                 
|Total investment securities                                            |                   |                 
|Loans held for investment:                                             |                   |                 
|Commercial                                                             |                   |                 
|Consumer                                                               |                   |                 
|Real estate mortgage                                                   |                   |                 
|Total loans held for investment                                        |                   |                 
|Less allowance for loan losses                                         |                   |                 
|Net loans held for investment                                          |                   |                 
|Premises and equipment, net                                            |                   |                 
|Other real estate owned, held for sale                                 |                   |                 
|Accrued interest and other assets                                      |                   |                 
|Total assets                                                           |                   |                 
|                                                                       |                   |                 
|Liabilities and Stockholders' Equity                                   |                   |                 
|Liabilities                                                            |                   |                 
|Deposits:                                                              |                   |                 
|Demand (non-interest bearing)                                          |                   |                 
|NOW                                                                    |                   |                 
|Savings and money market                                               |                   |                 
|Time deposits                                                          |                   |                 
|Brokered certificates of deposit                                       |                   |                 
|Total deposits                                                         |                   |                 
|Other borrowings                                                       |                   |                 
|Accrued interest, taxes, and other liabilities                         |                   |                 
|Total liabilities                                                      |                   |                 
|Stockholders' Equity                                                   |                   |                 
|Common stock, no par value. Authorized 4,200,000 shares; 3,060,769     |                   |                 
|shares issued and outstanding at September 30, 2008 and 3,045,153      |                   |                 
|shares issued and outstanding at December 31, 2007                     |                   |                 
|Retained earnings                                                      |                   |                 
|Deferred directors' compensation                                       |                   |                 
|Accumulated other comprehensive income (loss), net                     |                   |                 
|Total stockholders' equity                                             |                   |                 
|Total liabilities and stockholders' equity                             |                   |                 

See notes to consolidated
financial statements.

1

---



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

|                                                         | Three months ended September 30 | Nine months ended September 30
|-------------------------------------------------------- | ------------------------------- | ------------------------------
|                                                         |                                 |                               
|Interest and dividend income:                            |                                 |                               
|Interest and fees on loans                               |                                 |                               
|Interest and dividends on investment securities:         |                                 |                               
|U.S. Treasury, agency securities, and CMOs               |                                 |                               
|Obligations of states and political subdivisions         |                                 |                               
|Preferred stock                                          |                                 |                               
|Other securities                                         |                                 |                               
|Interest on certificates of deposit                      |                                 |                               
|Interest on short term investments                       |                                 |                               
|Total interest and dividend income                       |                                 |                               
|                                                         |                                 |                               
|Interest expense:                                        |                                 |                               
|Interest on deposits                                     |                                 |                               
|Interest on other borrowings                             |                                 |                               
|Total interest expense                                   |                                 |                               
|                                                         |                                 |                               
|Net interest income                                      |                                 |                               
|                                                         |                                 |                               
|Provision for loan losses                                |                                 |                               
|Net interest income after provision for loan losses      |                                 |                               
|                                                         |                                 |                               
|Noninterest income:                                      |                                 |                               
|Service charges and other fee income                     |                                 |                               
|Trust income                                             |                                 |                               
|Gain on sale of mortgage loans                           |                                 |                               
|Gain (loss) on available for sale securities             |                                 |                               
|Other                                                    |                                 |                               
|Total noninterest income                                 |                                 |                               
|                                                         |                                 |                               
|Noninterest expense:                                     |                                 |                               
|Loss on sale/writedown of commercial loans held for sale |                                 |                               
|Salaries and employee benefits                           |                                 |                               
|Net occupancy expense                                    |                                 |                               
|Equipment expense                                        |                                 |                               
|Professional and service fees                            |                                 |                               
|Loan collection and foreclosed property expense          |                                 |                               
|Computer service fees                                    |                                 |                               
|FDIC assessment fees                                     |                                 |                               
|Printing and supplies                                    |                                 |                               
|Director fees                                            |                                 |                               
|Other                                                    |                                 |                               
|Total noninterest expense                                |                                 |                               
|Loss before federal income tax credit                    |                                 |                               
|Federal income tax credit                                |                                 |                               
|Net loss                                                 |                                 |                               
|                                                         |                                 |                               
|Per share statistics:                                    |                                 |                               
|Basic EPS                                                |                                 |                               
|Diluted EPS                                              |                                 |                               
|Dividends                                                |                                 |                               
|Basic average shares outstanding                         |                                 |                               
|Diluted average shares outstanding                       |                                 |                               

See notes to consolidated
financial statements.

2

---



FNBH BANCORP, INC. AND
SUBSIDIARIES      Consolidated Statements of Stockholders' Equity and Comprehensive
Income         For the Three Months Ended September 30, 2008 and 2007 (Unaudited)

|                                                     | Common Stock | Retained Earnings | Deferred Directors' Compensation | Accumulated Other Comprehensive Income (Loss) | Total     
|---------------------------------------------------- | ------------ | ----------------- | -------------------------------- | --------------------------------------------- | ----------
|Balances at June 30, 2007                            |              |                   | $                                | 6,098,227                                     |           
|Earned portion of long term incentive plan           |              |                   |                                  | 15,610                                        |           
|Issued 205 shares for employee stock purchase plan   |              |                   |                                  | 3,961                                         |           
|Issued 172 shares for current directors' fees        |              |                   |                                  | 3,498                                         |           
|Directors' deferred compensation (1,251 stock units) |              |                   |                                  |                                               | 25,443    
|Comprehensive income (loss):                         |              |                  
|Net loss                                             |              |                   |                                  |                                               | (4,117,147
|Change in unrealized loss on investment              |              |                  
|securities available for sale, net of tax effect     |              |                   |                                  |                                               | 33,404    
|Less reclassification adjustment for net gain        |              |                  
|included in net loss, net of tax effect              |              |                   |                                  |                                               | (3,852    
|Total comprehensive loss                             |              |                   |                                  |                                               | (4,087,595
|Cash dividends ($.21 per share)                      |              |                   |                                  |                                               | (639,522  
|Balances at September 30, 2007                       |              |                   | $                                | 6,121,296                                     |           
|                                                     |              |                  
|Balances at June 30, 2008                            |              |                   | $                                | 6,284,950                                     |           
|Earned portion of long term incentive plan           |              |                   |                                  | 12,956                                        |           
|Issued 382 shares for employee stock purchase plan   |              |                   |                                  | 2,418                                         |           
|Issued 586 shares for current directors' fees        |              |                   |                                  | 3,902                                         |           
|Directors' deferred compensation (1,802 stock units) |              |                   |                                  |                                               | 12,000    
|Comprehensive income (loss):                         |              |                  
|Net loss                                             |              |                   |                                  |                                               | (1,624,795
|Change in unrealized loss on investment              |              |                  
|securities available for sale, net of tax effect     |              |                   |                                  |                                               | (46,947   
|Total comprehensive loss                             |              |                   |                                  |                                               | (1,671,742
|Balances at September 30, 2008                       |              |                   | $                                | 6,304,226                                     |           

See notes to consolidated
financial statements.

3

---



FNBH BANCORP, INC. AND
SUBSIDIARIES        Consolidated Statements of Stockholders' Equity and Comprehensive
Income            For the Nine Months Ended September 30, 2008 and 2007 (Unaudited)

|                                                     | Common Stock | Retained Earnings | Deferred Directors' Compensation | Accumulated Other Comprehensive Income (Loss) | Total     
|---------------------------------------------------- | ------------ | ----------------- | -------------------------------- | --------------------------------------------- | ----------
|Balances at December 31, 2006                        |              |                   | $                                | 6,005,835                                     |           
|Earned portion of long term incentive plan           |              |                   |                                  | 119,086                                       |           
|Issued 904 shares for employee stock purchase plan   |              |                   |                                  | 20,927                                        |           
|Issued 371 shares for current directors' fees        |              |                   |                                  | 8,489                                         |           
|Issued 1,141 shares for variable directors fees      |              |                   |                                  | 30,020                                        |           
|Issued 685 shares for deferred directors' fees       |              |                   |                                  | 14,549                                        |           
|Directors' deferred compensation (4,549 stock units) |              |                   |                                  |                                               | 127,766   
|Comprehensive income (loss):                         |              |                  
|Net loss                                             |              |                   |                                  |                                               | (6,350,897
|Change in unrealized loss on investment              |              |                  
|securities available for sale, net of tax effect     |              |                   |                                  |                                               | (29,711   
|Less reclassification adjustment for net loss        |              |                  
|included in net loss, net of tax effect              |              |                   |                                  |                                               | 361,397   
|Total comprehensive loss                             |              |                   |                                  |                                               | (6,019,211
|Repurchase of common stock (39,000 shares)           |              |                   |                                  | (77,610                                       | )         
|Cash dividends ($.63 per share)                      |              |                   |                                  |                                               | (1,923,816
|Balances at September 30, 2007                       |              |                   | $                                | 6,121,296                                     |           
|                                                     |              |                  
|Balances at December 31, 2007                        |              |                   | $                                | 6,141,835                                     |           
|Earned portion of long term incentive plan           |              |                   |                                  | 125,361                                       |           
|Issued 918 shares for employee stock purchase plan   |              |                   |                                  | 8,523                                         |           
|Issued 1,385 shares for current directors' fees      |              |                   |                                  | 13,399                                        |           
|Issued 712 shares for deferred directors' fees       |              |                   |                                  | 15,108                                        |           
|Directors' deferred compensation (4,713 stock units) |              |                   |                                  |                                               | 46,432    
|Comprehensive income (loss):                         |              |                  
|Net loss                                             |              |                   |                                  |                                               | (5,668,398
|Change in unrealized gain (loss) on investment       |              |                  
|securities available for sale, net of tax effect     |              |                   |                                  |                                               | (326,929  
|Total comprehensive loss                             |              |                   |                                  |                                               | (5,995,327
|Cash dividends ($.16 per share)                      |              |                   |                                  |                                               | (488,180  
|Balances at September 30, 2008                       |              |                   | $                                | 6,304,226                                     |           

See notes to consolidated
financial statements.

4

---



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

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

See notes to consolidated
financial statements.

5

---



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

1.    
          In the opinion of management of FNBH Bancorp, Inc. (the Corporation), the
          unaudited consolidated financial statements filed with this Form 10-Q contain
          all adjustments (consisting of only normal recurring accruals) necessary to
          present fairly the consolidated financial position of the Corporation as of
          September 30, 2008 and consolidated results of operations and cash flows for the
          nine months ended September 30, 2008 and 2007.

2.    
          The results of operations for the nine months ended September 30, 2008 are not
          necessarily indicative of the results to be expected for the full year.

3.    
          The accompanying unaudited consolidated financial statements should be read in
          conjunction with the Consolidated Financial Statements in the 2007 Annual Report
          contained in the Corporations report on Form 10-K filing.

4.    
          The provision for income taxes represents federal income tax expense calculated
          using estimated annualized rates on taxable income or loss generated during the
          respective periods adjusted, as necessary, to avoid recording tax benefits
          during loss periods in excess of amounts expected to be realized.

5.    
          Investment and Mortgage-Backed/CMO Securities. A summary of the amortized cost
          and approximate fair value of investment and mortgage-backed/CMO securities at
          September 30, 2008 and December 31, 2007 follows:

|                              | September 30, 2008 | December 31, 2007
|----------------------------- | ------------------ | -----------------
|                              |                    |                  
|Held to maturity:             |                    |                  
|Obligations of state and      |                    |                  
|political subdivisions        |                    |                  
|Total held to maturity        |                    |                  
|                              |                    |                  
|Available for sale:           |                    |                  
|U.S. Treasury and agency      |                    |                  
|securities                    |                    |                  
|Mortgage-backed/CMO           |                    |                  
|securities                    |                    |                  
|Preferred stock securities(1) |                    |                  
|Total available for sale      |                    |                  
|                              |                    |                  
|Total securities              |                    |                  

(1)       
          Represents preferred stock issued by Freddie Mac and Fannie Mae.

There were no securities in a
continuous loss position for 12 months or more at September 30, 2008. As of December 31,
2007, there were three agency securities and seven municipal securities in a continuous
loss position for 12 months or more and no other-than-temporary impairment was recorded.
On September 8, 2008, the Federal Housing Finance Agency placed Freddie Mac and Fannie Mae
into conservatorship. Accordingly, management believes it is probable that the Corporation
will not be able to recover its entire investment in Freddie Mac and Fannie Mae preferred
securities and has recorded an other-than-temporary impairment charge of $1,772,497 during
the current quarter, which is reflected in the income statement as Gain (loss) on
available for sale securities. During the third quarter of 2007, six agency
securities and 24 mortgage-backed securities were sold at a net realized loss of $547,571
as reflected in the income statement as Gain (loss) on available for sale
securities. These securities were reinvested in higher yielding securities of a
similar nature.

6

---



The following is a summary of the
unrealized losses and fair value of the securities available for sale portfolio at
September 30, 2008 by length of time that individual securities in each category have been
in a continuous loss position:

|                           | Less than 12 months |  | September 30, 200812 months or more |          | Total |  
|-------------------------- | ------------------- |  | ----------------------------------- | -------- | ----- | -
|
|Held to maturity:          |                     |  |                                     |          |       |  
|Obligations of state and   |                     | 
|political subdivisions     |                     |  | $                                   | (366,828 | )     | $
|                           |                     | 
|Available for sale:        |                     | 
|U.S. Treasury and agency   |                     | 
|securities                 |                     |  | $                                   | (61,694  | )     | $
|Mortgage-backed/CMO        |                     | 
|securities                 |                     |  |                                     | (588,758 | )     |  
|Preferred stock securities |                     |  |                                     | -        |       |  
|                           |                     | 
|Total available for sale   |                     |  | $                                   | (650,452 | )     | $

Included in the unrealized losses for
mortgage-backed/CMO securities is a private issue CMO with a book value of $4,170,000 and
a fair value of $3,603,000. The security was evaluated for a realized loss of $567,000 as
an other-than-temporary impairment through the use of a cash flow model at the original
discount rate with assumptions regarding defaults, loss rates and loss severity tested at
current levels. The analysis showed no other-than-temporary impairment has occurred at
this time.

The Bank assesses whether its
mortgage-backed/CMO securities are considered within the scope of Emerging Issues Task
Force Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased
Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in
Securitized Financial Assets (EITF 99-20), at date of acquisition of the security.
EITF 99-20 excludes from its scope beneficial interests in securitized financial assets
that are of high credit quality (e.g., securities guaranteed by the U.S.
government, its agencies, or other creditworthy guarantors and loans or securities
sufficiently collateralized to ensure that the possibility of credit loss is remote). The
Securities and Exchange Commission (SEC) staff has acknowledged that beneficial interests
rated AA or better should be deemed to be of high credit quality. The
Banks mortgage-backed/CMO securities held at September 30, 2008 and December 31,
2007 were either backed by agencies of the U.S. government or were rated AA or
higher at date of acquisition, thus are not considered to be within the scope of EITF
99-20.

The market value of investment
securities pledged to secure public deposits and for other purposes required or permitted
by law, amounted to approximately $19.0 million at September 30, 2008 and $1.8 million at
December 31, 2007.

6.    
          Managements assessment of the allowance for loan losses is based on an
          evaluation of the loan portfolio, recent loss experience, current economic
          conditions, and other pertinent factors. Loans on non-accrual status and those
          past due more than 90 days amounted to $31,138,000 at September 30, 2008,
          $28,138,000 at June 30, 2008, $14,573,000 at December 31, 2007, and $11,471,000
          at September 30, 2007. (See Managements Discussion and Analysis of
          Financial Condition and Results of Operations).

7

---



7.    
          Effective January 1, 2008, the Corporation implemented Statement of Financial
          Accounting Standards No. 157, Fair Value Measurements, relating to its
          financial assets and liabilities. Statement No. 157 establishes a fair value
          hierarchy that prioritizes the use of inputs used in valuation methodologies
          into the following three levels:

| | Level
1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that
the entity has the ability to access as of the measurement date.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Level
2: Significant other observable inputs other than Level 1 prices such as quoted prices for
similar assets or liabilities in active markets; quoted prices for identical or similar
assets or liabilities in markets that are not active; or other inputs that are observable
or can be derived from or corroborated by observable market data by correlation or other
means.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Level
3: Significant unobservable inputs that reflect a reporting entitys own assumptions
about the assumptions that market participants would use in pricing an asset or liability.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following is a description of the
Corporations valuation methodologies used to measure and disclose the fair values of
its financial assets and liabilities on a recurring or nonrecurring basis:

Securities available for sale.
Securities available for sale are recorded at fair value on a recurring basis. Fair value
measurement is based on quoted prices, if available. If quoted prices are not available,
fair values are measured using independent pricing models. Level 2 securities include U.S.
government and agency securities, other U.S. government and agency mortgage-backed
securities, private collateralized mortgage obligations, municipal bonds and preferred
stock securities. The Corporation has no Level 3 securities.

Upon further assessment of its
investment portfolio in September 2008, the Corporation changed the classification of its
available for sale U.S. government and agency securities and other U.S. government and
agency mortgage-backed securities from a Level 1 to a Level 2 measurement.

See Note 5 to the Consolidated
Financial Statements for additional information on available for sale securities and their
fair values.

Securities held to maturity.
Securities held to maturity are carried at amortized cost when management has the positive
intent and ability to hold them to maturity. The fair value of held to maturity
securities, as disclosed in the accompanying consolidated financial statements, is based
on quoted prices, if available. If quoted prices are not available, fair values are
measured using independent pricing models.

Loans.
          The Corporation does not record loans at fair value on a recurring basis.
          However, from time to time, the Corporation records nonrecurring fair value
          adjustments to collateral dependent loans to reflect partial write-downs or
          specific reserves that are based on the observable market price or current
          appraised value of the collateral. These loans are reported in the nonrecurring
          table below at initial recognition of impairment and on an ongoing basis until
          recovery or charge-off. When the fair value of the collateral is based on an
          observable market price or a current appraised value, the Corporation records
          the impaired loan as nonrecurring Level 2. When a current appraised value is not
          available or management determines the fair value of the collateral is further
          impaired below the appraised value and there is no observable market price, the
          Corporation records the impaired loan as nonrecurring Level 3. At time of
          foreclosure, foreclosed assets are adjusted to fair value less costs to sell
          upon transfer of the loans to foreclosed assets, establishing a new cost basis.
          At that time, they are reported in the Corporations fair value disclosures
          related to nonfinancial assets.

Mortgage servicing rights
(MSRs). MSRs are carried at the lower of cost or fair value, and therefore can be
subject to the fair value measurements on a nonrecurring basis. MSRs do not trade in an
active market with readily observable prices. Accordingly, the Corporation determines the
fair values of MSRs using a valuation model that calculates the present value of estimated
future net servicing income. The model incorporates assumptions that market participants
use in estimating future net servicing income, including estimates of prepayment speeds,
discount rate, cost to service, escrow account earnings, contractual servicing fee income,
ancillary income and late fees. Fair value measurements of the Corporations MSRs use
significant unobservable inputs and, accordingly, are classified as Level 3. MSRs are
reported in the nonrecurring table below at initial recognition of impairment and on an
ongoing basis until recovery.

8

---



Assets and Liabilities
Measured at Fair Value on a Recurring Basis

The balances of assets and
liabilities measured at fair value on a recurring basis as of September 30, 2008 are as
follows:

|                              | Total |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |            | Significant Other Observable Inputs (Level 2) |   | Significant Unobservable Inputs (Level 3) | 
|----------------------------- | ----- |  | -------------------------------------------------------------- | ---------- | --------------------------------------------- | - | ----------------------------------------- | 
|Securities available for sale |       |  | $                                                              | 27,973,294 |                                               | $ | -                                         | 

Assets and Liabilities
Measured at Fair Value on a Nonrecurring Basis

The balances of assets and
liabilities measured at fair value on a nonrecurring basis as of September 30, 2008 are as
follows:

|                  | Total |  | Quoted Prices in Active Markets for Identical Assets(Level 1) |            | Significant Other Observable Inputs(Level 2) |   | Significant Unobservable Inputs(Level 3) |  | Total Gains (Losses) Three Months Ended September 30, 2008 |            | Total Gains (Losses) Nine Months Ended September 30, 2008 |  
|----------------- | ----- |  | ------------------------------------------------------------- | ---------- | -------------------------------------------- | - | ---------------------------------------- |  | ---------------------------------------------------------- | ---------- | --------------------------------------------------------- | -
|Impaired loans(1) |       |  | $                                                             | 18,034,000 |                                              | $ | -                                        |  | $                                                          | 14,312,000 |                                                           | $

|(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 chargeoffs
          which impacts the allowance for loan losses.
|--- | ----------------------------------------------------------------------------------------------------------------------------------

Nonfinancial Assets and
Liabilities Subject to FSP FAS 157-2 Deferral Provisions

The Corporation will apply the fair
value measurement and disclosure provisions of SFAS No. 157 effective January 1, 2009 to
nonfinancial assets and liabilities measured on a nonrecurring basis. The Corporation
measures the fair value of the following on a nonrecurring basis: (1) long-lived assets
and (2) foreclosed assets.

8.    
          Basic earnings per share is computed by dividing net income by the weighted
          average number of shares of common stock and deferred director fee stock units
          outstanding during the period, exclusive of unvested restricted shares. Diluted
          earnings per share is computed by dividing net income by the weighted average
          number of common shares and deferred director fee stock units outstanding and
          potential common stock outstanding during the period, plus the effect of common
          stock equivalents (e.g., unvested restricted shares) that are dilutive,
          calculated under the treasury stock method.

9

---



The following table presents basic
and diluted earnings per share:

|                                                       | Third Quarter |  | Year-to-Date
|------------------------------------------------------ | ------------- |  | ------------
|
|Weighted average basic shares outstanding              |               |  |             
|Effect of dilutive restricted stock                    |               |  |             
|Weighted average diluted shares outstanding            |               |  |             
|                                                       |               | 
|Net loss                                               |               |  | $           
|Basic net loss per share                               |               |  | $           
|Diluted net loss per share                             |               |  | $           
|                                                       |               | 
|Anti-dilutive shares excluded from diluted calculation |               |  |             

9.    
          Under the Long-Term Incentive Plan (the Plan), the Corporation
          grants stock options and restricted stock as compensation to key employees. The
          Corporation has not awarded any stock options under the Plan to date. The
          restricted stock awards generally have a five-year vesting period. The awards
          are recorded at fair market value on the grant date and are amortized into
          salary expense over the vesting period. The number of shares available for
          issuance under the Plan cannot exceed 200,000. A summary of the activity under
          the Plan for the nine months ended September 30, 2008 and 2007 is presented
          below:

|                             | 2008 |  | 2007
|---------------------------- | ---- |  | ----
|
|Outstanding at January 1,    |      |  |     
|Granted                      |      |  |     
|Vested                       |      |  |     
|Forfeited                    |      |  |     
|Outstanding at September 30, |      |  |     

There were no awards granted during
the three months ended September 30, 2008. The total fair value of awards granted during
the nine months ended September 30, 2008 and 2007 was $177,233 and $190,774, respectively.
The total fair value of the awards vested during the three months ended September 30, 2008
and 2007 was $12,956 and $15,610, respectively. The total fair value of the awards vested
during the nine months ended September 30, 2008 and 2007 was $125,361 and $119,086,
respectively. As of September 30, 2008, there was $163,329 of total unrecognized
compensation cost related to nonvested stock awards under the Plan. That cost is expected
to be recognized over a weighted-average period of 3.7 years.

10.    
          Certain amounts included in the 2007 Consolidated Financial Statements have been
          reclassified to conform to the 2008 presentation.

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

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

10

---



The Corporation, a Michigan business
corporation, is a one bank holding company which owns all of the outstanding capital stock
of First National Bank in Howell (the Bank) and all of the outstanding stock of HB Realty
Co., a subsidiary. The following is a discussion of the Corporations results of
operations for the three and nine months ended September 30, 2008 and 2007, and also
provides information relating to the Corporations financial condition, focusing on
its liquidity and capital resources.

On 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 portfolio (using both internal and external resources)
and obtained updated appraisals on the majority of adversely rated credits. The Bank has
also begun the process of obtaining proposals for a new outside independent loan review
service to begin in early 2009.

|Earnings                             | Third Quarter |  | Year-to-Date
|------------------------------------ | ------------- |  | ------------
|(in thousands except per share data)
|Net loss                             |               |  | $           
|Basic and diluted net loss per share |               |  | $           

Net loss for the three months ended
September 30, 2008 as compared to the same period last year, was negatively affected by
lower interest income on loans due to lower average balances, higher nonaccrual loans,
lower yields and lower noninterest income due to the impairment loss on the Freddie Mac
and Fannie Mae preferred securities. These unfavorable variances were more than offset by
lower interest expense due to lower average deposit balances and lower rates, lower loan
loss provision, and lower noninterest expense.

Net loss for the three months ended
September 30, 2008 decreased $2,492,000 (60.5%) compared to the same period last year. In
the third quarter of 2008, net interest income decreased $350,000 (7.8%), noninterest
income decreased $1,813,000 (192.5%) and federal income tax credit decreased $2,302,000
(98.9%). More than offsetting these unfavorable variances was a decrease in provision for
loan losses of $3,219,000 (73.8%) and a decrease in noninterest expense of $3,738,000
(49.7%).

Net loss for the nine months ended
September 30, 2008 decreased $682,000 (10.7%) compared to the same period last year. Net
interest income decreased $1,633,000 (11.6%), noninterest income decreased $1,446,000
(64.3%) and the federal income tax credit decreased $1,367,000 (37.0%). Offsetting these
unfavorable occurrences was a decrease in provision for loan losses of $1,793,000 (15.1%)
and a decrease in noninterest expense of $3,335,000 (22.9%).

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

11

---



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

# INTEREST YIELDS AND
COSTS (in thousands)           September 30, 2008 and 2007

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

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

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

|(3) | Interest on loans includes origination fees totaling $50,000 in 2008 and $77,000
          in 2007.
|--- | ---------------------------------------------------------------------------------------------------

12

---



# INTEREST YIELDS AND
COSTS (in thousands)           September 30, 2008 and 2007

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

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

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

|(3) | Interest on loans includes origination fees totaling $204,000 in 2008 and
          $271,000 in 2007.
|--- | -----------------------------------------------------------------------------------------------------

13

---



# Interest Earning
Assets/Interest Income

On a tax equivalent basis, interest
income decreased $1,405,000 (18.7%) in the third quarter of 2008 compared to the third
quarter of 2007. The yield on average earning assets decreased by 110 basis points
combined with a decrease of $13,950,000 (3.3%) in average earning assets.

The quarterly average balance of
short term investments, certificates of deposit and securities increased approximately
$26,672,000 (51.8%) in the third quarter of 2008 as compared with the same period in 2007.
Loans, which earn a higher yield than investments, had a decrease in average balances of
$40,622,000 (10.9%) in the third quarter of 2008 compared to the same period last year
combined with a 93 basis point decrease in yield.

The Corporation uses a third party
vendor to measure fair value of all securities. The third party provider uses a variety of
independent pricing services and performs quality assurance procedures to ensure the
effectiveness, quality and coverage of the pricing services. The pricing services use
models that use primarily market-based or independent sourced market parameters, including
but not limited to benchmark yields, prepayment speeds, broker/dealer quotes, option
volatility and cash flows.

The degree of management judgment
involved in determining the fair value of securities is minimal due to the availability of
quoted market prices and/or observable market parameters and the use of outside pricing
services. Management has determined that at September 30, 2008 the available for sale
securities are trading in active markets for those or similar type instruments, therefore
FSP FAS 157-3 had no impact on the Corporations financial statement at September 30, 2008.

See Note 5 and Note 7 to the
Consolidated Financial Statements for additional information on securities, their fair
values and other- than- temporary impairment considerations.

The largest decline in terms of
average balance was in commercial loans, the majority of our loan portfolio, due to
chargeoffs and decreased loan origination activities. The decline in interest income from
the prior year is also due to decreases in the prime rate and higher average balances of
nonperforming loans in 2008. Moreover, competitive pressures as well as the weakened local
economy have had, and are expected to continue to have, a negative impact on commercial
loan balances and yields.

For the first nine months of the
year, tax equivalent interest income decreased $4,211,000 (18.0%). Loan interest income
decreased $4,463,000 (20.8%) due to lower average balances of $41,187,000 (10.8%) combined
with the average yield decreasing 86 basis points. The decrease in loan balances primarily
occurred in commercial loans as the average commercial loan balances decreased $34,018,000
(10.3%). Short-term investments, certificates of deposits and securities interest income
increased by $252,000 (12.8%) due to an increase in average balances of 9,840,000 (17.9%),
partially offset by a decrease in the average yield of 22 basis points.

# Interest Bearing
Liabilities/Interest Expense

Interest expense on deposits for the
third quarter of 2008 decreased $1,043,000 (37.0%) compared to the third quarter of 2007.
This was the result of lower cost of funds due to lower interest rates paid on deposits of
123 basis points, combined with lower average deposit balances of $6,109,000 (1.9%).
Pricing competition in the local market for deposits continues to be a factor in
attracting deposits at reasonable costs.

Interest expense on deposits for the
first nine months of 2008 decreased $2,517,000 (28.9%) compared to the same period in
2007. This was a result of a decrease in the average interest rate paid on deposits of 86
basis points along with lower average balances of $19,327,000 (5.8%) in 2008 compared to
2007.

Borrowed funds average balance
increased $487,000 (5.6%) in the third quarter of 2008 compared to 2007. As of September
30, 2008, the Bank had a $797,000 loan advance outstanding, included in borrowed funds,
which was entered into in 2000 from the FHLBI plus an $8,000,000 loan advance entered into
in 2007 from the FHLBI. Additional FHLBI borrowings are available to fund future loan
growth if needed. The holding company had a $445,000 advance outstanding at September 30,
2008 from a correspondent bank used to pay the February and May 2008 dividend to
shareholders. This advance matured on October 31, 2008. The advance was partially paid off
at October 31, 2008 and a new note for $100,000, maturing on July 31, 2009, was entered
into. The advance was partially repaid by proceeds from the sale of 57,556 shares of stock
to certain directors and one executive for a total of $259,000. The sale price was $4.50
per share, the closing price on the day before the issuance was reported on a Form 8-K
filed with the SEC.

14

---



# Liquidity

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

Deposits are the principal source of
funds for the Bank. Management monitors rates at other financial institutions in the area
to ascertain that its rates are competitive in the market. Management also attempts to
offer a wide variety of products to meet the needs of its customers. The makeup of the
Banks Large Certificates, which are generally considered to be more
volatile and sensitive to changes in rates, consist principally of local depositors known
to the Bank. The Bank had Large Certificates totaling approximately $65,000,000 at
September 30, 2008 and $72,000,000 at December 31, 2007. Included in these totals are
$384,000 at September 30, 2008 and $374,000 at December 31, 2007 of brokered certificates
of deposit.

It is the intention of the
Banks management to handle unexpected liquidity needs through FHLBI borrowings. The
Bank has a line of credit of approximately $23,000,000 available at the FHLBI and has
pledged certain commercial and consumer loans secured by residential real estate as
collateral for this borrowing. As of September 30, 2008, the Bank had $8,797,000 in
borrowings against the line. Management may also need to look to available for
sale securities in the investment portfolio to meet additional liquidity needs.

# Interest Rate Risk

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

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

15

---



# Interest Rate
Sensitivity as of September 30, 2008

|0-3Months                              | 4-12Months | 1-5Years | 5+Years | Total  
|-------------------------------------- | ---------- | -------- | ------- | -------
|Assets:                                |            |          |         |        
|Loans, net                             |            |          | $       | 86,119 
|Securities                             |            |          |         | 3,506  
|Certificates of deposit                |            |          |         | 294    
|Short term investments                 |            |          |         | 25,084 
|Total rate sensitive assets            |            |          | $       | 115,003
|                                       |            |         
|Liabilities:                           |            |         
|NOW, savings & MMDA                    |            |          | $       | 82,560 
|Time deposits                          |            |          |         | 25,785 
|Other borrowings                       |            |          |         | 445    
|Total rate sensitive liabilities       |            |          | $       | 108,790
|                                       |            |         
|Rate sensitivity gap and ratios:       |            |         
|Gap for period                         |            |          | $       | 6,213  
|Cumulative gap                         |            |          |         | 6,213  
|                                       |            |         
|Cumulative rate sensitive ratio        |            |          |         | 1.06   
|December 31, 2007 rate sensitive ratio |            |          |         | 0.83   

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

In the gap table above, the short
term (one year and less) cumulative interest rate sensitivity is liability sensitive as of
September 30, 2008. A liability sensitive position would normally indicate increased net
interest income in a falling rate environment as liabilities would be repriced quicker
than assets. Gap analysis is limited and may not provide an accurate indication of the
impact of general interest rate movements on the net interest margin since repricing of
various categories of assets and liabilities is subject to the Banks needs,
competitive pressures, and the needs of the Banks customers. In addition, various
assets and liabilities indicated as repricing within the same period may in fact reprice
at different times within the period and at different rate indices. Due to these inherent
limitations in the GAP analysis, the Corporation also utilizes simulation modeling, which
measures the impact of upward and downward movements of interest rates on interest margin
and provides meaningful insight into strategies management can take to help mitigate the
movement of interest rates.

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

16

---



The Corporation recorded a provision
of $1,145,000 in the third quarter of 2008 compared to $4,364,000 in the same period of
2007. The 2008 provision is based upon an analysis of estimated losses inherent in the
portfolio and other economic factors. Nonperforming loans at September 30, 2008 have
increased $3,000,000 to $31,138,000 from the June 30, 2008 balance of $28,138,000, and
$16,565,000 from the December 31, 2007 balance of $14,573,000 and increased $19,667,000
from the September 30, 2007 balance of $11,471,000. Net charge offs for the third quarter
of 2008 were $2,282,000 compared to $3,121,000 in the same period in 2007. The 2007
year-to-date provision was impacted by transferring $24,732,000 of loans into the held for
sale classification which had partial charge-offs of $2,935,000 and writedowns to
estimated fair value of $4,603,000, resulting in $17,194,000 of net loans transferred to
held for sale. For the third quarter of 2007, $6,311,000 of loans were transferred to held
for sale with $1,156,000 of partial charge-offs and $1,101,000 of fair value adjustments
for a net transfer of $4,054,000. During the third quarter of 2007, $9,779,000 of the
loans were sold at a further loss of $1,107,000, which was recorded in the income
statement under the caption Loss on sale/writedown of commercial loans held for
sale, along with the commission paid to the broker and $68,000 of recoveries on
these loans. The remaining $7,415,000 of loans classified as held for sale were
transferred back to loans held for investment at their estimated fair value of $3,689,000,
requiring a further impairment recognized in the third quarter of 2007 of $3,147,000,
after consideration of $579,000 of payments received on these loans during the third
quarter. This impairment was also recorded in the income statement as part of Loss
on sale/writedown of commercial loans held for sale. Nonperforming loans as a
percentage of total loans was 9.55% at September 30, 2008 compared to 8.83% at June 30,
2008, 4.19% at December 31, 2007 and 3.21% at September 30, 2007. Management has
determined that the allowance is adequate based on potential losses in the portfolio.

Year to date, the provision was
$10,045,000 compared to $11,838,000 in the prior year. At September 30, 2008, the
allowance for loan losses as a percent of loans was 4.50% compared to 2.96% at December
31, 2007 and 2.45% at September 30, 2007. For the first nine months of 2008, the bank had
net charge-offs of $5,802,000 compared to $10,386,000 for 2007.

Impaired loans, as defined by
Statement of Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan, totaled approximately $29,540,000 at September 30, 2008, and
included non-accrual and past due 90 days other than homogenous residential and consumer
loans, and $273,000 of commercial loans separately identified as impaired. Included in
impaired loans is $4,159,000 of commercial loans with no specific reserve allocation based
on the Statement No. 114 analysis which indicates the loan is adequately collateralized at
this time. A loan is considered impaired when it is probable that all or part of amounts
due according to the contractual terms of the loan agreement will not be collected on a
timely basis. Impaired loans totaled $34,854,000 at June 30, 2008, $17,000,000 at December
31, 2007 and $11,624,000 at September 30, 2007. Impaired commercial loans had specific
reserves calculated in accordance with Statement No. 114 of $4,781,000 at September 30,
2008, $1,720,000 at December 31, 2007 and $1,363,000 at September 30, 2007.

The adequacy of the allowance for
loan losses is determined by managements assessment of the composition of the loan
portfolio, an evaluation of specific credits, an analysis of the value of the underlying
collateral for those loans, historical loss experience, relevant economic factors, the
level of nonperforming loans, loans that have been identified as impaired, and the overall
credit quality of the portfolio. Management continues to refine its techniques in this
analysis. Due to the concentration of the Bank in residential real estate development and
construction loans and the continued decline in the Michigan real estate market, the Bank
is particularly focused on this segment of loans.

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

17

---



Loans are generally placed on a
nonaccrual basis when principal or interest is past due ninety days or more and when, in
the opinion of management, full collection of principal and interest is unlikely. However,
as of September 30, 2008, approximately $8.4 million of nonperforming loans are making
scheduled payments on their loans. Management has decided, based upon the declines in the
value of the real estate securing these loans and concerns regarding the cash flow of the
borrowers, that ultimate collectibility of the full principal and interest on these loans
is uncertain. Loans categorized as 90 days past due and still accruing are well secured
and in the process of collection. Nonperforming loans are reviewed regularly for
collectibility. The following table reflects nonperforming assets:

|September 30,2008                           |  | June 30,2008 |   | December 31,2007 |  | September 30,2007
|------------------------------------------- |  | ------------ | - | ---------------- |  | -----------------
|Nonaccrual Loans                            |  |              | $ | 30,337           |  | $                
|90 days or more past due and still accruing |  |              |   | 801              |  |                  
|Total nonperforming loans                   |  |              | $ | 31,138           |  | $                
|Other real estate owned                     |  |              |   | 2,381            |  |                  
|Total nonperforming assets                  |  |              | $ | 33,519           |  | $                
|                                            |  |             
|Nonperforming loans as a percent of         |  |             
|total loans                                 |  |              |   | 9.55%            |  |                  
|Allowance for loan losses as a percent of   |  |             
|nonperforming loans                         |  |              |   | 47%              |  |                  
|Nonperforming assets as a percent of        |  |             
|total loans and other real estate owned     |  |              |   | 10.21%           |  |                  

A summary of the composition of loans
is presented below. Included in residential first mortgage totals are real estate
mortgage loans listed in the consolidated financial statements and other loans
(primarily commercial) to customers who pledge their homes as collateral for their
borrowings.

|September 30, 2008                                |  | December 31, 2007 |  
|------------------------------------------------- |  | ----------------- | -
|Loans (in thousands)                             
|Secured by real estate:                           |  |                   |  
|Residential first mortgage                        |  |                   | $
|Residential home equity/other junior liens        |  |                   |  
|1-4 family residential construction loans         |  |                   |  
|Other construction, land development, and         |  |                  
|other land loans                                  |  |                   |  
|Multifamily residential properties                |  |                   |  
|Owner-occupied nonfarm, nonresidential properties |  |                   |  
|Other nonfarm, nonresidential properties          |  |                   |  
|Consumer                                          |  |                   |  
|Commercial                                        |  |                   |  
|Other                                             |  |                   |  
|Total gross loans                                 |  |                   |  
|Net unearned fees                                 |  |                   |  
|Total loans                                       |  |                   | $

The increase in other construction,
land development, and other land loans at September 30, 2008 from December 31, 2007 is due
to reclassifications based on the underlying collateral. The Corporations exposure
to real estate secured loans continues as the economy and real estate values have
continued to deteriorate. If the economy continues to weaken and/or real estate values
decline further, nonperforming loans may increase in subsequent quarters. In addition,
continued adverse economic conditions could result in further deterioration in the overall
loan portfolio.

18

---



The following table summarizes the
changes in the allowance for loan losses and reserve for unfunded credit commitments for
the first nine months of 2008 and 2007 (in thousands):

|2008                                                               |  | 2007
|------------------------------------------------------------------ |  | ----
|Allowance for loan losses                                          |  |     
|Balance, beginning of year                                         |  |     
|Loans charged off:                                                 |  |     
|Real estate mortgage                                               |  |     
|Commerical                                                         |  |     
|Consumer                                                           |  |     
|Subtotal                                                           |  |     
|Charge-offs on loans transferred to held for sale                  |  |     
|Total charge-offs                                                  |  |     
|Recoveries to loans previously charged off:                        |  |     
|Real estate mortgage                                               |  |     
|Commerical                                                         |  |     
|Consumer                                                           |  |     
|Total recoveries                                                   |  |     
|Net loans charged off                                              |  |     
|Additions to allowance charged to operations                       |  |     
|Balance, end of quarter                                            |  |     
|Reserve for unfunded credit commitments                            |  |     
|Balance, beginning of year                                         |  |     
|Additions to reserve charged to operations                         |  |     
|Balance, end of quarter                                            |  |     
|Total allowance for loan losses and reserve for                    |  |     
|unfunded credit commitments                                        |  |     
|Ratios:                                                            |  |     
|Net loans charged off (annualized) to average loans outstanding    |  |     
|Net loans charged off (annualized) to average loans outstanding(1) |  |     
|Allowance for loan losses to loans outstanding                     |  |     

|(1) Computed
without annualizing the charge-off related to transferring loans to held for sale.
|-----------------------------------------------------------------------------------------------

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

Noninterest income, which includes
service charges and other fee income, trust income, gain on sale of mortgage loans, gain
(loss) on available for sale securities, and other miscellaneous income, decreased by
$1,813,000 (192.5%) during the third quarter of 2008 compared to the same quarter in 2007.
The primary reason for the decrease was the loss on impairment of available for sale
securities of $1,772,000 in 2008 due to the impairment recorded on the Freddie Mac and
Fannie Mae preferred securities as discussed in Note 5 of the accompanying consolidated
financial statements. Service charges and other fee income decreased $24,000 (2.9%) during
the third quarter of 2008 from the third quarter of 2007 primarily due to decreases in
returned check fees and commercial loan late fees partially offset by an increase in ATM
network fees. Trust income decreased $8,200 (8.1%) in the third quarter 2008 compared to
the same period last year. The Bank had no gain on sale of mortgage loans in the third
quarter of 2008 compared to $11,000 in the same period in 2007. The Bank is now using a
third party to underwrite, fund, and close mortgage loans, and the Bank receives a
commission for taking the loan application and performing related services. The Bank
received $14,000 in commissions in the third quarter of 2008 which are included in other
fee income.

19

---



For the nine months ended September
30, 2008, noninterest income decreased $1,446,000 (64.3%). This decrease was primarily due
to the loss on impairment of available for sale securities as discussed above. Service
charges and other fee income decreased $217,000 (8.8%) due primarily to lower returned
check fees of $94,000 (7.4%) and loan late fees and service charges $122,000 (39.7%). Gain
on sale of mortgage loans decreased $35,000 due to the bank no longer originating mortgage
loans in 2008 as discussed above. The Bank received $34,000 in commissions for the nine
months ended September 30, 2008 which are included in other fee income. Other income
increased $37,000 primarily due to the gain on sale of four other real estate owned
properties, all of which were residential mortgage properties.

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

Noninterest expense decreased
$3,738,000 (49.7%) in the third quarter of 2008 compared to the same quarter in 2007. This
decrease was primarily due to the loss on sale/writedown of commercial loans held for sale
of $4,312,000 in the third quarter of 2007. Salaries and employee benefits increased
$135,000 (8.6%) in the third quarter of 2008 compared to the third quarter of 2007
primarily due to an increase in profit sharing expense of $114,000 and other employee
benefits of $17,000. Profit sharing expense (discretionary bonuses) increased in the third
quarter of 2008 compared to the same period of 2007 due to the Bank reducing the accrual
in the third quarter of 2007 by $39,000 based on the Banks results through September
30, 2007. Net occupancy costs decreased $25,000 (8.7%) in 2008 compared to 2007 due to
lower property taxes, building services and depreciation expense. Equipment expense
decreased $16,000 (13.1%) primarily due to lower depreciation expense due to the
Banks telephone system is now fully depreciated. Professional and service fees
increased $125,000 (26.9%) primarily due to higher legal fees. Legal fees increased
$126,000 in the third quarter of 2008 from the third quarter of 2007 and are expected to
remain elevated as the Bank will require additional legal services as nonperforming loans
are worked out. Loan collection and foreclosed property expense increased $241,000 in the
third quarter compared to 2007 due to higher nonperforming loans and foreclosed assets.
These costs are expected to remain high in the near term future. Computer service fees
decreased $11,000 (7.9%) as 2007 included maintenance fees related to the replaced core
system. FDIC assessment fees increased $206,000 due to a one-time credit being fully used
in the first half of 2008. Printing and supplies decreased $4,000 (6.8%) due to timing of
purchases. Director fees decreased $16,000 (25.6%) due changes in director compensation in
2008 and fewer committee meetings. Other expenses decreased $60,000 (13.6%) primarily due
to 2007 including higher losses on the sale of two other real estate owned properties, all
of which were commercial properties.

For the first nine months of 2008,
noninterest expense decreased $3,335,000 (22.9%) compared to 2007. As noted above, this
was primarily due to the loss on sale/writedown of commercial loans held for sale of
$4,312,000 in 2007. Salaries and employee benefits increased $227,000 (4.5%) primarily due
to salaries and wages increasing $135,000 and profit sharing expense increasing $133,000.
Salaries increased due to adding positions in the commercial loan department. Profit
sharing increased due to the Bank reducing the 2007 accrual based on the Banks
results through September 30, 2007. Net occupancy expense increased $13,000 (1.5%)
primarily due to an increase in building services primarily related to increased snow
removal services in 2008 partially offset by lower depreciation expense. Equipment expense
decreased $2,000 (.6%). Professional and service fees increased $199,000 (13.1%) primarily
due to an increase in legal fees of $313,000 as noted above. Partially offsetting the
increase in legal fees was a decrease in other fees of $90,000 due to a consulting project
related to the core system conversion in 2007. Loan collection and foreclosed property
expense increased $496,000 compared to same period in 2007 for reasons noted above as well
as higher property taxes paid on nonperforming assets in 2008. Computer service fees
decreased $40,000 (9.4%) as 2007 fees included costs related to the core system conversion
with occurred in April 2007. FDIC assessment fees increased $233,000 in 2008 due to
reasons stated above. The Bank will be subject to higher deposit insurance premiums in the
last quarter of 2008 as compared to 2007. The total increase in premiums in 2008 compared
to 2007 is estimated to be approximately $460,000 based on current assessments and
anticipated assessments in the fourth quarter of 2008. FDIC premiums are expected to
continue to increase in 2009. Printing and supplies decreased $28,000 (11.5%) as 2007
included costs related to the core system conversion which occurred in April 2007.
Director fees decreased $70,000 (28.6%) due to no profit sharing bonus accrual for
directors in 2008, changes in director compensation in 2008, and fewer committee meetings.
Other expenses decreased $53,000 (4.2%) in 2008 compared to 2007 primarily due to higher
losses on the sale of other real estate owned property in 2007 partially offset by a 2007
reversal of a $78,000 settlement accrued in 2006;

20

---



|Income Tax Expense | Third Quarter |  | Year-to-Date
|------------------ | ------------- |  | ------------
|(in thousands)    
|Total              |               |  | $           

Fluctuations in income taxes resulted
primarily from changes in the level of profitability and in variations in the amount of
tax-exempt income as a percentage of the pre-tax loss as well as the tax treatment of our
other-than-temporary impairment on preferred securities discussed in the following
sentences. In the third quarter of 2008, the Corporation recorded a loss on our Fannie Mae
and Freddie Mac preferred stock of $1,772,000. On October 3, 2008, the Emergency Economic
Stabilization Act of 2008 (EESA) enacted Section 301 provides tax relief to banking
organizations that have suffered losses on Fannie Mae and Freddie Mac preferred securities
by changing the character of these losses from capital to ordinary for federal income tax
purposes. However, since the EESA was enacted after September 30, 2008, the Corporation
will not be able to recognize the tax effects of the ordinary losses in its financial
statements until the fourth quarter of 2008. The Corporation is expected to recognize a
$603,000 tax credit in the fourth quarter of 2008 related to this transaction.

|September 30, 2008              |  | December 31, 2007 |   | September 30, 2007
|------------------------------- |  | ----------------- | - | ------------------
|Stockholders' Equity            |  |                   | $ | 34,337            
|Ratio of Equity to Total Assets |  |                   |   | 8.27%             

The Federal Banking Agencies have
allowed Banks to elect to recognize the effect of the tax law change enacted in Section
301 of the EESA (as discussed above) in the third quarter 2008 regulatory capital
calculations. The Banks Tier 1, Tier 1 risk-based and total risk-based capital
ratios at September 30, 2008 reflect the $603,000 tax benefit of the losses on Fannie Mae
and Freddie Mac preferred securities.

The Federal Reserve Board provides
guidelines for the measurement of capital adequacy. The Banks capital, as adjusted
under these guidelines, is referred to as risk-based capital. The Banks Tier 1
risk-based capital ratio at September 30, 2008 was 10.22% and total risk-based capital was
11.51%. At September 30, 2007, these ratios were 10.62% and 11.88%, respectively. Minimum
regulatory Tier 1 risk-based and total risk-based capital ratios under the Federal Reserve
Board guidelines are 4% and 8%, respectively. The capital guidelines also provide for a
standard to measure risk-based capital to total assets which is called the leverage ratio.
The Banks leverage ratio was 8.35% at September 30, 2008 and 9.28% at September 30,
2007. The minimum standard leverage ratio is 3% but financial institutions are expected to
maintain a leverage ratio of 1 to 2 percentage points above the 3% minimum.

While the Bank remains well
capitalized, further dividends from the Bank to the Corporation will require OCC approval.
This is due to the fact that, under current banking regulations, the Bank may only pay
dividends, without prior OCC approval, to the extent of its current years retained
earnings (current years earnings less current years dividends paid) plus the
prior two years retained earnings. The Banks prior and current years
losses obligate the Bank to obtain this approval. To the extent that the Corporation pays
dividends given (1) the losses incurred in 2007 and to date in 2008, and (2) dividends
paid by the Bank to the Corporation in 2007, and based on an assumption of future earnings
commensurate with historical earning levels, OCC approval will be required as a condition
to future dividends until at least 2010. We have no basis or understanding with the OCC
that such approval will be granted.

21

---



The Corporation has filed a
preliminary proxy statement with the SEC in connection with a special meeting of the
shareholders to amend the Corporations articles of incorporation to permit the
issuance of preferred stock. The special meeting of shareholders is scheduled for December
17, 2008 for the purpose of voting on this amendment. Management believes that the ability
of the Corporation to issue preferred stock in the current capital environment, especially
in regards to the Emergency Economic Stabilization Act of 2008 which allows the U.S.
Department of Treasury to inject capital in the form of preferred stock into banks and
bank holding companies, is beneficial. Management is currently evaluating the program
offered by the Treasury and other opportunities to raise capital in a low-cost and
efficient manner.

Critical Accounting
Policies  The Corporation maintains critical
accounting policies for the allowance for loan losses. Refer to notes 1c and 1d of the
Notes to Consolidated Financial Statements for additional information included in Form
10-K for the year ended December 31, 2007.

Contractual ObligationsAs of September 30, 2008, December
31, 2007, and September 30, 2007, the Bank had outstanding irrevocable standby letters of
credit, which carry a maximum potential commitment of approximately $1,422,000, $2,328,000
and $2,600,000, respectively. These letters of credit are conditional commitments issued
by the Bank to guarantee the performance of a customer to a third party. The majority of
these letters of credit are short-term guarantees of one year or less, although some have
maturities which extend as long as two years. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loans to customers. The
Bank primarily holds real estate as collateral supporting those commitments for which
collateral is deemed necessary. The extent of collateral held on those commitments at
September 30, 2008, December 31, 2007 and September 30, 2007, where there is collateral,
was in excess of the committed amount. A letter of credit is not recorded on the balance
sheet unless a customer fails to perform.

Impact of New Accounting
Standards  In September 2006, the Financial
Accounting Standards Board (FASB) issued Statement No. 157,Fair Value
Measurements. The Statement defines fair value, establishes a framework for measuring
fair value and expands disclosures about fair value measurements. This Statement applies
to other accounting pronouncements that require or permit fair value measurements, the
Board having previously concluded in those accounting pronouncements that fair value is
the relevant measurement attribute. The Statement does not require any new fair value
measurements and was initially effective for the Corporation beginning January 1,
2008. In February 2008, the FASB approved the issuance of FASB Staff Position (FSP)
FAS157-2. FSP FAS 157-2 allows entities to electively defer the effective date of
Statement No. 157 until January 1, 2009 for nonfinancial assets and nonfinancial
liabilities except those items recognized or disclosed at fair value on an annual or more
frequently recurring basis. On October 10, 2008, the FASB issued FSP FAS 157-3 to clarify
the application of fair value measurements of a financial asset when the market for that
asset is not active. This clarifying guidance became effective upon issuance, including
prior periods for which financial statements had not been issued, such as the period ended
September 30, 2008. This new guidance had no effect on our consolidated results of
operations or financial position. The Corporation will apply the fair value measurement
and disclosure provisions of Statement No. 157 to nonfinancial assets and liabilities
effective January 1, 2009. Such is not expected to be material to our results of
operations or financial position. See Note 7 for a discussion regarding the January 1,
2008 implementation of Statement No. 157 relating to the Corporations financial
assets and liabilities.

In February 2007, the FASB issued
Statement No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities. This Statement permits entities to choose to measure eligible items at
fair value at specified election dates. For items for which the fair value option has been
elected, unrealized gains and losses are to be reported in earnings at each subsequent
reporting date. The fair value option is irrevocable unless a new election date occurs,
may be applied instrument by instrument, with a few exceptions, and applies only to entire
instruments and not to portions of instruments. This Statement provides an opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting. Statement No.
159 was effective for the Corporation beginning January 1, 2008. Through September 30,
2008, the Corporation has not elected the fair value option for any of its financial
assets or liabilities.

22

---



In December 2007, the FASB issued
Statement No. 141(R), Business Combinations, to further enhance the accounting and
financial reporting to related business combinations. This Statement establishes
principles and requirements for how the acquirer in a business combinations (1) recognizes
and measures in its financial statements the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interests in the acquiree, (2) recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase, and (3)
determines what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. Statement No.
141(R) applies prospectively to business combinations for which the acquisition date is on
or after the beginning of the first annual reporting period beginning on or after December
15, 2008. Therefore, the effects of the Corporations adoption of Statement No.
141(R) will depend upon the extent and magnitude of acquisitions after December 31, 2008.

In May 2008, the FASB issued
Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles. 
This Statement is intended to improve financial reporting by identifying a consistent
framework, or hierarchy, for selecting accounting principles to be used in the preparation
of financial statements of nongovernmental entities that are presented in conformity with
U.S. generally accepted accounting principles (GAAP).  Statement No. 162
directs the GAAP hierarchy to the entity, not the independent auditors, as the entity is
responsible for selecting accounting principles for financial statements that are
presented in conformity with GAAP.  Statement No. 162 is effective 60 days following
the Securities and Exchange Commissions approval of the Public Company Accounting
Oversight Board amendments to remove the GAAP hierarchy from the auditing standards. 
Management does not expect Statement No. 162 to have a material effect on the
Corporations results of operations or financial position upon adoption.

Item 3. Quantitative and
Qualitative Disclosures About Market Risk There has been no material change in
the market risk faced by the Corporation since December 31, 2007.

Item 4. Controls and
Procedures

| | (a) | Evaluation
of Disclosure Controls and Procedures. With the participation of management, the
Corporations chief executive officer and chief financial officer, after evaluating
the effectiveness of the Corporations disclosure controls and procedures (as
defined in Exchange Act Rules 13a  15(e) and 15d 15(e)) for the period ended
September 30, 2008, have concluded that, as of such date, the Corporations
disclosure controls and procedures were effective.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Changes
in Internal Control Over Financial Reporting. During the quarter ended September 30, 2008
there were no changes in the Corporations internal control over financial reporting
that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# PART II  OTHER
INFORMATION

# Item 1A. Risk Factors

In addition to the risk factors
previously  disclosed in Part I, Item 1A of the  Corporations  Form 10-K, the Corporation
is subject to the following additional risk factors under the current economic and regulatory environment.

23

---



Difficult market
conditions have adversely affected our industry. Dramatic  declines  in the housing
 market over the past year,  with  falling  home prices and  increasing foreclosures,
 unemployment and under-employment,  have negatively impacted the credit performance of
real estate  related loans and resulted in significant  write-downs of asset values by
financial  institutions. This has also resulted in the  write-downs  of  asset-backed
 securities  and other  securities and loans. Reflecting  concern  about  the  stability
 of  the  financial  markets  generally  and  the  strength  of counterparties,  many
lenders and  institutional  investors  have reduced or ceased  providing  funding to
borrowers,  including to other financial  institutions.  This market turmoil and
tightening of credit have led to an  increased  level  of  commercial  and  consumer
 delinquencies,  lack of  consumer  confidence, increased  market   volatility  and
 widespread   reduction  of  business   activity   generally.   Market developments  may
affect consumer  confidence  levels and may cause adverse  changes in payment  patterns,
causing increases in delinquencies  and default rates,  which may impact our charge-offs
and provision for credit  losses.  A worsening of these  conditions  would likely
 exacerbate  the adverse  effects of these difficult market conditions on us and others
in the financial institutions industry.

Current levels of market
volatility are unprecedented. The capital and credit markets have been  experiencing
 volatility and disruption for more than 12 months. Recently,  the  volatility and
disruption has reached  unprecedented  levels.  In some cases,  the markets have
 produced  downward  pressure on stock prices and credit  availability  for certain
 issuers  without regard to those  issuers  underlying  financial  strength.  If current
 levels of market  disruption  and volatility  continue or worsen,  there can be no
assurance that we will not experience an adverse  effect, which may be material,  on our
ability to access  capital and on our  business,  financial  condition  and results of
operations.

There can be no assurance
that recently enacted legislation will stabilize the U.S. financial system. On October 3,
 2008, President Bush signed into law the Emergency Economic  Stabilization Act of 2008
(the EESA).  The  legislation  was the result of a proposal by Treasury  Secretary
 Henry Paulson to the U.S. Congress in response to the  financial  crises  affecting  the
banking  system and  financial  markets and threats to investment  banks and other
 financial  institutions.  Pursuant to the EESA, the U.S.  Treasury will  have  the
 authority   to,  among  other   things,   purchase  up  to  $700  billion  of
 mortgages, mortgage-backed  securities and certain other financial  instruments  from
financial  institutions for the purpose of stabilizing and providing  liquidity to the
U.S.  financial markets.  On October 14,  2008, the U.S.  Department  of Treasury
 announced a program  under the EESA  pursuant to which it would make senior preferred
 stock  investments  in  participating   financial  institutions  (the  TARP  Capital
 Purchase Program).  On October 14,  2008, the Federal Deposit Insurance Corporation
announced the development of a guarantee  program under the systemic risk exception to
the Federal Deposit Act (FDA)  pursuant to which the FDIC would  offer a  guarantee  of
certain  financial  institution  indebtedness  in  exchange  for an insurance  premium
 to be  paid  to the  FDIC by  issuing  financial  institutions  (the  FDIC  Temporary
Liquidity  Guarantee  Program).  There can be no  assurance,  however,  as to the actual
 impact that the EESA and its implementing  regulations,  the FDIC programs, or any other
governmental program will have on the  financial  markets.  The failure of the EESA,  the
FDIC,  or the U.S.  government  to  stabilize  the financial  markets  and  a
 continuation  or  worsening  of  current  financial  market  conditions  could
materially and adversely affect our business,  financial condition,  results of
operations,  and access to credit or the trading price of our common stock.

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. The programs  established or to be  established  under the EESA and Troubled
Asset Relief Program may have adverse  effects  upon us.  We may  face  increased
 regulation  of our  industry.  Compliance  with  such regulation  may  increase  our
costs  and  limit our  ability  to  pursue  business  opportunities.  Also, participation
  in  specific   programs  may  subject  us  to   additional   restrictions.   For
 example, participation  in the TARP Capital  Purchase Program would limit (without the
consent of the Department of Treasury)  our  ability to increase  our  dividend or to
 repurchase  our common  stock for so long as any securities  issued  under  such
 program  remain  outstanding.  It would  also  subject  us to  additional executive
 compensation  restrictions.  Similarly,  programs  established  by the FDIC under the
 systemic risk  exception  of  the  FDA,  whether  we  participate  or  not,  may  have
 an  adverse  effect  on us. Participation  in the FDIC  Temporary  Liquidity  Guarantee
 Program  likely  will  require the payment of additional  insurance  premiums  to the
FDIC.  We may be  required  to pay  significantly  higher  Federal Deposit  Insurance
 Corporation  premiums even if we do not  participate in the FDIC  Temporary  Liquidity
Guarantee Program because market  developments have significantly  depleted the insurance
fund of the FDIC and  reduced  the  ratio  of  reserves  to  insured   deposits.   The
 affects  of  participating  or  not participating  in any such programs and the extent
of our  participation  in such programs cannot reliably be determined at this time.

24

---



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

All securities sold by the
Corporation through the Employee Stock Purchase Plan and the Long-Term Incentive Plan
during the quarter ended September 30, 2008 were registered under the Securities Act.

There were no purchases of common
stock for the three months ended September 30, 2008.

# Item 6. Exhibits

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

| | 31.1 | Certificate
of the Chief Executive Officer of FNBH Bancorp, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------

| | 31.2 | Certificate
of the Chief Financial Officer of FNBH Bancorp, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------

| | 32.1 | Certificate
of the Chief Executive Officer of FNBH Bancorp, Inc. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------

| | 32.2 | Certificate
of the Chief Financial Officer of FNBH Bancorp, Inc. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------

25

---



SIGNATURES

Pursuant to the requirements of the
Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on
Form 10-Q for the quarter ended September 30, 2008 to be signed on its behalf by the
undersigned hereunto duly authorized.

| |  | FNBH BANCORP, INC./s/ Ronald L. Long
Ronald L. LongPresident and Chief Executive Officer/s/ Janice B. Trouba
Janice B. TroubaChief Financial Officer
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: November 7, 2008

26