# UNITED STATES SECURITIES AND
EXCHANGE COMMISSION Washington, 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, 2009

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. Employer Identification No.)
|---------------------------------------------------------------------- | -----------------------------------------------

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

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

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 has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
               Yes [__]    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. See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of
the Exchange Act. Large accelerated filer [__]    Accelerated filer [__]    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:
3,141,066 shares of the Corporations Common Stock (no par value) were outstanding as
of October 31, 2009.

---



# TABLE OF CONTENTS

|                                                                                                     
|-----------------------------------------------------------------------------------------------------
|Part I. Financial Information (unaudited)                                                            
|Item 1. Financial Statements:                                                                        
|Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008                           
|Consolidated Statements of Operations for the three and nine months ended September 30, 2009 and 2008
|Consolidated Statements of Shareholders' Equity and Comprehensive Income for                         
|the nine months ended September 30, 2009 and 2008                                                    
|Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008          
|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 30,2009 | December 31,2008
|------------------------------------------------------------------- | ----------------- | ----------------
|Cash and due from banks                                             |                   |                 
|Short term investments                                              |                   |                 
|Total cash and cash equivalents                                     |                   |                 
|Certificates of deposit                                             |                   |                 
|Investment securities:                                              |                   |                 
|Investment securities 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                              |                   |                 
|Facilities held for sale, net                                       |                   |                 
|Deferred taxes, net                                                 |                   |                 
|Accrued interest and other assets                                   |                   |                 
|Total assets                                                        |                   |                 
|                                                                    |                   |                 
|Liabilities and Shareholders' 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                                                   |                   |                 
|Shareholders' Equity                                                |                   |                 
|Preferred stock, no par value.  Authorized 30,000 shares; no shares |                   |                 
|issued and outstanding at September 30, 2009                        |                   |                 
|Common stock, no par value. Authorized 7,000,000 shares; 3,141,066  |                   |                 
|shares issued and outstanding at September 30, 2009 and 3,119,620   |                   |                 
|shares issued and outstanding at December 31, 2008                  |                   |                 
|Retained earnings                                                   |                   |                 
|Deferred directors' compensation                                    |                   |                 
|Accumulated other comprehensive income                              |                   |                 
|Total shareholders' equity                                          |                   |                 
|Total liabilities and shareholders' equity                          |                   |                 

See notes to consolidated financial
statements.

1

---



# FNBH Bancorp, Inc.Consolidated
Statements of Operations (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 (deficiency) after provision for loan losses |                                 |                               
|                                                                 |                                 |                               
|Noninterest income:                                              |                                 |                               
|Service charges and other fee income                             |                                 |                               
|Trust income                                                     |                                 |                               
|Gain (loss) on available for sale securities                     |                                 |                               
|Other                                                            |                                 |                               
|Total noninterest income (loss)                                  |                                 |                               
|Noninterest expense:                                             |                                 |                               
|Salaries and employee benefits                                   |                                 |                               
|Net occupancy expense                                            |                                 |                               
|Equipment expense                                                |                                 |                               
|Professional and service fees                                    |                                 |                               
|Computer service fees                                            |                                 |                               
|FDIC assessment fees                                             |                                 |                               
|Amortization expense                                             |                                 |                               
|Printing and supplies                                            |                                 |                               
|Director fees                                                    |                                 |                               
|Loan collection and foreclosed property expenses                 |                                 |                               
|Net (gain) loss on sale of OREO/repossessions                    |                                 |                               
|Other                                                            |                                 |                               
|Total noninterest expense                                        |                                 |                               
|                                                                 |                                 |                               
|Loss before federal income tax expense                           |                                 |                               
|                                                                 |                                 |                               
|Federal income tax expense (benefit)                             |                                 |                               
|                                                                 |                                 |                               
|Net loss                                                         |                                 |                               
|                                                                 |                                 |                               
|Per share statistics:                                            |                                 |                               
|Basic and Diluted EPS                                            |                                 |                               
|Dividends                                                        |                                 |                               
|Basic average shares outstanding                                 |                                 |                               
|Diluted average shares outstanding                               |                                 |                               

See notes to consolidated financial
statements

2

---



# FNBH BANCORP, INC. AND
SUBSIDIARIESConsolidated Statements
of Shareholders Equity and Comprehensive IncomeFor the Nine Months Ended
September 30, 2009 and 2008 (Unaudited)

|                                                         | Common Stock | Retained Earnings | Deferred Directors' Compensation | Accumulated Other ComprehensiveIncome (Loss) | Total      
|-------------------------------------------------------- | ------------ | ----------------- | -------------------------------- | -------------------------------------------- | -----------
|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                                    |            
|                                                         |              |                  
|Balances at December 31, 2008                            |              |                   | $                                | 6,583,158                                    |            
|Cumulative effect of change in accounting                |              |                  
|principle, adoption of ASC Topic 320, net of tax         |              |                   |                                  |                                              | 692,967    
|Earned portion of long term incentive plan               |              |                   |                                  | 67,090                                       |            
|Issued 2,267 shares for employee stock   purchase plan   |              |                   |                                  | 4,149                                        |            
|Issued 18,910 shares for current directors' fees         |              |                   |                                  | 42,559                                       |            
|Issued 823 shares for deferred directors' fees           |              |                   |                                  | 16,414                                       |            
|Comprehensive income (loss):                             |              |                  
|Net loss                                                 |              |                   |                                  |                                              | (14,138,083
|Change in unrealized gain (loss) on investment           |              |                  
|securities available for sale                            |              |                   |                                  |                                              | 615,993    
|Less reclassification adjustment for realized            |              |                  
|securities net gain included in net loss                 |              |                   |                                  |                                              | (92,109    
|Total comprehensive loss                                 |              |                   |                                  |                                              | (13,614,199
|Balances at September 30, 2009                           |              |                   | $                                | 6,713,370                                    |            

See notes to consolidated financial
statements.

3

---



# FNBH BANCORP, INC. AND
SUBSIDIARIESConsolidated 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 activites: |                               
|Provision for loan losses                                                      |                               
|Depreciation and amortization                                                  |                               
|Deferred income tax expense                                                    |                               
|Net amortization on investment securities                                      |                               
|Earned portion of long term incentive plan, net                                |                               
|Shares issued for current and variable directors' compensation                 |                               
|Shares earned for deferred directors' compensation                             |                               
|(Gain) loss on disposal of software                                            |                               
|(Gain) loss on sale of available for sale securities                           |                               
|Impairment charge on available for sale securities                             |                               
|Loss on the sale of other real estate owned, held for sale                     |                               
|Decrease 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              |                               
|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                                                   |                               
|Maturity of long term debt                                                     |                               
|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                                              |                               
|Loans transferred to other real estate                                         |                               
|Loans charged off                                                              |                               
|See notes to consolidated financial
statements.                                |                               

4

---



Notes to Consolidated
Financial Statements (unaudited) 1. Basis of
Presentation 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, these financial statements do not include all of the information and
footnotes required by US GAAP for complete financial statements. In the opinion of
management of FNBH Bancorp, Inc. (the Corporation), all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation were included. The
results of operations for the nine months ended September 30, 2009 are not necessarily
indicative of the results to be expected for the year ending December 31, 2009. For
further information, refer to the consolidated financial statements and footnotes thereto
included in the 2008 Annual Report contained in the Corporations report on Form 10-K
filing. Certain reclassifications have been made to prior period financial statements to
conform to the current period presentation. Management has evaluated subsequent events
through November 16, 2009, the filing date of this Form 10-Q. The Corporation has
determined that there were no subsequent events that require disclosure, except for the matters
disclosed in Note 8 and as described within "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

2. Income Taxes 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.

3.
          Investment Securities.Investment securities available for
sale consist of the following:

|                               | September 30, 2009 | December 31, 2008
|------------------------------ | ------------------ | -----------------
|                               |                    |                  
|Obligations of state and       |                    |                  
|political subdivisions         |                    |                  
|U.S. Treasury and agency       |                    |                  
|securities                     |                    |                  
|Mortgage-backed/CMO            |                    |                  
|securities                     |                    |                  
|Preferred stock securities (1) |                    |                  
|Total securities               |                    |                  

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

Investment securities are reviewed
quarterly for possible other-than-temporary impairment (OTTI). In the second quarter of
2009, the Corporation adopted new guidance impacting ASC Topic 320, Investments 
Debt and Equity Instruments, related to the recognition and presentation of
other-than-temporary impairments. This new guidance requires an entity to assess whether
it intends to sell, or it is more likely than not that it will be required to sell a
security in an unrealized loss position before the recovery of its amortized cost basis.
If either of these criteria is met, the entire difference between the amortized cost and
fair value is recognized in earnings. For securities that do not meet the aforementioned
criteria, the amount of impairment recognized in earnings is limited to the amount related
to credit losses, while impairment related to other factors is recognized in other
comprehensive income. Additionally, this new guidance expands and increases the frequency
of existing disclosures about OTTI for debt and equity securities.

5

---



Through March 31, 2009, the
Corporation had previously recognized a cumulative OTTI charge of $1,338,938 on a
non-government agency CMO security. Based on managements intent not to sell this
security before recovery and the likelihood that the Corporation will not have to sell the
security before recovery of its cost basis, the Corporation reversed $1,049,951 ($692,967
net of tax) of the non credit portion of the cumulative life to date OTTI charge. The
adoption of this ASC was recognized as a cumulative effect adjustment that increased
retained earnings and decreased accumulated other comprehensive income as of April 1,
2009. At September 30, 2009, the unrealized (non credit) loss on the CMO security was
determined to be $626,674 using the valuation methodology, inputs and assumptions
described more fully below.

The CMO security was the only
security in a continuous loss position for 12 months or more at September 30, 2009. There
were no securities in a continuous loss position for 12 months or more at December 31,
2008.

Management regularly reviews the
securities portfolio for the existence of OTTI. Managements evaluation considers
various qualitative and quantitative factors regarding each investment category, including
if the securities were U.S. Government issued, the credit rating on the securities, credit
outlook, payment status and financial condition, the length of time the security has been
in a loss position, the size of the loss position and other meaningful information. Based
on managements review, no impairment charges were required to be recognized during
the three and nine months ended September 30, 2009. With respect to the Corporations
non-government agency CMO security, management regularly completes a cash flow analysis of
the CMO with the assistance of a third party vendor. The analysis considers assumptions
regarding voluntary prepayment speed, default rate, and loss severity using the CMOs
original yield as the discount rate. At September 30, 2009, the estimated fair value of
the CMO, based on a combination of Level 2 and Level 3 inputs, including a market
participant discount rate, indicated that the related cash flows continue to support the
amortized cost of the security and no additional other-than-temporary impairment had been
incurred.

6

---



The following is a summary of the
available for sale portfolios gross unrealized losses and fair value aggregated by
investment category and length of time that individual securities have been in a
continuous loss position:

|                           |  | September 30, 2009 |  
|-------------------------- |  | ------------------ | -
|                           |  |                   
|                           |  |                    |  
|Obligations of state and   |  |                    |  
|political subdivisions     |  |                    | $
|U.S. Treasury and agency   |  |                   
|securities                 |  |                    |  
|Mortgage-backed/CMO        |  |                   
|securities                 |  |                    |  
|Preferred stock securities |  |                    |  
|Total available for sale   |  |                    | $

|                           |  | December 31, 2008 |  
|-------------------------- |  | ----------------- | -
|                           |  |                  
|                           |  |                   |  
|Obligations of state and   |  |                   |  
|political subdivisions     |  |                   | $
|U.S. Treasury and agency   |  |                  
|securities                 |  |                   |  
|Mortgage-backed/CMO        |  |                  
|securities                 |  |                   |  
|Preferred stock securities |  |                   |  
|Total available for sale   |  |                   | $

The following is a summary of the
amortized cost and approximate fair value of investment securities by contractual maturity
at September 30, 2009 and December 31, 2008. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.

|                                      | September 30, 2009 | December 31, 2008
|------------------------------------- | ------------------ | -----------------
|                                      |                    |                  
|Due in one year or less               |                    |                  
|Due after one year through five years |                    |                  
|Due after five years through          |                    |                  
|ten years                             |                    |                  
|Due after ten years                   |                    |                  
|                                      |                    |                  
|Mortgage-backed/CMO securities        |                    |                  
|Totals                                |                    |                  

Investment securities, with an
amortized cost of approximately $12,707,000 at September 30, 2009 and $17,871,000 at
December 31, 2008 were pledged to secure public deposits and for other purposes required
or permitted by law.

7

---



The Bank owns stock in both the
Federal Home Loan Bank of Indianapolis (FHLBI) and the Federal Reserve Bank (FRB), both of
which are recorded at cost. The Bank is required to hold stock in the FHLBI equal to 5% of
the institutions borrowing capacity with the FHLBI. The Banks investment in
FHLBI stock amounted to $950,700 at September 30, 2009 and December 31, 2008. The
Banks investment in FRB stock, which totaled $44,250 at September 30, 2009 and
December 31, 2008, is a requirement for the Banks membership in the Federal Reserve
System. These investments can only be resold to, or redeemed by, the issuer.

4.
          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 $45,958,000 at September 30, 2009,
          $38,656,000 at December 31, 2008, and $31,138,000 at September 30, 2008. (See
          Managements Discussion and Analysis of Financial Condition and Results of
          Operations).

5. Fair Value Measurements In April 2009, the FASB issued a new
guidance impacting ASC Topic 820, Fair Value Measurements and Disclosures, related
to determining fair value when the volume and level of activity for the asset or liability
have significantly decreased and identifying transactions that are not orderly. This
guidance establishes a fair value hierarchy which requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring fair vale.
This guidance requires increased disclosures and is effective for interim and annual
reporting periods ending after June 15, 2009, and is to be applied prospectively. The
Corporation adopted this guidance effective April 1, 2009.

In April 2009, the FASB also
issued new guidance impacting ASC Topic 825, Financial Instruments, related to
interim disclosures about fair value of financial instruments. This guidance requires
disclosure about fair value of financial instruments for interim reporting periods of
publicly traded companies that were previously only required in annual financial
statements. It also requires disclosure of the method(s) and significant assumptions used
to estimate the fair value of financial instruments and changes in method(s) and
significant assumptions, if any, during the period. The Corporation adopted this guidance
effective April 1, 2009 and has included additional required disclosures below.

The three levels of inputs that may
be used to measure fair value are as follows:

| | 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, municipal bonds and preferred stock securities. Level 3
securities include private collateralized mortgage obligations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | See
Note 3 for additional information on securities available for sale and their fair values.
| | ---------------------------------------------------------------------------------------------

8

---



| | 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Other
real estate owned.Real estate acquired through foreclosure is adjusted to fair value
less costs to sell upon transfer of the loan to other real estate owned, usually based on
an appraisal of the property. Subsequently, other real estate owned is carried at the
lower of carrying value or fair value. A valuation based on a current appraisal or by a
brokers opinion is considered a Level 2 fair value.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Assets and liabilities measured at
fair value on a recurring basis are as follows:

|                                         | Fair Value Measurements at September 30, 2009
|---------------------------------------- | ---------------------------------------------
|                                         |                                              
|Investment securities available for sale |                                              

|                                         | Fair Value Measurements at December 31, 2008
|---------------------------------------- | --------------------------------------------
|                                         |                                             
|Investment securities available for sale |                                             

Assets and liabilities measured at fair
value on a recurring basis using significant unobservable inputs (Level 3) for the three
and nine month periods ended September 30, 2009 are as follows:

|                                                          
|----------------------------------------------------------
|Fair value of CMO, beginning of period(1)                 
|Total gains (losses) realized/unrealized:                 
|Included in earnings                                      
|Included in other comprehensive income                    
|Purchases, issuances, and other settlements               
|Transfers into Level 3                                    
|Fair value of CMO, September 30, 2009                     
|                                                          
|Total amount of losses for the period included            
|in earnings attributable to the change in unrealized      
|losses relating to assets still held at September 30, 2009

|(1) | Non-agency CMO classified as available for sale is valued using internal
               valuation models and pricing information from third parties.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------

9

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Assets and liabilities measured at
fair value on a nonrecurring basis are as follows:

|                        | Fair Value Measurements at September 30, 2009
|----------------------- | ---------------------------------------------
|                        |                                              
|Impaired loans (1)      |                                              
|Other real estate owned |                                              

|                   | Fair Value Measurements at December 31, 2008
|------------------ | --------------------------------------------
|                   |                                             
|Impaired loans (1) |                                             

|(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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Fair value disclosures require
fair-value information about financial instruments for which it is practicable to estimate
that value. In cases where quoted market prices are not available, fair values are based
on estimates using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and estimates
of future cash flows. In that regard, the derived fair-value estimates cannot be
substantiated by comparison to independent markets and, in many cases, cannot be realized
in immediate settlement of the instrument.

Fair-value methods and assumptions
for the Corporations financial instruments are as follows:

| | Cash
and cash equivalents  The carrying amounts reported in the
consolidated balance sheet for cash and short term investments reasonably approximate
those assets fair values.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Certificates
of deposit  The carrying amounts reported in the consolidated
balance sheet for certificates of deposit reasonably approximate those assets fair
values.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Investment
securities  Fair values for investment securities are determined as
discussed above.
| | ------------------------------------------------------------------------------------------------

| | FHLBI
and FRB stock  The carrying amounts reported in the consolidated
balance sheet for FHLBI and FRB stock reasonably approximate those assets fair
values.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Loans For
variable-rate loans that reprice frequently, fair values are generally based on carrying
values, adjusted for credit risk. The fair value of fixed-rate loans is estimated by
discounting future cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings and for the same remaining maturities.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accrued
interest income  The carrying amount of accrued interest income is a
reasonable estimate of fair value.
| | ----------------------------------------------------------------------------------------------------------------

10

---



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

| | Other
borrowings  The fair value of other borrowings is estimated based on
quoted market prices.
| | -------------------------------------------------------------------------------------------------

| | Accrued
interest payable  The carrying amount of accrued interest payable is
a reasonable estimate of fair value.
| | ------------------------------------------------------------------------------------------------------------------

| | Off-balance-sheet
instruments  The fair value of commitments to extend credit is
estimated using the fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The fair value of
commitments to extend credit, including letters of credit, is estimated to approximate
their aggregate book balance and is not considered material and therefore not included in
the following table.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The estimated fair values of the
Corporations financial instruments are as follows:

|                                           | September 30, 2009 | December 31, 2008
|------------------------------------------ | ------------------ | -----------------
|                                           |                    |                  
|Financial assets:                          |                    |                  
|Cash and cash equivalents                  |                    |                  
|Certificates of deposit                    |                    |                  
|Investments and mortgage-backed securities |                    |                  
|FHLBI and FRB stock                        |                    |                  
|Loans, net                                 |                    |                  
|Accrued interest income                    |                    |                  
|Financial liabilities:                     |                    |                  
|Deposits:                                  |                    |                  
|Demand                                     |                    |                  
|NOW                                        |                    |                  
|Savings and money market accounts          |                    |                  
|Time deposits                              |                    |                  
|Brokered certificates                      |                    |                  
|Other borrowings                           |                    |                  
|Accrued interest expense                   |                    |                  

Current accounting pronouncements
require disclosure of the estimated fair value of financial instruments. Given the
current market conditions, a portion of our loan portfolio is not readily marketable and
market prices do not exist. We have not attempted to market our loans to potential
buyers, if any exist, to determine the fair value of those instruments. Since negotiated
prices in illiquid markets depend upon the then present motivations of the buyer and
seller, it is reasonable to assume that actual sales prices could vary widely from any
estimate of fair value made without the benefit of negotiations. Additionally, changes in
market interest rates can dramatically impact the value of financial instruments in a
short period of time. Accordingly, the fair value measurements for loans included in the
table above are unlikely to represent the instrumentsliquidation values.

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

11

---



6.
          Basic earnings per share is based on the weighted average number of common
          shares and participating securities outstanding during the period. Diluted
          earnings per share are the same as basic earnings per share because any
          additional potential common shares issuable are included in the basic earnings
          per share calculation. On January 1, 2009, the Corporation adopted new guidance
          impacting ASC Topic 260, Earnings Per Share, related to determining
          whether instruments granted in a share-based payment transaction are
          participating securities. This guidance requires that unvested stock awards
          which contain non-forfeitable rights to dividends or dividend equivalents,
          whether paid or unpaid (referred to as participating securities), be
          included in the number of shares outstanding for both basic and diluted earnings
          per share calculations. Our unvested restricted stock under the Long-Term
          Incentive Plan is considered a participating security. All prior period earnings
          per share data presented is required to be adjusted retrospectively. In the
          event of a net loss, the participating securities are excluded from the
          calculation of both basic and diluted earnings per share. Due to our net loss
          for the three and nine months ended September 30, 2009 and 2008, the unvested
          restricted shares of 4,231 and 9,020 for the three and nine months ended
          September 30, 2009 and 2008, were not included in determining both basic and
          diluted earnings per share for the respective periods.

The following table presents basic
and diluted earnings per share:

|                                                             | Third Quarter | Year-to-Date
|------------------------------------------------------------ | ------------- | ------------
|                                                             |               |             
|Weighted average common shares outstanding                   |               |             
|Weighted average unvested restricted stock outstanding       |               |             
|Weighted average basic and diluted common shares outstanding |               |             
|                                                             |               |             
|Net loss available to common shareholders                    |               |             
|Basic and diluted net loss per share                         |               |             

7.
          Under the Long-Term Incentive Plan (the Plan), the Corporation had
          the authority to grant stock options and restricted stock as compensation to key
          employees. Such authority expired April 22, 2008. The Corporation did not award
          any stock options under the Plan. The restricted shares have a five-year vesting
          period. The awards are recorded at fair value on the grant date and are
          amortized into salary expense over the vesting period.

A summary of the activity under the
Plan for the nine months ended September 30, 2009 and 2008 is presented below:

|                             | 2009 | 2008
|---------------------------- | ---- | ----
|                             |      |     
|Outstanding at January 1,    |      |     
|Granted                      |      |     
|Vested                       |      |     
|Forfeited                    |      |     
|Outstanding at September 30, |      |     

The total fair value of stock awards
granted during the nine months ended September 30, 2008 was $177,233. No stock awards have
been granted during 2009, as the Corporations authority to grant awards expired
April 22, 2008. The total fair value of the awards vested during the three months ended
September 30, 2009 and 2008 was $8,034 and $12,956, respectively. The total fair value of
the awards vested during the nine months ended September 30, 2009 and 2008 was $67,090 and
$125,361, respectively. As of September 30, 2009, there was $72,900 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 2.9 years.

12

---



8. Subsequent EventOn November 6, 2009, President Obama
signed into law H.R. 3548: Worker, Home Ownership and Business Assistance Act of 2009.
This legislation extends the Net Operating Loss (NOL) carryback period for federal income
tax from two years to five for either 2008 or 2009 NOLs. In year five, the NOL carryback
would be limited to 50 percent of a companys taxable income. There would be no limit
on the NOL carryback in years one, two, three and four.

As a result of this legislation, the
Corporation expects to carryback its 2009 net operating loss resulting in an approximate
refund of $1.3 million of taxes paid in prior years. In addition, the carryback is
expected to provide a partial reduction in our existing income tax valuation allowance and
a corresponding income tax benefit during the fourth quarter of 2009, which also serves to
increase capital by a like amount.

# 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. Important factors also include the Corporations ability to raise
additional capital and the nature and scope of any additional enforcement actions that may
be taken by the agencies that regulate the Corporation and its subsidiary bank.

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 nine months ended September 30, 2009 and 2008, and 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. On
September 24, 2009, pursuant to a Stipulation and Consent to the Issuance of a Consent
Order, the Bank consented to issuance of a Consent Order (the Order) by the
OCC. The order, which supersedes, in its entirety, the formal agreement, requires the Bank
and/or its board of directors to take certain actions, including adopting and implementing
a three-year strategic plan for the Bank, achieving and maintaining total capital equal to
11% of risk-weighted assets and Tier 1 capital equal to at least 8.5% of adjusted total
assets, developing and implementing various written plans designed to improve the loan
portfolio management, and taking certain steps to manage risks associated with commercial
real estate and construction and development lending. The Bank has already acted on many
of the requirements of the Order and has developed a comprehensive plan to address all of
the requirements of the Order and to otherwise take steps designed to improve the
financial condition of the Bank. 
The foregoing description is only a summary of the
material terms of the Order and is qualified in its entirety by reference to the Order.
The OCC has made a copy of the Order available on their website at www.occ.gov. The
contents of the OCC website are not incorporated by reference into this filing. See the Capital section
of this Managements Discussion and Analysis for further details.

13

---



|                                    
|------------------------------------
|                                    
|                                    
|Net loss                            
|Basic and diluted net loss per share

Net loss for the nine months ended
September 30, 2009 as compared to the same period last year, was negatively affected by a
substantially higher loan loss provision, lower interest income on loans due to lower
average balances, higher nonaccrual loans and lower yields, higher noninterest expense
(primarily due to an increase in FDIC assessment expense and increased write downs on OREO
properties), and recognition of federal income tax expense necessary to adjust realizable
deferred tax assets. These unfavorable variances were partially offset by lower interest
expense due to lower average deposit balances and lower rates and higher noninterest
income.

Net loss for the three months ended
September 30, 2009 decreased $194,000 compared to the same period last year. In the third
quarter of 2009, net interest income decreased $900,000, provision for loan losses
increased $605,000, and noninterest expense increased $114,000. Partially offsetting these
unfavorable variances was an increase in noninterest income of $1,837,000.

Net loss for the nine months ended
September 30, 2009, increased $8,470,000 compared to nine months ended September 30, 2008.
Net interest income decreased $2,286,000, provision for loan loss increased $4,602,000,
noninterest expense increased $761,000 and federal income tax credit decreased $2,791,000.
Partially offsetting these unfavorable variances was an increase in noninterest income of
$1,970,000.

|                            
|----------------------------
|                            
|                            
|Interest and dividend income
|Interest expense            
|Net interest income         

14

---



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
COSTSSeptember 30, 2009 and 2008(in thousands)

|                                               | ----------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 Shareholders' 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                          |                                   
|Shareholders' 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.
|--- | --------------------------------------------------------------------------------------------------------------

|(2) | For
purposes of the computation above,           average non-accruing loans of $44,686,000 in
2009 and $29,095,000 in 2008 are included in the average daily loan balance.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Interest
on loans includes origination fees totaling $22,000 in 2009 and $50,000           in
2008.
|--- | ---------------------------------------------------------------------------------------------------

15

---



# INTEREST YIELDS AND
COSTS September 30, 2009 and
2008(in thousands)

|                                               | ----------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 Shareholders' 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                          |                                 
|Shareholders' 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.
| | --- | --------------------------------------------------------------------------------------------------------------

| | (2) | For
purposes of the computation above,           average non-accruing loans of $40,118,000 in
2009 and $21,831,000 in
2008 are included in the average daily loan balance.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Interest
on loans includes origination fees totaling $77,000 in 2009 and           $204,000 in
2008.
| | --- | ----------------------------------------------------------------------------------------------------

Interest Earning
Assets/Interest IncomeOn a tax equivalent basis, interest
income decreased $1,713,000 (28.0%) in the third quarter of 2009 compared to the third
quarter of 2008. This is due to a decrease in average earning assets of $87,595,000
(21.3%) combined with a decrease in the yield on average earning assets of 50 basis
points.

16

---



The average balance of short term
investments, certificates of deposit and securities decreased $45,728,000 (58.5%) in the
third quarter of 2009 as compared with the same period in 2008. Fluctuations in average
short term investments and average cash and due from banks balances in the third quarter
of 2009 from the same period in 2008 relate to the Banks use of a noninterest
bearing correspondent account for excess cash deposits during 2009 rather than federal
funds sold positions in 2008, primarily to obtain more competitive pricing on
correspondent account services and full FDIC insurance on all its available cash balances.
Loans, which earn a higher yield than investments, had a decrease in average balances of
$41,867,000 (12.5%) combined with a 95 basis point decrease in yield in the third quarter
of 2009 compared to the same period last year. It is expected that continued efforts to
manage the Banks regulatory capital levels (i.e., shrinking the Banks size)
will further compress net interest margin in future periods.

For the first nine months of the
year, tax equivalent interest income decreased $5,117,000 (26.6%). Short-term investments,
certificates of deposits and securities interest income decreased by $538,000 (24.2%) due
to a decrease in average balances of $19,125,000 (29.6%), which was partially offset by an
increase in the average yield of 36 basis points. Loan interest income decreased
$4,578,000 (26.9%) due to lower average balances of $37,975,000 (11.1%) along with the
average yield decreasing 115 basis points.

The largest decline in terms of
average balances was in commercial loans, the majority of our loan portfolio, which
decreased $34,322,000 (11.6%) in the first nine months of 2009 compared to the first nine
months of 2008. This is primarily due to decreased loan origination activities and charge
offs. The decline in interest income from the prior year is due to decreases in the prime
rate and higher average balances of nonperforming loans in 2009. The increasing level of
nonperforming loans has negatively impacted loan interest income in 2009. Management
expects the average balance of nonperforming loans to continue to remain high in 2009,
adversely impacting net interest income. Moreover, competitive pressures as well as the
weakened local economy have had, and are expected to continue to have, a negative impact
on commercial balances and yields.

Interest Bearing
Liabilities/Interest ExpenseInterest expense on deposits for the
third quarter of 2009 decreased $681,000 (38.3%) compared to the third quarter of 2008.
This was the result of lower cost of funds due to lower interest rates paid on deposits of
71 basis points combined with lower average deposit balances of $29,933,000 (9.4%).
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 2009 decreased $2,500,000 (40.4%) compared to the first nine months
of 2008. This was a result of a decrease in the average interest rate paid on deposits of
94 basis points along with lower average balances of $22,848,000 (7.2%) in 2009 compared
to 2008.

Borrowed funds average balance
decreased $8,837,000 (95.5%) in the third quarter of 2009 compared to the third quarter of
2008. The Bank repaid an $8,000,000 FHLBI advance in February 2009. As of September 30,
2009, the Bank had a $414,000 loan advance outstanding, included in borrowed funds, which
was entered into in 2000 with the FHLBI. Additional FHLBI and Federal Reserve discount
borrowings are available to fund future loan growth if needed.

LiquidityLiquidity risk is the risk of the
Corporation being unable to meet current and future financial obligations in a timely
manner. Liquidity is managed to ensure stable, reliable and cost-effective sources of
funds to satisfy demand for credit, deposit withdrawals and investment opportunities. The
Corporation relies primarily on a large, stable core deposit base to manage liquidity
risk. Additionally, the Corporation has access to certain wholesale funding sources (as
discussed below) to manage unexpected liquidity needs.

The Corporation identifies, measures
and monitors its liquidity profile. The profile is evaluated daily, weekly and monthly by
analyzing the composition of all funding sources, reviewing projected liquidity
commitments by future month and identifying sources and uses of funds. A contingency
funding plan is also prepared that details the potential erosion of funds in the event of
systemic financial market crisis or institution-specific stress. In addition, the overall
management of the Corporations liquidity position is integrated into retail deposit
pricing policies to ensure a stable core deposit base.

17

---



Asset liquidity for financial
institutions typically consists of cash and cash equivalents, certificates of deposits and
investment securities available for sale. These categories totaled $65.5 million at
September 30, 2009 or about 19.0% of total assets. This compares to $67.9 million or about
17.5% of total assets at year end 2008. Liquidity is important for financial institutions
because of their need to meet loan funding commitments and depositor withdrawal requests.
Liquidity can vary significantly on a daily basis based on customer activity.

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 $48,000,000 at
September 30, 2009 and $61,000,000 at December 31, 2008. The Bank has $11.4 million of
brokered deposits at September 30, 2009. Due to the Banks capital classification as
undercapitalized at September 30, 2009, these brokered deposits may not be
renewed or additional brokered deposits taken without prior approval of the Federal
Deposit Insurance Corporation (FDIC). See Capital section of this
Managements Discussion and Analysis for further details.

It is the intention of the
Banks management to handle unexpected liquidity needs through its cash and cash
equivalents, FHLBI borrowings, or Federal Reserve discount borrowings. The Bank has an
$11,000,000 line of credit available at the FHLBI for which the Bank has pledged certain
commercial and consumer loans secured by residential real estate. As of September 30,
2009, the Bank had $414,000 in borrowings against the line. The Bank also has a
$27,000,000 line of credit available at the Federal Reserve and the Bank has pledged
certain commercial loans as collateral for the available borrowing. At September 30, 2009
the Bank did not have any borrowings against the line. The Federal Reserve announced new
collateral margins for the discount window lending effective October 19, 2009. These
changes resulted in reducing the Banks line of credit to $16,000,000. The Bank could
also satisfy unexpected liquidity needs through repurchase agreements which would allow it
to borrow from a broker, pledging investment securities as collateral. In the event the
Bank must borrow for an extended period, management may look to available for
sale securities in the investment portfolio for liquidity.

Interest Rate RiskInterest rate risk is the potential
for economic losses due to future rate changes and can be reflected as a loss of future
net interest income and/or a loss of current market values. The Corporations
Asset/Liability Management Committees (ALCO) 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 reflects the repricing schedule for various asset and liability categories and an
interest rate shock simulation report. The Bank has no market risk sensitive instruments
held for trading purposes. However, the 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.

18

---



The table below shows the scheduled
maturity and repricing of the Corporations interest sensitive assets and liabilities
as of September 30, 2009:

|                                      
|--------------------------------------
|0-3Months                             
|Assets:                               
|Loans, net                            
|Securities                            
|Certificates of deposit               
|Short term investments                
|Total rate sensitive assets           
|Liabilities:                          
|NOW, savings & MMDA                   
|Time deposits                         
|Other borrowings                      
|Total rate sensitive liabilities      
|Rate sensitivity gap and ratios:      
|Gap for period                        
|Cumulative gap                        
|                                      
|Cumulative rate sensitive ratio       
|December 31, 2008 rate sensitive ratio

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 1.40% asset sensitive as
of September 30, 2009.

Because of the Banks asset
sensitive position, if market interest rates increase, this positive GAP position
indicates that the interest margin would be positively affected. However, GAP analysis is
limited and may not provide an accurate indication of the impact of general interest rate
movements on the net interest margin since repricing of various categories of assets and
liabilities is subject to the Banks needs, competitive pressures, and the needs of
the Banks customers. In addition, various assets and liabilities indicated as
repricing within the same period may in fact reprice at different times within the period
and at different rate indices. Due to these inherent limitations in the GAP analysis, the
Corporation also utilizes simulation modeling, which means the impact of upward and
downward movements of interest rates on interest margin. This modeling indicates that a
100 basis point increase in interest rates would increase net interest income by
approximately .93% in the first year, while a 200 basis point increase in interest rates
would increase net interest income by approximately .55% in the first year. This is
influenced by the assumptions regarding how quickly and to what extent liabilities will
reprice with an increase in interest rates.

|Loans
|-----
|     
|     
|Total

19

---



The Corporation recorded a provision
of $1,750,000 in the third quarter of 2009 compared to $1,145,000 in the same period of
2008. The increase in the provision in this quarter as well as last, was in recognition of
increased risk and problem loan levels brought on by weak economic conditions and
declining collateral values. Each quarter management performs a detailed analysis of the
loan portfolio to appropriately identify and quantify the credit risk to estimate losses
inherent in the portfolio. The evaluation considered identified problem loans, loss
experience, current and future economic factors and other risk considerations impacting
the portfolio at large to determine the required reserve level.

Management has enhanced its portfolio
management practices to address the portfolio challenges. Given the significant portion of
loans that are secured by real estate, our portfolio has been directly impacted by the
economic downturn and deterioration of real estate values, Quarterly, management performs
a detailed review of the portfolio to insure that loans are appropriately risk rated and
collateral is realistically valued. We have also expanded the number of credits for which
we have obtained updated appraisals and valuations. During the last two quarters, as
borrowers current financial statements were received and analyzed they revealed
weaker operating results, deterioration of debt service coverage and/or decreased
liquidity. In addition, updated appraisals received during the quarter indicated continued
declines in property values for collateral on our impaired loans. At present, the weak
Michigan economy, coupled with historically high unemployment, does not suggest near term
signs of relief or stabilization. Consequently, we have continued to allocate reserves for
these risks and uncertainties, resulting in reserves well above normal levels. At quarter
end, managements analysis determined that a reserve of $19,449,000 was required. The
provision required during the quarter to bring the allowance to that level was $1,750,000.

Nonperforming loans at September 30,
2009 increased $7,302,000 to $45,958,000 from the December 31, 2008 balance of
$38,656,000, and increased $14,820,000 from the September 30, 2008 balance of $31,138,000.
Nonperforming loans as a percentage of total loans were 16.17% at September 30, 2009
compared to 12.24% at December 31, 2008, and 9.55% at September 30, 2008. Net charge offs
for the third quarter of 2009 were $3,000,000 compared to $2,282,000 in the third quarter
of 2008.

Year to date, the provision is
$14,647,000 compared to $10,045,000 in the prior year. At September 30, 2009, the
allowance for loan losses as a percent of loans was 6.84% compared to 6.97% as of June 30,
2009, 4.47% at December 31, 2008 and 4.50% at September 30, 2008. For the first nine
months of 2009, the Bank had net charge-offs of $9,336,000 compared to $5,802,000 for
2008.

The following table reflects the
composition of the commercial and consumer loans in the Consolidated Financial Statements.
Included in the residential first mortgage totals below are the real estate
mortgage loans listed in the Consolidated Financial Statements and other loans to
customers who pledge their homes as collateral for their borrowings. A portion of the
loans listed in residential first mortgages represent commercial loans where the borrower
has pledged his/her residence as collateral. In the majority of the loans to commercial
customers, the Bank is relying on the borrowers cash flow to service the loans.

The following table shows the balance
and percentage composition of loans as of:

20

---



|                                                 
|-------------------------------------------------
|                                                 
|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         
|Commercial                                       
|Consumer                                         
|Other                                            
|Total gross loans                                
|Net unearned fees                                
|Total loans                                      

Loans secured by 1-4 family
residential construction and other construction, land development and other land loans
decreased a total of $13,738,000 (32.2%) through the third quarter of 2009 from December
31, 2008. This is due primarily to the completion of construction projects, charge offs,
and the intentional run-off of such loans to reduce exposure within this segment of the
loan portfolio.

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. Due to the uncertainty
of future current economic conditions and the continued decline in real estate values, the
provision for loan losses for the balance of 2009 may continue to be impacted by the
Banks concentration in real estate secured loans. While we have considered these
factors when determining the level of reserves, it is difficult to accurately predict
future economic events, especially in the current environment.

Loans also include the
reclassification of demand deposit overdrafts, which amounted to $152,000 and $122,000 at
September 30, 2009 and December 31, 2008, respectively.

Nonperforming assets consist of loans
accounted for on a nonaccrual basis, loans contractually past due 90 days or more as to
interest or principal payments (but not included in nonaccrual loans), and other real
estate which has been acquired primarily through foreclosure and is actively managed
through the time of disposition to minimize loss. Based on the existing level of problem
loans, we anticipate that other real estate owned may increase in the near term as the
Bank manages through the problem loan portfolio and borrowers continue to face financial
difficulties and tight credit markets. The aggregate amount of nonperforming loans and
other nonperforming assets are presented below:

21

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|                                                
|------------------------------------------------
|                                                
|Nonaccrual Loans                                
|90 days or more past due and still accruing     
|Total nonperforming loans                       
|Other real estate owned                         
|Total nonperforming assets                      
|                                                
|Nonperforming loans as a percent of  total loans
|Allowance for loan losses as a percent of       
|nonperforming loans                             
|Nonperforming assets as a percent of total      
|total loans and other real estate owned         

The following table shows
nonperforming loans by type of loan collateral and percentage composition of nonperforming
loans as of:

|                                          
|------------------------------------------
|                                          
|                                          
|Secured by real estate:                   
|Residential first mortgage                
|Residential home equity/other junior liens
|1-4 family construction loans             
|Other construction, land development      
|and other land loans                      
|Multifamily residential properties        
|Owner-occupied nonfarm, nonresidential    
|properties                                
|Other nonfarm, nonresidential properties  
|Commercial                                
|Consumer                                  
|Total nonperforming loans                 

Management continually evaluates the
condition of problem credits and when reduced cash flows coupled with collateral
shortfalls are evident, the loans are placed in nonaccrual. In addition, loans are placed
on a nonaccrual basis when principal or interest is past due ninety days or more. If
management believes there is significant risk of not collecting full principal and
interest, we may elect to place the loan in nonaccrual even if the borrower is current. As
of September 30, 2009, approximately $18,524,000 (40.3%) of nonperforming loans are making
scheduled payments on their loans. Loans categorized as 90 days past due and still
accruing are well secured and in the process of collection. Nonperforming assets increased
$15,405,000 from the third quarter of 2008 primarily due to deteriorating economic
conditions that have impacted customers cash flows and lowered collateral values of
real estate. Nonperforming loans are reviewed regularly for collectibility and
uncollectible balances are promptly charged off.

Impaired loans totaled approximately
$43,011,000 at September 30, 2009, and include specifically identified commercial loans
included in non-accrual loans, other than homogenous small commercial, residential and
consumer loans, and $14,190,000 of commercial loans  identified as troubled debt
restructurings. Included in impaired loans is $10,148,000 of commercial loans with no
specific reserve allocation which indicates the loan is well 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 or the loan has been restructured and is classified as a trouble debt restructuring.
Impaired loans totaled $42,140,000 at June 30, 2009, $27,867,000 at December 31, 2008, and
$29,540,000 at September 30, 2008. Impaired commercial loans had specific reserves of
$7,607,000 at September 30, 2009, $8,534,000 at June 30, 2009, $4,289,000 at December 31,
2008 and $4,781,000 at September 30, 2008.

22

---



The following table summarizes the
changes in the allowance for loan losses and reserve for unfunded credit commitments for
the first nine months of 2009 and 2008:

|                                                               
|---------------------------------------------------------------
|                                                               
|Allowance for loan losses                                      
|Balance, beginning of year                                     
|Loans charged off:                                             
|Secured by real estate:                                        
|Residential first mortgage                                     
|Residential home equity/junior liens                           
|1-4 family residential construction loans                      
|Other construction and land development and other land loan    
|Multifamily residential properties                             
|Owner-occupied nonfarm, nonresidential properties              
|Other nonfarm, nonresidential properties                       
|Commerical                                                     
|Consumer                                                       
|Total charge offs                                              
|Recoveries to loans previously charged off:                    
|Secured by real estate:                                        
|Residential first mortgage                                     
|Residential home equity/junior liens                           
|1-4 family residential construction loans                      
|Owner occupied non, nonresidential properties                  
|Other nonfarm, nonresidential properties                       
|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
|Allowance for loan losses to loans outstanding                 

Management estimates the required
allowance balance using past loan loss experience, the nature and volume of the portfolio
segments and concentrations, information about specific borrower situations, estimated
collateral values, economic conditions and trends, and other factors. Allocations of the
allowance are made for specific loans, but the entire allowance is available for any loan
that, in managements judgment, should be charged off. Management continually
analyzes portfolio risk to refine the process of effective risk identification and
measurement for determination of the required allowance balance. When all of these factors
were considered, management determined that the $1,750,000 provision for the third quarter
of 2009 and the $19,449,000 allowance as of September 30, 2009 were appropriate.

23

---



|     
|-----
|     
|     
|Total

Noninterest income, which includes
service charges and other fee income, trust income, gain/loss on available for sale
securities, and other miscellaneous income, increased by $1,837,000 (208.1%) during the
third quarter of 2009 compared to the same quarter in 2008. The primary reason for the
increase relates to a $1,772,000 impairment recorded on the Freddie Mac and Fannie Mae
preferred securities in September 2008. Service charges and other fee income increased
$47,000 (5.9%) during the third quarter of 2009 compared to the third quarter of 2008
primarily due to higher returned check fees relating to the Banks implementation of
an overdraft protection program, lower deposit service charge reversals and an increase in
commercial loan late fees. These favorable variances were partially offset by a decrease
in mortgage application fees, service charges on sold mortgages, and check printing fees.
Trust income decreased $2,600 (2.7%) in the third quarter of 2009 compared to the same
period last year. Trust income decreased due to lower asset values and a greater
percentage of investments in fixed income products partially offset by higher nonrecurring
trust consulting income. The gain on available for sale securities of $16,000 during the
third quarter of 2009 resulted from managements decision to sell twelve municipal
securities based on an evaluation of the issuers credit ratings.

For the nine months ended September
30, 2009, noninterest income increased $1,970,000 (255.4%). As noted above, this increase
was primarily due to recording impairment on preferred stock in September 2008. Service
charges and other fee income increased $140,000 (6.2%) due primarily to higher returned
check fees, lower deposit service charge reversals, an increase in ATM network income,
service charges on sold mortgages, commercial loan late fees and service charges. These
favorable variances were partially offset by lower consumer loan late fee income, lower
deposit service charges on business accounts, lower mortgage application fees and lower
check printing fees. Trust income decreased $31,000 (10.7%) primarily due to lower
portfolio values and higher percentage of investments in fixed income products as noted
above partially offset by higher nonrecurring trust consulting income. The $92,000 gain on
sale of available for sale securities is the result of management deciding to sell twenty
one municipal securities due to their low credit rating.

|     
|-----
|     
|     
|Total

Noninterest expense increased
$114,000 (3.0%) in the third quarter of 2009 compared to the same quarter in 2008.

Salaries and employee benefits
decreased $107,000 (6.3%) in the third quarter of 2009 compared to the third quarter of
2008 primarily due to a decrease of $70,000 in salaries and wages and $79,000 in other
employee benefits. Wages and employee benefits decreased due to fewer employees in 2009
compared to 2008. These favorable variances were partially offset by an increase in
contracted payroll of $44,000. Contracted payroll has increased due to the Bank hiring
additional temporary help in the commercial loan workout area.

Equipment expense decreased $15,000
(14.2%) in the third quarter of 2009 compared to the same quarter in 2008 primarily due to
lower equipment maintenance costs and depreciation expense.

Professional and service fees
decreased $55,000 (9.4%) in the third quarter of 2009 compared to the same quarter in 2008
primarily due to lower audit and accounting fees of $24,000, legal fees of $41,000, and
consulting fees of $13,000, partially offset by higher OCC fees of $23,000.

Computer service fees decreased
$15,000 (11.6%) in the third quarter of 2009 compared to the same quarter in 2008 due to
timing of service contract renewals.

24

---



FDIC assessment fees increased
$293,000 in the third quarter of 2009 compared to the third quarter of 2008 due to higher
FDIC rates assessed in 2009 and an additional $104,000 assessment related to the
Banks increased risk profile based on a regulatory examination completed in July
2009. On November 12, 2009, the FDIC promulgated  assessment  regulations  requiring insured  depository  institutions to
prepay their estimated quarterly  risk-based deposit insurance  assessments for the fourth quarter of 2009, as well
as for all of 2010,  2011 and  2012,  by  December  30 of this  year.  The  pre-payment  of  these  assessments  is
mandatory for all insured  depository  institutions;  however,  the FDIC retains the  discretion to exempt  certain
institutions from the prepayment  requirements  under the promulgated  regulations.  Under these  regulations,  the
FDIC did exempt the Bank from  prepaying  its  assessment  for the fourth  quarter of 2009, as well as all of 2010,
2011 and 2012.

Director fees decreased $32,000
(69.1%) in the third quarter of 2009 compared to the same quarter of 2008 due to a
reduction in the number of directors and reductions in director compensation.

Loan collection and foreclosed
property expense increased $183,000 (62.6%) in the third quarter of 2009 compared to 2008
due to higher expenses on loans and foreclosed properties in 2009. These costs are
expected to remain relatively high in the near term future.

Net gain on sale of
OREO/repossessions of $132,000 is the result of net gains on sales on foreclosed
properties during the third quarter of 2009.

Other expenses increased $73,000
(30.9%) in the third quarter 2009 compared to the same quarter in 2008 primarily due to
the Corporation paying higher business insurance premiums and debit card fraud losses
incurred in the third quarter. These unfavorable variances were partially offset by lower
advertising, business development and community contribution expense. Business insurance
premiums increased due to the overall instability in the financial markets and the
Corporations financial performance in 2008 and 2007. Business insurance premiums are
expected to continue to increase in 2009.

For the first nine months of the year
noninterest expense increased $760,000 (6.8%) compared to 2008.

Salaries and employee benefits
decreased $300,000 (5.6%) in 2009 compared to 2008 primarily due to a decrease of $443,000
in wages and employee benefits, partially offset by other one-time expenses attributable
to a reduction in our workforce. Wages and employee benefits decreased due to fewer
employees in 2009 compared to 2008. These variances were partially offset by an increase
in contracted payroll of $143,000. Contracted payroll has increased due to the Bank hiring
additional temporary help in the commercial loan workout area.

Net occupancy costs decreased $35,000
(4.0%) in 2009 compared to 2008 due to lower building maintenance and operating costs due
in part to the Bank closing one of its retail branches.

Equipment expense decreased $75,000
(20.5%) in 2009 compared to 2008 primarily due to lower equipment maintenance costs, other
equipment expense and depreciation expense.

Professional and service fees
decreased $154,000 (8.9%) in 2009 compared 2008 primarily due to lower consulting fees of
$182,000. These fees were partially offset by higher OCC fees of $73,000.

Computer service fees decreased
$48,000 (12.4%) in 2009 compared to 2008 due to timing of service contract renewals.

FDIC assessment fees increased
$1,021,000 in 2009 compared to 2008 due to higher FDIC rates assessed in 2009 and an
industry wide special assessment fee imposed on all insured depository institutions. The
Bank recorded approximately $173,000 for the special assessment fee at June 30, 2009 which
was paid on September 30, 2009. In addition, due to the Banks undercapitalized
regulatory classification (see Capital section of this Managements
Discussion and Analysis) at September 30, 2009, the FDIC rates to be paid by the Bank in
subsequent periods will significantly increase. Based on current rates, management
estimates that the FDIC assessment for the remainder of 2009 will be approximately
$400,000.

25

---



Printing and supplies decreased
$72,000 (34.2%) in 2009 compared to 2008 primarily due to the outsourcing of our statement
rendering department in 2009, which accounted for a majority of our printing and supplies
expense. In addition, the Bank changed its debit card provider in 2009 which further
decreased expense.

Director fees decreased $115,000
(66.3%) in 2009 compared to 2008 due to a reduction in the number of directors and
reductions in director compensation.

Loan collection and foreclosed
property expense increased $93,000 (14.0%) in 2009 compared to 2008 due to higher expenses
on loans secured by real estate and foreclosed properties in 2009. These costs are
expected to remain relatively high in the near term future.

Net loss on sale of
OREO/repossessions of $463,000 is the result of net losses on sales and valuation write
downs incurred on foreclosed properties during 2009. These losses reflect the continued
deterioration of real estate values experienced in the Banks market area.

Other expenses increased $149,000
(18.4%) in 2009 compared to 2008 primarily due to the Corporation paying higher business
insurance premiums and losses from debit card fraud. These were partially offset by lower
advertising, contributions, business development, membership and dues and education
expense which are attributed to the Banks overall plan to cut expenses wherever
possible. Business insurance premiums have increased in 2009 due to the overall
instability in the financial markets and the Corporations financial results in 2008
and 2007. Business insurance premiums are expected to approximate $525,000 for the 2009
year.

|     
|-----
|     
|     
|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. In the second quarter of 2009, the
Corporation recorded $467,000 of federal income tax expense for an additional valuation
allowance on previously recorded deferred tax assets. The Corporation recorded a federal
deferred tax valuation allowance of $4,793,000 on the tax credit for the loss recognized
during the nine months ended September 30, 2009 due to the uncertainty of future taxable
income necessary to fully realize the recorded net deferred tax asset.

26

---



# Capital

The Corporations and the
Banks actual capital amounts and ratios are presented in the following table as of
September 30, 2009, December 31, 2008, and September 30, 2008:

|                                         | Actual | Minimum for Capital Adequacy Purposes | To be Well Capitalized Under Prompt Corrective Action Provision
|---------------------------------------- | ------ | ------------------------------------- | ---------------------------------------------------------------
|                                         |        |                                       |                                                                
|Total Capital (to risk weighted assets)  |        |                                       |                                                                
|Bank                                     |        |                                       | $                                                              
|FNBH Bancorp                             |        |                                       |                                                                
|                                         |        |                                      
|Tier 1 Capital (to risk weighted assets) |        |                                      
|Bank                                     |        |                                       |                                                                
|FNBH Bancorp                             |        |                                       |                                                                
|                                         |        |                                      
|Tier 1 Capital (to average assets)       |        |                                      
|Bank                                     |        |                                       |                                                                
|FNBH Bancorp                             |        |                                       |                                                                

|As of December 31, 2008                  | Amount | Ratio | Amount | Ratio      | Amount | Ratio
|---------------------------------------- | ------ | ----- | ------ | ---------- | ------ | -----
|Total Capital (to risk weighted assets)  |        |       |        |            |        |      
|Bank                                     |        |       | $      | 31,419,000 |        |      
|FNBH Bancorp                             |        |       |        | 31,365,000 |        |      
|                                         |        |      
|Tier 1 Capital (to risk weighted assets) |        |      
|Bank                                     |        |       |        | 27,183,000 |        |      
|FNBH Bancorp                             |        |       |        | 27,129,000 |        |      
|                                         |        |      
|Tier 1 Capital (to average assets)       |        |      
|Bank                                     |        |       |        | 27,183,000 |        |      
|FNBH Bancorp                             |        |       |        | 27,129,000 |        |      

|As of September 30, 2008                 | Amount | Ratio | Amount | Ratio      | Amount | Ratio
|---------------------------------------- | ------ | ----- | ------ | ---------- | ------ | -----
|Total Capital (to risk weighted assets)  |        |       |        |            |        |      
|Bank                                     |        |       | $      | 39,988,000 |        |      
|FNBH Bancorp                             |        |       |        | 39,664,000 |        |      
|                                         |        |      
|Tier 1 Capital (to risk weighted assets) |        |      
|Bank                                     |        |       |        | 35,511,000 |        |      
|FNBH Bancorp                             |        |       |        | 35,187,000 |        |      
|                                         |        |      
|Tier 1 Capital (to average assets)       |        |      
|Bank                                     |        |       |        | 35,511,000 |        |      
|FNBH Bancorp                             |        |       |        | 35,187,000 |        |      

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

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

27

---



|Well capitalized              
Adequately capitalized        
Undercapitalized              
Significantly undercapitalized
Critically undercapitalized | Total        
Risk-Based   Capital Ratio
10% or above 
8% or above  
Less than 8% 
Less than 6% 
         - | Tier 1
Risk-BasedCapital Ratio
6% or above  
4% or above  
Less than 4% 
Less than 3% 
        - | Leverage Ratio
5% or above
4% or above
Less than 4%
Less than 3%
A ratio of tangible equity
 to total assets of 2% or less
|------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------

At September 30, 2009, based on the
above minimum capital requirements, the Corporation and its subsidiary Bank are classified
as undercapitalized. Under the terms of the  Consent  Order with the OCC,  referenced  above,  the Bank  submitted  to the OCC a capital
restoration  plan  and  capital  plan  (collectively,  the  "Plan").  The OCC has  determined  that the Plan is not
acceptable,  principally  due to the fact that the OCC is unable to determine that the Plan is realistic and likely
to succeed in restoring the Bank's capital,  based upon the information  provided in the Plan. As noted below,  the
Bank  intends to update the Plan and  continue to pursue its capital  raising  efforts as well as resubmit the Plan
to the OCC. As a result of its  failure to submit an  acceptable  plan to the OCC within the  permitted  time,  for
purposes  of Prompt  Correct  Action  ("PCA") the Bank is now  treated as if it were  significantly  undercapitalized.
This  determination  is based solely for purposes of applying PCA, and the Bank's  resulting  capital  category may
not constitute an accurate  representation of the Bank's overall financial  condition or prospects.  As a result of
this  classification,  for  purposes  of PCA,  the Bank is subject to a number of  additional  restrictions.  These
include,  among other things,  (1) the  requirement  that the Bank obtain prior written  approval of the OCC before
paying any bonus or increase in the compensation of any senior  executive  officer of the Bank, (2) prohibitions on
the acceptance of employee benefit plan deposits, and (3) restrictions on interest rates paid on deposits.

The above capital requirements are
minimum requirements. In addition to its obligation to submit an acceptable Plan to the OCC, under the Consent Order,
the Bank must achieve and maintain total capital equal to 11% of risk weighted
assets and Tier 1 capital equal to at least 8.5% of adjusted total assets by January 24,
2010. As of September 30, 2009, the Banks capital ratios are significantly below the
increased minimum requirements imposed by the OCC. In light of the Banks continued
losses and capital position through September 30, 2009, it is reasonable to anticipate
further regulatory enforcement action by the OCC. See the Risk Factors disclosed in Part
II  Item 1A below.

Based on the Banks current
financial condition, asset quality issues, and capital ratios, management estimates that
the Bank needs to raise $18  24 million of additional capital to comply with the
OCCs capital directive and provide sufficient capital resources and liquidity to
meet commitments and business needs. Accordingly, management is actively soliciting
potential accredited investors and exploring the capital markets with the aid of retained
advisors to determine the sources and most immediate timing for the additional equity
believed necessary to sufficiently recapitalize the Bank. While the Corporations
common stock is traded in the public markets, the size of the institution and other
factors are likely to limit our ability to access the public capital markets. As such, the
Corporations alternatives for additional capital are somewhat limited. The ongoing
liquidity crisis and the loss of confidence in financial institutions will likely serve to
only further increase our cost of funding and further limit our access to capital. We may
not be able to raise the necessary capital on favorable terms, or at all. An inability to
raise capital on acceptable terms is likely to have a materially adverse effect on our
business, financial condition and results of operations.

On February 19, 2009, in anticipation
of the need to raise additional capital, the shareholders of the Corporation approved an
amendment to the Corporations Articles of Incorporation to authorize the Board of
Directors to issue up to 30,000 shares of preferred stock. The terms and conditions of
these securities, when and if issued, including dividend or interest rates, conversion
rates and rights, voting rights, redemption prices, maturity dates and similar matters
will be determined by the Board of Directors. There were no issued and outstanding shares
of preferred stock through the date of filing of this Form 10-Q.

Additionally, at the annual meeting
of shareholders on May 28, 2009, our shareholders approved a 2,800,000 increase in the
number of authorized shares of common stock.

The Corporations ability to pay
dividends is subject to various regulatory and state law requirements. Due to the
Banks financial condition, the Bank cannot pay a dividend to the Corporation without
the prior approval of the OCC. The Corporation suspended, indefinitely, the payment of
dividends in the third quarter of 2008 due to the Banks inability to pay dividends
to the holding company and insufficient cash at the holding company to pay the dividends.

28

---



Critical Accounting
PoliciesThe Corporation maintains critical
accounting policies for the allowance for loan losses. Refer to Notes 1c, 1d and 1j of the
December 31, 2008 Consolidated Financial Statements as included in Form 10-K for
additional information on critical accounting policies.

Contractual
Obligations The Bank had outstanding irrevocable
standby letters of credit, which carry a maximum potential commitment of approximately
$198,000 at September 30, 2009, $332,000 at December 31, 2008 and $1,422,000 at September
30, 2008. 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,
2009, December 31, 2008 and September 30, 2008, 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.

New Accounting
StandardsIn June 2009, the Financial
Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.
2009-01, Topic 105  Generally Accepted Accounting Principles, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles, (SFAS 168). ASU No. 2009-01 establishes the Financial Accounting
Standards Board (FASB) Accounting Standards Codification (ASC) as the single source of
authoritative, nongovernmental GAAP in the preparation of financial statements. Rules and
interpretative releases of the Securities and Exchange Commission under federal securities
laws are also sources of authoritative guidance for SEC registrants. The Codification is
not intended to change GAAP. Effective with the adoption of ASU No. 2009-01, all existing
non-SEC accounting and reporting standards, except for grandfathered guidance and certain
recently-issued standards not yet integrated into the Codification were superseded and are
considered nonauthoritative. References to GAAP in the Notes to the Consolidated Financial
Statements are provided under the Codification structure where applicable. Recently-issued
standards not yet integrated into the Codification and still considered authoritative are
referred to using the issued terminology.

In May 2009, the FASB issued a new
standard now codified in ASC Topic 855, Subsequent Events, which establishes
general standards of accounting for disclosure of events that occur after the balance
sheet date but before the financial statements are issued or available to be issued. It
requires the disclosure of the date through which an entity has evaluated subsequent
events and the basis for that date. It is effective for interim periods ending after June
15, 2009. The adoption of the standard did not have any impact on our results of
operations or financial position.

In April 2009, the FASB issued new
guidance impacting ASC Topic 320, Investments  Debt and Equity Instruments,
related to the recognition and presentation of other-than-temporary impairments. This new
guidance requires an entity to assess whether it intends to sell, or it is more likely
than not that it will be required to sell a security in an unrealized loss position before
the recovery of its amortized cost basis. If either of these criteria is met, the entire
difference between the amortized cost and fair value is recognized in earnings. For
securities that do not meet the aforementioned criteria, the amount of impairment
recognized in earnings is limited to the amount related to credit losses, while impairment
related to other factors is recognized in other comprehensive income. Additionally, this
new guidance expands and increases the frequency of existing disclosures about OTTI for
debt and equity securities.

29

---



In April 2009, the FASB issued new
guidance impacting ASC Topic 820, Fair Value Measurements and Disclosures, related
to determining fair value when the volume and level of activity for the asset or liability
have significantly decreased and identifying transactions that are not orderly. This
guidance establishes a fair value hierarchy which requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring fair vale.
This guidance requires increased disclosures and is effective for interim and annual
reporting periods ending after June 15, 2009, and is to be applied prospectively. The
Corporation adopted this guidance effective April 1, 2009.

In April 2009, the FASB also
issued new guidance impacting ASC Topic 825, Financial Instruments, related to
interim disclosures about fair value of financial instruments. This guidance requires
disclosure about fair value of financial instruments for interim reporting periods of
publicly traded companies that were previously only required in annual financial
statements. It also requires disclosure of the method(s) and significant assumptions used
to estimate the fair value of financial instruments and changes in method(s) and
significant assumptions, if any, during the period. The Corporation adopted this guidance
effective April 1, 2009.

In June 2008, the FASB issued new
guidance impacting ASC Topic 260, Earnings Per Share, related to determining whether
instruments granted in share-based payment transactions are participating securities. This
new guidance addresses whether these types of instruments are participating prior to
vesting and, therefore need to be included in the earnings allocation in computing
earnings per share under the two class method described in ASC Topic 260. All prior-period
earnings per share data presented shall be adjusted retrospectively. The Corporation
adopted this new guidance on January 1, 2009 which had no impact on our first, second and
third quarter 2009 or 2008 earnings per share.

# 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, 2008.

# 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, 2009, 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, 2009 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

The Corporation may not be able to
meet federal regulatory requirements regarding the restoration of capital at the Bank.

Since June 30, 2009, the Bank has
been undercapitalized by regulatory capital standards. As a result, the Bank was required
to submit a capital restoration plan to the OCC to demonstrate how the Bank will improve
its capital position such that it meets the minimum capital requirements imposed by the
OCC. The Bank submitted a capital restoration plan to the OCC in September 2009, which as explained below,
was not deemed acceptable by the OCC. As the sole shareholder of the Bank, the
Corporation was required to guarantee the Banks compliance with such plan until such
time that the Bank becomes adequately capitalized on average during each of four
consecutive calendar quarters. The Corporations guarantee was secured by a pledge of
the Corporations assets.

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By letter dated October 28, 2009,
the OCC notified the Bank that its Capital Restoration Plan and Capital Plan (collectively, the "Plan") was not acceptable due to an
inability to determine whether the Plan was realistic and the uncertainty surrounding
whether it would succeed in restoring the Banks capital. The OCC also noted that the
Plan failed to identify specific, reliable sources of additional capital and lacked a
detailed strategy for a proposed sale of problem loans. Consequently, the Corporation
remains responsible for preparation and submission of a revised capital restoration plan
that is acceptable to the OCC. As a result of the Banks failure to submit an
acceptable capital restoration plan within an acceptable time, for purposes of Prompt Correction
Action, the Bank is now considered significantly undercapitalized by
regulatory standards. While the Bank intends to submit a revised Plan to the OCC, there are
no assurances that the Plan will be deemed acceptable to the OCC.  The Bank's classification
as "significantly undercapilized" results in a number of additional restrictions on its operations
as described above in "Management's Discussion and Analysis of Financial Condition and Results of Operation."

The Banks ability to comply
with the capital restoration plan will be very challenging. Although the Corporation is
actively pursuing additional investment from potential investors, the Corporation
currently does not have any formal commitment from any investor. As described under
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Capital above, the Corporations ability to raise additional
capital is significantly restricted by several factors, and there is a meaningful
possibility the Corporation will not be successful in raising additional capital. In
addition, the Corporations management believes the likelihood of a third party
acquiring the Corporation or the Bank is relatively low. As a result, the Bank may not be
able to comply with the capital restoration plan submitted to the OCC.

If the Bank and the Corporation are
unable to resubmit and comply with a revised capital restoration plan
that is acceptable to the OCC, it is likely the OCC would take increasingly severe actions
against the Bank which could, in extreme circumstances, lead to a seizure of the
Banks assets and a liquidation or other closure of the Bank.

The Banks capital may not be
sufficient to support the risk inherent in its loan portfolio.

The Bank maintains capital as a means of
absorbing losses resulting from the Banks operations. The Bank has incurred losses
for six consecutive quarters, which losses have significantly depleted the Banks
capital and resulted in the Bank being considered undercapitalized pursuant to
regulatory capital standards. A continuing decline in the collectability of the
Banks loans, a continuing decline in the value of the collateral supporting those
loans, or both, will require the Bank to increase its allowance for loan losses, which
would further deplete existing capital. Due to the economic conditions in the areas where
the Bank operates, the Bank expects to continue to incur operating losses in the
near-term, including through 2010. As noted under Managements Discussion and
Analysis of Financial Condition and Results of Operations  Loans above, the
Banks recent detailed review of its loan portfolio and recent appraisals obtained by
the Bank on properties serving as collateral for loans reflect continued deterioration in
borrowers financial condition and in property values. The Banks current
capital may be insufficient to absorb future operating losses and, unless the Bank is
successful in raising additional capital or taking other steps to meaningfully reduce the
risk in its loan portfolio, this lack of capital is likely to have a material adverse
effect on the Corporations business, results of operations, and financial condition
and, in extreme circumstances, could result in the insolvency and liquidation of the Bank.

There are other consequences of
the Banks current financial condition that will present additional challenges to the
Bank and could, individually or collectively, result in material adverse effects on the
Corporations financial condition.

The amount of FDIC deposit insurance
premiums required to be paid by financial institutions depends in part on the
institutions risk rating and capital position. As a result of the Banks
current capital position, the assessment rate to be paid by the Bank for FDIC deposit
insurance has increased significantly. This rate increase is in addition to any
industry-wide rate increases for all insured depository institutions and is in addition to
any special assessments imposed by the FDIC. Based on current information, the Corporation
estimates the Bank will incur approximately $400,000 of FDIC assessment expense during the
fourth quarter of 2009 before consideration of any required industry wide prepayment
assessment that may be imposed by the FDIC. These higher assessment rates charged against
the Bank are likely to continue into 2010.

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In addition, as a result of the
Banks failure to meet minimum capital requirements, it is prohibited from accepting,
renewing, or rolling over any brokered deposits, and the effective yield on deposits
solicited by the Bank cannot be more than 75 basis points over local market yields for
comparable size and maturity deposits. While the Bank does not currently anticipate these
restrictions presenting an additional challenge due to the Banks liquidity position
and off-balance sheet borrowing capacity, the restrictions could serve to limit the
Banks flexibility should conditions deteriorate or in the event of unexpected
problems with the Banks liquidity position.

# 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, 2009 were registered under the Securities Act of
1933.

There were no repurchases of common
stock by the Corporation for the three months ended September 30, 2009.

# 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).
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------

| | 99.1 | Stipulation
and Consent to the Issuance of a Consent Order, dated September 24, 2009, pursuant to
which First National Bank in Howell consented to the issuance of a Consent Order by the
Office of the Comptroller of the Currency.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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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, 2009 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/ Mark J. Huber
Mark J. HuberChief Financial Officer
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: November 16, 2009

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