UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

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

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-25752

FNBH BANCORP, INC.

(Exact name of Registrant as specified in its charter)

MICHIGAN		No. 38-2869722
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
101 East Grand River, Howell, Michigan		48843
(Address of principal executive offices)		(Zip Code)

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

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

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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 þ No o

Indicate by check mark whether registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to 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 o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Exchange Act Rule 12b-2).

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
				(Do not check if a smaller reporting company)

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. The aggregate market value of common stock held by non-affiliates as of June 30, 2010, was $1,897,013.

The number of outstanding shares of common stock (no par value) as of April 15, 2011 was 3,171,523.

Documents Incorporated by Reference:

Portions of the Corporation’s Proxy Statement for the Annual Meeting of Shareholders to be held June 23, 2011, are incorporated by reference into Part III of this report.

 

 

TABLE OF CONTENTS

		Page
PART I
Item 1 Business			4
Item 1A Risk Factors			11
Item 1B Unresolved Staff Comments			15
Item 2 Properties			15
Item 3 Legal Proceedings			15
Item 4 Reserved			16
PART II
Item 5 Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities			16
Item 6 Selected Financial Data			18
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 7A Quantitative and Qualitative Disclosures about Market Risk			36
Item 8 Financial Statements and Supplementary Data			36
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures			66
Item 9A Controls and Procedures			66
Item 9B Other Information			67
PART III
Item 10 Directors, Executive Officers and Corporate Governance			67
Item 11 Executive Compensation			67
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters			67
Item 13 Certain Relationships, Related Transactions and Director Independence			67
Item 14 Principal Accountant Fees and Services			68
PART VI
Item 15 Exhibits and Financial Statement Schedules			68
SIGNATURES			69
EXHIBIT INDEX			70
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

FORWARD-LOOKING STATEMENTS

Discussions and statements in this Annual Report on Form 10-K that are not statements of historical fact, including, without limitation, statements that include terms such as “will,” “may,” “should,” “believe,” “expect,” “forecast,” “anticipate,” “estimate,” “project,” “intend,” “likely,” “optimistic” and “plan,” and statements about future or projected financial and operating results, plans, projections, objectives, expectations, and intentions and other statements that are not historical facts, are forward-looking statements. Forward-looking statements include, but are not limited to, descriptions of plans and objectives for future operations, products or services; projections of our future revenue, earnings or other measures of economic performance; forecasts of credit losses and other asset quality trends; predictions as to our Bank’s ability to maintain certain regulatory capital standards; our expectation that we will have sufficient cash on hand to meet expected obligations during 2011; and descriptions of steps we may take to improve our capital position. These forward-looking statements express our current expectations, forecasts of future events, or long-term goals and, by their nature, are subject to assumptions, risks, and uncertainties. Although we believe that the expectations, forecasts, and goals reflected in these forward-looking statements are reasonable, actual results could differ materially for a variety of reasons, including, among others:

	•		our ability to successfully raise new equity capital and/or our ability to implement our capital restoration and recovery plan;
	•		our ability to continue as a going concern in light of the uncertainty regarding the extent and timing of possible future regulatory enforcement action against the Bank;
	•		the failure of assumptions underlying the establishment of and provisions made to our allowance for loan losses;
	•		the timing and pace of an economic recovery in Michigan and the United States in general, including regional and local real estate markets;
	•		the ability of our Bank to attain and maintain certain regulatory capital standards;
	•		limitations on our ability to access and rely on wholesale funding sources;
	•		the continued services of our management team, particularly as we work through our asset quality issues and the implementation of our capital restoration plan; and
	•		implementation of the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act or other new legislation, which may have significant effects on us and the financial services industry

This list provides examples of factors that could affect the results described by forward-looking statements contained in this Annual Report on Form 10-K, but the list is not intended to be all inclusive. The risk factors disclosed in Part I — Item 1A below include all known risks our management believes could materially affect the results described by forward-looking statements in this report. However, those risks may not be the only risks we face. Our results of operations, cash flows, financial position, and prospects could also be materially and adversely affected by additional factors that are not presently known to us, that we currently consider to be immaterial, or that develop after the date of this report. We cannot assure you that our future results will meet expectations. While we believe the forward-looking statements in this report are reasonable, you should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. We do not undertake, and expressly disclaim, any obligation to update or alter any statements, whether as a result of new information, future events, or otherwise, except as required by applicable law.

PART I

Item 1. Business.

FNBH Bancorp, Inc. (“FNBH”), 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”). FNBH and the Bank are collectively herein referred to as the “Corporation”. FNBH was formed in 1988 for the purpose of acquiring all of the stock of the Bank in a shareholder approved reorganization, which became effective in May 1989. The Corporation’s Internet address is www.fnbh.com. Through our Internet Website, we make available free of charge, as soon as reasonably practical after such information has been filed with the Securities and Exchange Commission, our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed with the Securities and Exchange Commission. Also available on our website are the respective Charters of the Board’s Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee, as well as the Corporation’s Code of Ethics for its Chief Executive Officer and other senior financial officers.

The Bank was originally organized in 1934 as a national banking association. As of January 31, 2011, the Bank had approximately 85 full-time and part-time employees. None of the Bank’s employees are subject to collective bargaining agreements. FNBH does not directly employ any personnel. The Bank serves primarily five communities, Howell, Brighton, Green Oak Township, Hartland, and Fowlerville, all of which are located in Livingston County. The county has historically been rural in character but has a growing suburban population.

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

Bank Services

The Bank is a full-service bank offering a wide range of commercial and personal banking services. These services include checking accounts, savings accounts, certificates of deposit, commercial loans, real estate loans, installment loans, trust and investment services, collections, night depository, safe deposit box, telephone banking, Internet banking, online bill pay and U.S. Savings Bonds. The Bank maintains correspondent relationships with major banks, pursuant to which the Bank engages in the clearance of checks and certain foreign currency transactions. The Bank also has a relationship with the Federal Home Loan Bank of Indianapolis (“FHLBI”) where it makes short term investments and where it has a line of credit of $13,900,000 of which no amounts were outstanding as of year-end. The Bank also has a relationship with the Federal Reserve Bank of Chicago, the Fed Discount Window, where it has a line of credit of $16,800,000 of which no amounts were outstanding at year end. Each of the lines is collateralized by specific pledged loans and/or investment securities. Due to the Bank’s condition, borrowing availability under the lines is subject to approval by the FHLBI and Federal Reserve, respectively, and terms may be limited or restricted. In addition, the Bank participates with other financial institutions to fund certain large loans which would exceed the Bank’s legal lending limit if made solely by the Bank.

The Bank’s deposits are generated in the normal course of business, and the loss of any one depositor would not have a materially adverse effect on the business of the Bank. As of December 31, 2010 and 2009, the Bank’s certificates of deposit of $100,000 or more constituted approximately 12% and 15%, respectively, of total deposit liabilities. The Bank’s deposits are primarily from its service areas, and the Bank does not traditionally seek or encourage large deposits from outside the area.

FNBH’s cash revenues are primarily limited to dividends paid by the Bank. The Bank’s principal sources of revenue are interest and fees on loans and interest on investment securities. Interest and fees on loans constituted approximately 74% of total revenues for the years ended December 31, 2010 and 2009. Interest and dividends on investment securities, including short-term investments and certificates of deposit, constituted approximately 6% of total revenues in 2010 and 9% of total revenues in 2009. Revenues were also generated from deposit service charges and other financial service fees.

The Bank provides real estate, consumer and commercial loans to customers in its market. As of December 31, 2010, 25% of outstanding loans were secured by construction, land development and residential mortgages or residential construction. As of December 31, 2010, 66% of outstanding loans were secured by nonfarm, nonresidential properties, 41% of which were owner occupied. Sixty-nine percent of the Bank’s loan portfolio is in fixed rate loans. Most of these loans, approximately 93%, mature within five years of issuance. Approximately $11,444,000 of loans with fixed rates (or about 5% of the Bank’s total loan portfolio) have remaining balances that mature after five years. Fifty-five percent of the Bank’s interest-bearing deposits are in savings, NOW, and MMDAs, all of which are variable rate products. As of December 31, 2010, certificates of deposits totaled approximately $104,000,000 with $71,000,000 maturing within a year, and the majority of the balance maturing within a five year period.

Requests to the Bank for credit are considered on the basis of credit worthiness of each applicant, without consideration to race, color, religion, national origin, sex, marital status, physical handicap, age, or the receipt of income from public assistance programs. Consideration is also given to the applicant’s capacity for repayment, collateral, capital and alternative sources of repayment. Loan applications are accepted at all the Bank’s offices and are approved under each lending officer’s authority. Request for loans from borrowers with aggregate indebtedness in excess of $1,500,000 are required to be presented to the Board of Directors or the Executive Committee of the Board for its review and approval.

As described in more detail below, the Corporation’s cumulative one year gap ratio of rate sensitive assets to rate sensitive liabilities was 150% and 151% asset sensitive at December 31, 2010 and December 31, 2009, respectively. See discussion and table under “Quantitative and Qualitative Disclosures about Market Risk” in Item 7A below.

The Bank sells participations in commercial loans to other financial institutions approved by the Bank for the purpose of meeting legal lending limit requirements or loan concentration considerations. Loans are classified as held for investment unless management does not have the intent or ability to hold the loans for the foreseeable future, or until maturity or payoff. The Bank is in the process of entering into an arrangement with a third party to provide residential mortgage loans to Bank customers, which is expected to result in additional income to the Bank. Those residential real estate mortgage loan requests that do not meet the third party provider’s criteria will be reviewed by the Bank for approval and, if approved, will be retained in the Bank’s loan portfolio. The Bank also may purchase loans which meet its normal credit standards.

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

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

Bank Competition

The Bank has eight offices within the five communities it serves, all of which are located in Livingston County, Michigan. Three of the offices, including the main office, are located in Howell. There are two facilities in Brighton, and one each in Green Oak Township, Hartland, and Fowlerville. See “Properties” below for more detail on these facilities. Within these communities, the Bank’s principal competitors are Fifth Third Bank, PNC Bank National, JP Morgan Chase, Citizens Bank, Comerica Bank, and Bank of America. Each of these financial institutions, which are headquartered in larger metropolitan areas, has significantly greater assets and financial resources than the Corporation. Among the principal competitors in the communities in which the Bank operates, the Bank is the only financial institution with a local community headquarters. Based on deposit information as of June 30, 2010, the Bank holds approximately 14.4% of local deposits, compared to approximately 13.5% by Fifth Third Bank, approximately 12.9% held by PNC Bank National, approximately 11.2% held by JP Morgan Chase, approximately 10.4% held by Citizens Bank, approximately 9.2% held by Comerica Bank, and approximately 7.5% held by Bank of America. Information as to asset size of competitor financial institutions is derived from publicly available reports filed by and with regulatory agencies. Within the Bank’s markets, Fifth Third Bank maintains five branch offices, PNC Bank National operates six branch offices, JP Morgan Chase operates six branch offices, Citizens Bank has five branch offices, Comerica Bank has three branch offices, and Bank of America has two branch offices. Management is not aware of any plans by these financial institutions to expand their presence in the Bank’s market.

The Bank competes with other commercial banks, savings banks, credit unions, mortgage banking companies, securities brokerage companies, insurance companies, and money market mutual funds. Many of these competitors have substantially greater resources than we do and offer certain services that we do not generally provide. Such competitors may also have greater lending limits than our Bank. In addition, non-bank competitors are generally not subject to the extensive regulations applicable to us.

Condition of Corporation

The following table sets forth certain information regarding the condition of the Corporation:

		Balances as of December 31,
		(in thousands)
		2010				2009				2008				2007				2006
Total Assets		$	305,341			$	332,390			$	388,783			$	432,894			$	473,896
Loans			235,938				274,046				315,817				347,876				384,581
Securities			28,171				23,701				42,516				38,632				54,214
Noninterest-Bearing Deposits			62,294				65,644				56,405				56,506				62,681
Interest-Bearing Deposits			230,986				249,552				293,122				323,072				342,863
Total Deposits			293,280				315,196				349,527				379,578				405,544
Shareholders’ Equity			10,134				14,376				27,525				40,627				49,992

Throughout 2010, the Bank operated eight branch facilities: one in downtown Howell, one in a grocery store located west of downtown Howell, two in Brighton (one on the east side and one on the west side), one in Hartland, one in the village of Fowlerville, one in Genoa Township, and one in Green Oak Township, which is 11 miles southwest of downtown Howell. In 2010, loans decreased due to lower loan demand resulting from the decline in local economic conditions and a focus on reducing the Bank’s size to enhance capital ratios. Deposits in 2010 were also lower due to continued increased competition for deposits in our local markets. Shareholders’ equity has decreased primarily due to net losses of $3,893,000 and $13,696,000 in 2010 and 2009, respectively.

Supervision and Regulation

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

General

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

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

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

Regulatory Developments

Emergency Economic Stabilization Act of 2008. On October 3, 2008, Congress enacted the Emergency Economic Stabilization Act of 2008 (“EESA”). EESA enables the federal government, under terms and conditions developed by the Secretary of the United States Department of the Treasury (“UST”), to insure troubled assets, including mortgage-backed securities, and collect premiums from participating financial institutions. EESA includes, among other provisions: (a) the $700 billion Troubled Assets Relief Program (“TARP”), under which the Secretary of the UST is authorized to purchase, insure, hold, and sell a wide variety of financial instruments, particularly those that are based on or related to residential or commercial mortgages originated or issued on or before March 14, 2008; and (b) an increase in the amount of deposit insurance provided by the FDIC. Both of these specific provisions are discussed in the below sections.

Troubled Assets Relief Program (TARP). Under TARP, the UST authorized a voluntary capital purchase program (“CPP”) to purchase senior preferred shares of qualifying financial institutions that elect to participate. Participating companies must adopt certain standards for executive compensation, including (a) prohibiting “golden parachute” payments as defined in EESA to senior executive officers; (b) requiring recovery of any compensation paid to senior executive officers based on criteria that is later proven to be materially inaccurate; and (c) prohibiting incentive compensation that encourages unnecessary and excessive risks that threaten the value of the financial institution. The terms of the CPP also limit certain uses of capital by the issuer, including repurchases of company stock and increases in dividends. The Corporation did not participate in the CPP.

Federal Deposit Insurance Coverage. The EESA temporarily raised the limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor, and the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010 (the “Dodd-Frank Act”) made this temporary increase in the insurance limit permanent. Separate from EESA, in October 2008, the FDIC also announced the Temporary Liquidity Guarantee Program (“TLGP”). Under one component of this program, the Transaction Account Guarantee Program (“TAGP”), the FDIC temporarily provided unlimited coverage for noninterest bearing transaction deposit accounts (as defined in the TAGP) for participating institutions that did not opt out. This temporary coverage expired on December 31, 2010; however, the Dodd-Frank Act extended protection similar to that provided under the TAGP through December 31, 2012. The Corporation did elect to participate in the deposit portion of the TLGP.

Financial Stability Plan. On February 10, 2009, the UST announced the Financial Stability Plan (“FSP”), which is a comprehensive set of measures intended to shore up the U.S. financial system and earmarks the balance of the unused funds originally authorized under EESA. The major elements of the FSP include: (a) a capital assistance program that will invest in convertible preferred stock of certain qualifying institutions, (b) a consumer and business lending initiative to fund new consumer loans, small business loans and commercial mortgage-asset-backed securities issuances, (c) a new public-private investment fund that will leverage public and private capital with public financing to purchase up to $500 billion to $1 trillion of legacy “toxic assets” from financial institutions, and (d) assistance for homeowners by providing up to $75 billion to reduce mortgage payments and interest rates and establishing loan modification guidelines for government and private programs.

American Recovery and Reinvestment Act of 2009. On February 17, 2009, Congress enacted the American Recovery and Reinvestment Act of 2009 (“ARRA”). In enacting ARRA, Congress intended to provide a stimulus to the U.S. economy in light of the significant economic downturn. The AARA includes federal tax cuts, expansion of unemployment benefits and other social welfare provisions, and numerous domestic spending efforts in education, healthcare and infrastructure. The ARRA also includes numerous non-economic recovery related items, including a limitation on executive compensation in federally-aided financial institutions, including banks that have received or will receive assistance under TARP. The Corporation has received no assistance under TARP.

Homeowner Affordability and Stability Plan. On February 18, 2009, President Obama announced the Homeowner Affordability and Stability Plan (“HASP”). HASP is intended to support a recovery in the housing market and ensure that workers can continue to pay off their mortgages through the following elements: provide access to low-cost refinancing for responsible homeowners suffering from

falling home prices, a $75 billion homeowner stability initiative to prevent foreclosure and help responsible families stay in their homes, and support for low mortgage rates by strengthening confidence in Fannie Mae and Freddie Mac.

The UST has issued extensive guidance on the scope and mechanics of the various components of HASP. We continue to monitor these developments and access their potential impact on our business.

Dodd-Frank Act. On July 21, 2010, President Obama signed the Dodd-Frank Act into law. This new federal law includes the following:

	•		Creation of a new Consumer Financial Protection Bureau with power to promulgate and, with respect to financial institutions with more than $10 billion in assets, enforce consumer protection laws;
	•		Creation of a Financial Stability Oversight Council chaired by the Secretary of the Treasury with authority to identify institutions and practices that might pose a systemic risk to the U.S. economy;
	•		Provisions affecting corporate governance and executive compensation of all companies whose securities are registered with the SEC;
	•		A provision that will broaden the base for FDIC insurance assessments and permanently increase FDIC deposit insurance to $250,000;
	•		A provision under which interchange fees for debit cards of issuers with at least $10 billion in assets will be set by the Federal Reserve under a restrictive “reasonable and proportional cost” per transaction standard;
	•		A provision that will require bank regulators to set minimum capital levels for bank holding companies that are at least as strong as those required for their insured depository subsidiaries, subject to a grandfather clause for financial institutions with less than $15 billion in assets as of December 31, 2009; and
	•		New restrictions on how mortgage brokers and loan originators may be compensated.

When implemented, these provisions may impact our business operations and may negatively affect our earnings and financial condition by affecting our ability to offer certain products or earn certain fees and by exposing us to increased compliance and other costs. Many aspects of the new law are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on us, our customers or the financial industry more generally.

Future Legislation. Various other legislative and regulatory initiatives, including proposals to overhaul the banking regulatory system, are from time to time introduced in Congress and state legislatures, as well as regulatory agencies. Such future legislation regarding financial institutions may change banking statutes and our operating environment in substantial and unpredictable ways, and could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance depending on whether any such potential legislation is introduced and enacted. The nature and extent of the future legislative and regulatory changes affecting financial institutions is very unpredictable. We cannot determine the ultimate effect that any such potential legislation, if enacted, would have upon our financial condition or results of operations.

The Corporation

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

In accordance with Federal Reserve policy, FNBH is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances where FNBH might not do so absent such policy. The Dodd-Frank Act codified this policy as a statutory requirement. Such support may be required by the Federal Reserve at times when we might otherwise determine not to provide it.

In addition, if the Bank’s capital becomes impaired, the OCC may require the Bank to restore its capital by a special assessment upon FNBH as the Bank’s sole shareholder. If FNBH were to fail to pay any such assessment, the directors of the Bank would be required, under federal law, to sell the shares of the Bank’s stock owned by FNBH at public auction and use the proceeds of the sale to restore the Bank’s capital. Given current market conditions, it would likely be difficult for FNBH to raise significant amounts of additional capital on reasonable terms.

Pursuant to the results of examinations of FNBH by the Federal Reserve in January 2011 and November 2009, FNBH is considered a troubled institution due to the critically deficient condition of its subsidiary Bank. As such, the Federal Reserve has required FNBH to take action to support the Bank, which principally involves a capital infusion sufficient to satisfy minimum capital ratios imposed on the Bank. In addition, FNBH must receive prior approval from the Federal Reserve before the payment of dividends, issuance of debt, or redemption of stock. Additional restrictions imposed on FNBH by the Federal Reserve relate to changes in the composition of board members, the employment of senior executive officers or changes in the responsibilities of senior executive officers, and limitations on indemnification and severance payments.

As a result of the Bank's current inability to pay dividends to FNBH, we have an insufficient level of resources and cash flows to meet operational liquidity needs. Also, the Bank is prohibited from paying expenses on behalf of FNBH. To resolve FNBH's illiquidity and the deficient capital levels at FNBH and the Bank, the Corporation's board of directors plans to complete a timely recapitalization of the Corporation and provide interim funding, as necessary, should the recapitalization require more time than contemplated.

Investments and Activities. In general, any direct or indirect acquisition by FNBH of any voting shares of any bank which would result in FNBH’s direct or indirect ownership or control of more than 5% of any class of voting shares of such bank, and any merger or consolidation of FNBH with another bank holding company, will require the prior written approval of the Federal Reserve under the BHCA. In acting on such applications, the Federal Reserve must consider various statutory factors including the effect of the proposed transaction on competition in relevant geographic and product markets, and each party’s financial condition, managerial resources, and record of performance under the Community Reinvestment Act.

In addition and subject to certain exceptions, the Change in the Bank Control Act (“Control Act”) and regulations promulgated thereunder by the Federal Reserve, require any person acting directly or indirectly, or through or in concert with one or more persons, to give the Federal Reserve 60 days written notice before acquiring control of a bank holding company. Transactions which are presumed

to constitute the acquisition of control include the acquisition of any voting securities of a bank holding company having securities registered under Section 12 of the Securities Exchange Act of 1934, as amended, if, after the transaction, the acquiring person (or persons acting in concert) owns, controls or holds with power to vote 10% or more of any class of voting securities of the institution. The acquisition may not be consummated subsequent to such notice if the Federal Reserve issues a notice within 60 days, or within certain extensions of such period, disapproving the acquisition.

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

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

Eligible bank holding companies that elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of non-banking activities, including securities and insurance activities and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature, incidental to any such financial activity or complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. The BHCA generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank or financial holding companies. As of this filing date, FNBH has not applied for approval to operate as a financial holding company and has no current intention to do so.

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

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

The risk-based and leverage standards presently used by the Federal Reserve are minimum requirements, and higher capital levels may be required if warranted by the particular circumstances or risk profiles of individual banking organizations. The Federal Reserve has not advised FNBH of any specific capital ratios applicable to it; however, the Bank is currently not in compliance with minimum capital ratios to which it is subject, as described below.

Dividends. FNBH is an entity separate and distinct from the Bank. The primary source of FNBH’s revenues are from dividends paid by the Bank. Thus, FNBH’s ability to pay dividends to its shareholders is limited by statutory restrictions on the Bank’s ability to pay dividends as described below. Further, in a policy statement, the Federal Reserve has expressed its view that a bank holding company experiencing earnings weaknesses should not pay cash dividends exceeding its net income or which can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. Additionally, the Federal Reserve possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by bank and bank holding companies. Similar enforcement powers over the Bank are possessed by the OCC. The “prompt corrective action” provisions of federal law and regulation authorizes the Federal Reserve to restrict the payment of dividends by FNBH for an insured bank which fails to meet specified capital levels. Due to the current financial condition of the Bank, FNBH is currently prohibited from paying any dividends on its common stock without prior approval from the Federal Reserve. FNBH does not foresee being able to pay dividends in the near future.

In addition to the restrictions on dividends imposed by the Federal Reserve, the Michigan Business Corporation Act provides that dividends may be legally declared or paid only if after the distribution a corporation, such as the Corporation, can pay its debts as they come due in the usual course of business and its total assets equal or exceed the sum of its liabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of any holders of preferred stock whose preferential rights are superior to those receiving the distribution. The Corporation’s Articles of Incorporation were amended in February 2009 to authorize the issuance of up to 30,000 shares of preferred stock, with no par value. As of April 15, 2011, no preferred shares have been issued.

Federal Securities Regulation. The Corporation’s common stock is registered with the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As a result, the Corporation is subject to the information, proxy solicitation, insider trading and other restrictions and

requirements of the SEC under the Exchange Act. The Corporation’s securities are not listed for trading on any national or regional securities exchange.

The Bank

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

Deposit Insurance. As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. Under the FDIC’s risk-based assessment system for deposit insurance premiums, all insured depository institutions are placed into one of four categories (Risk Categories I, II, III, and IV), based primarily on their level of capital and supervisory evaluations.

Historically, assessment rates for deposit insurance premiums have been largely based on the risk category of the institution and the amount of its deposits. However, the Dodd-Frank Act passed in 2010 required the FDIC to establish rules setting insurance premium assessments based on an institution’s total assets minus its tangible equity instead of deposits. On February 7, 2011, the FDIC adopted a final rule under which, effective for assessments for the second quarter of 2011 and payable at the end of September 2011, the initial base assessment rate for institutions in Risk Category I (generally, well-capitalized institutions with a CAMELS composite rating of 1 or 2) is set at an annual rate of between 5 and 9 basis points. The initial base assessment rate for institutions in Risk Categories II, III, and IV is set at annual rates of 14, 23, and 35 basis points, respectively, and the initial base assessment rates for institutions with at least $10 billion in assets and certain “highly complex institutions” is set at an annual rate of between 5 and 35 basis points. These initial base assessments rates are adjusted to determine an institution’s final assessment rate based on its brokered deposits and unsecured debt. In addition, the rates are subject to a new depository institution debt adjustment, which is meant to offset the benefit received by institutions that issue long-term, unsecured liabilities when those liabilities are held by other insured depository institutions. However, institutions may exclude from the unsecured debt amount used in calculating the depository institution debt adjustment an amount equal to no more than 3% of their Tier 1 capital. Total base assessment rates after adjustments, other than the depository institution debt adjustment, range from 2.5 to 9 basis points for Risk Category I, 9 to 24 basis points for Risk Category II, 18 to 33 basis points for Risk Category III, 30 to 45 basis points for Risk Category IV, and 2.5 to 45 basis points for institutions with at least $10 billion in assets and certain “highly complex institutions.”

On December 15, 2010, the FDIC established 2.0% as the Designated Reserve Ratio (“DRR”), that is, the ratio of the DIF to insured deposits. The FDIC adopted a plan under which it will meet the statutory minimum DRR of 1.35% by September 30, 2020, the deadline imposed by the Dodd-Frank Act. The Dodd-Frank Act requires the FDIC to partially offset the effect of the increase in the DRR on institutions with assets less than $10 billion.

For more information about the deposit insurance premiums payable by the Bank, see “Noninterest Expense” under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.

On November 12, 2009, the FDIC enacted 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, 2009. The prepayment of these assessments was mandatory for all insured depository institutions; however, the FDIC retained the discretion to exempt certain institutions from the prepayment requirements. Under these regulations, the FDIC exempted the Bank from prepaying its assessment for the fourth quarter of 2009, as well as all of 2010, 2011 and 2012. Consequently, the Bank’s premiums continue to be assessed and collected quarterly by the FDIC.

On May 22, 2009, the FDIC adopted a final rule imposing a 5 basis point special assessment on each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009. This special assessment (which totaled $173,000 for our Bank) was paid on September 30, 2009.

In addition, during 2010 and 2009, the Bank also elected to participate in the FDIC’s Transaction Account Guarantee Program (TAGP), which required us to pay an additional assessment to the FDIC. Under the TAGP, funds in noninterest bearing transaction accounts, in interest bearing transaction accounts with an interest rate of 0.25% or less, and in Interest on Lawyers Trust Accounts (IOLTA) received a temporary (until June 30, 2010) unlimited guarantee from the FDIC. This temporary coverage expired December 31, 2010. The Dodd-Frank Act extended protection similar to that provided under the TAGP through December 31, 2012 for only noninterest bearing transaction accounts. This coverage applies to all insured depository institutions, and there is no separate FDIC assessment for the insurance. Furthermore, this unlimited coverage was in addition to and separate from the coverage available under the FDIC’s general deposit insurance rules which insure accounts up to $250,000.

FICO Assessments. The Bank, as a member of the DIF, is subject to assessments to cover the payments on outstanding obligations of the Financing Corporation (“FICO”). FICO was created to finance the recapitalization of the Federal Savings and Loan Insurance Corporation, the predecessor to the FDIC’s Savings Association Insurance Fund (the “SAIF”) which was created to insure the deposits of thrift institutions and was merged with the Bank Insurance Fund into the DIF in 2006. From now until the maturity of the outstanding FICO obligations in 2019, DIF members will share the cost of the interest on the FICO bonds on a pro rata basis. Currently on an annualized basis, FICO assessments are 0.010% of deposits.

OCC Assessments. National banks are required to pay supervisory fees to the OCC to fund the operations of the OCC. The amount of supervisory fees paid by a national bank is primarily based upon the bank’s total assets, as reported to the OCC. Based on current conditions, the Bank is also subject to a surcharge by the OCC due to the Bank’s need for increased regulatory supervision.

Capital Requirements. The OCC has established the following minimum capital standards for national banks: a leverage requirement consisting of a minimum ratio of Tier 1 capital to total average assets of 3% for the most highly-rated 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 shareholders’ equity. These capital requirements are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions. As described below, the OCC has imposed higher capital levels on the Bank.

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

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

In general, a depository institution may be reclassified to a lower category than is indicated by its capital levels if the appropriate federal depository institution regulatory agency determines the institution to be otherwise in an unsafe or unsound condition, be engaged in an unsafe or unsound practice, or have received an unsatisfactory examination rating with respect to certain matters.

The Bank is subject to a Consent Order imposed by the OCC on September 24, 2009. Among other things, the Consent Order requires the Bank to maintain capital ratios higher than the minimum ratios set forth above. The Consent Order requires the Bank to maintain a minimum Total Risk-Based Capital Ratio of at least 11% and a Leverage Ratio of at least 8.5%. The Bank is not currently in compliance with the minimum capital ratios imposed by the Consent Order.

At December 31, 2010, the Bank’s ratios are classified as “undercapitalized” according to the table set forth above. However, because the capital restoration plan the Bank submitted to the OCC was not accepted by the OCC, the Bank is now treated as if it were “significantly undercapitalized.”

Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include: requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent Banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution. The Bank is subject to many of these restrictions pursuant to the Consent Order entered on September 24, 2009 and as a result of the OCC’s rejection of the capital restoration plan submitted by the Bank pursuant to the requirements of the Consent Order.

Dividends. Under federal law, the Bank is restricted as to the maximum amount of dividends it may pay on its common stock to the Corporation. The Bank may not pay dividends except out of undivided net profits then on hand after deducting its losses and bad debts. In addition, the Bank is required by federal law to obtain the prior approval of the OCC for the declaration or payment of a dividend, if the total of all dividends declared by the Bank’s Board of Directors in any year will exceed the total of (i) the Bank’s retained net income (as defined and interpreted by regulation) for that year plus (ii) the retained net income for the preceding two years, less any required transfers to surplus. Federal law generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Further, federal regulatory agencies can prohibit a banking institution or bank holding company from engaging in unsafe and unsound business practices and could prohibit payment of dividends if such payment could be currently deemed an unsafe and unsound business practice. Due to these requirements and based upon current conditions, the Bank cannot pay a dividend to the Corporation without the prior approval of the OCC.

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

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

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

Item 1A. Risk Factors.

Significant uncertainty regarding the impact of possible further regulatory enforcement action against the Bank threatens our ability to continue as a going concern. As described elsewhere in this Form 10-K, the Bank is subject to a Consent Order imposed by the Office of the Comptroller of the Currency (OCC) that requires management to take a number of actions, including increasing and maintaining the Bank’s capital levels at amounts in excess of the Bank’s current capital levels. The Bank has failed to increase its capital levels as required by the Consent Order. As of the date of this Form 10-K, the Corporation has not entered into any definitive agreement regarding the raising of additional capital or a potential sale of the Corporation or the Bank, and it is not certain whether the Corporation will ultimately be able to enter into any such agreement. This failure to comply with the Consent Order results in the Bank being deemed “significantly undercapitalized” for purposes of the federal regulators’ Prompt Corrective Action (PCA) powers and may result in additional regulatory enforcement action. If we are unable to successfully raise capital or sell the Bank and if our financial condition otherwise fails to improve significantly, additional regulatory enforcement action against the Bank may result. Consequently, management believes that these matters raise substantial doubt about the Corporation’s ability to continue as a going concern. If we are unable to continue as a going concern, our shareholders will likely lose all of their investment in the Corporation. The consolidated financial statements included in this Form 10-K have been prepared assuming the Bank continues to operate in the normal course of business for the foreseeable future, and do not include any adjustments to recorded assets or liabilities should we be unable to continue as a going concern. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for management’s discussion of our financial condition at December 31, 2010.

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.

By letter dated October 28, 2009, the OCC notified the Bank that its Capital Restoration Plan and Capital Plan (collectively, the “Plan”) were not acceptable due to an inability to determine that 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 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 once more definitive plans for new capital have been finalized, the Bank does not believe any Plan will be deemed acceptable to the OCC unless it contains a firm commitment by one or more investors to make the additional capital contributions necessary for the Bank to meet its minimum capital ratios or to otherwise acquire the Bank. The Bank’s classification as “significantly undercapitalized” results in a number of additional restrictions on its operations as described below in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

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” below, 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 lead to the Bank being placed into receivership by federal regulators. In such a scenario, it is unlikely the holders of the Corporation’s common stock would realize any value for their common stock.

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 significant losses in each of the last four years, 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 collectibility of the Bank’s loans, a continuing decline in the value of the collateral supporting those loans, or both, may require the Bank to increase its allowance for loan losses, which would further deplete existing capital. Due to the depressed economic conditions and real estate values in the areas where the Bank operates, the Bank may continue to incur operating losses in the near-term, including through 2011. 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. These higher assessment rates charged against the Bank are expected to continue into 2011.

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 national market yields for comparable size and maturity deposits. These 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.

We are in the business of lending, which involves substantial credit risk, and our allowance for loan losses may not be sufficient to cover actual loan losses. If our loan customers do not repay their loans according to their respective terms, and if we are unable to collect on the loans through foreclosure of any collateral securing repayment, we may experience significant credit losses, which could have a material adverse effect on our operating results. We have established an allowance for loan losses that is intended to approximate credit losses inherent in our current loan portfolio and prevent negative effects on our operating results as a result of loan losses. In determining the size of the allowance, we make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In doing so, we rely primarily on our experience and our evaluation of current economic conditions, including use of current appraisals and valuations performed by licensed appraisers. If our assumptions or judgments prove to be incorrect, our current allowance for loan losses may not be sufficient to cover certain loan losses inherent in our loan portfolio, and adjustments may be necessary to allow for different economic conditions or adverse developments in our loan portfolio. Material additions to our allowance would materially decrease our net income.

As of December 31, 2010, approximately 86% of the Bank’s loan portfolio is commercial purpose loans. Of these, approximately 86% are loans made for land development, single family home construction and leasing of commercial properties. Commercial loans are generally viewed as having more inherent risk of default than residential mortgages or consumer loans. Also, the commercial loan balance per borrower is generally greater than that of a residential mortgage loan or consumer loan, inferring higher potential losses on an individual loan basis.

In addition, federal regulators periodically review our allowance for loan losses and, if warranted, may require us to increase our provision for loan losses or recognize additional loan charge offs. Any increase in our allowance for loan losses or loan charge offs required by these regulatory agencies could have a material adverse effect on our results of operations and financial condition.

As a community bank, our financial condition is dependent, in part, on the general economic condition of the communities we serve. Our operations are primarily limited to Livingston County and surrounding areas; and, therefore, our success depends to a great extent upon the general economic conditions of such region. In general, the economy of the State of Michigan has suffered in recent years as a result of the struggling automotive industry and other factors. Unlike larger banks that are more geographically diversified, our loan portfolio, the ability of the borrowers to repay these loans and the value of the collateral securing these loans will be impacted, to a greater extent, by local economic conditions. A continued economic slowdown could have many adverse consequences, including the following: loan delinquencies may increase, problem assets and foreclosures may increase, demand for our products and services may decline, and collateral for our loans may decline in value, in turn reducing customers’ borrowing power and reducing the value of assets and collateral associated with existing loans. In particular from 2007 to 2010, our level of nonperforming loans, net loan charge offs, loan delinquencies and provision for loan losses either increased over the prior year or remained elevated from prior historical levels.

Additionally, during the last three years the overall capital and credit markets experienced unprecedented levels of volatility and disruption. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. As a consequence of the U.S. recession, business activity across a wide range of industries faces serious difficulties due to the lack of consumer spending and the lack of liquidity in the global credit markets. In addition, unemployment reached historically high levels and is expected to remain elevated for some time. In particular, according to data published by the federal Bureau of Labor Statistics, Michigan’s unemployment rate in December 2010 was 11.7%, improved from 14.6% in December 2009, but still among the worst of all states.

During the past year, the general business environment continued to have an overall adverse effect on our business. While we believe that there are now some signs of stabilization within segments of this business environment, conditions are not expected to improve dramatically in the near term. Until conditions improve, we expect our businesses, financial condition and results of operations to continue to be adversely affected. In addition, a continued downturn in the national economy may impact our operations.

Current market developments, particularly in real estate markets, may adversely affect our industry, business and results of operations. Dramatic declines in the real estate market in recent years, with falling home prices and increasing foreclosures and unemployment, have resulted in, and may continue to result in, significant write-downs of asset values by us and other financial institutions. These write-downs have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. As a result of these conditions, many lenders and institutional investors have reduced, and in some cases, ceased to provide funding to borrowers including financial institutions.

This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting lack of available credit, lack of confidence in the financial sector, increased volatility in the financial markets and reduced business activity could materially and adversely affect our business, financial condition and results of operations.

Further negative market developments may continue to negatively affect consumer confidence levels and may continue to contribute to increases in delinquencies and default rates, which may impact our charge-offs and provisions for credit losses. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial services industry.

We are heavily weighted with loans secured by real estate and further declines in the real estate market and the overall economy may result in higher loan losses. A large majority of our loans are secured by residential and commercial real estate. While cash flows from our commercial customers’ business operations are intended to provide for repayment of their loans, further declines in the economy may impact their ability to do so. The Bank relies on the underlying collateral of a loan as the secondary source of repayment. If collateral values continue to decline because of further declines in the overall real estate market, the Bank may incur increased loan losses.

Fluctuations in interest rates could reduce our profitability. We realize income primarily from the difference between interest earned on loans and investments and the interest paid on deposits and borrowings. Our interest income and interest expense are affected by general economic conditions and by the policies of regulatory authorities. While we have taken measures intended to manage the risks of operating in a changing interest rate environment, there can be no assurance that these measures will be effective in avoiding undue interest rate risk. We expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to our position, this “gap” will work against us, and our earnings may be negatively affected.

Moreover, we are unable to predict fluctuations of market interest rates, and among other factors, changes in the following:

	§		Inflation or deflation rates;
	§		Levels of business activity;
	§		Recession;
	§		Unemployment levels;
	§		Money supply;
	§		Domestic or foreign events; and
	§		Instability in domestic and foreign financial markets

Competition with other financial institutions and financial service providers could adversely affect our profitability. We face vigorous competition from banks and other financial institutions, including savings and loan associations, savings banks, finance companies, and credit unions. Many of these banks and other financial institutions have substantially greater resources and lending limits, larger branch systems, and a wider array of banking services. To a limited extent, we also compete with other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies, and insurance companies, which are not subject to the same degree of regulation as that imposed on bank holding companies. As a result, these non-bank competitors may have an advantage over us in providing certain services, and this competition may reduce or limit our margins on banking services, reduce our market share, and adversely affect our results of operations and financial condition.

We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations. We are subject to extensive regulation, supervision, and examination by federal banking authorities. Any change in applicable legislation could have a substantial impact on us and our Bank and its operations. Additional legislation may be enacted or adopted in the future that could significantly affect our powers, authority, and operations, which could increase our costs of doing business and, as a result, give an advantage to our competitors who may not be subject to similar legislative and regulatory requirements. Further, regulators have significant discretion and power to prevent or remedy unsafe or unsound practices or violations of laws by banks and bank holding companies in the performance of their supervisory and enforcement duties. The exercise of regulatory power may have a negative impact on our results of operations and financial condition.

We may face challenges in managing our operational risk. Like other financial services companies, we face a number of operational risks, including the potential for processing errors, internal or external fraud, failure of computer systems, and external events beyond our control such as natural disasters. Acts of fraud are difficult to detect and deter, and we cannot assure investors that our risk management procedures and controls will prevent losses from fraudulent activity.

Difficult market conditions have adversely affected our industry. Dramatic declines in the housing market in recent years, with falling home prices and increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of real estate related loans and resulted in significant write-downs of asset values by financial institutions. This has also resulted in the write-downs of asset-backed securities and other securities and loans. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to

borrowers, including to other financial institutions. This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. Further negative market developments may affect consumer confidence levels and may cause adverse changes in payment patterns, causing increases in delinquencies and default rates, which may impact our charge offs and provision for credit losses. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry.

Market volatility may adversely impact our business. Market disruption and volatility, if excessive, may cause us to experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.

There can be no assurance that recently enacted legislation will stabilize the U.S. financial system. Beginning in the fourth quarter of 2008 and continuing into 2010, the federal government has enacted new laws intended to strengthen and restore confidence in the U.S. financial system. See Item 1 “Regulatory Developments” above for additional information regarding these developments. There can be no assurance, however, as to the actual impact that such programs will have on the financial markets, including the extreme levels of volatility and limited credit availability currently being experienced. The failure of these and other programs to stabilize the financial markets and a continuation of worsening of current financial market conditions could materially and adversely affect our business, financial condition, results of operations, access to credit or the trading price of our common stock.

In addition, these statutes are relatively new initiatives and, as such, are subject to change and evolving interpretation. There can be no assurances as to the effects that any such changes will have on the effectiveness of the federal government’s efforts to restructure the financial industry or to stabilize the financial and credit markets on our business, financial condition or results of operations.

We have credit risk inherent in our securities portfolio. We maintain diversified securities portfolios, which may include obligations of the U.S. Treasury and government-sponsored agencies as well as securities issued by states and political subdivisions, mortgage-backed securities, and asset-backed securities. We also invest in capital securities which includes preferred stocks. We seek to limit credit losses in our securities portfolios by generally purchasing only highly rated securities (rated “AA” or higher by a major debt rating agency) or by conducting significant due diligence on the issuer for unrated securities. However, we may, in the future, experience additional losses in our securities portfolio which may result in charges that could materially adversely affect our results of operations.

Changes in accounting standards could impact our reported earnings. Financial accounting and reporting standards are periodically changed by the Financial Accounting Standards Board (FASB), the SEC, and other regulatory authorities. Such changes affect how we are required to prepare and report our consolidated financial statements. These changes are often hard to predict and may materially impact our reported financial condition and results of operations. In some cases, we may be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.

We may not pay dividends on our common stock. Holders of shares of our common stock are only entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such payments. Our inability to pay dividends to our common stock shareholders could adversely affect the market price of our stock.

There have been numerous media reports about bank failures, which we expect will continue as additional banks fail. These reports have created concerns among certain of our customers, particularly those with deposit balances in excess of deposit insurance limits. We have proactively sought to provide appropriate information to our deposit customers about our organization in order to retain our business and deposit relationships. The outflow of significant amounts of deposits could have an adverse impact on our liquidity and results of operations.

If successful, our efforts to raise additional capital as set forth in our Capital Plan will be highly dilutive to our common shareholders. Our Capital Plan contemplates the issuance of a significant number of shares of our capital stock to recapitalize the Corporation. The completion of such capital raise is likely to be highly dilutive to our current shareholders. There can be no assurances provided regarding the market price of our common stock relative to the effect of a successful capital raising transaction or the perception that such transaction could occur.

The capital raise initiative we are pursuing could result in one or more private investors owning a significant percentage of our stock and having the ability to exert significant influence over our management and operations. The capital raise initiative set forth in our Capital Plan may result in one or more large investors owning a significant portion of our common stock. This could occur if one or more large investors makes a significant investment in our stock. Any such significant shareholder could exercise significant influence on matters submitted to our shareholders for approval, including the election of directors. In addition, having a significant shareholder could make future transactions more difficult or even impossible to complete without the support of such shareholder, whose interests may not coincide with interests of smaller shareholders. These possibilities could have an adverse effect on the market price of our common stock.

It is possible that a successful capital raise initiative as set forth in our Capital Plan could trigger an ownership change that will negatively affect our ability to utilize net operating loss carryforwards and other deferred tax assets in the future. As of December 31, 2010, we had federal net operating loss carryforwards of approximately $18.3 million, and such amount may grow significantly in the future. Under federal tax law, our ability to utilize these carryforwards and other deferred tax assets is limited if we are deemed to experience a change of ownership. This would result in our loss of the benefit of these deferred tax assets. The capital raise transaction contemplated by our Capital Plan could cause a change of ownership under these rules, which would likely materially limit our ability to utilize these significant deferred tax assets.

The trading price of our common stock may be subject to continued significant fluctuations and volatility. The market price of our common stock could be subject to significant fluctuations due to, among other things:

	§		announcements regarding significant transactions in which we may engage, including the capital raise initiative included in our Capital Plan;
	§		market assessments regarding such transactions, including the timing, terms, and likelihood of success of our capital raise initiative(s);
	§		operating results that vary from the expectations of management, securities analysts, and investors, including with respect to further loan losses we may incur;
	§		changes or perceived changes in our operations or business prospects;
	§		legislative or regulatory changes affecting our industry generally or our businesses and operations;
	§		the failure of general market and economic conditions to stabilize and recover, particularly with respect to economic conditions in Michigan, and the pace of any such stabilization and recovery;
	§		the operating and share price performance of companies that investors consider to be comparable to us; and
	§		other changes in global financial markets, economies, and market conditions, such as interest or foreign exchange rates, stock, commodity, credit or asset valuations or volatility.

Stock markets in general, and our common stock in particular, have experienced significant volatility over approximately the past three years, and continue to experience significant price and volume volatility. As a result, the market price of our common stock may continue to be subject to similar market fluctuations that may or may not be related to our operating performance or prospects. Increased volatility could continue to adversely impact the market price of our common stock.

We rely heavily on our management team, including our loan officers, and the unexpected loss of key employees may adversely affect our operations. As a community bank, our success depends largely on our ability to attract and to retain key employees who are experienced in banking and financial services and who have developed relationships within the communities served by our Bank. Our ability to retain these key employees will continue to be important to our business and financial results. The unexpected loss of services of key personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business and financial results.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

The Bank operates from eight facilities, located in five communities, in Livingston County, Michigan. The executive offices of the Corporation are located at the Bank’s main office, 101 East Grand River, Howell, Michigan. The Bank maintains two branches in Howell at 4299 East Grand River and 2400 West Grand River. The Bank also maintains branch offices at 9911 East Grand River, Brighton, Michigan; 8080 Challis Road, Brighton, Michigan; 760 South Grand Avenue, Fowlerville, Michigan; 10700 Highland Road, Hartland, Michigan; and 9775 M-36, Whitmore Lake, Michigan. All of the offices have ATM machines and all except the West Grand River branch, which is in a grocery store, have drive up services. All of the properties are owned by the Bank except for the West Grand River branch which is leased. The lease is for 5 years with two 5 year renewal options, expiring September 2022. The average lease payment over the remaining life of the lease is $4,000 monthly.

Item 3. Legal Proceedings.

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

Item 4. Reserved.

Additional Item —Executive Officers of Registrant

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

The Corporation’s executive officers as of April 15, 2011 are as follows:

Ronald L. Long (Age 51), President, Chief Executive Officer, since May 12, 2008; Senior Vice President and Senior Business Development Officer, Independent Bank from October 2007 through January 2008; President and Chief Executive Officer, Independent Bank East Michigan from 1993 through September 2007.

Nancy Morgan (Age 60), Senior Vice President, Human Resources, since October 2001; and Vice President, Human Resources, of the Bank from June 1999 to October 2001.

Mark J. Huber (Age 42), Senior Vice President, Chief Financial Officer, since June 4, 2009; Senior Manager, specializing in financial institutions, with Plante & Moran, PLLC from 1993 —2009.

Gerald Moyer (Age 57), Senior Vice President, Commercial Loan Officer since April 13, 2009, Chief Work Out Officer August 16, 2008 — April 12, 2009, Vice President, Commercial Loan Officer April 21, 2008 — August 15, 2008. Vice President and Senior Relationship Manager, Private Financial Group, with Huntington National Bank from June 2001 — March 2008.

PART II

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.

There is not an established trading market for the Corporation’s common stock. Information regarding its market price can be obtained on the Internet at nasdaq.com, symbol FNHM. There are occasional direct sales by shareholders of which the Corporation’s management is generally aware. From January 1, 2009, through December 31, 2010, there were, so far as the Corporation’s management knows, a total of 523,326 shares of the Corporation’s common stock sold. The price was reported to management in some of these transactions; however, there may have been other transactions involving the Corporation’s stock at prices not reported to management. During 2010, the highest and lowest prices known to management involving sales of more than 200 shares were $1.04 and $0.06 per share, respectively. To the knowledge of management, the last sale of common stock occurred on April 1, 2011 at a price of $0.37 per share.

As of March 1, 2011, there were approximately 800 holders of record of the Corporation’s common stock. The following table sets forth the range of high and low sales prices of the Corporation’s common stock during 2009 and 2010, based on information made available to the Corporation, as well as per share cash dividends declared during those periods. Although management is not aware of any transactions exceeding 200 shares at higher or lower prices, there may have been transactions at prices outside the ranges listed in the table.

Sales prices, for sales known to management involving more than 200 shares, and dividend information for the years 2009 and 2010 are as follows:

		Sale Prices
2010		High				Low				Cash Dividends Declared
First Quarter		$	1.04			$	0.06			$	0.00
Second Quarter		$	1.01			$	0.37			$	0.00
Third Quarter		$	0.80			$	0.28			$	0.00
Fourth Quarter		$	0.65			$	0.25			$	0.00

		Sale Prices
2009		High				Low				Cash Dividends Declared
First Quarter		$	4.40			$	1.20			$	0.00
Second Quarter		$	2.52			$	2.00			$	0.00
Third Quarter		$	2.00			$	0.98			$	0.00
Fourth Quarter		$	0.98			$	0.05			$	0.00

The holders of the Corporation’s common stock are entitled to dividends when, as, and if declared by the Board of Directors of the Corporation out of funds legally available for that purpose. Dividends were paid on a quarterly basis until the third quarter of 2008 at which time dividends were indefinitely suspended. In determining dividends, the Board of Directors considers the earnings, capital requirements and financial condition of the Corporation and the Bank, along with other relevant factors. The Corporation’s principal source of funds for cash dividends is the dividends paid by the Bank. The ability of the Corporation and Bank to pay dividends is subject to statutory and regulatory restrictions and requirements. The Bank cannot currently, under these requirements, pay a dividend to the Corporation without the prior approval of the OCC.

The Corporation did not repurchase any of its stock during the fourth quarter of 2010, nor has the Corporation’s Board adopted or approved a stock repurchase program.

SHAREHOLDER RETURN PERFORMANCE GRAPH

Set forth below is a line graph comparing the yearly percentage change in the cumulative total shareholder return on the Corporation’s common stock with that of the cumulative total return on the NASDAQ Stock Market Index and the NASDAQ Bank Stocks Index for the five year period ended December 31, 2010. The following information is based on an investment of $100, on January 1, 2006, in the Corporation’s common stock, the NASDAQ Bank Stocks Index and the NASDAQ Stock Market Index, with dividends reinvested. There has been only limited trading in the Corporation’s common stock, and the Corporation’s stock does not trade on any stock exchange or the NASDAQ market. Accordingly, the returns reflected in the following graph and tables are based on sale prices of the Corporation’s stock of which management is aware. There may have been sales at higher or lower prices of which management is not aware.

				January 1					December 31
				2006					2006					2007					2008					2009					2010
	FNBH Bancorp, Inc.				100					108.37					57.50					19.00					0.26					1.08
	NASDAQ Stock Market Index				100					110.30					122.10					73.50					106.60					125.80
	NASDAQ Bank Stocks Index				100					113.60					91.40					72.00					60.20					68.60

Item 6. Selected Financial Data.

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

		2010				2009				2008				2007				2006
Statement of Operations Data:
Interest income		$	14,227			$	17,870			$	24,307			$	30,173			$	31,818
Interest expense			2,496				4,632				8,118				11,884				10,295
Net interest income			11,731				13,238				16,189				18,289				21,523
Provision for loan losses			5,975				15,847				14,855				14,030				2,639
Noninterest income (1)			3,225				3,569				3,341				3,755				4,031
Gain (loss) on available for sale securities (1)			329				199				(3,237	)			(548	)			—
Noninterest expense (2)			13,146				15,939				14,979				13,493				14,939
Loss on sale/writedown of commercial loans held for sale (2)			—				—				—				4,312				—
Income (loss) before tax			(3,836	)			(14,780	)			(13,541	)			(10,339	)			7,976
Net income (loss)			(3,893	)			(13,696	)			(13,414	)			(6,556	)			5,586
Per Share Data:
Basic net income (loss) per share		$	(1.22	)		$	(4.32	)		$	(4.33	)		$	(2.13	)		$	1.76
Diluted net income (loss) per share			(1.22	)			(4.32	)			(4.33	)			(2.13	)			1.76
Dividends paid			—				—				0.16				0.84				0.84
Weighted average basic shares outstanding			3,193,101				3,167,918				3,096,332				3,074,732				3,177,093
Weighted average diluted shares outstanding			3,193,101				3,167,918				3,096,332				3,074,732				3,177,146
Balance Sheet Data:
Total assets		$	305,341			$	332,390			$	388,783			$	432,894			$	473,896
Loans, gross			235,938				274,046				315,817				347,876				384,581
Allowance for loan losses			13,970				18,665				14,122				10,314				7,598
Deposits			293,280				315,196				349,527				379,578				405,544
Shareholders’ equity			10,134				14,376				27,525				40,627				49,992
Ratios:
Dividend payout ratio			N/A				N/A				N/A				N/A				47.55	%
Average equity to average asset ratio			4.31	%			5.80	%			9.24	%			10.47	%			10.86	%

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

This discussion provides additional information to assess the consolidated financial condition and results of operations of FNBH Bancorp, Inc. (“Corporation”) and its subsidiaries. This section should be read in conjunction with the consolidated financial statements and the supplemental financial data contained elsewhere in this annual report.

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

During 2009, the level of regulatory enforcement action taken against the Bank by the Office of the Comptroller of the Currency (OCC) heightened from a formal agreement entered into on October 16, 2008 to the issuance of a Consent Order (the “Order”) dated September 24, 2009. Pursuant to the Order, the Bank was required to 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 22, 2010. The Bank failed to meet these required minimum ratios by such deadline and is currently out of compliance with these required minimum capital ratios.

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 continues to pursue its capital raising efforts and intends to update and resubmit the Plan to the OCC once more definitive plans to improve the Bank’s capital have been made.

As a result of its failure to submit an acceptable plan to the OCC within the permitted time, for purposes of Prompt Corrective Action (“PCA”) the Bank is now treated as if it were “significantly undercapitalized”. 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. At December 31, 2010, the Bank’s capital ratios continue to be significantly below the increased minimum requirements imposed by the OCC. In light of the Bank’s continued losses and capital position at December 31, 2010 and the lack of any commitments for the investment of additional capital as of the current date, it is reasonable to anticipate further regulatory enforcement action by the OCC.

The success of the Corporation depends to a great extent upon the economic conditions in Livingston County and the surrounding area. The Corporation has in general experienced a slowing economy in Michigan since 2001. In particular, Michigan’s current unemployment rate of approximately 10.4% is among the worst for all states. Unlike larger banks that are more geographically diversified, we provide banking services to customers primarily in Livingston County. Our loan portfolio, the ability to of the borrowers to repay these loans, and the value of the collateral securing these loans is impacted by local economic conditions. The continued economic difficulties in Michigan have had and may continue to have many adverse consequences as described below in “Loans”.

Dramatic declines in the housing market in recent years, with falling home prices and elevated levels of foreclosures and unemployment have resulted in and may continue to result in significant write-downs of asset values by us and other financial institutions. These write-downs have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Additionally, capital and credit markets have continued to experience elevated levels of volatility and disruption in recent years. This market turmoil and tightening of credit have led to a lack of general consumer confidence and reduction in business activity.

Due to the conditions and events discussed above and elsewhere in this Form 10-K, there is significant uncertainty regarding the impact of potential future regulatory action against the Bank. The extent of such regulatory action may threaten the ability of the Bank to continue operating as a going concern. Notwithstanding the above, the consolidated financial statements included in this Form 10-K have been prepared assuming the Bank continues to operate in the normal course of business for the foreseeable future, and do not include any adjustments to recorded assets or liabilities should we be unable to continue as a going concern.

As noted below and fully described in management’s recovery plan included in Note 2 to the consolidated financial statements, management has undertaken various initiatives to address the current challenges facing the Bank. The successful implementation of the various actions being undertaken by management will be difficult in the current economic environment. Even if such actions are successfully implemented, such strategy or results may not be sufficient to increase the Bank’s capital levels to satisfactory levels, return the Bank to profitability, or otherwise avoid further regulatory enforcement action.

In response to these regulatory challenges, difficult market conditions and significant losses incurred in the past four years that have depleted a substantial portion our capital, we have taken steps or initiated actions in an attempt to restore our capital levels and improve our operations, including:

	•		On February 19, 2009, we held a special shareholders’ meeting at which our shareholders 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. Additionally, at the annual meeting on May 28, 2009 our shareholders approved a 2,800,000 increase in the number of authorized shares of common stock. We requested the authorization to issue preferred shares and additional shares of common stock in order to be able to raise additional capital required by our current capital position and the Consent Order imposed by the OCC.
	•		In September 2009, we prepared a Capital Plan followed by a Confidential Offering Memorandum in November 2009 for the offering and sale of shares of our preferred stock. Although the Capital Plan was deemed unacceptable by the OCC for purposes of its PCA enforcement powers, we continue to work to raise the necessary capital. Throughout 2010, we continued to work with financial and legal advisors to pursue various transactions that would result in additional capital to the Bank, including ongoing negotiations with several potential investors. To date, although we have not received any firm commitments for new capital, we continue to negotiate the terms of an investment in the Corporation with interested investors.
	•		The Bank has taken many steps to address other requirements of the Consent Order, including making improvements to its liquidity risk management program and its loan portfolio management.
	•		The Bank believes it has increased the strength of its executive management team through new hires in 2008 and 2009, by including CEO Ron Long, CFO Mark Huber, and Sr. VP — Commercial Loan Officer Gerald Moyer.
	•		Management continues to support the Bank’s regulatory capital levels and ratios via strategic balance sheet reductions achieved primarily through non-renewal of high cost certificates of deposits while managing normal loan runoff (i.e., scheduled payments) with limited new money loan originations. The execution of this strategy is expected to sustain the Bank’s net interest margin via lower deposit pricing in the current rate environment coupled with greater reliance on lower cost core deposits. The strategy involves close monitoring of the Bank’s liquidity position and attention to significant customer relationships.
	•		Management continues to maintain significant borrowing availability as a source of contingency funding at the Federal Home Loan Bank of Indianapolis (“FHLBI”) and Federal Reserve which is secured by investment securities and/or eligible loans pledged as collateral. At December 31, 2010, the Bank has approximately $30.7 million of unused availability under established lines of credit at the FHLBI and Federal Reserve Discount Window, the availability of which is subject to approval by the respective lender due to the Bank’s current condition.

	•		Asset quality improvements are critical to the Bank’s future financial results and performance. The active management and targeted reduction in the current level of criticized loans includes continued quarterly loan portfolio credit quality reviews emphasizing timely monitoring of borrower relationships, timely identification of credit weaknesses, and heightened accountability of loan officers.
	•		The Bank’s 2011 budget places continued emphasis on revenue enhancements, expense reductions and operational efficiencies.
	•		Planned revenue enhancements include investment of excess on-balance cash into low-risk, liquid securities; further market reductions to deposit interest rates; origination and sale of commercial loans under the federal government’s SBA loan guarantee program; and affiliation with an established residential mortgage origination company to generate additional income. Finally, the sale of certain non-essential assets and select Bank branches are periodically evaluated to support capital levels.
	•		Planned expense reductions include adjustments to staffing and compensation levels within select departments, controlled monitoring and reduction of costs related to management of problem loans and other real estate, and further reduction of discretionary costs.
	•		In considering alternatives to effect other cost savings and expense reductions, management remains committed to ensuring that only reasonably priced and appropriate resources are utilized to operate the Bank in a manner consistent with safe and sound banking practices.

There can be no assurance these efforts will improve the Bank’s financial condition. Further deterioration of the Bank’s capital position is possible. The current economic environment in southeast Michigan and local real estate market conditions will continue to impose significant challenges on the Bank and are expected to adversely impact financial results. Any further declines in the Bank’s capital levels may likely result in more severe regulatory enforcement action by either the OCC or FDIC.

It is against this backdrop that we discuss our financial condition and results of operations in 2010 as compared to earlier periods.

FINANCIAL CONDITION

At year end 2010, total assets were $305,341,000 representing a 8.1% decrease from the prior year total assets of $332,390,000. Investment securities increased $4,470,000 (18.9%) to $28,171,000 and gross loans decreased $38,107,000 (13.9%) to $235,938,000. Deposits decreased $21,916,000 (7.0%) to $293,280,000. Shareholders’ equity decreased $4,242,000 (29.5%) to $10,134,000.

Securities

During 2010, investments securities increased $4,470,000 due to the purchase of $16,338,000 U.S. Agency CMO securities offset by scheduled maturities and calls of $2,275,000, pay downs of $4,526,000 and sales of mortgage-backed securities of $4,850,000. At year end, the Bank had $40,572,000 of cash and cash equivalents, an increase of $3,529,000 from the December 31, 2009 balance.

The following table sets forth the fair value of available for sale securities and the book value of other securities at December 31:

		(in thousands)
		2010				2009				2008
States and political subdivisions		$	6,286			$	7,156			$	14,704
U.S. agencies			—				1,527				9,693
Preferred stock			48				87				49
Mortgage-backed/CMO securities			20,936				13,936				17,074
Total available for sale		$	27,270			$	22,706			$	41,520
Other securities:
FRB stock		$	44			$	44			$	44
FHLBI stock			857				951				951
Total other securities		$	901			$	995			$	995

The following table sets forth the fair value contractual maturities of securities at December 31, 2010 and the weighted average coupon rate of such securities:

		(in thousands)
										Maturing After One
		Maturing Within One								but Within Five								Maturing After Five								Maturing After Ten
		Year								Years								but Within Ten Years								Years
		Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield
States and political subdivisions		$	—							$	735				4.24	%		$	2,701				3.99	%		$	2,850				4.38	%
U.S. agencies			—								—																—
Mortgage-backed/CMO securities			—								—								2,234				4.00	%			18,702				4.80	%
Preferred stock			—								—								—								48				0.00	%
FRB stock			—								—								—								44				6.00	%
FHLBI stock			—								—								—								857				2.08	%
Total		$	—							$	735				4.24	%		$	4,935				3.99	%		$	22,501				4.64	%
Tax equivalent adjustment for calculations of yield		$	—							$	15							$	54							$	61

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

		Tax-Exempt								Equivalent
		Rate				Adjustment				Basis
Under 1 year
1-5 years			4.24	%			2.05	%			6.29	%
5-10 years			3.99	%			2.05	%			6.04	%
10 years or more			4.38	%			2.05	%			6.43	%

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

		2010				2009				2008
U.S. Treasury & agency securities			—				6.4	%			22.8	%
Agency mortgage backed/CMO securities			74.3	%			58.8	%			40.2	%
Tax exempt obligations of states and political subdivisions			22.3	%			30.2	%			34.6	%
Preferred stock			0.2	%			0.4	%			0.1	%
Other			3.2	%			4.2	%			2.3	%
Total securities			100.0	%			100.0	%			100.0	%

Loans

The senior management and board of directors of the Bank retain the authority and responsibility for credit decisions. We have adopted uniform loan policy documenting required underwriting standards. Our delegated loan authorities and loan committee structure attempt to provide requisite controls and promote compliance with such established underwriting standards. Loans to a borrower with aggregate indebtedness in excess of $1,500,000 are approved by a committee of the board or the entire board. There can be no assurance that the aforementioned lending procedures and the use of uniform underwriting standards will prevent us from the possibility of incurring significant credit losses in our lending activities and, in fact, the provision for loan losses was elevated in 2010, 2009 and 2008 from prior historical levels.

During 2010, the loan portfolio decreased $38,107,000 (13.9%). The decrease was attributable in part to the deliberate run-off of existing loans to shrink the Bank’s asset size and manage capital ratios and to diversify risk within the loan portfolio (i.e., reduce concentrations in real estate secured loans). Further deceases in loans resulted from $11.9 million of charge offs and $5.6 million of loans transferred to other real estate owned during 2010. In addition, fewer lending opportunities and credit worthy borrowers continued to limit loan growth in 2010.

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 a 1 — 4 family residential property 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 December 31:

		(in thousands)
		2010								2009								2008								2007								2006
		Balances				Percent				Balances				Percent				Balances				Percent				Balances				Percent				Balances				Percent
Secured by real estate:
Residential first mortgage		$	24,546				10.4	%		$	29,719				10.8	%		$	31,332				9.9	%		$	35,545				10.2	%		$	39,768				10.3	%
Residential home equity/other junior liens			14,967				6.3	%			17,606				6.4	%			20,511				6.5	%			19,353				5.6	%			20,983				5.4	%
Construction, land development and other land			19,641				8.3	%			29,119				10.6	%			42,712				13.5	%			52,383				15.0	%			67,376				17.5	%
Commercial (nonfarm, nonresidential)			155,006				65.7	%			170,364				62.2	%			179,674				56.9	%			192,784				55.3	%			203,219				52.8	%
Commercial			16,196				6.9	%			20,015				7.3	%			31,628				10.0	%			33,677				9.7	%			31,710				8.2	%
Consumer and Other			5,784				2.4	%			7,467				2.7	%			10,256				3.2	%			14,623				4.2	%			22,195				5.8	%
Total gross loans			236,140				100.0	%			274,290				100.0	%			316,113				100.0	%			348,365				100.0	%			385,251				100.0	%
Net unearned fees			(202	)							(244	)							(296	)							(489	)							(670	)
Total Loans		$	235,938							$	274,046							$	315,817							$	347,876							$	384,581

Loans secured by residential first mortgages decreased $5,173,000 (17.4%) in 2010 as the mortgage loan portfolio experienced runoff from scheduled payments along with charge offs and transfers into other real estate. In addition, despite relatively attractive interest rates, demand for residential loan products was weak in 2010 due to depressed real estate values, historically high unemployment, and the beleaguered state of the residential housing market. At December 31, 2010, the Bank had $5,806,000 of home equity interest-only loans; none of these loans are at low promotional rates.

Construction, land development and other land loans at December 31, 2010 totaled $19,641,000; of this, $4,105,000 was secured by 1-4 family residential construction loans and $15,536,000 was secured by non 1-4 family residential properties. These loans experienced a decline of $9,478,000 (32.5%) attributable to scheduled payments and our desire for continued diversification away from these higher risk loans given the poor economic conditions for real estate development, particularly residential real estate. Additionally, no new money construction or land development loans were originated in 2010. This portfolio was further reduced by charge offs and loans transferred to other real estate in 2010 as collateral dependent loans were charged down to market adjusted fair values or as properties were ultimately foreclosed upon after exhausting loan workout strategies with borrowers.

Commercial real estate loans (nonfarm and nonresidential) decreased $15,538,000 (9.0%) from 2009 to 2010. The decrease resulted from loan run-off, as intended, to reduce the Bank’s concentration of real estate secured loans, along with charge offs and transfers of loans into other real estate. At December 31, 2010, $63,315,000 of these loans were secured by owner occupied properties, while $89,327,000 were secured by nonowner occupied properties and $2,364,000 were secured by multifamily housing.

Commercial loans experienced a decrease of $3,819,000 (19.1%) in 2010 due to the overall decline in the current economic environment.

Consumer and other loans decreased $1,683,000 (22.5%) in 2010 primarily due to continued runoff in indirect auto loans and maturities and pay downs on other loans.

The following table shows the amount of commercial, financial, and agricultural loans outstanding as of December 31, 2010, which based on remaining scheduled repayments of principal, mature in the periods indicated:

		Maturing
		(in thousands)
						After One
		Within One				but Within				After Five
		Year				Five Years				Years				Total
Real estate construction, land development and other land loans		$	12,170			$	7,315			$	156			$	19,641
Real estate other (secured by commercial and multi-family)			28,863				118,033				8,110				155,006
Commercial (secured by business assets or unsecured)			10,639				4,786				771				16,196
Other (loans to farmers, political subdivisions, and overdrafts)			431				555				299				1,285
Totals		$	52,103			$	130,689			$	9,336			$	192,128

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

		Interest Sensitivity
		(in thousands)
		Fixed Rate				Variable Rate
Due after one but within five years		$	109,204			$	21,485
Due after five years			7,685				1,651

At December 31, 2010 and 2009, the Bank’s loan portfolio included significant industry concentrations for: non-residential building operators, single family home builders, lessors of residential buildings, and hotels and motels. Management determines such concentrations using NAICS codes and regulatory standards that define significant concentrations as greater than 25 percent of the Bank’s capital, inclusive of the allowance for loan losses. In addition, management believes the Bank’s most significant loan portfolio concentration and exposure relates to loans secured by real estate. There were no foreign loans outstanding at December 31, 2010.

The future size of the loan portfolio is dependent upon a number of economic, competitive and regulatory factors faced by the Bank. Overall loan balances have decreased during each of the past three years primarily resulting from weak economic conditions and depressed real estate values in Michigan. Further declines in loans, restrictions on the Bank’s ability to make new loans or competition that leads to lower relative pricing on new loans could adversely impact our future operating results.

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. The aggregate amount of nonperforming loans and other nonperforming assets are presented below:

		(in thousands)
		2010				2009				2008				2007				2006
Nonperforming Loans and Assets:
Nonaccrual loans		$	30,858			$	43,724			$	37,096			$	14,459			$	12,199
Loans past due 90 days and still accruing			—				—				1,560				114				288
Total nonperforming loans			30,858				43,724				38,656				14,573				12,487
Other real estate			4,294				3,777				2,678				1,523				1,629
Total nonperforming assets		$	35,152			$	47,501			$	41,334			$	16,096			$	14,116
Nonperforming loans as a percent of total loans			13.08	%			15.95	%			12.24	%			4.19	%			3.25	%
Allowance for loan losses as a percent of nonperforming loans			45	%			43	%			37	%			71	%			61	%

There were no other interest bearing assets at December 31, 2010 that would be required to be disclosed under Item III(C) of Guide 3 of the Securities Act Industry Guide, if such assets were loans.

The following table shows nonperforming loans by type of loan collateral and percentage composition of nonperforming loans as of December 31:

		(in thousands)
Nonperforming Loans		2010								2009								2008
Secured by real estate:		Amount				Percent				Amount				Percent				Amount				Percent
Residential first mortgage		$	3,848				12.5	%		$	4,503				10.3	%		$	2,994				7.7	%
Residential home equity/other junior liens			747				2.4	%			1,043				2.4	%			2,486				6.4	%
Construction and land development and farmland			8,647				28.0	%			15,737				36.0	%			18,904				48.9	%
Commercial real estate			15,275				49.5	%			19,802				45.3	%			12,053				31.2	%
Consumer			43				0.1	%			53				0.1	%			22				0.1	%
Commercial			2,298				7.5	%			2,586				5.9	%			2,197				5.7	%
Total nonperforming loans		$	30,858				100.0	%		$	43,724				100.0	%		$	38,656				100.0	%

Management regularly 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 nonaccrual 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 December 31, 2010, approximately $17,557,000 (56.9%) 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 loans are reviewed regularly for collectibility and uncollectible balances are promptly charged off.

Other real estate owned (“OREO”) is comprised primarily of commercial real estate properties and totaled $4,294,000 at December 31, 2010 compared to $3,777,000 at December 31, 2009. This increase results from the transfer of nonperforming loans secured by real estate into OREO as the foreclosure process is completed and any redemption period expires and from the receipt of deeds in lieu of foreclosure.

Since 2007, the decline in real estate sales and valuations in southeast Michigan has significantly and adversely impacted the quality of the Corporation’s portfolio of loans secured by real estate. In addition, during this time the local economies served by the Corporation

have been adversely impacted by the restructuring of the automotive market and related industries which, in turn, has caused our borrowers to experience declining revenues, diminished cash flows, and reduced collateral values in their businesses. Due to these factors and the prolonged troubled economy, real estate values have remained distressed. Consequently, due to the high concentration of the Corporation’s loans that are secured by real estate, the Corporation has continued to experience elevated levels of nonperforming loans and impaired loans.

During 2010, nonperforming loans experienced a net decrease of $12,866,000 from December 31, 2009 primarily due to a combination of principal payments, charge offs, transfers to other real estate, and the upgrade of certain loans demonstrating both improved cash flows and established payment history.

Management expects the work out of the remaining nonperforming loans to take some time, especially given the economic outlook for the state and the Bank’s relatively high balance of loans secured by real estate. These conditions are expected to result in the Bank maintaining high balances of nonperforming loans and are expected to continue to impact the provision for loan losses for the foreseeable future. Management continues to make oversight of these loans a priority. In addition, based on the existing level of problem loans, we anticipate that other real estate owned will remain elevated for some period of time as the Bank manages through the problem loan portfolio and borrowers continue to face financial difficulties and tight credit markets.

Impaired loans totaled approximately $30,606,000 at December 31, 2010, and include specifically identified commercial loans included in non-accrual loans, other than homogenous small commercial, residential and consumer loans, and $10,161,000 of commercial and commercial real estate loans identified as troubled debt restructurings. Included in impaired loans is $7,632,000 of 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 $41,449,000 at December 31, 2009, and $27,867,000 at December 31, 2008. Impaired commercial loans had specific reserves of $6,535,000 at December 31, 2010, $7,439,000 at December 31, 2009 and $4,289,000 at December 31, 2008.

During 2010, the Bank charged off loans totaling $11,883,000 and recovered $1,213,000 for a net charge off amount of $10,670,000. The Bank had net charge offs totaling $11,320,000 in 2009 and $11,470,000 in 2008.

If the economy continues to weaken and/or real estate values decline further, the provision for loan losses may continue to be impacted by the Bank’s concentration in real estate secured loans. While we have carefully considered these factors when determining the level of reserves, it is difficult to accurately predict future economic events, especially in the current environment.

The loan portfolio is periodically reviewed by internal and external parties and the results of these reviews are reported to the Bank’s Board of Directors. The purpose of these reviews is to verify proper loan documentation, to provide for the early identification of potential problem loans, to challenge and validate internal risk grades assigned by management, to monitor collateral values and to assist the Bank in evaluating the adequacy of the allowance for loan losses.

The following table sets forth loan balances and summarizes the changes in the allowance for loan losses and reserve for unfunded credit commitments, which is part of the Corporation’s critical accounting policies, for each of the years ended December 31:

		(in thousands)
		2010				2009				2008				2007				2006
Loans:
Average daily balance of loans for the year		$	252,314			$	297,609			$	336,637			$	375,037			$	374,634
Amount of loans outstanding at end of year			235,938				274,046				315,817				347,876				384,581
Components:
Allowance for loan losses
Balance, beginning of year		$	18,665			$	14,122			$	10,314			$	7,598			$	6,991
Loans charged off:
Real estate mortgage			574				619				261				243				260
Commercial (1)			10,751				10,730				11,170				5,519				1,785
Consumer			558				581				674				860				619
Subtotal			11,883				11,930				12,105				6,622				2,664
Charge offs on loans transferred to held for sale (2)			—				—				—				4,669				—
Total charge offs			11,883				11,930				12,105				11,291				2,664
Recoveries to loans previously charged off:
Real estate mortgage			6				7				14				—				—
Commercial			1,029				462				370				146				283
Consumer			178				141				251				239				226
Total recoveries			1,213				610				635				385				509
Net loans charged off			10,670				11,320				11,470				10,906				2,155
Additions to allowance charged to operations			5,975				15,863				15,278				13,622				2,762
Balance, end of year			13,970				18,665				14,122				10,314				7,598
Reserve for unfunded credit commitments
Balance, beginning of year			300				316				739				331				454
Additions (reductions) to reserve charged to operations			—				(16	)			(423	)			408				(123	)
Balance, end of year			300				300				316				739				331
Total allowance for loan losses and reserve for unfunded credit commitments		$	14,270			$	18,965			$	14,438			$	11,053			$	7,929
Ratios:
Net loans charged off to average loans outstanding			4.23	%			3.80	%			3.41	%			2.91	%			0.58	%
Allowance for loan losses to loans outstanding			5.92	%			6.81	%			4.47	%			2.96	%			1.98	%

The following table shows charge offs by the type of loan collateral and percentage composition as of December 31:

										(in thousands)
		2010								2009								2008
Charge offs		Amount				Percent				Amount				Percent				Amount				Percent
Secured by real estate
Residential first mortgage		$	868				7.3	%		$	1,145				9.6	%		$	775				6.4	%
Residential home equity/other junior liens			395				3.3	%			1,280				10.7	%			413				3.4	%
Construction and land development and farmland			4,547				38.3	%			3,573				30.0	%			7,647				63.2	%
Commercial real estate			5,376				45.2	%			3,889				32.6	%			1,357				11.2	%
Consumer			232				2.0	%			444				3.7	%			450				3.7	%
Commercial			465				3.9	%			1,599				13.4	%			1,463				12.1	%
Total charge offs		$	11,883				100.0	%		$	11,930				100.0	%		$	12,105				100.0	%

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

		(in thousands)
		2010								2009								2008								2007								2006
		Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent
Commercial		$	11,604				86.0	%		$	16,520				86.1	%		$	13,064				86.4	%		$	9,274				86.5	%		$	6,675				85.5	%
Consumer			1,032				7.1	%			1,138				6.9	%			613				6.9	%			609				6.3	%			442				7.2	%
Real estate mortgage			1,334				6.9	%			1,007				7.0	%			445				6.7	%			431				7.2	%			481				7.3	%
Total		$	13,970				100.0	%		$	18,665				100.0	%		$	14,122				100.0	%		$	10,314				100.0	%		$	7,598				100.0	%

The following table presents the portion of the reserve for unfunded credit commitments applicable to each loan category and the percent of the credit commitments in each category to total credit commitments, as of December 31:

		(in thousands)
		2010								2009								2008								2007								2006
		Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent
Commercial		$	95				57.1	%		$	136				58.8	%		$	76				62.5	%		$	488				79.6	%		$	207				80.1	%
Consumer			205				42.9	%			164				41.2	%			240				37.5	%			251				20.4	%			124				19.9	%
Real estate mortgage			—				—				—				—				—				—				—				—				—				—
Total		$	300				100.0	%		$	300				100.0	%		$	316				100.0	%		$	739				100.0	%		$	331				100.0	%

The allowance for loan losses totaled $13,970,000 at year end which was 5.92% of total loans, compared to $18,665,000 (6.81%) in 2009, and $14,122,000 (4.47%) in 2008.

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 $5,975,000 provision for loan losses and resulting $13,970,000 allowance were appropriate as of and for the year ended December 31, 2010.

Due to current economic conditions and the decline in real estate values, the provision for loan losses in 2010 continued to be impacted by the Bank’s concentration in real estate secured lending. The level of loan loss provision in 2011 is expected to be dependent on stabilization in local real estate values and the overall economy. Although management evaluates the adequacy of the allowance for loan losses based on information known at a given time, as facts and circumstances change, the provision and resulting allowance may also change.

We remain cautiously optimistic that we have identified any problem assets and our remaining borrowers will continue to stay current on their loans. However, we also recognize that we are not immune to losses in our loan portfolio. If the unemployment rate continues to remain high and real estate values decline further, we anticipate that even our strong borrowers may experience financial difficulties as they continue to cope with declining revenues, diminishing cash flows and depreciating collateral values in their businesses.

Deposits

Deposit balances of $293,280,000 at December 31, 2010 were $21,916,000 lower than the previous year end. Because year-end deposit balances may fluctuate, it is often more meaningful to analyze changes in average balances. Average deposits decreased 13.8% in 2010 compared to 2009. Average demand deposits increased $1.4 million (2.6%) while average NOW, savings and money market deposit account (MMDA) balances as a group decreased $17.5 million (12.7%). Average certificates of deposit decreased $30.7 million (20.8%). Average demand deposits remained the same from 2008 to 2009. Average NOW, savings, and MMDA balances fell 6.0% from 2008 to 2009 and average certificates of deposit fell 9.8% from 2008 to 2009.

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

		(in thousands)
		2010								2009								2008
		Average								Average								Average
		Balance				Rate				Balance				Rate				Balance				Rate
Non-interest bearing demand		$	56,520				0.00	%		$	55,102				0.00	%		$	55,077				0.00	%
NOW			48,946				0.16	%			47,497				0.19	%			35,845				0.24	%
Savings			39,104				0.20	%			41,211				0.28	%			38,033				0.49	%
MMDA			32,291				0.64	%			49,160				0.95	%			72,762				2.01	%
Time deposits			116,587				1.83	%			147,271				2.64	%			163,211				3.64	%
Total		$	293,448				0.85	%		$	340,241				1.34	%		$	364,928				2.10	%

See Note 8, “Time Certificates of Deposits” in Notes to Consolidated Financial Statements for the maturities of negotiated rate time deposits of $100,000 or more outstanding at December 31, 2010.

There was an increase in NOW and savings deposits of 3.0% and 8.4%, respectively, on average from 2008 to 2009. NOW deposits increased due to the Bank’s participation in the FDIC’s Temporary Liquidity Guarantee Program which provided unlimited deposit insurance on these balances in 2009. MMDA deposits decreased 32.4% on average from 2008 to 2009 primarily due to consumers transferring their deposits to NOW accounts to take advantage of the FDIC’s unlimited deposit insurance coverage.

The majority of the Bank’s deposits are from core customer sources, representing long term relationships with local personal, business, and public customers. In some financial institutions, the presence of interest bearing certificates greater than $100,000 indicates reliance upon purchased funds. However, large certificates in the Bank’s portfolio consist primarily of core deposits of local customers. The average balance of brokered certificates was $4.6 million and $14.4 million in 2010 and 2009, respectively. At year-end 2010, brokered deposits totaled $3.4 million compared to $5.4 million at December 31, 2009. Only $187,000 of these brokered certificates were over $100,000 at December 31, 2010 as compared to $275,000 as of December 31, 2009.

Capital

The Corporation’s capital at year end totaled $10,134,000, a $4,242,000 (29.5%) decrease compared to capital of $14,376,000 at December 31, 2009, and $27,525,000 at December 31, 2008. Included in capital at December 31, 2010 is a $257,000 unrealized net loss on investment securities available for sale.

Banking regulators have established various ratios of capital to assets to assess a financial institution’s soundness. Tier 1 capital is equal to shareholders’ equity adjusted for unrealized gains or losses accumulated in other comprehensive income while Tier 2 capital also includes a portion of the allowance for loan losses. The regulatory agencies have set capital standards for institutions. The leverage ratio, which divides Tier 1 capital by quarterly average assets, must be 4% for an institution to be considered adequately capitalized. The Bank’s leverage ratio was 3.50% at year-end 2010. Tier 1 risk-based capital, which includes some off balance sheet items in assets and weights assets by risk, must be 4% for an institution to be considered adequately capitalized. The Bank’s Tier 1 risk-based capital ratio was 4.28% at year-end 2010. Total risk-based capital, which includes Tier 1 and Tier 2 capital, must be 8% for an institution to be considered adequately capitalized. The Bank’s total risk-based capital ratio was 5.58% at year-end 2010.

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

		Minimum				Minimum
		Regulatory				Regulatory Ratio
		Ratio for Well				for Adequately				Bank Ratios
		Capitalized				Capitalized				2010				2009				2008
Average equity to average asset ratio			—				—				4.31	%			5.80	%			9.24	%
Tier 1 leverage ratio			5.00	%			4.00	%			3.50	%			4.25	%			6.89	%
Tier 1 risk-based capital			6.00	%			4.00	%			4.28	%			5.15	%			8.27	%
Total risk-based capital			10.00	%			8.00	%			5.58	%			6.46	%			9.56	%

As a result of the Consent Order issued to the Bank by the OCC on September 24, 2009, the Bank is subject to higher minimum capital ratios than those shown above. The Bank is required to maintain a Total risk-based capital ratio of 11% and a Tier 1 leverage ratio of 8.5%. As shown above, the Bank was not in compliance with these minimum ratios as of December 31, 2010. In addition, the Capital Plan submitted by the Bank to the OCC was deemed not acceptable by the OCC. As a result, the Bank is currently deemed to be “significantly undercapitalized” for purposes of the OCC’s prompt corrective action (PCA) enforcement powers. See Item 1, Business, Supervision and Regulation above for additional details.

The Corporation’s ability to pay dividends is subject to various regulatory and state law requirements. In the third quarter of 2008 the Corporation suspended, indefinitely, the payment of dividends due to the Bank’s inability to pay dividends to the holding company and insufficient cash at the holding company to pay the dividends.

Liquidity and Funds Management

Liquidity 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 and excess on-balance sheet cash positions to manage liquidity risk. In addition, wholesale funding sources are also available to a limited extent to satisfy contingent 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 a 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.

Asset liquidity for financial institutions typically consists of cash and cash equivalents, certificates of deposits and investment securities available for sale. These categories totaled $67.8 million at year end 2010 or about 22.2% of total assets. This compares to $59.7 million or about 18.0% of total assets at year end 2009. 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.

Of the Corporation’s available liquidity at December 31, 2010 and 2009 noted above, investment securities with a fair value of approximately $16,926,000 and $12,567,000, respectively, were pledged to secure borrowing availability on a line of credit from the Federal Home Loan Bank of Indianapolis, public deposits and for other purposes as required or permitted by law.

The core deposit base is the primary source of the Corporation’s liquidity. The Corporation also has available unused wholesale sources of liquidity, including borrowing availability from the Federal Home Loan Bank of Indianapolis (FHLBI) and through the discount window of the Federal Reserve Bank of Chicago. In the past, the Corporation has also issued certificates of deposit through brokers.

The Corporation’s liquidity could be adversely affected by both direct and indirect circumstances. An example of a direct event would be restrictions imposed by regulators due to factors such as deterioration in asset quality, a large charge to earnings, a decline in profitability or other financial measures. Examples of indirect events unrelated to the Corporation that could have an effect on the Corporation’s access to liquidity would be terrorism or war, natural disasters, political events, or the default or bankruptcy of a major corporation, mutual fund or hedge fund. Similarly, market speculation or rumors about the Corporation or the banking industry in general may adversely affect the cost and availability of normal funding sources.

The Corporation maintains a liquidity contingency plan that outlines the process for addressing a potential liquidity crisis. The plan provides for an evaluation of funding sources under various market conditions. It also assigns specific roles and responsibilities for effectively managing liquidity though a problem period.

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 a $13,900,000 line of credit available at the FHLBI and has pledged certain investment securities and commercial and consumer loans secured by residential real estate as collateral for this borrowing. At December 31, 2010, the Bank had no borrowings against the line. The Bank also has a $16,800,000 line of credit available at the Federal Reserve for which certain commercial loans are pledged as collateral. At December 31, 2010, the Bank did not have any borrowings against this line. Due to the Bank’s condition, borrowing availability under these lines of credit is subject to approval by the FHLBI and Federal Reserve, respectively, and terms may be limited or restricted.

In addition, no short-term borrowings were made by the Bank during 2010 for liquidity needs or other purposes.

Contractual Obligations and Commitments

The following table lists significant fixed and determinable contractual obligations to third parties as of December 31, 2010:

		(in thousands)
		Within				One to				Three to				Over
		One Year				Three Years				Five Years				Five Years				Total
Deposits without a stated maturity (1)		$	189,540			$	—			$	—			$	—			$	189,540
Consumer and brokered certificates of deposits(2)			74,517				23,359				7,587				27				105,490
Operating leases (3)			72				91				40				—				203
Purchase obligations (4)			609				659				242				—				1,510

The following table lists significant commitments by maturity date as of December 31, 2010:

		(in thousands)
		Within				One to				Three to				Over
		One Year				Three Years				Five Years				Five Years				Total
Commercial loans		$	9,309			$	97			$	500			$	—			$	9,906
Commercial construction loans			479				—				—				—				479
Consumer loans			—				156				—				7,647				7,803
Standby letters of credit			92				—				—				—				92

Commitments to extend credit, including loan commitments, standby letters of credit, and commercial letters of credit do not necessarily represent future cash requirements, in that these commitments often expire without being drawn upon.

Quantitative and Qualitative Disclosures about Market Risk

The current economic outlook and its potential impact on the Bank and current interest rate forecasts are reviewed monthly to determine the potential impact on the Corporation’s performance. Actual results are compared to budget in terms of growth and income. A yield and cost analysis is done to monitor interest margin. Various ratios are monitored including capital ratios and liquidity. Also, the quality of the loan portfolio is reviewed in light of the current allowance for loan losses, and the Bank’s exposure to market risk is reviewed.

Interest rate risk is the potential for economic losses due to future rate changes and can be reflected as a loss of future net interest income and/or a loss of current market values. The 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 (see Note 17, “Financial Instruments with Off-Balance-Sheet Risk” in Notes to Consolidated Financial Statements).

The table below shows the scheduled maturity and repricing of the Corporation’s interest sensitive assets and liabilities as of December 31, 2010:

		(in thousands)
		0-3				4-12				1-5				5+
		Months				Months				Years				Years				Total
Assets:
Loans		$	94,849			$	64,487			$	75,248			$	1,354			$	235,938
Securities			1,066				3,969				16,593				6,543				28,171
Short term investments			196				—				—				—				196
Total assets		$	96,111			$	68,456			$	91,841			$	7,897			$	264,305
Liabilities:
NOW, savings, and MMDA		$	36,174			$	—			$	—			$	91,071			$	127,245
Time deposits			25,711				47,787				30,217				26				103,741
Total liabilities		$	61,885			$	47,787			$	30,217			$	91,097			$	230,986
Rate sensitivity GAP:
GAP for period		$	34,226			$	20,669			$	61,624			$	(83,200	)
Cumulative GAP			34,226				54,895				116,519				33,319
December 31, 2010 cumulative sensitive ratio			1.55				1.50				1.83				1.14
December 31, 2009 cumulative sensitive ratio			1.62				1.51				1.78				1.19