Birmingham Bloomfield Bancshares (BBBI) 10-K 2011 FY Annual report

Exhibit 13

BIRMINGHAM BLOOMFIELD BANCSHARES, INC

CONSOLIDATED BALANCE SHEETS

	December 31, 2011			December 31, 2010
Assets
Cash and cash equivalents
Cash	$	4,693,585		$	5,300,368
Federal funds sold		—			65,936
Total cash and cash equivalents		4,693,585			5,366,304
Securities, available for sale (Note 2)		4,594,761			3,200,002
Federal home loan bank stock		169,900			160,200
Loans held for sale		2,484,829			322,500
Loans (Note 3)
Total portfolio loans		106,297,926			100,378,678
Less: allowance for loan losses		(1,574,350	)		(1,448,096	)
Net portfolio loans		104,723,576			98,930,582
Premises & equipment (Note 5)		1,395,187			1,359,510
Bank-owned Life Insurance		2,100,000			—
Interest receivable and other assets		4,235,623			995,438
Total assets	$	124,397,461		$	110,334,536
Liabilities and Shareholders’ Equity
Deposits (Note 6)
Non-interest bearing	$	19,662,283		$	14,190,295
Interest bearing		88,015,546			83,060,199
Total deposits		107,677,829			97,250,494
Secured borrowings		—			1,469,095
Interest payable and other liabilities		755,090			629,422
Total liabilities		108,432,919			99,349,011
Shareholders’ equity
Senior cumulative perpetual preferred stock series A $1,000 liquidation value per share, 5% Authorized, issued and outstanding – 1,635 shares		—			1,635,000
Discount on senior preferred stock series A		—			(61,027	)
Senior cumulative perpetual preferred stock series B $1,000 liquidation value per share, 9% Authorized, issued and outstanding – 82 shares		—			82,000
Premium on preferred stock series B		—			6,634
Senior cumulative perpetual preferred stock series C $1,000 liquidation value per share, 5% Authorized, issued and outstanding – 1,744 shares		—			1,744,000
Senior non-cumulative perpetual preferred stock series D $1,000 liquidation value per share, 1% Authorized, issued and outstanding – 4,621 shares		4,621,000			—
Common stock, no par value Authorized – 4,500,000 shares Issued and outstanding – 1,812,662 and 1,800,000 shares, respectively		17,066,618			17,034,330
Additional paid in capital		493,154			493,154
Accumulated deficit		(6,311,398	)		(10,061,474	)
Accumulated other comprehensive income		95,168			112,908
Total shareholders’ equity		15,964,542			10,985,525
Total liabilities and shareholders’ equity	$	124,397,461		$	110,334,536

See notes to consolidated financial statements

A-1

BIRMINGHAM BLOOMFIELD BANCSHARES, INC

CONSOLIDATED STATEMENT OF OPERATIONS

	For the Years Ended December 31,
	2011			2010		2009
Interest Income
Interest and fees on loans	$	6,243,577		$	5,587,997	$	3,859,870
Interest on securities		101,239			133,112		151,777
Interest on federal funds and bank balances		20,362			30,500		30,956
Total interest income		6,365,178			5,751,609		4,042,603
Interest Expense
Interest on deposits		1,208,513			1,337,544		1,345,475
Interest on federal funds and short-term borrowings		14,705			2,415		—
Total interest expense		1,223,218			1,339,959		1,345,475
Net Interest Income		5,141,960			4,411,650		2,697,128
Provision for loan losses		234,000			593,750		480,380
Net Interest Income After Provision for Loan Losses		4,907,960			3,817,900		2,216,748
Non-interest Income
Service charges on deposit accounts		55,443			52,266		42,052
Mortgage banking activities		434,338			12,002		—
SBA loan sales		701,588			—		—
Other income		41,399			61,280		43,188
Total non-interest income		1,232,768			125,548		85,240
Non-interest Expense
Salaries and employee benefits		2,755,204			1,641,944		1,571,537
Occupancy expense		518,634			442,456		549,986
Equipment expense		180,674			140,693		242,488
Loss on branch closing		—			—		609,330
Advertising and public relations		191,076			114,612		61,740
Data processing expense		223,179			190,530		211,514
Professional fees		473,438			379,256		373,502
Loan origination		224,324			78,018		48,250
Regulatory assessments		127,941			217,436		233,174
Other expenses		396,805			307,811		313,389
Total non-interest expense		5,091,275			3,512,756		4,214,910
Net Income (Loss) Before Federal Income Tax		1,049,453			430,692		(1,912,922	)
Federal income tax		(2,884,715	)		—		—
Net Income (Loss)		3,934,168			430,692		(1,912,922	)
Dividend on senior preferred stock		129,699			176,330		64,055
Accretion of discount on preferred stock		54,393			16,400		11,207
Net Income (Loss) Applicable to Common Shareholders	$	3,750,076		$	237,962	$	(1,988,184	)
Basic and Diluted Income (Loss) per Share	$	2.08		$	0.13	$	(1.10	)

See notes to consolidated financial statements

A-2

BIRMINGHAM BLOOMFIELD BANCSHARES, INC

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (DEFICIT)

	Preferred Stock			Common Stock		Additional Paid in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income			Total
Balance at December 31, 2008	$	—		$	17,034,330	$	466,553	$	(8,311,252	)	$	122,338		$	9,311,969
Issue senior preferred stock A		1,635,000													1,635,000
Discount senior preferred stock A		(92,000	)												(92,000	)
Accretion of preferred stock A		12,573							(12,573	)					—
Issue preferred stock B		82,000													82,000
Premium preferred stock B		10,000													10,000
Amortization of pref. stock B		(1,366	)						1,366						—
Issue senior preferred stock C		1,744,000													1,744,000
Preferred dividends									(64,055	)					(64,055	)
Share based payments expense							22,906								22,906
Comprehensive loss:
Net loss									(1,912,922	)					(1,912,922	)
Change in unrealized gain on securities, net of tax												(8,965	)		(8,965	)
Total comprehensive loss															(1,921,887	)
Balance at December 31, 2009		3,390,207			17,034,330		489,459		(10,299,436	)		113,373			10,727,933
Accretion of preferred stock A		18,400							(18,400	)					—
Amortization of pref. stock B		(2,000	)						2,000						—
Preferred Dividends									(176,330	)					(176,330	)
Share based payments expense							3,695								3,695
Comprehensive income:
Net income									430,692						430,692
Change in unrealized gain on securities, net of tax												(465	)		(465	)
Total comprehensive income															430,227
Balance at December 31, 2010		3,406,607			17,034,330		493,154		(10,061,474	)		112,908			10,985,525
Redeem senior preferred stock A		(1,635,000	)												(1,635,000	)
Accretion of preferred stock A		61,027							(61,027	)					—
Redeem senior preferred stock B		(82,000	)												(82,000	)
Amortization of pref. stock B		(6,634	)						6,634						—
Redeem senior preferred stock C		(1,744,000	)												(1,744,000	)
Issue senior preferred stock D		4,621,000													4,621,000
Preferred Dividends									(129,699	)					(129,699	)
Stock awards					32,288										32,288
Comprehensive income:
Net income									3,934,168						3,934,168
Change in unrealized gain on securities, net of tax												(17,740	)		(17,740	)
Total comprehensive income															3,916,428
Balance at December 31, 2011	$	4,621,000		$	17,066,618	$	493,154	$	(6,311,398	)	$	95,168		$	15,964,542

See notes to consolidated financial statements

A-3

BIRMINGHAM BLOOMFIELD BANCSHARES, INC

CONSOLIDATED STATEMENT OF CASH FLOWS

	For the Years Ended December 31,
	2011			2010			2009
Cash flows from operating activities
Net income (loss)	$	3,934,168		$	430,692		$	(1,912,922	)
Share based payment and stock awards		32,288			3,695			22,906
Provision for loan losses		234,000			593,750			480,380
Gain on sale of loans		(434,337	)		—			—
Proceeds from sales of loans originated for sale		14,155,956			—			—
Loans originated for sale		(15,883,948	)		(322,500	)		—
Accretion of securities		(802	)		(5,287	)		(5,147	)
Gain on calls of securities		—			(237	)		(3,028	)
Gain on sale of fixed assets		—			(226	)		—
Depreciation expense		218,478			180,312			303,360
Loss on disposal of branch assets		—			—			482,830
Deferred income taxes		(2,884,715	)		—			—
Net decrease (increase) in other assets		(404,496	)		77,332			(699,474	)
Net increase (decrease) in other liabilities		125,668			186,068			204,822
Net cash (used in) provided by operating activities		(907,740	)		1,143,599			(1,126,273	)
Cash flows from investing activities
Net change in portfolio loans		(6,026,994	)		(21,042,301	)		(22,813,386	)
Purchase of securities		(2,775,437	)		(2,976,260	)		(2,954,862	)
Proceeds from calls or maturities of securities		1,200,000			3,264,900			2,999,391
Proceeds from sales of securities		—			—			—
Principal payments on securities		203,066			191,299			—
Purchase of Bank-owned Life Insurance		(2,100,000	)		—			—
Purchases of premises and equipment		(254,155	)		(50,907	)		(42,562	)
Net cash used in investing activities		(9,753,520	)		(20,613,269	)		(22,811,419	)
Cash flows from financing activities
Increase in deposits		10,427,335			15,785,008			23,717,451
Net change in short term borrowings		(1,469,095	)		1,469,095			—
Proceeds from sale of senior preferred stock		1,160,000			—			3,379,000
Dividend on senior preferred stock		(129,699	)		(176,330	)		(64,055	)
Net cash provided by financing activities		9,988,541			17,077,773			27,032,396
(Decrease) increase in cash and cash equivalents		(672,719	)		(2,391,897	)		3,094,704
Cash and cash equivalents – beginning of period		5,366,304			7,758,201			4,663,497
Cash and cash equivalents – end of period	$	4,693,585		$	5,366,304		$	7,758,201
Supplemental Information:
Interest paid	$	1,277,935		$	1,235,563		$	1,302,913
Income tax paid		—			—			—
Loans transferred to other real estate		297,806			—			—

See notes to consolidated financial statements

A-4

Birmingham Bloomfield Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 1 – Summary of Significant accounting principles

Basis of Presentation and Organization- The consolidated financial statements include the accounts of Birmingham Bloomfield Bancshares, Inc. (the “Corporation”), and its wholly owned subsidiary, Bank of Birmingham (“Bank”). All significant intercompany transactions are eliminated in consolidation. The Corporation was incorporated February 26, 2004 as Birmingham Bloomfield Bancorp, Inc., for the purpose of becoming a bank holding company under the Bank Holding Company Act of 1956, as amended. The Bank opened for business on July 26, 2006.

Use of Estimates - The accounting and reporting policies of the Corporation and its subsidiary conform to accounting principles generally accepted in the United States of America. Management is required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates and assumptions. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of investment securities and the valuation of deferred tax assets.

Nature of Operations - The Corporation provides a variety of financial services to individuals and small businesses through its main office in Birmingham, Michigan. The Corporation had a second branch facility located in Bloomfield Township but this location was closed in January 2010 due to the lack of profitability. Its primary deposit products are savings, demand deposit accounts and term certificate accounts and its primary lending products are commercial loans, commercial real estate loans, residential real estate mortgages, home equity lines and consumer loans. The Bank serves businesses and consumers across Oakland and Macomb counties with the largest geographic segment of our customer base being in Oakland County.

Cash and Cash Equivalents - For the purpose of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from banks and federal funds sold which mature within 90 days.

Securities - Securities are classified as available for sale and are reported at fair value. Unrealized holding gains or losses are reported in other comprehensive income except those determined to be other-than-temporary impaired. Premiums and discounts on securities are recognized in interest income using the interest method over the period to maturity. Realized gains or losses are based upon the amortized cost of the specific securities sold.

In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent the fair value has been less than cost, (2) the financial condition of the issuer, and (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Loans Held for Sale - Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or market value in the aggregate. Net unrealized losses, if any, are recognized in a valuation allowance by charges to income.

Loans - The Corporation grants mortgage, commercial, and consumer loans to customers throughout the state focusing on southeast Michigan. A large portion of the loan portfolio is represented by commercial real estate mortgages and equity line loans primarily in Oakland County, Michigan. The ability of the Corporation’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in the process of collection. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

A-5

Birmingham Bloomfield Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 1 – Summary of Significant Accounting Policies – continued

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses- The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the ability to collect a loan balance is impaired. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the loans in light of historical loss experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific and general components. The specific component relates to loans that are classified as doubtful, substandard, or special mention. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Large groups of homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual consumer and residential loans for impairment disclosures, except if modified and considered to be a troubled debt restructuring.

Off-balance-sheet Instruments- In the ordinary course of business, the Corporation has entered into commitments under commercial letters of credit and standby letters of credit. Such financial instruments are recorded when they are funded.

Bank Premises and Equipment- Bank premises and equipment are carried at cost, less accumulated depreciation computed on the straight-line method over the shorter of the estimated useful lives of the assets or the length of the building leases as applicable.

Servicing Rights- Servicing rights are recognized as assets for the allocated value of retained servicing on loans sold. Servicing rights are expensed in the proportion to, and over the period of, estimated servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates, remaining loan terms and prepayment characteristics. Any impairment of a grouping is reported as a valuation allowance.

Income Taxes - Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method the net deferred tax asset or liability is determined based on the tax effects of the various temporary differences between the book and the tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Valuation allowances are utilized, when necessary, to reduce deferred tax assets to the amount expected to be realized.

A-6

Birmingham Bloomfield Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 1 – Summary of Significant Accounting Policies – continued

Secured Borrowings-The Corporation sells the guaranteed portion of Small Business Administration “SBA” loans to outside investors. Previously, these transactions contained a provision whereby the Corporation must rebate the premium received on the sale if a loan prepays or defaults within 90 days of the loan origination (the “recourse provision”). The transfers were recognized as secured borrowing transactions while the recourse provision is in effect. After the recourse provision expired, the Corporation recognized the outstanding transaction as a sale by decreasing the Corporations loan balance, removing the secured borrowing and recognizing the gain associated with the sale. At December 31, 2010, the guaranteed portion of SBA loans sold with recourse provisions in effect continue to be reported as assets of the Company and the transferred interests totaling $1.469 million were reported as secured borrowings in the balance sheet. The unrecognized gain on these sales total $153,000 was recognized as income after the recourse provision on these loans expired in 2011. On January 28, 2011, the Small Business Administration (“SBA”) released a notice removing the 90-day warranty, or “recourse provision,” on the guaranteed portion of SBA 7(a) loans sold at a premium in the secondary market. This change allowed the Corporation to recognize income from SBA loan sales immediately upon settlement rather than waiting for the expiration of the recourse period.

Other Comprehensive Income - Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income (loss). Certain changes in assets and liabilities, however, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the consolidated balance sheet. Such items, along with net income (loss) are components of comprehensive income. Accumulated other comprehensive income is reported as a separate component of stockholders equity, net of tax, and consists solely of unrealized gain and loss on available for sale investments.

Earnings per Share - Basic earnings per share represents income available to common shareholders divided by the weighted-average number of shares outstanding during the period. Diluted earnings per share includes stock options and organizer warrants. Weighted-average shares outstanding was 1,803,608 for the year ended December 31, 2011, 1,800,000 for the year ended December 31, 2010, and 1,800,000 for the year ended December 31, 2009.

Reclassification- Certain amounts appearing in the prior year’s financial statements have been reclassified to conform to the current year’s financial statements.

Recently Issued Accounting Standards

Comprehensive Income - In June 2011, the FASB issued ASU 2011-05 “Presentation of Comprehensive Income”.This standard requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but continuous statements. This standard eliminates the option to present the components of other comprehensive income as part of the statement of equity. This standard is effective for fiscal years and interim periods with those years beginning after December 15, 2011. The implementation of this standard will only change the presentation of comprehensive income; it will not have an impact on the Company’s financial position or results of operations. In December 2011, the FASB issued ASU 2011-12. This standard defers the requirement to present reclassification adjustments for each component of OCI in both net income and OCI on the face of the financial statements.

ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” This ASU represents the converged guidance of the FASB and the IASB (the Boards) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments to the Codification in this ASU are to be applied prospectively. The amendments are effective during interim and annual periods beginning after December 15, 2011. The guidance was adopted in the first quarter of 2012 with no impact to the financial statements.

A-7

Birmingham Bloomfield Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 1 – Summary of Significant Accounting Policies – continued

ASU No. 2011-02, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (‘TDR’)”In April, 2011, FASB issued ASU No. 2011-02, intended to provide additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring. The amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and are to be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. This guidance was adopted in the current year and the necessary disclosures are included in these financial statements.

Note 2 – Securities

The amortized cost and fair value of securities, with gross unrealized gains and losses, follows at December 31, 2011 and 2010 (000s omitted):

2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U. S. Government agency securities	$	2,347	$	9	$	(2	)	$	2,354
Municipal securities		709		16		(4	)		721
Mortgage backed securities		1,145		113		—			1,258
Corporate bonds		250		12		—			262
Sub-Total Available for Sale	$	4,451	$	150	$	(6	)	$	4,595
FHLB Stock		170		—		—			170
Total Securities	$	4,621	$	150	$	(6	)	$	4,765

2010	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U. S. Government agency securities	$	1,350	$	11	$	—	$	1,361
Municipal securities		650		7		—		657
Mortgage backed securities		837		91		—		928
Corporate bonds		250		4		—		254
Sub-Total Available for Sale	$	3,087	$	113	$	—	$	3,200
FHLB Stock		160		—		—		160
Total Securities	$	3,247	$	113	$	—	$	3,360

As of December 31, 2011 and 2010, all securities are classified as available for sale. Unrealized gains and losses within the investment portfolio are determined to be temporary. The Bank has performed an analysis of the portfolio for other than temporary impairment and concluded no losses are required to be recognized. Management has no specific intent to sell any securities and it is not more likely than not the Bank will be required to sell any securities before recovery of the cost basis. Management expects to collect all amounts due according to the contractual terms of the security. The unrealized losses reported in the Bank’s investment portfolio are the result of changes in interest rates. The Bank expects to recover the amortized cost of the investment and the length of time the securities have been in a loss position is less than 12 months. The Corporation had three individual securities with gross unrealized losses totaling $6,000 at December 31, 2011 while there were none at December 31, 2010.

Total securities representing $0 and $1,450,000 as of December 31, 2011 and 2010 were pledged to secure public deposits from the State of Michigan. At December 31, 2011, securities with a market value of $3.6 million were pledged to the Federal Home Loan Bank of Indianapolis as collateral to access funding.

Federal Home Loan Bank stock is restricted and can only be sold back to the Federal Home Loan Bank. The carrying value of the stock approximates its fair value.

A-8

Birmingham Bloomfield Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 2 – Securities – continued

The amortized cost and estimated fair value of all securities at December 31, 2011, by contractual maturity are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations without call or prepayment penalties. The contractual maturities of securities are as follows (000s omitted):

	Amortized Cost		Estimated Fair Value
Due in one year or less	$	2,000	$	1,998
Due in one year through five years		2,451		2,597
Due in five years through ten years		—		—
Due after ten years		—		—
Total	$	4,451	$	4,595

For the year ended December 31, 2011, proceeds from called securities was $1,200,000. There were no realized gains or losses in 2011. For the year ended December 31, 2010 proceeds from called securities was $3,265,000 and gross realized gains amounted to $237, no losses were recognized. There were no sales of securities in 2011 or 2010. For the year ended December 31, 2009, proceeds from sales of securities available for sale amounted to $2,999,000. Realized gains amounted to $3,028 and gross realized losses amounted to $0 in 2009.

Note 3 – Loans

A summary of the balances of portfolio loans as of December 31, 2011 and 2010 is as follows (000s omitted):

	2011			2010
Mortgage loans on real estate:
Residential 1 to 4 family	$	4,005		$	3,380
Multifamily		14,508			12,355
Commercial		50,426			49,029
Construction		2,541			2,024
Second mortgage		112			118
Equity lines of credit		11,119			11,794
Total mortgage loans on real estate		82,711			78,700
Commercial loans		22,512			20,776
Consumer installment loans		1,141			964
Total loans		106,364			100,440
Less: Allowance for loan losses		(1,574	)		(1,448	)
Net deferred loan fees		(66	)		(61	)
Net loans	$	104,724		$	98,931

A-9

Birmingham Bloomfield Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 3 – Loans – continued

An analysis of the allowance for loan losses at December 31, 2011 and 2010 follows (000s omitted):

2011	Commercial			Home Equity			Residential			Consumer			Total
Allowance for Loan Losses
Beginning balance	$	1,070		$	352		$	14		$	12		$	1,448
Charge-offs		—			(128	)		—			—			(128	)
Recoveries		20			—			—			—			20
Provision		52			192			(4	)		(6	)		234
Ending balance	$	1,142		$	416		$	10		$	6		$	1,574
Percent of principal balance		1.22	%		4.32	%		0.52	%		0.46	%		1.48	%
Ending balance: individually evaluated for impairment	$	115		$	212		$	—		$	—		$	327
Ending balance: collectively evaluated for impairment	$	1,027		$	204		$	10		$	6		$	1,247
Portfolio Loans
Ending unpaid principal balance	$	93,503		$	9,619		$	1,939		$	1,303		$	106,364
Ending unpaid principal balance: individually evaluated for impairment	$	699		$	590		$	—		$	—		$	1,289
Ending unpaid principal balance: collectively evaluated for impairment	$	92,804		$	9,029		$	1,939		$	1,303		$	105,075

2010	Commercial			Home Equity			Residential			Consumer			Total
Allowance for Loan Losses
Beginning balance	$	991		$	166		$	10		$	7		$	1,174
Charge-offs		(141	)		(225	)		—			—			(366	)
Recoveries		46			—			—			—			46
Provision		174			410			4			6			594
Ending balance	$	1,070		$	351		$	14		$	13		$	1,448
Percent of principal balance		1.21	%		3.45	%		1.21	%		1.25	%		1.44	%
Ending balance: individually evaluated for impairment	$	25		$	212		$	—		$	—		$	237
Ending balance: collectively evaluated for impairment	$	1,045		$	139		$	14		$	13		$	1,211
Portfolio Loans
Ending unpaid principal balance	$	88,080		$	10,166		$	1,153		$	1,041		$	100,440
Ending unpaid principal balance: individually evaluated for impairment	$	2,107		$	887		$	—		$	—		$	2,994
Ending unpaid principal balance: collectively evaluated for impairment	$	85,973		$	9,279		$	1,153		$	1,041		$	97,446

A-10

Birmingham Bloomfield Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 3 – Loans – continued

Management uses a loan rating system to identify the inherent risk associated with portfolio loans. Loan ratings are based on a subjective definition that describes the conditions present at each level of risk. The Bank currently uses a 1 to 8 risk rating scale for commercial loans. Each loan rating corresponds to a specific qualitative classification. All other consumer and mortgage loan types are internally rated based on various credit quality characteristics using the same qualitative classification. The risk rating classifications included: pass, special mention, substandard, doubtful and loss.

Loans risk-rated as special mention, are considered criticized loans, exhibiting some potential credit weakness that requires additional attention by management and are maintained on the internal watch list and monitored on a regular basis. Loans risk-rated as substandard or higher are considered classified loans exhibiting well-defined credit weakness and are recorded on the problem loan list and evaluated more frequently. The Bank’s credit administration function is designed to provide increased information on all types of loans to identify adverse credit risk characteristics in a timely manner. Total criticized and classified loans increased $2,931,000 to $13,821,000 at December 31, 2011 from $10,890,000 at December 31, 2010. The change was the result of an increase totaling $3,874,000 in special mention loans and a $943,000 decrease in substandard accounts. The majority of the increase is isolated to commercial loans and represents the weakness of the economic environment of our market area. There were no loans that were risk rated doubtful or loss at December 31, 2011 or 2010. Management closely monitors each loan adversely criticized or classified and institutes appropriate measures to eliminate the basis of criticism.

The primary risk elements considered by management regarding each consumer and residential real estate loan are lack of timely payment and loss of real estate values. Management has a reporting system that monitors past due loans and has adopted policies to pursue its creditor’s rights in order to preserve the Bank’s position. The primary risk elements concerning commercial and industrial loans and commercial real estate loans are the financial condition of the borrower, the sufficiency of collateral, and lack of timely payment. Management has a policy of requesting and reviewing periodic financial reporting from its commercial loan customers and verifies existence of collateral and its value.

An analysis of credit quality indicators at December 31, 2011 and 2010 follows (000s omitted):

2011

Commercial Loans

Credit Quality	Commercial Real Estate		Commercial Term		Commercial LOC		Commercial Construction
1 – pass	$	—	$	—	$	—	$	—
2 – pass		217		89		—		—
3 – pass		16,023		3,793		4,644		—
4 – pass		41,184		8,754		5,248		683
5 – special mention		5,586		2,524		511		1,858
6 – substandard		1,426		598		365		—
7 – doubtful		—		—		—		—
8 – loss		—		—		—		—
	$	64,436	$	15,758	$	10,768	$	2,541

Consumer Loans

Credit Quality	Home Equity LOC		Residential Mortgage		Home Equity Term		Consumer Installment		Consumer LOC
Pass	$	8,686	$	1,828	$	111	$	583	$	700
Special mention		343		—		—		20		—
Substandard		590		—		—		—		—
Doubtful		—		—		—		—		—
Loss		—		—		—		—		—
	$	9,619	$	1,828	$	111	$	603	$	700

A-11

Birmingham Bloomfield Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 3 – Loans – continued

2010

Commercial Loans

Credit Quality	Commercial Real Estate		Commercial Term		Commercial LOC		Commercial Construction
1 – pass	$	—	$	—	$	—	$	—
2 – pass		392		—		—		—
3 – pass		16,845		3,994		4,416		—
4 – pass		40,348		6,265		5,071		1,250
5 – special mention		2,994		1,249		1,574		774
6 – substandard		1,441		857		610		—
7 – doubtful		—		—		—		—
8 – loss		—		—		—		—
	$	62,020	$	12,365	$	11,671	$	2,024

Consumer Loans

Credit Quality	Home Equity LOC		Residential Mortgage		Home Equity Term		Consumer Installment		Consumer LOC
Pass	$	8,808	$	1,035	$	118	$	335	$	673
Special mention		344		—		—		33		—
Substandard		1,014		—		—		—		—
Doubtful		—		—		—		—		—
Loss		—		—		—		—		—
	$	10,166	$	1,035	$	118	$	368	$	673

A loan is considered a troubled debt restructure (“TDR”) if the Bank for economic or legal reasons related to the borrower’s financial condition grants a concession to the debtor that the Bank would not otherwise consider. TDRs represent loans where the original terms of the agreement have been modified to provide relief to the borrower and are individually evaluated for impairment. The Bank had one loan classified as a TDR at December 31, 2011 and 2010, and it continues to perform according to the modified terms.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all principal and interest payments according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include delinquency status, collateral value, and know factors adversely affecting the ability of the borrower to satisfy the terms of the agreement. When an individual loan is classified as impaired, the Bank measures impairment using (1) the present value of expect cash flows discounted at the loans effective interest rate, (2) the loans observable market price, or (3) the fair value of the collateral. The method used is determined on a loan by loan basis, except for a collateral dependent loan. All collateral dependent loans are required to be measured using the fair value of collateral method. If the value of an impaired loan is less than the recorded investment in the loan, an impairment reserve is recognized. All modified loans are considered impaired.

Large groups of homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures, except if modified and considered to be a troubled debt restructuring

A-12

Birmingham Bloomfield Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 3 – Loans – continued

Information regarding modified loans as of December 31 (000s omitted):

2011 Trouble Debt Restructuring	Number of Contract		Pre- Modification Investment		Post- Modification Investment
Commercial Real Estate		1	$	699	$	699
Commercial Term		—		—		—
Commercial LOC		—		—		—
Construction		—		—		—
Home Equity		—		—		—
Residential Mortgage		—		—		—
Consumer		—		—		—

2010 Trouble Debt Restructuring	Number of Contract		Pre- Modification Investment		Post- Modification Investment
Commercial Real Estate		1	$	699	$	699
Commercial Term		—		—		—
Commercial LOC		—		—		—
Construction		—		—		—
Home Equity		—		—		—
Residential Mortgage		—		—		—
Consumer		—		—		—

Information regarding impaired loans at December 31 (000s omitted):

		$2,107		$2,107		$2,107		$2,107		$2,107
2011	Recorded		Unpaid				Average		Interest
	Investment		Principal		Allowance		Investment		Recognized
Allowance recorded:
Commercial Line of Credit	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate	$	699	$	699	$	115	$	699	$	35
Home Equity Line of Credit	$	590	$	590	$	211	$	590	$	29
Total:
Commercial	$	699	$	699	$	115	$	699	$	35
Home Equity	$	590	$	590	$	211	$	590	$	29

		$2,107		$2,107		$2,107		$2,107		$2,107
2010	Recorded		Unpaid				Average		Interest
	Investment		Principal		Allowance		Investment		Recognized
No related allowance recorded:
Home Equity Line of Credit	$	298	$	298	$	—	$	256	$	—
Allowance recorded:
Commercial Line of Credit		1,407		1,407		17		1,418		99
Commercial Real Estate		699		699		8		117		7
Home Equity Line of Credit		590		590		212		197		10
Total:
Commercial	$	2,107	$	2,107	$	25	$	1,674	$	106
Home Equity	$	887	$	887	$	212	$	453	$	10

A-13

Birmingham Bloomfield Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 3 – Loans – continued

As of December 31, 2011 and 2010, loans totaling approximately $4,000 and $298,000, respectively were more than 30 days past due. Nonperforming loans, which represents non-accruing loans and loans past due 90 days or more and still accruing interest, were $0 and $298,000 at December 31, 2011 and December 31, 2010, respectively. Loans are placed in non-accrual status when, in the opinion of management, uncertainty exists as to the ultimate collection of principal and interest. Commercial loans are reported as being in non-accrual status if: (a) they are maintained on a cash basis because of deterioration in the financial position of the borrower, (b) payment in full of interest or principal is not expected, or (c) principal or interest has been in default for a period of 90 days or more. If it can be documented that the loan obligation is both well secured and in the process of collection, the loan may remain on accrual status. However, if the loan is not brought current before becoming 120 days past due, the loan is reported as non-accrual. A non-accrual asset may be restored to accrual status when none of its principal or interest is due and unpaid, when it otherwise becomes well secured, or is in the process of collection.

Information regarding past due loans at December 31 follows (000s omitted):

	Loans past due						Total				Total		Non-		>90 days
2011	30 - 59		60 - 90		Over 90		Past Due		Current		Loans		Accrual		Accruing
Commercial real estate	$	—	$	—	$	—	$	—	$	64,436	$	64,436	$	—	$	—
Commercial term		—		—		—		—		15,758		15,758		—		—
Commercial LOC		—		—		—		—		10,768		10,768		—		—
Construction		—		—		—		—		2,541		2,541		—		—
Home equity LOC		—		—		—		—		9,619		9,619		—		—
Residential mortgage		—		—		—		—		1,828		1,828		—		—
Home equity term		—		—		—		—		111		111		—		—
Consumer installment		4		—		—		4		599		603		—		—
Consumer LOC		—		—		—		—		700		700		—		—
	$	4	$	—	$	—	$	4	$	106,360	$	106,364	$	—	$	—

	Loans past due						Total				Total		Non-		>90 days
2010	30 - 59		60 - 90		Over 90		Past Due		Current		Loans		Accrual		Accruing
Commercial real estate	$	—	$	—	$	—	$	—	$	62,020	$	62,020	$	—	$	—
Commercial term		—		—		—		—		12,365		12,365		—		—
Commercial LOC		—		—		—		—		11,671		11,671		—		—
Construction		—		—		—		—		2,024		2,024		—		—
Home equity LOC		—		—		298		298		9,868		10,166		298		—
Residential mortgage		—		—		—		—		1,035		1,035		—		—
Home equity term		—		—		—		—		118		118		—		—
Consumer installment		—		—		—		—		368		368		—		—
Consumer LOC		—		—		—		—		673		673		—		—
	$	—	$	—	$	298	$	298	$	100,142	$	100,440	$	298	$	—

Certain directors and executive officers of the Corporation, including associates of such persons, were loan customers of the Bank during 2011 and 2010. A summary of aggregate related-party loan activity for loans to any related party at December 31, 2011 and 2010 is as follows (000s omitted):

	2011			2010
Balance at January 1	$	1,782		$	1,927
New loans or draws		568			581
Repayments		(787	)		(726	)
Balance at December 31	$	1,563		$	1,782

A-14

Birmingham Bloomfield Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 4 – Loan Servicing

Loans serviced for others are not included in the accompanying consolidated financial statements. The unpaid principal balance of loans serviced for others was $6,388,140 and $0 at December 31, 2011 and December 31, 2010, respectively. Unamortized cost of loan servicing rights included in accrued interest receivable and other assets on the consolidated balance sheet, for the years ended December 31, 2011 and 2010 are shown below:

	2011		2010
Balance, January 1	$	—	$	—
Amount capitalized		129,783		—
Amount amortized		5,963		—
Balance, December 31	$	123,820	$	—

Note 5 – Bank Premises and Equipment

A summary of the cost and accumulated depreciation of premises and equipment as of December 31 follows (000s omitted):

	2011		2010
Leasehold improvements	$	1,681	$	1,638
Furniture and equipment		379		375
Computer equipment & software		506		420
Total		2,566		2,433
Less: accumulated depreciation		1,171		1,073
Net premises and equipment	$	1,395	$	1,360

Depreciation expense for the years ended December 31, 2011, 2010 and 2009 amounted to $218,478, $180,312 and $303,360 respectively.

Note 6 – Deposits

The following is a summary of the distribution of deposits at December 31 (000s omitted):

	2011		2010
Non-interest bearing deposits	$	19,662	$	14,190
NOW accounts		8,040		7,897
Savings and money market accounts		24,810		24,700
Certificates of deposit <$100,000		11,469		12,153
Certificates of deposit >$100,000		43,697		38,310
Total	$	107,678	$	97,250

At December 31, 2011, the scheduled maturities of time deposits are as follows (000s omitted):

	<$100,000		>$100,000		Total
2012	$	8,411	$	21,776	$	30,187
2013		1,661		14,875		16,536
2014		859		5,316		6,175
2015		78		991		1,069
2016		460		739		1,199
Thereafter		—		—		—
Total	$	11,469	$	43,697	$	55,166

A-15

Birmingham Bloomfield Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 7 – Stock Options and Warrants

The Corporation measures the cost of employee services received in exchange for equity awards, including stock options, based on the grant date fair value of the awards. The cost is recognized as compensation expense over the vesting period of the awards. The Corporation is required to estimate the fair value of all stock options on each grant date, using an appropriate valuation approach such as the Black-Scholes option pricing model.

The Corporation’s 2006 Stock Incentive Plan (the “Plan”) was approved by shareholders on April 23, 2007. Under the Plan, the Corporation is authorized to grant options to key employees for up to 225,000 shares of common stock. The Corporation believes the Plan serves to better align the interests of its employees with those of its shareholders. Option awards are generally granted with an exercise price equal to the market price of the Corporation’s stock at the date of grant. The option awards vest based upon a three year to five year schedule, with the first tranche vesting as of April 23, 2008, and have 10-year contractual terms.

During 2007, the Corporation issued 180,000 stock options. Based on the fair market value at the grant date using the Black-Scholes option pricing model, the compensation cost recognized by the Corporation for the portion of the equity awards earned during 2011 and 2010 was $0 and $3,695 respectively. No income tax benefit was recognized in the income statement for share based compensation (see Note 8). There is no difference between basic and diluted loss per share due to the anti-dilutive effect of outstanding options at December 31, 2010. No additional options were granted during 2011 or 2010.

In 2006, the Corporation issued warrants to organizers to purchase 184,000 shares of common stock at an exercise price of $10.00 per share. The warrants expire in 2016.

The Corporation uses a Black-Scholes formula to estimate the calculated value of its share-based payments. The volatility assumption used in the Black-Scholes formula is based on the volatility of the America’s Community Bankers index as quoted on the NASDAQ exchange. The Corporation calculated the historical volatility using the closing total returns for that index for the 3 years immediately prior to the grant date.

The aggregate intrinsic value of the options represents the total pretax intrinsic value (i.e., the difference between the Corporation’s closing stock price on the last trading day of our fiscal year and the exercise price, times the number of shares) that would have been received by the option holders had all option holders exercised their options on that date. As of December 31, 2011, all outstanding and exercisable options are out of the money (options have an exercise price that exceeds market value), and they are assumed to have no intrinsic value. The intrinsic value of the options changes based on the fair market value of the Corporation’s stock. As of December 31, 2011 and 2010, outstanding options were 82,500. Options available to be exercised at a price of $10 were 72,500 at the end of 2011 versus 62,500 at year end 2010. There were no options exercised for the three years ended December 31, 2011.

A-16

Birmingham Bloomfield Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 8 – Income Taxes

Allocation of income taxes between current and deferred portions is as follows:

		$(2,884,715)			$(2,884,715)		$(2,884,715)
	2011			2010		2009
Current expense	$	—		$	—	$	—
Deferred (benefit) expense		(2,884,715	)		—		—
Total income tax (benefit) expense	$	(2,884,715	)	$	—	$	—

The reasons for the differences between the income tax expense at the federal statutory income tax rate and the recorded income tax expense are summarized as follows:

		$(2,884,715)			$(2,884,715)			$(2,884,715)
	2011			2010			2009
Income tax expense (benefit) at federal statutory rate of 34%	$	356,814		$	146,435		$	(650,393	)
Increases resulting from nondeductible expenses		30,647			13,468			9,112
Other		(6,080	)		—			—
Change in valuation allowance		(3,266,096	)		(159,903	)		641,281
Income tax expense (benefit)	$	(2,884,715	)	$	—		$	—

The components of the net deferred tax assets, included in other assets, are as follows:

	2011		2010
Deferred tax assets:
Allowance for loan losses	$	408,437	$	344,430
Organizational costs		447,734		495,281
Net operating loss carry-forward		1,935,597		2,302,452
Share based compensation		142,800		142,800
Other		60,129		90,852
Total deferred tax asset		2,294,697		3,375,815
Less: Valuation allowance		—		3,266,096
Deferred tax liabilities:
Fixed assets		75,382		86,019
Unrealized gain/loss on securities		49,026		—
Other		34,600		23,700
Total deferred tax liabilities		159,008		109,719
Net deferred tax assets	$	2,835,689	$	—

The Corporation’s deferred tax asset (“DTA”) is included in other assets on the balance sheet. A valuation reserve is required when it is more likely than not that a portion or all of the benefit related to the asset will not be realized. Since inception, the Corporation had provided a valuation reserve for the full amount of the DTA balance due to cumulative losses, but this was reversed in 2011. The Corporation believes there is sufficient evidence that it would recognize the benefits of the DTA based on improved earnings, positive performance trends and future projections demonstrating sustainable profitability. As a result, no valuation reserve is required as of December 31, 2011.

The Corporation has net operating loss carry-forwards of approximately $5,832,000 that are available to reduce future taxable income. The carry-forwards begin to expire in 2027, extending through the year ending December 31, 2030.

A-17

Birmingham Bloomfield Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 9 – Leases and Commitments

The Corporation has entered into a lease agreement for its main office facility. Payments began in February 2005 and the initial term of the lease expires in October 2015. In October 2007, the Corporation exercised its first renewal option on the property which expires in October 2025. The main office lease has one additional ten year renewal option. The Corporation also entered into a lease agreement for its former branch office in Bloomfield Township which provided for lease payments to begin in March 2006 and expire February 2016. The Bloomfield Township branch office lease was terminated effective January 18, 2010 pursuant to an agreement with the leaseholder. The termination agreement called for a one-time payment of $110,000 to the leaseholder to end the lease. In October 2010, the Corporation entered into a one year lease agreement for a lending production office (“LPO”) in Bay City, Michigan. The lease was not renewed and ended in October 2011. In March 2011, a new one year lease was signed for additional office space in the building adjacent to the main office at a rate of $2,800 per month. The lease has two, five year renewal options. The Bank operated two additional independent LPO’s located in Michigan during 2011 on temporary month to month leases. These locations were closed during the year. Rent expense under all lease agreements was $285,000 for the year ended December 31, 2011, $247,000 for the year ended December 31, 2010, and $280,000 for the year ended December 31, 2009.

The following is a schedule of future minimum rental payments under operating leases on a calendar year basis:

2012	$	242,816
2013		239,098
2014		243,910
2015		248,746
2016		253,721
thereafter		2,473,081
Total	$	3,701,372

A-18

Birmingham Bloomfield Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 10 – Restrictions on dividends, loans and advances

Banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Corporation.

The total amount of dividends that may be paid at any date is generally limited to the retained earnings of the Bank. In addition, dividends paid by the Bank would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum standards. Because of the aggregated total of the Bank’s startup losses, the Bank’s retained earnings available for the payment of dividends, without approval from the regulators, was $0 at December 31, 2011. Accordingly, all of the Corporation’s investment in the Bank was restricted at December 31, 2011.

Loans or advances made by the Bank to the Corporation are generally limited to 10 percent of the Bank’s capital stock and surplus. Accordingly, at December 31, 2011, Bank funds available for loans or advances to the Corporation amounted to $1,375,000.

Note 11 – Retirement Plans

The Corporation sponsors a 401(k) plan for substantially all employees. There were no required matching contributions for 2011 or 2010.

Note 12 – Parent Only Financial Statements

The condensed financial information that follows presents the financial condition of Birmingham Bloomfield Bancshares, Inc. (the “Parent”) along with the results of operations and its cash flows. The Parent has recorded its investment in its subsidiaries at cost plus its share of the earnings (losses) of its subsidiaries. The Parent recognizes dividends from its subsidiaries as revenue and earnings of its subsidiaries as other income. The Parent financial information should be read in conjunction with the Corporation’s consolidated financial statements.

The condensed balance sheets as of December 31, 2011 and 2010 are as follows:

	December 31,
	2011		2010
Assets
Cash and cash equivalents	$	1,642,997	$	1,854,322
Investment in subsidiary		13,841,805		9,230,821
Other assets		529,472		—
Total assets	$	16,014,274	$	11,085,143
Liabilities and Shareholders’ Equity
Other liabilities	$	49,732	$	99,618
Shareholders’ equity		15,964,542		10,985,525
Total liabilities and shareholders’ equity	$	16,014,274	$	11,085,143

A-19

Birmingham Bloomfield Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 12 – Parent Only Financial Statements – continued

The condensed statements of operations for the years ended December 31, 2011, 2010 and 2009 are as follows:

	For the Years Ended December 31,
	2011			2010			2009
Dividends from subsidiary	$	—		$	—		$	—
Other income		—			—			—
Total income		—			—			—
Salaries and employee benefits		18,000			15,000			59,567
Professional fees		120,620			184,881			142,075
Other expenses		69,407			19,427			54,879
Total non-interest expense		208,027			219,308			256,521
Income taxes (benefit)		(529,472	)		—			—
Net income (loss) before net income (loss) of subsidiary		321,445			(219,308	)		(256,521	)
Undistributed net income (loss) of subsidiary		3,612,723			650,000			(1,656,401	)
Net income (loss)		3,934,168			430,692			(1,912,922	)
Effective dividend on preferred stock		184,092			192,730			75,262
Net income (loss) applicable to common shareholders	$	3,750,076		$	237,962		$	(1,988,184	)

The condensed statements of cash flows for the years ended December 31, 2011, 2010 and 2009 are as follows:

	For the Years Ended December 31,
	2011			2010			2009
Cash flows from operating activities
Net income (loss)	$	3,934,168		$	430,692		$	(1,912,922	)
Undistributed (income) loss of subsidiary		(3,612,723	)		(650,000	)		1,656,401
Share based payments expense		32,288			3,695			22,906
Net increase in other assets		(529,472	)		—			—
Net increase (decrease) in other liabilities		(49,887	)		52,878			45,240
Net cash used in operating activities		(225,626	)		(162,735	)		(188,375	)
Cash flows from investing activities
Investment in subsidiary		(1,016,000	)		—			(1,489,000	)
Decrease in premises and equipment		—			—			—
Net cash used in investing activities		(1,016,000	)		—			(1,489,000	)
Cash flows from financing activities
Proceeds from sale of senior preferred stock		4,621,000			—			3,379,000
Retirement of senior preferred stock		(3,461,000	)		—			—
Dividends on senior preferred stock		(129,699	)		(176,330	)		(64,055	)
Net cash (used in) provided by financing activities		1,030,301			(176,330	)		3,314,945
Increase (decrease) in cash and cash equivalents		(211,325	)		(339,065	)		1,637,570
Cash and cash equivalents at beginning of period		1,854,322			2,193,387			555,817
Cash and cash equivalents at end of period	$	1,642,997		$	1,854,322		$	2,193,387

A-20

Birmingham Bloomfield Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 13 – Off Balance Sheet Risk

Credit-related Financial Instruments

The Corporation is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.

The Corporation’s exposure to credit loss is represented by the contractual amount of these commitments. The Corporation follows the same credit policies in making commitments as it does for on-balance-sheet instruments.

At December 31, 2011 and 2010, the following financial instruments were outstanding whose contract amounts represent credit risk:

	Contract Amount
	2011		2010
Commitments to grant loans	$	16,212,000	$	13,564,000
Unfunded commitments under lines of credit	$	13,363,000	$	12,914,000
Commercial and standby letters of credit	$	1,003,000	$	803,000

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Corporation, is based on management’s credit evaluation of the customer.

Unfunded commitments under commercial lines of credit, revolving credit lines, and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are collateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Corporation is committed.

Commercial and standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those letters of credit are used primarily to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved is extending loan facilities to customers. The Corporation generally holds collateral supporting those commitments if deemed necessary.

Collateral Requirements- To reduce credit risk related to the use of credit-related financial instruments, the Corporation might deem it necessary to obtain collateral. The amount and nature of the collateral obtained are based on the Corporation’s credit evaluation of the customer. Collateral held varies but may include cash, securities, accounts receivable, inventory, property, plant, and equipment, and real estate.

If the counterparty does not have the right and ability to redeem the collateral or the Corporation is permitted to sell or re-pledge the collateral on short notice, the Corporation records the collateral on its balance sheet at fair value with a corresponding obligation to return it.

Legal Contingencies- Various legal claims also arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Corporation’s financial statements.

A-21

Birmingham Bloomfield Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 14 – Fair Value of Financial Instruments

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Corporation’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. The fair value disclosure herein excludes all non-financial instruments. Therefore, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Corporation.

The following methods and assumptions were used by the Corporation in estimating fair value disclosures for financial instruments:

Cash and Cash Equivalents- The carrying values of cash and cash equivalents approximate fair values.

Securities - Quoted market prices in an active market are used to value securities when such prices are available. Those securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, the fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows using reasonable inputs. Level 2 securities include U.S. Government agency securities, mortgage backed securities, obligations of states and municipalities, and certain corporate securities. Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities, but rather relying on the investment securities’ relationship to other benchmark quoted investment securities. In certain cases where Level 1 or Level 2 inputs are not available, securities would be classified within Level 3 of the hierarchy.

Loans Receivable- For variable rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values of nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Deposit Liabilities- The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Accrued Interest- The carrying value of accrued interest approximates fair value.

Other Financial Instruments- The fair value of other financial instruments, including loan commitments and unfunded letters of credit, based on discounted cash flow analyses, is not material.

A-22

Birmingham Bloomfield Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 14 – Fair Value of Financial Instruments – continued

The carrying values and estimated fair values of financial instruments are as follows (000s omitted):

	2011				2010
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	4,694	$	4,694	$	5,366	$	5,366
Securities available for sale		4,764		4,764		3,360		3,360
Net Portfolio Loans		104,724		104,638		98,931		99,786
Loans held for sale		2,485		2,485		323		323
Accrued interest receivable		450		450		440		440
Financial liabilities:
Deposits		107,678		107,987		97,250		97,688
Secured borrowings		—		—		1,469		1,469
Accrued interest payable		61		61		115		115

Note 15 – Fair Value Accounting

Accounting standards establishes a three-level valuation hierarchy for fair value measurements. The valuation hierarchy prioritizes valuation techniques based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and are the primary method of valuation used by Birmingham Bloomfield Bancshares, Inc. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows.

• Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets which the Corporation can participate.

• Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

• Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement, and include inputs that are available in situations where there is little, if any, market activity for the related asset or liability.

Following is a description of the inputs and valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as general classification of those instruments under the valuation hierarchy.

Available-for-sale Securities

Quoted market prices in an active market are used to value securities when such prices are available. Those securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, the fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows using reasonable inputs. Level 2 securities include U.S. Government agency securities, mortgage backed securities, obligations of states and municipalities, and certain corporate securities. Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities, but rather relying on the investment securities’ relationship to other benchmark quoted investment securities. In certain cases where Level 1 or Level 2 inputs are not available, securities would be classified within Level 3 of the hierarchy.

A-23

Birmingham Bloomfield Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 15 – Fair Value Accounting – continued

The following table presents the fair value measurements of assets recognized in the accompanying consolidated balance sheets measured at fair value on a recurring basis and the level within the valuation hierarchy in which the fair value measurements fall at December 31, 2011 and 2010 (000s omitted):

December 31, 2011	Level 1		Level 2		Level 3		Fair Value
U.S. government agency	$	—	$	2,354	$	—	$	2,354
Municipal securities		—		721		—		721
Mortgage backed securities		—		1,258		—		1,258
Corporate bonds		—		262		—		262
Securities available for sale	$	—	$	4,595	$	—	$	4,595

December 31, 2010	Level 1		Level 2		Level 3		Fair Value
U.S. government agency	$	—	$	1,361	$	—	$	1,361
Municipal securities		—		657		—		657
Mortgage backed securities		—		928		—		928
Corporate bonds		—		254		—		254
Securities available for sale	$	—	$	3,200	$	—	$	3,200

Following is a description of the inputs and valuation methodologies used for instruments measured at fair value on a non-recurring basis and recognized in the accompanying consolidated balance sheets, as well as general classification of those instruments under the valuation hierarchy.

Impaired Loans

Loans for which it is probable the Corporation will not collect all principal and interest due according to the contractual terms are measured for impairment. The fair value of impaired loans is estimated using one of three methods; market value, collateral value, or discounted cash flow. Those impaired loans not requiring an allowance represent loans for which the fair value of collateral exceeds the recorded investment. When the fair value of the collateral is based on an observable market price or current appraised value, the impaired loan is classified within Level 2. When a market value is not available or management applies a discount factor to the appraised value, the Corporation records the impaired loan in Level 3.

The following table presents the fair value measurements of assets recognized in the accompanying consolidated balance sheets measured at fair value on a non-recurring basis and the level within the valuation hierarchy in which the fair value measurements fall at December 31 (000s omitted):

December 31, 2011	Balance		Level 1		Level 2		Level 3		Losses
Impaired Loans	$	1,289	$	—	$	—	$	1,289	$	—

December 31, 2010	Balance		Level 1		Level 2		Level 3		Losses
Impaired Loans	$	2,994	$	—	$	—	$	2,994	$	200

A-24

Birmingham Bloomfield Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 16 – Minimum Regulatory Capital Requirements

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The prompt corrective action regulations provide four classifications, well capitalized, adequately capitalized, undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. The Bank was well-capitalized as of December 31, 2011 and 2010.

The Bank’s actual capital amounts and ratios as of December 31, 2011 and 2010 are presented in the following table (000s omitted):

	Actual					For Capital Adequacy Purposes					To be Well-Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2011
Total risk-based capital
(to risk weighted assets)
Bank of Birmingham	$	13,504		12.0	%	$	9,026		8.0	%	$	11,283		10.0	%
Tier I capital
(to risk weighted assets)
Bank of Birmingham	$	12,091		10.7	%	$	4,513		4.0	%	$	6,770		6.0	%
Tier I capital
(to average assets)
Bank of Birmingham	$	12,091		9.9	%	$	4,866		4.0	%	$	6,083		5.0	%
As of December 31, 2010
Total risk-based capital
(to risk weighted assets)
Bank of Birmingham	$	10,334		10.6	%	$	7,834		8.0	%	$	9,792		10.0	%
Tier I capital
(to risk weighted assets)
Bank of Birmingham	$	9,117		9.3	%	$	3,917		4.0	%	$	5,875		6.0	%
Tier I capital
(to average assets)
Bank of Birmingham	$	9,117		8.1	%	$	4,477		4.0	%	$	5,597		5.0	%

A-25

Birmingham Bloomfield Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 17 – Quarterly Results of Operations (unaudited)

The following table summarizes the Corporation’s quarterly results for the years ended December 31, 2011 and 2010 (000s omitted):

2011	4th Quarter			3rd Quarter		2nd Quarter		1st Quarter
Interest income	$	1,630		$	1,582	$	1,565	$	1,588
Interest expense		280			301		314		329
Net interest income		1,350			1,281		1,251		1,259
Provision for loan losses		75			105		15		39
Non-interest income		309			319		280		325
Non-interest expense		1,484			1,317		1,207		1,083
Income before income taxes		100			177		309		462
Income tax expense (benefit)		(2,885	)		—		—		—
Net income		2,985			177		309		462
Effective dividend on preferred stock		20			68		48		48
Net income (loss) applicable to common shareholders		2,965			109		261		414
Basic and diluted income per share	$	1.64		$	0.06	$	0.15	$	0.23

2010	4th Quarter		3rd Quarter			2nd Quarter		1st Quarter
Interest income	$	1,501	$	1,531		$	1,436	$	1,283
Interest expense		327		337			352		324
					��
Net interest income		1,174		1,194			1,084		959
Provision for loan losses		49		256			177		112
Non-interest income		21		27			42		35
Non-interest expense		977		867			815		853
Income before income taxes		169		98			134		29
Income tax expense (benefit)		—		—			—		—
Net income		169		98			134		29
Effective dividend on preferred stock		48		48			49		47
Net income (loss) applicable to common shareholders		121		50			85		(18	)
Basic and diluted income per share	$	0.07	$	0.03		$	0.04	$	(0.01	)

A-26

Birmingham Bloomfield Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 18 – Shareholders’ Equity

Participation in the TARP Capital Purchase Program

On April 24, 2009, the Corporation entered into a Securities Purchase Agreement with the U.S. Treasury under the Capital Purchase Program. Pursuant to the Securities Purchase Agreement, the Corporation issued and sold to the Treasury (i) 1,635 shares of the Corporation’s Series A Preferred Shares (liquidation preference $1,000 per share, and (ii) the Warrant to purchase 82 shares of the Corporation’s preferred stock (preferred stock B) which was immediately exercised (liquidation preference $1,000 per share). The total proceeds received of $1,635,000 were allocated between the Series A and Series B stock on a relative fair value basis. The discount/premium will be amortized over a five year period.

On December 18, 2009, the Corporation issued 1,744 shares of Series C, no par value ($1,000 liquidation preference per share) fixed rate cumulative perpetual preferred stock (Preferred Stock) to the U.S. Treasury in exchange for $1,744,000 under the Capital Purchase Program (CPP). The same rules and restrictions below apply to all preferred stock issued under the program. All of the Preferred Stock qualifies as Tier 1 capital.

As a result of the CPP transaction, the Corporation is required to take certain actions, for so long as the Treasury holds any securities acquired from the Corporation pursuant to the CPP, to ensure that its executive compensation and benefit plans with respect to Senior Executive. The applicable executive compensation standards generally remain in effect during the CPP Period and apply to the Corporation’s Senior Executive Officers, which includes the Corporation’s Chief Executive Officer, its Chief Financial Officer, and the next three most highly-compensated executive officers.

The Preferred Stock A and C pays cumulative quarterly cash dividends at a rate of 5% per annum on the $1,000 liquidation preference for the first five years and at a rate of 9% per year thereafter. Preferred Stock B pays cumulative quarterly cash dividends at a rate of 9% per annum. In addition, all accrued and unpaid dividends on the Preferred Stock must be declared and the payment set aside for the benefit of the holders of Preferred Stock before any dividend may be declared on our common stock and before any shares of our common stock may be repurchased, subject to certain limited exceptions. Holders of shares of the Preferred Stock have no right to exchange or convert such shares into any other security of Birmingham Bloomfield Bancshares, Inc. and have no right to require the redemption or repurchase of the Preferred Stock. The Preferred Stock is non-voting, other than class voting rights on certain matters that could adversely affect the Preferred Stock. The Preferred Stock may be redeemed at any time with regulatory approval. The Treasury may also transfer the Preferred Stock to a third party at any time. The Corporation has the right to redeem the Preferred Shares at any time after consulting with its primary regulator, in which case the executive compensation standards would no longer apply to the Corporation.

Participation in the Small Business Lending Fund and Redemption of Preferred Shares from the TARP Capital Purchase Program

On July 28, 2011, the Corporation entered into a Securities Purchase Agreement with the Secretary of the Treasury (the “Treasury”), pursuant to which the Corporation issued and sold to the Treasury 4,621 shares of its Senior Non-Cumulative Perpetual Preferred Stock, Series D (“Series D Preferred Stock”), having a liquidation preference of $1,000 per share (the “Liquidation Amount”), for aggregate proceeds of $4,621,000. Proceeds totaling $3,4611,00 from the issuance of the Series D Preferred Stock were used to redeem from the Treasury all of the Series A Preferred Shares, Series B Preferred Shares, and Series C Preferred Shares which were issued to the Treasury in 2009 under the Treasury’s Emergency Economic Stabilization Act of 2008 Capital Purchase Program. As a result of the transaction, the Corporation recorded $46,000 in accelerated accretion on the remaining discount of the Capital Purchase Program Preferred stock during the third quarter of 2011, reducing the amount available to common shareholders.

A-27

Birmingham Bloomfield Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 18 – Shareholders’ Equity – continued

The Series D Preferred Stock is entitled to receive non-cumulative dividends payable quarterly, on each January 1, April 1, July 1 and October 1, beginning October 1, 2011. The dividend rate, which is calculated on the aggregate Liquidation Amount, is based upon the current level of “Qualified Small Business Lending”, or “QSBL” (as defined in the Securities Purchase Agreement) by the Company’s wholly owned subsidiary Bank of Birmingham. The dividend rate for future dividend periods will be set based upon the “Percentage Change in Qualified Lending” (as defined in the Securities Purchase Agreement) between each dividend period and the “Baseline” QSBL level. Such dividend rate may vary from 1% per annum to 5% per annum for the second through tenth dividend periods, from 1% per annum to 7% per annum for the eleventh dividend period through year four and one-half. If the Series D Preferred Stock remains outstanding for more than four and one-half years, the dividend rate will be fixed at 9%. Prior to that time, in general, the dividend rate decreases as the level of the Bank’s QSBL increases. Such dividends are not cumulative, but the Company may only declare and pay dividends on its common stock (or any other equity securities junior to the Series D Preferred Stock) if it has declared and paid dividends for the current dividend period on the Series D Preferred Stock, and will be subject to other restrictions on its ability to repurchase or redeem other securities.

A-28

Birmingham Bloomfield Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

FORWARD LOOKING STATEMENTS

This report contains forward-looking statements throughout that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about the Corporation and the Bank. Words such as anticipates, believes, estimates, expects, forecasts, intends, is likely, plans, projects, variations of such words and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are intended to be covered by the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Actual results and outcomes may materially differ from what may be expressed or forecasted in the forward-looking statements. The Corporation undertakes no obligation to update, amend, or clarify forward looking statements, whether as a result of new information, future events (whether anticipated or unanticipated), or otherwise.

Future factors that could cause actual results to differ materially from the results anticipated or projected include, but are not limited to the following: the credit risks of lending activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses; competitive pressures among depository institutions; interest rate movements and their impact on customer behavior and net interest margin; the impact of re-pricing and competitor’s pricing initiatives on loan and deposit products; the ability to adapt successfully to technological changes to meet customers’ needs and development in the market place; our ability to access cost-effective funding; changes in financial markets; changes in economic conditions in general and particularly as related to the automotive and related industries in the Detroit metropolitan area; new legislation or regulatory changes, including but not limited to changes in federal and/or state tax laws or interpretations thereof by taxing authorities; changes in accounting principles, policies or guidelines; and our future acquisitions of other depository institutions or lines of business.

Background

The Corporation is a Michigan corporation that was incorporated in 2004 to serve as the holding company for a Michigan state bank, Bank of Birmingham (“Bank”). The Bank is a full service commercial bank headquartered in Birmingham, Michigan. The Bank serves businesses and consumers across Oakland and Macomb counties with a full range of lending, deposit and Internet banking services. The net income of the Corporation is derived primarily from net interest income. Net interest income is the difference between interest earned on the Bank’s loan and investment portfolios and the interest paid on deposits and borrowings. The volume, mix and rate of interest-bearing assets and liabilities determine net interest income.

Operations

The Corporation’s (and the Bank’s) main office is located at 33583 Woodward Avenue, Birmingham, MI 48009. The building is a free-standing one story office building of approximately 8,300 square feet. The Bank also operated a branch office at 4145 West Maple Road in Bloomfield Township, MI, which was unprofitable and closed on January 18, 2010. The main office lease commenced in October 2005 and the Bank exercised its first renewal option resulting in the lease being extended until October 2025. The main office lease has an additional ten year renewal option. The office lease related to the closed Bloomfield Township branch commenced in March 2006 and was terminated effective January 18, 2010 by an agreement with the leaseholder executed in October of 2009. See Note 9 of the Notes to Consolidated Financial Statements regarding additional lease information.

The Bank will continue to focus on the lending, deposit and general banking needs in the community it serves. The Bank will investigate additional product and service offerings and will consider offering those that will be of benefit to our customers and the Bank.

Economic Trends

Economic activity has experienced modest growth in 2011, but conditions remain tenuous given the pace and scope of improvement. Gross Domestic Product reported a full year of positive growth as a result of an increase in personal consumption and business investment from commercial enterprise however the rate of growth was less than reported during 2010. The national unemployment rate has declined from its peak, but remains elevated and presents an impediment to a robust recovery. Residential real estate values continue to deteriorate but foreclosure activity has slowed. Manufacturing conditions have improved with an increase in net exports and production levels. Inflation has been limited and credit conditions are beginning to improve.

A-29

Birmingham Bloomfield Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

The local economy in our core market continues to exhibit weakness, but core elements are beginning to improve. Manufacturing data and production activity has expanded and vehicles sales have increased for three consecutive quarters. The unemployment rate has gradually declined during the past two years and consumer spending has increased. However, residential real estate conditions remain weak and commercial vacancy rates continue to be elevated. The combination of these factors will continue to impact the growth of the economy and present challenges to the recovery of the general business environment and banking industry.

Market Developments

Dodd-Frank Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) was signed into law by President Obama on July 21, 2010. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States, establishes the new federal Bureau of Consumer Financial Protection (“CFPB”), and will require the CFPB and other federal agencies to implement many new and significant rules and regulations. The act is categorized into 16 titles and requires regulators to create rules, conduct studies, and issue periodic reports. The rulemaking phase began shortly after enactment. Implementation is occurring in stages, and widespread and complex changes are expected. The Dodd-Frank Act contains more than 300 provisions that expressly indicate that rulemaking is either required or permitted. At this time, it is difficult to predict the extent to which the Dodd-Frank Act or the resulting rules and regulations will impact the Corporation’s business. Compliance with these new laws and regulations will likely result in additional costs, which could be significant and could adversely impact the Corporation’s results of operations, financial condition or liquidity.

Deposit Insurance

In 2011, the FDIC changed the assessment base for FDIC insurance assessments from adjusted domestic deposits to a bank’s average consolidated total assets minus average tangible equity, as required by the Dodd-Frank Act. The new measurement defines tangible equity as Tier 1 capital. Since the new base is larger than the current base, the FDIC lowered assessment rates to between 2.5 and 9 basis points on the broader base for banks in the lowest risk category, and 30 to 45 basis points for banks in the highest risk category. Initial assessment rates were determined by combining supervisory ratings with financial ratios. Under the new rule, the Bank pays less in FDIC assessments than under the prior methodology, at similar risk ratings and balance sheet size. Those reductions were realized in 2011 beginning with the assessment for the second quarter of 2011 and payable at the end of September 2011. As a result of provisions of the Dodd-Frank Act, all funds in a “noninterest-bearing transaction account” are insured in full by the FDIC from December 31, 2010, through December 31, 2012. This temporary unlimited coverage is in addition to, and separate from, the general FDIC deposit insurance coverage of up to $250,000 available to depositors. The increase in maximum deposit insurance coverage to $250,000 was made permanent under the Dodd-Frank Act.

Regulation

The growth and earnings performance of the Bank and the Holding Company may be affected by a myriad of Federal and state laws and various governmental regulatory authorities including, but not limited to, the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Federal Deposit Insurance Corporation (the “FDIC”), the Michigan Office of Financial and Insurance Regulation (the “OFIR”), the Internal Revenue Service and state taxing authorities as well as by management decisions and general economic conditions. These laws and agencies regulate the scope of business, investments, reserves against deposits, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. The effect of such statutes, regulations and policies can be significant and cannot be predicted with a high degree of certainty.

Executive Summary

The Corporation reported net income available to common shareholders after preferred dividends of $3,750,000 or $2.08 per share. The results were positively impacted by the reversal of the valuation reserve on the Corporations Deferred Tax Asset representing $2,885,000. Excluding the impact of the one-time tax adjustment, net income after preferred dividends was $865,000 or $0.48 per common share, an increase of $627,000 from 2010. The improved performance relative to the prior fiscal year was a result of an increase in net interest income, additional revenue from non-interest income sources and a reduction in provision expense related to the allowance for loan loss. The pre-tax, pre- provision Return on Average Assets for 2011 was 1.08% compared to 0.96% in 2011.

A-30

Birmingham Bloomfield Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

Net interest income increased 16.6% in 2011 to $5,142,000 as a result of a reduction in funding costs and cumulative growth in total average earning assets of 9.0%. Net interest margin for 2011 was 4.51% compared to 4.22% in 2010, an increase of 6.8%. The improvement is due to a reduction in funding costs and a more favorable asset mix. Total funding costs declined $117,000 compared to 2010 despite an increase in average interest bearing deposits of 8.6%. This was achieved by restructuring the maturity profile of the deposit portfolio and reducing the overall cost of funds. Total cost of funds were reduced from 1.61% in 2010 to 1.35% in 2011.

The Corporation provided $234,000 in provision expense for 2011, a reduction of $360,000 from 2010. The decrease is directly related to the improved quality of the portfolio and lower charge off volumes relative to the prior year. As of December 31, 2011, the Corporation had no non-accrual loans.

The Corporation was able to generate significant revenue from non-interest income sources in 2011. Total non-interest income for the year to date period ending December 31, 2011 was $1,233,000 a significant increase relative to the $126,000 reported for the same period last year. The increase was the result of revenue from SBA loan sales and mortgage banking activity. The Corporation continues to participate in the Small Business Administrative loan program to generate additional revenue. In 2011, the Company earned $702,000 on sales of SBA loans. Income from the sale of residential mortgages in the secondary market totaled $434,000 in 2011 compared to and $12,000 in 2010.

Total non-interest expense in 2011 was $5,091,000 compared to $3,513,000 for the prior year, an increase of $1,579,000. The significant growth in expenses were a result of costs associated with developing the residential mortgage operation, adding additional personnel to accommodate future growth, expansion of space at the main office and increased business marketing efforts to improve franchise recognition. The additional expenses were an investment in diversifying the revenue production of the organization and developing a strong core infrastructure to position the Corporation for growth opportunities.

As of December 31, 2011, total assets were $124,397,000 million, an increase of 12.7% from 2010. The net growth in total assets was the result of an increase in loan and deposit balances. Total portfolio loans reached $106,298,000 in 2011, an increase of $5,919,000 from the prior year. The growth was primarily concentrated in commercial real estate and mortgage related loans. The new loan activity was achieved by focusing on organic opportunities in our core markets, increasing business development efforts and by expanding the product profile of the Corporation. The allowance for loan losses marginally increased to 1.48% of total portfolio loans in 2011 from 1.44% in 2010 and the Corporation experienced a decrease in net charge-off activity in 2011 as the overall quality of the portfolio improved. The Corporation owned one Other Real Estate Owned “ORE” property as of December 31, 2011, totaling $298,000.

The residential mortgage operation generates loans to be sold in the secondary market and originated $15,884,000 in total loans during 2011. At December 31, 2011, the Corporation had a total of $2,485,500 in residential mortgage loans held for sale.

Other assets totaled $6,336,000 as of December 31, 2011 compared to $995,000 at December 31, 2010. The increase is due to the recognition of the Corporation’s Deferred Tax Asset and purchase of corporate life insurance policies. Previously, the Corporation was required to provide a reserve against the balance of the deferred tax asset, but as a result of the improved performance of the organization and future earnings potential, the Corporation was able to reverse the valuation reserve in 2011. This amount totaled $2,885,000. The Corporation also purchased $2,100,000 in life insurance policies on key executives in 2011 and the value of the contracts are reported as other assets. The Corporation is the owner and beneficiary of the policies. The remaining balance of the category includes accrued interest, prepaid assets and the value of the ORE property owned by the bank.

Total deposits increased $10,427,000 in 2011 to $107,678,000. The composition of the deposit portfolio continues to evolve as the Corporation attempts to diversify the mix and reduce overall funding costs. The strategy was successful in 2011 as the level of deposits increased 10.7%, but total interest expense declined. The largest aggregate dollar increases were in non-interest bearing accounts and CD balances. The increase in deposit balances was used to fund loan growth, increase investment balances and provide additional liquidity.

A-31

Birmingham Bloomfield Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

Total shareholder’s equity increased $4,979,000, due to the earnings of the Corporation and participation in the Small Business Lending Fund. The Bank remains “well capitalized” based on regulatory capital guidelines and maintains an 9.94% Tier 1 capital ratio. Management monitors the capital levels of the Bank to provide for current and future business opportunities and to meet regulatory guidelines for “well capitalized” institutions.

Selected Financial Information

The following sets forth the selected consolidated financial data for the years ended December 31, 2007 - 2011.

(Dollars in thousands except per share data)	2011			2010			2009			2008			2007
Interest income	$	6,365		$	5,752		$	4,043		$	3,327		$	2,463
Interest expense		1,223			1,340			1,346			1,387			1,090
Net interest income		5,142			4,412			2,697			1,940			1,373
Provision for loan losses		234			594			480			384			465
Non-interest income		1,233			126			85			99			132
Non-interest expense		5,092			3,513			4,215			3,167			3,723
Income (loss) before income taxes		1,049			431			(1,913	)		(1,512	)		(2,683	)
Income tax expense		(2,885	)		—			—			—			—
Net income (loss)		3,934			431			(1,913	)		(1,512	)		(2,683	)
Effective dividend on preferred stock		184			193			75			—			—
Net income (loss) - common shareholders	$	3,750		$	238		$	(1,988	)	$	(1,512	)	$	(2,683	)
Basic and diluted income per share	$	2.08		$	0.13		$	(1.10	)	$	(0.84	)	$	(1.49	)
Total Assets		124,397			110,335			92,637			67,299			47,260
Securities, available for sale		4,595			3,200			3,673			3,880			2,596
Total gross loans		106,298			100,379			79,656			56,841			37,107
Allowance for loan losses		1,574			1,448			1,174			710			560
Total deposits		107,678			97,250			81,465			57,748			36,262
Secured borrowings		—			1,469			—			—			—
Shareholders’ equity		15,965			10,986			10,728			9,312			10,760
Net interest margin		4.51	%		4.22	%		3.49	%		3.31	%		3.63	%
Return on average assets (1)		3.30	%		0.40	%		-2.38	%		-2.47	%		-6.43	%
Return on average assets (2)		1.08	%		0.96	%		-1.78	%		-1.84	%		-5.31	%
Return on average common equity (1)		47.59	%		5.80	%		-23.32	%		-15.19	%		-21.39	%
Return on average common equity (2)		15.52	%		13.80	%		-17.47	%		-11.33	%		-17.68	%
Equity / Assets		12.8	%		10.0	%		11.6	%		13.8	%		22.8	%
Total loans / Total deposits		98.7	%		103.2	%		97.8	%		98.4	%		102.3	%
Book value per common share (3)	$	6.26		$	4.21		$	4.08		$	5.17		$	5.98
Non-accrual loans / Total loans		0.00	%		0.30	%		0.00	%		0.00	%		0.00	%
Allowance for loan losses / Total loans		1.48	%		1.44	%		1.47	%		1.25	%		1.51	%

(1) Amount is calculated on net income before preferred dividends

(2) Amount is calculated on pre-tax, pre-provision earnings before preferred dividends

(3) Book value per common share is computed by subtracting the amount of preferred stock from total stockholders’ equity divided by the average number of common shares outstanding.

Cash and Cash Equivalents

Cash and cash equivalents decreased $673,000, or 12.5%, to $4,694,000 at December 31, 2011. The reduction was the result of deploying excess liquidity into earning assets to improve margin and increase revenue.

A-32

Birmingham Bloomfield Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

Investments

Total securities available-for-sale increased $1,395,000 to $4,595,000 at December 31, 2011, compared to $3,200,000 at December 31, 2010. The portfolio experienced a significant volume of activity during 2011 as investments with a book value of $1,200,000 were redeemed and a total of $2,775,000 of new securities were purchased. The Corporation had no held-to-maturity securities as of December 31, 2011 and 2010.

FHLB Stock

The Bank is a member of the Federal Home Loan Bank of Indianapolis (“FHLBI”) and holds a $170,000 investment in stock of the FHLBI. The investment is carried at par value, as there is not an active market for the FHLBI stock. The Bank reviews the credit quality of the FHLBI Stock for impairment and determined no impairment was necessary as of December 31, 2011.

The following table presents the maturity schedule of all securities (based on estimated fair value) held and weighted average yield of those securities, as of December 31, 2011 (000s omitted):

	0 – 1 Year			1 – 5 Years			5 – 10 Years			Over 10 Years			Total
U.S. Treasury & Government Agency	$	1,998		$	356		$	—		$	—		$	2,354
Weighted average yield		0.80	%		2.09	%		0.00	%		0.00	%		0.99	%
Municipal securities	$	—		$	721		$	—		$	—		$	721
Weighted average yield		0.00	%		2.30	%		0.00	%		0.00	%		2.30	%
Mortgage Backed securities	$	—		$	1,258		$	—		$	—		$	1,258
Weighted average yield		0.00	%		4.47	%		0.00	%		0.00	%		4.47	%
Corporate bonds	$	—		$	262		$	—		$	—		$	262
Weighted average yield		0.00	%		3.47	%		0.00	%		0.00	%		3.47	%
FHLB Stock	$	—		$	—		$	—		$	170		$	170
Weighted average yield		0.00	%		0.00	%		0.00	%		2.63	%		2.63	%

Maturity information does not incorporate any call provisions that the various securities may contain. The Federal Home Loan Bank stock is restricted for sale back to the Federal Home Loan Bank. Its carrying value is equal to its estimated fair value above. An analysis of the amortized cost and estimated fair market value of the investment portfolio is contained in Note 2 to the Corporation’s Consolidated Financial Statements.

Loans, Credit Quality and Allowance for Loan Losses

The following table summarizes the mix of the Corporation’s portfolio loans at December 31, 2011 and 2010 (000s omitted):

	2011			2010
Real estate mortgage	$	82,711		$	78,700
Commercial and industrial		22,512			20,776
Consumer installment		1,141			964
Deferred loan fees and costs		(66	)		(61	)
Total portfolio loans	$	106,298		$	100,379

Total portfolio loans increased $5,919,000 or 5.9% to $106,298,000 at December 31, 2011. The growth was the direct result of targeted marketing efforts, expanded lending options and new opportunities in our core market.

The categories experiencing the largest growth were real estate mortgage and commercial and industrial loans, increasing $4,011,000 and $1,736,000, respectively. Real estate loans are comprised of various types of credits, including commercial, construction, land development, multifamily, home equity lines of credit and residential mortgage loans. Within this category, multifamily and commercial real estate reported the largest dollar increases. Multifamily loans increased $2,153,000 in 2011 and Commercial real estate increased $1,397,000. Commercial and

A-33

Birmingham Bloomfield Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

industrial loans represent term loans to businesses based on the borrower’s capacity to service the debt with various types of underlying non real estate collateral. The growth in this loan type was an intentional effort by the Bank to diversify the composition of the portfolio.

The Bank operates a residential mortgage division. The function of the operation is the origination of single family residential mortgage loans to be sold in the secondary market and high quality loans that are not eligible to be sold on the secondary market would be retained in the portfolio. Mortgage loans held for sale totaled $2,485,000 at December 31, 2011. The volume of activity is generally dependent on the local real estate market and current rate environment. Loans closed are generally held for less than 30 days and are committed for sale prior to funding.

The Bank originates and sells the guaranteed portion of SBA loans in the secondary market. The product mitigates the exposure to the Bank, reduces loan concentrations and provides an additional non-interest revenue source. The Bank sold $6,160,000 in SBA loans during 2011.

The following table presents the remaining maturity of total portfolio loan principal outstanding for the categories shown at December 31, 2011, based on scheduled principal repayments, as well as categorized as fixed or variable rate loans (000s omitted):

	0 – 1 Year		1 – 5 Years		Over 5 Years		Total		Fixed		Variable
Real estate mortgage	$	7,745	$	48,817	$	23,608	$	80,170	$	72,170	$	8,000
Construction		2,541		—		—		2,541		2,541		—
Commercial and industrial		11,195		9,299		2,018		22,512		21,452		1,060
Consumer installment		491		650		—		1,141		1,141		—
Total loans	$	21,972	$	58,766	$	25,626	$	106,364	$	97,304	$	9,060

The majority of loans originated by the Bank have a maturity which will occur within five years. Closed-end commercial loans, though they may mature within five years, typically have principal amortization periods that exceed five years. Principal balances on commercial lines of credit are typically due in full at maturity (generally one year).

Management evaluates the condition of the loan portfolio on a quarterly basis or more frequently when warranted, to determine the adequacy of the allowance for loans losses. The allowance for loan losses is maintained at a level believed to be adequate to cover losses on individually evaluated loans that are determined to be impaired and on groups of loans with similar risk characteristics that are collectively evaluated for impairment. Estimated credits losses represent the current amount of the loan portfolio that is probable the institution will be unable to collect given the facts and circumstances as of the evaluation date. Management’s evaluation of the allowance is based on consideration of actual loss experience, the present and prospective financial condition of borrowers, adequacy of collateral, industry concentrations within the portfolio, various environmental factors and general economic conditions. Loans individually evaluated for impairment are measured using one of the three standard methods and provided a specific allowance. Management believes that the present allowance is adequate given the size, complexity and risk profile of the current portfolio.

The allowance for loan losses was $1,574,000, or 1.48% of total portfolio loans at December 31, 2011 compared to $1,448,000 or 1.44% at December 31, 2010. The total dollar amount of allowance for loan losses increased as the Bank was successful in growing the loan portfolio.

Although management believes that the allowance for credit losses is adequate to absorb losses as they arise, there can be no assurance that the Bank will not sustain losses in any given period that could be substantial in relation to the size of the allowance for credit losses. It must be understood that inherent risks and uncertainties related to the operation of a financial institution require management to depend on estimates, appraisals and evaluations of loans to prepare the Corporation’s financial statements. Changes in economic conditions and the financial prospects of borrowers may result in changes to the estimates, appraisals and evaluations used. In addition, if circumstances and losses differ substantially from management’s assumptions and estimates, the allowance for loan losses may not be sufficient to absorb all future losses and net income could be adversely impacted.

A-34

Birmingham Bloomfield Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

Off-Balance Sheet Items

The following is a summary of outstanding commitments by the Bank to grant loans, unfunded commitments under lines of credit and letters of credit at December 31, 2011 and 2010 (000s omitted):

	2011		2010
Commitments to extend credit	$	16,212	$	13,564
Unfunded commitments under lines of credit		13,363		12,914
Commercial standby letters of credit		1,003		803
Total commitments	$	30,578	$	27,281

Outstanding commitments to grant loans, lines of credit and letters of credit increased $3,297,000, or 12.1% to $30,578,000 at December 31, 2011 from $27,281,000 at December 31, 2010. The increase in commitments to extend credit and unfunded commitments under lines of credit is primarily due to funding of new loan commitments made during 2011. Management does not expect that all commitments will result in funded loans.

Deposits and Short-term Financing

Total deposits increased $10,427,000 to $107,678,000 at December 31, 2011. The categories experiencing the largest increase were non-interest bearing demand, savings accounts and CDs account greater than $100,000. Non-interest bearing demand account balances increased $5,472,000 during the year and consist primarily of commercial DDA customers. The increase was a result of focused business development efforts and improving the acquisition of deposit relationships associated with current loan customers. Savings account balances increased $1,667,000 during 2011 as customers were willing to sacrifice yield to maintain balances in more liquid accounts. Time deposits greater than $100,000 increased $5,387,000 during the year and represents the largest single source of funding for the Bank. The increase is attributable to special rate promotions and participation in an on-line marketing service which facilitates deposit acquisition in the wholesale CD market. The Bank does not hold any brokered deposits. Money market accounts experienced a decline as a result of internal transfers. Existing customers reallocated balances to other accounts to satisfy liquidity demands. This activity also enhanced the growth in other deposit categories.

	As of December 31, 2011					As of December 31, 2010
	Balance		Percentage			Balance		Percentage
Non-interest bearing demand	$	19,662		18.26	%	$	14,190		14.59	%
NOW accounts		8,040		7.47	%		7,897		8.12	%
Money market		6,622		6.15	%		8,179		8.41	%
Savings		18,188		16.89	%		16,521		16.99	%
Time deposits < $100,000		11,469		10.65	%		12,153		12.50	%
Time deposits >$100,000		43,697		40.58	%		38,310		39.39	%
Total deposits	$	107,678		100.00	%	$	97,250		100.00	%

At December 31, 2010, the Bank has $1,469,000 in secured borrowings outstanding. The balance in this category represents the secured liability associated with the sale of two SBA loans in fourth quarter of 2010. Based on previous accounting guidelines and sale structure of the transaction, the Bank was required to recognize a secured liability on the sale of the guaranteed portion of SBA loans until the redemption period has expired. The redemption period term was 90 days. As noted in Note 1- Summary of Significant accounting principles, on January 28, 2011, the Small Business Administration (“SBA”) released a notice removing the 90-day warranty, or “recourse provision,” on the guaranteed portion of SBA 7(a) loans sold at a premium in the secondary market. This change allowed the Corporation to recognize income from SBA loan sales immediately upon settlement rather than waiting for the expiration of the recourse period. The Bank did not have any outstanding secured borrowings at December 31, 2011.

The Bank did not utilize the FRB of Chicago discount window during 2011. In 2011, the Bank began to utilize its FHLB line of credit for temporary liquidity needs. At December 31, 2011, the Bank had no outstanding borrowings at the FHLB.

A-35

Birmingham Bloomfield Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

SHAREHOLDERS’ EQUITY

Total shareholders’ equity was $15,965,000 at December 31, 2011, an increase of $4,979,000 from December 31, 2010. The increase is a combination of the net income after preferred dividends and additional capital from participation in the Small Business Loan Fund “SBLF” program. The Corporation redeemed all of the preferred shares previously issued under the Capital Purchase Program with total proceeds of $4,621,000 from the SBLF program. The net impact was approximately $1,160,000 in new capital. The change in Common Stock of $32,288 represents the value of stock issued to Directors in 2011 for participation on the Board. Accumulated other comprehensive income includes net unrealizable gains on the Bank’s available for sale investment securities as described in Note 2. The Corporations subsidiary Bank remains classified as “well capitalized” based on regulatory capital guidelines, see Note 15 for detail.

RESULTS OF OPERATIONS

Net Income

The Corporation reported net income of $3,750,000 or $2.08 per common share in 2011 compared to $238,000 or $0.13 per common share for 2010. The results include the impact of reversing the deferred tax valuation reserve of $2,885,000. Net income in 2011 before the tax adjustment was $865,000 relative to $238,000 in 2010, an increase of $627,000. The record performance is a result of an increase in net interest margin, additional non-interest income and a reduction in provision for loan losses, despite an increase in operating expense. The pre-tax, pre-provision Return on Average Assets and Return on Common Average Equity was 1.08% and 15.52%, respectively.

Net Interest Income

Net interest income increased $730,000 or 16.6% to $5,142,000 for the period ended December 31, 2011. Interest income during this period increased 10.7% while interest expense declined 8.7%. The Corporation was able to generate new loan volume to increase interest income and reduce funding costs by replacing matured term deposits with lower cost alternatives and improved pricing on transactional accounts to be more competitive with the local market.

Net interest income for the period ended December 31, 2010 totaled $4,412,000, an increase of 63.6% compared to the prior year. The increase was a result of earning assets growth, loan yield improvement and a reduction in total funding costs. The earning asset growth was concentrated in loan volume, providing the largest benefit to interest income. The loan growth was due to market opportunities resulting from less competition and focused business development efforts. Total average interest bearing deposit accounts increased $20,640,000 in 2010 but total interest expenses declined $6,000. The lower cost of funds was achieved by a change in pricing strategy to be more competitive in the local market and the decision by the Federal Reserve to maintain rates at historic lows.

Net interest margin was 4.51% for the year ended December 31, 2011 compared to 4.22% for the same period of 2010. Margin improved in 2011 as the Corporation was successful in reducing the funding cost of the balance sheet. Earning asset yields remained relatively flat during 2011 as management restructured the mix of the balance sheet to mitigate the reduction in loan yields. Total cost of funds was 1.35% for 2011 compared to 1.61% for the same period in 2010. The reduction in funding costs was the result of the historically low interest rate environment, pricing strategy and opportunity to replace time deposit maturities at a lower aggregate cost.

The Corporation’s net interest margin increased 81 basis points to 4.32% for the year ended December 31, 2010 compared to 3.51% for the same period in 2009, while spread increased 89 basis points over the same period. The increase in both spread and net interest margin was attributable to a decrease in the cost of funds and improvement in loan yields. The yield on loans increased to 6.33% for the year ended December 31, 2010 and total funding costs decreased to 1.61% for the same period. The cost of funds decreased due to a reduction in the rate on Time Deposits. This was achieved by participating in an online marketplace to generate deposits at attractive rates.

A-36

Birmingham Bloomfield Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

The following table presents the Corporation’s consolidated average balances of interest-earning assets, interest-bearing liabilities, and the amount of interest income or interest expense attributable to each category, the average yield or rate for each category, and the net interest margin for the years ended December 31, 2011, and 2010 (000s omitted). Average loans are presented net of unearned income and the allowance for loan and lease losses. Interest on loans includes loan fees.

	2011							2010
	Average Balance		Interest		Yield/ Rate			Average Balance		Interest		Yield/ Rate
Interest-earning assets:
Interest-bearing balances with other financial institutions	$	9,098	$	20		0.22	%	$	9,537	$	29		0.31	%
Federal funds sold		10		—		0.13	%		1,197		2		0.11	%
Securities available-for-sale		3,546		101		2.98	%		3,939		133		3.38	%
Loans receivable		101,429		6,244		6.08	%		89,969		5,588		6.21	%
Total interest-earning assets		114,083		6,365		5.52	%		104,641		5,572		5.50	%
Non-interest earning assets:
Cash and due from banks		4,054							634
All other assets		1,212							1,258
Total assets	$	119,349						$	106,532
Interest-bearing liabilities:
NOW accounts	$	7,949	$	28		0.36	%	$	7,667	$	35		0.46	%
Money markets		9,419		45		0.48	%		9,441		62		0.65	%
Savings deposits		18,158		115		0.63	%		15,612		157		1.01	%
Time deposits		54,658		1,020		1.87	%		50,659		1,084		2.14	%
Total interest-bearing deposits		90,184		1,208		1.34	%		83,379		1,338		1.60	%
Short term borrowings		392		15		3.75	%		40		2		6.00	%
Total interest-bearing liabilities	$	90,576	$	1,223		1.35	%	$	83,419		1,340		1.61	%
Non-interest bearing demand deposits		15,979							12,016
Other liabilities		599							274
Total liabilities		107,153							95,709
Shareholders’ equity		12,196							10,823
Total liabilities and shareholders’ equity	$	119,349						$	106,532
Net interest income			$	5,142						$	4,412
Net spread						4.17	%						3.89	%
Net interest margin(1)						4.51	%						4.22	%

⁽¹⁾  Net interest earnings divided by average interest-earning assets on a fully tax equivalent basis.

A-37

Birmingham Bloomfield Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Corporation’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (ii) changes attributable to changes in rate and (iii) the net change (the sum of the prior columns). The changes attributable to the combined impact of volume and rate have been allocated on a proportional basis between changes in rate and volume (000s omitted):

	2011 compared to 2010									2010 compared to 2009
	Net			Increase/(decrease) due to						Net			Increase/(decrease) due to
	Change			Volume			Rate			Change			Volume			Rate
Interest-earning assets:
Interest-bearing balances with other financial institutions	$	(9	)	$	(1	)	$	(8	)	$	2		$	14		$	(12	)
Federal funds sold		(1	)		(1	)		—			(3	)		(2	)		(1	)
Securities available-for-sale		(32	)		(15	)		(17	)		(19	)		8			(27	)
Loans receivable		655			763			(108	)		1,729			1,544			185
Total interest income	$	613		$	746		$	(133	)	$	1,709		$	1,564		$	145
Interest-bearing liabilities:
NOW Accounts	$	(7	)	$	1		$	(8	)	$	(29	)	$	(2	)	$	(27	)
Money markets		(16	)		—			(16	)		(52	)		(6	)		(46	)
Savings deposits		(42	)		23			(65	)		18			84			(66	)
Time deposits		(64	)		81			(145	)		55			348			(293	)
Total interest-bearing deposits		(129	)		105			(234	)		(8	)		424			(432	)
Short term borrowings		12			14			(2	)		2			2			—
Total interest expense	$	(117	)	$	119		$	(236	)	$	6		$	426		$	(432	)
Net change in net interest income	$	730		$	627		$	103		$	1,715		$	1,138		$	577

Provision for Loan Losses

The provision for loan losses was $234,000, $594,000 and $480,000 for the years ended December 31, 2011, 2010 and 2009, respectively. See “Loans, Credit Quality and Allowance for Loan Losses”and Note 3 in the consolidated financials for additional information.

Non-interest Income

Non-interest income is comprised of service charges, mortgage banking related income, SBA loan sales and other ancillary fees for banking services. Total revenue for the year ended December 31, 2011 was $1,233,000 compared to $126,000 for the same period in 2010. The significant increase is attributable to new revenue from SBA loan sales and increased activity from the Mortgage division. The Corporation engaged in originating, selling and servicing the guaranteed portion of SBA 7(a) loans to investors during 2011 and recognized $702,000 in gain on sale and servicing income. Mortgage banking income represents the premium received on selling qualified residential loans in the secondary market. This generated $434,000 in revenue during 2011 compared to $12,000 in 2010. The increase production is a result of the higher volumes due to the low interest rate environment and additional resources dedicated to the activity by the Corporation. Service charges on deposit products experienced modest growth in 2011 increasing 6.1% to $55,000 and other income primarily ATM fees earned on non-customers declined to $41,000.

Non-interest income increased 47.3% to $126,000 for the year ended December 31, 2010 compared to $85,000 for the same period in 2009. The growth in non-interest income was the result of an increase in service charges on deposit account, gain on sale of mortgage loans and other income activity. Service charges increased $10,000 in 2010 relative to 2009 as the volume of deposit accounts increased generating additional revenue. Mortgage banking activities generated $12,000 in 2010 as the Corporation began to increase emphasis on those activities. Other non-interest income increased by $19,000 during 2010 as the Corporation recognized gains on the disposal of select assets from the Bloomfield branch closure.

A-38

Birmingham Bloomfield Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

The following table summarizes changes in the Corporation’s non-interest income by category for the twelve month period ended December 31, 2011 and 2010:

					Change
Non-interest income	2011		2010		Amount			Percentage
Service charge income	$	55,443	$	52,266	$	3,177			6.1	%
Mortgage banking activities		434,338		12,002		422,336			3518.9	%
SBA loan sales		701,588		—		701,588			—
Other income		41,399		61,280		(19,881	)		(32.4	%)
Total non-interest income	$	1,232,768	$	125,548	$	1,107,220			881.9	%

Non-interest Expense

Total non-interest expense for the year ended December 31, 2011 was $5,091,000, an increase of $1,579,000 from the same period in 2010. The increase is the result of adding new personnel to support anticipated growth, expenses associated with implementing new business products, increased facility costs and additional marketing efforts. The largest component of the organizations cost structure is salaries and benefits. This category increased $1,113,000 in 2011 relative to the prior year. The additional costs are the result of hiring new personnel to support the residential mortgage operation and drive organic growth. Total occupancy and equipment expense increased $77,000 in 2011 compared to 2010. The increase is associated with the additional lending production offices utilized in 2011 and expansion of office space at the main branch location. The Corporation dedicated additional resources to generate market awareness, improve franchise visibility and supporting local community events, this activity is reflected in the increased advertising costs. Total advertising expenses increased $76,000 in 2011 to $191,000. Professional fees increased $94,000 in 2011 relative to the prior period. The additional expenses are related to engaging professionals and consultants to assist with achieving strategic objectives and implementing core initiatives. Loan origination expenses are a variable cost based on loan volume and increased $146,000 in 2011 due to additional activity from the mortgage division. Other expenses include supplies, training, communication, insurance and other miscellaneous costs. The increase in this category is related to the additional burden of the new personnel and temporary locations.

Non-interest expense for the year ended December 31, 2010 decreased $702,000 to $3,513,000, a reduction of 16.7%. Excluding the one-time branch closure costs of $609,000, the net reduction in non-interest expense for the year ended December 31, 2010 was $93,000. Salaries and Benefits expense increased $70,000 as a result of increased staffing levels to accommodate asset growth and the addition personnel for the residential mortgage operation. Occupancy and equipment expense decreased $209,000 in 2010 compared to 2009 as costs associated with maintaining the Bloomfield branch location were eliminated. Advertising expense increased 86% during 2010 as the Corporation implemented various marketing campaigns to generate new business growth. In 2010, professional fees increased $18,000 compared to 2009, as the Corporation experienced an increase in audit related expenses and other consulting charges related to the creation of the mortgage operation and implementation of other strategic corporate initiatives.

The following table summarizes changes in the Corporation’s non-interest expense by category for the twelve month period ended December 31, 2011 and 2010:

					Change
Non-interest expense	2011		2010		Amount			Percentage
Salaries and employee benefits	$	2,755,204	$	1,641,944	$	1,113,260			67.8	%
Occupancy expense		518,634		442,456		76,178			17.2	%
Equipment expense		180,674		140,693		39,981			28.4	%
Advertising		191,076		114,612		76,464			66.7	%
Data processing		223,179		190,530		32,649			17.1	%
Professional fees		473,438		379,256		94,182			24.8	%
Loan origination expenses		224,324		78,018		146,306			187.5	%
Regulatory assessments		127,941		217,436		(89,495	)		(41.2	%)
Other expense		396,805		307,811		88,924			28.9	%
Total non-interest expense	$	5,091,275	$	3,512,756	$	1,578,519			44.9	%

A-39

Birmingham Bloomfield Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

Income Taxes

In 2011 the Corporation recognized a tax benefit of $2,885,000 as a result of eliminating the Deferred Tax Asset valuation reserve. The amount was recognized as an income tax benefit in the income statement for the period ended December 31, 2011. A valuation reserve is required when it is considered more likely than not that a portion or all of the asset will not be realized. Based on all available evidence, including the recent performance of the Corporation and internal financial projections, it was determined to be more reasonable than not it would be recognized. The deferred tax asset includes a net operating loss carry-forward available to reduce future tax payments of $1,983,000 as of December 31, 2011. No income tax expense was recorded in 2010 or 2009 due to the valuation reserve and net operating loss carry-forward position of the Corporation. See Note 7 for additional detail.

LIQUIDITY AND CAPITAL RESOURCES; ASSET/LIABILITY MANAGEMENT

The management team has responsibility for developing and recommending liquidity and risk management policies including but not limited to the determination of internal operating guidelines, contingency plans, change management and pricing to the Asset/Liability Committee (ALCO) of the Board of Directors. Management ensures that the liquidity of a bank allows it to provide funds to meet its cash flow needs, such as loan requests, outflows of deposits, other investment opportunities and general operating requirements, under multiple operating scenarios. While the current structure of the Corporation and the Bank are not complex, the objective in the management of liquidity and capital resources is to be able to take advantage of business opportunities that may arise. The major sources of liquidity for the Bank have been deposit growth, federal funds sold, and loans which mature within one year. The Bank is also a member of the Federal Home Loan Bank of Indianapolis with a $3,000,000 line of credit supported by pledged investment and has access to funding from the discount window at the Federal Reserve Bank of Chicago. The ALCO committee has also approved alternate funding sources to add flexibility. Large deposit balances which might fluctuate in response to interest rate changes are closely monitored. These deposits consist mainly of certificates of deposit over $100,000. We anticipate that we will have more than sufficient funds available to meet our future commitments. As of December 31, 2011, off balance sheet loan commitments totaled $30,578,000. As a majority of the unused commitments represent commercial and equity lines of credit, the Bank expects, and experience has shown that only a small portion of the unused commitments will normally be drawn upon.

The largest uses and sources of cash and cash equivalents for the Corporation for the year ended December 31, 2011, as noted in the Consolidated Statement of Cash Flows, were primarily loan funding and deposit origination. The uses of cash in investing activities were largely due to the replacement of matured securities.

The following table presents loan commitments by time period as of December 31, 2011 (000s omitted):

			Amount of commitment expiration by period
	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Commitments to grant loans	$	16,212	$	16,212	$	—	$	—	$	—
Unfunded commitments under lines of credit		13,363		7,468		2,905		798		2,192
Commercial and standby letters of credit		1,003		1,003		—		—		—
Total commitments	$	30,578	$	24,683	$	2,905	$	798	$	2,192

Commitments to grant loans are governed by the Corporation’s credit underwriting standards, as established in the Corporation’s Loan Policy. As the above schedule illustrates, in general, it is the Corporation’s practice to grant loan commitments for a finite period of time, usually lasting one year or less. The most significant departure from this practice involves home equity lines of credit (HELOCs). The Corporation’s equity lines have a contractual draw period exceeding 5 years. The Corporation has the ability to suspend the draw privileges on a HELOC where a default situation or other impairment issue is identified.

A-40

Birmingham Bloomfield Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

Contractual Obligations

The following table presents contractual obligations as of December 31, 2011 (000s omitted):

			Payments due by period
	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Certificates of deposit	$	55,166	$	30,187	$	22,711	$	2,268	$	—
Capital lease obligations		—		—		—		—		—
Operating lease obligations		3,701		243		482		503		2,473
Purchase agreements		—		—		—		—		—
Total	$	58,867	$	30,430	$	23,193	$	2,771	$	2,473

Long-term obligations consist of time deposits (certificates of deposit) and operating lease obligations. The above schedule represents principal payments only and does not include interest (where applicable).

The Corporation has contractual payments due on time deposits totaling $30,187,000 in 2012. The Corporation anticipates that a significant portion of maturing retail time deposits will be renewed and retained. Management also plans to utilize lower cost and longer term brokered deposits as it deems appropriate. Depending on the economic and competitive conditions at the time of maturity, the rates paid on renewed time deposits may differ from rates currently paid.

Capital Resources

Management closely monitors capital levels to provide for current and future business needs and to comply with regulatory requirements. Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The Corporation’s objective is to maintain its strong capital position, enhancing its ability to weather adverse conditions and to take advantage of business opportunities that may arise, while keeping the confidence of its customers and regulators. The Bank was well-capitalized as of December 31, 2011 and 2010. The Bank’s regulatory capital levels are presented in Note 16 to the consolidated financial statements.

On April 24, 2009, the Company completed the sale of 1,635 shares of Series A fixed rate, cumulative perpetual preferred stock (liquidation preference of $1,000 per share) and a warrant to purchase 82 shares of Series B fixed rate, cumulative perpetual preferred stock (liquidation preference of $1,000 per share) to the U.S. Treasury. The warrant was immediately exercised by the U. S. Treasury. Dividends on the Series A preferred stock accrue at a rate of 5% per annum for the first five years and 9% per annum thereafter, and the dividends on the Series B preferred stock accrue at a rate of 9% per annum. On December 18, 2009, the Company completed the sale of an additional 1,744 shares of Series C fixed rate cumulative perpetual preferred stock to the U.S. Treasury (liquidation preference $1,000 per share). Dividends on the Series C preferred stock accrue at a rate of 5% per annum for the first five years and 9% thereafter.

On July 28, 2011, the Corporation fully redeemed from the Treasury all of the Preferred Shares associated with the Capital Purchase Program for $3,461,000. The redemption was funded by proceeds from the issuance of Preferred Shares to the U.S. Treasury under the Small Business Lending Fund totaling $4,621,000. As a result of the transaction, the Corporation recorded $46,000 in accelerated accretion on the remaining discount of the Capital Purchase Program Preferred stock during the third quarter of 2011, reducing the amount available to common shareholders.

On July 28, 2011, Birmingham Bloomfield Bancshares, Inc. entered into a Securities Purchase Agreement with the Secretary of the Treasury (the “Treasury”), pursuant to which the Company issued and sold to the Treasury 4,621 shares of its Senior Non-Cumulative Perpetual Preferred Stock, Series D (“Series D Preferred Stock”), having a liquidation preference of $1,000 per share (the “Liquidation Amount”), for aggregate proceeds of $4,621,000. In conjunction with the issuance of the Series D Preferred Stock, the Company has redeemed from the Treasury for $3,461,000, all of the Series A Preferred Shares, Series B Preferred Shares, and Series C Preferred Shares which were issued to the Treasury in 2009 under the Treasury’s Emergency Economic Stabilization Act of 2008 Capital Purchase Program.

A-41

Birmingham Bloomfield Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

The Series D Preferred Stock is entitled to receive non-cumulative dividends payable quarterly, on each January 1, April 1, July 1 and October 1, beginning October 1, 2011. The dividend rate, which is calculated on the aggregate Liquidation Amount, is based upon the current level of “Qualified Small Business Lending”, or “QSBL” (as defined in the Securities Purchase Agreement) by the Company’s wholly owned subsidiary Bank of Birmingham (the “Bank”). The dividend rate for future dividend periods will be set based upon the “Percentage Change in Qualified Lending” (as defined in the Securities Purchase Agreement) between each dividend period and the “Baseline” QSBL level. Such dividend rate may vary from 1% per annum to 5% per annum for the second through tenth dividend periods, from 1% per annum to 7% per annum for the eleventh dividend period through year four and one-half. If the Series D Preferred Stock remains outstanding for more than four and one-half years, the dividend rate will be fixed at 9%. Prior to that time, in general, the dividend rate decreases as the level of the Bank’s QSBL increases. Such dividends are not cumulative, but the Company may only declare and pay dividends on its common stock (or any other equity securities junior to the Series D Preferred Stock) if it has declared and paid dividends for the current dividend period on the Series D Preferred Stock, and will be subject to other restrictions on its ability to repurchase or redeem other securities.

At December 31, 2011, the Bank’s capital ratios for Tier 1 risk-based and Total risk-based were 10.72% and 11.97%, respectively, compared with 9.31% and 10.56% in 2010. The increase in the risk-based capital ratios was the result of improved earnings relative to the increased levels of risk weighted assets due to loan growth at the Bank. The Bank’s tier 1 leverage ratio was 9.94% at December 31, 2011 compared with 8.15% at December 31, 2010.

A-42

Birmingham Bloomfield Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Corporation faces market risk to the extent that both earnings and the fair value of its financial instruments are affected by changes in interest rates. The Corporation does not believe that there has been a material change in the nature of the Corporation’s substantially influenced market risk exposures, including the categories of market risk to which the Corporation is exposed and the particular markets that present the primary risk of loss to the Corporation.

The Corporation’s market risk exposure is mainly comprised of its vulnerability to interest rate risk. Prevailing interest rates and interest rate relationships in the future will be primarily determined by market factors, which are outside of the Corporation’s control. All information provided in this section consists of forward-looking statements. Reference is made to the section captioned “Forward Looking Statements” in this annual report for a discussion of the limitations on the Corporation’s responsibility for such statements. The following table provides information about the Corporation’s financial instruments that are sensitive to changes in interest rates as of December 31, 2011. The table shows expected cash flows from market sensitive instruments for each of the next five years and thereafter. The expected maturity date values for loans and securities were calculated without adjusting the instruments’ contractual maturity dates for expected prepayments. Maturity date values for interest bearing core deposits were not based on estimates of the period over which the deposits would be outstanding, but rather the opportunity for re-pricing. The Corporation believes that re-pricing dates, as opposed to expected maturity dates, may be more relevant in analyzing the value of such instruments and are reported as such in the following table.

The following table presents principal/notional contractual maturities at December 31, 2011 (000s omitted):

Principal Amount Maturing In:

	2012			2013			2014			2015			2016			Thereafter			Total		Fair Value
RATE-SENSITIVE ASSETS
Other interest-earning assets	$	3,292		$	—		$	—		$	—		$	—		$	—		$	3,292	$	3,292
Average interest rate		0.22	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
Securities available for sale	$	2,000		$	590		$	685		$	450		$	725		$	—		$	4,451	$	4,595
Average interest rate		0.80	%		2.05	%		1.63	%		3.52	%		6.05	%		0.00	%
Gross portfolio loans	$	21,971		$	10,897		$	21,167		$	14,682		$	12,021		$	25,626		$	106,364	$	106,278
Average interest rate		5.84	%		6.17	%		6.66	%		6.19	%		5.85	%		5.35	%
RATE-SENSITIVE LIABILITIES
Savings & interest bearing
Demand deposits	$	35,526		$	—		$	—		$	—		$	—		$	—		$	52,512	$	52,512
Average interest rate		0.53	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
Time deposits	$	30,187		$	16,536		$	6,175		$	1,069		$	1,199		$	—		$	55,166	$	55,476
Average interest rate		1.58	%		1.16	%		1.37	%		1.34	%		2.14	%		0.00	%
Secured borrowings	$	—		$	—		$	—		$	—		$	—		$	—		$	—	$	—
Average interest rate		0.00	%		0.00	%		000	%		0.00	%		0.00	%		0.00	%

A-43

Birmingham Bloomfield Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

INTEREST RATE SENSITIVITY MANAGEMENT

Some of the major areas of focus of the Corporation’s Asset Liability Committee (“ALCO”) incorporate the following overview functions: review the interest rate risk sensitivity of the Bank to measure the impact of changing interest rates on the Bank’s net interest income, review the liquidity position through various measurements, review current and projected economic conditions and the corresponding impact on the Bank, ensure that capital and adequacy of the allowance for loan losses are maintained at proper levels to sustain growth, monitor the investment portfolio, recommend policies and strategies to the Board that incorporate a better balance of our interest rate risk, liquidity, balance sheet mix and yield management, and review the current balance sheet mix and proactively determine the future product mix.

The following table presents an analysis of our interest-sensitivity gap position at December 31, 2011. All interest-earning assets and interest-bearing liabilities are shown based on the earlier of their contractual maturity or re-pricing date adjusted by forecasted prepayment and decay rates, our historical experience, and the re-pricing and prepayment characteristics of portfolios acquired through acquisition. (000s omitted)

	Within Three Months			After Three Months but Within One Year			After One  Year but Within Five Years			After Five Years			Total
Interest earning assets
Federal funds sold	$	—		$	—		$	—		$	—		$	—
Interest bearing due from banks		4,374			—			—			—			4,374
Securities		1,060			1,214			1,899			447			4,620
Loans		28,068			26,742			47,228			6,745			108,783
Total		33,502			27,956			49,127			7,192			117,777
Interest bearing liabilities
NOW accounts		6,030			—			2,010			—			8,040
Money markets		4,966			—			1,655			—			6,621
Savings		13,666			—			4,556			—			18,222
Time deposits less than $100,000		1,983			6,452			3,034			—			11,469
Time deposits > $100,000		7,731			14,235			21,732			—			43,698
Short term borrowings		—			—			—			—			—
Total	$	34,376		$	20,687		$	32,987			—		$	88,050
Rate sensitivity gap	$	(874	)	$	7,269		$	16,140		$	7,192
Cumulative rate sensitivity gap				$	6,395		$	22,535		$	29,727
Rate sensitivity gap ratio		0.97	X		1.35	X		1.49	X		—	X
Cumulative rate sensitivity gap ratio					1.12	X		1.26	X		1.34	X

A-44

Birmingham Bloomfield Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

The Corporation currently utilizes static gap analysis and a dynamic net interest income simulation model to measure and monitor interest rate risk. Interest rate risk is the risk to earnings or capital arising from movements in interest rates. Managing rates on earning assets and interest bearing liabilities focuses on maintaining stability in the net interest margin, an important factor in earnings growth and stability. Interest rate risk is examined from both a short term and long term perspective. Short term rate change impacts are measured through rate shock analysis of forecasted earnings. To examine the short term, we analyze earnings at risk, and for longer term risk, we look at the economic value of equity (EVE). The economic value of equity is the difference between the present value of assets and liabilities. Similar to earnings at risk, interest rate shocks are applied to the base set of rates and all present values are then re-computed.

The net interest earnings at risk analysis as of December 31, 2011 reveals that the Bank is liability sensitive and negatively exposed to rising rates in the short term, as a 200 basis point shock would potentially decrease earnings by 4.06%. In addition, the economic value of equity analysis indicates the Bank is exposed to rising rates over the long term as the simulation reports a 13.71% decrease from the base in a 200 basis point rising rate environment. Concerted efforts to improve the structure of the balance sheet have reduced risks associated with interest rate changes. It should be noted, however, the simulations referred to above do not incorporate any management initiated changes that may be used to further mitigate any potentially negative impact of interest rate environment changes. They do provide a conservative estimate of potential interest rate risks for the Bank and Corporation.

CRITICAL ACCOUNTING POLICIES

Allowance for loan losses

The Corporation performs a detailed quarterly review of the allowance for credit losses. The Corporation evaluates those loans classified as substandard, under its internal risk rating system, on an individual basis for impairment. The level and allocation of the allowance is determined primarily on management’s evaluation of collateral value, less the cost of disposal, for loans reviewed in this category. The remainder of the total loan portfolio is segmented into homogeneous loan pools with similar risk characteristics for evaluation. The Corporation uses factors such as, historical portfolio losses, national and local economic trends and levels of delinquency to determine the appropriate level and allocation of the allowance for loans in this grouping. In addition, due to the Corporation’s short operating history, it looks to historical results for similar banks of similar size and those in similar geographic areas as a comparison. The Corporation’s policy dictates that specifically identified credit losses be recognized immediately by a charge to the allowance for credit losses. See also Note 1 to the financial statements. Inherent risks and uncertainties related to determination of adequacy of the allowance for credit losses require management to depend on estimates, appraisals and evaluations of loans to prepare the analysis. Changes in economic conditions and the financial prospects of borrowers may result in changes to the estimates, appraisals and evaluations used. In addition, if circumstances and losses differ substantially from management’s assumptions and estimates, the allowance for credit losses may not be sufficient to absorb all future losses and net income could be significantly impacted.

Loan Servicing Rights

Loan servicing rights associated with loans originated and sold, where servicing is retained, are capitalized and included in other assets in the consolidated balance sheet. The value of the capitalized servicing rights represents the present value of the future servicing fees arising from the right to service the loans in the portfolio. The methodology used to determine loan servicing rights relates to the initial valuation and subsequent impairment tests. The methodology used to determine the valuations of the loan servicing rights requires the development and use of a number of estimates, including anticipated principal amortization and prepayment of that principal balance. Events that may significantly affect the estimates used are changes in interest rates, loan prepayment speeds and the payment performance of the underlying loans. The carrying value of the loan servicing rights is periodically reviewed for impairment based on a determination of fair value. For purposes of measuring impairment, the servicing rights are compared to a valuation prepared based on a discounted cash flow methodology, utilizing current prepayment speeds and discount rates. Impairment, if any, is recognized through a valuation allowance.

A-45

Birmingham Bloomfield Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

Deferred Tax Assets

The deferred tax asset “DTA” balance represents the aggregate tax effect of all deductible temporary differences and operating loss carry-forwards. DTA’s are recorded when an event generating a tax benefit has been recognized in the financial statements and is measured using the applicable tax rate. When it is more likely than not a portion or all of the DTA will not be realized a valuation reserve is required. The objective of the reserve is to reduce the DTA balance to an amount that is likely to be recognized. The requirement for a valuation reserve on a “DTA” is based on an analysis of all existing evidence, both positive and negative.

Since inception, the Corporation established a reserve on the full amount of the outstanding DTA balance. The reserve was maintained based on the Corporation’s cumulative losses and concern regarding the ability of the organization to realize the full benefit of the asset. However, in 2011 as a result of improved earnings, positive performance trends and financial projections, management determined there was sufficient evidence the Corporation would be able to recognize the benefits of the DTA balance and eliminated the valuation reserve of $2,885,000 in the fourth quarter. See Note 7 for additional detail.

SEC FORM 10-K

Copies of the Corporation’s annual report on Form 10-K, as filed with the Securities and Exchange Commission are available to stockholders without charge, upon written request. Please mail your request to Robert E. Farr; Chief Executive Officer, Birmingham Bloomfield Bancshares, Inc., 33583 Woodward Avenue, P. O. Box 1298, Birmingham, MI 48012-1298.

STOCK INFORMATION

The common stock of Birmingham Bloomfield Bancshares, Inc. trades on The OTC Bulletin Board under the ticker symbol “BBBI.” At December 31, 2011, there were 1,812,622 shares of Birmingham Bloomfield Bancshares, Inc. common stock issued and outstanding and approximately 828 shareholders of record.

The following table shows the high and low bid price of our common stock on the OTC Bulletin Board for each quarter of 2011 and 2010. These over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. There is not currently an active public trading market for our common stock.

	High		Low
2011
First Quarter	$	4.00	$	2.40
Second Quarter	$	3.95	$	2.35
Third Quarter	$	3.25	$	2.25
Fourth Quarter	$	3.55	$	2.15
2010
First Quarter	$	4.75	$	2.25
Second Quarter	$	3.50	$	2.60
Third Quarter	$	3.25	$	2.50
Fourth Quarter	$	3.25	$	2.00

The Company has not yet paid any dividends on its common stock and does not anticipate that it will in the near future. Because the Company’s principal activity is its ownership of the Bank, its ability to declare and pay dividends is dependent upon the ability of the Bank to declare and pay dividends to it. As a result of the Bank’s startup losses, at December 31, 2011, the Bank’s retained earnings available for the payment of dividends, with out approval from its regulators, was $0. See Note 10 to the financial statements for a discussion of restrictions on the Bank’s ability to pay dividends.

A-46