Birmingham Bloomfield Bancshares - FORM 10-K - EX-13

Attached files

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10-K - FORM 10-K - Birmingham Bloomfield Bancshares	k50177e10vk.htm
EX-23 - EX-23 - Birmingham Bloomfield Bancshares	k50177exv23.htm
EX-21 - EX-21 - Birmingham Bloomfield Bancshares	k50177exv21.htm
EX-99.2 - EX-99.2 - Birmingham Bloomfield Bancshares	k50177exv99w2.htm
EX-99.1 - EX-99.1 - Birmingham Bloomfield Bancshares	k50177exv99w1.htm
EX-31.2 - EX-31.2 - Birmingham Bloomfield Bancshares	k50177exv31w2.htm
EX-31.1 - EX-31.1 - Birmingham Bloomfield Bancshares	k50177exv31w1.htm
EX-32.1 - EX-32.1 - Birmingham Bloomfield Bancshares	k50177exv32w1.htm

EXHIBIT 13

Dear Fellow Shareholder;

2010 proved to be a turnaround year for us. Since officially opening for business in the summer of 2006, we have consistently grown our loan portfolio and deposit base. That growth continued in 2010 as loans and deposits increased by 26.0% and 19.4%, respectively. As a result, I am pleased to report earnings prior to preferred dividends of $431,000 for the year ending December 31, 2010 compared to a loss of $1,913,000 for the same period in 2009. In addition to the loan and deposit growth, net interest margin improved and we were able to reduce our operating expenses. Net interest margin for 2010 was 4.32% compared to 3.51% for the previous year.

The keys to any bank’s success and stability can be traced to the quality of its loan portfolio and its capital ratio. Unfortunately, banks in general continue to struggle with problem loans. The commercial real estate sector in particular continues to suffer. We have been fortunate to maintain excellent credit quality while continuing our growth. Our net charge-offs, non-performing assets, and non-accrual loans are all well below our peers. In addition, the Bank remains “well capitalized” based on regulatory capital guidelines and maintains an 8.15% Tier 1 capital ratio.

I am pleased to announce the addition of Bruce Nyberg to our Board of Directors. Bruce provides substantial banking experience, including six years as Regional President of Huntington Bank, before retiring in 2007. Bruce is a long time Birmingham resident and is actively involved in the community. I would also like to take this opportunity to thank both Tim Trenary and John Erb for their significant contributions to the Board. Both John and Tim stepped down from our Board in order to spend more time in their respective businesses.

I am confident we have built a solid foundation to support our continued growth. Despite the obvious economic challenges we have positioned ourselves to be “the bank” in the Birmingham Bloomfield market. I appreciate your continued support and would welcome any additional business you can provide by banking with us and referring friends and family.

Sincerely,
Robert E. Farr
President & CEO


		Plante & Moran, PLLC Suite 500 2601 Cambridge Court Auburn Hills, MI 48326 Tel: 248.375.7100 Fax: 248.375.7101 plantemoran.com

Report of Independent Registered Accounting Firm

To the Board of Directors
Birmingham Bloomfield Bancshares Inc.

We have audited the accompanying consolidated balance sheet of Birmingham Bloomfield Bancshares, Inc. as of December 31, 2010 and 2009 and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Birmingham Bloomfield Bancshares, Inc. at December 31, 2010 and 2009 and the consolidated results of its operations, changes in stockholders’ equity and its cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.

/s/ Plante & Moran, PLLC

Auburn Hills, Michigan
March 21, 2011

BIRMINGHAM BLOOMFIELD BANCSHARES, INC
CONSOLIDATED BALANCE SHEETS


	December 31,			December 31,
	2010			2009
Assets

Cash and cash equivalents
Cash	$	5,300,368		$	4,644,416
Federal funds sold		65,936			3,113,785

Total cash and cash equivalents		5,366,304			7,758,201

Securities, available for sale (Note 2)		3,200,002			3,672,982
Federal home loan bank stock		160,200			162,100
Loans held for sale		322,500			—

Loans (Note 3)
Total portfolio loans		100,378,678			79,655,896
Less: allowance for loan losses		(1,448,096	)		(1,173,865	)

Net portfolio loans		98,930,582			78,482,031

Premises & equipment (Note 4)		1,359,510			1,488,689
Interest receivable and other assets		995,438			1,072,770

Total assets	$	110,334,536		$	92,636,773


Liabilities and Shareholders’ Equity

Deposits (Note 5)
Non-interest bearing	$	14,190,295		$	8,494,903
Interest bearing		83,060,199			72,970,583

Total deposits		97,250,494			81,465,486

Secured borrowings		1,469,095			—
Interest payable and other liabilities		629,422			443,354

Total liabilities		99,349,011			81,908,840


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			1,635,000
Discount on senior preferred stock series A		(61,027	)		(79,427	)
Senior cumulative perpetual preferred stock series B $1,000 liquidation value per share, 9%
Authorized, issued and outstanding - 82 shares		82,000			82,000
Premium on preferred stock series B		6,634			8,634
Senior cumulative perpetual preferred stock series C $1,000 liquidation value per share, 5%
Authorized, issued and outstanding - 1,744 shares		1,744,000			1,744,000
Common stock, no par value
Authorized - 4,500,000 shares
Issued and outstanding - 1,800,000 shares		17,034,330			17,034,330
Additional paid in capital		493,154			489,459
Accumulated deficit		(10,061,474	)		(10,299,436	)
Accumulated other comprehensive income		112,908			113,373

Total shareholders’ equity		10,985,525			10,727,933

Total liabilities and shareholders’ equity	$	110,334,536		$	92,636,773

See notes to consolidated financial statements

A-1

BIRMINGHAM BLOOMFIELD BANCSHARES, INC
CONSOLIDATED STATEMENT OF OPERATIONS


	For the Years Ended December 31,
	2010		2009			2008
Interest Income
Interest and fees on loans	$	5,587,997	$	3,859,870		$	3,070,224
Interest on securities		162,281		151,777			138,339
Interest on federal funds and bank balances		1,331		30,956			118,258

Total interest income		5,751,609		4,042,603			3,326,821

Interest Expense
Interest on deposits		1,337,544		1,345,475			1,386,846
Interest on federal funds and short-term borrowings		2,415		—			—

Total interest expense		1,339,959		1,345,475			1,386,846

Net Interest Income		4,411,650		2,697,128			1,939,975

Provision for loan losses		593,750		480,380			384,003


Net Interest Income After Provision for Loan Losses		3,817,900		2,216,748			1,555,972

Non-interest Income
Service charges on deposit accounts		52,016		42,052			44,957
Other income		73,512		43,188			54,318

Total non-interest income		125,528		85,240			99,275

Non-interest expense
Salaries and employee benefits		1,641,944		1,571,537			1,422,774
Occupancy expense		442,456		549,986			820,491
Equipment expense		140,693		242,488			—
Loss on branch closing		—		609,330			—
Advertising and public relations		114,612		61,740			185,211
Data processing expense		190,530		211,514			74,431
Professional fees		392,289		373,502			278,087
Other expenses		590,212		594,813			386,355

Total non-interest expense		3,512,736		4,214,910			3,167,349

Net Income (Loss) Before Federal Income Tax		430,692		(1,912,922	)		(1,512,102	)
Federal income tax		—		—			—

Net Income (Loss)		430,692		(1,912,922	)		(1,512,102	)

Dividend on senior preferred stock		176,330		64,055			—
Accretion of discount on preferred stock		16,400		11,207			—


Net Income (Loss) Applicable to Common Shareholders	$	237,962	$	(1,988,184	)	$	(1,512,102	)


Basic and Diluted Income (Loss) per Share	$	0.13	$	(1.10	)	$	(0.84	)

See notes to consolidated financial statements

A-2

BIRMINGHAM BLOOMFIELD BANCSHARES, INC
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (DEFICIT)


											Accumulated
						Additional					Other
	Preferred			Common		Paid in		Accumulated			Comprehensive
	Stock			Stock		Capital		Deficit			Income			Total
Balance at December 31, 2007	$	—		$	17,034,330	$	462,000	$	(6,799,150	)	$	62,459		$	10,759,639

Share based payment expense							4,553								4,553
Comprehensive loss:
Net loss									(1,512,102	)					(1,512,102	)
Change in unrealized gain on securities, net of tax												59,879			59,879

Total comprehensive loss															(1,452,223	)

Balance at December 31, 2008		—			17,034,330		466,553		(8,331,252	)		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

See notes to consolidated financial statements

A-3

BIRMINGHAM BLOOMFIELD BANCSHARES, INC
CONSOLIDATED STATEMENT OF CASH FLOWS


	For the Years Ended December 31,
	2010			2009			2008
Cash flows from operating activities
Net income (loss)	$	430,692		$	(1,912,922	)	$	(1,512,102	)
Share based payment expense		3,695			22,906			4,553
Provision for loan losses		593,750			480,380			384,003
Loans originated for sale		(322,500	)		—			—
Accretion of securities		(5,287	)		(5,147	)		(30,604	)
Gain on calls of securities		(237	)		(3,028	)		(19,270	)
Gain on sale of fixed assets		(226	)		—			—
Depreciation expense		180,312			303,360			312,660
Loss on disposal of branch assets		—			482,830			—
Net decrease (increase) in other assets		77,332			(699,474	)		66,511
Net increase (decrease) in other liabilities		186,068			204,822			629

Net cash provided by (used) in operating activities		1,143,599			(1,126,273	)		(793,620	)

Cash flows from investing activities
Net change in portfolio loans		(21,042,301	)		(22,813,386	)		(19,967,702	)
Purchase of securities		(2,976,260	)		(2,954,862	)		(3,990,436	)
Proceeds from calls or maturities of securities		3,264,900			2,999,391			2,815,718
Proceeds from sales of securities		—			—			—
Principal payments on securities		191,299			—			—
Purchases of premises and equipment		(50,907	)		(42,562	)		(25,276	)

Net cash used in investing activities		(20,613,269	)		(22,811,419	)		(21,167,696	)

Cash flows from financing activities
Increase in deposits		15,785,008			23,717,451			21,485,687
Net change in short term borrowings		1,469,095			—			—
Proceeds from sale of senior preferred stock		—			3,379,000			—
Dividend on senior preferred stock		(176,330	)		(64,055	)		—

Net cash provided by financing activities		17,077,773			27,032,396			21,485,687


(Decrease) increase in cash and cash equivalents		(2,391,897	)		3,094,704			(475,629	)

Cash and cash equivalents — beginning of period		7,758,201			4,663,497			5,139,126


Cash and cash equivalents — end of period	$	5,366,304		$	7,758,201		$	4,663,497


Supplemental Information:
Interest paid	$	1,235,563		$	1,302,913		$	1,296,872
Income tax paid		—			—			—
Loans transferred to other real estate		—			—			—

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.

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 established, 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 with 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”). These transfers are recognized as secured borrowing transactions while the recourse provision is in effect. After the recourse provision expires, the Corporation recognizes 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 are reported as secured borrowings in the balance sheet. The unrecognized gain on these sales total $153,000 is expected to be recognized as income after the recourse provision on these loans expire.

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.

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.

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

In July 2010, FASB issued ASU No. 2010-20 “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”. The standard requires the Company to expand disclosures about the credit quality of our loans and the related reserves against them. The additional disclosures will include details on our past due loans and credit quality indicators. For public entities, ASU 2010-20 disclosures of period-end balances are effective for interim and annual reporting periods ending on or after December 15, 2010 and are included in Note 3 of the financial statements. Disclosures related to activity that occurs during the reporting period are required for interim and annual reporting periods beginning on or after December 15, 2010. The Company will adopt the disclosures related to the activity that occurs during the reporting period beginning with our December 31, 2010 consolidated financial statements.

In June 2009, the FASB issued ASU No. 2009-16 “Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets”. ASU 2009-16 clarified the reporting requirements over transfers of financial assets that are no longer recognized, and, as a result, should continue to be reported in the financial statements of the transferors. This interpretation primarily affects loan participations sold and the securing of financial assets and increases required disclosures for such transactions. Upon adoption of the standard, any participations sold are required to meet the definition of participating interest, as well as conditions for surrender of control. Both requirements must be satisfied for the sale to be removed from the records of the Company. The provisions for this standard were effective at the beginning of the reporting period, January 1, 2010. The new provisions did not have impact on the required disclosures of the Company.

In January 2010, the FASB issued ASU No. 2010-06 “Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements.” ASU 2010-06 amends the fair value disclosure guidance. The amendments include new disclosures and changes to clarify existing disclosure requirements. ASU 2010-06 was effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements of Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The impact of ASU 2010-06 on the Company’s disclosures is reflected in Note 14 of the consolidated financial statements.

A-7

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 – Securities

The amortized cost and fair value of securities, with gross unrealized gains and losses, follows at December 31, 2010 and 2009 (000s omitted):


			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
2010
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


2009
U. S. Government agency securities	$	2,342	$	18	$	—	$	2,360
Municipal securities		200		4		—		204
Mortgage backed securities		1,018		91		—		1,109
Corporate bonds		—		—		—		—

Sub-total Available for Sale	$	3,560	$	113	$	—	$	3,673
FHLB Stock		162		—		—		162

Total Securities	$	3,722	$	113	$	—	$	3,835

As of December 31, 2010 and 2009, all securities are classified as available for sale. Unrealized gains and losses within the investment portfolio are determined to be temporary. The Corporation 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 Corporation 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 Corporation had no individual securities with gross unrealized losses at December 31, 2010 or 2009.

Total securities representing $1,788,000 and $1,450,000 as of December 31, 2010 and 2009 were pledged to secure public deposits from the State of Michigan.

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.

The amortized cost and estimated fair value of all securities at December 31, 2010, 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):


			Estimated
	Amortized		Fair
	Cost		Value
Due in one year or less	$	1,200	$	1,203
Due in one year through five years		1,617		1,699
Due in five years through ten years		270		298
Due after ten years		—		—

Total	$	3,087	$	3,200

A-8

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 – Securities – continued

For the year ended December 31, 2010, proceeds from called available for sale securities amounted to $3,265,000. Gross realized gains amounted to $237 and gross realized losses amounted to $0 in 2010. For the year ended December 31, 2009, proceeds from sales of securities available for sale amounted to $2,999,000. Gross realized gains amounted to $3,028 and gross realized losses amounted to $0 in 2009.

Note 3 – Loans

A summary of the balances of loans as of December 31, 2010 and 2009 is as follows (000s omitted):


	2010			2009
Mortgage loans on real estate:
Residential 1 to 4 family	$	3,380		$	1,353
Multifamily		12,355			12,647
Commercial		49,029			35,917
Construction		2,024			518
Second mortgage		118			171
Equity lines of credit		11,794			11,445

Total mortgage loans on real estate		78,700			62,051
Commercial loans		20,776			17,186
Consumer installment loans		964			512

Total loans		100,440			79,749
Less: Allowance for loan losses		(1,448	)		(1,174	)
Net deferred loan fees		(61	)		(93	)

Net loans	$	98,931		$	78,482

An analysis of the allowance for loan losses at December 31, 2010 and 2009 follows (000s omitted):


				Home
2010	Commercial			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-9

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3 – Loans – continued


				Home
2009	Commercial			Equity			Residential			Consumer			Total
Allowance for Loan Losses
Beginning balance	$	546		$	120		$	30		$	14		$	710
Charge-offs		—			(18	)		—			—			(18	)
Recoveries		—			2			—			—			2
Provision		445			62			(20	)		(7	)		480

Ending balance	$	991		$	166		$	10		$	7		$	1,174
Percent of principal balance		1.44	%		1.77	%		1.20	%		1.29	%		1.47	%

Ending balance: individually evaluated for impairment	$	152		$	—		$	—		$	—		$	152

Ending balance: collectively evaluated for impairment	$	839		$	166		$	10		$	7		$	1,022

Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—		$	—

Portfolio Loans
Ending unpaid principal balance	$	68,970		$	9,405		$	832		$	542		$	79,749

Ending unpaid principal balance: individually evaluated for impairment	$	1,681		$	—		$	—		$	—		$	1,681

Ending unpaid principal balance: collectively evaluated for impairment	$	67,289		$	9,405		$	832		$	542		$	78,068

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 and identifies the important aspect of each loan. The Bank currently uses a 1 to 8 grading scale for commercial loans. Each loan grade 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 $1,875,000 to $10,854,000 at December 31, 2010 from $8,979,000 at December 31, 2009. The change was the result of an increase totaling $1,403,000 in special mention loans and a $472,000 increase 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. The Bank only has one loan in non-accrual status. This is a home equity credit totaling $298,000 and is in the process of foreclosure. The loan has been individually evaluated for impairment and a corresponding charge-off has been recorded. There were no loans that were risk rated doubtful or loss at December 31, 2010 or 2009. Management closely monitors each loan adversely criticized or classified and institutes appropriate measures to eliminate the basis of criticism.

A-10

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3 – Loans – continued

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, 2010 and 2009 follows (000s omitted):

2010
Commercial Loans


	Commercial		Commercial		Commercial		Commercial
Credit Quality	Real Estate		Term		LOC		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


	Home Equity		Residential		Home Equity		Consumer		Consumer
Credit Quality	LOC		Mortgage		Term		Installment		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

2009
Commercial Loans


	Commercial		Commercial		Commercial		Commercial
Credit Quality	Real Estate		Term		LOC		Construction
1 – pass	$	—	$	—	$	—	$	—
2 – pass		—		—		—		—
3 – pass		15,888		4,265		3,741		—
4 – pass		27,319		5,896		4,143		—
5 – special mention		3,027		175		1,465		518
6 – substandard		757		1,166		610		—
7 – doubtful		—		—		—		—
8 – loss		—		—		—		—

	$	46,991	$	11,502	$	9,959	$	518

Consumer Loans


	Home Equity		Residential		Home Equity		Consumer		Consumer
Credit Quality	LOC		Mortgage		Term		Installment		LOC
Pass	$	8,144	$	661	$	171	$	409	$	133
Special mention		344		—		—		—		—
Substandard		917		—		—		—		—
Doubtful		—		—		—		—		—
Loss		—		—		—		—		—

	$	9,405	$	661	$	171	$	409	$	133

A-11

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3 – Loans – continued

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, 2010 and it continues to perform according to the modified terms. No loans were classified as a TDR at December 31, 2009.

A loan is considered impaired when, based on current information and events, it is probable that the Corporation 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 Corporation 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.

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


			Pre-		Post-
	Number of		Modification		Modification
2010	Contract		Investment		Investment
Trouble Debt Restructuring
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):


	Recorded		Unpaid				Average		Interest
2010	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-12

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3 – Loans – continued


	Recorded		Unpaid				Average		Interest
2009	Investment		Principal		Allowance		Investment		Recognized
No related allowance recorded:
Commercial Line of Credit	$	—	$	—	$	—	$	—	$	—
Allowance recorded:
Commercial Line of Credit		1,681		1,681		152		143		6

Total:
Commercial	$	1,681	$	1,681	$	152	$	143	$	6

As of December 31, 2010 and 2009, loans totaling approximately $298,000 and $493,000, 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 $298,000 at December 31, 2010. The total nonperforming loans for 2010 represents 1 home equity loan currently recorded as non-accrual and in the process of foreclosure. 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
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	$	—


	Loans past due						Total				Total		Non-		>90 days
2009	30 – 59		60 – 90		Over 90		Past Due		Current		Loans		Accrual		Accruing
Commercial real estate	$	112	$	—	$	—	$	112	$	46,879	$	46,991	$	—	$	—
Commercial term		—		—		—		—		11,502		11,502		—		—
Commercial LOC		381		—		—		381		9,578		9,959		—		—
Construction		—		—		—		—		518		518		—		—
Home equity LOC		—		—		—		—		9,405		9,405		—		—
Residential mortgage		—		—		—		—		661		661		—		—
Home equity term		—		—		—		—		171		171		—		—
Consumer installment		—		—		—		—		409		409		—		—
Consumer LOC		—		—		—		—		133		133		—		—

	$	493	$	—	$	—	$	493	$	79,256	$	79,749	$	—	$	—

A-13

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3 – Loans – continued

Certain directors and executive officers of the Bank, including associates of such persons, were loan customers of the Company during 2010 and 2009. A summary of aggregate related-party loan activity for loans to any related party at December 31, 2010 and 2009 is as follows (000s omitted):


	2010			2009
Balance at January 1	$	1,927		$	1,473
New loans		581			1,165
Repayments		(726	)		(711	)

Balance at December 31	$	1,782		$	1,927

Note 4 – Bank Premises and Equipment

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


	2010		2009
Leasehold improvements	$	1,638	$	1,625
Furniture and equipment		375		357
Computer equipment & software		420		400

Total		2,433		2,382
Less: accumulated depreciation		1,073		893

Net premises and equipment	$	1,360	$	1,489

Depreciation expense for the years ended December 31, 2010, 2009 and 2008 amounted to $180,312, $303,360 and $312,660 respectively.

During 2009 a review of branch profitability was performed. The Bloomfield Township branch location had not been profitable for the three years it was in operation. During the fourth quarter of 2009, a decision was made to close the branch and the process of notification and closure began. The Bloomfield Township branch closed at the end of business on January 18, 2010. The leasehold improvements, furniture and equipment and computer equipment impairment charges related to the closure amounted to $482,830. In addition, a charge to terminate the lease by agreement with the leaseholder for a one time payment of $110,000 and other miscellaneous closure costs of $16,500 were accrued, for a total cost of $609,330 for the Bloomfield branch location closure charged to operations in 2009.

Note 5 – Deposits

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


	2010		2009
Non-interest bearing deposits	$	14,190	$	8,495
NOW accounts		7,897		7,894
Savings and money market accounts		24,700		19,600
Certificates of deposit <$100,000		12,153		13,240
Certificates of deposit >$100,000		38,310		32,236

Total	$	97,250	$	81,465

A-14

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 – Deposits – continued

At December 31, 2010, the scheduled maturities of time deposits are as follows (000s omitted):


	<$100,000		>$100,000		Total
2011	$	5,510	$	23,970	$	29,480
2012		5,562		11,876		17,438
2013		745		2,344		3,089
2014		324		120		444
2015		12		—		12
Thereafter		—		—		—

Total	$	12,153	$	38,310	$	50,463

Note 6 – 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 2010 and 2009 was $3,695 and $22,906 respectively. No income tax benefit was recognized in the income statement for share based compensation (see Note 7). 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 2010 or 2009.

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 estimates the value of its stock options using the calculated value on the grant date. The Corporation measures compensation cost of employee stock options based on the calculated value instead of fair value because it is not practical to estimate the volatility of its share price. The Corporation does not maintain an internal market for its shares and its shares are rarely traded privately. While it was a de novo institution, the Corporation’s initial stock offering was completed in July 2006. The calculated value method requires that the volatility assumption used in an option-pricing model be based on the historical volatility of an appropriate industry sector index.

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.

A-15

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6 – Stock Options and Warrants – continued

The weighted average assumptions used in the Black-Scholes model are noted in the following table. The Corporation uses expected data to estimate option exercise and employee termination within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.


Calculated volatility	12.40	%
Weighted average dividends	0.00	%
Expected term (in years)	5
Risk-free rate	4.50	%

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 ended 2010 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 December 31, 2010. As of December 31, 2010, 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, 2010 and 2009, outstanding options were 82,500. Options available to be exercised at a price of $10 were 62,500 at the end of 2010 versus 41,666 at year end 2009. There were no options exercised for the three years ended December 31, 2010.

Note 7 – Income Taxes

The Corporation has net operating loss carry-forwards of approximately $6,509,000 generated from inception through December 31, 2010 that are available to reduce future taxable income. The carry-forwards begin to expire in 2026, extending through the year ending December 31, 2030. The deferred tax asset generated by that loss carry-forward has been offset with a valuation allowance since the Corporation does not have a history of earnings.

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


	2010		2009
Deferred tax assets:
Allowance for loan losses	$	344,430	$	285,014
Organizational costs		495,281		542,828
Net operating loss carry-forward		2,302,452		2,398,855
Share based compensation		142,800		142,800
Other		90,852		82,383

Total deferred tax asset		3,375,815		3,451,880

Less: Valuation allowance		3,266,096		3,425,999

Deferred tax liabilities:
Fixed assets		86,019		—
Other		23,700		25,881

Total deferred tax liabilities		109,719		25,881

Net deferred tax assets	$	—	$	—

A-16

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7 – Income Taxes – continued

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


	2010		2009
Current expense	$	—	$	—
Deferred (benefit) expense		—		—


Total income tax expense	$	—	$	—

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:


	2010			2009
Income tax (expense ) benefit at federal statutory rate of 34%	$	146,435		$	(650,393	)
Increases resulting from nondeductible expenses		13,468			9,112
Other		—			—
Change in valuation allowance		(159,903	)		641,281

Income tax expense	$	—		$	—

Note 8 – 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 has two, one year renewal options. In 2010, the Corporation also entered into a six month lease agreement for a business development office and a month to month lease for additional office space located adjacent to the main office facility. Rent expense under all lease agreements was $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:


2011	$	244,840
2012		234,416
2013		239,098
2014		243,910
2015		248,746
thereafter		2,726,802

Total	$	3,937,812

A-17

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9 – 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, at December 31, 2010, the Bank’s retained earnings available for the payment of dividends, without approval from the regulators, was $0. Accordingly, all of the Corporation’s investment in the Bank was restricted at December 31, 2010.

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, 2010, Bank funds available for loans or advances to the Corporation amounted to $900,000.

Note 10 – Retirement Plans

The Corporation sponsors a 401(k) plan for substantially all employees. There were no required matching contributions for 2010 or 2009.

Note 11 – 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 since inception. 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, 2010 and 2009 are as follows:


	December 31,
	2010		2009
Assets
Cash and cash equivalents	$	1,854,322	$	2,193,387
Investment in subsidiary		9,230,821		8,581,286

Total assets	$	11,085,143	$	10,774,673


Liabilities and Shareholders’ Equity

Other liabilities	$	99,618	$	46,740
Shareholders’ equity		10,985,525		10,727,933

Total liabilities and shareholders’ equity	$	11,085,143	$	10,774,673

A-18

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11 – Parent Only Financial Statements – continued

The condensed statements of operations for the years ended December 31, 2010, 2009 and 2008 are as follows:


	For the Years Ended December 31,
	2010			2009			2008
Dividends from subsidiary	$	—		$	—		$	—
Other income		—			—			—

Total income		—			—			—

Salaries and employee benefits		15,000			59,567			(40,322	)
Professional fees		184,881			142,075			101,100
Other expenses		19,427			54,879			36,555

Total non-interest expense		219,308			256,521			97,333

Income taxes (benefit)		—			—			—

Net income (loss) before net income (loss) of subsidiary		(219,308	)		(256,521	)		(97,333	)
Undistributed net income (loss) of subsidiary		650,000			(1,656,401	)		(1,414,769	)

Net income (loss)		430,692			(1,912,922	)		(1,512,102	)
Effective dividend on preferred stock		192,730			75,262			—

Net income (loss) applicable to common shareholders	$	237,962		$	(1,988,184	)	$	(1,152,102	)

The condensed statements of cash flows for the years ended December 31, 2010, 2009 and 2008 are as follows:


	For the Years Ended December 31,
	2010			2009			2008
Cash flows from operating activities
Net income (loss)	$	430,692		$	(1,912,922	)	$	(1,512,102	)
Undistributed (income) loss of subsidiary		(650,000	)		1,656,401			1,414,769
Share based payments expense		3,695			22,906			4,553
Net decrease in other assets		—			—			—
Net increase (decrease) in other liabilities		52,878			45,240			(68,500	)

Net cash used in operating activities		(162,735	)		(188,375	)		(161,280	)

Cash flows from investing activities
Investment in subsidiary		—			(1,489,000	)		—
Decrease in premises and equipment		—			—			—

Net cash used in investing activities		—			(1,489,000	)		—

Cash flows from financing activities
Proceeds from sale of senior preferred stock		—			3,379,000			—
Dividends on senior preferred stock		(176,330	)		(64,055	)		—

Net cash (used in) provided by financing activities		(176,330	)		3,314,945			—

Decrease in cash and cash equivalents		(339,065	)		1,637,570			(161,280	)

Cash and cash equivalents at beginning of period		2,193,387			555,817			717,097


Cash and cash equivalents at end of period	$	1,854,322		$	2,193,387		$	555,817

A-19

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12 – 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, 2010 and 2009, the following financial instruments were outstanding whose contract amounts represent credit risk:


	Contract Amount
	2010		2009
Commitments to grant loans	$	13,564,000	$	9,570,000
Unfunded commitments under lines of credit	$	12,914,000	$	9,636,000
Commercial and standby letters of credit	$	803,000	$	603,000

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-20

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13 – 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-21

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13 – Fair Value of Financial Instruments – continued

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


	2010				2009
			Estimated				Estimated
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Financial assets:
Cash and cash equivalents	$	5,366	$	5,366	$	7,758	$	7,758
Securities available for sale		3,360		3,360		3,835		3,835
Loans		98,931		99,786		78,482		78,952
Loans held for sale		323		323		—		—
Accrued interest receivable		440		440		335		335

Financial liabilities:
Deposits		97,250		97,688		81,465		81,807
Secured borrowings		1,469		1,469		—		—
Accrued interest payable		115		115		77		77

Note 14 – 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-22

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14 – 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, 2010 and 2009 (000s omitted):


	Level 1		Level 2		Level 3		Fair Value
December 31, 2010
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


December 31, 2009
U.S. Government Agency	$	—	$	2,360	$	—	$	2,360
Municipal securities		—		204		—		204
Mortgage backed securities		—		1,109		—		1,109
Corporate bonds		—		—		—		—

Securities available for sale	$	—	$	3,673	$	—	$	3,673

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, 2010 (000s omitted):


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

A-23

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 15 – 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, 2010 and 2009.

The Bank’s actual capital amounts and ratios as of December 31, 2010 and 2009 are presented in the following table (000s omitted):


						For Capital					To be
	Actual					Adequacy Purposes					Well-Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
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	%

As of December 31, 2009
Total risk-based capital (to risk weighted assets) Bank of Birmingham	$	9,467		12.0	%	$	6,318		8.0	%	$	7,897		10.0	%

Tier I capital (to risk weighted assets) Bank of Birmingham	$	8,468		10.7	%	$	3,159		4.0	%	$	4,738		6.0	%

Tier I capital (to average assets) Bank of Birmingham	$	8,468		9.4	%	$	3,590		4.0	%	$	4,488		5.0	%

A-24

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16 – QUARTERLY RESULTS OF OPERATIONS (unaudited)

The following table summarizes the Corporation’s quarterly results for the years ended December 31, 2010 and 2009 (000s omitted):


	4^th		3rd		2^nd		1^st
	Quarter		Quarter		Quarter		Quarter
2010
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	)


	4^th			3rd			2^nd			1^st
	Quarter			Quarter			Quarter			Quarter
2009
Interest income	$	1,153		$	1,085		$	938		$	883
Interest expense		340			337			328			340

Net interest income		813			748			610			543
Provision for loan losses		300			32			115			34
Non-interest income		21			27			25			26
Non-interest expense		1,538			866			992			848

Income (loss) before income taxes		(1,004	)		(123	)		(472	)		(313	)
Income tax expense (benefit)		—			—			—			—

Net income (loss)		(1,004	)		(123	)		(472	)		(313	)
Effective dividend on preferred stock		41			26			9			—

Net income (loss) applicable to common shareholders		(1,045	)		(149	)		(481	)		(313	)


Basic and diluted income per share	$	(0.58	)	$	(0.08	)	$	(0.27	)	$	(0.17	)

A-25

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 – 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 we 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.

A-26

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 portfolio’s 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 8 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

The general economy exhibited marginal improvement in 2010 but still remains weak. Gross Domestic Product reported a full year of positive economic growth mainly as the result of increased personal consumption but this positive trend has not had a meaningful impact on several key factors negatively affecting the performance of the banking industry, including unemployment rates, residential foreclosure activity, bankruptcy filings, consumer confidence and market uncertainty.

A-27

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 demonstrate fundamental weakness. Residential and commercial real estate prices remain depressed, commercial vacancy rates are elevated, the unemployment rate is among the highest in the country, residential foreclosure filings are at historical levels, manufacturing production activity is limited and based on the recent US Census; Michigan is the only state in the union with a declining population. The combination of these elements continue to have a negative impact on the business environment of the state and future opportunities for the Bank.

MARKET DEVELOPMENTS

Deposit Insurance

The standard maximum deposit insurance amount increased to $250,000 due to the passage of the Dodd—Frank Wall Street Reform and Consumer Protection Act in 2010.

Other

On July 21, 2010, the President signed into the law the Dodd—Frank Wall Street Reform and Consumer Protection Act. The legislation is comprehensive in scope, providing for significant changes to the structure of federal financial regulation and new substantive requirements that apply to a broad range of market participants. The Act also mandates significant changes to the authority of the Federal Reserve and the Securities and Exchange Commission as well as enhanced oversight and regulation of banks and non-bank financial institutions.

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

In 2010, the Corporation reported the first year of profitability, generating net income of $431,000 and income available to common shareholders after preferred dividends of $238,000 or $0.13 per share of common stock. This was achieved as a result of an increase in net interest income and reductions in non-interest expenses. Net interest income for 2010 increased 63.6% to $4,412,000 compared to $2,697,000 in 2009. This was achieved by growing the aggregate level of earning assets, increasing asset yields on loans and lowering the overall funding cost, despite an increase in total deposits. Net interest margin for 2010 was 4.32%, compared to 3.51% in 2009. The earning asset increase was directly attributable to the 26.0% increase in loan balances during 2010. The Bank continues to focus on quality organic loan growth in our core market areas. In addition, the Corporation expanded the portfolio of products available to customers by providing SBA lending to commercial customers and starting a residential mortgage lending operation. The loans generated by the mortgage operation and the guaranteed portions of the SBA loans are expected to be sold to investors on the secondary market.

The two new programs are expected to supplement the future profitability of the Bank and enhance non-interest income production. Management will continue to focus on opportunities to grow the franchise, reduce costs, improve efficiency and increase revenue.

Total non-interest expense experienced a decline of 16.7% to $3,513,000 in 2010 from $4,215,000 for the same period of 2009. The major component of the decline related to the closure of the Bloomfield branch. The total impairment charged to earnings was $609,330 and recognized in the fourth quarter of 2009. The Bank remains focused on improving efficiency and reducing the operating cost structure of the organization to be more comparable with peer banks. The Corporation provided $593,750 in provision for loan losses in 2010, an increase from the $480,380 allocated in 2009. The increase was a result of loan growth and higher levels of charge offs. The elevated level of charge off activity was isolated to specifically identified loans with collateral deficiencies and is not indicative of the credit quality of the general loan portfolio. As of December 31, 2010, the Bank had 1 loan classified as non-accrual, and no additional past due credits.

A-28

Birmingham Bloomfield Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operation

Despite the difficult economic conditions, the Corporation was able to grow total assets to $110,335,000 during 2010, an increase of 19.1% compared to the prior year. The asset increase was the result of continued growth in portfolio loans, primarily commercial and commercial real estate. Total loans reached $100,379,000 in 2010, an increase of $20,723,000 from 2009. The growth was achieved by focusing on organic opportunities in our core markets and by expanding the product profile of the Bank. The allowance for loan losses marginally declined to 1.44% of total portfolio loans in 2010 from 1.47% in 2009 and total non-performing assets increased 298,000 and represent 0.30% of total loans in 2010. The Bank experienced an increase in charge-off activity during 2010 due to the deterioration in a few specific credits; however the overall quality of the portfolio remains strong and supports the level of loan loss reserve coverage based on the analysis of the loan population. Late in 2010, the Bank established a residential mortgage operation to originate mortgage loans to be sold to investors in the secondary market. At December 31, 2010, the Bank had a total of $322,500 in residential mortgage loans held for sale. Total deposits increased $15,785,000 in 2010 to $97,250,000. The composition of the deposit portfolio continues to evolve as the Bank attempts to diversify the mix and reduce overall funding costs. The strategy was successful in 2010 as the level of deposits increased 19.4%, but total interest expense remained flat. The largest dollar increases were realized in non-interest bearing accounts and CD balances. The increase in deposit balances was used to fund loan growth and provide additional liquidity. Total shareholder’s equity increased $258,000, due to the earnings of the Corporation. The Bank remains “well capitalized” based on regulatory capital guidelines and maintains an 8.15% 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.

A-29

Birmingham Bloomfield Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operation

Selected Financial Information

The following sets forth the selected consolidated financial data for the years ended December 31, 2006 — 2010.

(Dollars in thousands except per share data)


	2010			2009			2008			2007			2006
Interest income	$	5,752		$	4,043		$	3,327		$	2,463		$	379
Interest expense		1,340			1,346			1,387			1,090			158

Net interest income		4,412			2,697			1,940			1,373			221
Provision for loan losses		594			480			384			465			195
Non-interest income		126			85			99			132			13
Non-interest expense		3,513			4,215			3,167			3,723			3,002

Income (loss) before income taxes		431			(1,913	)		(1,512	)		(2,683	)		(2,963	)
Income tax expense		—			—			—			—			—

Net income (loss)		431			(1,913	)		(1,512	)		(2,683	)		(2,963	)
Effective dividend on preferred stock		193			75			—			—			—

Net income (loss) — common shareholders	$	238		$	(1,988	)	$	(1,512	)	$	(2,683	)	$	(2,963	)


Basic and diluted income per share	$	0.13		$	(1.10	)	$	(0.84	)	$	(1.49	)	$	(1.65	)

Total Assets		110,335			92,637			67,299			47,260			23,704
Securities, available for sale		3,200			3,673			3,880			2,596			—
Total gross loans		100,379			79,656			56,841			37,107			12,914
Allowance for loan losses		1,448			1,174			710			560			195
Total deposits		97,250			81,465			57,748			36,262			10
Secured borrowings		1,469			—			—			—			—
Shareholders’ equity		10,986			10,728			9,312			10,760			13,338

Net interest margin		4.32	%		3.51	%		3.31	%		3.63	%		4.90	%
Return on average assets		0.40	%		-2.38	%		-2.47	%		-6.43	%		-16.60	%
Return on average common equity		5.80	%		-23.32	%		-15.19	%		-21.39	%		-23.09	%
Equity / Assets		10.0	%		11.6	%		13.8	%		22.8	%		56.3	%
Total loans / Total deposits		103.2	%		97.8	%		98.4	%		102.3	%		126.2	%
Book value per common share (1)	$	4.21		$	4.08		$	5.17		$	5.98		$	7.41
Non-accrual loans / Total loans		0.30	%		0.00	%		0.00	%		0.00	%		0.00	%
Allowance for loan losses / Total loans		1.44	%		1.47	%		1.25	%		1.51	%		1.51	%


(1)		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 $2,392,000, or 30.8%, to $5,366,000 at December 31, 2010. The reduction was the result of deploying excess liquidity into earning assets to improve margin and increase revenue.

Investments

Total securities available-for-sale declined $473,000 to $3,200,000 at December 31, 2010, compared to $3,673,000 at December 31, 2009. The portfolio experienced a significant volume of activity during 2010 as investments with a book value of $3,265,000 were redeemed. The proceeds from the transactions were used to reinvest in the market or fund loan growth. A total of $2,976,000 of new securities were purchased in 2010. The Corporation had no held-to-maturity securities as of December 31, 2010 and 2009.

A-30

Birmingham Bloomfield Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operation

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, 2010 (000s omitted):


	0 – 1			1 – 5			5 – 10			Over 10
	Year			Years			Years			Years			Total
U.S. Treasury & Government Agency	$	1,002		$	359		$	—		$	—		$	1,361
Weighted average yield		2.00	%		2.09	%		0.00	%		0.00	%		2.02	%
Municipal securities	$	201		$	456		$	—		$	—		$	657
Weighted average yield		3.25	%		2.70	%		0.00	%		0.00	%		2.87	%
Mortgage Backed securities	$	—		$	630		$	298		$	—		$	928
Weighted average yield		0.00	%		6.41	%		5.67	%		0.00	%		6.17	%
Corporate bonds	$	—		$	254		$	—		$	—		$	254
Weighted average yield		0.00	%		3.47	%		0.00	%		0.00	%		3.47	%
FHLB Stock	$	—		$	—		$	—		$	160		$	160
Weighted average yield		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%

Maturity information does not incorporate any call provisions that the various securities may contain. Mortgage-backed securities do not have specific maturity dates, and thus have been incorporated into the above table as a separate maturity column. 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 loan portfolio at December 31, 2010 and 2009 (000s omitted):


	2010			2009
Real estate mortgage	$	76,676		$	61,533
Construction		2,024			518
Commercial and industrial		20,776			17,186
Consumer installment		964			512
Deferred loan fees and costs		(61	)		(93	)

Total loans	$	100,379		$	79,656

Total portfolio loans increased $20,723,000 or 26.0%, to $100,379,000 at December 31, 2010. As noted in Note 3 to the consolidated financial statements, the categories with the largest dollar increase were commercial real estate and commercial industrial which increased $13,112,000 and $3,590,000, respectively. The growth in the commercial lending area was the direct result of a continued investment in business development efforts and expanded lending options that include the addition of SBA 504 and 7(a) loan products. Residential real estate mortgages increased $2,027,000 during 2010 and construction loans increased $1,506,000. This increased activity was due to new opportunities within our market and strategic decisions to modify the mix of the portfolio. Management expects continued loan growth in 2011, with an emphasis on diversifying the portfolio to reduce concentrations.

A-31

Birmingham Bloomfield Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operation

The following table presents the remaining maturity of total loans outstanding for the categories shown at December 31, 2010, based on scheduled principal repayments, as well as categorized as fixed or variable rate loans (000s omitted):


	0 – 1		1 – 5		Over 5
	Year		Years		Years		Total		Fixed		Variable
Real estate mortgage	$	8,421	$	46,119	$	22,137	$	76,677	$	47,565	$	29,112
Construction		774		1,250		—		2,024		—		2,024
Commercial and industrial		8,723		11,615		438		20,776		10,550		10,226
Consumer installment		529		434		—		963		566		397

Total loans	$	18,447	$	59,418	$	22,575	$	100,440	$	58,681	$	41,759

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).

The Bank established a new residential mortgage loan operation in the fall of 2010. The function of the new operation is the origination of single family residential mortgage loans to be sold in the secondary market. Mortgage loans held for sale totaled $322,500 at December 31, 2010. Management expects to emphasize this product to expand the services available to customers and increase non-interest income. Loans closed are generally in the held for sale category for less than 30 days and are committed for sale prior to funding.

In 2010, the Bank received approval to generate SBA loans. The loans generated under the SBA program provide a partial government guarantee and are generally sold in the secondary market. This product will help improve the non-interest income earnings capacity of the Bank and continue the strategic efforts to diversify the portfolio mix. The Bank was successful in selling $1,469,000 in SBA loans during 2010.

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 $1,448,000, or 1.44% of total portfolio loans at December 31, 2010 compared to $1,174,000 or 1.47% at December 31, 2009. 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-32

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, 2010 and 2009 (000s omitted):


	2010		2009
Commitments to extend credit	$	13,564	$	9,570
Unfunded commitments under lines of credit		12,914		9,636
Commercial standby letters of credit		803		603

Total commitments	$	27,281	$	19,809

Outstanding commitments to grant loans, lines of credit and letters of credit increased $7,472,000, or 37.7% to $27,281,000 at December 31, 2010 from $19,809,000 at December 31, 2009. 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 2010. Management does not expect that all commitments will result in funded loans.

Deposits and Short-term Financing

Total deposits increased $15,785,000 to $97,250,000 at December 31, 2010. 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 $5,695,000 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 $4,736,000 during 2010 as customers were willing to sacrifice yield to maintain balances in more liquid accounts. Time deposits greater than $100,000 increased $6,074,000 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.


	As of December 31, 2010					As of December 31, 2009
	Balance		Percentage			Balance		Percentage
Non-interest bearing demand	$	14,190		14.59	%	$	8,495		10.43	%
NOW accounts		7,897		8.12	%		7,894		9.69	%
Money market		8,179		8.41	%		7,815		9.59	%
Savings		16,521		16.99	%		11,785		14.47	%
Time deposits < $100,000		12,153		12.50	%		13,240		16.25	%
Time deposits >$100,000		38,310		39.39	%		32,236		39.57	%

Total deposits	$	97,250		100.00	%	$	81,465		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 existing accounting guidelines and sale structure of the transaction, the Bank is 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 is 90 days. The Bank did not utilize discount window or FHLB advances during 2010.

SHAREHOLDERS’ EQUITY

Total shareholders’ equity was $10,986,000 at December 31, 2010, an increase of $258,000 from December 31, 2009. The increase is attributable to the net income after preferred dividend of the Corporation. The additional paid-in-capital represents an offset to the expense recognized for the costs associated with stock options issued to certain employees. Accumulated other comprehensive income includes net unrealized gains on the Bank’s available-for sale investment securities as noted in Note 2. The Corporation’s subsidiary Bank remains classified as “well capitalized” based on regulatory capital guidelines and maintains a 8.1% Tier 1 ratio.

A-33

Birmingham Bloomfield Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operation

RESULTS OF OPERATIONS

Net Income

The Corporation reported net income of $238,000 for 2010 compared to a net loss of $1,988,000 for 2009. It was the first full year of profitability for the Corporation. The positive performance was the result of an increase in net interest margin, growth in non-interest income and reduction in operating expenses as the Bank was successful in controlling costs.

Net Interest Income

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 income for the period ended December 31, 2009 increased 41.2% or $757,000 compared with the previous year. Average loan yields and interest bearing due from banks yields dropped by 24 basis points and 203 basis points respectively as the impact of rate changes that took effect in late 2008 impacted the full year of 2009. The net interest margin increased 20 basis points to 3.51% for 2009 versus 3.31% for 2008 primarily due to the reduction in cost of funds from 3.87% in 2008 to 2.14% in 2009. The lower cost of funds was achieved by a change in deposit pricing philosophy and runoff of higher rate term certificates of deposit, and / or rollover of the higher rate certificates into lower rate products.

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.

The Corporation’s net interest margin increased 20 basis points, to 3.51% for the year ended December 31, 2009 compared to 3.31% for the same period in 2008, while the spread increased 48 basis points over the same period. The increase was the result of decreases in the cost of funds from the lower interest environment and management’s efforts to reduce costs and restructure the balance sheet to help mitigate the effect of changing interest rates. The yield on loans receivable decreased to 5.96% for the year ended December 31, 2009 down from 6.20% for the prior year. The combination of reduced yields on investments and Fed funds sold rates negatively impacted margin and earnings for the year.

A-34

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, 2010, and 2009 (000s omitted).

Average loans are presented net of unearned income and the allowance for loan and lease losses. Interest on loans includes loan fees.


	2010							2009
	Average				Yield/			Average				Yield/
	Balance		Interest		Rate			Balance		Interest		Rate
Interest-earning assets:
Interest-bearing balances with other financial institutions	$	9,537	$	29		0.31	%	$	5,672	$	27		0.47	%
Federal funds sold		1,197		2		0.11	%		2,983		4		0.14	%
Federal funds sold		3,939		133		3.38	%		3,736		152		4.06	%
Loans receivable		89,969		5,588		6.21	%		64,992		3,860		5.94	%

Total interest-earning assets		104,641		5,572		5.50	%		77,383		4,043		5.22	%
Non-interest earning assets:
Cash and due from banks		634							1,370
All other assets		1,258							1,559

Total assets	$	106,532						$	80,312


Interest-bearing liabilities:
NOW accounts	$	7,667	$	35		0.46	%	$	7,919		64		0.81	%
Money markets		9,441		62		0.65	%		10,027		114		1.14	%
Savings deposits		15,612		157		1.01	%		8,646		139		1.61	%
Time deposits		50,659		1,084		2.14	%		36,187		1,028		2.84	%


Total interest-bearing deposits		83,379		1,338		1.60	%		62,779		1,345		2.14	%
Short term borrowings		40		2		6.00	%		—		—		0.00	%

Total interest-bearing liabilities	$	83,419	$	1,340		1.61	%	$	62,779		1,345		2.14	%
Non-interest bearing demand deposits		12,016							7,269
Other liabilities		274							366

Total liabilities		95,709							70,414
Shareholders’ equity		10,823							9,898

Total liabilities and shareholders’ equity	$	106,532						$	80,312


Net interest income			$	4,412						$	2,697
Net spread						3.89	%						3.08	%
Net interest margin ⁽¹⁾						4.22	%						3.49	%


⁽¹⁾		Net interest earnings divided by average interest-earning assets.

A-35

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):


	2010 compared to 2009									2009 compared to 2008
	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	$	2		$	14		$	(12	)	$	25		$	26		$	(1	)
Federal funds sold		(3	)		(2	)		(1	)		(112	)		(51	)		(61	)
Securities available-for-sale		(19	)		8			(27	)		13			37			(24	)
Loans receivable		1,729			1,544			185			824			976			(152	)


Total interest income	$	1,709		$	1,564		$	145		$	750		$	988		$	(238	)

Interest-bearing liabilities:
NOW Accounts	$	(29	)	$	(2	)	$	(27	)	$	(89	)	$	3		$	(93	)
Money markets		(52	)		(6	)		(46	)		(153	)		(42	)		(111	)
Savings deposits		18			84			(66	)		127			140			(12	)
Time deposits		55			348			(293	)		73			445			(372	)

Total interest-bearing deposits		(8	)		424			(432	)		(42	)		546			(588	)
Short term borrowings		2			2			—			—			—			—

Total interest expense	$	6		$	426		$	(432	)	$	(42	)	$	546		$	(588	)
Net change in net interest income	$	1,715		$	1,138		$	577		$	792		$	442		$	350

Provision for Loan Losses

The provision for loan losses was $594,000, $480,000 and $384,000 for the years ended December 31, 2010, 2009 and 2008, 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 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. Other non-interest income increased by $20,000 during 2010 as the Corporation received broker fees for originating residential mortgage loans and recognized gains on the disposal of select assets from the Bloomfield branch closure.

A-36

Birmingham Bloomfield Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operation

Non-interest income for 2009 decreased by $14,000 or 14.1% to $85,000 for December 31, 2009 compared to $99,000 for the same period in 2008. Deposit fees and charges marginally decreased to $42,000 in 2009 relative to $45,000 in 2008. Other non-interest income decreased by 20.5% to $43,000 in 2009 compared to $54,000 for the year ended December 31, 2008. The difference was directly attributable to a reduction in the gains recognized on investment calls/sales.

Non-interest Expense

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.

Non-interest expense for the year ended December 31, 2009 increased $438,000 or 13.9% to $3,606,000 before the one-time charge to earnings for the closure of the unprofitable branch location from $3,167,000 for the same period in 2008. Including the one-time charge to earnings, 2009 costs increased 33.1% or $1,048,000 as compared to 2008. Salaries and Benefits expense increased $149,000 due to the addition of staff (Chief Financial Officer and additional relationship manager) in addition to new contract salaries for Mr. Farr and Mr. Krajacic that went into effect mid-year. Data processing expenses grew to $212,000 in 2009 versus $74,000 in 2008. These expenses are tied to increased volumes and the deployment of remote deposit capture to commercial customers. Professional fees increased $95,000 to $374,000 or 34.3% during 2009 compared to $278,000 for 2008. Increased audit charges due to asset growth, legal fees related to commercial credits and other consulting charges related to cash management services accounted for the increase. Other non-interest expense increased $208,000 over 2008 due primarily to the increased charges by the FDIC for deposit insurance in the amount of $167,000, increased business development expenses, and higher telecommunication costs.

Income Taxes

No income tax expense or benefit was recognized in 2010, 2009 or 2008 due to the tax loss carry-forward position of the Corporation. See Note 7 to the financial statements. An income tax benefit may be booked in future periods when management demonstrates profitability will be sustainable for the foreseeable future.

A-37

Birmingham Bloomfield Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operation

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 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, 2010, off balance sheet loan commitments totaled $27,281,000. 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, 2010, 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, 2010 (000s omitted):


			Amount of commitment expiration by period
			Less than 1						More than 5
	Total		Year		1-3 Years		3-5 Years		Years
Commitments to grant loans	$	13,564	$	13,564	$	—	$	—	$	—
Unfunded commitments under lines of credit		12,914		9,116		58		1,368		2,372
Commercial and standby letters of credit		803		803		—		—		—

Total commitments	$	27,281	$	23,483	$	58	$	1,368	$	2,372

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-38

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, 2010 (000s omitted):


			Payments due by period
			Less than 1						More than 5
	Total		Year		1-3 Years		3-5 Years		Years
Certificates of deposit	$	50,463	$	29,481	$	20,970	$	12	$	—
Capital lease obligations		—		—		—		—		—
Operating lease obligations		3,938		245		473		493		2,727
Purchase agreements		—		—		—		—		—

Total	$	54,401	$	29,726	$	21,443	$	505	$	2,727

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 $29,480,000 in 2011. The Corporation anticipates that a significant portion of maturing time deposits will be renewed and retained. Management also anticipates implementing a retail deposit marketing strategy to attract local funds to support continued growth. 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, 2010 and 2009. The Bank’s regulatory capital levels are presented in Note 15 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. At December 31, 2010, the Bank’s capital ratios for Tier 1 risk-based and Total risk-based were 9.3% and 10.6%, respectively, compared with 10.7% and 12.0% in 2009. The decrease in the risk-based capital ratios was the result of a marginal increase in equity relative to the increased levels of risk weighted assets due to loan growth at the Bank. The Bank’s tier 1 leverage ratio was 8.1% at December 31, 2010 compared with 9.4% at December 31, 2009.

A-39

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, 2010. 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, 2010 (000s omitted):

Principal Amount Maturing In:


	2011			2012			2013			2014			2015			Thereafter			Total		Fair Value
RATE-SENSITIVE ASSETS
Other interest-earning assets	$	4,708		$	—		$	—		$	—		$	—		$	—		$	4,708	$	4,708
Average interest rate		0.29	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%
Securities available for sale	$	200		$	—		$	600		$	500		$	950		$	837		$	3,087	$	3,200
Average interest rate		3.25	%		0.00	%		2.05	%		2.00	%		2.72	%		6.17	%
Gross portfolio loans	$	16,822		$	10,739		$	12,308		$	21,384		$	14,987		$	24,139		$	100,379	$	101,234
Average interest rate		5.91	%		6.62	%		6.39	%		6.71	%		6.23	%		5.19	%

RATE-SENSITIVE LIABILITIES
Savings & interest bearing
Demand deposits	$	32,597		$	—		$	—		$	—		$	—		$	—		$	32,597	$	32,597
Average interest rate		0.78	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
Time deposits	$	29,481		$	17,437		$	3,090		$	443		$	12		$	—		$	50,463	$	50,901
Average interest rate		1.99	%		2.08	%		2.41	%		2.76	%		2.72	%		0.0	%
Secured borrowings	$	1,469		$	—		$	—		$	—		$	—		$	—		$	1,469	$	1,469
Average interest rate		6.00	%		0.00	%		000	%		0.00	%		0.00	%		0.00	%

A-40

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, 2010. 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)


				After				After
				Three				One Year
				Months				but
	Within			but				Within			After
	Three			Within				Five			Five
	Months			One Year				Years			Years			Total
Interest earning assets
Federal funds sold	$	66		$	—			$	—		$	—		$	66
Interest bearing due from banks		4,556			—				—			—			4,556
Securities		1,245			133				1,405			484			3,248
Loans		24,266			23,523				47,728			5,183			100,700

Total		30,133			23,637				49,113			5,668			108,570

Interest bearing liabilities
NOW accounts		5,923			—				1,974			—			7,897
Money markets		6,134			—				4,130			—			16,521
Savings		12,391			—				2,045			—			8,179
Time deposits less than $100,000		1,643			3,942				6,568			—			12,153
Time deposits > $100,000		1,051			23,076				14,182			—			38,310
Short term borrowings		1,469			—				—			—			1,469

Total		28,611			27,018				30,661			—		$	84,529


Rate sensitivity gap	$	1,522		$	(3,382	)		$	20,233			5,668


Cumulative rate sensitivity gap				$	(1,860	)		$	18,373		$	24,041


Rate sensitivity gap ratio		1.05	X		0.87		X		1.60	X		—	X

Cumulative rate sensitivity gap ratio					0.97		X		1.22	X		1.28	X

A-41

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, 2010 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 4.28%. 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 1.22% 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.

Income Tax Valuation Allowance

The Corporation determines its tax liability under the Internal Revenue Code and its tax expense under Generally Accepted Accounting Principles. The result is a future net deductible amount or deferred tax asset. The Corporation which opened its subsidiary Bank in July 2006 has had a net operating loss in each year of operation which can be carried forward for a period not to exceed twenty years.

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.

A-42

Birmingham Bloomfield Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operation

STOCK INFORMATION

The common stock of Birmingham Bloomfield Bancshares, Inc. trades on The OTC Bulletin Board under the ticker symbol “BBBI.” At December 31, 2010, there were 1,800,000 shares of Birmingham Bloomfield Bancshares, Inc. common stock issued and outstanding and approximately 759 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 2010 and 2009. These over-the-counter market quotations reflect inter-dealer prices, with out 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
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

2009
First Quarter	$	5.00	$	3.50
Second Quarter	$	6.90	$	2.25
Third Quarter	$	3.00	$	2.00
Fourth Quarter	$	4.00	$	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, 2010, the Bank’s retained earnings available for the payment of dividends, without approval from its regulators was $0. See Note 9 to the financial statements for a discussion of restrictions on the Bank’s ability to pay dividends.

A-43

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