UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10 - Q

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

Commission File Number 000-52584

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Michigan		20-1132959
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

33583 Woodward Avenue, Birmingham, MI 48009
(Address of principal executive offices, including zip code)

(248) 723-7200
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days.

Yes þ     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filed,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

Yes o     No þ

The number of shares outstanding of the issuer’s Common Stock as of November 13, 2009, was 1,800,000 shares.

 

 

INDEX

PART I — FINANCIAL INFORMATION			3
ITEM 1. FINANCIAL STATEMENTS			3
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			16
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			25
ITEM 4. CONTROLS AND PROCEDURES			25
PART II. OTHER INFORMATION			27
ITEM 1. LEGAL PROCEEDINGS			27
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			27
ITEM 3. DEFAULTS UPON SENIOR SECURITIES			27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			27
ITEM 5. OTHER INFORMATION			27
ITEM 6. EXHIBITS			28
EX-31.1
EX-31.2
EX-32.1

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BIRMINGHAM BLOOMFIELD BANCSHARES, INC
CONSOLIDATED BALANCE SHEETS

		September 30,				December 31,
		2009				2008
		(unaudited)
Assets
Cash and cash equivalents
Cash		$	6,920,168			$	1,201,318
Federal funds sold			2,410,489				3,462,179
Total cash and cash equivalents			9,330,657				4,663,497
Securities, available for sale (Note 3)			4,406,090				3,880,401
Loans (Note 4)
Total loans			67,485,024				56,840,675
Less: allowance for loan losses			(872,426	)			(710,000	)
Net loans			66,612,598				56,130,675
Premises & equipment (Note 6)			2,023,389				2,232,317
Interest receivable and other assets			440,005				391,646
Total assets		$	82,812,739			$	67,298,536
Liabilities and Shareholders’ Equity
Deposits (Note 5)
Non-interest bearing		$	7,897,199			$	5,194,795
Interest bearing			64,694,097				52,553,240
Total deposits			72,591,296				57,748,035
Interest payable and other liabilities			204,686				238,532
Total liabilities			72,795,982				57,986,567
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				—
Warrant cumulative perpetual preferred stock series B $1,000 liquidation value per share, 9% Authorized, issued and outstanding — 82 shares			82,000				—
Discount on senior preferred stock			(84,154	)			—
Premium on warrant preferred stock			9,148				—
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 — share based payments			485,764				466,553
Accumulated deficit			(9,254,567	)			(8,311,252	)
Accumulated other comprehensive income			109,236				122,338
Total shareholders’ equity			10,016,757				9,311,969
Total liabilities and shareholders’ equity		$	82,812,739			$	67,298,536

See accompanying notes to consolidated financial statements

BIRMINGHAM BLOOMFIELD BANCSHARES, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Interest Income
Loans, including fees		$	1,038,306			$	817,556			$	2,774,781			$	2,196,208
Taxable securities			36,437				42,176				110,948				97,811
Federal funds sold			1,019				23,711				2,934				113,841
Correspondent bank			9,526				—				17,122				—
Total interest income			1,085,288				883,443				2,905,785				2,407,860
Interest expense
Deposits			337,221				351,789				1,005,080				1,005,217
Total interest expense			337,221				351,789				1,005,080				1,005,217
Net interest income			748,067				531,654				1,900,705				1,402,643
Provision for loan losses			32,000				109,146				180,776				253,811
Net interest income after provision for loan losses			716,067				422,508				1,719,929				1,148,832
Non-interest income
Loan fees and charges			4,337				3,198				10,008				15,027
Deposit fees and charges			20,053				15,492				54,779				53,307
Other income			2,916				16,224				12,733				28,141
Total non-interest income			27,306				34,914				77,520				96,475
Non-interest expense
Salaries and benefits			398,630				301,753				1,176,724				1,163,357
Occupancy & equipment expense			191,873				198,158				607,413				616,402
FAS 123R share based payments			5,911				(21,000	)			19,211				—
Data processing expense			54,845				47,973				158,610				135,068
Advertising and public relations			(650	)			10,110				56,608				69,721
Professional fees			72,663				54,311				269,977				197,067
Printing and office supplies			5,400				5,384				21,422				19,510
Other expense			138,130				95,310				396,323				302,068
Total non-interest expense			866,802				691,999				2,706,288				2,503,193
Net loss before taxes			(123,429	)			(234,577	)			(908,839	)			(1,257,886	)
Income taxes			—				—				—				—
Net loss		$	(123,429	)		$	(234,577	)		$	(908,839	)		$	(1,257,886	)
Dividend on senior preferred stock			(20,438	)			—				(25,207	)			—
Accretion of discount on pref stock			(4,422	)			—				(7,846	)			—
Effective dividend on preferred stock			(24,860	)			—				(33,053	)			—
Dividend on warrant preferred stock			(1,845	)			—				(2,275	)			—
Amortization of premium on warrant pref stk			480				—				852				—
Effective dividend on warrant pref stk			(1,365	)			—				(1,423	)			—
Net loss applicable to common shareholders		$	(149,654	)		$	(234,577	)		$	(943,315	)		$	(1,257,886	)
Basic loss per share		$	0.08			$	(0.13	)		$	0.52			$	(0.70	)
Diluted loss per share		$	0.08			$	(0.13	)		$	0.52			$	(0.70	)

See accompanying notes to consolidated financial statements

BIRMINGHAM BLOOMFIELD BANCSHARES, INC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
January 1, 2009 to September 30, 2009
(Unaudited)

										Additional								Accumulated Other
										Paid in				Accumulated				Comprehensive
		Preferred Stock				Common Stock				Capital				Deficit				Income				Total
Balance at January 1, 2009			—			$	17,034,330			$	466,553			$	(8,311,252	)		$	122,338			$	9,311,969
Issue senior preferred stock			1,635,000				—				—				—				—				1,635,000
Issue warrant preferred stock			82,000				—				—				—				—				82,000
Discount senior pref. stock			(84,154	)			—				—				—				—				(84,154	)
Amortization			—				—				—				(7,846	)			—				(7,846	)
Premium warrant pref. stock			9,148				—				—				—				—				9,148
Accretion			—				—				—				852				—				852
Preferred dividends															(27,482	)							(27,482	)
Share based payments			—				—				19,211				—				—				19,211
Comprehensive loss:
Net loss			—				—				—				(908,839	)			—				(908,839	)
Unrealized gain on securities			—				—				—				—				(13,102	)			(13,102	)
Total comprehensive loss																							(921,941	)
Balance at September 30, 2009		$	1,641,994			$	17,034,330			$	485,764			$	(9,254,567	)		$	109,236			$	10,016,757

See accompanying notes to consolidated financial statements

BIRMINGHAM BLOOMFIELD BANCSHARES, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		For the Nine Months Ended
		September 30,
		2009				2008
Cash flows from operating activities
Net loss		$	(908,839	)		$	(1,257,886	)
Share based payments expense			19,211				—
Provision for loan losses			180,776				253,811
Accretion of securities			(3,531	)			(20,821	)
Gain on sales or calls of securities			(3,027	)			(19,270	)
Depreciation expense			225,674				234,000
Net (increase) decrease in other assets			(48,359	)			92,466
Net increase (decrease) in other liabilities			(33,846	)			53,541
Net cash used in operating activities			(571,941	)			(664,159	)
Cash flows from investing activities
Increase in loans			(10,662,699	)			(18,875,912	)
Purchase of securities			(2,954,862	)			(2,978,241	)
Proceeds from sales, calls or maturities of securities			2,422,629				1,285,802
Purchases of premises and equipment improvements			(16,746	)			(25,276	)
Net cash used in investing activities			(11,211,678	)			(20,593,627	)
Cash flows from financing activities
Increase in deposits			14,843,261				18,537,249
Proceeds from sale of senior preferred stock			1,635,000				—
Dividend on senior preferred stock			(27,482	)			—
Net cash provided by financing activities			16,450,779				18,537,249
Increase in cash and cash equivalents			4,667,160				(2,720,537	)
Cash and cash equivalents at the beginning of the period			4,663,497				5,139,126
Cash and cash equivalents at the end of the period		$	9,330,657			$	2,418,589
Supplemental cash flow information:
Cash paid for interest:		$	1,070,918			$	882,655

See accompanying notes to consolidated financial statements

BIRMINGHAM BLOOMFIELD BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Summary of Significant Accounting Policies

Basis of Statement Presentation

The accompanying unaudited consolidated interim financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) with the instructions to Form 10-Q. Accordingly, certain information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements are not included herein. The interim financial statements should be read in conjunction with the financial statements of Birmingham Bloomfield Bancshares, Inc. (the “Corporation”) and the notes thereto included in the Corporation’s annual report on Form 10-K for the year ended December 31, 2008.

In the opinion of management, all adjustments, consisting of normal recurring adjustments, which in the opinion of management are necessary for a fair presentation of financial position, results of operations, and cash flows, have been made. Events occurring subsequent to the balance sheet date through November 13, 2009 (the date of filing with the Securities and Exchange Commission) have been evaluated for potential recognition or disclosure in the consolidated financial statements. The results of operations for the three and nine month periods ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ended December 31, 2009.

Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation.

Principles of Consolidation

The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiary the Bank of Birmingham (the “Bank”). All significant intercompany balances and transactions have been eliminated in consolidation.

Recent Accounting Developments

During May of 2009 the Financial Accounting Standards Board issued FASB ASC 855, “Subsequent Events” (formerly SFAS 165). This statement establishes standards under which an entity shall recognize and disclose events that occur after the balance sheet date but before the related financial statements are issued or are available to be issued. FASB ASC 855 is in effect for fiscal years and interim periods ending after June 15, 2009. Birmingham Bloomfield Bancshares’ adoption of FASB ASC 855 had no impact on our consolidated financial position or results of operations.

In June 2009, the Financial Accounting Standards board issued three additional pronouncements. Birmingham Bloomfield Bancshares is assessing the impact of the adoption of these pronouncements on its consolidated financial position and results of operations. The pronouncements were:

The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification TM (the “Codification” or “ASC”)

FASB ASC 105, “Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162” (formerly SFAS No. 168). On the effective date of FASB ASC 105, the codification will become the sole source of authoritative U.S. Generally Accepted Accounting Principles, (GAAP), recognized by the Financial Accounting Standards Board. This pronouncement is effective for interim and fiscal years ending after September 15, 2009. As FASB ASC 105 does not alter current Generally Accepted Accounting Principles, Birmingham Bloomfield Bancshares’ adoption of the same is not expected to have any material impact on our

BIRMINGHAM BLOOMFIELD BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

consolidated financial position or results of operations. In order to ease the transition to the Codification, we are providing the Codification cross-reference alongside the references to the standards issued and adopted prior to the adoption of the Codification. All future references to authoritative accounting literature in our consolidated financial statements will be referenced in accordance with the Codification.

FASB ASC 860, “Transfers and Servicing” (formerly SFAS No. 166). The objective of FASB ASC 860 is to improve both the relevance and the comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and the transferring entity’s continuing involvement, if any, in the transferred financial assets. This pronouncement is effective for interim and annual reporting periods that begin after November 15, 2009.

FASB ASC 810, “Consolidation of Variable Interest Entities.” The objective of FASB ASC 810 is to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. FASB ASC 810 shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for the interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. Birmingham Bloomfield Bancshares is currently evaluating the impact of the adoption of this standard, but does not expect it to have a material effect on the Corporation’s financial position or results of operation.

During August 2009, FASB issued FASB ASC 820, “Fair Value Measurements” (formerly ASU 2009-05). This update provides additional guidance on how to measure the fair value of liabilities. It does not require any new fair value disclosure measurements, but does reiterate the definition of the fair value of a liability is the price that would be paid to transfer it in an orderly transaction between market participants at the measurement date. It also states that a company must consider its own nonperformance risk, including credit risk in the fair value measurement of liabilities. FASB ASC 820 is effective for interim and annual reporting periods beginning after issuance. Birmingham Bloomfield Bancshares adoption of the update as of October 1, 2009 is not expected to have any material impact on its consolidated financial position or results of operations.

In September 2009, FASB issued FASB ASC 820, “Fair Value Measurements” (formerly ASU 2009-12). If certain conditions are met, FASB ASC 820 allows reporting entities to use net asset value per share to estimate the fair value of these investments as a “practical expedient” in cases where there is no readily determinable fair value. The FASB ASC also requires disclosures by major category of investment about the attributes of the investments, such as the nature of any restrictions on the investor’s ability to redeem its investments at the measurement date, any unfunded commitments, and the investment strategies of the investees. FASB ASC 820 is effective for interim and annual periods ending after Dec. 15, 2009, with early application permitted. Adoption of FASB ASC 820 is not expected to have any material impact on Birmingham Bloomfield Bancshares, Inc.

Note 2 — Fair Value Accounting

On January 1, 2008, the Corporation adopted FASB ASC 820, “Fair Value Measurements” (formerly SFAS 157, SFAS 157-2 and SFAS 157-4). FASB ASC 820 establishes a framework for measuring fair value and expands disclosures about fair value measurements. FASB ASC 820 was issued to bring conformity to the definition of fair value; prior to FASB ASC 820 there was no conformity in the accounting guidance regarding the definition of fair value. FASB ASC 820, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (formerly SFAS 157-4), provides guidance on how to determine the fair value of assets and liabilities in an environment where the volume and level of activity for the asset or liability have significantly decreased and re-

BIRMINGHAM BLOOMFIELD BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

emphasizes that the objective of a fair value measurement remains an exit price. The FASB ASC is effective for periods ending after June 15, 2009, with earlier adoption permitted. The adoption of FASB ASC 820 did not have a material effect on Birmingham Bloomfield Bancshares financial position or results of operations.

As of June 30, 2009 Birmingham Bloomfield Bancshares adopted FASB ASC 825, “The Fair Value Option for Financial Assets and Financial Liabilities” (formerly FSP 107-1 and APB 28-1), requires companies to disclose the fair value of financial instruments within interim financial statements, adding to the current requirement to provide those disclosures annually. Since FASB ASC 825 addresses financial statement disclosures only, its adoption, effective June 30, 2009, did not impact Birmingham Bloomfield Bancshares’ consolidated financial position or results of operations and the required disclosures have been provided within this note.

Valuation Hierarchy

FASB ASC 820 (formerly SFAS 157) establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is 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. 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.
			Birmingham Bloomfield Bancshares currently holds no securities in level one of the hierarchy.
	•		Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
			Level 2 assets and liabilities for Birmingham Bloomfield Bancshares, Inc. include available for sale investments in government sponsored agencies, asset backed securities, and investments in obligations of state and political subdivisions. Fair values of these items are determined via external pricing from vendors.
	•		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.
			Level 3 assets and liabilities for Birmingham Bloomfield Bancshares, Inc. include FHLB stock.

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 following table presents the financial instruments carried at fair value as of September 30, 2009, on the Consolidated Balance Sheet and by FASB ASC 820 valuation hierarchy (as described above):

Assets measured at fair value on a recurring basis as of September 30, 2009 (000s omitted):

Quoted Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Balance at

Assets

Inputs

Inputs

September

Level 1

Level 2

Level 3

30, 2009

Securities available for sale

$

—

$

4,244

$

162

$

4,406

BIRMINGHAM BLOOMFIELD BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3 — Securities

The amortized cost and estimated fair value of securities, with gross unrealized gains and losses, follows (000s omitted):

						Gross				Gross				Estimated
		Amortized				unrealized				unrealized				fair
September 30, 2009 (unaudited)		cost				gains				losses				value
U.S. Government agency securities		$	2,844			$	13			$	—			$	2,857
Municipal securities			200				4				—				204
Mortgage backed securities			1,091				92				—				1,183
Corporate bonds			—				—				—				—
FHLB Stock			162				—				—				162
Total securities available for sale		$	4,297			$	109			$	—			$	4,406

						Gross				Gross				Estimated
		Amortized				unrealized				unrealized				fair
December 31, 2008		cost				gains				losses				value
U.S. Government agency securities		$	2,004			$	30			$	—			$	2,034
Municipal securities			—				—				—				—
Mortgage backed securities			1,250				92				—				1,342
Corporate bonds			504				—				—				504
FHLB Stock			—				—				—				—
Total		$	3,758			$	122			$	—			$	3,880

As of September 30, 2009 and December 31, 2008, all securities are available for sale. The securities held in our portfolio experienced no rating changes during the quarter and remain at “AAA” for all except the municipal holding which is at “Aa3” based on ratings by Moody. At September 30, 2009, there were $1.5 million in securities pledged to secure public deposits from the State of Michigan. At December 31, 2008, there were no securities pledged to secure borrowings, public deposits or for other purposes required or permitted by law.

The amortized cost and estimated fair value of securities at September 30, 2009, 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		$	—			$	—
Due in one year through five years			3,044				3,061
Due in five years through ten years			162				162
Due after ten years			—				—
Subtotal			3,206				3,223
Mortgage backed securities, due after 10 years			1,091				1,183
Total		$	4,297			$	4,406

BIRMINGHAM BLOOMFIELD BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4 — Loans

A summary of the balances of loans are as follows (000s omitted):

		September 30,				December 31,
		2009				2008
		(unaudited)
Mortgage loans on real estate:
Residential 1 to 4 family		$	1,709			$	2,745
Multifamily			11,213				7,676
Commercial			29,302				23,085
Construction			1,218				3,000
Second mortgage			173				736
Equity lines of credit			11,347				10,381
Total mortgage loans on real estate			54,962				47,623
Commercial loans			12,069				8,242
Consumer installment loans			501				1,007
Total loans			67,532				56,872
Less:
Allowance for loan losses			872				710
Net deferred loan fees			47				31
Net loans		$	66,613			$	56,131

Activity in the allowance for loan losses for the periods ended September 30, are as follows (000s omitted):

		Three months ended								Nine months ended
		September 30,								September 30,
(unaudited)		2009				2008				2009				2008
Balance at beginning of period		$	840			$	789			$	710			$	560
Charge-offs			—				(198	)			(18	)			(198	)
Recoveries			—				—				—				84
Provision for loan losses			32				109				180				254
Balance at end of period		$	872			$	700			$	872			$	700

At September 30, 2009, the Corporation had no impaired, nonaccrual loans and there were no loans over 90 days past due and still accruing interest.

BIRMINGHAM BLOOMFIELD BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 — Deposits

Deposits are summarized as follows (000s omitted):

		September 30,				December 31,
		2009				2008
		(unaudited)
Non-interest bearing deposits		$	7,897			$	5,195
NOW accounts			7,819				7,882
Savings and money market accounts			20,405				10,571
Certificates of deposit <$100,000			13,205				13,089
Certificates of deposit >$100,000			23,265				21,011
Total		$	72,591			$	57,748

At September 30, 2009, the scheduled maturities of time deposits maturing are as follows (000s omitted):

		<$100,000				>$100,000				Total
Within 12 months		$	10,751			$	16,717			$	27,468
> 12 months			2,454				6,548				9,002
Total		$	13,205			$	23,265			$	36,470

Note 6 — Leases and Commitments

The Corporation has entered into a lease agreement for its main office. 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 branch office in Bloomfield Township. Payments began in March 2006 and the lease expires February 2016. The Bloomfield branch office lease has one five year renewal option. Refer to Management Discussion and Analysis for additional information regarding the Bloomfield office lease. Rent expense under the lease agreements was $70,000 and $68,000 for the three months ended September 30, 2009 and 2008, respectively. Rent expense under the lease agreements was $209,000 and $205,000 for the nine months ended September 30, 2009 and 2008, respectively.

The following is a schedule of future minimum rental payments under operating leases on a calendar year basis (000s omitted):

2009		$	71
2010			286
2011			292
2012			298
2013			304
Thereafter			3,365
Total		$	4,616

BIRMINGHAM BLOOMFIELD BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7 — 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. FASB ASC 825 (formerly SFAS 107) excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, 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 - Fair values of securities are based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

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.

BIRMINGHAM BLOOMFIELD BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7 — Fair Value of Financial Instruments — continued

The carrying values and estimated fair values of financial instruments at September 30, 2009 and December 31, 2008, are as follows (in thousands):

		September 30, 2009								December 31, 2008
						Estimated								Estimated
		Carrying				Fair				Carrying				Fair
		Value				Value				Value				Value
Financial assets:
Cash and cash equivalents		$	9,331			$	9,331			$	4,663			$	4,663
Securities available for sale			4,406				4,406				3,880				3,880
Loans			67,485				67,471				56,841				57,273
Accrued interest receivable			350				350				293				293
Financial liabilities:
Deposits			72,591				74,869				57,748				57,897
Accrued interest payable			87				87				153				153

BIRMINGHAM BLOOMFIELD BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8 — 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 of Birmingham was well-capitalized as of September 30, 2009. At September 30, 2009, the Corporation qualifies for an exemption from regulatory capital requirements due to its asset size.

The Bank’s actual capital amounts and ratios as of September 30, 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 September 30, 2009
Total risk-based capital (to risk weighted assets) Bank of Birmingham		$	8,775				13.0	%		$	5,407				8.0	%		$	6,758				10.0	%
Tier I capital (to risk weighted assets) Bank of Birmingham		$	7,920				11.7	%		$	2,703				4.0	%		$	4,055				6.0	%
Tier I capital (to average assets) Bank of Birmingham		$	7,920				9.4	%		$	3,389				4.0	%		$	4,236				5.0	%
As of December 31, 2008
Total risk-based capital (to risk weighted assets) Bank of Birmingham		$	9,345				16.6	%		$	4,491				8.0	%		$	5,614				10.0	%
Tier I capital (to risk weighted assets) Bank of Birmingham		$	8,635				15.4	%		$	2,246				4.0	%		$	3,369				6.0	%
Tier I capital (to average assets) Bank of Birmingham		$	8,635				12.8	%		$	2,695				4.0	%		$	3,369				5.0	%

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Disclosure Regarding 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, especially in light of increased consolidation within the industry; our ability to recruit and retain personnel required to support our growth and expansion and maintain the level of expertise necessary to support operational compliance; the ability to control expenses in this very difficult economic environment and era of special assessments from the FDIC and additional government oversight; 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 manage and access cost-effective funding; 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. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning and Corporation and its business, including additional factors that could materially affect the Corporation’s financial results, is included in its filings with the Securities and Exchange Commission.

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

Economic conditions have worsened for banks in general and particularly in Michigan as the U.S. economy has fallen into a recession. The nation’s economy as a whole including the banking industry has experienced significant downturns resulting in losses, additional government intervention and oversight, and additional expense from FDIC special assessments within our industry. The Bank has been very prudent in lending practices and those efforts continue to show a very clean loan portfolio through the third quarter of the year. Through management’s ongoing review of operations it was determined that the Bloomfield Hills branch location was not contributing to the profitability of the company in the manner anticipated. On October 1, 2009 the Corporation entered into an agreement with the lease holder for that location to terminate the lease effective January 18, 2010. The lease had an original termination date in February 2016. While the cost related to the closure of this location is expected to negatively impact earnings for 2009, the closure will aid in the reduction of ongoing operational costs which have been a hindrance in our efforts to achieve profitability. It is expected that the closure costs will be approximately $630,000 incurred in the fourth quarter that will allow for cost savings of approximately $300,000 per year going forward.

The Bank continues to use its capital for customer loans, investments and other general banking purposes. The Corporation’s initial offering proceeds have enabled the Bank to maintain a leverage capital ratio, which is a measure of core capital to average total assets, in excess of 8% for the first three years of operations as required by the FDIC. The Bank is no longer in de novo status as of July 27, 2009. The Corporation does anticipate that it will require $4.0 to $6.0 million in additional equity during the next 36 months of operations in order to continue to grow while meeting regulatory capital requirements. The Corporation has participated in the Government’s Capital Purchase Program, receiving $1.635 million in capital through the program to fulfill a portion of that need. A second application has been sent in for additional funding available under the program. No determination on the application has been made by the appropriate agencies as of this filing. Management is exploring additional options within the capital markets with the aid of consultants to determine how and when it may raise the anticipated necessary equity.

FINANCIAL CONDITION

At September 30, 2009, the Corporation’s total assets were $82.8 million, an increase of $15.5 million or 23.1% from December 31, 2008. Cash and cash equivalents increased by $4.7 million or 100.1%. Investment securities increased $.5 million or 13.5% from December 31, 2008 to September 30, 2009. Loans, net of the allowance for loan losses, increased by $10.5 million or 18.7% from December 31, 2008 to September 30, 2009. Total deposits increased by $14.8 million or 25.7% from December 31, 2008 to September 30, 2009. Basic and diluted loss per share for the three and nine months ended September 30, 2009 were $(0.08) per share and $(0.52) per share, respectively. These numbers include the impact of the Corporation’s participation in the Capital Purchase Program through the Department of Treasury. Basic and diluted loss per share for the three and nine months ended September 30, 2008 were $(0.13) per share and $(0.70) per share, respectively.

Cash and Cash Equivalents

Cash and cash equivalents increased $4.7 million or 100.1% to $9.3 million at September 30, 2009 up from $4.7 million at December 31, 2008. This difference is due to a decrease in Federal funds sold of $1.0 million and an increase in cash due to $1.6 million received through the Government Capital Purchase Plan, $1.5 million from the State of Michigan CD Stimulus program, and $2.6 million in certificates of deposit and new customer deposits. These funds will be utilized for future anticipated loan fundings.

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Investments

Total investment securities available-for-sale increased $526,000 or 13.5% to $4.4 million at September 30, 2009, compared to $3.9 million at December 31, 2008. The increase in investment securities is primarily attributable to $2.8 million in U.S. Government agency security purchases and the purchase of $162,100 in FHLBI stock, offset by the sale of a corporate security and the call of four U.S. Government agency securities, resulting in an approximate decrease of $2.3 million. The remaining offset was due to repayments on mortgage backed securities. The Bank had no held to maturity securities as of September 30, 2009 and December 31, 2008.

Loans, Credit Quality and Allowance for Loan Losses

During the first nine months of 2009, loans, net of the allowance for loan losses, increased $10.5 million or 18.7%, to $66.6 million at September 30, 2009 up from $56.1 million at December 31, 2008. The largest single category increase within loans, as noted in Note 4 to the financial statements, was commercial non real estate loans which increased by $3.8 million or 46.4% to $12.1 million at September 30, 2009. Multifamily real estate increased by $3.5 million or 46.1% to $11.2 million at September 30, 2009. Commercial real estate increased by $6.2 million or 26.9% to $29.3 million at the current quarter end. These loans are for the most part owner occupied properties. These increases are due in part to increased draws on existing lines as well as continued business development efforts.

The allowance for loan losses was $872,000 or 1.29% of loans at September 30, 2009. For the three and nine month periods ended September 30, 2009, there was one home equity line of credit loan charge off for approximately $18,000 due to it becoming a probate matter, which occurred in the second quarter of 2009. For the three and nine month periods ended September 30, 2008, there were two loan charge-offs totaling approximately $198,000 in the third quarter, a commercial term loan for $173,000 and a consumer line of credit for $25,000. The Corporation had no loan recoveries during the three and nine month periods ended September 30, 2009. In the second quarter of 2008, the Corporation did recover approximately $84,000 on a loan charged-off from 2007. There were no loans over 90 days past due and still accruing interest at September 30, 2009 or 2008.

The primary risk element considered by management regarding each consumer and residential real estate loan is lack of timely payment. 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 annual financial statements from its commercial loan customers and periodically reviews existence of collateral and its value.

Management evaluates the condition of the loan portfolio monthly and again on a quarterly basis to determine the adequacy of the allowance for loan losses. Management’s evaluation of the allowance is further based on consideration of actual loss experience, the present and prospective financial condition of borrowers, adequacy of collateral, industry concentrations within the portfolio, and general economic conditions. Management believes that the present allowance is currently adequate, based on the broad range of considerations listed above. However, management planned a gradual increase in the ratio of loan loss reserve to total loans to around 1.30% for 2009 due to the continued unstable economic environment that the corporation is operating within.

Although management believes that the allowance for loan losses is adequate to absorb losses as they arise, there can be no assurance that the Corporation will not sustain losses in any given period that could be substantial in relation to the size of the allowance for credit losses. 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

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 significantly impacted.

Premises and Equipment

Premises and equipment, net of depreciation, was $2.0 million as of September 30, 2009 and $2.2 million at December 31, 2008. Due to the anticipated branch closure the Corporation will experience a write off of premises and equipment that are associated with that location. The charge will be approximately $498,000 during the fourth quarter of 2009. The Corporation currently is anticipating a change in data processing service providers during the first quarter of 2010. This change may require some additional hardware purchases, however these are not anticipated to have a material impact on expenses.

Deposits

Total deposits were $72.6 million at September 30, 2009, an increase of $14.8 million over December 31, 2008. In the deposit categories, noninterest bearing DDA deposits were $7.9 million, which were made up primarily of business accounts. NOW accounts which, except for limited circumstances, are owned by individuals were $7.8 million at September 30, 2009, while Money Market accounts were $9.8 million and Savings accounts were $10.6 million at the current quarter end. Certificates of deposit were $36.5 million at September 30, 2009. Of this amount $23.3 million was in certificates greater than $100,000. Beginning in February 2008, the Corporation began advertising its rates on certain certificates of deposits on a national certificate of deposit network, which has attracted some deposits from outside the local market. We will continue to utilize this avenue to supplement our deposit base as we continue to focus on growing our portion of the local retail and commercial deposit market. We have also chosen to participate in the MI-CD program with the State of Michigan. This program allows us to acquire State of Michigan certificate of deposit funds at below market rates to aid in the funding of our loan portfolio. Currently, $1.5 million in these funds are included in our time deposits over $100,000.

		As of September 30,
		2009
(000s omitted)		Balance				Percentage
Noninterest bearing demand		$	7,897				10.9
NOW accounts			7,819				10.8
Money market			9,845				13.6
Savings			10,560				14.5
Time deposits under $100,000			13,205				18.1
Time deposits over $100,000			23,265				32.1
Total deposits		$	72,591				100.0	%

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

RESULTS OF OPERATIONS

Net Interest Income

Net interest income for the three months ended September 30, 2009 and 2008 were $748,000 and $532,000 respectively. Interest income on loans was $1,038,000 and $818,000 for the three months ended September 30, 2009 and 2008, respectively. The growth in interest income on loans was driven by continued growth in the loan portfolio. Deposit interest expense of $337,000 and $352,000 for the three month periods ended September 30, 2009 and 2008, respectively, decreased due to the growth in savings accounts and certificates of deposit accounts being offset by significantly lower interest rates offered during the 3^rd quarter of 2009 compared to the same period in 2008.

The following table shows the Corporation’s consolidated average balances of assets, liabilities, and equity. The table also details the amount of interest income or interest expense and the average yield or rate for each category of interest-earning asset or interest-bearing liability as well as the net interest margin.

		Three Months Ended September 30,
		2009												2008
		Average								Average				Average								Average
		Balance								Yield/				Balance								Yield/
		(000s)				Interest				Rate				(000s)				Interest				Rate
Interest-earning assets
Loans		$	67,801			$	1,038,306				6.13	%		$	53,000			$	817,556				6.17	%
Securities			3,773				36,437				3.86	%			3,893				42,176				4.33	%
Federal funds sold			2,316				1,019				0.18	%			4,791				23,711				1.98	%
Interest-bearing balance with other financial institutions			8,092				9,526				0.47	%			—				—				—
Total interest-earning assets			81,982				1,085,288				5.30	%			61,684				883,443				5.73	%
Cash and due from banks			1,266												1,329
All other assets			1,574												1,958
Total assets		$	84,822											$	64,971
Interest-bearing liabilities
NOW accounts		$	8,040				13,474				0.67	%		$	7,615				32,950				1.73	%
Money market			10,261				26,402				1.03	%			11,848				60,999				2.06	%
Savings			10,038				39,102				1.56	%			781				3,546				1.82	%
Time deposits			37,495				258,243				2.75	%			28,372				254,294				3.59	%
Total interest-bearing liabilities			65,834				337,221				2.05	%			48,616				351,789				2.89	%
Non-interest bearing deposits			8,335												6,486
All other liabilities			644												291
Total liabilities			74,813												55,393
Shareholders’ equity			10,009												9,578
Total liabilities and shareholders’ equity		$	84,822											$	64,971
Net interest income						$	748,067											$	531,654
Net spread											3.25	%											2.84	%
Net interest margin (1)											3.65	%											3.45	%
Ratio of interest-earning assets to interest-bearing liabilities			124.53	%											126.88	%

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Net interest income for the nine months ended September 30, 2009 and 2008 was $1.9 million and $1.4 million respectively. Interest income on loans was $2.8 million and $2.2 million for the nine months ended September 30, 2009 and 2008, respectively. As indicated above, the growth in interest income on loans was driven by continued growth in the loan portfolio. Significant growth in interest bearing deposit balances, offset by significantly lower interest rates offered in 2009, resulted in consistent levels of deposit interest expense. Interest expense was $1.0 million for the two nine month periods ended September 30, 2009 and 2008.

The following table shows the Corporation’s consolidated average balances of assets, liabilities, and equity. The table also details the amount of interest income or interest expense and the average yield or rate for each category of interest-earning asset or interest-bearing liability and the net interest margin for the nine month periods ended September 30, 2009 and 2008, respectively.

		Nine Months Ended September 30,
		2009												2008
		Average								Average				Average								Average
		Balance								Yield/				Balance								Yield/
		(000s)				Interest				Rate				(000s)				Interest				Rate
Interest-earning assets
Loans		$	62,782			$	2,774,781				5.89	%		$	46,756			$	2,196,208				6.26	%
Securities			3,554				110,948				4.16	%			2,616				97,811				4.99	%
Federal funds sold			2,544				2,934				0.15	%			6,386				113,841				2.38	%
Interest-bearing balance with other financial institutions			4,927				17,122				0.46	%			—				—				—
Total interest-earning assets			73,807				2,905,785				5.25	%			55,758				2,407,860				5.76	%
Cash and due from banks			1,586												1,277
All other assets			1,693												2,050
Total assets		$	77,086											$	59,085
Interest-bearing liabilities
NOW accounts		$	7,837				52,314				0.89	%		$	8,109				124,318				2.04	%
Money market			10,128				91,091				1.20	%			11,797				202,547				2.29	%
Savings			7,674				95,054				1.65	%			501				6,377				1.70	%
Time deposits			34,468				766,621				2.97	%			22,409				671,975				4.00	%
Total interest-bearing liabilities			60,107				1,005,080				2.23	%			42,816				1,005,217				3.13	%
Non-interest bearing deposits			6,691												5,927
All other liabilities			368												273
Total liabilities			67,166												49,016
Shareholders’ equity			9,920												10,069
Total liabilities and shareholders’ equity		$	77,086											$	59,085
Net interest income						$	1,900,705											$	1,402,643
Net spread											3.02	%											2.63	%
Net interest margin (1)											3.43	%											3.35	%
Ratio of interest-earning assets to interest-bearing liabilities			122.79	%											130.23	%