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		(I.R.S. Employer
incorporation or organization)		Identification No.)

33583 Woodward Avenue, Birmingham, MI 48009

(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		Smaller reporting company þ
		(Do not check if a smaller reporting company)

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

The number of shares outstanding of the issuer’s Common Stock as of November 15, 2010, 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			15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			24
ITEM 4T. CONTROLS AND PROCEDURES			25
PART II. OTHER INFORMATION			26
ITEM 1. LEGAL PROCEEDINGS			26
ITEM 1A. RISK FACTORS			26
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			26
ITEM 3. DEFAULTS UPON SENIOR SECURITIES			26
ITEM 4. [RESERVED]			26
ITEM 5. OTHER INFORMATION			26
ITEM 6. EXHIBITS			27
EX-31.1
EX-31.2
EX-32.1

PART I – FINANCIAL INFORMATION

ITEM 1.		FINANCIAL STATEMENTS

		(unaudited)
		September 30,				December 31,
		2010				2009
Assets
Cash and cash equivalents
Cash		$	11,661,891			$	4,644,416
Federal funds sold			50,299				3,113,785
Total cash and cash equivalents			11,712,190				7,758,201
Securities, available for sale (Note 3)			3,963,672				3,835,082
Loans (Note 4)
Total loans			94,284,107				79,655,896
Less: allowance for loan losses			(1,424,006	)			(1,173,865	)
Net loans			92,860,101				78,482,031
Premises & equipment (Note 6)			1,366,918				1,488,689
Interest receivable and other assets			1,351,593				1,072,770
Total assets		$	111,254,474			$	92,636,773
Liabilities and Shareholders’ Equity
Deposits (Note 5)
Non-interest bearing		$	12,708,760			$	8,494,903
Interest bearing			87,288,547				72,970,583
Total deposits			99,997,307				81,465,486
Interest payable and other liabilities			358,611				443,354
Total liabilities			100,355,918				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			(65,474	)			(79,427	)
Warrant 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 warrant preferred stock series B			7,117				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 — share based payments			493,154				489,459
Accumulated deficit			(10,182,536	)			(10,299,436	)
Accumulated other comprehensive income			150,965				113,373
Total shareholders’ equity			10,898,556				10,727,933
Total liabilities and shareholders’ equity		$	111,254,474			$	92,636,773

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,
		2010				2009				2010				2009
Interest Income
Loans, including fees		$	1,486,216			$	1,038,306			$	4,127,106			$	2,774,781
Taxable securities			35,215				36,437				101,270				110,948
Federal funds sold			51				1,019				1,299				2,934
Correspondent bank			9,967				9,526				21,283				17,122
Total interest income			1,531,449				1,085,288				4,250,958				2,905,785
Interest expense
Deposits			336,660				337,221				1,012,639				1,005,080
Total interest expense			336,660				337,221				1,012,639				1,005,080
Net interest income			1,194,789				748,067				3,238,319				1,900,705
Provision for loan losses			255,652				32,000				544,949				180,776
Net interest income after provision for loan losses			939,137				716,067				2,693,370				1,719,929
Non-interest income
Loan fees and charges			2,952				4,337				16,514				10,008
Deposit fees and charges			22,895				20,053				64,061				54,779
Other income			1,578				2,916				24,312				12,733
Total non-interest income			27,425				27,306				104,887				77,520
Non-interest expense
Salaries and benefits			428,327				398,630				1,226,890				1,176,724
Occupancy & equipment expense			143,398				191,873				433,941				607,413
Share based payments			—				5,911				3,695				19,211
Data processing expense			56,870				54,845				162,000				158,610
Advertising and public relations			21,895				(650	)			67,229				56,608
Professional fees			62,898				72,663				222,603				269,977
Printing and office supplies			7,013				5,400				18,714				21,422
FDIC and state regulatory assessments			48,876				50,131				121,861				137,054
Loan production and servicing expense			24,524				26,947				67,159				53,306
Other expense			74,821				61,052				212,334				205,963
Total non-interest expense			868,622				866,802				2,536,426				2,706,288
Net income (loss) before taxes			97,940				(123,429	)			261,831				(908,839	)
Income taxes			—				—				—				—
Net income (loss)		$	97,940			$	(123,429	)		$	261,831			$	(908,839	)
Dividend on senior preferred stock			(44,082	)			(22,283	)			(132,495	)			(27,482	)
Amortization of discount on preferred stock			(4,191	)			(3,942	)			(12,436	)			(6,994	)
Effective dividend on preferred stock			(48,273	)			(26,225	)			(144,931	)			(34,476	)
Net income (loss) applicable to common shareholders		$	49,667			$	(149,654	)		$	116,900			$	(943,315	)
Basic income (loss) per share		$	0.03			$	(0.08	)		$	0.06			$	(0.52	)
Diluted income (loss) per share		$	0.03			$	(0.08	)		$	0.06			$	(0.52	)

See notes to consolidated financial statements

BIRMINGHAM BLOOMFIELD BANCSHARES, INC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
January 1, 2010 to September 30, 2010
(Unaudited)

																		Accumulated
										Additional								Other
		Preferred				Common				Paid in				Accumulated				Comprehensive
		Stock				Stock				Capital				Deficit				Income				Total
Balance at January 1, 2010		$	3,390,207			$	17,034,330			$	489,459				($10,299,436	)		$	113,373			$	10,727,933
Amortization of senior preferred stock A			13,953				—				—				(13,953	)			—				—
Accretion of warrant preferred stock B			(1,517	)			—				—				1,517				—				—
Preferred dividends			—				—				—				(132,495	)			—				(132,495	)
Share based payments expense			—				—				3,695				—				—				3,695
Comprehensive income:			—				—				—				—				—				—
Net earnings			—				—				—				261,831				—				261,831
Change in unrealized gain on securities			—				—				—				—				37,592				37,592
Total comprehensive income			—				—				—				—								299,424
Balance at September 30,2010		$	3,402,643			$	17,034,330			$	493,154			$	(10,182,536	)		$	150,965			$	10,898,556

See accompanying notes to consolidated financial statements

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

		For the Nine Months Ended September 30,
		2010				2009
Cash flows from operating activities
Net income (loss)		$	261,831			$	(909,578	)
Share based payments expense			3,695				19,950
Provision for loan losses			544,949				180,776
Accretion of securities			(3,865	)			(3,531	)
Gain on sales or calls of securities			—				(3,027	)
Depreciation expense			134,157				225,674
Loss on disposal of equipment			—				—
Net (increase) decrease in other assets			(278,823	)			(48,359	)
Net decrease in other liabilities			(84,743	)			(33,846	)
Net cash provided by (used in) operating activities			577,201				(571,941	)
Cash flows from investing activities
Origination of portfolio loans, net of principal repayments			(14,923,019	)			(10,662,699	)
Purchase of securities			(2,976,260	)			(2,954,862	)
Proceeds from sales, calls or maturities of securities			2,889,128				2,422,629
Purchases of premises and equipment, net of proceeds			(12,387	)			(16,746	)
Net cash used in investing activities			(15,022,538	)			(11,211,678	)
Cash flows from financing activities
Increase in deposits			18,531,821				14,843,261
Proceeds from sale of senior preferred stock			—				1,635,000
Dividend on senior preferred stock			(132,495	)			(27,482	)
Net cash provided by financing activities			18,399,326				16,450,779
Increase in cash and cash equivalents			3,953,989				4,667,160
Cash and cash equivalents at the beginning of the period			7,758,201				4,663,497
Cash and cash equivalents at the end of the period		$	11,712,190			$	9,330,657
Supplemental cash flow information:
Cash paid for interest:		$	980,895			$	1,070,918

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, 2009.

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. The results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ended December 31, 2010.

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

Accounting Standards Update (ASU) No. 2010-20, “Receivables (Topic 310): Disclosure about Credit Quality of Financing Receivables and the Allowance For Credit Losses” The objective of this guidance is for an entity to provide disclosures that facilitate the evaluation of the nature of credit risk inherent in the entity’s portfolio of financing receivables; how that risk is analyzed and assessed in arriving at the allowance for doubtful accounts and; the changes and reasons for those changes in the allowance for credit losses. To achieve those objectives, disclosures on a disaggregated basis shall be provided on two defined levels: (1) portfolio segment; and (2) class of financing receivable. This guidance makes changes to existing disclosure requirements and includes additional disclosure requirements relating to financing receivables. Short-term accounts receivable, receivables measured at fair value or lower of cost or fair value and debt securities are exempt from this guidance. The guidance pertaining to disclosures as of the end of a reporting period is effective for the Corporation for interim and annual reporting periods on or after December 15, 2010. The guidance pertaining to disclosures about activity that occurs during a reporting period is effective for the Corporation for interim and annual reporting periods beginning on or after December 15, 2010. The provisions of this guidance are not expected to have a significant impact on the Corporation’s consolidated financial condition, results of operations or liquidity.

BIRMINGHAM BLOOMFIELD BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 – Fair Value Accounting

Valuation Hierarchy

FASB ASC 820 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. 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 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.

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 is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Assets

Securities available for sale

All of the Corporation’s securities available for sale are classified within Level 2 of the valuation hierarchy as quoted prices for similar assets are available in an active market.

The following table presents the financial instruments carried at fair value as of September 30, 2010, 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, 2010 (000s omitted):

Quoted Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Balance at

Assets

Inputs

Inputs

September

(unaudited)

Level 1

Level 2

Level 3

30,2010

Securities available for sale

$

—

$

3,964

$

—

$

3,964

BIRMINGHAM BLOOMFIELD BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 — Fair Value Accounting -continued

The Corporation has assets that under certain conditions are subject to measurement at fair value on a nonrecurring basis. The fair value of impaired loans is based on the present value of expected future cash flows using management’s assumptions about future payment ability, timing of expected cash flows and the estimated realizable value of collateral (typically based on appraisals). There were $0.6 million in impaired loans at September 30, 2010 and $0 at September 30, 2009.

Note 3 — Securities

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

						Gross				Gross				Estimated
(unaudited)		Amortized				unrealized				unrealized				fair
September 30, 2010		cost				gains				losses				value
U.S. Government agency securities		$	1,870			$	20			$	—			$	1,890
State and local government securities			650				13				—				663
Mortgage backed securities			881				107				—				988
Corporate bonds			250				11				—				261
Subtotal Available for Sale		$	3,651			$	151			$	—			$	3,802
FHLB Stock			162				—				—				162
Total		$	3,813			$	151			$	—			$	3,964

						Gross				Gross				Estimated
		Amortized				unrealized				unrealized				fair
December 31, 2009		cost				gains				losses				value
U.S. Government agency securities		$	2,342			$	18			$	—			$	2,360
State and local government securities			200				4				—				204
Mortgage backed securities			1,018				91				—				1,109
Corporate bonds			—				—				—				—
Subtotal Available for Sale		$	3,560			$	113			$	—			$	3,673
FHLB Stock			162				—				—				162
Total		$	3,722			$	113			$	—			$	3,835

BIRMINGHAM BLOOMFIELD BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3 — Securities -continued

As of September 30, 2010 and December 31, 2009, all securities are available for sale, with the exception of Federal Home Loan Bank stock which is restricted in that it can only be sold back to the Federal Home Loan Bank. The carrying value of the stock approximates its fair value. The securities held in our portfolio experienced no rating changes during the quarter and remain at “AAA,” except for two securities, a municipal holding which is “Aa3” and a corporate debt security at “Aa2.” Both were based on ratings by Moody. At September 30, 2010 and December 31, 2009, securities were pledged to secure public deposits from the State of Michigan. The total securities pledged were $1.85 million at September 30, 2010 and $1.45 million at December 31, 2009, respectively.

The amortized cost and estimated fair value of securities at September 30, 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):

(unaudited)		Amortized Cost				Estimated fair value
Due in one year or less		$	1,200			$	1,208
Due in one year through five years			851				880
Due in five years through ten years			718				726
Due after ten years			—				—
Subtotal		$	2,769			$	2,814
Mortgage backed securities			882				988
FHLB Stock			162				162
Total		$	3,813			$	3,964

Note 4 — Loans

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

		(unaudited)
		September 30,				December 31,
		2010				2009
Mortgage loans on real estate
Residential 1-4		$	3,302			$	1,353
Multifamily			12,436				12,647
Commercial			43,949				35,917
Construction			2,676				518
Second mortgage			145				171
Equity lines of credit			11,644				11,445
Total real estate loans			74,152				62,051
Commercial loans			19,310				17,186
Consumer installment loans			959				512
Total portfolio loans			94,421				79,749
Less: ALLL			1,424				1,174
Deferred fees			137				93
Net portfolio loans		$	92,860			$	78,482

BIRMINGHAM BLOOMFIELD BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4 — Loans — continued

Activity in the allowance for loan losses for the three and nine months ended September 30, are as follows (000’s omitted):

		Three months ended								Nine months ended
		September 30,								September 30,
(unaudited)		2010				2009				2010				2009
Balance at beginning of period		$	1,168			$	840			$	1,174			$	710
Charge-offs			—				—				(341	)			(18	)
Recoveries			—				—				46				—
Provision for loan losses			256				32				545				180
Balance at end of period		$	1,424			$	872			$	1,424			$	872

At September 30, 2010, there were 2 loans considered to be impaired totaling approximately $614,600 with allocated specific reserves of approximately $236,600. There was one nonaccrual loan in the portfolio with a balance of approximately $25,000. There were no loans over 90 days past due and still accruing interest as of September 30, 2010.

Note 5 — Deposits

Deposits are summarized as follows (000s omitted):

		(unaudited)
		As of September 30, 2010								As of December 31, 2009
		Balance				Percentage				Balance				Percentage
Noninterest bearing demand		$	12,709				12.7	%		$	8,495				10.4	%
NOW accounts			7,029				7.0	%			7,894				9.7	%
Money market			10,160				10.2	%			7,815				9.6	%
Savings			18,279				18.3	%			11,785				14.5	%
Time deposits under $100,000			12,264				12.3	%			13,240				16.3	%
Time deposits over $100,000			39,556				39.5	%			32,236				39.5	%
Total deposits		$	99,997				100.0	%		$	81,465				100.0	%

At September 30, 2010, the scheduled maturities of time deposits are as follows (000s omitted):

(unaudited)		<$100,000				>$100,000				Total
Within 12 months		$	3,793			$	12,835			$	16,628
> 12 months			8,471				26,721				35,192
Total		$	12,264			$	39,556			$	51,820

BIRMINGHAM BLOOMFIELD BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 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 provided for a one-time payment of $110,000 to the leaseholder to end the lease which was expensed in 2009 and paid in 2010. In January 2010, a six month lease agreement was signed for office space to house a business development officer at a lease rate of $900 per month. In July 2010, a six month lease was signed for additional office space in the building next to the main office at a rate of $700 per month. Rent expense under all these agreements was $59,000 and $70,000 for the quarters ended September 30, 2010 and September 30, 2009. Rent expense under these agreements was $185,000 and $139,000 for the nine month periods ended September 30, 2010 and 2009, respectively.

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

2010		$	59
2011			230
2012			234
2013			239
2014			244
Thereafter			2,976
Total		$	3,982

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 excludes certain financial instruments and all non-financial 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.

BIRMINGHAM BLOOMFIELD BANCSHARES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7 — Fair Value of Financial Instruments — continued

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.

The carrying values and estimated fair values of financial instruments at September 30, 2010 and December 31, 2009, are as follows (in thousands):

		(unaudited)
		September 30, 2010								December 31, 2009
		Carrying				Estimated				Carrying				Estimated
		Value				Fair Value				Value				Fair Value
Financial assets:
Cash and cash equivalents		$	11,712			$	11,712			$	7,758			$	7,758
Securities available for sale			3,964				3,964				3,835				3,835
Loans			92,860				93,305				78,482				78,952
Accrued interest receivable			419				419				335				335
Financial liabilities:
Deposits			99,997				100,411				81,465				81,807
Accrued interest payable			108				108				77				77

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 was well-capitalized as of September 30, 2010. At September 30, 2010, 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, 2010 and December 31, 2009 are presented in the following table (000s omitted):

										For Capital								To be
		Actual								Adequacy Purposes								Well-Capitalized
(unaudited)		Amount				Ratio				Amount				Ratio				Amount				Ratio
As of September 30, 2010
Total risk-based capital (to risk weighted assets) Bank of Birmingham		$	10,008				10.8	%		$	7,394				8.0	%		$	9,243				10.0	%
Tier I capital (to risk weighted assets) Bank of Birmingham		$	8,849				9.6	%		$	3,697				4.0	%		$	5,546				6.0	%
Tier I capital (to average assets) Bank of Birmingham		$	8,849				8.2	%		$	4,321				4.0	%		$	5,402				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	%

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; 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. 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 the 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

The Corporation is a Michigan corporation that was incorporated in 2004 to serve as the holding company for a Michigan state chartered 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. Bank of Birmingham has continued to grow despite the economic downturn in the state of Michigan by lending with a strong focus on credit quality. While Oakland county is not immune to these issues, the demographics of the Birmingham-Bloomfield area somewhat lessen the impact of these economic conditions.

The Corporation received funds from the sale of its preferred stock under the U.S. Treasury’s Capital Purchase Program. Proceeds received during 2009 from this sale were $3.379 million which will be used to supplement the strong capital position of the Bank.

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, near the intersection of Telegraph Road in Bloomfield Township, MI, which was unprofitable and subsequently closed on January 18, 2010. The main office lease commenced in October 2005 and the Bank exercised its first renewal option thereby extending the lease to 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 2010. During January 2010, a six month short term lease was executed for office space to house one of our business development officers. During July 2010, a six month short term lease was executed for office space for the remainder of 2010. During 2009, the Corporation completed the sale of fixed rate cumulative preferred stock under the United States Treasury Capital Purchase Program. These funds provided additional capital to support growth.

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.

FINANCIAL CONDITION

At September 30, 2010, the Corporation’s total assets were $111.3 million, an increase of $18.6 million or 20.1% from December 31, 2009. Cash and cash equivalents increased by $4.0 million or 51.0%. Investment securities available for sale increased $0.2 million or 3.4% from December 31, 2009 to September 30, 2010. Loans, net of the allowance for loan losses, increased by $14.2 million or 18.1% from December 31, 2009 to September 30, 2010. Total deposits increased by $18.5 million or 22.7% from December 31, 2009 to September 30, 2010. Basic and diluted earnings per share for the three and nine months ended September 30, 2010 were $0.05 per share and $0.15 per share, respectively. 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.

Cash and Cash Equivalents

Cash and cash equivalents increased $4.0 million or 51.0% to $11.7 million at September 30, 2010 up from $7.8 million at December 31, 2009. Federal funds sold decreased $3.1 million or 98.4% to $50,300 at September 30, 2010. The decrease in Federal funds sold is due to the shifting of excess funds to other correspondent bank accounts which earn somewhat higher interest rates.

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

Investments

Total investment securities available-for-sale increased $0.2 million or 5.3% to $4.0 million at September 30, 2010 up from $3.8 million at December 31, 2009. During the nine months ended September 30, 2010, decreases in the balance were due to repayments on mortgage backed securities and six called Agency securities, three of which were called in the third quarter. The decreases were offset by purchases of five Agency securities, two municipal bonds and one corporate bond. The Corporation had no held-to-maturity securities as of September 30, 2010 or December 31, 2009.

Loans, Credit Quality and Allowance for Loan Losses

During the first nine months of 2010, loans, net of the allowance for loan losses, increased $14.4 million or 18.3%, to $92.9 million at September 30, 2010 up from $78.5 million at December 31, 2009. The largest single category increase within loans, as noted in Note 4 to the financial statements, was commercial real estate which increased by $8.0 million or 22.4% to $43.9 million at September 30, 2010. Residential 1-4 family loans increased by $1.9 million or 144.1% to $3.3 million in the first nine months. Construction loans increased by $2.2 million to $2.7 million during the first nine months of 2010 up from $0.5 million at December 31, 2009. Commercial non real estate loans increased as well by approximately $1.9 million or 11.2% to $19.1 million at September 30, 2010. Management expects further loan growth in 2010, primarily in the commercial and commercial real estate loan portfolios driven by continued business development efforts.

The allowance for loan losses was $1.4 million or 1.51% of portfolio loans at September 30, 2010. There were no charge-offs during the three months ended September 30, 2010 while charge-offs totaled $341,000 for the nine month period ended September 30, 2010. There were no recoveries in the current quarter, while recoveries for the nine months ended September 30, 2010 totaled $46,000. For the three and nine month periods ended September 30, 2009, one home equity line of credit was charged-off for approximately $18,000, with no recoveries during the period. Nonperforming loans, which consist of non-accruing loans and loans past due 90 days or more and still accruing interest, were $199,999 at December 31, 2009. There was one nonperforming loan as of September 30, 2010 for $25,000.

Commercial loans are reported as being in nonaccrual 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 stay on accrual status. However, if the loan is not brought current before becoming 120 days past due, the loan is reported as nonaccrual. A nonaccrual 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.

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 on at least 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.

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

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 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 was $1.4 million as of September 30, 2010 down from $1.5 million as of December 31, 2009. The Corporation has plans to support further growth of business lines, such as mortgage lending, over the next twelve months.

Deposits

Total deposits were $100.0 million as September 30, 2010, an increase of $18.5 million over December 31, 2009. In the deposit categories, noninterest bearing DDA deposits were $12.7 million, consisting of business accounts. NOW accounts which, except for limited circumstances, are owned by individuals were $7.0 million at September 30, 2010, while money market accounts were $10.2 million and savings accounts were $18.3 million at the current quarter end. Certificates of deposit were $51.8 million at September 30, 2010. Of this amount $39.6 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.

		(unaudited)
		As of September 30, 2010
Deposits (000s omitted)		Balance				Percentage
Noninterest bearing demand		$	12,709				12.7	%
NOW accounts			7,029				7.0	%
Money market			10,160				10.2	%
Savings			18,279				18.3	%
Time deposits under $100,000			12,264				12.3	%
Time deposits over $100,000			39,556				39.5	%
Total deposits		$	99,997				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, 2010 and 2009 was $1.2 million and $0.7 million respectively. Interest income on loans was $1.5 million and $1.1 million for the three months ended September 30, 2010 and 2009, respectively. The growth in interest income on loans was driven by continued growth in the loan portfolio. Deposit interest expense was steady at $0.3 million for the three month periods ended September 30, 2010 and 2009, respectively, despite significantly higher levels of deposits in the current quarter. This was the result of the Corporation paying lower rates on deposits in the current quarter compared to the same quarter in the prior year.

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 three months ended September 30, 2010 and 2009, respectively.

		Three Months Ended												Three Months Ended
		September 30, 2010												September 30, 2009
		Average				Interest				Average				Average				Interest				Average
		Balance				Income/				Yield/				Balance				Income/				Yield/
		(000’s)				Expense				Rate				(000’s)				Expense				Rate
Interest-earning assets:
Loans receivable		$	92,522			$	1,486,216				6.43	%		$	67,801			$	1,038,306				6.13	%
Securities available for sale			4,410				35,215				3.19	%			3,773				36,437				3.86	%
Federal funds sold			127				51				0.16	%			2,316				1,019				0.18	%
Interest-bearing balances with other financial institutions			11,261				9,967				0.35	%			8,092				9,526				0.47	%
Total interest-earning assets			108,320				1,531,449				5.66	%			81,982				1,085,288				5.30	%
Noninterest-earning assets:
Cash and due from banks			569												1,266
All other assets			1,202												1,574
Total Assets		$	110,091											$	84,822
Interest-bearing liabilities:
NOW accounts		$	7,442			$	7,963				0.43	%		$	8,040			$	13,474				0.67	%
Money market			9,558				15,401				0.64	%			10,261				26,402				1.03	%
Savings			16,575				39,673				0.96	%			10,038				39,102				1.56	%
Time deposits			51,940				273,623				2.11	%			37,495				258,243				2.75	%
Total interest-bearing liabilities:		$	85,515				336,660				1.57	%		$	65,834				337,221				2.05	%
Non-interest bearing demand deposits			13,467												8,335
All other liabilities			249												644
Total liabilities			99,231												74,813
Shareholders’ Equity			10,860												10,009
Total liabilities and shareholders’ equity		$	110,091											$	84,822
Net Interest Income						$	1,194,789											$	748,067
Net spread											4.08	%											3.25	%
Net Interest Margin(1)											4.41	%											3.65	%
Ratio of interest-earning assets to interest-bearing liabilities											126.67	%											124.53	%

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, 2010 and 2009 was $3.2 million and $1.9 million respectively. Interest income on loans was $4.3 million and $2.9 million for the nine months ended September 30, 2010 and 2009, respectively. The growth in interest income on loans was driven by continued growth in the loan portfolio. Deposit interest expense remained steady at $1.0 million for the nine month periods ended September 30, 2010 and 2009, respectively. The Corporation had significant growth in deposit balances, but at considerably lower interest rates in 2010 compared to 2009.

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 months ended September 30, 2010 and 2009, respectively.

		Nine Months Ended												Nine Months Ended
		September 30, 2010												September 30, 2009
		Average				Interest				Average				Average				Interest				Average
		Balance				Income/				Yield/				Balance				Income/				Yield/
		(000’s)				Expense				Rate				(000’s)				Expense				Rate
Interest-earning assets:
Loans receivable		$	87,680			$	4,127,106				6.28	%		$	62,782			$	2,774,781				5.89	%
Securities available for sale			3,944				101,270				3.42	%			3,554				110,948				4.16	%
Federal funds sold			1,566				1,299				0.11	%			2,544				2,934				0.15	%
Interest-bearing balances with other financial institutions			9,794				21,283				0.29	%			4,927				17,122				0.46	%
Total interest-earning assets			102,984				4,250,958				5.50	%			73,807				2,905,785				5.25	%
Noninterest-earning assets:
Cash and due from banks			710												1,586
All other assets			1,209												1,693
Total Assets		$	104,903											$	77,086
Interest-bearing liabilities:
NOW accounts		$	7,807			$	28,929				0.49	%		$	7,837			$	52,314				0.89	%
Money market			9,117				44,580				0.65	%			10,128				91,091				1.20	%
Savings			14,990				123,479				1.10	%			7,674				95,054				1.65	%
Time deposits			50,551				815,651				2.15	%			34,468				766,621				2.97	%
Total interest-bearing liabilities:		$	82,465				1,012,639				1.64	%		$	60,107				1,005,080				2.23	%
Non-interest bearing demand deposits			11,301												6,691
All other liabilities			352												368
Total liabilities			94,118												67,166
Shareholders’ Equity			10,785												9,920
Total liabilities and shareholders’ equity		$	104,903											$	77,086
Net Interest Income						$	3,238,319											$	1,900,705
Net spread											3.87	%											3.02	%
Net Interest Margin (1)											4.19	%											3.43	%
Ratio of interest-earning assets to interest-bearing liabilities											124.88	%											122.79	%