EXHIBIT 13

April 2010

Dear Fellow Shareholders:

As you know, Bank of Birmingham is very much a community bank. The term “community bank” has been around a longtime; only recently has its value as a brand become apparent. As the name suggests, we are locally owned and locally operated. Decisions are made by individuals who live in and understand the market. There is a positive perception of a community bank versus a big bank. That is why I believe we are very well positioned to continue to be successful.

In 2009, we increased loans and deposits, improved our margins, eliminated overhead, and maintained credit quality. Despite the poor economy, we continued to grow at double digit rates. Our assets grew by $25.3 million (38%) from 2008 to 2009. Asset growth was funded by an increase in deposits from $57.7 million in 2008 to $81.5 million in 2009. We were also able to increase our net interest margin from 3.31% in 2008, to 3.51% in 2009. What is even more encouraging is we were able to increase our margin from 3.28% in January 2009 to 3.64% in December of 2009. We expect continued margin improvement in 2010.

Credit quality remains one of the keys to our success. We are very fortunate we have not had the problems in our loan portfolio that a majority of other banks have had. Our net charge offs of $16,000 for 2009 is something we are very proud of. I attribute this success to the quality and experience of our Relationship Managers and credit staff. Although I am encouraged by improvement in some sectors of the economy, I believe the recovery is still in a very fragile state. As a result, credit quality will continue to be a challenge for all banks in 2010.

Capital is a critical component for any business, including a bank. Those companies that are well capitalized have the staying power necessary to work through difficult times. Capital availability or the lack thereof, is the biggest challenge facing our industry. Traditional sources of capital have not yet reentered the market. We feel very fortunate that we are one of the few banks in Michigan approved by the Treasury to receive TARP funds. As a result, our year-end capital ratios put us in the “well capitalized” category as defined under regulatory guidelines.

Unfortunately, we reported a net loss of $1.9 million for 2009 compared to a net loss of $1.5 million for 2008. Our 2009 loss includes an extraordinary charge of $609,330 resulting from the closing of our Bloomfield branch and an increase in our loan loss reserve in December. The elimination of the branch will reduce our occupancy expense by $250,000 per year, bringing this expense more in line with our peers. And though our loan loss experience did not dictate an increase in our reserve, we thought it prudent to do so, given the continued softness both in the residential housing and commercial real estate markets.

I am encouraged by what I see ahead. The U.S. auto companies have lowered costs, improved quality, and are designing attractive vehicles customers want. Our regional politicians seem to be working hard to move Southeast Michigan forward. Companies and individuals have gone through the difficult process of deleveraging. I believe the worst is behind us.

My goal for 2010 is to continue to prudently grow the bank, generate consistent profitability, and remain committed to providing outstanding customer service. I appreciate your continued support in helping make that happen. Please feel free to call me (248)283-6430 or email me rob.farr@bkofb.com at anytime with your questions or comments.

Sincerely,
Robert E. Farr
President and CEO

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

Report of Independent Registered Public Accounting Firm

To the Board of Directors
Birmingham Bloomfield Bancshares Inc.

We have audited the accompanying consolidated balance sheet of Birmingham Bloomfield Bancshares, Inc. as of December 31, 2009 and 2008 and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years ended December 31, 2009 and 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Birmingham Bloomfield Bancshares, Inc. at December 31, 2009 and 2008 and the consolidated results of its operations, changes in stockholders’ equity and its cash flows for the years ended December 31, 2009 and 2008, in conformity with accounting principles generally accepted in the United States of America.

/s/ Plante & Moran, PLLC

Auburn Hills, Michigan
March 31, 2010

BIRMINGHAM BLOOMFIELD BANCSHARES, INC
CONSOLIDATED BALANCE SHEETS

		December 31,
		2009				2008
Assets
Cash and cash equivalents
Cash		$	4,644,416			$	1,201,318
Federal funds sold			3,113,785				3,462,179
Total cash and cash equivalents			7,758,201				4,663,497
Securities, available for sale (Note 3)			3,835,082				3,880,401
Loans (Note 4)
Total loans			79,655,896				56,840,675
Less: allowance for loan losses			(1,173,865	)			(710,000	)
Net loans			78,482,031				56,130,675
Premises & equipment (Note 6)			1,488,689				2,232,317
Interest receivable and other assets			1,072,770				391,646
Total assets		$	92,636,773			$	67,298,536
Liabilities and Shareholders’ Equity
Deposits (Note 5)
Non-interest bearing		$	8,494,903			$	5,194,795
Interest bearing			72,970,583				52,553,240
Total deposits			81,465,486				57,748,035
Interest payable and other liabilities			443,354				238,532
Total liabilities			81,908,840				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				-
Discount on senior preferred stock series A			(79,427	)			—
Senior cumulative perpetual preferred stock series B $1,000 liquidation value per share, 9%
Authorized, issued and outstanding - 82 shares			82,000				—
Premium on preferred stock series B			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				—
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			489,459				466,553
Accumulated deficit			(10,299,436	)			(8,311,252	)
Accumulated other comprehensive income			113,373				122,338
Total shareholders’ equity			10,727,933				9,311,969
Total liabilities and shareholders’ equity		$	92,636,773			$	67,298,536

See notes to consolidated financial statements

BIRMINGHAM BLOOMFIELD BANCSHARES, INC
CONSOLIDATED STATEMENT OF OPERATIONS

		For the Years Ended December 31,
		2009				2008
Interest Income
Loans, including fees		$	3,876,233			$	3,052,072
Taxable securities			151,777				138,339
Federal funds sold			4,103				116,000
Correspondent bank			26,853				2,258
Total interest income			4,058,966				3,308,669
Interest expense
Deposits			1,345,475				1,386,846
Total interest expense			1,345,475				1,386,846
Net interest income			2,713,491				1,921,823
Provision for loan losses			480,380				384,003
Net interest income after provision for loan losses			2,233,111				1,537,820
Non-interest income
Loan fees and charges			13,118				18,152
Deposit fees and charges			70,178				69,009
Other income			15,062				30,266
Total non-interest income			98,358				117,427
Non-interest expense
Salaries and benefits			1,601,016				1,422,774
Occupancy & equipment expense			808,973				820,491
Loss on Bloomfield Branch closure			609,330				—
Data processing expense			211,514				185,211
Advertising and public relations			61,740				74,431
Professional fees			340,397				278,087
Printing and office supplies			27,950				25,066
Other expense			583,471				361,289
Total non-interest expense			4,244,391				3,167,349
Income taxes			—				—
Net loss		$	(1,912,922	)		$	(1,512,102	)
Dividend on senior preferred stock			(64,055	)			—
Accretion of discount on pref stock			(11,207	)			—
Effective dividend on preferred stock			(75,262	)			—
Net loss applicable to common shareholders		$	(1,988,184	)		$	(1,512,102	)
Basic loss per share			(1.10	)			(0.84	)
Diluted loss per share			(1.10	)			(0.84	)

See notes to consolidated financial statements

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

																		Accumulated
										Additional								Other
		Preferred				Common				Paid in				Accumulated				Comprehensive
		Stock				Stock				Capital				Deficit				Income				Total
Balance at December 31, 2007			—				17,034,330				462,000			$	(6,799,150	)			62,459				10,759,639
Share based payments expense			—				—				4,553				—				—				4,553
Comprehensive loss:
Net loss			—				—				—				(1,512,102	)			—				(1,512,102	)
Change in unrealized gain on securities — Net of reclassification adjustment of $19,270 (Note 3)			—				—				—				—				59,879				59,879
Total comprehensive loss																							(1,447,670	)
Balance at December 31, 2008			—				17,034,330				466,553			$	(8,311,252	)			122,338			$	9,311,969
Issue senior preferred stock A			1,635,000				—				—				—				—				1,635,000
Discount senior preferred stock A			(92,000	)			—				—				—				—				(92,000	)
Accretion of senior pref stock A			12,573				—				—				(12,573	)			—				0
Issue preferred stock B			82,000				—				—				—				—				82,000
Premium preferred stock B			10,000				—				—				—				—				10,000
Amortization of premium pref stock B			(1,366	)			—				—				1,366				—				0
Issue senior preferred stock C			1,744,000				—				—								—				1,744,000
Preferred dividends			—				—				—				(64,055	)			—				(64,055	)
Share based payments expense			—				—				22,906				—				—				22,906
Comprehensive loss:
Net loss			—				—				—				(1,912,922	)			—				(1,912,922	)
Change in unrealized gain on securities — Net of reclassification adjustment of $3,028 (Note 3)			—				—				—				—				(8,965	)			(8,965	)
Total comprehensive loss																							(1,921,887	)
Balance at December 31, 2009		$	3,390,207			$	17,034,330			$	489,459			$	(10,299,436	)		$	113,373			$	10,727,933

See notes to consolidated financial statements

BIRMINGHAM BLOOMFIELD BANCSHARES, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS

		For the Years Ended December 31,
		2009				2008
Cash flows from operating activities
Net loss		$	(1,912,922	)		$	(1,512,102	)
Share based payments expense			22,906				4,553
Provision for loan losses			480,380				384,003
Accretion of securities			(5,147	)			(30,604	)
Gain on calls of securities			(3,028	)			(19,270	)
Depreciation expense			786,190				312,660
Net decrease (increase) in other assets			(699,474	)			66,511
Net increase in other liabilities			204,822				629
Net cash used in operating activities			(1,126,273	)			(793,620	)
Cash flows from investing activities
Origination of loans, net of principal repayments			(22,813,386	)			(19,967,702	)
Purchase of securities			(2,954,862	)			(3,990,436	)
Proceeds from sales, calls or maturities of securities			2,999,391				2,815,718
Purchases of premises and equipment			(42,562	)			(25,276	)
Net cash used in investing activities			(22,811,419	)			(21,167,696	)
Cash flows from financing activities
Increase in deposits			23,717,451				21,485,687
Proceeds from sale of senior preferred stock			3,379,000				—
Dividend on senior preferred stock			(64,055	)			—
Net cash provided by financing activities			27,032,396				21,485,687
(Decrease) increase in cash and cash equivalents			3,094,704				(475,629	)
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		$	7,758,201			$	4,663,497

See notes to consolidated financial statements

Note 1 – Summary of Significant accounting principles

Basis of Presentation - The accompanying consolidated statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The consolidated financial statements include the accounts of Birmingham Bloomfield Bancshares, Inc. (the “Corporation”), and its wholly owned subsidiary, Bank of Birmingham (“Bank”). All significant intercompany transactions are eliminated in consolidation.

Organization - The Corporation was incorporated February 26, 2004 as Birmingham Bloomfield Bancorp, Inc., for the purpose of becoming a bank holding company under the Bank Holding Company Act of 1956, as amended. The Corporation subsequently changed its name to Birmingham Bloomfield Bancshares, Inc. The Corporation received the required regulatory approvals to purchase the common stock of the Bank on July 26, 2006. The Corporation closed on its first phase of its equity offering totaling $13,988,300 on July 26, 2006 and capitalized the Bank with $13,000,000. Bank of Birmingham opened for business on July 26, 2006. The Corporation continued raising capital until the closing of its offering on September 30, 2006. Early in the fourth quarter of 2006, the Corporation closed on the remaining portion of its equity offering of $4,011,700 bringing its total equity to $18,000,000 before offering costs. Direct costs related to the offering of common stock were $966,000 and were capitalized and netted against the offering proceeds as of December 31, 2006.

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

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

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

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

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

Note 1 – Summary of Significant Accounting Policies – continued

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

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

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

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

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

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

Large groups of homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual consumer and residential loans for impairment disclosures, except if modified and considered to be a troubled debt restructuring. The Corporation performed no such modifications in the current year.

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

Note 1 – Summary of Significant Accounting Policies – continued

Property and Equipment – The Corporation has approximately $1,489,000 of property and equipment on its balance sheet as of December 31, 2009. The majority of this represents leasehold improvements on the Corporation’s main office at 33583 Woodward, Birmingham, MI. Leasehold improvements and equipment are carried at cost, less accumulated depreciation computed on the straight-line method over the shorter of the estimated useful lives of the assets or the length of the building leases as applicable.

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

Other Comprehensive Income - Basic accounting principals generally require that recognized revenue, expenses, gains, and losses be included in net income (loss). Certain changes in assets and liabilities, however, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the consolidated balance sheet. Such items, along with net income (loss) are components of comprehensive income.

Earnings per Share - Basic earnings per share represents income available to shareholders divided by the weighted-average number of shares outstanding during the period. Diluted earnings per share includes stock options and organizer warrants.

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

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 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.

Note 2 – Fair Value Accounting – continued

	•		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 December 31, 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 December 31, 2009 (000’s omitted):

Quoted Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Balance at

Assets

Inputs

Inputs

December

Level 1

Level 2

Level 3

31, 2009

Securities available for sale

$

—

$

3,673

$

0

$

3,673

Note 3 – Securities

The amortized cost and fair value of securities, with gross unrealized gains and losses, follows at December 31, 2009 and 2008 (000s omitted):

						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
2009
U. S. Government agency securities		$	2,342			$	18			$	—			$	2,360
Municipal securities			200				4				—				204
Mortgage backed securities			1,018				91				—				1,109
Corporate bonds			—				—				—				—
Sub-Total Available for Sale		$	3,560			$	113			$	—			$	3,673
FHLB Stock			162				—				—				162
Total Securities		$	3,722			$	113			$	—			$	3,835
2008
U. S. Government agency securities		$	2,004			$	30			$	—			$	2,034
Municipal securities			—				—				—				—
Mortgage backed securities			1,250				92				—				1,342
Corporate bonds			504				—				—				504
Total Securities		$	3,758			$	122			$	—			$	3,880

Note 3 – Securities - continued

As of December 31, 2009 and December 31, 2008, all securities are available for sale. The securities held in our portfolio experienced no rating changes during the year and remain at “AAA” for all except the municipal holding which is at “AA” based on ratings by Standard & Poor’s, none of which were determined to be impaired. At December 31, 2009 there were $1.45 million in securities pledged to secure public deposits from the State of Michigan. There were no securities pledged at December 31, 2008. Other securities not listed above include 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 amortized cost and estimated fair value of all securities at December 31, 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			2,542				2,564
Due in five years through ten years			162				162
Due after ten years			—				—
Subtotal			2,704				2,726
Mortgage backed securities			1,018				1,109
Total		$	3,722			$	3,835

For the year ended December 31, 2009, proceeds from sales of securities available for sale amounted to $2,755,000. Gross realized gains amounted to $3,028 and gross realized losses amounted to $0. For the year ended December 31, 2008, proceeds from sales of securities available for sale amounted to $2,635,000. Gross realized gains amounted to $19,270 and gross realized losses amounted to $0. The Corporation had no impaired securities or individual securities with gross unrealized losses at December 31, 2009 or 2008.

     Note 4 – Loans

A summary of the balances of loans as of December 31, 2009 and 2008 is as follows (000s omitted):

		2009				2008
Mortgage loans on real estate:
Residential 1 to 4 family		$	1,353			$	2,745
Multifamily			12,641				7,676
Commercial			35,861				23,064
Construction			518				3,000
Second mortgage			171				736
Equity lines of credit			11,445				10,381
Total mortgage loans on real estate			61,989				47,602
Commercial loans			17,160				8,232
Consumer installment loans			507				1,007
Total loans			79,656				56,841
Less:
Allowance for loan losses			1,174				710
Net loans		$	78,482			$	56,131

An analysis of the allowance for loan losses follows (000s omitted):

		2009				2008
Balance at beginning of year		$	710			$	560
Provision for loan losses			480				384
Loans charged off			(18	)			(318	)
Recoveries of loans previously charged off			2				84
Balance at end of year		$	1,174			$	710

At December 31, 2009, there were two loans classified as sub-standard for which the Bank set aside a specific reserve. The loans continue to pay and are not on non-accrual status.

Certain directors and executive officers of the Bank, including associates of such persons, were loan customers of the Company during 2009 and 2008. A summary of aggregate related-party loan activity for loans to any related party at December 31, 2009 and 2008 is as follows (000s omitted):

		2009				2008
Balance at January 1		$	1,473			$	1,038
Loans no longer related-party			—				(72	)
New loans			1,165				950
Repayments			(711	)			(443	)
Balance at December 31		$	1,927			$	1,473

Note 5 – Bank Premises and Equipment

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

		2009				2008
Leasehold improvements		$	2,131			$	2,126
Furniture and equipment			462				454
Computer equipment & software			424				394
Total			3,017				2,974
Less: accumulated depreciation			1,528				742
Net premises and equipment		$	1,489			$	2,232

Depreciation expense for the years ended December 31, 2009 and 2008 amounted to $786,190 and $312,660 respectively.

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

Note 6 – Deposits

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

		2009				2008
Non-interest bearing deposits		$	8,495			$	5,195
NOW accounts			7,894				7,882
Savings and money market accounts			19,600				10,571
Certificates of deposit <$100,000			13,240				13,089
Certificates of deposit >$100,000			32,236				21,011
Total		$	81,465			$	57,748

At December 31, 2009, the scheduled maturities of time deposits are as follows (000s omitted):

		<$100,000				>$100,000				Total
2010		$	8,613			$	12,840			$	21,453
2011			3,543				16,997				20,540
2012			767				2,266				3,033
2013			—				133				133
2014			317				—				317
Total		$	13,240			$	32,236			$	45,476

Note 7 – Stock Option Plan

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

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

During 2007, the Corporation issued 180,000 stock options. Based on the fair market value at the grant date using the Black-Scholes option pricing model, the compensation cost recognized by the Corporation for the portion of the equity awards earned during 2009 and 2008 was $22,906, $4,553 respectively. No income tax benefit was recognized in the income statement for share based compensation (see Note 8). There is no difference between basic and diluted loss per share due to the anti-dilutive effect of outstanding options at December 31, 2009. No additional options were granted during 2009 or 2008.

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

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

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

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

Note 7 – Stock Option Plan - continued

The aggregate intrinsic value of the options represents the total pretax intrinsic value (i.e., the difference between the Corporation’s closing stock price on the last trading day of our fiscal year ended 2009 and the exercise price, times the number of shares) that would have been received by the option holders had all option holders exercised their options on December 31, 2009. As of December 31, 2009, all outstanding and exercisable options are out of the money (options have an exercise price that exceeds market value), and they are assumed to have no intrinsic value. The intrinsic value of the options changes based on the fair market value of the Corporation’s stock. As of December 31, 2009 and 2008, outstanding options were 82,500 and 90,000 respectively. Options available to be exercised at a price of $10 were 46,666 at the end of 2009 versus 23,333 at year end 2008. There were no options exercised for the three years ended December 31, 2009.

Note 8 – Income Taxes

The Corporation has net operating loss carry-forwards of approximately $7,055,000 generated from inception through December 31, 2009 that are available to reduce future taxable income through the year ending December 31, 2029. The deferred tax asset generated by that loss carry-forward has been offset with a valuation allowance since the Corporation does not have a history of earnings.

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

		2009				2008
Deferred tax assets:
Allowance for loan losses		$	285,014			$	142,662
Organizational costs			542,828				590,375
Net operating loss carry-forward			2,398,855				2,049,105
Share based compensation			166,416				158,628
Other			77,716				48,626
Total deferred tax assets			3,470,829				2,989,396
Less valuation allowance			3,449,615				2,808,334
Deferred tax liabilities:
Fixed assets			—				134,261
Other			85,274				46,801
Total deferred tax liabilities			85,274				181,062
Net deferred tax assets		$	—			$	—

Note 8 – Income Taxes - continued

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

		2009				2008
Current expense		$	—			$	—
Deferred (benefit) expense			—				—
Total income tax expense		$	—			$	—

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

		2009				2008
Income tax benefit at federal statutory rate of 34 percent		$	(650,393	)		$	(514,115	)
Increases resulting from nondeductible expenses			9,112				6,992
Other			—				—
Change in valuation allowance			641,281				507,123
Income tax expense		$	—			$	—

Note 9 – 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 called for a one time payment of $110,000 to the leaseholder to end the lease. Rent expense under these agreements was $221,000 for the main office and $59,000 for the branch office for the year ended December 31, 2009, and $217,000 for the main office and $57,000 for the branch office for the year ended December 31, 2008. In January 2010, a six month lease agreement was signed for office space to house a business development officer. Rent expense under the agreement added $5,400 to 2010 in the chart below.

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

2010		$	235,676
2011			229,840
2012			234,416
2013			239,098
2014			243,910
thereafter			2,975,548
Total		$	4,153,088

Note 10 – Restrictions on dividends, loans and advances

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

Prior approval of the Bank’s federal regulator is required if the total dividends declared by the Bank in a calendar year exceed the sum of the net profits of the Bank for the preceding three years, less any required transfers to surplus. In addition, dividends paid by the Bank would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum standards. Because of the Bank’s startup losses, at December 31, 2009, the Bank’s retained earnings available for the payment of dividends, without approval from the regulators, was $0. Accordingly, all of the Corporation’s investment in the Bank was restricted at December 31, 2009.

Loans or advances made by the Bank to the Corporation are generally limited to 10 percent of the Bank’s capital stock and surplus. Accordingly, at December 31, 2009, Bank funds available for loans or advances to the Corporation amounted to $0.9 million.

Note 11 – Fair Value of Financial Instruments

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

Note 11 – Fair Value of Financial Instruments - continued

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 are as follows (in thousands):

		2009								2008
						Estimated								Estimated
		Carrying				Fair				Carrying				Fair
		Value				Value				Value				Value
Financial assets:
Cash and cash equivalents		$	7,758			$	7,758			$	4,663			$	4,663
Securities available for sale			3,835				3,835				3,880				3,880
Loans			78,482				78,952				56,131				56,563
Accrued interest receivable			335				335				293				293
Financial liabilities:
Deposits			81,465				81,807				57,748				57,897
Accrued interest payable			77				77				153				153

Note 12 – Retirement Plans

The Corporation sponsors a 401(k) plan for substantially all employees. There were no required matching contributions for 2008 or 2009.

Note 13 – Parent Only Financial Statements

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

Note 13 – Parent Only Financial Statements – continued

The condensed balance sheets as of December 31, 2009 and 2008 are as follows:

		December 31,
		2009				2008
Assets
Cash and cash equivalents		$	2,l93,387			$	555,817
Investment in subsidiary			8,581,286				8,757,652
Total assets		$	10,774,673			$	9,313,469
Liabilities and Shareholders’ Equity
Other liabilities		$	46,740			$	1,500
Shareholders’ equity			10,727,933				9,311,969
Total liabilities and shareholders’ equity		$	10,774,673			$	9,313,469

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

		For the Years Ended December 31,
		2009				2008
Interest income		$	—			$	—
Interest expense			—				—
Net interest income			—				—
Non-interest expense
Salaries and benefits			59,567				(40,322	)
Occupancy & equipment expense			—				—
Professional fees			142,075				101,100
Printing and office supplies			—				—
Other expense			54,879				36,555
Total non-interest expense			256,521				97,333
Income taxes			—				—
Net (loss) income before equity in loss of subsidiary			(256,521	)			(97,333	)
Equity in loss of subsidiary			(1,656,401	)			(1,414,769	)
Net loss			($1,912,922	)			($1,512,102	)
Dividend on preferred stock			(64,055	)			—
Accretion of discount on preferred stock			(11,207	)			—
Effective dividend on preferred stock			(75,262	)			—
Net loss applicable to common shareholders			($1,988,184	)			($1,512,102	)

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13 – Parent Only Financial Statements – continued

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

		2009				2008
Cash flows from operating activities
Net loss		$	(1,912,922	)		$	(1,512,102	)
Loss of subsidiary			1,656,401				1,414,769
Share based payments expense			22,906				4,553
Net increase (decrease) in other liabilities			45,240				(68,500	)
Net cash (used in) provided by operating activities			(188,375	)			(161,280	)
Cash flows from investing activities
Investment in subsidiary			(1,489,000	)			—
Net cash used in investing activities			(1,489,000	)			—
Cash flows from financing activities
Proceeds from sale of senior preferred stock			3,379,000				—
Dividend on senior preferred stock			(64,055	)			—
Net cash provided by financing activities			3,314,945				—
(Decrease) increase in cash and cash equivalents			1,637,570				(161,280	)
Cash and cash equivalents at the beginning of the period			555,817				717,097
Cash and cash equivalents at the end of the period		$	2,193,387			$	555,817

Note 14 – Off Balance Sheet Risk

Credit-related Financial Instruments

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

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

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14 – Off Balance Sheet Risk - continued

At December 31, 2009 and 2008, the following financial instruments were outstanding whose contract amounts represent credit risk:

		Contract Amount
		2009				2008
Commitments to grant loans		$	9,570,000			$	2,400,000
Unfunded commitments under lines of credit		$	9,636,000			$	11,655,000
Commercial and standby letters of credit		$	603,000			$	110,000

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

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

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

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

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

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

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 15 – Minimum Regulatory Capital Requirements

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The prompt corrective action regulations provide four classifications, well capitalized, adequately capitalized, undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. The Bank was well-capitalized as of December 31, 2009 and 2008.

The Bank’s actual capital amounts and ratios as of December 31, 2009 and 2008 are presented in the following table (000s omitted):

										For Capital								To be
		Actual								Adequacy Purposes								Well-Capitalized
		Amount				Ratio				Amount				Ratio				Amount				Ratio
As of December 31, 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	%
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16 – QUARTERLY RESULTS OF OPERATIONS (unaudited)

The following table summarizes the Corporation’s quarterly results for the years ended December 31, 2009 and 2008 (000s omitted):

		For the Three-Month Period ended
		March 31				June 30				September 30				December 31
2009
Interest income		$	883			$	938			$	1,085			$	1,153
Interest expense			340				328				337				340
Net interest income			543				610				748				813
Provision for loan losses			34				115				32				300
Net interest income after provision for loan losses			509				494				716				513
Noninterest income			26				25				27				21
Noninterest expense			848				991				867				1,538
Net loss before income taxes			(313	)			(472	)			(123	)			(1,004	)
Income taxes			—				—				—				—
Net loss		$	(313	)		$	(472	)		$	(123	)		$	(1,004	)
Dividend on preferred stock			—				(6	)			(22	)			(36	)
Accretion of discount			—				(3	)			(4	)			(5	)
Net loss applicable to common shareholders		$	(313	)		$	(481	)		$	(149	)		$	(1,045	)
Net loss per share
Basic		$	(0.17	)		$	(0.26	)		$	(0.08	)		$	(0.58	)
Diluted		$	(0.17	)		$	(0.26	)		$	(0.08	)		$	(0.58	)

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16 – QUARTERLY RESULTS OF OPERATIONS (unaudited) - continued

		For the Three-Month Period ended
		March 31				June 30				September 30				December 31
2008
Interest income		$	728			$	797			$	883			$	901
Interest expense			314				340				352				381
Net interest income			414				457				531				520
Provision for loan losses			50				95				109				130
Net interest income after provision for loan losses			364				362				422				390
Noninterest income			38				24				35				20
Noninterest expense			1,027				785				692				663
Net loss before income taxes			(625	)			(399	)			(235	)			(253	)
Income taxes			—				—				—				—
Net loss		$	(625	)		$	(399	)		$	(235	)		$	(253	)
Net loss per share
Basic		$	(0.35	)		$	(0.22	)		$	(0.13	)		$	(0.14	)
Diluted		$	(0.35	)		$	(0.22	)		$	(0.13	)		$	(0.14	)

NOTE 17 – SHAREHOLDERS’ EQUITY

Participation in the TARP Capital Purchase Program

On April 24, 2009, the Corporation entered into a Securities Purchase Agreement with the U.S. Treasury under the Capital Purchase Program. Pursuant to the Securities Purchase Agreement, the Corporation issued and sold to the Treasury (i) 1,635 shares of the Corporation’s Series A Preferred Shares(liquidation preference $1,000 per share, and (ii) the Warrant to purchase 82 shares of the Corporation’s preferred stock (preferred stock B) which was immediately exercised (liquidation preference $1,000 per share). The total proceeds received of $1.635 million was allocated between the Series A and Series B stock on a relative fair value basis. The discount/premium will be amortized over a five year period.

On December 18, 2009 we issued 1,744 shares of Series C, no par value ($1,000 liquidation preference per share) fixed rate cumulative perpetual preferred stock (Preferred Stock) to the U.S. Treasury in exchange for $1.744 million under the Capital Purchase Program (CPP). The same rules and restrictions below apply to all preferred stock issued under the program. All of the Preferred Stock qualifies as Tier 1 capital.

As a result of the CPP transaction, the Corporation is required to take certain actions, for so long as the Treasury holds any securities acquired from the Corporation pursuant to the CPP, to ensure that its executive compensation and benefit plans with respect to Senior Executive Officers (as defined in the relevant agreements) comply with Section 111(b) of Emergency Economic Stabilization Act of 2008 (“EESA”), as implemented by any guidance or regulations issued under Section 111(b) of EESA, and not adopt any benefit plans with respect to, or which cover, the Corporation’s Senior Executive Officers that do not comply with EESA, as amended by the American Recovery and Reinvestment Act of 2009 (the “ARRA”), which was

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 – SHAREHOLDERS’ EQUITY - continued

passed by Congress and signed by the President on February 17, 2009. The applicable executive compensation standards generally remain in effect during the CPP Period and apply to the Corporation’s Senior Executive Officers (which for purposes of the ARRA and the CPP agreements, includes the Corporation’s Chief Executive Officer, its Chief Financial Officer, and the next three most highly-compensated executive officers, even though the Corporation’s senior executive officers consist of a smaller group of executives for purposes of the other compensation disclosures in this proxy statement).

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

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

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.

OVERVIEW

The Corporation is a Michigan corporation that was incorporated in 2004 to serve as the holding company for a Michigan state bank, Bank of Birmingham (“Bank”). The Bank is a full service commercial bank headquartered in Birmingham, Michigan. The Bank serves businesses and consumers across Oakland and Macomb counties with a full range of lending, deposit and Internet banking services. 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. General economic conditions have worsened, creating a difficult environment for banks in general and particularly in Michigan. Michigan has one of the highest foreclosure rates and unemployment rates in the country, a weakened manufacturing economy, high inventories of unsold residential housing, declining real estate values and increasing borrower defaults. The ripple effect of the struggling automotive manufacturing sector and its associated businesses has had a major impact on the area. According to the “Beige Book” published quarterly by the Federal Reserve, conditions in the Seventh reserve district over the last quarter of 2009 showed commercial real estate conditions deteriorated, but residential real estate activity began to pick up and that credit conditions improved marginally. While Oakland county is not immune to these issues, the demographics of the Birmingham Bloomfield area somewhat lessen the impact.

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 increase the strong capital position of the Bank.

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

OVERVIEW – continued

During 2009, the Bank conducted a thorough review of its profitability and related cost structure. Changes were made to reduce the cost of funding and enhance the net interest margin while improving the overall structure of our balance sheet; a decision was made to close the unprofitable Bloomfield Hills branch location, and anticipated enhancements to our product offerings should all have a positive impact on ongoing profitability. Two key items had a negative impact on 2009 earnings for the Bank and Corporation of approximately $729,000. The items were: our decision to close the unprofitable Bloomfield Township location and increased deposit insurance premiums due to the overall state of the Federal Deposit Insurance fund.

After three years of unprofitable operation, a decision was made to close the Bloomfield Township branch and take a one time charge to current earnings to aid in the improvement of future earnings. During October 2009, an agreement was formalized with the leaseholder of the Bloomfield Township location to terminate the outstanding lease. One time costs related to the branch closure negatively impacted earnings in the amount of $609,330, with an expected future annual decrease in related expenses of approximately $250,000 per year.

On February 27, 2009, the FDIC adopted a final rule modifying the risk-based assessment system and setting initial base assessment rates beginning April 1, 2009, at 12 to 45 basis points, extended the period of the Restoration Plan to seven years, and adopted an interim rule with request for comments imposing an emergency 20 basis point special assessment on June 30, 2009, which was collected on September 30, 2009, and allowing the FDIC to impose possible additional special assessments of up to 10 basis points thereafter to maintain public confidence in the Deposit Insurance Fund. The effect of these changes on the Bank of Birmingham was an increased regulatory assessments of approximately $120,000 over 2008 deposit insurance costs.

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

CRITICAL ACCOUNTING POLICIES

Allowance for loan losses

The Corporation performs a detailed quarterly review of the allowance for credit losses. The Corporation evaluates those loans classified as substandard, under its internal risk rating system, on an individual basis for impairment. The level and allocation of the allowance is determined primarily on management’s evaluation of collateral value, less the cost of disposal, for loans reviewed in this category. The remainder of the total loan portfolio is segmented into homogeneous loan pools with similar risk characteristics for evaluation. The Corporation uses factors such as, historical portfolio losses, national and local economic trends and levels of delinquency to determine the appropriate level and allocation of the allowance for loans in this grouping. In addition, due to the Corporation’s short operating history, it looks to historical results for similar banks of similar size and those

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

CRITICAL ACCOUNTING POLICIES - continued

in similar geographic areas as a comparison. The Corporation’s policy dictates that specifically identified credit losses be recognized immediately by a charge to the allowance for credit losses. See also Note 1 to the financial statements.

Inherent risks and uncertainties related to determination of adequacy of the allowance for credit losses require management to depend on estimates, appraisals and evaluations of loans to prepare the analysis. Changes in economic conditions and the financial prospects of borrowers may result in changes to the estimates, appraisals and evaluations used. In addition, if circumstances and losses differ substantially from management’s assumptions and estimates, the allowance for credit losses may not be sufficient to absorb all future losses and net income could be significantly impacted.

Income Tax Valuation Allowance

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

OPERATIONS

The Corporation’s (and the Bank’s) main office is located at 33583 Woodward Avenue, Birmingham, MI 48009. The building is a free-standing one story office building of approximately 8,300 square feet. The Bank also operated a branch office at 4145 West Maple Road in Bloomfield Township, MI, which was unprofitable and subsequently closed on January 18, 2010. The main office lease commenced in October 2005 and the bank exercised its first renewal option resulting in the lease being extended until October 2025. The main office lease has an additional ten year renewal option. The office lease related to the closed Bloomfield Township branch commenced in March 2006 and was terminated effective January 18, 2010 by an agreement with the leaseholder executed in October of 2009. During January 2010, a six month short term lease was executed for office space to house one of our business development officers. 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 allow for continued growth over the next few years. Refer to the Capital Resources section for detailed information on the preferred stock.

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.

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

Selected Financial Information

The following sets forth the selected consolidated financial data for the years ended December 31, 2005 -2009. Information shown for 2005 is not comparable as the Corporation did not commence banking operations until July 26, 2006.

Selected Financial Condition Data (dollars in thousands)

		For the Year Ended December 31,
		2009				2008				2007				2006				2005
Total assets		$	92,637			$	67,299			$	47,260			$	23,704			$	640
Gross loans			79,656				56,841				37,107				12,914				—
Allowance for Loan Losses			1,174				710				560				195				—
Total deposits			81,465				57,748				36,262				10,229				—
Borrowings			—				—				—				—				1,709
Total stockholders equity (deficit)			10,728				9,312				10,760				13,338				(1,151	)
Summary of operations
Interest income			4,058				3,309				2,463				385				—
Interest expense			1,345				1,387				1,090				158				14
Net interest income			2,713				1,922				1,373				227				14
Provision for loan losses			480				384				465				195				—
Noninterest income			98				117				132				7				—
Noninterest expense			4,244				3,167				3,723				3,002				981
Loss before taxes			(1,913	)			(1,512	)			(2,683	)			(2,963	)			(995	)
Provision for income tax			—				—				—				—				—
Net loss		$	(1,913	)		$	(1,512	)		$	(2,683	)		$	(2,963	)		$	(995	)
Dividend on senior preferred stock			(64	)			—				—				—				—
Accretion of discount on pref stock			(11	)			—				—				—				—
Effective dividend on preferred stock A			(75	)			—				—				—				—
Net loss applicable to common shareholders		$	(1,988	)		$	(1,512	)		$	(2,683	)		$	(2,963	)		$	(995	)
Per share Data:
Basic earnings		$	(1.10	)		$	(0.84	)		$	(1.49	)		$	(4.19	)		$	(9,954.59	)
Diluted earnings		$	(1.10	)		$	(0.84	)		$	(1.49	)		$	(4.19	)		$	(9,954.59	)
Dividend declared			—				—				—				—				—