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 on February 26, 2004 to organize and serve as the holding company for a Michigan state bank, Bank of Birmingham (the "Bank") in Birmingham, Michigan. The Bank is a full service commercial bank headquartered in Birmingham, Michigan, with a full service branch banking office in Bloomfield Township, Michigan. It serves the communities of Birmingham, Bloomfield, Bingham Farms, Franklin and Beverly Hills and the neighboring communities. The Corporation completed the first phase of its stock offering on July 25, 2006 and capitalized the Bank on that date. The Bank opened for business on July 26, 2006 in a modular facility at the site of its future branch at 4145 W. Maple in Bloomfield Township. The modular facility served as the Bank's temporary main office until leasehold improvements at the permanent main office facility at 33583 Woodward Avenue in Birmingham were completed and the office opened for business at the end of August 2006. Remodeling then commenced at the Bloomfield facility and it opened for business on February 20, 2007. The Bank serves businesses and consumers across Oakland and Macomb counties with a full range of lending, deposit, and Internet banking services.
The results of operations depend largely on net interest income. Net interest income is the difference in interest income the Corporation earns on interest-earning assets, which comprise primarily commercial business, commercial real estate and residential real estate loans and the interest the Corporation pays on our interest-bearing liabilities, which are primarily deposits and borrowings. Management strives to match the re-pricing characteristics of the interest earning assets and interest bearing liabilities to protect net interest income from changes in market interest rates and changes in the shape of the yield curve.
The results of our operations have also been affected by local and general economic conditions. The largest geographic segment of our customer base is in Oakland County, Michigan. The economic base of the County continues to diversify from the automotive service sector. This trend should lessen the impact on the County of future economic downturns in the automotive sector of the economy. Oakland County's proximity to major highways and affordable housing has continued to spur economic growth in the area. Changes in the local economy may affect the demand for commercial loans and related small to medium business related products. The competitive environment among other financial institutions and financial service providers and the Bank in the Oakland and Macomb counties of Michigan may affect the pricing levels of various deposit products. General economic conditions have worsened for banks in general and particularly in Michigan as the U.S. economic picture has place us into a recession. Michigan and the Detroit area in particular have been hit fairly hard. Michigan has one of the highest foreclosure rates and unemployment rates in the country. While Oakland county is not immune to these issues, the demographics of the Birmingham Bloomfield area somewhat lessen the impact as the residents of the area tend to be more business owners and professionals. The Bank has been very prudent in our lending practices and those efforts continue to show a very clean loan portfolio through the first quarter of the year. During April 2009, we placed two credits on non-accrual status, one for $18,277 and the second for $817,018. The first is a probate matter, and the second involves a collateral dependent commercial real estate property. This property is well collateralized and management does not expect to sustain a loss related to this account.

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
Management's Discussion and Analysis of Financial Condition and Results of Operations
PLAN OF OPERATION
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 operates a branch office at 4145 West Maple Road, near the intersection of Telegraph Road in Bloomfield Township, MI, which is approximately 5 miles from the main office. The branch office occupies approximately 2,815 square feet in a one story office building. The Bank has executed lease agreements with respect to each of its banking locations. The main office lease commenced in October 2005 and the Bank has exercised its first renewal option resulting in the lease being extended until October 2025, and the branch office lease commenced in March 2006 and runs through February 2016. Each of the leases has a ten year renewal option. At this time, neither the Corporation nor the Bank intends to own any of the properties from which the Bank will conduct banking operations. The Bank used approximately $2.9 million of the proceeds of the Company's initial public offering to purchase furniture, fixtures and equipment at the two locations. The Bank has 20 full-time equivalent employees to staff its banking offices. The Bank will continue to use the remainder of its capital for customer loans, investments and other general banking purposes. We believe that the Corporation's initial offering proceeds will enable the Bank to maintain a leverage capital ratio, which is a measure of core capital to average total assets, in excess of 8% for the first three years of operations as required by the FDIC. The Corporation does anticipate that it will require $4.0 to $6.0 million in additional equity during the next 36 months of operations in order to continue to grow while meeting regulatory capital requirements. Management is exploring the capital markets with the aid of consultants to determine how and when it may raise the additional equity.
FINANCIAL CONDITION
At March 31, 2009, the Corporation's total assets were $73.0 million, an increase of $5.7 million or 8.5% from December 31, 2008. Cash and cash equivalents increased by $3.5 million or 74.8%. Investment securities available for sale decreased $250,000 or 6.4% from December 31, 2008 to March 31, 2009. Loans, net of the allowance for loan losses, increased by $2.6 million or 4.6% from December 31, 2008 to March 31, 2009. Total deposits increased by $6.1 million or 10.5% from December 31, 2008 to March 31, 2009. Basic and diluted loss per share for the three months ended March 31, 2009 were $(0.17) per share and $(0.17) per share, respectively. Basic and diluted loss per share for the three months ended March 31, 2008 were $(0.35) per share and $(0.35) per share, respectively.
Cash and Cash Equivalents
Cash and cash equivalents increased $3.5 million or 74.8% to $8.2 million at March 31, 2009 up from $4.7 million at December 31, 2008. Federal funds sold decreased $1.5 million or 42.9% to $2.0 million at March 31, 2009. The decrease in Federal funds sold is due to the shifting of excess funds to other accounts which earn somewhat higher interest rates. Investments
Total investment securities available-for-sale decreased $250,000 or 6.4% to $3.6 million at March 31, 2009, compared to $3.9 million at December 31, 2008. The decrease in investment securities is primarily attributable to the sale of a corporate security and the maturity of a U.S. Government agency security, resulting in an approximate decrease of $1.0 million, offset by $790,000 in U.S. Government agency security purchases. The remaining decrease was due to repayments on mortgage backed securities. The Corporation had no held-to-maturity securities as of March 31, 2009 or December 31, 2008.

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Loans, Credit Quality and Allowance for Loan Losses During the first three months of 2009, loans, net of the allowance for loan losses, increased $2.6 million or 4.6%, to $58.7 million at March 31, 2009 up from $56.1 million at December 31, 2008. The largest single category increase within loans, as noted in Note 4 to the financial statements, was equity lines of credit which increased by $1.6 million or 15.0% to $11.9 million at March 31, 2009. Commercial real estate increased by $1.1 million or 4.9% to $24.2 million at the current quarter end. These loans are for the most part owner occupied properties. These increases are due in part to increased draws on existing lines as well as continued business development efforts. Commercial non real estate loans increased approximately $970,000 or 11.8% to $9.2 million at March 31, 2009. The increase is due to new loan production.
The allowance for loan losses was $743,500 or 1.25% of loans at March 31, 2009. There were no loan charge offs or recoveries during the three month periods ended March 31, 2009 or 2008. The Corporation had no nonperforming loans, which consist of non-accruing loans and loans past due 90 days or more and still accruing interest, at March 31, 2009, but as previously stated two accounts totaling $835,295 were placed on non-accrual status during April 2009. 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 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. Management will, during 2009, increase its planned provision to raise the reserve to around 1.30% of total loans due to the continued unstable economic environment that we are operating within. Although management believes that the allowance for loan losses is adequate to absorb losses as they arise, there can be no assurance that the Corporation will not sustain losses in any given period that could be substantial in relation to the size of the allowance for credit losses. Inherent risks and uncertainties related to the operation of a financial institution require management to depend on estimates, appraisals and evaluations of loans to prepare the Corporation's financial statements. Changes in economic conditions and the financial prospects of borrowers may result in changes to the estimates, appraisals and evaluations used. In addition, if circumstances and losses differ 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.

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Premises and Equipment
Premises and equipment was $2.2 million as of March 31, 2009 and December 31, 2008. The Corporation has no plans for significant additions over the next twelve months.
Deposits
Total deposits were $63.8 million as March 31, 2009, an increase of $6.1 million over December 31, 2008. In the deposit categories, noninterest bearing DDA deposits were $5.7 million, which were made up primarily of business accounts. NOW accounts which, except for limited circumstances, are owned by individuals were $8.1 million at March 31, 2009, while Money Market accounts were $10.4 million and Savings accounts were $7.8 million at the current quarter end. Certificates of deposit were $31.8 million at March 31, 2009. Of this amount $18.3 million was in certificates greater than $100,000. Beginning in February 2008, the Corporation began advertising its rates on certain certificates of deposits on a national certificate of deposit network, which has attracted some deposits from outside the local market. We will continue to utilize this avenue to supplement our deposit base as we continue to focus on growing our portion of the local retail and commercial deposit market. We have also chosen to participate in the MI-CD program with the State of Michigan. This program allows us to acquire State of Michigan certificate of deposit funds at below market rates to aid in the funding of our loan portfolio.

                                                   As of March 31,
                                                        2009
                       (000's omitted)        Balance       Percentage
               Noninterest bearing demand     $  5,755              9.0 %
               NOW accounts                      8,071             12.6
               Money market                     10,356             16.2
               Savings                           7,837             12.3
               Time deposits under $100,000     13,451             21.1
               Time deposits over $100,000      18,356             28.8

               Total deposits                 $ 63,826            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 March 31, 2009 and 2008 were $543,000 and $414,000 respectively. Interest income on loans was $843,000 and $650,000 for the three months ended March 31, 2009 and 2008, respectively. The growth in interest income on loans was driven by continued growth in the loan portfolio. Deposit interest expense of $340,000 and $314,000 for the three month periods ended March 31, 2009 and 2008, respectively, increased due to the growth in savings accounts and certificates of deposit.
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 March 31, 2009 and 2008, respectively.

                                                           Three Months Ended March 31,
                                              2009                                              2008
                           Average                           Average         Average                           Average
                           Balance                           Yield/          Balance                           Yield/
                           (000's)         Interest           Rate           (000's)         Interest           Rate
Interest-earning
assets
Loans                      $ 58,414        $ 842,821             5.77 %      $ 39,805        $ 650,141             6.53 %
Securities                    3,378           37,406             4.43 %         2,086           29,145             5.59 %
Federal funds sold            2,395              891             0.15 %         5,937           48,300             3.25 %
Interest-bearing
balance with Other
financial
institutions                  2,121            1,340              .25 %             -                -                -

Total
interest-earning
assets                       66,308          882,458             5.32 %        47,828          727,586             6.09 %

Cash and due from
banks                         1,971                                             1,258
All other assets              1,822                                             2,175

Total assets               $ 70,101                                          $ 51,261


Interest-bearing
liabilities
NOW accounts               $  7,559           21,913             1.16 %      $  8,909           59,635             2.68 %
Money market                 10,059           34,532             1.37 %        11,640           85,985             2.95 %
Savings                       3,793           16,699             1.76 %           332            1,318             1.59 %
Time deposits                33,493          266,447             3.18 %        13,930          166,804             4.79 %

Total
interest-bearing
liabilities                  54,904          339,591             2.47 %        34,811          313,742             3.61 %


Non-interest bearing
deposits                      5,782                                             5,683
All other liabilities           234                                               206

Total liabilities            60,920                                            40,700
Shareholders' equity          9,181                                            10,561

Total liabilities and
shareholders' equity       $ 70,101                                          $ 51,261

Net interest income                        $ 542,867                                         $ 413,844

Net spread                                                       2.85 %                                            2.48 %



Net interest margin
(1)                                                              3.27 %                                            3.46 %

Ratio of
interest-earning
assets to
interest-bearing
liabilities                  120.77 %                                          137.39 %

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

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
Management's Discussion and Analysis of Financial Condition and Results of Operations
The yield on interest-earning assets decreased for the quarter ended March 31, 2009 to 5.32% from 6.09% as compared to the same period in the prior year. Much of the decrease was due to reductions in the yield in the loan portfolio with the prime rate changes throughout 2008. The yield on loans receivable decreased to 5.77% for the three months ended March 31, 2009 from 6.53% for the same period in 2008. The Corporation's interest rate spread increased for the three months ended March 31, 2009 to 2.85% from 2.48% for the same period in 2008. The Corporation has benefited from an improvement in the spread on interest rates as reductions in the cost of deposits outpaced the reduction in loan yields. In the prior year, deposit rates were higher due to the competitive market as well as promotional rates offered to attract and build the customer base. Net interest margin decreased to 3.27% for the three months ended March 31, 2009 down from 3.46% for the same period in 2008. As loan growth continues, management expects to utilize the liquidity of the federal funds sold and interest-bearing balances with other financial institutions, in addition to local deposits, which will improve the yield on interest-earning assets, which should translate to improvement in the net interest margin.
Provision for Loans Losses
The provision for loan losses was $33,500 and $50,000 for the three months ended March 31, 2009 and 2008, respectively. The decrease from the previous comparable period in provision for loan losses was due to loans growing at a slower pace of $2.6 million for the three months ended March 31, 2009, while the increase in the loan portfolio for the same period in 2008 was $6.5 million. Due to the continuing rough economic conditions, management has decided to gradually increase the provision to build our loan loss reserve levels to a more conservative 1.30% of total loans during 2009. Non-Interest Income
Non-interest income was $26,000 and $38,000 for the three months ended March 31, 2009 and 2008, respectively. Loan fees and charges decreased to approximately $3,200 for the three months ended March 31, 2008, down from $10,700 for the same period in 2008. This decrease is primarily due to decreases in income earned on mortgage loans originated for third parties. Other income decreased approximately $4,800 for the quarter ended March 31, 2009, down from $9,400 for the same period in 2008. This decrease is due to a decrease in the gain on sale of securities, which was approximately $1,200 for the quarter ended March 31, 2009, and approximately $6,500 for the same period in 2008. Deposit fees and charges remained stable at approximately $18,000 for the three month periods ending March 31, 2008 and 2009.
Non-Interest Expense
Non-interest expense for the three months ended March 31, 2009 and 2008 was $848,000 and $1,026,000 respectively. Salaries and benefits continued to be the largest component of non-interest expense. Salaries and benefits decreased $178,000, or 32.4%, to $371,000 for the quarter ended March 31, 2009 down from $549,000 for the same period of 2008. During the quarter ended March 31, 2008, management decreased staffing levels; therefore severance costs totaling approximately $134,000 are included in the prior quarter salaries and benefits costs. During the current period, management of the Corporation continued to examine the business trends to date and increased staffing accordingly, with the additions of a Chief Financial Officer and a Senior Loan Officer. Occupancy expenses decreased to $213,000 for the quarter ended March 31, 2009 down from $219,000 for the same period of 2008. Data processing expenses were $54,000 for the three month period ended March 31, 2009, compared to $44,000 for the same period in 2008 mainly due to loan and deposit growth and price increases from the vendor. Advertising expenses were $34,000 for the three months ended March 31, 2009, up from $23,000 as compared to the same period in 2008. In the current period, the Corporation incurred a $10,000 platinum sponsorship cost aimed at increasing business in the Corporation's principal markets. Professional fees were $81,000 for the three months ended March 31, 2009 compared to $87,000 for the same period in 2008. For the current quarter end, the Corporation recognized $15,500 for external audit expenses, $12,000 for internal audit expenses, and $14,000 for legal expenses and $5,400 for other consulting expenses. By comparison, for the same period in 2008, the Corporation incurred $24,000, $10,800, $18,000 and $-0- in external audit, internal audit, legal

BIRMINGHAM BLOOMFIELD BANCSHARES, INC.
Management's Discussion and Analysis of Financial Condition and Results of Operations
and other consulting costs, respectively. Other expenses decreased to $79,000 for the three months ended March 31, 2009 compared to $87,000 for the same period in 2008. This decrease is due in large part to loan costs having a positive variance in the current period. Income Taxes
No income tax expense or benefit was recognized during the three month periods ended March 31, 2009 or 2008 due to the tax loss carry-forward position of the Corporation. An income tax benefit may be booked in future periods when the Corporation begins to turn a profit and management believes that profitability will be expected for the foreseeable future beyond that point.
LIQUIDITY AND CAPITAL RESOURCES; ASSET/LIABILITY MANAGEMENT The liquidity of a bank allows it to provide funds to meet loan requests, to . . .