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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934  Commission file number 000-24478. DEARBORN BANCORP, INC.   Michigan
    
    38-3073622(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 1360 Porter Street,
Dearborn, MI           48124   (313) 565-5700   N/A   Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X]   No [  ] Indicate the number of shares outstanding for each of the issuers classes of
common stock, as of July 31, 2004. Class
    
    Shares OutstandingCommon Stock
    
    4,403,087
 Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the 1934 Securities and Exchange Act). Yes [  ]   No [X] 1




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DEARBORN BANCORP, INC.
INDEX Part
I. Financial Information:Item 1. Financial StatementsThe following consolidated financial statements of Dearborn
Bancorp, Inc. and its subsidiary included in this report are:
    
    PageIndependent Accountants Report
    
    
    3Consolidated Balance Sheets  June 30, 2004,
December 31, 2003 and June 30, 2003
    
    
    4Consolidated Statements of Income  For the Three and Six
Months Ended June 30, 2004 and 2003
    
    
    5Consolidated Statements of Comprehensive Income   For the
Three and Six Months Ended June 30, 2004 and 2003
    
    
    6Consolidated Statements of Cash Flows  For the
Six Months Ended June 30, 2004 and 2003
    
    
    7Notes to Consolidated Financial Statements
    
    
    8-11Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations, Liquidity and Capital
    
    
    12-25Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    26-28Item 4. Controls and Procedures
    
    
    29Part II. Other Information:Pursuant to SEC rules and regulations, the following item(s) are
included with the Form 10-Q Report:Item 4.
Submission of Matters to a Vote of Security Holders
    
    
    30Item 6.
Exhibits and Reports on Form 8-K
    
    
    31Pursuant to SEC rules and regulations, the following items are omitted
from this Form 10-Q as inapplicable or to which the answer is negative:Item 1. Legal ProceedingsItem 2. Changes in Securities and Use of ProceedsItem 3. Defaults upon Senior SecuritiesItem 5 Other InformationSIGNATURES
    
    
    32Section 302 Certification of CEOSection 302 Certification of CFOSection 906 Certification of CEOSection 906 Certification of CFOUnderwriting Agreement
  2




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INDEPENDENT ACCOUNTANTS REPORT Board of Directors and Shareholders
Dearborn Bancorp, Inc.
Dearborn, Michigan We have reviewed the consolidated balance sheets of Dearborn Bancorp, Inc. as
of June 30, 2004 and 2003, the related consolidated statements of income and
comprehensive income for the three and six month periods then ended, and the
related consolidated statements of cash flows for the six month periods then
ended. These financial statements are the responsibility of the Corporations
management. We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with auditing standards generally accepted in the United States
of America, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express such
an opinion. Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with accounting principles generally accepted in the United States
of America. /s/ Crowe Chizek and Company LLC Grand Rapids, Michigan
July 31, 2004 3




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DEARBORN BANCORP, INC. AND SUBSIDIARY 
 CONSOLIDATED BALANCE SHEETS (unaudited) (Dollars, in thousands)
    
    06/30/04
    
    12/31/03
    
    06/30/03ASSETSCash and cash equivalentsCash and due from banks
    
    $
    7,759
    
    
    $
    5,172
    
    
    $
    9,393Federal funds sold
    
    
    3,422
    
    
    
    7,651
    
    
    
    6,162Interest bearing deposits with banks
    
    
    125
    
    
    
    8,325
    
    
    
    3,425Total cash and cash equivalents
    
    
    11,306
    
    
    
    21,148
    
    
    
    18,980Mortgage loans held for sale
    
    
    1,415
    
    
    
    1,505
    
    
    
    13,053Securities, available for sale
    
    
    12,859
    
    
    
    16,948
    
    
    
    27,411Federal Home Loan Bank stock
    
    
    1,098
    
    
    
    1,073
    
    
    
    1,047LoansLoans
    
    
    439,776
    
    
    
    400,958
    
    
    
    327,383Allowance for loan loss
    
    
    (4,894
    )
    
    
    (4,314
    )
    
    
    (3,514
    )Net loans
    
    
    434,882
    
    
    
    396,644
    
    
    
    323,869Premises and equipment, net
    
    
    10,404
    
    
    
    5,554
    
    
    
    5,680Real estate owned
    
    
    207
    
    
    
    
    
    
    
    Accrued interest receivable
    
    
    1,431
    
    
    
    1,461
    
    
    
    1,329Other assets
    
    
    1,850
    
    
    
    1,742
    
    
    
    1,691Total assets
    
    $
    475,452
    
    
    $
    446,075
    
    
    $
    393,060LIABILITIESDepositsNon-interest bearing deposits
    
    $
    41,565
    
    
    $
    39,081
    
    
    $
    42,008Interest bearing deposits
    
    
    364,265
    
    
    
    340,538
    
    
    
    286,489Total deposits
    
    
    405,830
    
    
    
    379,619
    
    
    
    328,497Other liabilitiesFederal Home Loan Bank advances
    
    
    20,638
    
    
    
    20,638
    
    
    
    20,660Other liabilities
    
    
    886
    
    
    
    463
    
    
    
    1,002Accrued interest payable
    
    
    823
    
    
    
    754
    
    
    
    617Subordinated debentures
    
    
    10,000
    
    
    
    10,000
    
    
    
    10,000Total liabilities
    
    
    438,177
    
    
    
    411,474
    
    
    
    360,776STOCKHOLDERS EQUITYCommon stock - 5,000,000 shares authorized,
3,136,987 shares at 06/30/04, 3,089,567 shares at
12/31/03; and 3,067,747 shares at 06/30/03
    
    
    37,286
    
    
    
    34,451
    
    
    
    32,229Retained earnings
    
    
    187
    
    
    
    128
    
    
    
    14Accumulated other comprehensive income (loss)
    
    
    (198
    )
    
    
    22
    
    
    
    41Total stockholders equity
    
    
    37,275
    
    
    
    34,601
    
    
    
    32,284Total liabilities and stockholders equity
    
    $
    475,452
    
    
    $
    446,075
    
    
    $
    393,060
 The accompanying notes are an integral part of these consolidated statements. 4




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DEARBORN BANCORP, INC. AND SUBSIDIARY 
 CONSOLIDATED STATEMENTS OF INCOME (unaudited) Three Months Ended
    
    Six Months Ended(In thousands, except share and per share data)
    
    06/30/04
    
    06/30/03
    
    06/30/04
    
    06/30/03Interest incomeInterest on loans, including fees
    
    $
    6,750
    
    
    $
    5,452
    
    
    $
    13,154
    
    
    $
    10,452Interest on securities, available for sale
    
    
    67
    
    
    
    189
    
    
    
    138
    
    
    
    388Interest on federal funds
    
    
    22
    
    
    
    52
    
    
    
    38
    
    
    
    130Interest on deposits with banks
    
    
    10
    
    
    
    39
    
    
    
    17
    
    
    
    79Total interest income
    
    
    6,849
    
    
    
    5,732
    
    
    
    13,347
    
    
    
    11,049Interest expenseInterest on deposits
    
    
    1,703
    
    
    
    1,890
    
    
    
    3,363
    
    
    
    3,843Interest on other borrowings
    
    
    231
    
    
    
    230
    
    
    
    462
    
    
    
    460Interest on subordinated debentures
    
    
    100
    
    
    
    123
    
    
    
    223
    
    
    
    245Total interest expense
    
    
    2,034
    
    
    
    2,243
    
    
    
    4,048
    
    
    
    4,548Net interest income
    
    
    4,815
    
    
    
    3,489
    
    
    
    9,299
    
    
    
    6,501Provision for loan losses
    
    
    281
    
    
    
    511
    
    
    
    505
    
    
    
    739Net interest income after provision for loan
    
    
    4,534
    
    
    
    2,978
    
    
    
    8,794
    
    
    
    5,762Non-interest incomeService charges on deposit accounts
    
    
    136
    
    
    
    110
    
    
    
    268
    
    
    
    213Fees for other services to customers
    
    
    46
    
    
    
    6
    
    
    
    58
    
    
    
    15Gain on the sale of loans
    
    
    231
    
    
    
    675
    
    
    
    374
    
    
    
    1,301Gain on the sale of investment securities
    
    
    
    
    
    
    79
    
    
    
    
    
    
    
    79Loss on the sale of real estate
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )
    
    
    Other income
    
    
    9
    
    
    
    36
    
    
    
    28
    
    
    
    49Total non-interest income
    
    
    419
    
    
    
    906
    
    
    
    725
    
    
    
    1,657Non-interest expensesSalaries and employee benefits
    
    
    1,852
    
    
    
    1,538
    
    
    
    3,669
    
    
    
    3,046Commissions on the origination of loans
    
    
    87
    
    
    
    291
    
    
    
    150
    
    
    
    560Occupancy and equipment expense
    
    
    365
    
    
    
    349
    
    
    
    724
    
    
    
    671Advertising and marketing
    
    
    80
    
    
    
    62
    
    
    
    157
    
    
    
    144Stationery and supplies
    
    
    73
    
    
    
    84
    
    
    
    144
    
    
    
    185Professional services
    
    
    99
    
    
    
    114
    
    
    
    214
    
    
    
    212Data processing
    
    
    76
    
    
    
    71
    
    
    
    147
    
    
    
    135Other operating expenses
    
    
    216
    
    
    
    226
    
    
    
    434
    
    
    
    439Total non-interest expenses
    
    
    2,848
    
    
    
    2,735
    
    
    
    5,639
    
    
    
    5,392Income before income tax provision
    
    
    2,105
    
    
    
    1,149
    
    
    
    3,880
    
    
    
    2,027Income tax provision
    
    
    715
    
    
    
    390
    
    
    
    1,316
    
    
    
    688Net income
    
    $
    1,390
    
    
    $
    759
    
    
    $
    2,564
    
    
    $
    1,339Per share data:Net income  basic
    
    $
    0.44
    
    
    $
    0.25
    
    
    $
    0.82
    
    
    $
    0.44Net income  diluted
    
    $
    0.40
    
    
    $
    0.23
    
    
    $
    0.75
    
    
    $
    0.42Weighted average number of shares outstanding  basic
    
    
    3,124,815
    
    
    
    3,055,820
    
    
    
    3,112,582
    
    
    
    3,043,846Weighted average number of shares outstanding -
diluted
    
    
    3,456,470
    
    
    
    3,323,457
    
    
    
    3,428,738
    
    
    
    3,182,299
 The accompanying notes are an integral part of these consolidated statements. 5




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DEARBORN BANCORP, INC. AND SUBSIDIARY 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) Three Months Ended
    
    Six Months Ended(In thousands)
    
    06/30/04
    
    06/30/03
    
    06/30/04
    
    06/30/03Net income
    
    $
    1,390
    
    
    $
    759
    
    
    $
    2,564
    
    
    $
    1,339Other comprehensive loss, net of taxUnrealized gains (losses) on securitiesUnrealized holding gains (losses) arising during
period
    
    
    (38
    )
    
    
    35
    
    
    
    (334
    )
    
    
    20Less: reclassification adjustment for gains included
in net income
    
    
    
    
    
    
    (79
    )
    
    
    
    
    
    
    (79
    )Tax effects
    
    
    14
    
    
    
    15
    
    
    
    114
    
    
    
    20Other comprehensive loss
    
    
    (24
    )
    
    
    (29
    )
    
    
    (220
    )
    
    
    (39
    )Comprehensive income
    
    $
    1,366
    
    
    $
    730
    
    
    $
    2,344
    
    
    $
    1,300
 The accompanying notes are an integral part of these consolidated statements. 6




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DEARBORN BANCORP, INC. AND SUBSIDIARY 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Six Months Ended(In thousands)
    
    6/30/04
    
    6/30/03Cash flows from operating activitiesInterest and fees received
    
    $
    13,368
    
    
    $
    10,980Interest paid
    
    
    (3,695
    )
    
    
    (4,540
    )Taxes paid
    
    
    (840
    )
    
    
    (1,000
    )Proceeds from sale of mortgages held for sale
    
    
    22,946
    
    
    
    81,158Origination of mortgages held for sale
    
    
    (22,622
    )
    
    
    (83,058
    )Cash paid to suppliers and employees
    
    
    (5,424
    )
    
    
    (4,892
    )Net cash provided by (used in) operating activities
    
    
    3,733
    
    
    
    (1,352
    )Cash flows from investing activitiesProceeds from maturities of securities available for sale
    
    
    4,000
    
    
    
    7,500Proceeds from call of securities available for sale
    
    
    10
    
    
    
    Proceeds from sales of securities available for sale
    
    
    2,120
    
    
    
    3,079Proceeds from repayments of securities available for sale
    
    
    265
    
    
    
    612Purchases of securities available for sale
    
    
    (2,649
    )
    
    
    (16,412
    )Purchases of Federal Home Loan Bank stock
    
    
    (25
    )
    
    
    (14
    )Increase in loans, net of payments received
    
    
    (38,743
    )
    
    
    (59,961
    )Purchases of property and equipment
    
    
    (5,096
    )
    
    
    (626
    )Net cash used in investing activities
    
    
    (40,118
    )
    
    
    (65,822
    )Cash flows from financing activitiesNet increase in non-interest bearing deposits
    
    
    2,484
    
    
    
    9,551Net increase in interest bearing deposits
    
    
    23,728
    
    
    
    56,860Stock option exercise
    
    
    330
    
    
    
    293Net cash provided by financing activities
    
    
    26,542
    
    
    
    66,704Decrease in cash and cash equivalents
    
    
    (9,843
    )
    
    
    (470
    )Cash and cash equivalents at the beginning of the period
    
    
    21,148
    
    
    
    19,450Cash and cash equivalents at the end of the period
    
    $
    11,305
    
    
    $
    18,980Reconciliation of net income to net cash provided by
(used in) operating activitiesNet income
    
    $
    2,564
    
    
    $
    1,339Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Provision for loan losses
    
    
    505
    
    
    
    739Depreciation and amortization expense
    
    
    246
    
    
    
    222Accretion of discount on investment securities
    
    
    (2
    )
    
    
    (4
    )Amortization of premium on investment securities
    
    
    11
    
    
    
    50Gain on the sale of securities, available for sale
    
    
    
    
    
    
    (79
    )(Increase) decrease in mortgages held for sale
    
    
    90
    
    
    
    (3,201
    )(Increase) decrease in interest receivable
    
    
    42
    
    
    
    (69
    )Increase in interest payable
    
    
    69
    
    
    
    8Increase in other assets
    
    
    (214
    )
    
    
    (305
    )Increase (decrease) in other liabilities
    
    
    422
    
    
    
    (52
    )Net cash provided by (used in) operating activities
    
    $
    3,733
    
    
    
    ($1,352
    )
 The accompanying notes are an integral part of these consolidated statements. 7




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DEARBORN BANCORP, INC.
FORM 10-Q (continued) 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  A.
    
    Accounting and Reporting Policies The consolidated financial statements of Dearborn Bancorp, Inc. (the
Corporation) include the consolidation of its only subsidiary,
Community Bank of Dearborn (the Bank). The accounting and reporting
policies of the Corporation are in accordance with generally accepted
accounting principles and conform to practice within the banking
industry. The consolidated financial statements of the Corporation as of June 30,
2004 and 2003, and December 31, 2003 and for the three and six month
periods ended June 30, 2004 and 2003 reflect all adjustments, consisting
of normal recurring items which are in the opinion of management,
necessary for a fair presentation of the results for the interim period.
The operating results for the quarter are not necessarily indicative of
results of operations for the entire year. The consolidated financial statements as of June 30, 2004 and 2003, and
for the three and six month periods ended June 30, 2004 and 2003
included herein have been prepared by the Corporation, without an audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally
included in interim financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. These financial statements
should be read in conjunction with the financial statements and notes
thereon included in the Corporations 2003 Annual Report to Stockholders
on Form 10-K. Certain of the Corporations accounting policies are important to the
portrayal of the Corporations financial condition, since they require
management to make difficult, complex or subjective judgments, some of
which may relate to matters that are inherently uncertain. Estimates
associated with these policies are susceptible to material changes as a
result of changes in facts and circumstances. Facts and circumstances
which could affect these material judgments include, but without
limitation, changes in interest rates, in the performance of the economy
or in the financial condition of borrowers. Management believes that
its critical accounting policies include determining the allowance for
loan losses and determining the fair value of securities and other
financial instruments. 8




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##### Table of Contents



A.
    
    Accounting and Reporting Policies (continued) Employee compensation expense under stock option plans is reported using
the intrinsic value method. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise price
equal to or greater than the market price of the underlying common stock
at date of grant. The following table illustrates the effect on net
income and earnings per share if expense was measured using the fair
value recognition provisions of FASB Statement No. 123, Accounting for
Stock-based Compensation (in thousands, except share and per share
data). Three Months Ended
    
    Six Months Ended06/30/04
    
    06/30/03
    
    06/30/04
    
    06/30/03Net incomeAs reported
    
    $
    1,390
    
    
    $
    759
    
    
    $
    2,564
    
    
    $
    1,339Less: stock-based compensation expense
determined under fair value based
method
    
    
    
    
    
    
    353
    
    
    
    9
    
    
    
    698Pro forma
    
    $
    1,390
    
    
    $
    406
    
    
    $
    2,555
    
    
    $
    641Basic income per shareAs reported
    
    $
    0.44
    
    
    $
    0.25
    
    
    $
    0.82
    
    
    $
    0.44Pro forma
    
    $
    0.44
    
    
    $
    0.13
    
    
    $
    0.82
    
    
    $
    0.21Diluted income per shareAs reported
    
    $
    0.40
    
    
    $
    0.23
    
    
    $
    0.75
    
    
    $
    0.42Pro forma
    
    $
    0.40
    
    
    $
    0.12
    
    
    $
    0.75
    
    
    $
    0.20
 Stock options vest after a six month period from date of grant. No
options were granted in 2004. The pro forma effects are computed using
option pricing models and the assumptions for the 2003 grants were a
risk-free interest rate of 3.55%, expected life of seven years, and
expected volatility of 25.55%. 9




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##### Table of Contents



B.
    
    Securities Available For Sale The amortized cost and estimated market value of securities available for
sale are as follows (in thousands): June 30, 2004Gross
    
    Gross
    
    EstimatedAmortized
    
    Unrealized
    
    Unrealized
    
    MarketCost
    
    Gains
    
    Losses
    
    ValueMortgage backed securities
    
    $
    941
    
    
    $
    15
    
    
    $
    
    
    
    $
    956Corporate debt securities
    
    
    8,219
    
    
    
    
    
    
    
    
    
    
    
    8,219FHLMC preferred stock
    
    
    4,000
    
    
    
    
    
    
    
    (316
    )
    
    
    3,684Totals
    
    $
    13,160
    
    
    $
    15
    
    
    
    ($316
    )
    
    $
    12,859
 December 31, 2003Gross
    
    Gross
    
    EstimatedAmortized
    
    Unrealized
    
    Unrealized
    
    MarketCost
    
    Gains
    
    Losses
    
    ValueUS Treasury securities
    
    $
    2,011
    
    
    $
    2
    
    
    $
    
    
    
    $
    2,013Mortgage backed securities
    
    
    1,194
    
    
    
    31
    
    
    
    
    
    
    
    1,225Corporate debt securities
    
    
    9,710
    
    
    
    
    
    
    
    
    
    
    
    9,710FHLMC preferred stock
    
    
    4,000
    
    
    
    
    
    
    
    
    
    
    
    4,000Totals
    
    $
    16,915
    
    
    $
    33
    
    
    $
    
    
    
    $
    16,948
 The amortized cost and estimated market value of securities available
for sale at June 30, 2004 by contractual maturity are shown below (in
thousands): EstimatedAmortized
    
    MarketCost
    
    ValueDue in over ten years
    
    $
    8,219
    
    
    $
    8,219Mortgage backed securities
    
    
    941
    
    
    
    956FHLMC preferred stock
    
    
    4,000
    
    
    
    3,684Totals
    
    $
    13,160
    
    
    $
    12,859
 The entire portfolio has a net unrealized loss of $301,000 at June 30,
2004. The Bank holds a floating rate issue of preferred stock of the
Federal Home Loan Mortgage Corporation that has an unrealized loss of
$316,000. This unrealized loss is primarily caused by the floating rate
characteristic of this security and its market value is expected to
improve as interest rates rise. The Corporation does not expect to
realize a loss as a
result of holding this security. The Corporation does not hold any
securities in the Held to Maturity category nor does the Corporation
hold or utilize derivatives. 10




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##### Table of Contents



C.
    
    Stock Option Plan Options to buy common stock are granted to officers and employees under a
Stock Option Plan which provides for issue of up to 747,790 shares.
Exercise price is the market price at date of grant. The maximum option
term is ten years, and options vest fully after six months from the date
of grant. If an option expires or terminates without having been
exercised, such option becomes available for future grant under the Plan. A summary of the option activity for the six months ended June 30, 2004
is as follows: WeightedAvailable
    
    
    
    
    
    AverageFor
    
    Options
    
    ExerciseGrant
    
    Outstanding
    
    PriceOutstanding at January 1, 2004
    
    
    
    
    
    
    590,957
    
    
    $
    9.48Granted
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    (47,425
    )
    
    
    7.66Outstanding at June 30, 2004
    
    
    
    
    
    
    543,532
    
    
    $
    9.64
 For the options outstanding at June 30, 2004, the range of exercise
prices was $4.84 to $18.69 per share with a weighted-average remaining
contractual term of 6.6 years. At June 30, 2004, 543,532 options were
exercisable at weighted average exercise price of $9.64 per share. Stock
options for 109,780 shares of common stock were not considered in
computing diluted earnings per share for the six months ended June 30,
2003 because they were antidilutive. There were no antidilutive shares
for the six months ended June 30, 2004. 11




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##### Table of Contents



PART I    FINANCIAL INFORMATION 
  ITEM 2.    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis are intended to address significant
factors affecting the financial condition and results of operations of the
Corporation. The discussion provides a more comprehensive review of the
financial position and operating results than can be obtained from a reading
of the financial statements and footnotes presented elsewhere in this report. Managements Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements 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 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 statements are not guarantees of future performance and involve certain
risks, uncertainties and assumptions (Future Factors) that are difficult to
predict with regard to timing, extent, likelihood and degree of occurrence.
Therefore, actual results and outcomes may materially differ from what may be
expressed or forecasted in such 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 include changes in interest rates and interest rate
relationships; demand for products and services; the degree of competition by
traditional and non-traditional competitors; changes in banking regulation;
changes in tax laws; changes in prices, levies and assessments; the impact of
technological advances; governmental and regulatory policy changes; the
outcomes of contingencies; trends in customer behavior as well as their ability
to repay loans; and changes in the national and local economy. These are
representative of the Future Factors that could cause a difference between an
ultimate actual outcome and a preceding forward-looking statement. 12




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##### Table of Contents



General The Corporation was formed in 1992 and the Bank was formed in 1993.
Subsequently, the Bank has opened offices in several communities in
Southeastern Michigan. The date opened, branch location and branch type of
each branch is listed below: Date Opened
    
    Location
    
    Type of officeFebruary 1994
    
    22290 Michigan Avenue
Dearborn, Michigan 48124
    
    Full service retail branch with ATM
Regional lending centerDecember 1995
    
    24935 West Warren Avenue
Dearborn Heights, Michigan 48127
    
    Full service retail branchAugust 1997
    
    44623 Five Mile Road
Plymouth, Michigan 48170
    
    Full service retail branch with ATMMay 2001
    
    1325 North Canton Center Road
Canton, Michigan 48187
    
    Full service retail branch with ATMDecember 2001
    
    45000 River Ridge Drive,
Suite 110

Clinton Township, Michigan 48038
    
    Regional lending centerNovember 2002
    
    19100 Hall Road
Clinton Township, Michigan 48038
    
    Full service retail branch with ATMFebruary 2003
    
    12820 Fort Street
Southgate, Michigan 48195
    
    Full service retail branch with ATMMay 2003
    
    3201 University Drive,
Suite 180

Auburn Hills, Michigan 48326
    
    Full service retail branch
Regional lending center
 The Bank has also formed three subsidiaries that offer additional or
specialized services to the Banks customers. The Banks subsidiaries, their
formation date and the type of services offered are listed below: Date Formed
    
    Name
    
    Services OfferedAugust 1997
    
    Community Bank Insurance Agency,
Inc.
    
    Limited insurance related activitiesMay 2001
    
    Community Bank Mortgage, Inc.
    
    Origination of commercial and
residential mortgage loansMarch 2002
    
    Community Bank Audit Services, Inc.
    
    Internal auditing and compliance
services for financial institutions
 13




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##### Table of Contents



Recent Developments Acquisition of Bank of Washtenaw.On July 16, 2004, the Corporation entered
into a definitive agreement to acquire the Bank of Washtenaw (Washtenaw), a
wholly owned subsidiary of Pavillion Bancorp, Inc. for $15,000,000 in cash.
Washtenaw, which was founded in January 2001, has its main office in Saline,
Michigan with a branch office and an administrative office in Ann Arbor,
Michigan. As of June 30, 2004, Washtenaw had total assets of $72,590,000,
gross loans of $65,926,000 and total deposits of $61,684,000. The acquisition
is subject to regulatory approvals and standard closing conditions. Sale of Common Stock.The Corporation announced the sale of 1,265,000 shares
of its common stock at $26.00 per share in a firm commitment underwritten
offering lead managed by Oppenheimer & Co., Inc. and co-managed by Howe Barnes
Investments, Inc. The underwriters have a 30 day option to purchase up to an
additional 189,750 shares of common stock from the Company solely to cover
over-allotments. The offering was priced on July 19, 2004 and closed on July
23, 2004. The Corporation intends to use $15 million of the net proceeds for
the acquisition of the Bank of Washtenaw. The Corporation will the use
remaining net proceeds to increase its capital position in anticipation of
future growth, and for other general corporate purposes. Results of Operations The Corporation reported net income of $1,390,000 and $2,564,000 for the three
and six month periods ended June 30, 2004, compared to net income of $759,000
and $1,339,000 for the three month and six month periods ended June 30, 2003.
The increase in net income was primarily due to the improvement in net interest
income. The increase in net interest income was partially offset by the
decrease in non-interest income. The improvement in net interest income was
primarily due to the increase in the commercial real estate loan and other
commercial loan portfolios and the decreasing cost of deposits during the
period. The increase in loans was partially funded with short term investments
such as interest bearing deposits with banks, federal funds sold and floating
rate securities, which carry a lower yield than loans. Net Interest Income 2004 Compared to 2003.As noted on the two charts on the following pages, net
interest income for the three and six month periods ended June 30, 2004 was
$4,815,000 and $9,299,000, compared to $3,489,000 and $6,501,000 for the same
periods ended June 30, 2003, an increase of $1,326,000 or 38% and $2,798,000 or
43%, respectively. This increase was caused primarily by the decreasing cost
of interest bearing liabilities and the redeployment of interest bearing
deposits with banks, federal funds sold and securities, available for sale into
loans. The Corporations interest rate spread was 3.98% and 3.93% for the
three and six month periods ended June 30, 2004, compared to 3.32% and 3.15%
for the same periods in 2003. The Corporations interest rate margin was 4.25%
and 4.21% for the three and six month periods ended June 30, 2004, compared to
3.70% and 3.59 for the same periods in 2003. 14




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##### Table of Contents



Average Balances, Interest Rates and Yields.Net interest income is affected
by the difference (interest rate spread) between rates of interest earned on
interest-earning assets and rates of interest paid on interest-bearing
liabilities and the relative amounts of interest-bearing liabilities and
interest-earning assets. When the total of interest-earning assets
approximates or exceeds the total of interest-bearing liabilities, any positive
interest rate spread will generate net interest income. Financial institutions
have traditionally used interest rate spreads as a measure of net interest
income. Another indication of an institutions net interest income is its net
yield on interest-earning assets or net interest margin, which is net
interest income divided by average interest-earning assets. The following tables set forth certain information relating to the
Corporations consolidated average interest-earning assets and interest-bearing
liabilities and reflect the average yield on assets and average cost of
liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average daily balance of assets or
liabilities, respectively, for the periods presented. During the periods
indicated, non-accruing loans, if any, are included in the loan category. Three months ended
    
    Three months endedJune 30, 2004
    
    June 30, 2003Average
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    Average(In thousands)
    
    Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    RateAssetsInterest-bearing deposits with banks
    
    $
    4,672
    
    
    $
    10
    
    
    
    0.86
    %
    
    $
    16,957
    
    
    $
    52
    
    
    
    1.23
    %Federal funds sold
    
    
    8,800
    
    
    
    22
    
    
    
    1.01
    %
    
    
    13,370
    
    
    
    39
    
    
    
    1.17
    %Investment securities, available for sale
    
    
    13,449
    
    
    
    67
    
    
    
    2.00
    %
    
    
    29,390
    
    
    
    189
    
    
    
    2.59
    %Loans
    
    
    428,498
    
    
    
    6,750
    
    
    
    6.34
    %
    
    
    319,084
    
    
    
    5,452
    
    
    
    6.87
    %Sub-total earning assets
    
    
    455,419
    
    
    
    6,849
    
    
    
    6.05
    %
    
    
    378,801
    
    
    
    5,732
    
    
    
    6.09
    %Other assets
    
    
    19,137
    
    
    
    
    
    
    
    
    
    
    
    13,440Total assets
    
    $
    474,556
    
    
    
    
    
    
    
    
    
    
    $
    392,241Liabilities and stockholders equityInterest bearing deposits
    
    $
    364,424
    
    
    $
    1,703
    
    
    
    1.88
    %
    
    $
    295,443
    
    
    $
    1,890
    
    
    
    2.57
    %Other borrowings
    
    
    30,638
    
    
    
    331
    
    
    
    4.35
    %
    
    
    30,660
    
    
    
    353
    
    
    
    4.63
    %Sub-total interest bearing liabilities
    
    
    395,062
    
    
    
    2,034
    
    
    
    2.07
    %
    
    
    326,103
    
    
    
    2,243
    
    
    
    2.77
    %Non-interest bearing deposits
    
    
    41,692
    
    
    
    
    
    
    
    
    
    
    
    32,708Other liabilities
    
    
    925
    
    
    
    
    
    
    
    
    
    
    
    1,391Stockholders equity
    
    
    36,877
    
    
    
    
    
    
    
    
    
    
    
    32,039Total liabilities and stockholders
equity
    
    $
    474,556
    
    
    
    
    
    
    
    
    
    
    $
    392,241Net interest income
    
    
    
    
    
    $
    4,815
    
    
    
    
    
    
    
    
    
    
    $
    3,489Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.98
    %
    
    
    
    
    
    
    
    
    
    
    3.32
    %Net interest margin on earning assets
    
    
    
    
    
    
    
    
    
    
    4.25
    %
    
    
    
    
    
    
    
    
    
    
    3.70
    %
 15




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##### Table of Contents



Six months ended
    
    Six months endedJune 30, 2004
    
    June 30, 2003Average
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    Average(In thousands)
    
    Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    RateAssetsInterest-bearing deposits with banks
    
    $
    3,651
    
    
    $
    17
    
    
    
    0.94
    %
    
    $
    21,961
    
    
    $
    130
    
    
    
    1.20
    %Federal funds sold
    
    $
    8,036
    
    
    
    38
    
    
    
    0.96
    %
    
    $
    13,611
    
    
    
    79
    
    
    
    1.17
    %Investment securities, available for sale
    
    
    14,119
    
    
    
    138
    
    
    
    1.98
    %
    
    
    27,293
    
    
    
    388
    
    
    
    2.87
    %Loans
    
    
    420,622
    
    
    
    13,154
    
    
    
    6.32
    %
    
    
    303,214
    
    
    
    10,452
    
    
    
    6.97
    %Sub-total earning assets
    
    
    446,428
    
    
    
    13,347
    
    
    
    6.05
    %
    
    
    366,079
    
    
    
    11,049
    
    
    
    6.10
    %Other assets
    
    
    17,411
    
    
    
    
    
    
    
    
    
    
    
    13,405Total assets
    
    $
    463,839
    
    
    
    
    
    
    
    
    
    
    $
    379,484Liabilities and stockholders equityInterest bearing deposits
    
    $
    356,679
    
    
    $
    3,363
    
    
    
    1.91
    %
    
    $
    281,144
    
    
    $
    3,843
    
    
    
    2.76
    %Other borrowings
    
    
    30,638
    
    
    
    685
    
    
    
    4.52
    %
    
    
    30,660
    
    
    
    705
    
    
    
    4.65
    %Sub-total interest bearing liabilities
    
    
    387,317
    
    
    
    4,048
    
    
    
    2.11
    %
    
    
    311,804
    
    
    
    4,548
    
    
    
    2.95
    %Non-interest bearing deposits
    
    
    39,204
    
    
    
    
    
    
    
    
    
    
    
    34,663Other liabilities
    
    
    1,096
    
    
    
    
    
    
    
    
    
    
    
    1,434Stockholders equity
    
    
    36,222
    
    
    
    
    
    
    
    
    
    
    
    31,583Total liabilities and stockholders
equity
    
    $
    463,839
    
    
    
    
    
    
    
    
    
    
    $
    379,484Net interest income
    
    
    
    
    
    $
    9,299
    
    
    
    
    
    
    
    
    
    
    $
    6,501Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.93
    %
    
    
    
    
    
    
    
    
    
    
    3.15
    %Net interest margin on earning assets
    
    
    
    
    
    
    
    
    
    
    4.21
    %
    
    
    
    
    
    
    
    
    
    
    3.59
    %
 16




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##### Table of Contents



Rate/Volume Analysis.The following table analyzes net interest income in
terms of changes in the volume of interest-earning assets and interest-bearing
liabilities and changes in yields and rates. The table reflects the extent to
which changes in the interest income and interest expense are attributable to
changes in volume (changes in volume multiplied by prior year rate) and changes
in rate (changes in rate multiplied by prior year volume). Changes
attributable to the combined impact of volume and rate have been allocated
proportionately to changes due to volume and changes due to rate. Three Months Ended
    
    Six Months EndedJune 30, 2004/2003
    
    June 30, 2004/2003Average
    
    Average
    
    Net
    
    Average
    
    Average
    
    Net(In thousands)
    
    Balance
    
    Rate
    
    Change
    
    Balance
    
    Rate
    
    ChangeAssetsInterest bearing deposits with banks
    
    ($
    26
    )
    
    ($
    16
    )
    
    ($
    42
    )
    
    ($
    85
    )
    
    ($
    28
    )
    
    ($
    113
    )Federal funds sold
    
    
    (11
    )
    
    
    (6
    )
    
    
    (17
    )
    
    
    (26
    )
    
    
    (15
    )
    
    
    (41
    )Investment securities, available for sale
    
    
    (79
    )
    
    
    (43
    )
    
    
    (122
    )
    
    
    (130
    )
    
    
    (120
    )
    
    
    (250
    )Loans
    
    
    1,726
    
    
    
    (428
    )
    
    
    1,298
    
    
    
    3,681
    
    
    
    (979
    )
    
    
    2,702Total earning assets
    
    $
    1,610
    
    
    ($
    493
    )
    
    $
    1,117
    
    
    $
    3,440
    
    
    ($
    1,142
    )
    
    $
    2,298LiabilitiesInterest bearing deposits
    
    $
    325
    
    
    ($
    512
    )
    
    ($
    187
    )
    
    $
    725
    
    
    ($
    1,205
    )
    
    ($
    480
    )Other borrowings
    
    
    
    
    
    
    (22
    )
    
    
    (22
    )
    
    
    
    
    
    
    (20
    )
    
    
    (20
    )Total interest bearing liabilities
    
    $
    325
    
    
    ($
    534
    )
    
    ($
    209
    )
    
    $
    725
    
    
    ($
    1,225
    )
    
    ($
    500
    )Net interest income
    
    
    
    
    
    
    
    
    
    $
    1,326
    
    
    
    
    
    
    
    
    
    
    $
    2,798Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    0.66
    %
    
    
    
    
    
    
    
    
    
    
    0.78
    %Net interest margin on earning assets
    
    
    
    
    
    
    
    
    
    
    0.55
    %
    
    
    
    
    
    
    
    
    
    
    0.62
    %
 Provision for Loan Losses 2004 Compared to 2003.The provision for loan losses was $281,000 and $505,000
for the three and six month periods ended June 30, 2004, compared to $511,000
and $739,000 for the same periods in 2003, a decrease of $230,000 or 45% for
the three month period and $234,000 or 32% for the six month period. The
provision for loan losses for the three and six month periods ended June 30,
2004 is based on the internal analysis of the adequacy of the allowance for
loan losses. The provision for loan losses was based upon managements
assessment of relevant factors, including types and amounts of non-performing
loans, historical and anticipated loss experience on such types of loans, and
current economic conditions. 17




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##### Table of Contents



Non-interest Income 2004 Compared to 2003.Non-interest income was $419,000 and $725,000 for the
three and six month periods ended June 30, 2004, compared to $906,000 and
$1,657,000 for the same periods in 2003, a decrease of $487,000 or 54% for the
three month period and $932,000 or 56% for the six month period. The decrease
was primarily due to the decrease in the gain on the sale of loans during the
period. The volume of mortgage loans sold decreased during the period as a
result of increased interest rates and a decrease in the size of the mortgage
origination staff. Management expects the gain on sale of loans to continue
at current levels during 2004. Non-interest Expense 2004 Compared to 2003.Non-interest expense was $2,848,000 and $5,639,000 for
the three and six month periods ended June 30, 2004, compared to $2,735,000 and
$5,392,000 for the same periods in 2003, an increase of $113,000 or 4% for the
three month period and $247,000 or 5% for the six month period. The largest
component of non-interest expense was salaries and employee benefits which
amounted to $1,852,000 and $3,669,000 for the three and six month periods ended
June 30, 2004, compared to $1,538,000 and $3,046,000 for the same periods in
2003, an increase of $314,000 or 20% for the three month period and $623,000 or
20% for the six month period. The primary factors for the increase in salaries
and benefits expense were the addition of one branch office in May 2003 and the
expansion of the commercial lending and operations departments. As of June 30,
2004, the number of full time equivalent employees was 124 compared to 113 as
of June 30, 2003. Salaries and employee benefits will continue to increase as
a result of general staff increases. Commissions on the origination of loans amounted to $87,000 and $150,000 for
the three and six month periods ended June 30, 2004, compared to $291,000 and
$560,000 for the same periods in 2003, a decrease of $204,000 or 70% for the
three month period and $410,000 or 73% for the six month period. The primary
reason for the decrease in the commissions on the origination of loans was the
decrease in the volume of loans originated during the period. Management
expects the commissions paid on the origination of loans to continue at current
levels during 2004. The second largest component of non-interest expense was occupancy and
equipment expense. Occupancy and equipment expense amounted to $365,000 and
$724,000 for the three and six month periods ended June 30, 2004, compared to
$349,000 and $671,000 for the same periods in 2003, an increase of $16,000 or
5% for the three month period and $53,000 or 8% for the six month period. The
primary factor in the increase in occupancy and equipment expense was the
opening of the regional lending center in Auburn Hills, Michigan. Income Tax Provision 2004 Compared to 2003.The income tax expense was $715,000 and $1,316,000 for
the three and six month periods ended June 30, 2004, compared to $390,000 and
$688,000 for the same periods in 2003, an increase of 325,000 or 83% for the
three month period and $628,000 or 91% for the six month period. The increase
was primarily a result of increased pre-tax income. 18




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##### Table of Contents



Comparison of Financial Condition at June 30, 2004 and December 31, 2003 Assets.Total assets at June 30, 2004 were $475,452,000 compared to
$446,075,000 at December 31, 2003, an increase of $29,377,000 or 7%. The
increase was primarily due to the increase in loans during the period. Federal Funds Sold.Total federal funds sold at June 30, 2004 were $3,422,000
compared to $7,651,000 at December 31, 2003, a decrease of $4,229,000 or 55%.
The decrease was primarily due to the short term deployment of funds that were
received as a result of an increase in deposits. Available funds are deployed
into federal funds sold until they can be utilized to fund loan volume. Interest bearing deposits with banks.Total interest bearing deposits with
banks at June 30, 2004 were $125,000 compared to $8,325,000 at December 31,
2003, a decrease of $8,200,000 or 98%. This investment was established to
provide the Corporation with an alternate short term investment option. This
short term investment is a variable-rate certificate of deposit with the
Federal Home Loan Bank of Indianapolis that carries a similar rate of return to
federal funds sold. Mortgage Loans Held for Sale.Total mortgage loans held for sale at June 30,
2004 were $1,415,000 compared to $1,505,000 at December 31, 2003, a decrease of
$90,000 or 6%. This decrease was a result of the decrease in the level of
residential real estate mortgage loans waiting to be purchased by mortgage
correspondents. Securities  Available for Sale.Total securities, available for sale, at June
30, 2004 were $12,859,000 compared to $16,948,000 at December 31, 2003, a
decrease of $4,089,000 or 24%. The decrease was due to the maturity and sale
of securities, available for sale during the first half of 2004. The funds
from the sale of these securities were utilized to fund loan volume. Please refer to Note B of the Notes to Consolidated Financial Statements for
the amortized cost and estimated market value of securities, available for
sale. Federal Home Loan Bank Stock.Federal Home Loan Bank stock was valued at
$1,098,000 at June 30, 2004, compared to $1,073,000 at December 31, 2003, an
increase of $25,000 or 2%. 19




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##### Table of Contents



Loans.Total loans at June 30, 2004 were $439,776,000 compared to
$400,958,000 at December 31, 2003, an increase of $38,818,000 or 10%. The
increase was primarily due to the continued expansion of the commercial
lending department during the past twelve months. This expansion included the
addition of two experienced loan officers during the last twelve months.
Major categories of loans included in the loan portfolio are as follows (in
thousands): 06/30/04
    
    12/31/03
    
    06/30/03Consumer loans
    
    $
    26,045
    
    
    $
    25,200
    
    
    $
    21,521Commercial, financial, & other
    
    
    76,067
    
    
    
    68,922
    
    
    
    59,623Commercial real estate construction
    
    
    55,933
    
    
    
    50,087
    
    
    
    41,698Commercial real estate mortgages
    
    
    235,471
    
    
    
    208,305
    
    
    
    172,205Residential real estate mortgages
    
    
    46,260
    
    
    
    48,444
    
    
    
    32,336439,776
    
    
    
    400,958
    
    
    
    327,383Allowance for loan losses
    
    
    (4,894
    )
    
    
    (4,314
    )
    
    
    (3,514
    )$
    434,882
    
    
    $
    396,644
    
    
    $
    323,869
 The following is a summary of non-performing assets and problems loans (in
thousands): 06/30/04
    
    12/31/03
    
    06/30/03Over 90 days past due and still accruing
    
    $
    85
    
    
    $
    19
    
    
    $
    34Non-accrual loans
    
    
    1,674
    
    
    
    2,056
    
    
    
    2,564Renegotiated loans
    
    
    
    
    
    
    
    
    
    
    Other real estate owned
    
    
    207
    
    
    
    
    
    
    
    $
    1,966
    
    
    $
    2,075
    
    
    $
    2,598
 Non-accrual loans at June 30, 2004 were $1,674,000, of which, $791,000 was
related to one commercial loan relationship that is well secured. The
remaining non-accrual loans consisted of one slow paying home equity loan
with a balance of $28,000, one slow paying construction loan with a balance of
$525,000 and two well-secured residential mortgage loans with balances of
$212,000 and $118,000. Allowance for Loan Losses.The allowance for loan losses was $4,894,000 at
June 30, 2004 compared to $4,314,000 at December 31, 2003, an increase of
$580,000 or 13%. The increase resulted from provisions recorded during the six
months ended June 30, 2004 and a net recovery of $75,000 during the six months
ended June 30, 2004 and responds to the growth of the loan portfolio as well as
the mix of loans and levels of nonperforming loans. The allowance for loan
losses was based upon managements assessment of relevant factors, including
loan growth, types and amounts of non-performing loans, historical and
anticipated loss experience on such types of loans, and current economic
conditions. 20




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##### Table of Contents



The following is an analysis of the allowance for loan losses (in thousands): Six Months Ended
    
    Year Ended
    
    Six Months Ended06/30/04
    
    12/31/03
    
    06/30/03Balance, beginning of year
    
    $
    4,314
    
    
    $
    2,875
    
    
    $
    2,875Charge-offs:Consumer loans
    
    
    5
    
    
    
    38
    
    
    
    16Commercial, financial & other
    
    
    
    
    
    
    141
    
    
    
    100Commercial real estate construction
    
    
    
    
    
    
    50
    
    
    
    Commercial real estate mortgages
    
    
    
    
    
    
    124
    
    
    
    Residential real estate mortgages
    
    
    32
    
    
    
    
    
    
    
    Recoveries:Consumer loans
    
    
    11
    
    
    
    13
    
    
    
    4Commercial, financial & other
    
    
    40
    
    
    
    30
    
    
    
    12Commercial real estate construction
    
    
    
    
    
    
    50
    
    
    
    Commercial real estate mortgages
    
    
    61
    
    
    
    
    
    
    
    Residential real estate mortgages
    
    
    
    
    
    
    
    
    
    
    Net charge-offs
    
    
    (75
    )
    
    
    260
    
    
    
    100Additions charged to operations
    
    
    505
    
    
    
    1,699
    
    
    
    739Balance, end of period
    
    $
    4,894
    
    
    $
    4,314
    
    
    $
    3,514Allowance to total loans
    
    
    1.11
    %
    
    
    1.08
    %
    
    
    1.07
    %Allowance to nonperforming assets
    
    
    248.93
    %
    
    
    207.90
    %
    
    
    136.20
    %Net charge-offs to average loans
    
    
    -0.02
    %
    
    
    0.08
    %
    
    
    0.04
    %
 Premises and Equipment.Bank premises and equipment at June 30, 2004 was
$10,404,000 compared to $5,554,000 at December 31, 2003, an increase of
$4,850,000 or 87 %. The increase in premises and equipment was primarily due
to the purchase and renovation of the Banks operation center in Allen Park,
Michigan. Accrued Interest Receivable.Accrued interest receivable at June 30, 2004 was
$1,431,000 compared to $1,461,000 at December 31, 2003, a decrease of $30,000
or 2%. The increase was primarily due to the timing of loan payments. Real Estate Owned.Real estate owned at June 30, 2004 was $207,000 compared to
$0 at December 31, 2003. The increase was due to the Banks foreclosure of one
commercial loan, which was collateralized by three residential properties.
These properties are in good condition with recently appraised values of
$277,000. 21




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##### Table of Contents



Other Assets. Other assets at June 30, 2004 were $1,850,000 compared to
$1,742,000 at December 31, 2003, an increase of $108,000 or 6%. The increase
was primarily due to changes in deferred tax assets. 22




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##### Table of Contents



Deposits.Total deposits at June 30, 2004 were $405,830,000 compared to
$379,619,000 at December 31, 2003, an increase of $26,211,000 or 7%. The
following is a summary of the distribution of deposits (in thousands): 06/30/04
    
    12/31/03
    
    6/30/2003Non-interest bearing:Demand
    
    $
    41,565
    
    
    $
    39,081
    
    
    $
    42,008Interest bearing:Checking
    
    $
    19,472
    
    
    $
    24,069
    
    
    $
    25,417Money market
    
    
    15,232
    
    
    
    10,998
    
    
    
    14,587Savings
    
    
    110,251
    
    
    
    126,596
    
    
    
    99,666Time, under $100,000
    
    
    74,041
    
    
    
    65,120
    
    
    
    66,571Time, $100,000 and over
    
    
    145,269
    
    
    
    113,755
    
    
    
    80,248364,265
    
    
    
    340,538
    
    
    
    286,489Total deposits
    
    $
    405,830
    
    
    $
    379,619
    
    
    $
    328,497
 Management continues to implement a strategy to change the mix of the deposit
portfolio by focusing more heavily on savings and institutional deposits. The
increase in deposits was primarily due to normal business development,
marketing, telemarketing, referral programs and growth strategies which
included a promotion that celebrated the Banks 10th Anniversary during March
2004, which targeted time deposit growth. Management expects deposits to
continue to grow at a similar rate during the remainder of 2004. The Bank has enacted a strategy to utilize public funds to a higher degree.
The Bank will also utilize brokered deposits. The Bank has designated a public
funds officer to coordinate and manage these efforts. Public funds consist of
interest checking and time deposits of local governmental units. They are the
result of strong relationships between the Bank and the communities in the
Banks marketing area and are considered by the Bank to be core deposits. The
following is a summary of the distribution of municipal deposits (in
thousands): 06/30/04
    
    12/31/03
    
    06/30/03Interest bearing checking
    
    $
    8,781
    
    
    $
    14,419
    
    
    $
    15,326Time, $100,000 and over
    
    
    57,586
    
    
    
    46,580
    
    
    
    21,648Total municipal deposits
    
    $
    66,367
    
    
    $
    60,999
    
    
    $
    36,974
 Brokered deposits are included in the Time, $100,000 and over category.
Brokered deposits were $6,050,000, $1,330,000 and $0 at June 30, 2004, December
31, 2003 and June 30, 2003, respectively. 23




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##### Table of Contents



Federal Home Loan Bank Advances. Federal Home Loan Bank advances were
$20,638,000 at June 30, 2004 and December 31, 2003. Other Liabilities. Other liabilities at June 30, 2004 were $886,000 compared
to $463,000 at December 31, 2003, an increase of $423,000 or 91%. The increase
was primarily due to the increase in expenses payable during the period. Accrued Interest Payable. Accrued interest payable at June 30, 2004 was
$823,000 compared to $754,000 at December 31, 2003, an increase of $69,000 or
9%. The increase was primarily due to the increasing amount of interest
bearing deposits during the period. Subordinated Debentures. Subordinated debentures were $10,000,000 at June 30,
2004 and December 31, 2003.On December 19, 2002, the Corporation issued
$10,000,000 of floating rate obligated mandatory redeemable securities through
a special purpose entity as part of a pooled offering. The securities have a
term of thirty years. The Corporation may redeem the securities after five
years at face value. They are considered to be Tier 1 capital for regulatory
capital purposes. The funds from the issue of these securities were invested
into the Bank to allow for additional growth. Debt issue costs of $300,000
have been capitalized and are being amortized over the term of the securities.
Unamortized debt issuance costs were $285,000 at June 30, 2004. 24




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##### Table of Contents



Capital Stockholders equity at June 30, 2004 was $37,275,000 compared to $34,601,000
as of December 31, 2003, an increase of $2,674,000 or 8%. The following is a presentation of the Corporations and Banks regulatory
capital ratios (in thousands): MinimumTo Be Well CapitalizedMinimum for Capital
    
    Under Prompt CorrectiveActual

    
    Adequacy Purposes
    
    Action ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAs of June 30, 2004Total capital
(to risk weighted assets)Consolidated
    
    $
    52,169
    
    
    
    11.20
    %
    
    $
    37,253
    
    
    
    8.00
    %
    
    $
    46,566
    
    
    
    10.00
    %Bank
    
    
    49,031
    
    
    
    10.59
    %
    
    
    37,052
    
    
    
    8.00
    %
    
    
    46,315
    
    
    
    10.00
    %Tier 1 capital
(to risk weighted assets)Consolidated
    
    
    47,275
    
    
    
    10.15
    %
    
    
    18,626
    
    
    
    4.00
    %
    
    
    27,940
    
    
    
    6.00
    %Bank
    
    
    44,137
    
    
    
    9.53
    %
    
    
    18,526
    
    
    
    4.00
    %
    
    
    27,789
    
    
    
    6.00
    %Tier 1 capital
(to average assets)Consolidated
    
    
    47,275
    
    
    
    9.96
    %
    
    
    18,982
    
    
    
    4.00
    %
    
    
    23,728
    
    
    
    5.00
    %Bank
    
    
    44,137
    
    
    
    9.39
    %
    
    
    18,796
    
    
    
    4.00
    %
    
    
    23,496
    
    
    
    5.00
    %As of December 31, 2003Total capital
(to risk weighted assets)Consolidated
    
    $
    48,893
    
    
    
    11.80
    %
    
    $
    33,237
    
    
    
    8.00
    %
    
    $
    41,547
    
    
    
    10.00
    %Bank
    
    
    42,763
    
    
    
    10.50
    %
    
    
    32,701
    
    
    
    8.00
    %
    
    
    40,877
    
    
    
    10.00
    %Tier 1 capital
(to risk weighted assets)Consolidated
    
    
    44,579
    
    
    
    10.70
    %
    
    
    16,639
    
    
    
    4.00
    %
    
    
    24,928
    
    
    
    6.00
    %Bank
    
    
    38,449
    
    
    
    9.40
    %
    
    
    16,351
    
    
    
    4.00
    %
    
    
    24,526
    
    
    
    6.00
    %Tier 1 capital
(to average assets)Consolidated
    
    
    44,579
    
    
    
    10.20
    %
    
    
    17,460
    
    
    
    4.00
    %
    
    
    21,825
    
    
    
    5.00
    %Bank
    
    
    38,449
    
    
    
    9.00
    %
    
    
    17,113
    
    
    
    4.00
    %
    
    
    21,391
    
    
    
    5.00
    %
 Based on the respective regulatory capital ratios at June 30, 2004 and December
31, 2003, the Corporation and Bank are considered well capitalized. 25




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##### Table of Contents



PART I    FINANCIAL INFORMATION 
  ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK Interest Rate Sensitivity Analysis.The Corporation has sought to manage its
exposure to changes in interest rates by matching the effective maturities or
repricing characteristics of the Corporations interest-earning assets and
interest-bearing liabilities. The matching of the assets and liabilities may
be analyzed by examining the extent to which the assets and liabilities are
interest rate sensitive and by monitoring the expected effects of interest rate
changes on net interest income. An asset or liability is interest rate sensitive within a specific time period
if it will mature or reprice within that time period. If the Corporations
assets mature or reprice more quickly or to a greater extent that its
liabilities, the Corporations net portfolio value and net interest income
would tend to increase during periods of rising interest rates but decrease
during periods of falling interest rates. If the Corporations assets mature
or reprice more slowly or to a lesser extent than its liabilities, its net
portfolio value and net interest income would tend to decrease during periods
of rising interest rates but increase during periods of falling interest rates. The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are interest rate sensitive and by
monitoring an institutions interest rate sensitivity gap. An asset or
liability is said to be interest rate sensitive within a specific period if it
will mature or reprice within that period. The interest rate sensitivity gap
is the difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount
of interest rate sensitive liabilities, and is considered negative when the
amount of interest rate sensitive liabilities exceed the amount of interest
rate sensitive assets. During a period of rising interest rates, a negative
gap would be expected to adversely affect net interest income while a positive
gap would be expected to result in an increase in net interest income, while
conversely during a period of declining interest rates, a negative gap would be
expected to result in an increase in net interest income and a positive gap
would be expected to adversely affect net interest income. 26




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##### Table of Contents



Different types of assets and liabilities with the same or similar maturities
may react differently to changes in overall market rates or conditions, and
thus changes in interest rates may affect net interest income positively or
negatively even if an institution were perfectly matched in each maturity
category. Additionally, the gap analysis does not consider the many factors as
banking interest rates move. While the interest rate sensitivity gap is a
useful measurement and contributes toward effective asset and liability
management, it is difficult to predict the effect of changing interest rates
solely on that measure, without accounting for alterations in the maturity or
repricing characteristics of the balance sheet that occur during changes in
market interest rates.
During periods of rising interest rates, the Corporations assets tend to have
prepayments that are slower than those in an interest rate sensitivity gap and
would increase the negative gap position. Conversely, during a period of
declining interest rates, the Corporations assets would tend to prepay faster
than originally expected thus decreasing the negative gap position. In
addition, some of the Corporations assets, such as adjustable rate mortgages,
have caps on the amount by which their interest rates can change in any single
period, and therefore may not reprice as quickly as liabilities in the same
maturity category. The following table sets forth the amounts of interest earning assets and
interest bearing liabilities outstanding at June 30, 2004, which are expected
to mature or reprice in each of the time periods shown below. 1-90
    
    91-365
    
    1-5
    
    Over(In thousands)
    
    Days
    
    Days
    
    Years
    
    5 Years
    
    TotalEarning assetsFederal funds sold
    
    $
    3,422
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    3,422Interest bearing deposits with Banks
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125Mortgage loans held for sale
    
    
    1,415
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,415Securities available for sale
    
    
    8,219
    
    
    
    3,684
    
    
    
    61
    
    
    
    895
    
    
    
    12,859Federal Home Loan Bank stock
    
    
    1,098
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,098Total loans, net of non-accrual
    
    
    187,572
    
    
    
    18,185
    
    
    
    216,107
    
    
    
    16,238
    
    
    
    438,102Total earning assets
    
    
    201,851
    
    
    
    21,869
    
    
    
    216,168
    
    
    
    17,133
    
    
    
    457,021Interest bearing liabilitiesTotal interest bearing deposits
    
    
    208,686
    
    
    
    90,878
    
    
    
    64,701
    
    
    
    
    
    
    
    364,265Federal Home Loan Bank advances
    
    
    
    
    
    
    
    
    
    
    20,638
    
    
    
    
    
    
    
    20,638Trust preferred securities
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000Total interest bearing liabilities
    
    
    218,686
    
    
    
    90,878
    
    
    
    85,339
    
    
    
    
    
    
    
    394,903Net asset (liability) funding gap
    
    
    (16,835
    )
    
    
    (69,009
    )
    
    
    130,829
    
    
    
    17,133
    
    
    $
    62,118Cumulative net asset (liability) funding gap
    
    
    ($16,835
    )
    
    
    ($85,844
    )
    
    $
    44,985
    
    
    $
    62,118
 27




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##### Table of Contents



Liquidity.Liquidity refers to readily available funds to meet the needs of
borrowers and depositors. Levels of liquidity are closely monitored in
conjunction with loan funding requirements and deposit outflows. Adequate
liquidity protects institutions from raising funds under duress at excessive
expense and provides a necessary cushion for occasional unpredictable
aberrations in demand. While adequate liquidity is imperative, excessive
liquidity in lower yielding cash investments or other easily marketable assets
reduces potential interest income. Thus, an appropriate balance must be
maintained to protect the institution and at the same time, prudently maximize
income opportunities. Sources of liquidity from both assets and liabilities
include federal funds sold, securities available for sale, loan repayments,
core deposits, Federal Home Loan Bank advances and a federal funds purchase
credit facility. The following tables provide information about the Banks contractual
obligations and commitments at June 30, 2004 (in thousands): Contractual Obligations Payments Due By PeriodLess Than 1 Year
    
    1-3 Years
    
    3-5 Years
    
    Over 5 Years
    
    TotalLong-term borrowings
    
    $
    24
    
    
    $
    10,052
    
    
    $
    10,562
    
    
    
    
    
    
    $
    20,638Lease commitments
    
    
    360
    
    
    
    735
    
    
    
    651
    
    
    
    720
    
    
    
    2,466Subordinated debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    10,000Totals
    
    $
    384
    
    
    $
    10,787
    
    
    $
    11,213
    
    
    $
    10,720
    
    
    $
    33,104
 Unused Loan Commitments
and Letters of Credit Amount Of Commitment Expiration Per PeriodLess Than 1 Year
    
    1-3 Years
    
    3-5 Years
    
    Over 5 Years
    
    TotalUnused loan commitments
    
    $
    56,786
    
    
    $
    12,609
    
    
    $
    1,216
    
    
    $
    14,969
    
    
    $
    85,580Standby letters of credit
    
    
    2,199
    
    
    
    
    
    
    
    3,000
    
    
    
    
    
    
    
    5,199Totals
    
    $
    58,985
    
    
    $
    12,609
    
    
    $
    4,216
    
    
    $
    14,969
    
    
    $
    90,779
 28




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##### Table of Contents



DEARBORN BANCORP, INC. AND SUBSIDIARY
FORM 10-Q (continued) 
 Item 4. Controls and Procedures Disclosure Controls and Procedures As of the end of the period covered by
this report, the registrant carried out an evaluation, under the supervision
and with the participation of management, including the Chief Executive Officer
and the Chief Financial Officer, of the effectiveness of the design and
operation of the registrants disclosure controls and procedures. Based on the
review of the disclosure controls of the registrant, the Chief Executive
Officer and the Chief Financial Officer have concluded that the registrants
disclosure controls and procedures are effective in timely alerting them to the
material information relating to the registrant that is required to be included
in the periodic SEC filings. Internal Controls Over Financial Reporting  There has been no change in the
registrants internal control over financial reporting that occurred during the
period covered by this report that has materially affected, or is reasonably
likely to materially affect the registrants internal control over financial
reporting. 29




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##### Table of Contents



PART II    OTHER INFORMATION 
 ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS The corporation held its regular annual meeting on May 18, 2004. At
this meeting, there were several matters submitted to a vote of the
security holders. The first matter was the re-election of directors. Four directors
were re-elected to serve three-year terms expiring in 2007. The voting
results for each nominee were as follows: Nominee
    
    Total ForMargaret
I. Campbell 
John E. Demmer
Michael V. Dorian, Jr.
Donald G. Karcher
    
    2,680,390
2,661,652
2,679,491
2,664,375
 There were no votes against any nominee. The second matter was the election of a director. Mr. William J. Demmer
was elected to serve a one year term expiring in 2005. The voting
results for the nominee were as follows: Nominee
    
    Total ForWilliam J. Demmer
    
    2,659,205
 There were no votes against this nominee. The final matter was the consideration of an amendment to the Articles
of Incorporation to increase the number of authorized shares of Common
Stock to 10,000,000 shares. The amendment passed. The voting results
were: Total For
    
    Total Against2,663,316
    
    14,683
 30




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##### Table of Contents



ITEM 6. EXHIBITS AND REPORTS IN FORM 8-K.  (a)
    
    Exhibits Exhibit 31.1
    
    CEO Certification. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.Exhibit 31.2
    
    CFO Certification. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.Exhibit 32.1
    
    CEO Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.Exhibit 32.2
    
    CFO Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.Exhibit 99.1
    
    Underwriting agreement dated July 20, 2004 by and among the
registrant, Oppenheimer & Co., Inc. and Howe Barnes Investments,
Inc.
  (b)
    
    Three Form 8-K Reports, dated April 20, 2004, May 18, 2004 and June 25,
2004 were filed during the quarter ended June 30, 2004.(c)
    
    A Form S-2 Report, dated June 25, 2004 was filed during the quarter
ended June 30, 2004. 31




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##### Table of Contents



DEARBORN BANCORP, INC.
FORM 10-Q (continued) 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. Dearborn Bancorp, Inc.
(Registrant) /s/ John E. Demmer    /s/ Michael J. Ross    /s/ Jeffrey L. Karafa    Date: August 10, 2004 32




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##### Table of Contents



EXHIBIT INDEX NO.
    
    DESCRIPTIONExhibit 31.1
    
    CEO Certification. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.Exhibit 31.2
    
    CFO Certification. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.Exhibit 32.1
    
    CEO Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.Exhibit 32.2
    
    CFO Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.Exhibit 99.1
    
    Underwriting agreement dated July 20, 2004 by and among the
registrant, Oppenheimer & Co., Inc. and Howe Barnes Investments,
Inc.