##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ

    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarterly period ended September 30, 2010
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 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(Address of principal executive office)
    
    (Zip Code)
 (Registrants telephone number, including area code)
  þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller Reporting Company þ(Do not check if a smaller reporting company)
  o þ
  Class
    
    Shares OutstandingCommon Stock
    
    7,685,705




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##### 



PagePart I. Financial Information:Item 1. Financial StatementsThe following condensed consolidated financial statements of
Dearborn Bancorp, Inc. and its subsidiary are included in this report:Report of Independent Registered Public Accounting Firm
    
    
    3Condensed Consolidated Balance Sheets  September 30, 2010,
December 31, 2009 and September 30, 2009
    
    
    4Condensed Consolidated Statements of Operation  For the Three
And Nine Months Ended September 30, 2010 and 2009
    
    
    5Condensed Consolidated Statements of Comprehensive Loss  For the
Three and Nine Months Ended September 30, 2010 and 2009
    
    
    6Condensed Consolidated Statements of Cash Flows  For the Nine
Months Ended September 30, 2010 and 2009
    
    
    7Notes to Condensed Consolidated Financial Statements
    
    
    9-28Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    29-48Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    49-52Item 4. Controls and Procedures
    
    
    53Part II. Other Information:Pursuant to SEC rules and regulations, the following item(s) are
included with the Form 10-Q Report:Item 1A Risk Factors
    
    
    54Item 6. Exhibits
    
    
    55Pursuant 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. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationSIGNATURES
    
    
    56EX-31.1EX-31.2EX-32.1EX-32.2
  2




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Report of Independent Registered Public Accounting Firm
 
     BKD, LLP
 
 3




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 DEARBORN BANCORP, INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Dollars, in thousands)
    
    9/30/2010
    
    
    12/31/2009
    
    
    9/30/2009ASSETSCash and cash equivalentsCash and due from banks
    
    $
    7,136
    
    
    $
    7,803
    
    
    $
    17,330Federal funds sold
    
    
    56
    
    
    
    156
    
    
    
    6,206Interest bearing deposits with banks
    
    
    70,216
    
    
    
    69,538
    
    
    
    117,732Total cash and cash equivalents
    
    
    77,408
    
    
    
    77,497
    
    
    
    141,268Mortgage loans held for sale
    
    
    572
    
    
    
    1,129
    
    
    
    1,449Securities available for sale
    
    
    46,372
    
    
    
    45,964
    
    
    
    13,547Securities held to maturity
    
    
    250
    
    
    
    336
    
    
    
    363Federal Home Loan Bank stock
    
    
    3,698
    
    
    
    3,698
    
    
    
    3,698LoansLoans
    
    
    760,683
    
    
    
    833,136
    
    
    
    862,664Allowance for loan losses
    
    
    (29,831
    )
    
    
    (35,125
    )
    
    
    (28,373
    )Net loans
    
    
    730,852
    
    
    
    798,011
    
    
    
    834,291Premises and equipment, net
    
    
    19,415
    
    
    
    20,194
    
    
    
    20,477Real estate owned
    
    
    25,043
    
    
    
    23,435
    
    
    
    15,472Accrued interest receivable
    
    
    3,301
    
    
    
    3,562
    
    
    
    3,619Other assets
    
    
    9,820
    
    
    
    12,660
    
    
    
    8,153Total assets
    
    $
    916,731
    
    
    $
    986,486
    
    
    $
    1,042,337LIABILITIESDepositsNon-interest bearing deposits
    
    $
    87,205
    
    
    $
    83,873
    
    
    $
    89,329Interest bearing deposits
    
    
    722,213
    
    
    
    784,082
    
    
    
    815,625Total deposits
    
    
    809,418
    
    
    
    867,955
    
    
    
    904,954Other liabilitiesSecurities sold under agreements to repurchase
    
    
    
    
    
    
    
    
    
    
    2,302Federal Home Loan Bank advances
    
    
    63,716
    
    
    
    63,855
    
    
    
    73,855Accrued interest payable
    
    
    972
    
    
    
    1,046
    
    
    
    956Other liabilities
    
    
    2,471
    
    
    
    1,685
    
    
    
    2,380Subordinated debentures
    
    
    10,000
    
    
    
    10,000
    
    
    
    10,000Total liabilities
    
    
    886,577
    
    
    
    944,541
    
    
    
    994,447COMMITMENT AND CONTINGENT LIABILITIES
    
    
    
    
    
    
    
    
    
    
    STOCKHOLDERS EQUITYCommon stock  no par value 100,000,000 shares
authorized, 7,685,705 at 9/30/10, 7,687,470
shares at 12/31/09 and 7,687,470 shares at 9/30/09
    
    
    131,929
    
    
    
    131,929
    
    
    
    131,898Accumulated deficit
    
    
    (101,626
    )
    
    
    (89,850
    )
    
    
    (84,043
    )Accumulated other comprehensive income (loss)
    
    
    (149
    )
    
    
    (134
    )
    
    
    35Total stockholders equity
    
    
    30,154
    
    
    
    41,945
    
    
    
    47,890Total liabilities and stockholders equity
    
    $
    916,731
    
    
    $
    986,486
    
    
    $
    1,042,337
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DEARBORN BANCORP, INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 Three Months Ended
    
    
    Nine Months Ended(In thousands, except share data)
    
    9/30/2010
    
    
    9/30/2009
    
    
    9/30/2010
    
    
    9/30/2009Interest incomeInterest on loans
    
    $
    11,328
    
    
    $
    13,135
    
    
    $
    34,642
    
    
    $
    40,231Interest on securities, available for sale
    
    
    276
    
    
    
    33
    
    
    
    601
    
    
    
    467Interest on deposits with banks
    
    
    115
    
    
    
    76
    
    
    
    216
    
    
    
    273Interest on federal funds
    
    
    
    
    
    
    2
    
    
    
    1
    
    
    
    14Total interest income
    
    
    11,719
    
    
    
    13,246
    
    
    
    35,460
    
    
    
    40,985Interest expenseInterest on deposits
    
    
    2,578
    
    
    
    4,806
    
    
    
    9,046
    
    
    
    16,262Interest on other borrowings
    
    
    285
    
    
    
    504
    
    
    
    858
    
    
    
    1,523Interest on subordinated debentures
    
    
    106
    
    
    
    110
    
    
    
    295
    
    
    
    320Total interest expense
    
    
    2,969
    
    
    
    5,420
    
    
    
    10,199
    
    
    
    18,105Net interest income
    
    
    8,750
    
    
    
    7,826
    
    
    
    25,261
    
    
    
    22,880Provision for loan losses
    
    
    500
    
    
    
    14,185
    
    
    
    12,403
    
    
    
    38,522Net interest income (loss) after provision for loan losses
    
    
    8,250
    
    
    
    (6,359
    )
    
    
    12,858
    
    
    
    (15,642
    )Non-interest incomeService charges on deposit accounts
    
    
    366
    
    
    
    388
    
    
    
    1,089
    
    
    
    1,118Fees for other services to customers
    
    
    35
    
    
    
    33
    
    
    
    120
    
    
    
    95Gain on the sale of loans
    
    
    54
    
    
    
    37
    
    
    
    178
    
    
    
    253Gain on the sale of securities
    
    
    470
    
    
    
    
    
    
    
    539
    
    
    
    465Other than temporary impairment on securities, held to maturityPortion of loss recognized in other comprehensive income
before taxesNet impairment losses recognized in earnings
    
    
    
    
    
    
    (387
    )
    
    
    
    
    
    
    (387
    )Gain (loss) on the sale of real estate owned
    
    
    (38
    )
    
    
    (154
    )
    
    
    (6
    )
    
    
    (157
    )Loss on the write-down of real estate owned
    
    
    (960
    )
    
    
    (639
    )
    
    
    (5,309
    )
    
    
    (2,499
    )Write-down of other assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (100
    )Other income
    
    
    91
    
    
    
    122
    
    
    
    271
    
    
    
    369Total non-interest income (loss)
    
    
    18
    
    
    
    (600
    )
    
    
    (3,118
    )
    
    
    (843
    )Non-interest expenseSalaries and employee benefits
    
    
    3,050
    
    
    
    3,159
    
    
    
    9,247
    
    
    
    9,657Occupancy and equipment expense
    
    
    857
    
    
    
    903
    
    
    
    2,488
    
    
    
    2,753Amortization of intangible expense
    
    
    
    
    
    
    4,195
    
    
    
    
    
    
    
    4,592FDIC assessment
    
    
    1,075
    
    
    
    672
    
    
    
    3,150
    
    
    
    1,853Advertising and marketing
    
    
    42
    
    
    
    48
    
    
    
    102
    
    
    
    177Stationery and supplies
    
    
    82
    
    
    
    120
    
    
    
    229
    
    
    
    340Professional services
    
    
    490
    
    
    
    234
    
    
    
    962
    
    
    
    598Data processing
    
    
    180
    
    
    
    219
    
    
    
    540
    
    
    
    685Defaulted loan expense
    
    
    1,184
    
    
    
    1,827
    
    
    
    3,273
    
    
    
    3,514Other operating expenses
    
    
    577
    
    
    
    433
    
    
    
    1,519
    
    
    
    1,255Total non-interest expense
    
    
    7,537
    
    
    
    11,810
    
    
    
    21,510
    
    
    
    25,424Income (loss) before federal income tax expense
    
    
    731
    
    
    
    (18,769
    )
    
    
    (11,770
    )
    
    
    (41,909
    )Income tax expense
    
    
    100
    
    
    
    21,276
    
    
    
    100
    
    
    
    13,460Net income (loss)
    
    $
    631
    
    
    $
    (40,045
    )
    
    $
    (11,870
    )
    
    $
    (55,369
    )Per share data:Net income (loss)  basic
    
    
    0.08
    
    
    
    (5.24
    )
    
    
    (1.55
    )
    
    
    (7.24
    )Net income (loss)  diluted
    
    
    0.08
    
    
    
    (5.24
    )
    
    
    (1.55
    )
    
    
    (7.24
    )Weighted average number of shares outstanding  basic
    
    
    7,645,940
    
    
    
    7,645,940
    
    
    
    7,645,940
    
    
    
    7,644,785Weighted average number of shares outstanding  diluted
    
    
    7,645,940
    
    
    
    7,645,940
    
    
    
    7,645,940
    
    
    
    7,644,785
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DEARBORN BANCORP, INC. AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
 Three Months Ended
    
    
    Nine Months Ended(In thousands)
    
    9/30/10
    
    
    9/30/09
    
    
    9/30/10
    
    
    9/30/09Net loss
    
    $
    631
    
    
    $
    (40,045
    )
    
    $
    (11,870
    )
    
    $
    (55,369
    )Other comprehensive income (loss) , net of taxUnrealized gains on securitiesUnrealized holding gains (losses) arising during period
    
    
    (941
    )
    
    
    424
    
    
    
    (554
    )
    
    
    (333
    )Less: net unrealized loss on securities, held to
maturity which has been recognized in income
    
    
    
    
    
    
    (387
    )
    
    
    
    
    
    
    (387
    )Less: reclassification adjustment for gains included
in net income
    
    
    470
    
    
    
    
    
    
    
    539
    
    
    
    465Tax effects
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    88Other comprehensive income (loss)
    
    
    (471
    )
    
    
    26
    
    
    
    (15
    )
    
    
    (167
    )Comprehensive income (loss)
    
    $
    160
    
    
    $
    (40,019
    )
    
    $
    (11,885
    )
    
    $
    (55,536
    )
  6




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DEARBORN BANCORP, INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 Nine Months Ended(In thousands)
    
    9/30/2010
    
    
    9/30/2009Cash flows from operating activitiesInterest and fees received
    
    $
    35,721
    
    
    $
    40,865Interest paid
    
    
    (10,273
    )
    
    
    (18,844
    )Proceeds from sale of mortgages held for sale
    
    
    16,190
    
    
    
    26,150Origination of mortgages held for sale
    
    
    (15,455
    )
    
    
    (25,512
    )Taxes refunded
    
    
    4,074
    
    
    
    (Gain) loss on sale of real estate owned
    
    
    6
    
    
    
    32Gain on sale of securities
    
    
    (539
    )
    
    
    465Cash paid to suppliers and employees
    
    
    (18,568
    )
    
    
    (16,288
    )Net cash provided by operating activities
    
    
    11,156
    
    
    
    6,868Cash flows from investing activitiesSale of securities available for sale
    
    
    52,116
    
    
    
    49,661Proceeds from calls, maturities and repayments of
of securities available for sale
    
    
    2,908
    
    
    
    52,067Purchases of securities available for sale
    
    
    (55,444
    )
    
    
    (32,777
    )Purchase of Federal Home Loan Bank stock
    
    
    
    
    
    
    (84
    )(Increase) decrease in loans, net of payments received
    
    
    44,803
    
    
    
    33,336Proceeds from the sale of real estate owned
    
    
    3,036
    
    
    
    4,165Purchases of property and equipment
    
    
    12
    
    
    
    (206
    )Net cash used in investing activities
    
    
    47,431
    
    
    
    106,162Cash flows from financing activitiesNet decrease in non-interest bearing deposits
    
    
    3,332
    
    
    
    8,012Net increase in interest bearing deposits
    
    
    (61,869
    )
    
    
    (41,453
    )Increase (decrease) in other borrowings
    
    
    
    
    
    
    (159
    )Repayments on Federal Home Loan Bank advances
    
    
    (139
    )
    
    
    8,836Net cash provided by financing activities
    
    
    (58,676
    )
    
    
    (24,764
    )Increase (decrease) in cash and cash equivalents
    
    
    (89
    )
    
    
    88,266Cash and cash equivalents at the beginning of year
    
    
    77,497
    
    
    
    53,002Cash and cash equivalents at the end of year
    
    $
    77,408
    
    
    $
    141,268
  7




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DEARBORN BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)
 Nine Months Ended(In thousands)
    
    9/30/2010
    
    
    9/30/2009Reconciliation of net loss to net cash provided by operating activitiesNet loss
    
    
    ($11,870
    )
    
    
    ($55,369
    )Adjustments to reconcile net income to net cash
provided by operating activitiesProvision for loan losses
    
    
    12,403
    
    
    
    38,522Depreciation and amortization expense
    
    
    767
    
    
    
    1,001Restricted stock award expense
    
    
    47
    
    
    
    61Stock option expense
    
    
    47
    
    
    
    54Accretion of discount on investment securities
    
    
    (123
    )
    
    
    (54
    )Amortization of premium on investment securities
    
    
    277
    
    
    
    237Impairment of investment securities
    
    
    
    
    
    
    387Write-down of real estate owned
    
    
    5,309
    
    
    
    2,499Amortization of intangible assets
    
    
    
    
    
    
    595Impairment of intangible assets
    
    
    
    
    
    
    3,997Decrease in mortgages held for sale
    
    
    557
    
    
    
    385(Increase) decrease in interest receivable
    
    
    261
    
    
    
    (120
    )Decrease in interest payable
    
    
    (74
    )
    
    
    (739
    )Decrease in other assets
    
    
    2,769
    
    
    
    14,069Increase in other liabilities
    
    
    786
    
    
    
    1,343Net cash provided by operating activities
    
    $
    11,156
    
    
    $
    6,868Supplemental noncash disclosures:Transfers from loans to real estate owned
    
    $
    9,953
    
    
    $
    12,511
  8




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A.
    
    Accounting and Reporting PoliciesThe condensed consolidated financial statements of Dearborn Bancorp, Inc. (the
Corporation) include the consolidation of its only subsidiary, Fidelity Bank (the
Bank). The accounting and reporting policies of the Corporation are in accordance with
accounting principles generally accepted in the United States of America and conform to
practice within the banking industry.The condensed consolidated financial statements of the Corporation as of September 30, 2010
and 2009, and December 31, 2009 and for the three and nine month periods ended September
30, 2010 and 2009 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 condensed consolidated balance sheet of the Corporation as of December
31, 2009 has been derived from the audited consolidated balance sheet as of that date. The
operating results for the three and nine month periods ended September 30, 2010 are not
necessarily indicative of results of operations for the entire year.The condensed consolidated financial statements as of September 30, 2010 and 2009, and for
the three and nine month periods ended September 30, 2010 and 2009 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 accounting
principles generally accepted in the United States of America 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 2009 Annual Report 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 and assessing other than temporary impairments of securities.
 9




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A.
    
    Accounting and Reporting Policies (cont)Income (Loss) Per ShareBasic income (loss) per share is net income (loss) divided by the weighted average number of
common shares outstanding during the period. Diluted income (loss) per share includes the
dilutive effect of additional potential common shares issuable under stock options. Income
(loss) per share is restated for all stock splits and dividends through the date of issue of
the financial statements.Factors in the basic and diluted income (loss) per share calculation follow (in thousands,
except share and per share data):
 Three Months Ended
    
    
    Nine Months Ended9/30/2010
    
    
    9/30/2009
    
    
    9/30/2010
    
    
    9/30/2009BasicNet income (loss)
    
    $
    631
    
    
    $
    (40,045
    )
    
    $
    (11,870
    )
    
    $
    (55,369
    )Weighted average common shares
    
    
    7,645,940
    
    
    
    7,645,940
    
    
    
    7,645,940
    
    
    
    7,644,785Basic earnings (loss) per common share
    
    $
    0.08
    
    
    $
    (5.24
    )
    
    $
    (1.55
    )
    
    $
    (7.24
    )DilutedNet income (loss)
    
    $
    631
    
    
    $
    (40,045
    )
    
    $
    (11,870
    )
    
    $
    (55,369
    )Weighted average common shares outstanding
for basic earnings (loss) per common share
    
    
    7,645,940
    
    
    
    7,645,940
    
    
    
    7,645,940
    
    
    
    7,644,785Add: Dilutive effects of assumed exercise of
stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Average shares and dilutive potential common shares
    
    
    7,645,940
    
    
    
    7,645,940
    
    
    
    7,645,940
    
    
    
    7,644,785Dilutive earnings (loss) per common share
    
    $
    0.08
    
    
    $
    (5.24
    )
    
    $
    (1.55
    )
    
    $
    (7.24
    )
 Stock options for 549,342 and 542,511 shares of common stock were not considered in
computing diluted earnings per common share for the nine months ended September 30, 2010 and
2009, respectively, because they were antidilutive. All share and per share amounts have
been adjusted for stock dividends.
 10




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##### Table of Contents



A.
    
    Accounting and Reporting Policies (cont)Current Accounting DevelopmentsFASB ASU 2009-16, Transfers and Servicing (Topic 860); Accounting for Transfers of Financial
Assets ASU 2009-16 requires more information about transfers of financial assets,
including securitization transactions, and where entities have continued exposure to the
risks related to transferred assets. The Corporation adopted ASU 2009-16 effective January
1, 2010 and adoption did not have a material effect on its financial position or results of
operations.ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures
about Fair Value Measurements. ASU 2010-06 revises two disclosure requirements concerning
fair value measurements and clarifies two others. It requires separate presentation of
significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and
disclosure of the reasons for such transfers. It will also require the presentation of
purchases, sales, issuances, and settlements within Level 3 on a gross basis rather than a
net basis. The amendments also clarify that disclosures should be disaggregated by class of
asset or liability and that disclosures about inputs and valuation techniques should be
provided for both recurring and non-recurring fair value measurements. The Companys
disclosures about fair value measurements are presented in Note E   Disclosures About Fair
Value of Assets and Liabilities. These new disclosure requirements were effective for the
period ended March 31, 2010, except for the requirement concerning gross presentation of
Level 3 activity, which is effective for fiscal years beginning after December 15, 2010.
There was no significant effect to the Corporations financial statement disclosure upon
adoption of this ASU.ASU No. 2010-09, Subsequent Events (Topic 855)  Amendments to Certain Recognition and
Disclosure Requirements. ASU 2010-09 amends the subsequent events disclosure guidance.
The amendments include a definition of an SEC filer, requires an SEC filer or conduit bond
obligor to evaluate subsequent events through the date the financial statements are issued,
and removes the requirement for an SEC filer to disclose the date through which subsequent
events have been evaluated. ASU 2010-09 was effective upon issuance for us. The impact of
ASU 2010-09 on our disclosures is reflected in Subsequent Events footnote.FASB ASU 2010-18  Effect of a Loan Modification When the Loan Is Part of a Pool That Is
Accounted for as a Single Asset. This Update clarifies that modifications of loans that are
accounted for within a pool under Subtopic 310-30, which provides guidance on accounting for
acquired loans that have evidence of credit deterioration upon acquisition, do not result in
the removal of those loans from the pool even if the modification would
otherwise be considered a troubled debt restructuring. An entity will continue to be
required to consider whether the pool of assets in which the loan is included is impaired if
expected cash flows for the pool change. The amendments do not affect the accounting for
loans under the scope of Subtopic 310-30 that are not accounted for within pools. Loans
accounted for individually under Subtopic 310-30 continue to be subject to the troubled debt
restructuring accounting provisions within Subtopic 310-40. The Corporation has adopted ASU
2010-18, but does not anticipate that its adoption will have an impact on its financial
statements.
 11




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##### Table of Contents



A.
    
    Accounting and Reporting Policies (cont)ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses. ASU 2010-20 requires that more information
be disclosed about the credit quality of a companys loans and the allowance for loan losses
held against those loans. A company will need to disaggregate new and existing disclosure
based on how it develops its allowance for loan losses and how it manages credit exposures.
Existing disclosures to be presented on a disaggregated basis include a roll-forward of the
allowance for loan losses, the related recorded investment in such loans, the nonaccrual
status of loans, and impaired loans. Additional disclosure is also required about the
credit quality indicators of loans by class at the end of the reporting period, the aging of
past due loans, information about troubled debt restructurings, and significant purchases
and sales of loans during the reporting period by class.For public companies, ASU 2010-20 requires certain disclosures as of the end of a reporting
period effective for periods ending on or after December 15, 2010. Other required
disclosures about activity that occurs during a reporting period are effective for periods
beginning on or after December 15, 2010. The Corporation anticipates that adoption of these
additional disclosures will not have a material effect on its financial position or results
of operations.B.
    
    SecuritiesThe amortized cost and fair value of securities available for sale are as follows (in
thousands):
 September 30, 2010Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueUS Government sponsored
agency securities
    
    $
    2,007
    
    
    
    
    
    
    $
    (4
    )
    
    $
    2,003Mortgage backed securities
    
    
    44,514
    
    
    
    104
    
    
    
    (249
    )
    
    
    44,369Totals
    
    $
    46,521
    
    
    $
    104
    
    
    $
    (253
    )
    
    $
    46,372
 December 31, 2009Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueUS Government sponsored
agency securities
    
    $
    12,759
    
    
    $
    20
    
    
    $
    (30
    )
    
    $
    12,749Corporate bonds
    
    
    33,308
    
    
    
    
    
    
    
    (197
    )
    
    
    33,111Mortgage backed securities
    
    
    101
    
    
    
    3
    
    
    
    
    
    
    
    104Totals
    
    $
    46,168
    
    
    $
    23
    
    
    $
    (227
    )
    
    $
    45,964
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B.
    
    Securities (cont)
 The amortized cost and fair value of securities available for sale at September 30, 2010 by
contractual maturity are shown below (in thousands):
 Amortized
    
    
    FairCost
    
    
    ValueDue in one year through five years
    
    $
    2,007
    
    
    $
    2,003Mortgage backed securities
    
    
    44,514
    
    
    
    44,369Totals
    
    $
    46,521
    
    
    $
    46,372
 The entire portfolio has a net unrealized loss of $149,000 at September 30, 2010,
compared to net unrealized loss of $204,000 at December 31, 2009.Securities with unrealized losses at September 30, 2010 and December 31, 2009, aggregated by
investment category and length of time that individual securities have been in a continuous
unrealized loss position are as follows:
 September 30, 2010Investment category
    
    Less than one year
    
    
    One year or more
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    
    Value
    
    
    Loss
    
    
    Value
    
    
    LossUS Government sponsored
entity securities
    
    $
    2,003
    
    
    $
    (4
    )
    
    $
    
    
    
    $
    
    
    
    $
    2,003
    
    
    $
    (4
    )Mortgage backed securities
    
    
    15,966
    
    
    
    (249
    )
    
    
    
    
    
    
    
    
    
    
    15,966
    
    
    
    (249
    )Total temporarily impaired
    
    $
    17,969
    
    
    $
    (253
    )
    
    $
    
    
    
    $
    
    
    
    $
    17,969
    
    
    $
    (253
    )
 December 31, 2009Investment category
    
    Less than one year
    
    
    One year or more
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    
    Value
    
    
    Loss
    
    
    Value
    
    
    LossUS Government sponsored
entity securities
    
    $
    6,657
    
    
    $
    (30
    )
    
    $
    
    
    
    $
    
    
    
    $
    6,657
    
    
    $
    (30
    )Corporate bonds
    
    
    33,111
    
    
    
    (197
    )
    
    
    
    
    
    
    
    
    
    
    33,111
    
    
    
    (197
    )Total temporarily impaired
    
    $
    39,768
    
    
    $
    (227
    )
    
    $
    
    
    
    $
    
    
    
    $
    39,768
    
    
    $
    (227
    )
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B.
    
    Securities (cont)
 Sales of available for sale securities for the three and nine months ended September 30,
2010 and 2009 are as follows (in thousands):
 For the three months ended
    
    
    For the nine months ended9/30/2010
    
    
    9/30/2009
    
    
    9/30/2010
    
    
    9/30/2009Gross Gains
    
    $
    470
    
    
    $
    
    
    
    $
    539
    
    
    $
    467Gross Losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
 Securities having a carrying value of $37,042,000 and $5,524,000 at September 30, 2010
and December 31, 2009, respectively, were pledged to secure clearing requirements and
borrowings.The Corporation currently holds one single issuer trust preferred security that is
classified as securities held to maturity. The amortized cost and fair value of securities,
held to maturity are listed below (in thousands):
 September 30, 2010Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueTrust preferred securities
    
    $
    250
    
    
    $
    
    
    
    $
    
    
    
    $
    250Totals
    
    $
    250
    
    
    $
    
    
    
    $
    
    
    
    $
    250
 December 31, 2009Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueTrust preferred securities
    
    $
    336
    
    
    $
    
    
    
    $
    
    
    
    $
    336Totals
    
    $
    336
    
    
    $
    
    
    
    $
    
    
    
    $
    336
 The contractual maturity of this security is over five years.The single issuer trust preferred security was evaluated for other than temporary impairment
by determining the strength of the underlying issuer and its ability to make the contractual
principal and interest payments.
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C.
    
    Loans and Allowance for Loan Losses
 Major categories of loans included in the loan portfolio are as follows (in thousands):
 09/30/10
    
    
    12/31/09
    
    
    09/30/09Consumer loans
    
    $
    27,391
    
    
    $
    29,386
    
    
    $
    30,028Commercial, financial, & other
    
    
    126,573
    
    
    
    144,630
    
    
    
    154,358Land development loans  residential property
    
    
    26,668
    
    
    
    38,472
    
    
    
    44,997Land development loans  non- residential property
    
    
    9,374
    
    
    
    11,644
    
    
    
    11,604Commercial real estate construction  residential property
    
    
    11,407
    
    
    
    13,287
    
    
    
    15,042Commercial real estate construction  non-residential
property
    
    
    17,370
    
    
    
    20,061
    
    
    
    20,445Commercial real estate mortgages
    
    
    501,059
    
    
    
    531,156
    
    
    
    539,200Residential real estate mortgages
    
    
    40,841
    
    
    
    44,500
    
    
    
    46,990760,683
    
    
    
    833,136
    
    
    
    862,664Allowance for loan losses
    
    
    (29,831
    )
    
    
    (35,125
    )
    
    
    (28,373
    )$
    730,852
    
    
    $
    798,011
    
    
    $
    834,291
  09/30/10
    
    
    12/31/09
    
    
    09/30/09Troubled debt restructuring
    
    $
    39,714
    
    
    $
    59,420
    
    
    $
    46,025Over 90 days past due and still accruing
    
    
    
    
    
    
    
    
    
    
    Non-accrual loans
    
    
    72,286
    
    
    
    49,341
    
    
    
    58,866Total non-performing loans
    
    
    112,000
    
    
    
    108,761
    
    
    
    104,891Real estate owned
    
    
    21,452
    
    
    
    23,435
    
    
    
    11,684Real estate in redemption
    
    
    3,591
    
    
    
    
    
    
    
    3,788Other non-performing assets
    
    
    25,043
    
    
    
    23,435
    
    
    
    15,472Total non-performing assets
    
    $
    137,043
    
    
    $
    132,196
    
    
    $
    120,363
 The most significant proportion of the Banks non-performing loans continues to be in
the land development and commercial real estate construction segments of the Banks loan
portfolio. These loans comprise 9% of loans and 35% of non-accrual loans at September 30,
2010. Management has implemented a strategy to decrease the amount of
loans in these segments. These loans have decreased 22% during the first nine months of
2010, while the loan portfolio has declined by 9% during the same period.
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C.
    
    Loans and Allowance for Loan Losses (cont)The distribution of non-accrual loans by loan type (in thousands) is as follows:
 Number ofLoans
    
    
    BalanceConsumer loans
    
    
    17
    
    
    $
    900Commercial, financial, & other
    
    
    49
    
    
    
    13,595Land development loans  residential property
    
    
    17
    
    
    
    15,597Land development loans  non-residential property
    
    
    1
    
    
    
    1,318Commercial real estate construction  residential property
    
    
    10
    
    
    
    8,621Commercial real estate construction  non-residential property
    
    
    
    
    
    
    Commercial real estate mortgages
    
    
    57
    
    
    
    29,628Residential real estate mortgages
    
    
    17
    
    
    
    2,627Total non-accrual loans
    
    
    168
    
    
    $
    72,286
 The increase in non-accrual loans during the period was primarily due to the
downgrading of 81 loans to non-accrual status for $45,295,000 and partially offset by net
charge-offs of $17,697,000 and the transfer of 28 loans to other real estate for
$10,166,000. This increase was primarily due to the migration of previously identified
classified loans. These loans have been identified as impaired loans and have been charged
down to the value of the collateral or an appropriate reserve has been identified in the
allowance for loan loss. Loans transferred to non-accrual status during 2010 in the amount
of $37,880,000 were identified at December 31, 2009 as classified loans with reserves for
losses established accordingly. As these loans were identified as classified loans with
the appropriate risk allocation in the allowance for loan losses at December 31, 2009, the
migration of these loans to non-accrual status did not have a significant impact on the
allowance for loan losses. Loans transferred to non-accrual status during 2010 totaling
$7,415,000 were not identified as substandard at December 31, 2009 but have deteriorated
during the nine months ended September 30, 2010.
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C.
    
    Loans and Allowance for Loan Losses (cont)The following is an analysis of the allowance for loan losses (in thousands):
 Nine Months
    
    
    
    
    
    
    Nine MonthsEnded
    
    
    Year Ended
    
    
    Ended09/30/10
    
    
    12/31/09
    
    
    09/30/09Balance, beginning of year
    
    $
    35,125
    
    
    $
    14,452
    
    
    $
    14,452Charge-offs:Consumer loans
    
    
    635
    
    
    
    1,154
    
    
    
    718Commercial, financial & other
    
    
    3,756
    
    
    
    4,878
    
    
    
    3,616Land development loans  residential property
    
    
    7,535
    
    
    
    1,471
    
    
    
    7,050Land development loans  non-residential property
    
    
    300
    
    
    
    1,981
    
    
    
    3,999Commercial real estate construction  residential property
    
    
    1,740
    
    
    
    9,441
    
    
    
    1,270Commercial real estate construction  non-residential
property
    
    
    36
    
    
    
    4,364
    
    
    
    1,981Commercial real estate mortgages
    
    
    4,291
    
    
    
    6,919
    
    
    
    5,770Residential real estate mortgages
    
    
    232
    
    
    
    701
    
    
    
    691Recoveries:Consumer loans
    
    
    47
    
    
    
    176
    
    
    
    171Commercial, financial & other
    
    
    113
    
    
    
    339
    
    
    
    247Land development loans  residential property
    
    
    39
    
    
    
    107
    
    
    
    42Commercial real estate construction  residential property
    
    
    1
    
    
    
    
    
    
    
    Commercial real estate mortgages
    
    
    555
    
    
    
    61
    
    
    
    27Residential real estate mortgages
    
    
    73
    
    
    
    36
    
    
    
    7Net charge-offs (recoveries)
    
    
    17,697
    
    
    
    30,190
    
    
    
    24,601Provision for loan losses
    
    
    12,403
    
    
    
    50,863
    
    
    
    38,522Balance, end of period
    
    $
    29,831
    
    
    $
    35,125
    
    
    $
    28,373Allowance to total loans
    
    
    3.92
    %
    
    
    4.22
    %
    
    
    3.29
    %Allowance to nonperforming assets
    
    
    21.77
    %
    
    
    26.57
    %
    
    
    23.57
    %Net charge-offs to average loans
    
    
    2.21
    %
    
    
    3.40
    %
    
    
    2.74
    %
 The Bank recorded net charge-offs of $17,697,000 during the nine months ended September
30, 2010. Specific allocations of $4,058,000 were recorded on these loans at December 31,
2009. These specific allocations were assigned as of December 31, 2009 based on information
that was received in early in the first quarter of 2010 but where deterioration of the
credits related to events that occurred in 2009. Accordingly, the
provision for loan losses related to the charge-off of these loans was recorded during the
fourth quarter of 2009. Additionally, net charge-offs of $3,667,000 were due to a change in
the methodology relating to the valuation of residential building lots. This change was
related to the evaluation of appraisals of this type of collateral, where the appraised
value of developed residential building lots was required to be discounted based on the
absorption factor associated with the collateral. The remaining charge-offs of $9,972,000
were due to the further deterioration of credits during 2010 and updated appraisals received
during 2010. The reserves established for classified loans are based on the information
currently available to the Corporation. However, in these challenging economic conditions,
information could become known in the future that could materially alter our estimate.
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C.
    
    Loans and Allowance for Loan Losses (cont)A primary factor in the continued decline in the underlying value of our collateral and the
decision to recognize these charge-offs was the continuing decline during the first nine
months of 2010 in the economic environment in Southeastern Michigan. This decline in
economic conditions is heavily impacted by conditions and events that impacted the
automotive industry during 2009 and continues to impact the local economy. These conditions
have had a negative impact on the residential real estate and commercial real estate markets
in the Banks market area and these loans represent 80% of the Banks loan portfolio. These
conditions have led to an increase in the Banks classified assets during 2010. Management
has recognized this trend in our analysis of the allowance for loan losses at September 30,
2010. 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. If
collateral values continue to decline, additions to the allowance for loan losses will be
required and will have an adverse effect on the Corporations earnings through increases to
the provision for loan losses.The aggregate balance in impaired loans are as follows (in thousands):
 09/30/10
    
    
    12/31/09
    
    
    09/30/09Impaired loans with no allocated allowance for loan
losses
    
    $
    71,136
    
    
    $
    83,226
    
    
    $
    114,226Impaired loans with allocated allowance for loan losses
    
    
    42,394
    
    
    
    43,553
    
    
    
    Total
    
    $
    113,530
    
    
    $
    126,779
    
    
    $
    114,226Amount of the allowance for loan loss allocated
    
    $
    9,976
    
    
    $
    10,715
    
    
    $
    
 These loans have been evaluated under impairment standards and have been either
charged down to the collateral value or the collateral value exceeds the loan balance.D.
    
    Incentive Stock PlansIncentive stock awards have been granted to officers and employees under two Incentive Stock
Plans. The first plan is the 1994 Stock Option Plan. Options to buy common stock have been
granted to officers and employees under the 1994 Stock Option Plan, which
provides for issue of up to 738,729 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.There were 29,391 shares forfeited during the nine months ended September 30, 2010. There
were no options exercised during the nine months ended September 30, 2010. For the options
outstanding at September 30, 2010, the range of exercise prices was $4.94 to $14.65 per
share with a weighted-average remaining contractual term of 1.4 years. At September 30,
2010, options for 331,010 shares were exercisable at weighted average exercise price of
$8.97 per share. There was no intrinsic value at September 30, 2010.
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D.
    
    Incentive Stock Plans (cont)During 2005, the Corporation initiated the 2005 Long-Term Incentive Plan. Under this plan,
up to 347,248 shares may be granted to officers and employees of the Bank. This plan
provides that stock awards may take the form of any combination of options, restricted
shares, restricted share units or performance awards.The administration of the plan, including the granting of awards and the nature of those
awards is determined by the Corporations Compensation Committee. The Corporations Board
of Directors approved grants of stock options and restricted stock in 2005, 2006 and 2008.
The awards have a term of ten years and typically vest fully three years from the grant
date. In order for vesting to occur with some grants, the Corporation must meet certain
performance criteria over the vesting period. The expected compensation cost of the 2005
plan is being calculated assuming the Corporations attainment of target performance goals
over the vesting period of the awards. The actual cost of these awards could range from
zero to 100% of the currently recorded compensation cost, depending on the Corporations
actual performance. The awards granted in 2005 and 2006 did have such performance criteria.
The awards granted in 2008 did not have performance criteria.Stock Options Granted  Stock options were awarded to officers in 2005, 2006 and 2008. The
incentive stock options were granted with exercise prices equal to market prices on the day
of grant. At September 30, 2010, there were stock options outstanding for 170,846 shares
with a weighted average exercise price of $5.46 per share.The Corporation recognized stock option compensation expense of $47,000 and $54,000 during
the nine months ended September 30, 2010 and 2009, respectively. Compensation cost of
$62,000 and $26,000 is expected to be recognized during 2010 and 2011, respectively.Restricted Stock Grants   Restricted stock was awarded to officers in 2005, 2006 and 2008.
The restricted stock is eligible to vest three years from grant date. Upon full vesting,
restricted shares are transferred to common shares. At September 30, 2010, there were
39,765 shares of restricted stock outstanding.The Corporation recognized restricted stock compensation expense of $47,000 and $61,000,
respectively during the nine months ended September 30, 2010 and 2009,
respectively. Compensation cost of $62,000 and $26,000 is expected to be recognized during
2010 and 2011, respectively.
 E.
    
    Fair Value of Assets and LiabilitiesThe Corporation has adopted fair value guidance which defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value measurements.Fair value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the
measurement date.
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E.
    
    Fair Value of Assets and Liabilities ( cont)A fair value hierarchy was also established which requires an entity to maximize the use of
observable inputs when measuring fair value. The standard describes three levels of inputs
that may be used to measure fair value:
 Level 1 
    
    Quoted prices in active markets for identical assets or liabilities.Level 2 
    
    Observable inputs other than Level 1 prices, such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities. Observable inputs may
include available credit information and bond terms and conditions of similar
securities, market spreads, cash flow analysis and market concensus prepayment speeds.Level 2 securities include U.S. agency and U.S. government sponsored
enterprise mortgage-backed securities. Level 2 securities are valued by a third
party pricing service commonly used in the banking industry utilizing observable
inputs. The pricing provider utilizes evaluated pricing models that vary based
on asset class. These models incorporate available market information including
quoted prices of securities with similar characteristics and, because many
fixed-income securities do not trade on a daily basis, apply available
information through processes such as benchmark curves, benchmarking of like
securities, sector grouping and matrix pricing. In addition, model processes,
such as an option adjusted spread model is used to develop prepayment and
interest rate scenarios for securities with prepayment features.Level 3 
    
    Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities.
 Following is a description of the valuation methodologies used for instruments measured at
fair value on a recurring basis and recognized in the accompanying balance sheet, as well as
the general classification of such instruments pursuant to our valuation hierarchy.
 Securities available for saleFair values of securities, available for sale are estimated by a third party using inputs
that are observable or that can be corroborated by observable market data and, therefore,
are classified within Level 2 of the valuation hierarchy.The following table presents the fair value measurements of the Corporations assets and
liabilities recognized in the accompanying balance sheet measured at fair value on a
recurring basis and the level within the ASC 820 fair value hierarchy in which the fair
value measurements fall at September 30, 2010 and December 31, 2009 (in thousands):
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E.
    
    Fair Value of Assets and Liabilities ( cont)
 Quoted Prices in
    
    
    Significant Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableFair
    
    
    Identical Assets
    
    
    Inputs
    
    
    InputsAt 9/30/2010
    
    Value
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)US Government sponsored agency
securities
    
    $
    2,003
    
    
    $
    
    
    
    $
    2,003
    
    
    $
    Mortgage backed securities
    
    
    44,369
    
    
    
    
    
    
    
    44,369
    
    
    
    Total securities, available for sale
    
    $
    46,372
    
    
    $
    
    
    
    $
    46,372
    
    
    $
    
 Quoted Prices in
    
    
    Significant Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableFair
    
    
    Identical Assets
    
    
    Inputs
    
    
    InputsAt 12/31/2009
    
    Value
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)US Government sponsored agency
securities
    
    $
    12,749
    
    
    $
    
    
    
    $
    12,749
    
    
    $
    Corporate bonds
    
    
    33,111
    
    
    
    
    
    
    
    33,111
    
    
    
    Mortgage backed securities
    
    
    104
    
    
    
    
    
    
    
    104
    
    
    
    Total securities, available for sale
    
    $
    45,964
    
    
    $
    
    
    
    $
    45,964
    
    
    $
    
 Impaired loans and other real estate ownedFair value adjustments for impaired and non-accrual loans typically occur when there is
evidence of impairment. Loans are designated as impaired when, in the judgment of
management based on current information and events, it is probable that all amounts due
according to the contractual terms of the loan agreement will not be collected. The
measurement of loss associated with impaired loans can be based on either the observable
market price of the loan or the fair value of the collateral. The Company measures fair
value based on the value of the collateral securing the loans. Collateral may be in the form
of real estate or personal property including equipment and inventory. The value of the
collateral is determined based on internal estimates as well as third party appraisals or
non-binding broker quotes. These measurements were classified as Level 3. The fair value of
the Corporations other real estate owned is determined using Level 3 inputs, which include
current and prior appraisals and estimated costs to sell.The following table presents the fair value measurements of the Corporations assets and
liabilities recognized in the accompanying balance sheet measured at fair value on a
non-recurring basis and the level within the fair value hierarchy in which the fair value
measurements fall at September 30, 2010 and December 31, 2009 (in thousands):
 21




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##### Table of Contents



E.
    
    Fair Value of Assets and Liabilities ( cont)
 Quoted Prices in
    
    
    Significant Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    InputsAt 9/30/2010
    
    Fair Value
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Impaired loans
(collateral
dependent)
    
    $
    63,676
    
    
    $
    
    
    
    $
    
    
    
    $
    63,676Other real estate
    
    $
    13,264
    
    
    $
    
    
    
    $
    
    
    
    $
    13,264
 Quoted Prices in
    
    
    Significant Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    InputsAt 12/31/2009
    
    Fair Value
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Impaired loans
(collateral
dependent)
    
    $
    60,905
    
    
    $
    
    
    
    $
    
    
    
    $
    60,905Other real estate
    
    $
    7,601
    
    
    $
    
    
    
    $
    
    
    
    $
    7,601
 The carrying amounts and estimated fair value of principal financial assets and
liabilities were as follows (in thousands):
 At September 30, 2010
    
    
    At December 31, 2009Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueAssets:Cash and cash equivalents
    
    $
    77,408
    
    
    $
    77,408
    
    
    $
    77,497
    
    
    $
    77,497Mortgage loans held for sale
    
    
    572
    
    
    
    581
    
    
    
    1,129
    
    
    
    1,146Securities available for sale
    
    
    46,372
    
    
    
    46,372
    
    
    
    45,964
    
    
    
    45,964Securities held to maturity
    
    
    250
    
    
    
    250
    
    
    
    336
    
    
    
    336Federal Home Loan Bank Stock
    
    
    3,698
    
    
    
    3,698
    
    
    
    3,698
    
    
    
    3,698Loans, net
    
    
    760,683
    
    
    
    757,676
    
    
    
    833,136
    
    
    
    829,122Accrued interest receivable
    
    
    3,301
    
    
    
    3,181
    
    
    
    3,562
    
    
    
    3,562Liabilities:Deposits
    
    
    809,418
    
    
    
    811,006
    
    
    
    867,955
    
    
    
    871,177Federal Home Loan Bank
advances
    
    
    63,716
    
    
    
    64,251
    
    
    
    63,855
    
    
    
    64,275Subordinated debentures
    
    
    10,000
    
    
    
    4,801
    
    
    
    10,000
    
    
    
    4,081Accrued interest payable
    
    
    972
    
    
    
    941
    
    
    
    1,046
    
    
    
    1,046
 22




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##### Table of Contents



E.
    
    Fair Value of Assets and Liabilities ( cont)
 Fair Value of Financial Instruments
 The following methods and assumptions were used by the Corporation in estimating its fair
value disclosure for financial instruments:
 Cash and Cash Equivalents, Securities Sold Under Agreements to Repurchase,
Interest-bearing Deposits and Federal Home Loan Bank Stock
 The carrying amount approximates fair value.
 Held-to-maturity Securities
 Fair value is based on quoted market prices, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar securities.
 Loans Held for Sale
 Fair value is based upon the quoted price for the sale of those loans.
 Loans
 The fair value of loans is estimated by discounting the future cash flows using the market
rates at which similar loans would be made to borrowers with similar credit ratings and for
the same remaining maturities. Loans with similar characteristics were aggregated for
purposes of the calculations. The carrying amount of accrued interest approximates its fair
value.
 Deposits
 Deposits include demand deposits, savings accounts, NOW accounts and certain money market
deposits. The carrying amount approximates fair value. The fair value of fixed-maturity
time deposits is estimated using a discounted cash flow calculation that applies the rates
currently offered for deposits of similar remaining maturities.
 Interest Receivable and Interest Payable
 The carrying amount approximates fair value.
 Federal Home Loan Bank Advances
 Rates currently available to the Corporation for debt with similar terms and remaining
maturities are used to estimate the fair value of existing debt. Fair value of long-term
debt is based on quoted market prices or dealer quotes for the identical liability when
traded as an asset in an active market. If a quoted market price is not available, an
expected present value technique is used to estimate fair value.
 23




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##### Table of Contents



E.
    
    Fair Value of Assets and Liabilities ( cont)
 Subordinated Debentures
 Rates currently available to the Corporation for debt with similar terms and remaining
maturities are used to estimate the fair value of existing debt.
 Commitments to Originate Loans, Forward Sale Commitments, Letters of Credit and Lines of
Credit
 The fair value of commitments to originate loans is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between current levels of interest
rates and the committed rates. The fair value of forward sale commitments is estimated
based on current market prices for loans of similar terms and credit quality. The fair
values of letters of credit and lines of credit are based on fees currently charged for
similar agreements or on the estimated cost to terminate or otherwise settle the obligations
with the counterparties at the reporting date. The fair value of such arrangements are not
considered material to this presentation.
 F.
    
    Capital and Operating Matters
 Stockholders equity at September 30, 2010 was $30,154,000 compared to $41,945,000 as of
December 31, 2009, a decrease of $11,791,000 or 28%. The decrease was due to the net loss
during the period.
 Based on the respective regulatory capital ratios, the Bank is considered to be
undercapitalized at September 30, 2010 and December 31, 2009.
 24




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##### Table of Contents



F.
    
    Capital and Operating Matters (cont)
 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 September 30, 2010Total capital
(to risk weighted
assets)Consolidated
    
    
    50,263
    
    
    
    6.45
    %
    
    
    62,305
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    48,781
    
    
    
    6.28
    %
    
    
    62,155
    
    
    
    8.00
    %
    
    
    77,694
    
    
    
    10.00
    %Tier 1 capital
(to risk weighted
assets)Consolidated
    
    
    40,303
    
    
    
    5.17
    %
    
    
    31,153
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    38,821
    
    
    
    5.00
    %
    
    
    31,078
    
    
    
    4.00
    %
    
    
    46,617
    
    
    
    6.00
    %Tier 1 capital
(to average assets)Consolidated
    
    
    40,303
    
    
    
    4.35
    %
    
    
    37,041
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    38,821
    
    
    
    4.20
    %
    
    
    36,965
    
    
    
    4.00
    %
    
    
    46,206
    
    
    
    5.00
    %As of December 31, 2009Total capital
(to risk weighted
assets)Consolidated
    
    
    63,043
    
    
    
    7.39
    %
    
    
    68,264
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    61,169
    
    
    
    7.19
    %
    
    
    68,105
    
    
    
    8.00
    %
    
    
    85,132
    
    
    
    10.00
    %Tier 1 capital
(to risk weighted
assets)Consolidated
    
    
    52,080
    
    
    
    6.10
    %
    
    
    34,132
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    50,225
    
    
    
    5.90
    %
    
    
    34,053
    
    
    
    4.00
    %
    
    
    51,079
    
    
    
    6.00
    %Tier 1 capital
(to average assets)Consolidated
    
    
    52,080
    
    
    
    4.98
    %
    
    
    41,838
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    50,225
    
    
    
    4.81
    %
    
    
    41,776
    
    
    
    4.00
    %
    
    
    52,220
    
    
    
    5.00
    %
 The capital ratios disclosed in the middle column of the table above are minimum
requirements. Due to our financial condition, the Bank entered into a formal enforcement
action (Consent Order) with the Federal Deposit Insurance Corporation (FDIC) and
the Office of Financial and Insurance Regulation for the State of Michigan (OFIR)
which conveys specific actions needed to address certain findings from their
examination and to address our current financial condition.
 25




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##### Table of Contents



F.
    
    Capital and Operating Matters (cont)
 Applicable federal prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Based on its regulatory capital ratios,
the Bank is undercapitalized at September 30, 2010. Undercapitalized institutions are
subject to close monitoring by their federal bank regulator, restrictions on asset growth
and expansion, and other significantly greater regulatory restrictions than apply to
well-capitalized or adequately capitalized institutions.
 The Corporation needs to raise sufficient capital to return the Bank to well-capitalized
status. Management is pursuing various sources of capital and estimates the need to raise
approximately $50 million to be in compliance with its Consent Order with the FDIC and OFIR.
Given the current economic environment, there can be no assurance the Corporation will be
able to raise the estimated capital needed. Additionally, if real estate values in the
Corporations market area continue to decline, this will negatively impact the loan
portfolio and values of other real estate owned. Additional declines in real estate values
would result in the need for additional provision expense resulting in increased losses and
further reducing the Corporations and the Banks capital.
 Failure to meet minimum capital requirements can initiate certain mandatory, and possibly
discretionary, action by the regulators that, if undertaken, could have a direct material
effect on the Corporations financial statements and raise substantial doubt about the
Corporations ability to continue as a going concern.
 26




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##### Table of Contents



G.
    
    Consent Order and Federal Reserve Bank Agreement
 Consent Order
 Due to our financial condition, the Federal Deposit Insurance Corporation (FDIC) and the
Office of Financial and Insurance Regulation for the State of Michigan (OFIR) required
that our Board of Directors sign a formal enforcement action (Consent Order) with the FDIC
and OFIR which conveys specific actions needed to address certain findings from their
examination and to address our current financial condition. We entered into the Consent
Order on February 12, 2010, which contains a list of requirements that are to be met by
specific dates. Certain requirements are listed below:
 Completion of a senior management study by an independent consultant
Plans for the reduction of delinquencies and classified assets
Plans for lending and collection policies
Plans for the reduction of loan concentrations
The revision and implementation of a comprehensive strategic plan
The revision of its Liquidity Plan and the submission of weekly liquidity reports to the
FDIC and OFIR
 The requirements of that consent order that are listed above were completed on a timely
basis.
 The Consent Order also includes a capital directive, which requires the Bank to have and
maintain its level of tier 1 capital as a percentage of total assets (capital ratio) at a
minimum of 9% and its level of qualifying total capital as a percentage of risk-weighted
assets (total risk-based capital ratio) at a minimum of 12% . These ratios are in excess of
the statutory minimums to be well-capitalized. At September 30, 2010, the Banks capital
ratio was 4.20% and the Banks total risk-based capital ratio was 6.28%.
 Additionally, the Bank is prohibited from declaring or paying any cash dividends without
prior written consent of the FDIC.
 As a result of the loss recorded during 2009, the capitalization status of the Bank declined
from well capitalized to undercapitalized. As a result of the decline in the Banks
capitalization level, the Bank is limited in its utilization of brokered deposits. The Bank
is also restricted in the setting of deposit interest rates. Additionally, there are
limitations in the borrowing terms and capacity with the Federal Reserve Bank. The Bank
submitted a Capital Restoration Plan (CRP) to the FDIC and OFIR on December 15, 2009, due
to our undercapitalized status based on our September 30, 2009 regulatory report of
condition and income. An amended CRP was submitted to the FDIC and OFIR on May 18,
2010.
 27




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##### Table of Contents



Federal Reserve Board Agreement
 On June 15, 2010, the Corporation entered into a written agreement with the Federal
Reserve Bank of Chicago (the FRB). The FRB Agreement prohibits the Corporation and the
Bank from taking any of the following actions without the FRBs prior written approval: (i)
declaring or paying any dividends; (ii) taking dividends from the Bank; (iii) making any
distributions of interest, principal or other sums on the Corporations subordinated
debentures; (iv) incurring, increasing or guaranteeing any debt; or (v) repurchasing or
redeeming any shares of its stock.
 Under the FRB Agreement, the Corporation was required to submit a written capital plan
(Plan) to the FRB by August 15, 2010 to maintain sufficient capital, on a consolidated
basis. This Plan was submitted by the Corporation in July of 2010. The Corporation received
notification that the Plan was not accepted by the FRB and that a revised Plan was to be
submitted to the FRB by December 1, 2010. The Plan shall, at a minimum, include: (a) the
Corporations current and future capital requirements in compliance with FRB Regulation Y
and the applicable capital adequacy guidelines for the Bank issued by the FDIC; (b) the
adequacy of the Banks capital, taking into account the volume of classified credits,
concentrations of credit, Allowance for Loan Losses, current and projected growth, and
projected retained earnings; (c) the source and timing of additional funds necessary to
fulfill the Corporations and Banks future capital requirements; (d) supervisory requests
for additional capital at the Bank or the requirements of any supervisory action imposed on
the Bank by the FDIC; and (e) the requirements of FRB Regulation Y that the Corporation
serve as a source of strength to the Bank.
 28




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##### Table of Contents



ITEM 2.  
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    29




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##### Table of Contents



Company Overview
        Date Formed
    
    Name
    
    Services OfferedAugust 1997
    
    Community Bank Insurance Agency, Inc.
    
    Limited insurance related activitiesMarch 2002
    
    Community Bank Audit Services, Inc.
    
    Internal auditing and complianceservices for financial institutions
 30




---



##### Table of Contents



Date Opened
    
    Location
    
    Type of officeFebruary 1994
    
    22290 Michigan Avenue
    
    Full service retail branch with ATMDearborn, Michigan 48123
    
    Regional lending centerDecember 1995
    
    24935 West Warren Avenue
    
    Full service retail branchDearborn Heights, Michigan 48127August 1997
    
    44623 Five Mile Road
    
    Full service retail branch with ATMPlymouth, Michigan 48170May 2001
    
    1325 North Canton Center Road
    
    Full service retail branch with ATMCanton, Michigan 48187December 2001
    
    45000 River Ridge Drive
    
    Regional lending centerClinton Township, Michigan 48038November 2002
    
    19100 Hall Road
    
    Full service retail branch with ATMClinton Township, Michigan 48038February 2003
    
    12820 Fort Street
    
    Full service retail branch with ATMSouthgate, Michigan 48195May 2003
    
    3201 University Drive, Suite 180
    
    Full service retail branchAuburn Hills, Michigan 48326October 2004
    
    450 East Michigan Avenue
    
    Full service retail branch with ATMSaline, Michigan 48176October 2004
    
    250 West Eisenhower Parkway
    
    Full service retail branch with ATMAnn Arbor, Michigan 48103
    
    Regional lending centerDecember 2004
    
    1360 Porter Street
    
    Loan production officeDearborn, Michigan 48123
    
    Regional lending centerJanuary 2007
    
    1040 E. Maple
    
    Full service retail branch with ATMBirmingham, Michigan 48009
    
    Regional lending centerJanuary 2007
    
    3681 W. Maple
    
    Full service retail branch with ATMBloomfield Township, Michigan 48301January 2007
    
    30700 Telegraph
    
    Full service retail branch with ATMBingham Farms, Michigan 48025January 2007
    
    20000 Twelve Mile Road
    
    Full service retail branch with ATMSouthfield, Michigan 48076January 2007
    
    200 Galleria Officenter
    
    Full service retail branch with ATMSouthfield, MI 48076April 2007
    
    7755 23 Mile Road
    
    Full service retail branch with ATMShelby Township, Michigan 48075
 31




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32




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##### Table of Contents



33




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##### Table of Contents



Net Interest Income
 2010 Compared to 2009.
 Average Balances, Interest Rates and Yields.
  34




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##### Table of Contents



Three months ended September 30,
    
    
    Three months ended September 30,2010
    
    
    2009Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average(In thousands)
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateAssetsInterest-bearing deposits with banks
    
    $
    73,070
    
    
    $
    115
    
    
    
    0.62
    %
    
    $
    66,331
    
    
    $
    76
    
    
    
    0.45
    %Federal funds sold
    
    
    57
    
    
    
    1
    
    
    
    0.00
    %
    
    
    4,315
    
    
    
    2
    
    
    
    0.18
    %Securities, available for sale
    
    
    46,617
    
    
    
    275
    
    
    
    2.35
    %
    
    
    11,532
    
    
    
    33
    
    
    
    1.14
    %Loans
    
    
    772,662
    
    
    
    11,328
    
    
    
    5.82
    %
    
    
    876,205
    
    
    
    13,135
    
    
    
    5.95
    %Sub-total earning assets
    
    
    892,406
    
    
    
    11,719
    
    
    
    5.21
    %
    
    
    958,383
    
    
    
    13,246
    
    
    
    5.48
    %Other assets
    
    
    33,611
    
    
    
    
    
    
    
    
    
    
    
    59,937Total assets
    
    $
    926,017
    
    
    
    
    
    
    
    
    
    
    $
    1,018,320Liabilities and stockholders equityInterest bearing deposits
    
    $
    726,511
    
    
    $
    2,578
    
    
    
    1.41
    %
    
    $
    757,236
    
    
    $
    4,806
    
    
    
    2.52
    %Other borrowings
    
    
    73,786
    
    
    
    391
    
    
    
    2.10
    %
    
    
    86,213
    
    
    
    614
    
    
    
    2.83
    %Sub-total interest bearing liabilities
    
    
    800,297
    
    
    
    2,969
    
    
    
    1.47
    %
    
    
    843,449
    
    
    
    5,420
    
    
    
    2.55
    %Non-interest bearing deposits
    
    
    92,180
    
    
    
    
    
    
    
    
    
    
    
    84,211Other liabilities
    
    
    1,947
    
    
    
    
    
    
    
    
    
    
    
    2,095Stockholders equity
    
    
    31,593
    
    
    
    
    
    
    
    
    
    
    
    88,565Total liabilities and stockholders equity
    
    $
    926,017
    
    
    
    
    
    
    
    
    
    
    $
    1,018,320Net interest income
    
    
    
    
    
    $
    8,750
    
    
    
    
    
    
    
    
    
    
    $
    7,826Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.74
    %
    
    
    
    
    
    
    
    
    
    
    2.93
    %Net interest margin on earning assets
    
    
    
    
    
    
    
    
    
    
    3.89
    %
    
    
    
    
    
    
    
    
    
    
    3.24
    %
 35




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##### Table of Contents



Nine months ended September 30,
    
    
    Nine months ended September 30,2010
    
    
    2009Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average(In thousands)
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateAssetsInterest-bearing deposits with banks
    
    $
    70,971
    
    
    $
    216
    
    
    
    0.41
    %
    
    $
    60,304
    
    
    $
    273
    
    
    
    0.61
    %Federal funds sold
    
    
    77
    
    
    
    1
    
    
    
    1.74
    %
    
    
    6,335
    
    
    
    14
    
    
    
    0.32
    %Securities, available for sale
    
    
    48,799
    
    
    
    601
    
    
    
    1.65
    %
    
    
    40,724
    
    
    
    467
    
    
    
    1.53
    %Loans
    
    
    799,883
    
    
    
    34,642
    
    
    
    5.79
    %
    
    
    896,849
    
    
    
    40,231
    
    
    
    6.00
    %Sub-total earning assets
    
    
    919,730
    
    
    
    35,460
    
    
    
    5.15
    %
    
    
    1,004,212
    
    
    
    40,985
    
    
    
    5.46
    %Other assets
    
    
    34,561
    
    
    
    
    
    
    
    
    
    
    
    56,628Total assets
    
    $
    954,291
    
    
    
    
    
    
    
    
    
    
    $
    1,060,840Liabilities and stockholders equityInterest bearing deposits
    
    $
    749,978
    
    
    $
    9,046
    
    
    
    1.61
    %
    
    $
    805,701
    
    
    $
    16,262
    
    
    
    2.70
    %Other borrowings
    
    
    73,804
    
    
    
    1,153
    
    
    
    2.09
    %
    
    
    76,596
    
    
    
    1,843
    
    
    
    3.22
    %Sub-total interest bearing liabilities
    
    
    823,782
    
    
    
    10,199
    
    
    
    1.66
    %
    
    
    882,297
    
    
    
    18,105
    
    
    
    2.74
    %Non-interest bearing deposits
    
    
    88,807
    
    
    
    
    
    
    
    
    
    
    
    81,669Other liabilities
    
    
    2,030
    
    
    
    
    
    
    
    
    
    
    
    2,040Stockholders equity
    
    
    39,672
    
    
    
    
    
    
    
    
    
    
    
    94,834Total liabilities and stockholders equity
    
    $
    954,291
    
    
    
    
    
    
    
    
    
    
    $
    1,060,840Net interest income
    
    
    
    
    
    $
    25,261
    
    
    
    
    
    
    
    
    
    
    $
    22,880Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.50
    %
    
    
    
    
    
    
    
    
    
    
    2.71
    %Net interest margin on earning assets
    
    
    
    
    
    
    
    
    
    
    3.67
    %
    
    
    
    
    
    
    
    
    
    
    3.05
    %
 Rate/Volume Analysis.
 36




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##### Table of Contents



Three Months Ended
    
    
    Nine Months Ended2010/2009
    
    
    2010/2009Change in Interest Due to:
    
    
    Change in Interest Due to:Average
    
    
    Average
    
    
    Net
    
    
    Average
    
    
    Average
    
    
    Net(In thousands)
    
    Balance
    
    
    Rate
    
    
    Change
    
    
    Balance
    
    
    Rate
    
    
    ChangeAssetsInterest bearing deposits with banks
    
    $
    11
    
    
    $
    28
    
    
    $
    39
    
    
    $
    3
    
    
    $
    (60
    )
    
    $
    (57
    )Federal funds sold
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )
    
    
    (59
    )
    
    
    45
    
    
    
    (14
    )Investment securities, available for sale
    
    
    208
    
    
    
    35
    
    
    
    243
    
    
    
    108
    
    
    
    26
    
    
    
    134Loans
    
    
    (1,520
    )
    
    
    (287
    )
    
    
    (1,807
    )
    
    
    (4,661
    )
    
    
    (928
    )
    
    
    (5,589
    )Total earning assets
    
    $
    (1,301
    )
    
    $
    (226
    )
    
    $
    (1,527
    )
    
    $
    (4,609
    )
    
    $
    (917
    )
    
    $
    (5,526
    )LiabilitiesInterest bearing deposits
    
    $
    (126
    )
    
    $
    (2,102
    )
    
    $
    (2,228
    )
    
    $
    (2,841
    )
    
    $
    (4,375
    )
    
    $
    (7,216
    )Other borrowings
    
    
    (67
    )
    
    
    (156
    )
    
    
    (223
    )
    
    
    (258
    )
    
    
    (432
    )
    
    
    (690
    )Total interest bearing liabilities
    
    $
    (193
    )
    
    $
    (2,258
    )
    
    $
    (2,451
    )
    
    $
    (3,099
    )
    
    $
    (4,807
    )
    
    $
    (7,906
    )Net interest income
    
    
    
    
    
    
    
    
    
    $
    924
    
    
    
    
    
    
    
    
    
    
    $
    2,380Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    0.80
    %
    
    
    
    
    
    
    
    
    
    
    0.79
    %Net interest margin on earning assets
    
    
    
    
    
    
    
    
    
    
    0.65
    %
    
    
    
    
    
    
    
    
    
    
    0.63
    %
 Provision for Loan Losses
 2010 Compared to 2009.
   37




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##### Table of Contents



Non-interest Income (Loss)
 2010 Compared to 2009.
     38




---



##### Table of Contents



Non-interest Expense
 2010 Compared to 2009.
    Income Tax Provision
 2010 Compared to 2009.
 39




---



##### Table of Contents



Comparison of Financial Condition at September 30, 2010 and December 31, 2009
 Assets.
 Interest bearing deposits with banks.
 Mortgage Loans Held for Sale.
 Securities  Available for Sale.
   Federal Home Loan Bank Stock.
 Loans.
 40




---



##### Table of Contents



09/30/10
    
    
    12/31/09
    
    
    09/30/09Consumer loans
    
    $
    27,391
    
    
    $
    29,386
    
    
    $
    30,028Commercial, financial, & other
    
    
    126,573
    
    
    
    144,630
    
    
    
    154,358Land development loans  residential property
    
    
    26,668
    
    
    
    38,472
    
    
    
    44,997Land development loans  non- residential property
    
    
    9,374
    
    
    
    11,644
    
    
    
    11,604Commercial real estate construction  residential property
    
    
    11,407
    
    
    
    13,287
    
    
    
    15,042Commercial real estate construction   non- residential property
    
    
    17,370
    
    
    
    20,061
    
    
    
    20,445Commercial real estate mortgages
    
    
    501,059
    
    
    
    531,156
    
    
    
    539,200Residential real estate mortgages
    
    
    40,841
    
    
    
    44,500
    
    
    
    46,990760,683
    
    
    
    833,136
    
    
    
    862,664Allowance for loan losses
    
    
    (29,831
    )
    
    
    (35,125
    )
    
    
    (28,373
    )$
    730,852
    
    
    $
    798,011
    
    
    $
    834,291
  09/30/10
    
    
    12/31/09
    
    
    09/30/09Troubled debt restructuring
    
    $
    39,714
    
    
    $
    59,420
    
    
    $
    46,025Non-accrual loans
    
    
    72,286
    
    
    
    49,341
    
    
    
    58,866Total non-performing loans
    
    
    112,000
    
    
    
    108,761
    
    
    
    104,891Real estate owned
    
    
    21,452
    
    
    
    23,435
    
    
    
    11,684Real estate in redemption
    
    
    3,591
    
    
    
    0
    
    
    
    3,788Other non-performing assets
    
    
    25,043
    
    
    
    23,435
    
    
    
    15,472Total non-performing assets
    
    $
    137,043
    
    
    $
    132,196
    
    
    $
    120,363
  Number ofLoans
    
    
    BalanceConsumer Loans
    
    
    17
    
    
    $
    900Commercial Loans
    
    
    49
    
    
    
    13,595Land Development  Residential
    
    
    17
    
    
    
    15,597Land Development  Non Residential
    
    
    1
    
    
    
    1,318Commercial Construction Loans  Residential
    
    
    10
    
    
    
    8,621Commercial Construction Loans  Non Residential
    
    
    
    
    
    
    Commercial Mortgage Loans
    
    
    57
    
    
    
    29,628Residential Mortgages Loans
    
    
    17
    
    
    
    2,627Totals
    
    
    168
    
    
    $
    72,286
 41




---



##### Table of Contents



Number ofLoans
    
    
    BalanceConsumer Loans
    
    
    8
    
    
    $
    549Commercial Loans
    
    
    22
    
    
    
    7,713Land Development  Residential
    
    
    9
    
    
    
    11,893Commercial Construction Loans  Residential
    
    
    2
    
    
    
    4,097Commercial Construction Loans  Non Residential
    
    
    1
    
    
    
    333Commercial Mortgage Loans
    
    
    31
    
    
    
    19,644Residential Mortgages Loans
    
    
    8
    
    
    
    1,066Totals
    
    
    81
    
    
    $
    45,295
    42




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##### Table of Contents



Allowance for Loan Losses.
  43




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##### Table of Contents



Nine Months
    
    
    
    
    
    
    Nine MonthsEnded
    
    
    Year Ended
    
    
    Ended09/30/10
    
    
    12/31/09
    
    
    09/30/09Balance, beginning of year
    
    $
    35,125
    
    
    $
    14,452
    
    
    $
    14,452Charge-offs:Consumer loans
    
    
    635
    
    
    
    1,154
    
    
    
    718Commercial, financial & other
    
    
    3,756
    
    
    
    4,878
    
    
    
    3,616Land development loans  residential property
    
    
    7,535
    
    
    
    1,471
    
    
    
    7,050Land development loans  non- residential property
    
    
    300
    
    
    
    1,981
    
    
    
    3,999Commercial real estate construction  residential property
    
    
    1,740
    
    
    
    9,441
    
    
    
    1,270Commercial real estate construction  non- residential property
    
    
    36
    
    
    
    4,364
    
    
    
    1,981Commercial real estate mortgages
    
    
    4,291
    
    
    
    6,919
    
    
    
    5,770Residential real estate mortgages
    
    
    232
    
    
    
    701
    
    
    
    691Recoveries:Consumer loans
    
    
    47
    
    
    
    176
    
    
    
    171Commercial, financial & other
    
    
    113
    
    
    
    339
    
    
    
    247Land development loans  residential property
    
    
    39
    
    
    
    107
    
    
    
    42Land development loans  non- residential property
    
    
    
    
    
    
    
    
    
    
    Commercial real estate construction  residential property
    
    
    1
    
    
    
    
    
    
    
    Commercial real estate construction  non- residential property
    
    
    
    
    
    
    
    
    
    
    Commercial real estate mortgages
    
    
    555
    
    
    
    61
    
    
    
    27Residential real estate mortgages
    
    
    73
    
    
    
    36
    
    
    
    7Net charge-offs (recoveries)
    
    
    17,697
    
    
    
    30,190
    
    
    
    24,601Provision for loan losses
    
    
    12,403
    
    
    
    50,863
    
    
    
    38,522Balance, end of period
    
    $
    29,831
    
    
    $
    35,125
    
    
    $
    28,373Allowance to total loans
    
    
    3.92
    %
    
    
    4.22
    %
    
    
    3.29
    %Allowance to nonperforming assets
    
    
    21.77
    %
    
    
    26.57
    %
    
    
    23.57
    %Net charge-offs to average loans
    
    
    2.21
    %
    
    
    3.40
    %
    
    
    2.74
    %
 Premises and Equipment.
 Other Real Estate.
 44




---



##### Table of Contents



Number ofProperty Type
    
    Properties
    
    
    AmountSingle Family Homes
    
    
    24
    
    
    $
    2,023Condominium
    
    
    1
    
    
    
    727Vacant Land
    
    
    23
    
    
    
    10,257Commercial
    
    
    10
    
    
    
    6,172Office/Retail
    
    
    12
    
    
    
    5,864Total
    
    
    70
    
    
    $
    25,043
  Accrued Interest Receivable.
 Other Assets
 Deposits.
 09/30/10
    
    
    12/31/09
    
    
    09/30/09Non-interest bearing:Demand
    
    $
    87,205
    
    
    $
    83,873
    
    
    $
    89,329Interest bearing:Checking
    
    $
    73,670
    
    
    $
    83,087
    
    
    $
    88,820Money market
    
    
    55,581
    
    
    
    52,412
    
    
    
    75,962Savings
    
    
    42,312
    
    
    
    43,343
    
    
    
    45,665Time, under $100,000
    
    
    287,069
    
    
    
    301,829
    
    
    
    291,314Time, $100,000 and over
    
    
    263,581
    
    
    
    303,411
    
    
    
    313,864722,213
    
    
    
    784,082
    
    
    
    815,625Total deposits
    
    $
    809,418
    
    
    $
    867,955
    
    
    $
    904,954
  45




---



##### Table of Contents



09/30/10
    
    
    12/31/09
    
    
    09/30/09Interest bearing checking
    
    $
    3,923
    
    
    $
    2,715
    
    
    $
    3,968Time, $100,000 and over
    
    
    3,292
    
    
    
    4,366
    
    
    
    7,451Total municipal deposits
    
    $
    7,215
    
    
    $
    7,081
    
    
    $
    11,419
 Federal Home Loan Bank Advances
 Accrued Interest Payable
 Other Liabilities
 Subordinated Debentures .
 46




---



##### Table of Contents



Capital
        47




---



##### Table of Contents



48




---



##### Table of Contents



PART I    FINANCIAL INFORMATION
 
  Interest Rate Sensitivity Analysis.
   49




---



##### Table of Contents



Interest Rate Sensitivity Period1-90
    
    
    91-365
    
    
    1-5
    
    
    Over(In thousands)
    
    Days
    
    
    Days
    
    
    Years
    
    
    5 Years
    
    
    TotalEarning assetsFederal funds sold
    
    $
    56
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    56Interest bearing deposits with Banks
    
    
    40,582
    
    
    
    20,902
    
    
    
    8,732
    
    
    
    
    
    
    
    70,216Mortgage loans held for sale
    
    
    572
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    572Securities available for sale
    
    
    
    
    
    
    2,028
    
    
    
    40
    
    
    
    44,554
    
    
    
    46,622Federal Home Loan Bank stock
    
    
    3,698
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,698Total loans, net of non-accrual
    
    
    152,708
    
    
    
    130,256
    
    
    
    378,494
    
    
    
    26,749
    
    
    
    688,207Total earning assets
    
    
    197,616
    
    
    
    153,186
    
    
    
    387,266
    
    
    
    71,303
    
    
    
    809,371Interest bearing liabilitiesTotal interest bearing deposits
    
    
    225,357
    
    
    
    359,839
    
    
    
    136,749
    
    
    
    268
    
    
    
    722,213Federal Home Loan Bank advances
    
    
    49,000
    
    
    
    4,500
    
    
    
    10,216
    
    
    
    
    
    
    
    63,716Other Borrowings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Subordinated debentures
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000Total interest bearing liabilities
    
    
    284,357
    
    
    
    364,339
    
    
    
    146,965
    
    
    
    268
    
    
    
    795,929Net asset (liability) funding gap
    
    
    (86,741
    )
    
    
    (211,153
    )
    
    
    240,301
    
    
    
    71,035
    
    
    $
    13,442Cumulative net asset (liability) funding gap
    
    
    ($86,741
    )
    
    
    ($297,894
    )
    
    
    ($57,593
    )
    
    $
    13,442
 50




---



##### Table of Contents



Liquidity.
    51




---



##### Table of Contents



Payments Due By PeriodContractual Obligations
    
    Less Than 1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    Over 5 Years
    
    
    TotalCertificates of deposit
    
    $
    413,633
    
    
    $
    133,015
    
    
    $
    3,734
    
    
    $
    268
    
    
    $
    550,650Long-term borrowings
    
    
    53,500
    
    
    
    10,216
    
    
    
    
    
    
    
    
    
    
    
    63,716Lease commitments
    
    
    658
    
    
    
    535
    
    
    
    242
    
    
    
    
    
    
    
    1,435Subordinated debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    10,000Totals
    
    $
    467,791
    
    
    $
    143,766
    
    
    $
    3,976
    
    
    $
    10,268
    
    
    $
    625,801
 Amount Of Commitment Expiration Per PeriodUnused Loan Commitments and Letters of Credit
    
    Less Than 1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    Over 5 Years
    
    
    TotalUnused loan commitments
    
    $
    26,724
    
    
    $
    6,838
    
    
    $
    5,371
    
    
    $
    7,404
    
    
    $
    46,337Standby letters of credit
    
    
    563
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    563Totals
    
    $
    27,287
    
    
    $
    6,838
    
    
    $
    5,371
    
    
    $
    7,404
    
    
    $
    46,900
 52




---



##### Table of Contents



Item 4. Controls and Procedures
 Disclosure Controls and Procedures 
 Internal Controls Over Financial Reporting
 53




---



##### Table of Contents



PART II    OTHER INFORMATION
 
   Risks Related to Our Business
 We are subject to restrictions and conditions of a Consent Order issued by the FDIC and OFIR, and
an FRB Written Agreement. We have incurred and expect to continue to incur significant additional
regulatory compliance expense in connection with these enforcement actions, Failure to comply with
the Consent Order or the FRB Written Agreement could result in additional enforcement action
against us, including the imposition of further operating restrictions and monetary penalties.
  
    
    Plans for the reduction of delinquencies and classified assets
    
    Plans for lending and collection policies
    
    Plans for the reduction of loan concentrations
    
    The revision and implementation of a comprehensive strategic plan
    
    The revision of its Liquidity Plan and the submission of weekly liquidity
reports to the FDIC and OFIR
  54




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##### Table of Contents



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.
 55




---



##### Table of Contents



SIGNATURES
  
 /s/ John E. DemmerJohn E. DemmerChairman/s/ Michael J. RossMichael J. RossPresident and Chief Executive Officer/s/ Jeffrey L. KarafaJeffrey L. KarafaTreasurer and Chief Financial Officer  56




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##### Table of Contents



Exhibit Index
 Exhibit
    
    Description31.1
    
    CEO Certification. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    CFO Certification. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 57