##### 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 March 31, 2011
 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 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 (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
    
    7,685,706




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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  March 31, 2011,
December 31, 2010 and March 31, 2010
    
    
    4Condensed Consolidated Statements of Operations  For the Three
Months Ended March 31, 2011 and 2010
    
    
    5Condensed Consolidated Statements of Comprehensive Loss  For the
Three Months Ended March 31, 2011 and 2010
    
    
    6Condensed Consolidated Statements of Cash Flows  For the Three
Months Ended March 31, 2011 and 2010
    
    
    7Notes to Condensed Consolidated Financial Statements
    
    
    9-32Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    32-49Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    50-53Item 4. Controls and Procedures
    
    
    54Part 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
    
    
    55Item 6. Exhibits
    
    
    56Pursuant 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
    
    
    57EX-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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PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 DEARBORN BANCORP, INC. AND SUBSIDIARY


CONDENSED CONSOLIDATED BALANCE SHEETS
 Unaudited
    
    
    
    
    
    
    Unaudited(Dollars, in thousands)
    
    3/31/2011
    
    
    12/31/2010
    
    
    3/31/2010ASSETSCash and cash equivalentsCash and due from banks
    
    $
    7,454
    
    
    $
    6,645
    
    
    $
    8,047Federal funds sold
    
    
    55
    
    
    
    55
    
    
    
    57Interest bearing deposits with banks
    
    
    95,801
    
    
    
    87,075
    
    
    
    70,898Total cash and cash equivalents
    
    
    103,310
    
    
    
    93,775
    
    
    
    79,002Mortgage loans held for sale
    
    
    749
    
    
    
    353
    
    
    
    758Securities available for sale
    
    
    53,117
    
    
    
    54,811
    
    
    
    46,267Federal Home Loan Bank stock
    
    
    3,605
    
    
    
    3,605
    
    
    
    3,698LoansLoans
    
    
    718,187
    
    
    
    735,851
    
    
    
    813,961Allowance for loan losses
    
    
    (27,971
    )
    
    
    (27,971
    )
    
    
    (30,288
    )Net loans
    
    
    690,216
    
    
    
    707,880
    
    
    
    783,673Premises and equipment, net
    
    
    18,969
    
    
    
    19,195
    
    
    
    19,973Real estate owned
    
    
    22,120
    
    
    
    21,502
    
    
    
    24,467Accrued interest receivable
    
    
    3,310
    
    
    
    3,286
    
    
    
    3,595Other assets
    
    
    1,598
    
    
    
    11,277
    
    
    
    9,266Total assets
    
    $
    896,994
    
    
    $
    915,684
    
    
    $
    970,699LIABILITIESDepositsNon-interest bearing deposits
    
    $
    95,076
    
    
    $
    88,266
    
    
    $
    86,407Interest bearing deposits
    
    
    699,077
    
    
    
    723,835
    
    
    
    765,610Total deposits
    
    
    794,153
    
    
    
    812,101
    
    
    
    852,017Other liabilitiesFederal Home Loan Bank advances
    
    
    63,668
    
    
    
    63,716
    
    
    
    63,799Accrued interest payable
    
    
    1,079
    
    
    
    1,056
    
    
    
    956Other liabilities
    
    
    1,100
    
    
    
    1,852
    
    
    
    747Subordinated debentures
    
    
    10,000
    
    
    
    10,000
    
    
    
    10,000Total liabilities
    
    
    870,000
    
    
    
    888,725
    
    
    
    927,519STOCKHOLDERS EQUITYCommon stock
- 100,000,000 shares authorized, 7,685,706 shares at 3/31/11,
7,685,706 shares at 12/31/10 and 7,687,470 shares at 3/31/10
    
    
    132,163
    
    
    
    132,083
    
    
    
    131,960Retained earnings
    
    
    (103,944
    )
    
    
    (104,099
    )
    
    
    (88,721
    )Accumulated other comprehensive income (loss)
    
    
    (1,225
    )
    
    
    (1,025
    )
    
    
    (59
    )Total stockholders equity
    
    
    26,994
    
    
    
    26,959
    
    
    
    43,180Total liabilities and stockholders equity
    
    $
    896,994
    
    
    $
    915,684
    
    
    $
    970,699
  4




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DEARBORN BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 Three Months Ended
    
    
    Three Months Ended(In thousands, except share data)
    
    3/31/2011
    
    
    3/31/2010Interest incomeInterest on loans
    
    $
    10,369
    
    
    $
    11,778Interest on securities, available for sale
    
    
    442
    
    
    
    168Interest on deposits with banks
    
    
    136
    
    
    
    37Interest on federal funds
    
    
    1
    
    
    
    1Total interest income
    
    
    10,948
    
    
    
    11,984Interest expenseInterest on deposits
    
    
    2,119
    
    
    
    3,543Interest on other liabilities
    
    
    260
    
    
    
    386Total interest expense
    
    
    2,379
    
    
    
    3,929Net interest income
    
    
    8,569
    
    
    
    8,055Provision for loan losses
    
    
    1,395
    
    
    
    100Net interest income after provision for loan losses
    
    
    7,174
    
    
    
    7,955Non-interest incomeService charges on deposit accounts
    
    
    318
    
    
    
    343Fees for other services to customers
    
    
    35
    
    
    
    36Gain on the sale of loans
    
    
    22
    
    
    
    58Gain on the sale of securities
    
    
    
    
    
    
    69Loss on the sale of real estate owned
    
    
    (76
    )
    
    
    (11
    )Loss on the write-down of real estate owned
    
    
    (326
    )
    
    
    (656
    )Other income
    
    
    102
    
    
    
    102Total non-interest income (loss)
    
    
    75
    
    
    
    (59
    )Non-interest expenseSalaries and employee benefits
    
    
    3,190
    
    
    
    3,119Occupancy and equipment expense
    
    
    782
    
    
    
    854FDIC assessment
    
    
    950
    
    
    
    950Advertising and marketing
    
    
    33
    
    
    
    27Stationery and supplies
    
    
    79
    
    
    
    72Professional services
    
    
    213
    
    
    
    166Data processing
    
    
    194
    
    
    
    186Defaulted loan expense
    
    
    1,180
    
    
    
    1,035Other operating expenses
    
    
    474
    
    
    
    359Total non-interest expense
    
    
    7,095
    
    
    
    6,768Income before federal income tax expense
    
    
    154
    
    
    
    1,128Income tax expense
    
    
    
    
    
    
    Net income
    
    $
    154
    
    
    $
    1,128Per share data:Net income  basic
    
    $
    0.02
    
    
    $
    0.15Net income  diluted
    
    $
    0.02
    
    
    $
    0.15Weighted average number of shares outstanding  basic
    
    
    7,645,940
    
    
    
    7,687,470Weighted average number of shares outstanding  diluted
    
    
    7,645,940
    
    
    
    7,687,470
  5




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DEARBORN BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
 Three Months Ended
    
    
    Three Months Ended(In thousands)
    
    03/31/2011
    
    
    03/31/2010Net income
    
    $
    154
    
    
    $
    1,128Other comprehensive income , net of taxUnrealized gains on securitiesUnrealized holding gains (losses) arising during period
    
    
    (200
    )
    
    
    45Less:
reclassification adjustment for gains included in net income
    
    
    
    
    
    
    69Tax effects
    
    
    
    
    
    
    39Other comprehensive income (loss)
    
    
    (200
    )
    
    
    75Comprehensive income (loss)
    
    $
    (46
    )
    
    $
    1,203
  6




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DEARBORN BANCORP, INC. AND SUBSIDIARY 

CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months Ended March 31,(In thousands)
    
    2011
    
    
    2010Cash flows from operating activitiesInterest and fees received
    
    $
    10,924
    
    
    $
    11,951Interest paid
    
    
    (2,356
    )
    
    
    (4,019
    )Proceeds from sale of mortgages held for sale
    
    
    2,983
    
    
    
    4,654Origination of mortgages held for sale
    
    
    (3,357
    )
    
    
    (4,225
    )Taxes refunded
    
    
    7,248
    
    
    
    4,074Loss on sale of real estate owned
    
    
    (76
    )
    
    
    (11
    )Gain on sale of securities
    
    
    
    
    
    
    (69
    )Cash paid to suppliers and employees
    
    
    (3,997
    )
    
    
    (7,331
    )Net cash provided by operating activities
    
    
    11,369
    
    
    
    5,024Cash flows from investing activitiesSale of securities available for sale
    
    
    
    
    
    
    8,289Proceeds
from calls, maturities and repayments of securities available for sale
    
    
    915
    
    
    
    2,514Purchases of securities available for sale
    
    
    
    
    
    
    (10,689
    )Decrease in loans, net of payments received
    
    
    14,656
    
    
    
    11,666Proceeds from the sale of real estate owned
    
    
    593
    
    
    
    742Purchases of property and equipment
    
    
    (2
    )
    
    
    (47
    )Net cash provided by investing activities
    
    
    16,162
    
    
    
    12,475Cash flows from financing activitiesNet decrease in non-interest bearing deposits
    
    
    6,810
    
    
    
    2,534Net increase in interest bearing deposits
    
    
    (24,758
    )
    
    
    (18,472
    )Repayments on Federal Home Loan Bank advances
    
    
    (48
    )
    
    
    (56
    )Net cash used in financing activities
    
    
    (17,996
    )
    
    
    (15,994
    )Increase in cash and cash equivalents
    
    
    9,535
    
    
    
    1,505Cash and cash equivalents at the beginning of period
    
    
    93,775
    
    
    
    77,497Cash and cash equivalents at the end of period
    
    $
    103,310
    
    
    $
    79,002
  7




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DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 Three Months Ended March 31,(In thousands)
    
    2011
    
    
    2010Reconciliation of net loss to net cash provided by operating activitiesNet loss
    
    $
    154
    
    
    $
    1,128Adjustments
to reconcile net income to net cash provided by operating activitiesProvision for loan losses
    
    
    1,395
    
    
    
    100Depreciation expense
    
    
    228
    
    
    
    268Restricted stock award expense
    
    
    66
    
    
    
    16Stock option expense
    
    
    15
    
    
    
    16Accretion of discount on investment securities
    
    
    
    
    
    
    (41
    )Amortization of premium on investment securities
    
    
    579
    
    
    
    105Write-down of real estate owned
    
    
    326
    
    
    
    798(Increase) decrease in mortgages held for sale
    
    
    (396
    )
    
    
    371Increase in interest receivable
    
    
    (24
    )
    
    
    (33
    )Increase (decrease) in interest payable
    
    
    23
    
    
    
    (90
    )Decrease in other assets
    
    
    9,755
    
    
    
    3,324Increase in other liabilities
    
    
    (752
    )
    
    
    (938
    )Net cash provided by operating activities
    
    $
    11,369
    
    
    $
    5,024Supplemental noncash disclosures:Transfers from loans to real estate owned
    
    $
    1,613
    
    
    $
    2,572
  8




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Income (Loss) Per Share
   Three Months Ended3/31/2011
    
    
    3/31/2010BasicNet income
    
    $
    154
    
    
    $
    1,128Weighted average common shares
    
    
    7,645,940
    
    
    
    7,645,940Basic earnings per common share
    
    $
    0.02
    
    
    $
    0.15DilutedNet income
    
    $
    154
    
    
    $
    1,128Weighted average common shares outstanding
    
    
    7,645,940
    
    
    
    7,645,940Weighted average common shares
    
    $
    0.02
    
    
    $
    0.15
  10




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11




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March 31, 2011Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueGovernment sponsored
enterprises (GSE) - mortgage backed securities
    
    $
    54,092
    
    
    $
    1
    
    
    $
    (1,226
    )
    
    $
    52,867Other securities
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    250Totals
    
    $
    54,342
    
    
    $
    1
    
    
    $
    (1,226
    )
    
    $
    53,117
 December 31, 2010Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueGovernment sponsored
enterprises (GSE) - mortgage backed securities
    
    $
    55,586
    
    
    $
    1
    
    
    $
    (1,026
    )
    
    $
    54,561Other securities
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    250Totals
    
    $
    55,836
    
    
    $
    1
    
    
    $
    (1,026
    )
    
    $
    54,811
  Amortized
    
    
    FairCost
    
    
    ValueDue in over ten years
    
    $
    250
    
    
    $
    250GSE  mortgage backed securities
    
    
    54,092
    
    
    
    52,867Totals
    
    $
    54,342
    
    
    $
    53,117
   12




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March 31, 2011Less than one year
    
    
    One year or more
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedInvestment category
    
    Value
    
    
    Loss
    
    
    Value
    
    
    Loss
    
    
    Value
    
    
    LossGSE  mortgage backed
securities
    
    $
    52,842
    
    
    $
    (1,226
    )
    
    
    
    
    
    
    
    
    
    $
    52,842
    
    
    $
    (1,226
    )Total temporarily impaired
    
    $
    52,842
    
    
    $
    (1,226
    )
    
    $
    
    
    
    $
    
    
    
    $
    52,842
    
    
    $
    (1,226
    )
 December 31, 2010Less than one year
    
    
    One year or more
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedInvestment category
    
    Value
    
    
    Loss
    
    
    Value
    
    
    Loss
    
    
    Value
    
    
    LossGSE  mortgage backed
securities
    
    $
    54,526
    
    
    $
    (1,026
    )
    
    
    
    
    
    
    
    
    
    $
    54,526
    
    
    $
    (1,026
    )Total temporarily impaired
    
    $
    54,526
    
    
    $
    (1,026
    )
    
    $
    
    
    
    $
    
    
    
    $
    54,526
    
    
    $
    (1,026
    )
   For the three months ended3/31/2011
    
    
    3/31/2010Gross Gains
    
    $
    
    
    
    $
    69Gross Losses
    
    
    
    
    
    
    
 13




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3/31/11
    
    
    12/31/10
    
    
    3/31/10Consumer loans
    
    $
    25,477
    
    
    $
    25,871
    
    
    $
    28,623Commercial, financial and other
    
    
    106,859
    
    
    
    121,015
    
    
    
    141,338Construction and land development
    
    
    52,402
    
    
    
    55,126
    
    
    
    78,777Commercial real estate mortgages
    
    
    495,919
    
    
    
    495,501
    
    
    
    521,701Residential real estate mortgages
    
    
    37,530
    
    
    
    38,338
    
    
    
    43,522Total Loans
    
    
    718,187
    
    
    
    735,851
    
    
    
    813,961Allowance for loan losses
    
    
    (27,971
    )
    
    
    (27,971
    )
    
    
    (30,288
    )Loans, net
    
    $
    690,216
    
    
    $
    707,880
    
    
    $
    783,673
  3/31/11
    
    
    12/31/10
    
    
    3/31/10Troubled debt restructuring
    
    $
    48,499
    
    
    $
    48,527
    
    
    $
    31,737Over 90 days past due and still accruing
    
    
    236
    
    
    
    
    
    
    
    1,127Non-accrual loans
    
    
    71,953
    
    
    
    66,563
    
    
    
    81,163Total non-performing loans
    
    
    120,688
    
    
    
    115,090
    
    
    
    114,027Real estate owned
    
    
    22,120
    
    
    
    21,502
    
    
    
    24,467Other repossessed assets
    
    
    
    
    
    
    
    
    
    
    Other non-performing assets
    
    
    22,120
    
    
    
    21,502
    
    
    
    24,467Total non-performing assets
    
    $
    142,808
    
    
    $
    136,592
    
    
    $
    138,494
  14




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3/31/11
    
    
    12/31/10
    
    
    3/31/10Consumer loans
    
    $
    2,179
    
    
    $
    1,533
    
    
    $
    924Commercial, financial, & other
    
    
    13,617
    
    
    
    13,688
    
    
    
    12,749Land development loans  residential property
    
    
    10,890
    
    
    
    11,904
    
    
    
    23,260Land development loans  non- residential property
    
    
    1,943
    
    
    
    1,734
    
    
    
    1,558Commercial real estate construction  residential property
    
    
    7,302
    
    
    
    7,763
    
    
    
    9,573Commercial real estate construction  non- residential
property
    
    
    258
    
    
    
    317
    
    
    
    2,870Commercial real estate mortgages
    
    
    34,802
    
    
    
    28,458
    
    
    
    27,863Residential real estate mortgages
    
    
    962
    
    
    
    1,166
    
    
    
    2,366Total non-accrual loans
    
    $
    71,953
    
    
    $
    66,563
    
    
    $
    81,163
   15




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C.
    
    Loans and Allowance for Loan Losses (cont)
 At March 31, 2011
 90 Days30 - 59
    
    
    60 - 89
    
    
    or MoreDays
    
    
    Days
    
    
    Past Due or
    
    
    
    
    
    
    TotalPast Due
    
    
    Past Due
    
    
    Non-Accrual
    
    
    Current
    
    
    LoansConsumer loans
    
    $
    25
    
    
    $
    217
    
    
    $
    2,179
    
    
    $
    23,056
    
    
    $
    25,477Commercial, financial and other
    
    
    1,890
    
    
    
    1,153
    
    
    
    15,881
    
    
    
    87,935
    
    
    
    106,859Land Development Residential
    
    
    
    
    
    
    
    
    
    
    8,357
    
    
    
    11,392
    
    
    
    19,749Land Development Non Residential
    
    
    4,231
    
    
    
    
    
    
    
    1,943
    
    
    
    3,422
    
    
    
    9,596Commercial Construction  Residential
    
    
    1,017
    
    
    
    
    
    
    
    6,819
    
    
    
    1,999
    
    
    
    9,835Commercial Construction 
Non-Residential
    
    
    
    
    
    
    
    
    
    
    258
    
    
    
    12,964
    
    
    
    13,222Commercial real estate mortgages
    
    
    2,840
    
    
    
    6,278
    
    
    
    35,790
    
    
    
    451,011
    
    
    
    495,919Residential real estate mortgages
    
    
    388
    
    
    
    
    
    
    
    962
    
    
    
    36,180
    
    
    
    37,530Total Loans
    
    $
    10,391
    
    
    $
    7,648
    
    
    $
    72,189
    
    
    $
    627,959
    
    
    $
    718,187
 At December 31, 2010
 90 Days30 - 59
    
    
    60 - 89
    
    
    or MoreDays
    
    
    Days
    
    
    Past Due or
    
    
    
    
    
    
    TotalPast Due
    
    
    Past Due
    
    
    Non-Accrual
    
    
    Current
    
    
    LoansConsumer loans
    
    $
    47
    
    
    $
    168
    
    
    $
    1,533
    
    
    $
    24,123
    
    
    $
    25,871Commercial, financial and other
    
    
    951
    
    
    
    524
    
    
    
    15,729
    
    
    
    103,811
    
    
    
    121,015Land Development Residential
    
    
    
    
    
    
    
    
    
    
    9,111
    
    
    
    13,214
    
    
    
    22,325Land Development Non Residential
    
    
    4,000
    
    
    
    
    
    
    
    1,734
    
    
    
    4,236
    
    
    
    9,970Commercial Construction  Residential
    
    
    
    
    
    
    
    
    
    
    7,763
    
    
    
    2,500
    
    
    
    10,263Commercial Construction 
Non-Residential
    
    
    
    
    
    
    
    
    
    
    317
    
    
    
    12,251
    
    
    
    12,568Commercial real estate mortgages
    
    
    4,478
    
    
    
    8,134
    
    
    
    29,210
    
    
    
    453,679
    
    
    
    495,501Residential real estate mortgages
    
    
    
    
    
    
    
    
    
    
    1,166
    
    
    
    37,172
    
    
    
    38,338Total Loans
    
    $
    9,476
    
    
    $
    8,826
    
    
    $
    66,563
    
    
    $
    650,986
    
    
    $
    735,851
 Impaired loans and non-performing loans are defined differently. Impaired loans are
loans for which the collection of principal and interest according to the contractual terms
of the agreement is not probable. Non-performing loans include both smaller balance
homogeneous loans that are collectively evaluated for impairment and individually classified
impaired loans.
 16




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17




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##### Table of Contents



C.
    
    Loans and Allowance for Loan Losses (cont)
 Loans at March 31, 2011
 AverageUnpaid
    
    
    
    
    
    
    
    
    
    
    Investment
    
    
    InterestPrincipal
    
    
    Recorded
    
    
    Specific
    
    
    In Impaired
    
    
    IncomeBalance
    
    
    Investment
    
    
    Allowance
    
    
    Loans
    
    
    RecognizedWithout a specific valuation
allowanceConsumer loans
    
    $
    2,532
    
    
    $
    2,179
    
    
    $
    
    
    
    $
    1,856
    
    
    $
    Commercial, financial and other
    
    
    19,255
    
    
    
    13,703
    
    
    
    
    
    
    
    15,088
    
    
    
    20Construction and land development
    
    
    24,664
    
    
    
    17,402
    
    
    
    
    
    
    
    17,556
    
    
    
    67Commercial real estate mortgages
    
    
    45,394
    
    
    
    40,144
    
    
    
    
    
    
    
    38,481
    
    
    
    199Residential real estate mortgages
    
    
    1,027
    
    
    
    962
    
    
    
    
    
    
    
    1,064
    
    
    
    Total
    
    $
    92,872
    
    
    $
    74,390
    
    
    $
    
    
    
    $
    74,045
    
    
    $
    286With a specific valuation allowanceConsumer loans
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Commercial, financial and other
    
    
    4,202
    
    
    
    4,202
    
    
    
    228
    
    
    
    4,056
    
    
    
    18Construction and land development
    
    
    21,473
    
    
    
    20,259
    
    
    
    6,064
    
    
    
    19,278
    
    
    
    72Commercial real estate mortgages
    
    
    20,713
    
    
    
    21,601
    
    
    
    6,035
    
    
    
    21,114
    
    
    
    57Residential real estate mortgages
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    46,388
    
    
    $
    46,062
    
    
    $
    12,327
    
    
    $
    44,448
    
    
    $
    147TotalConsumer loans
    
    $
    2,532
    
    
    $
    2,179
    
    
    $
    
    
    
    $
    1,856
    
    
    $
    Commercial, financial and other
    
    
    23,457
    
    
    
    17,905
    
    
    
    228
    
    
    
    19,144
    
    
    
    38Construction and land development
    
    
    46,137
    
    
    
    37,661
    
    
    
    6,064
    
    
    
    36,834
    
    
    
    139Commercial real estate mortgages
    
    
    66,107
    
    
    
    61,745
    
    
    
    6,035
    
    
    
    59,595
    
    
    
    256Residential real estate mortgages
    
    
    1,027
    
    
    
    962
    
    
    
    
    
    
    
    1,064
    
    
    
    Total Impaired Loans
    
    $
    139,260
    
    
    $
    120,452
    
    
    $
    12,327
    
    
    $
    118,493
    
    
    $
    433
 Loans at December 31, 2010
 AverageUnpaid
    
    
    
    
    
    
    
    
    
    
    Investment
    
    
    InterestPrincipal
    
    
    Recorded
    
    
    Specific
    
    
    In Impaired
    
    
    IncomeBalance
    
    
    Investment
    
    
    Allowance
    
    
    Loans
    
    
    RecognizedWithout a specific valuation
allowanceConsumer loans
    
    $
    1,886
    
    
    $
    1,533
    
    
    $
    
    
    
    $
    1,102
    
    
    $
    Commercial, financial and other
    
    
    22,412
    
    
    
    16,472
    
    
    
    
    
    
    
    17,827
    
    
    
    125Construction and land development
    
    
    31,156
    
    
    
    17,709
    
    
    
    
    
    
    
    22,530
    
    
    
    96Commercial real estate mortgages
    
    
    41,773
    
    
    
    36,818
    
    
    
    
    
    
    
    38,794
    
    
    
    927Residential real estate mortgages
    
    
    1,323
    
    
    
    1,166
    
    
    
    
    
    
    
    2,181
    
    
    
    Total
    
    $
    98,550
    
    
    $
    73,698
    
    
    $
    0
    
    
    $
    82,434
    
    
    $
    1,148With a specific valuation allowanceConsumer loans
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Commercial, financial and other
    
    
    3,910
    
    
    
    3,910
    
    
    
    1,135
    
    
    
    3,933
    
    
    
    90Construction and land development
    
    
    18,364
    
    
    
    18,296
    
    
    
    5,280
    
    
    
    10,976
    
    
    
    240Commercial real estate mortgages
    
    
    22,174
    
    
    
    20,628
    
    
    
    4,310
    
    
    
    17,545
    
    
    
    497Residential real estate mortgages
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    44,448
    
    
    $
    42,834
    
    
    $
    10,725
    
    
    $
    32,454
    
    
    $
    827TotalConsumer loans
    
    $
    1,886
    
    
    $
    1,533
    
    
    $
    
    
    
    $
    1,102
    
    
    $
    Commercial, financial and other
    
    
    26,322
    
    
    
    20,382
    
    
    
    1,135
    
    
    
    21,760
    
    
    
    215Construction and land development
    
    
    49,520
    
    
    
    36,005
    
    
    
    5,280
    
    
    
    33,506
    
    
    
    336Commercial real estate mortgages
    
    
    63,947
    
    
    
    57,446
    
    
    
    4,310
    
    
    
    56,339
    
    
    
    1,424Residential real estate mortgages
    
    
    1,323
    
    
    
    1,166
    
    
    
    
    
    
    
    2,181
    
    
    
    Total Loans
    
    $
    142,998
    
    
    $
    116,532
    
    
    $
    10,725
    
    
    $
    114,888
    
    
    $
    1,975
 18




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C.
    
    Loans and Allowance for Loan Losses (cont)The Corporation utilizes a rating system to assign a risk rating to all loans in the loan
portfolio. The rating system used consists of classification grading from one through nine
which identifies the inherent risk associated with a loan. These risk ratings are assigned
by the loan officer and subsequently reviewed by the First Vice President  Credit.
Subsequently, each loan is regularly reviewed by the First Vice President  Credit. The
frequency of this review is dependent on the current risk rating and the balance of the
loan.Excellent Quality (Pass)Borrower may be a privately held company with a strong balance sheet, consistent earnings,
and worthy of unsecured credit. Leverage and liquidity are average to slightly better than
average within industry. History of profitable operations, but conditions exist that would
suggest borrowers earnings could temporarily decline due to market or economic conditions.
Cash flow is adequate and profit margins are slightly above average within the industry.Good Quality (Pass)Subject to normal degree of risk. Cash flow adequate to service debt, but is susceptible to
some deterioration due to seasonal or economic fluctuations. Balance sheet contains some
leverage, and liquidity could be temporarily tight. There could be some asset
concentration.Satisfactory Quality (Pass)Reasonable risk. Some unfavorable characteristics would be reliance on single product or
major customer concentration, volatility of earnings or increasing leverage which is still
within normal industry parameters.Acceptable Risk (Pass)More unpredictability in earnings and cash flow. Borrower may have experienced modest and
presumably temporary losses (less than 10% of capital), however cash flow is still
sufficient to meet debt service. Leverage and liquidity are below normal industry
standards. Secondary source of repayment may be limited.WatchA Watch asset is not considered rated or classified for regulatory purpose, but is
considered a criticized asset, which bears watching due to some modest deterioration in
financial performance or external threats, such as lawsuit, environmental issue, or
potential loss of a significant customer. The following points are characteristics which a
Monitor asset may exhibit: financial condition has taken a negative turn and may be
temporarily strained; borrower may have experienced recent losses from operations up to 20%
of net worth, cash flow may be insufficient to service debt in the most recent six month
period. This rating also applies to all other real estate loans performing at a level
slightly under the parameters as originally underwritten.
 19




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##### Table of Contents



C.
    
    Loans and Allowance for Loan Losses (cont)Special MentionA Special Mention asset has potential weaknesses that deserve managements close attention.
If left uncorrected, these potential weaknesses may result in deterioration of the repayment
prospects for the loan, or in the institutions credit position at some future date.
Special Mention assets are not adversely classified and do not expose an institution to
sufficient risk to warrant adverse classification. The following are some of the attributes
of a Special Mention credit: loans are currently protected, but are potentially weak due to
negative trends in the balance sheet or income statement; there is a lack of effective
control over the collateral or documentation deficiencies exists; there is a potential risk
of payment default; managements ability to cope with the current financial condition is
questioned; collateral coverage is becoming strained but is still acceptable; operating
losses may exceed 20% of capital. This rating applies to all other real estate loans
performing at a level significantly under the level as originally underwritten.SubstandardThis grade includes Substandard loans in accordance with regulatory guidelines. Loans
categorized in this grade possess a well defined credit weakness and the likelihood of
repayment from the primary source is uncertain. Significant financial deterioration has
occurred and very close attention is warranted to ensure the full repayment without loss.
Collateral coverage may be marginal. All non-accrual loans will be rated 7 or worse.DoubtfulThis grade includes Doubtful loans in accordance with regulatory guidelines. Such loans
have been placed on non-accrual status and may be heavily dependent upon collateral
possessing a value that is difficult to determine or based upon some near-term event which
lacks clear certainty. These loans have all of the weaknesses of those classified as
Substandard however, based on existing conditions, these weaknesses make full collection of
the principal balance highly improbable.LossAssets classified as Loss are determined to be uncollectible based on current facts.
Accordingly, they should be classified as Loss and promptly charged off.Loans segregated by risk category based on internally assigned risk ratings at March 31,
2011 and December 31, 2010 are listed below (in thousands):
 At March 31, 2011
 Special
    
    
    
    
    
    
    
    
    
    
    TotalPass
    
    
    Mention
    
    
    Substandard
    
    
    Doubtful
    
    
    LoansConsumer loans
    
    $
    22,407
    
    
    $
    59
    
    
    $
    2,530
    
    
    $
    481
    
    
    $
    25,477Commercial, financial and other
    
    
    71,818
    
    
    
    14,026
    
    
    
    20,642
    
    
    
    374
    
    
    
    106,860Land Development Residential
    
    
    5,719
    
    
    
    1,910
    
    
    
    11,618
    
    
    
    502
    
    
    
    19,749Land Development Non Residential
    
    
    2,032
    
    
    
    1,027
    
    
    
    6,537
    
    
    
    
    
    
    
    9,596Commercial Construction  Residential
    
    
    108
    
    
    
    
    
    
    
    9,727
    
    
    
    
    
    
    
    9,835Commercial Construction 
Non-Residential
    
    
    996
    
    
    
    
    
    
    
    12,226
    
    
    
    
    
    
    
    13,222Commercial real estate mortgages
    
    
    335,090
    
    
    
    47,316
    
    
    
    112,689
    
    
    
    823
    
    
    
    495,918Residential real estate mortgages
    
    
    35,158
    
    
    
    763
    
    
    
    1,609
    
    
    
    
    
    
    
    37,530Total Loans
    
    $
    473,328
    
    
    $
    65,101
    
    
    $
    177,578
    
    
    $
    2,180
    
    
    $
    718,187
 20




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C.
    
    Loans and Allowance for Loan Losses (cont)
 At December 31, 2010
 Special
    
    
    
    
    
    
    
    
    
    
    TotalPass
    
    
    Mention
    
    
    Substandard
    
    
    Doubtful
    
    
    LoansConsumer loans
    
    $
    22,988
    
    
    $
    
    
    
    $
    2,798
    
    
    $
    85
    
    
    $
    25,871Commercial, financial and other
    
    
    77,076
    
    
    
    14,298
    
    
    
    29,641
    
    
    
    
    
    
    
    121,015Land Development Residential
    
    
    9,456
    
    
    
    1,511
    
    
    
    11,358
    
    
    
    
    
    
    
    22,325Land Development Non Residential
    
    
    3,571
    
    
    
    4,035
    
    
    
    2,364
    
    
    
    
    
    
    
    9,970Commercial Construction  Residential
    
    
    47
    
    
    
    
    
    
    
    10,216
    
    
    
    
    
    
    
    10,263Commercial Construction 
Non-Residential
    
    
    281
    
    
    
    
    
    
    
    12,287
    
    
    
    
    
    
    
    12,568Commercial real estate mortgages
    
    
    338,194
    
    
    
    56,410
    
    
    
    100,897
    
    
    
    
    
    
    
    495,501Residential real estate mortgages
    
    
    35,750
    
    
    
    771
    
    
    
    1,817
    
    
    
    
    
    
    
    38,338Total Loans
    
    $
    487,363
    
    
    $
    77,025
    
    
    $
    171,378
    
    
    $
    85
    
    
    $
    735,851
 The allowance for loan losses is established as losses are estimated to have occurred
through a provision for loan losses charged to income. Loan losses are charged against the
allowance when management believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance. Charge-offs are recommended
by the First Vice President  Credit and approved by the Senior Vice President & Head of
Lending or the President of the Corporation.The allowance for loan losses is evaluated on a regular basis by management and is based
upon managements periodic review of the collectibility of the loans in light of historical
experience, the nature and volume of the loan portfolio, adverse situations that may affect
the borrowers ability to repay, estimated value of any underlying collateral and prevailing
economic conditions. This evaluation is inherently subjective as it requires estimates that
are susceptible to significant revision as more information becomes available.Loans have various types and levels of risk. All loans have repayment risk. Real estate
loans also have valuation risk, as the value of the underlying collateral can decline for
various reasons. Commercial real estate loans have historically involved more risk than
residential loans, because loan balances are greater and repayment is dependent upon the
borrowers operations. Other types of commercial loans are typically secured by
other assets. Commercial real estate loans and other commercial loans typically have
personal guarantees provided by the borrowers. Management addresses these various types
and levels of risk by utilizing a stringent underwriting and loan approval process.
Management has instituted a diligent loan monitoring process and formed a special assets
department, which is responsible for managing most non-performing loans. The special assets
department meets on a bi-weekly basis with the President , Senior Vice President & Head of
Lending and the First Vice President-Credit to discuss loans in the special assets
portfolios.
 21




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##### Table of Contents



C.
    
    Loans and Allowance for Loan Losses (cont)The allowance consists of allocated and general components. The allocated component relates
to loans that are classified as impaired. For those loans that are classified as impaired,
an allowance is established when the discounted cash flows (or collateral value or
observable market price) of the impaired loan is lower than the carrying value of that loan.
The general component covers nonclassified loans and is based on historical charge-off
experience and expected loss given default derived from the Corporations internal risk
rating process. Other adjustments may be made to the allowance for pools of loans after an
assessment of internal or external influences on credit quality that are not fully reflected
in the historical loss or risk rating data.Activity in the allowance for loan losses during the three months ended March 31, 2011 by
loan type is further described below (in thousands):
 For the three months ended March 31, 2011
 Commercial ,
    
    
    Construction
    
    
    Commercial
    
    
    ResidentialFinancial
    
    
    and Land
    
    
    Real Estate
    
    
    Real EstateConsumer
    
    
    & Other
    
    
    Development
    
    
    Mortgages
    
    
    Mortgages
    
    
    TotalBalance at
January 1, 2011
    
    $
    1,115
    
    
    $
    6,571
    
    
    $
    7,870
    
    
    $
    12,102
    
    
    $
    313
    
    
    $
    27,971Provision for loan
losses
    
    
    130
    
    
    
    (523
    )
    
    
    972
    
    
    
    891
    
    
    
    (75
    )
    
    
    1,395Charge-offs
    
    
    
    
    
    
    136
    
    
    
    534
    
    
    
    795
    
    
    
    99
    
    
    
    1,564Recoveries
    
    
    8
    
    
    
    11
    
    
    
    140
    
    
    
    10
    
    
    
    
    
    
    
    169Net Charge-offs
    
    
    (8
    )
    
    
    125
    
    
    
    394
    
    
    
    785
    
    
    
    99
    
    
    
    1,395Balance at
March 31, 2011
    
    $
    1,253
    
    
    $
    5,923
    
    
    $
    8,448
    
    
    $
    12,208
    
    
    $
    139
    
    
    $
    27,971
 22




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##### Table of Contents



C.
    
    Loans and Allowance for Loan Losses (cont)The Loan portfolio and allowance for loan losses segregated by evaluation methodology at
March 31, 2011 and December 31, 2010 is further described below (in thousands):
 Allowance For Loan Losses Evaluated at March 31, 2011Commercial ,
    
    
    Construction
    
    
    Commercial
    
    
    ResidentialFinancial
    
    
    and Land
    
    
    Real Estate
    
    
    Real EstateConsumer
    
    
    & Other
    
    
    Development
    
    
    Mortgages
    
    
    Mortgages
    
    
    TotalIndividually
Evaluated
For Impairment
    
    $
    
    
    
    $
    228
    
    
    $
    6,064
    
    
    $
    6,035
    
    
    $
    
    
    
    $
    12,327Collectively
Evaluated
For Impairment
    
    
    1,253
    
    
    
    5,695
    
    
    
    2,384
    
    
    
    6,173
    
    
    
    139
    
    
    
    15,644Allowance for
loan losses
    
    $
    1,253
    
    
    $
    5,923
    
    
    $
    8,448
    
    
    $
    12,208
    
    
    $
    139
    
    
    $
    27,971Loans Evaluated at March 31, 2011Commercial ,
    
    
    Construction
    
    
    Commercial
    
    
    ResidentialFinancial
    
    
    and Land
    
    
    Real Estate
    
    
    Real EstateConsumer
    
    
    & Other
    
    
    Development
    
    
    Mortgages
    
    
    Mortgages
    
    
    TotalIndividually
Evaluated
For Impairment
    
    $
    2,179
    
    
    $
    17,905
    
    
    $
    37,661
    
    
    $
    61,745
    
    
    $
    962
    
    
    $
    120,452Collectively
Evaluated
For Impairment
    
    
    23,298
    
    
    
    88,954
    
    
    
    18,842
    
    
    
    430,073
    
    
    
    36,568
    
    
    
    597,735Total loans
    
    $
    25,477
    
    
    $
    106,859
    
    
    $
    56,503
    
    
    $
    491,818
    
    
    $
    37,530
    
    
    $
    718,187Allowance For Loan Losses Evaluated at December 31, 2010Commercial ,
    
    
    Construction
    
    
    Commercial
    
    
    ResidentialFinancial
    
    
    and Land
    
    
    Real Estate
    
    
    Real EstateConsumer
    
    
    & Other
    
    
    Development
    
    
    Mortgages
    
    
    Mortgages
    
    
    TotalIndividually
Evaluated For
Impairment
    
    $
    
    
    
    $
    373
    
    
    $
    5,280
    
    
    $
    5,072
    
    
    $
    
    
    
    $
    10,725Collectively
Evaluated For
Impairment
    
    
    1,136
    
    
    
    6,292
    
    
    
    2,036
    
    
    
    7,438
    
    
    
    344
    
    
    
    17,246Allowance for
loan losses
    
    $
    1,136
    
    
    $
    6,665
    
    
    $
    7,316
    
    
    $
    12,510
    
    
    $
    344
    
    
    $
    27,971Loans Evaluated at December 31, 2010Commercial ,
    
    
    Construction
    
    
    Commercial
    
    
    ResidentialFinancial
    
    
    and Land
    
    
    Real Estate
    
    
    Real EstateConsumer
    
    
    & Other
    
    
    Development
    
    
    Mortgages
    
    
    Mortgages
    
    
    TotalIndividually
Evaluated For
Impairment
    
    $
    1,533
    
    
    $
    20,382
    
    
    $
    36,005
    
    
    $
    57,446
    
    
    $
    1,166
    
    
    $
    116,532Collectively
Evaluated For
Impairment
    
    
    24,338
    
    
    
    100,633
    
    
    
    19,121
    
    
    
    438,055
    
    
    
    37,172
    
    
    
    619,319Total loans
    
    $
    25,871
    
    
    $
    121,015
    
    
    $
    55,126
    
    
    $
    495,501
    
    
    $
    38,338
    
    
    $
    735,851
 23




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##### Table of Contents



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 was no activity in the shares or options of the plan during the three months ended
March 31, 2011. For the options outstanding at March 31, 2011, the range of exercise prices
was $7.69 to $14.65 per share with a weighted-average remaining contractual term of 1.3
years. At March 31, 2011, options for 242,991 shares were exercisable at weighted average
exercise price of $10.25 per share. There was no intrinsic value at March 31, 2011.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 March 31, 2011, there were stock options outstanding for 258,865 shares with a
weighted average exercise price of $4.17 per share.The Corporation recognized stock option compensation expense of $15,000 during the three
months ended March 31, 2011 and 2010. Compensation cost of $98,000 and $36,000 is expected
to be recognized during 2011 and 2012, 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 March 31, 2011, there were 39,765
shares of restricted stock outstanding.
 24




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##### Table of Contents



D.
    
    Incentive Stock Plans (cont)The Corporation recognized restricted stock compensation expense of $66,000 and $16,000,
respectively during the three months ended March 31, 2011, respectively. Compensation cost
of $176,000 and $0 is expected to be recognized during 2011 and 2012, 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.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. 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.
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##### Table of Contents



E.
    
    Fair Value of Assets and Liabilities ( cont)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 sheets, 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
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 March 31, 2011 and December 31, 2010 (in thousands):
 At 03/31/2011
 SignificantQuoted Prices in
    
    
    Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableFair
    
    
    Identical Assets
    
    
    Inputs
    
    
    InputsValue
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)GSE  mortgage backed securities
    
    $
    52,867
    
    
    $
    
    
    
    $
    52,867
    
    
    $
    Other securities
    
    
    250
    
    
    
    
    
    
    
    250
    
    
    
    Total securities, available for sale
    
    $
    53,117
    
    
    $
    
    
    
    $
    53,117
    
    
    $
    
 At 12/31/2010
 SignificantQuoted Prices in
    
    
    Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableFair
    
    
    Identical Assets
    
    
    Inputs
    
    
    InputsValue
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)GSE  mortgage backed securities
    
    $
    54,561
    
    
    $
    
    
    
    $
    54,561
    
    
    $
    Other securities
    
    
    250
    
    
    
    
    
    
    
    250
    
    
    
    Total securities, available for sale
    
    $
    54,811
    
    
    $
    
    
    
    $
    54,811
    
    
    $
    
 26




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E.
    
    Fair Value of Assets and Liabilities ( cont)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 March 31, 2011 and December 31, 2010 (in thousands):
 At 03/31/2011
 SignificantQuoted Prices in
    
    
    Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    InputsFair Value
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Impaired loans (collateral dependent)
    
    $
    69,234
    
    
    $
    
    
    
    $
    
    
    
    $
    69,234Other real estate
    
    $
    12,442
    
    
    $
    
    
    
    $
    
    
    
    $
    12,442
 At 12/31/2010
 SignificantQuoted Prices in
    
    
    Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    InputsFair Value
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Impaired loans (collateral dependent)
    
    $
    66,977
    
    
    $
    
    
    
    $
    
    
    
    $
    66,977Other real estate
    
    $
    10,003
    
    
    $
    
    
    
    $
    
    
    
    $
    10,003
 27




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E.
    
    Fair Value of Assets and Liabilities ( cont)The carrying amounts and estimated fair value of principal financial assets and liabilities
were as follows (in thousands):
 At March 31, 2011
    
    
    At December 31, 2010Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueAssets:Cash and cash equivalents
    
    $
    103,310
    
    
    $
    103,310
    
    
    $
    93,775
    
    
    $
    93,775Mortgage loans held for sale
    
    
    749
    
    
    
    761
    
    
    
    353
    
    
    
    356Securities available for sale
    
    
    53,117
    
    
    
    53,117
    
    
    
    54,836
    
    
    
    54,811Federal Home Loan Bank Stock
    
    
    3,605
    
    
    
    3,605
    
    
    
    3,605
    
    
    
    3,605Loans
    
    
    718,187
    
    
    
    717,469
    
    
    
    735,851
    
    
    
    734,106Accrued interest receivable
    
    
    3,310
    
    
    
    3,310
    
    
    
    3,286
    
    
    
    3,286Liabilities:Deposits
    
    
    794,153
    
    
    
    796,968
    
    
    
    812,101
    
    
    
    815,582Federal Home Loan Bank
advances
    
    
    63,668
    
    
    
    63,926
    
    
    
    63,716
    
    
    
    64,060Subordinated debentures
    
    
    10,000
    
    
    
    5,005
    
    
    
    10,000
    
    
    
    4,718Accrued interest payable
    
    
    1,079
    
    
    
    1,079
    
    
    
    1,216
    
    
    
    1,216
 Fair Value of Financial InstrumentsThe 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 StockThe carrying amount approximates fair value.Loans Held for SaleFair value is based upon the quoted price for the sale of those loans.
 28




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##### Table of Contents



E.
    
    Fair Value of Assets and Liabilities ( cont)LoansThe 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.DepositsDeposits 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 PayableThe carrying amount approximates fair value.Federal Home Loan Bank AdvancesRates 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.Subordinated DebenturesRates 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
CreditThe 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.
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##### Table of Contents



F.  
Capital and Operating MattersStockholders equity at March 31, 2011 was $26,994,000 compared to $26,959,000 as of
December 31, 2010, an increase of $35,000. The increase was primarily due to net income
during the period.Based on the respective regulatory capital ratios, the Bank is considered to be
undercapitalized at March 31, 2011 and December 31, 2010.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 March 31, 2011Total capital
(to risk weighted assets)Consolidated
    
    
    47,543
    
    
    
    6.54
    %
    
    
    58,189
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    47,640
    
    
    
    6.55
    %
    
    
    58,179
    
    
    
    8.00
    %
    
    
    72,724
    
    
    
    10.00
    %Tier 1 capital
(to risk weighted assets)Consolidated
    
    
    38,219
    
    
    
    5.25
    %
    
    
    29,095
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    38,316
    
    
    
    5.27
    %
    
    
    29,090
    
    
    
    4.00
    %
    
    
    43,634
    
    
    
    6.00
    %Tier 1 capital
(to average assets)Consolidated
    
    
    38,219
    
    
    
    4.21
    %
    
    
    36,304
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    38,316
    
    
    
    4.23
    %
    
    
    36,239
    
    
    
    4.00
    %
    
    
    45,299
    
    
    
    5.00
    %As of December 31, 2010Total capital
(to risk weighted assets)Consolidated
    
    
    47,591
    
    
    
    6.34
    %
    
    
    60,012
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    46,169
    
    
    
    6.17
    %
    
    
    59,902
    
    
    
    8.00
    %
    
    
    74,877
    
    
    
    10.00
    %Tier 1 capital
(to risk weighted assets)Consolidated
    
    
    37,984
    
    
    
    5.06
    %
    
    
    30,006
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    36,580
    
    
    
    4.89
    %
    
    
    29,951
    
    
    
    4.00
    %
    
    
    44,926
    
    
    
    6.00
    %Tier 1 capital
(to average assets)Consolidated
    
    
    37,984
    
    
    
    4.09
    %
    
    
    37,135
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    36,580
    
    
    
    3.95
    %
    
    
    37,077
    
    
    
    4.00
    %
    
    
    46,346
    
    
    
    5.00
    %
 30




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##### Table of Contents



F.  
Capital and Operating Matters (con't)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. The Consent Order 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.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 March 31, 2011. 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 be in compliance with the Consent
Order. Management is pursuing various sources of capital and estimates the need to raise
approximately $40 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.G.   Consent Order and Federal Reserve Bank AgreementConsent OrderDue 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:
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##### Table of Contents



G.  Consent Order and Federal Reserve Bank Agreement (con't) 
    
    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 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 March 31, 2011, the Banks total
risk-based capital ratio was 6.36%. Additionally, the Bank is prohibited from declaring or
paying any cash dividends without prior written consent of the FDIC.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. This CRP was rejected because capital has not been successfully
raised within the 120 days of the issuance of the consent order. An amended CRP was
submitted on May 24, 2010. This CRP was also rejected because capital has not been
successfully raised. The CRP addresses, among other things, the steps management will take
to cause our capital levels to return to the minimum level to be adequately capitalized.The Bank is currently undercapitalized. Failure to meet the minimum ratios set forth in the
Consent Order could result in regulators taking additional enforcement action against us.
With the exception of raising additional capital, management believes that it has met all of
the provisions of the consent order.Federal Reserve Board AgreementDue to our financial condition, the Federal Reserve Bank of Chicago (FRB) required
that our Board of Directors sign a formal enforcement action (Consent Order) with the FRB
which conveys specific actions needed to address certain findings from their examination and
to address our current financial condition. We entered into the Written Order on June 15,
2010, which contains certain requirements that are to be met by specific dates, including
the submission of a capital plan, the submission of annual cash flow projections and the
submission of quarterly update reports.With the exception of raising additional capital, management believes that it has met all of
the provisions of the written order.
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ITEM 2.  
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 The following discussion and analysis are intended to address significant factors affecting the
financial condition and results of operations of the Corporation. The discussion provides a more
comprehensive review of the financial position and operating results than can be obtained from a
reading of the financial statements and footnotes presented elsewhere in this report.Managements Discussion and Analysis of Financial Condition and Results of Operations contains
forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of
1995) that are based on current expectations. Words such as anticipates, believes,
estimates, expects, forecasts, intends, is likely, plans, projects, variations of
such words and similar expressions are intended to identify such forward-looking statements.
These statements are not guarantees of future performance and involve certain risks, uncertainties
and assumptions (Future Factors) that are difficult to predict with regard to timing, extent,
likelihood and degree of occurrence. Actual results and outcomes may materially differ from what
is expressed in forward-looking statements. The Corporation undertakes no
obligation to update, amend or clarify forward-looking statements, whether as a result of new
information, future events (whether anticipated or unanticipated), or otherwise.Future Factors include changes in interest rates and interest rate relationships; demand for
products and services; the degree of competition by traditional and non-traditional competitors;
changes in banking regulation; changes in tax laws; changes in prices, levies and assessments; the
impact of technological advances; governmental and regulatory policy changes; the outcomes of
contingencies, trends in customer behavior as well as their ability to repay loans; actions by
bank regulators; availability of capital; changes in local real estate values; changes in the
national and local economy; and other factors, including risk factors disclosed in this report,
the Corporations 2010 Annual Report on Form 10-K, or disclosed from time to time in other filings
made by the Corporation with the Securities and Exchange Commission. These are representative of
the Future Factors and could cause a difference between an ultimate actual outcome and a preceding
forward-looking statement.
 33




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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 compliance
services for financial institutions
  34




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##### 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 48187November 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
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##### Table of Contents



Net Interest Income
 2011 Compared to 2010.
 Average Balances, Interest Rates and Yields.
  37




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##### Table of Contents



Three months ended March 31, 2011
    
    
    Three months ended March 31, 2010Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average(In thousands)
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateAssetsInterest bearing deposits with banks
    
    $
    93,261
    
    
    $
    136
    
    
    
    0.59
    %
    
    $
    65,286
    
    
    $
    37
    
    
    
    0.23
    %Federal funds sold
    
    
    55
    
    
    
    1
    
    
    
    7.37
    %
    
    
    119
    
    
    
    1
    
    
    
    3.41
    %Securities, available for sale
    
    
    54,131
    
    
    
    442
    
    
    
    3.31
    %
    
    
    49,835
    
    
    
    168
    
    
    
    1.37
    %Loans
    
    
    729,132
    
    
    
    10,369
    
    
    
    5.77
    %
    
    
    826,719
    
    
    
    11,778
    
    
    
    5.78
    %Sub-total earning assets
    
    
    876,579
    
    
    
    10,948
    
    
    
    5.07
    %
    
    
    941,959
    
    
    
    11,984
    
    
    
    5.16
    %Other assets
    
    
    31,030
    
    
    
    
    
    
    
    
    
    
    
    31,949Total assets
    
    $
    907,609
    
    
    
    
    
    
    
    
    
    
    $
    973,908Liabilities and stockholders equityInterest bearing deposits
    
    $
    712,596
    
    
    $
    2,119
    
    
    
    1.21
    %
    
    $
    769,744
    
    
    $
    3,543
    
    
    
    1.87
    %Other borrowings
    
    
    73,692
    
    
    
    260
    
    
    
    1.43
    %
    
    
    73,828
    
    
    
    386
    
    
    
    2.12
    %Sub-total interest bearing liabilities
    
    
    786,288
    
    
    
    2,379
    
    
    
    1.23
    %
    
    
    843,572
    
    
    
    3,929
    
    
    
    1.89
    %Non-interest bearing deposits
    
    
    90,050
    
    
    
    
    
    
    
    
    
    
    
    84,327Other liabilities
    
    
    2,993
    
    
    
    
    
    
    
    
    
    
    
    2,442Stockholders equity
    
    
    28,278
    
    
    
    
    
    
    
    
    
    
    
    43,567Total liabilities and stockholders
equity
    
    $
    907,609
    
    
    
    
    
    
    
    
    
    
    $
    973,908Net interest income
    
    
    
    
    
    $
    8,569
    
    
    
    
    
    
    
    
    
    
    $
    8,055Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.84
    %
    
    
    
    
    
    
    
    
    
    
    3.27
    %Net interest margin on earning assets
    
    
    
    
    
    
    
    
    
    
    3.96
    %
    
    
    
    
    
    
    
    
    
    
    3.47
    %
 Rate/Volume Analysis.
 38




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##### Table of Contents



2011/2010Change in Interest Due to:Average
    
    
    Average
    
    
    Net(In thousands)
    
    Balance
    
    
    Rate
    
    
    ChangeAssetsInterest bearing deposits with banks
    
    $
    40
    
    
    $
    59
    
    
    $
    99Federal funds sold
    
    
    (1
    )
    
    
    1
    
    
    
    Investment securities, available for sale
    
    
    33
    
    
    
    241
    
    
    
    274Loans
    
    
    (1,388
    )
    
    
    (21
    )
    
    
    (1,409
    )Total earning assets
    
    
    ($1,316
    )
    
    $
    280
    
    
    
    ($1,036
    )LiabilitiesInterest bearing deposits
    
    
    ($159
    )
    
    
    ($1,265
    )
    
    
    ($1,424
    )Other borrowings
    
    
    1
    
    
    
    (127
    )
    
    
    (126
    )Total interest bearing liabilities
    
    
    ($159
    )
    
    
    ($1,391
    )
    
    
    ($1,550
    )Net interest income
    
    
    
    
    
    
    
    
    
    $
    514Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    0.57
    %Net interest margin on earning assets
    
    
    
    
    
    
    
    
    
    
    0.49
    %
 Provision for Loan Losses
 2011 Compared to 2010.
  39




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##### Table of Contents



Non-interest Income (Loss)
 2011 Compared to 2010.
  Non-interest Expense
 2011 Compared to 2010.
  40




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##### Table of Contents



Income Tax Provision
 2011 Compared to 2010.
 Comparison of Financial Condition at March 31, 2011 and December 31, 2010
 Assets.
 Interest bearing deposits with banks.
 Mortgage Loans Held for Sale.
 Securities  Available for Sale.
  Federal Home Loan Bank Stock.
 Loans.
 41




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##### Table of Contents



3/31/11
    
    
    12/31/10
    
    
    3/31/10Consumer loans
    
    $
    25,477
    
    
    $
    25,871
    
    
    $
    28,623Commercial, financial, & other
    
    
    106,859
    
    
    
    121,015
    
    
    
    141,338Land development loans  residential property
    
    
    19,749
    
    
    
    21,975
    
    
    
    36,089Land development loans  non-residential property
    
    
    9,596
    
    
    
    9,970
    
    
    
    9,711Commercial real estate construction  residential property
    
    
    9,835
    
    
    
    10,613
    
    
    
    12,164Commercial real estate construction  non-residential
property
    
    
    13,222
    
    
    
    12,568
    
    
    
    20,813Commercial real estate mortgages
    
    
    495,919
    
    
    
    495,501
    
    
    
    521,701Residential real estate mortgages
    
    
    37,530
    
    
    
    38,338
    
    
    
    43,522718,187
    
    
    
    735,851
    
    
    
    813,961Allowance for loan losses
    
    
    (27,971
    )
    
    
    (27,971
    )
    
    
    (30,288
    )$
    690,216
    
    
    $
    707,880
    
    
    $
    783,673
  3/31/11
    
    
    12/31/10
    
    
    3/31/10Troubled debt restructuring
    
    $
    48,499
    
    
    $
    48,527
    
    
    $
    31,737Over 90 days past due and still accruing
    
    
    236
    
    
    
    
    
    
    
    1,127Non-accrual loans
    
    
    71,953
    
    
    
    66,563
    
    
    
    81,163Total non-performing loans
    
    
    120,688
    
    
    
    115,090
    
    
    
    114,027Real estate owned
    
    
    22,120
    
    
    
    21,502
    
    
    
    24,467Other repossessed assets
    
    
    
    
    
    
    
    
    
    
    Other non-performing assets
    
    
    22,120
    
    
    
    21,502
    
    
    
    24,467Total non-performing assets
    
    $
    142,808
    
    
    $
    136,592
    
    
    $
    138,494
  Number ofLoans
    
    
    BalanceConsumer loans
    
    
    23
    
    
    $
    2,179Commercial, financial, & other
    
    
    44
    
    
    
    13,617Land development loans  residential property
    
    
    13
    
    
    
    10,890Land development loans  non-residential property
    
    
    3
    
    
    
    1,943Commercial real estate construction  residential property
    
    
    7
    
    
    
    7,302Commercial real estate construction  non-residential property
    
    
    1
    
    
    
    258Commercial real estate mortgages
    
    
    62
    
    
    
    34,802Residential real estate mortgages
    
    
    13
    
    
    
    962Total non-accrual loans
    
    
    166
    
    
    $
    71,953
 42




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##### Table of Contents



Number ofLoans
    
    
    BalanceConsumer loans
    
    
    5
    
    
    $
    656Commercial, financial, & other
    
    
    6
    
    
    
    687Land development loans  residential property
    
    
    2
    
    
    
    455Land development loans  non residential property
    
    
    1
    
    
    
    210Commercial real estate mortgages
    
    
    8
    
    
    
    7,353Residential real estate mortgages
    
    
    2
    
    
    
    116Total non-accrual loans
    
    
    24
    
    
    $
    9,477
    Allowance for Loan Losses.
 43




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44




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Three Months
    
    
    Year
    
    
    Three MonthsEnded
    
    
    Ended
    
    
    Ended03/31/11
    
    
    12/31/10
    
    
    03/31/10Balance, beginning of year
    
    $
    27,971
    
    
    $
    35,125
    
    
    $
    35,125Charge-offs:Consumer loans
    
    
    
    
    
    
    1,019
    
    
    
    342Commercial, financial & other
    
    
    136
    
    
    
    6,385
    
    
    
    1,521Land development loans  residential property
    
    
    157
    
    
    
    1,887
    
    
    
    1,292Land development loans  non-residential property
    
    
    
    
    
    
    36
    
    
    
    229Commercial real estate construction  residential property
    
    
    319
    
    
    
    10,046
    
    
    
    906Commercial real estate construction  non-residential
property
    
    
    58
    
    
    
    300
    
    
    
    36Commercial real estate mortgages
    
    
    795
    
    
    
    4,455
    
    
    
    558Residential real estate mortgages
    
    
    99
    
    
    
    276
    
    
    
    109Recoveries:Consumer loans
    
    
    8
    
    
    
    203
    
    
    
    23Commercial, financial & other
    
    
    11
    
    
    
    330
    
    
    
    15Land development loans  residential property
    
    
    89
    
    
    
    43
    
    
    
    9Land development loans  non-residential property
    
    
    
    
    
    
    
    
    
    
    Commercial real estate construction  residential property
    
    
    51
    
    
    
    1
    
    
    
    1Commercial real estate construction  non-residential
property
    
    
    
    
    
    
    
    
    
    
    Commercial real estate mortgages
    
    
    10
    
    
    
    622
    
    
    
    8Residential real estate mortgages
    
    
    
    
    
    
    73
    
    
    
    Net charge-offs (recoveries)
    
    
    1,395
    
    
    
    23,132
    
    
    
    4,937Provision for loan losses
    
    
    1,395
    
    
    
    15,978
    
    
    
    100Balance, end of period
    
    $
    27,971
    
    
    $
    27,971
    
    
    $
    30,288Allowance to total loans
    
    
    3.89
    %
    
    
    3.80
    %
    
    
    3.72
    %Allowance to nonperforming assets
    
    
    23.18
    %
    
    
    24.30
    %
    
    
    26.56
    %Net charge-offs to average loans
    
    
    0.19
    %
    
    
    2.94
    %
    
    
    0.60
    %
 Premises and Equipment.
 Other Real Estate.
 Number ofProperty Type
    
    Properties
    
    
    AmountSingle Family Homes
    
    
    21
    
    
    $
    1,539Multi-Family
    
    
    2
    
    
    
    550Condominium
    
    
    21
    
    
    
    1,341Vacant Land
    
    
    25
    
    
    
    11,187Commercial
    
    
    10
    
    
    
    3,490Office/Retail
    
    
    7
    
    
    
    4,013Total
    
    
    86
    
    
    $
    22,120
  Accrued Interest Receivable.
 45




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##### Table of Contents



Other Assets
 Deposits.
 03/31/11
    
    
    12/31/10
    
    
    03/31/10Non-interest bearing:Demand
    
    $
    95,075
    
    
    $
    88,267
    
    
    $
    86,407Interest bearing:Checking
    
    $
    71,853
    
    
    $
    73,107
    
    
    $
    79,566Money market
    
    
    56,274
    
    
    
    53,499
    
    
    
    57,864Savings
    
    
    43,101
    
    
    
    41,214
    
    
    
    44,992Time, under $100,000
    
    
    277,615
    
    
    
    291,478
    
    
    
    296,370Time, $100,000 and over
    
    
    250,235
    
    
    
    264,536
    
    
    
    286,818699,078
    
    
    
    723,834
    
    
    
    765,610Total deposits
    
    $
    794,153
    
    
    $
    812,101
    
    
    $
    852,017
     46




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##### Table of Contents



03/31/11
    
    
    12/31/10
    
    
    03/31/10Interest bearing checking
    
    $
    2,795
    
    
    $
    2,940
    
    
    $
    2,485Time, $100,000 and over
    
    
    3,496
    
    
    
    3,546
    
    
    
    4,368Total municipal deposits
    
    $
    6,291
    
    
    $
    6,486
    
    
    $
    6,853
 Federal Home Loan Bank Advances
 Accrued Interest Payable
 Other Liabilities
 Subordinated Debentures .
 47




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Capital
        48




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49




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PART I    FINANCIAL INFORMATION
 
  Interest Rate Sensitivity Analysis.
   50




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##### Table of Contents



Interest Rate Sensitivity Period1-90
    
    
    91-365
    
    
    1-5
    
    
    Over(In thousands)
    
    Days
    
    
    Days
    
    
    Years
    
    
    5 Years
    
    
    TotalEarning assetsFederal funds sold
    
    $
    55
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    55Interest bearing deposits with Banks
    
    
    52,814
    
    
    
    8,311
    
    
    
    34,676
    
    
    
    
    
    
    
    95,801Mortgage loans held for sale
    
    
    749
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    749Securities available for sale
    
    
    0
    
    
    
    5
    
    
    
    21
    
    
    
    53,091
    
    
    
    53,117Federal Home Loan Bank stock
    
    
    3,605
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,605Total loans, net of non-accrual
    
    
    142,286
    
    
    
    145,303
    
    
    
    333,045
    
    
    
    25,599
    
    
    
    646,233Total earning assets
    
    
    199,509
    
    
    
    153,619
    
    
    
    367,742
    
    
    
    78,690
    
    
    
    799,560Interest bearing liabilitiesTotal interest bearing deposits
    
    
    175,076
    
    
    
    361,222
    
    
    
    162,516
    
    
    
    263
    
    
    
    699,077Federal Home Loan Bank advances
    
    
    53,500
    
    
    
    
    
    
    
    10,168
    
    
    
    
    
    
    
    63,668Other Borrowings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Subordinated debentures
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000Total interest bearing liabilities
    
    
    238,576
    
    
    
    361,222
    
    
    
    172,684
    
    
    
    263
    
    
    
    772,745Net asset (liability) funding gap
    
    
    (39,067
    )
    
    
    (207,603
    )
    
    
    195,058
    
    
    
    78,427
    
    
    $
    26,815Cumulative net asset (liability) funding gap
    
    
    ($39,067
    )
    
    
    ($246,670
    )
    
    
    ($51,612
    )
    
    $
    26,815
 51




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##### Table of Contents



Liquidity.
   52




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##### Table of Contents



Payments Due By PeriodLess Than 1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    Over 5 Years
    
    
    TotalCertificates of deposit
    
    $
    439,338
    
    
    $
    75,945
    
    
    $
    9,091
    
    
    $
    3,476
    
    
    $
    527,850Long-term borrowings
    
    
    53,668
    
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    63,668Lease commitments
    
    
    522
    
    
    
    420
    
    
    
    161
    
    
    
    
    
    
    
    1,103Subordinated debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    10,000Totals
    
    $
    493,528
    
    
    $
    86,365
    
    
    $
    9,252
    
    
    $
    13,476
    
    
    $
    602,621
  Amount Of Commitment Expiration Per PeriodLess Than 1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    Over 5 Years
    
    
    TotalUnused loan commitments
    
    $
    23,108
    
    
    $
    7,178
    
    
    $
    4,225
    
    
    $
    7,059
    
    
    $
    41,570Standby letters of credit
    
    
    375
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    387Totals
    
    $
    23,483
    
    
    $
    7,190
    
    
    $
    4,225
    
    
    $
    7,059
    
    
    $
    41,957
 53




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##### Table of Contents



Item 4. Controls and Procedures
 Disclosure Controls and Procedures 
 Internal Controls Over Financial Reporting
 54




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##### 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
  55




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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.
 56




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##### Table of Contents



SIGNATURES
  Dearborn Bancorp, Inc.
(Registrant)/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  57




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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.
 58