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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934  Commission file number 000-24478. DEARBORN BANCORP, INC. 
  Michigan
    
    38-3073622(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)1360 Porter Street, Suite 200, Dearborn, MI
    
    48124(Address of principal executive office)
    
    (Zip Code)
 (313) 565-5700 
  N/A 
  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No o Indicate the number of shares outstanding for each of the issuers classes of
common stock, as of April 30, 2004. Class
    
    Shares OutstandingCommon Stock
    
    2,967,362
 Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the 1934 Securities and Exchange Act). Yes o No x




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DEARBORN BANCORP, INC.
INDEX PagePart I.
    
    
    
    Financial Information:Item 1.
    
    
    
    Financial StatementsThe following consolidated financial statements of Dearborn
Bancorp, Inc. and its subsidiary included in this report are:Independent Accountants Report
    
    
    3Consolidated Balance Sheets  March 31, 2004,
December 31, 2003 and March 31, 2003
    
    
    4Consolidated Statements of Income  For the Three
Months Ended March 31, 2004 and 2003
    
    
    5Consolidated Statements of Comprehensive Income   For
the Three Months Ended March 31, 2004 and 2003
    
    
    6Consolidated Statements of Cash Flows  For the
Three Months Ended March 31, 2004 and 2003
    
    
    7Notes to Consolidated Financial Statements
    
    
    8-11Item 2.
    
    
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations, Liquidity and Capital
    
    
    12-23Item 3.
    
    
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    24-26Item 4.
    
    
    
    Controls and Procedures
    
    
    27Part II.
    
    
    
    Other Information:Pursuant to SEC rules and regulations, the following item(s) are
included with the Form 10-Q Report:Item 6. Exhibits and Reports on Form 8-K
    
    
    28Pursuant to SEC rules and regulations, the following items are omitted
from this Form 10-Q as inapplicable or to which the answer is negative:Item 1. Legal ProceedingsItem 2. Changes in Securities and Use of ProceedsItem 3. Defaults upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5 Other InformationSIGNATURES
    
    
    
    
    29Section 302 Certification of CEOSection 302 Certification of CFOSection 906 CertificationSection 906 Certification
  2




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INDEPENDENT ACCOUNTANTS REPORT Board of Directors and Shareholders
Dearborn Bancorp, Inc.
Dearborn, Michigan We have reviewed the consolidated balance sheets of Dearborn Bancorp, Inc. as
of March 31, 2004 and 2003, the related consolidated statements of income and
comprehensive income for the three month periods then ended, and the related
consolidated statements of cash flows for the three month periods then ended.
These financial statements are the responsibility of the Corporations
management. We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with auditing standards generally accepted in the United States
of America, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express such
an opinion. Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with accounting principles generally accepted in the United States
of America. /s/ Crowe Chizek and Company LLC Grand Rapids, Michigan
April 20, 2004 3




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DEARBORN BANCORP, INC. AND SUBSIDIARY 
 CONSOLIDATED BALANCE SHEETS (unaudited) (Dollars, in thousands)
    
    03/31/04
    
    12/31/03
    
    03/31/03ASSETSCash and cash equivalentsCash and due from banks
    
    $
    9,149
    
    
    $
    5,172
    
    
    $
    7,510Federal funds sold
    
    
    11,751
    
    
    
    7,651
    
    
    
    12,385Interest bearing deposits with banks
    
    
    57
    
    
    
    8,325
    
    
    
    33,983Total cash and cash equivalents
    
    
    20,957
    
    
    
    21,148
    
    
    
    53,878Mortgage loans held for sale
    
    
    1,266
    
    
    
    1,505
    
    
    
    8,633Securities, available for sale
    
    
    12,521
    
    
    
    16,948
    
    
    
    28,866Federal Home Loan Bank stock
    
    
    1,086
    
    
    
    1,073
    
    
    
    1,033LoansLoans
    
    
    420,783
    
    
    
    400,958
    
    
    
    288,321Allowance for loan loss
    
    
    (4,632
    )
    
    
    (4,314
    )
    
    
    (3,109
    )Net loans
    
    
    416,151
    
    
    
    396,644
    
    
    
    285,212Premises and equipment, net
    
    
    8,323
    
    
    
    5,554
    
    
    
    5,596Accrued interest receivable
    
    
    1,525
    
    
    
    1,461
    
    
    
    1,279Other assets
    
    
    1,714
    
    
    
    1,742
    
    
    
    1,558Total assets
    
    $
    463,543
    
    
    $
    446,075
    
    
    $
    386,055LIABILITIESDepositsNon-interest bearing deposits
    
    $
    37,097
    
    
    $
    39,081
    
    
    $
    29,023Interest bearing deposits
    
    
    358,807
    
    
    
    340,538
    
    
    
    293,039Total deposits
    
    
    395,904
    
    
    
    379,619
    
    
    
    322,062Other liabilitiesFederal Home Loan Bank advances
    
    
    20,638
    
    
    
    20,638
    
    
    
    20,660Other liabilities
    
    
    490
    
    
    
    463
    
    
    
    1,119Accrued interest payable
    
    
    761
    
    
    
    754
    
    
    
    874Subordinated debentures
    
    
    10,000
    
    
    
    10,000
    
    
    
    10,000Total liabilities
    
    
    427,793
    
    
    
    411,474
    
    
    
    354,715STOCKHOLDERS EQUITYCommon stock - 5,000,000 shares authorized,
2,960,303 shares at 03/31/04, 2,942,602 shares at
12/31/03; and 2,896,078 shares at 03/31/03
    
    
    34,622
    
    
    
    34,451
    
    
    
    30,690Retained earnings
    
    
    1,302
    
    
    
    128
    
    
    
    580Accumulated other comprehensive income (loss)
    
    
    (174
    )
    
    
    22
    
    
    
    70Total stockholders equity
    
    
    35,750
    
    
    
    34,601
    
    
    
    31,340Total liabilities and stockholders equity
    
    $
    463,543
    
    
    $
    446,075
    
    
    $
    386,055
 The accompanying notes are an integral part of these consolidated statements. 4




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DEARBORN BANCORP, INC. AND SUBSIDIARY 
 CONSOLIDATED STATEMENTS OF INCOME (unaudited) Three Months Ended
    
    Three Months Ended(In thousands, except share and per share data)
    
    3/31/2004
    
    03/31/03Interest incomeInterest on loans
    
    $
    6,404
    
    
    $
    5,000Interest on securities, available for sale
    
    
    71
    
    
    
    199Interest on federal funds
    
    
    16
    
    
    
    40Interest on deposits with banks
    
    
    7
    
    
    
    78Total interest income
    
    
    6,498
    
    
    
    5,317Interest expenseInterest on deposits
    
    
    1,660
    
    
    
    1,953Interest on other borrowings
    
    
    231
    
    
    
    229Interest on subordinated debentures
    
    
    123
    
    
    
    123Total interest expense
    
    
    2,014
    
    
    
    2,305Net interest income
    
    
    4,484
    
    
    
    3,012Provision for loan losses
    
    
    224
    
    
    
    228Net interest income after provision for loan losses
    
    
    4,260
    
    
    
    2,784Non-interest incomeService charges on deposit accounts
    
    
    132
    
    
    
    103Fees for other services to customers
    
    
    12
    
    
    
    9Gain on the sale of loans
    
    
    143
    
    
    
    626Other income
    
    
    19
    
    
    
    13Total non-interest income
    
    
    306
    
    
    
    751Non-interest expensesSalaries and employee benefits
    
    
    1,817
    
    
    
    1,486Commissions on the origination of loans
    
    
    63
    
    
    
    291Occupancy and equipment expense
    
    
    359
    
    
    
    322Advertising and marketing
    
    
    77
    
    
    
    82Stationery and supplies
    
    
    71
    
    
    
    101Professional services
    
    
    115
    
    
    
    98Data processing
    
    
    71
    
    
    
    64Other operating expenses
    
    
    218
    
    
    
    213Total non-interest expenses
    
    
    2,791
    
    
    
    2,657Income before income tax provision
    
    
    1,775
    
    
    
    878Income tax provision
    
    
    601
    
    
    
    298Net income
    
    $
    1,174
    
    
    $
    580Per share data:Net income  basic
    
    
    $0.40
    
    
    
    $0.20Net income  diluted
    
    
    $0.36
    
    
    
    $0.19Weighted average number of shares outstanding  basic
    
    
    2,952,870
    
    
    
    2,887,525Weighted average number of shares outstanding  diluted
    
    
    3,255,853
    
    
    
    3,119,441
 The accompanying notes are an integral part of these consolidated statements. 5




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DEARBORN BANCORP, INC. AND SUBSIDIARY 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) Three Months Ended
    
    Three Months Ended(In thousands)
    
    03/31/04
    
    03/31/03Net income
    
    $
    1,174
    
    
    $
    580Other comprehensive loss, net of taxUnrealized losses on securitiesUnrealized holding losses arising during period
    
    
    (296
    )
    
    
    (15
    )Tax effects
    
    
    100
    
    
    
    5Other comprehensive loss
    
    
    (196
    )
    
    
    (10
    )Comprehensive income
    
    $
    978
    
    
    $
    570
 The accompanying notes are an integral part of these consolidated statements. 6




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DEARBORN BANCORP, INC. AND SUBSIDIARY 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Three Months Ended(In thousands)
    
    3/31/04
    
    3/31/03Cash flows from operating activitiesInterest and fees received
    
    $
    6,434
    
    
    $
    5,298Interest paid
    
    
    (2,007
    )
    
    
    (2,040
    )Taxes paid
    
    
    
    
    
    
    (100
    )Proceeds from sale of mortgages held for sale
    
    
    10,383
    
    
    
    43,763Origination of mortgages held for sale
    
    
    (10,001
    )
    
    
    (41,918
    )Cash paid to suppliers and employees
    
    
    (2,949
    )
    
    
    (2,732
    )Net cash provided by operating activities
    
    
    1,860
    
    
    
    2,271Cash flows from investing activitiesProceeds from maturities of securities available for sale
    
    
    4,000
    
    
    
    4,000Proceeds from repayments of securities available for sale
    
    
    121
    
    
    
    232Purchases of securities available for sale
    
    
    
    
    
    
    (10,913
    )Purchases of Federal Home Loan Bank stock
    
    
    (13
    )
    
    
    Increase in loans, net of payments received
    
    
    (19,731
    )
    
    
    (20,793
    )Purchases of property and equipment
    
    
    (2,884
    )
    
    
    (424
    )Net cash used in investing activities
    
    
    (18,507
    )
    
    
    (27,898
    )Cash flows from financing activitiesNet decrease in non-interest bearing deposits
    
    
    (1,984
    )
    
    
    (3,434
    )Net increase in interest bearing deposits
    
    
    18,269
    
    
    
    63,410Stock option exercise
    
    
    171
    
    
    
    79Net cash provided by financing activities
    
    
    16,456
    
    
    
    60,055Increase (decrease) in cash and cash equivalents
    
    
    (191
    )
    
    
    34,428Cash and cash equivalents at the beginning of the period
    
    
    21,148
    
    
    
    19,450Cash and cash equivalents at the end of the period
    
    $
    20,957
    
    
    $
    53,878Reconciliation of net income to net cash provided by
operating activitiesNet income
    
    $
    1,174
    
    
    $
    580Adjustments to reconcile net income to net cash
provided by operating activitiesProvision for loan losses
    
    
    224
    
    
    
    228Depreciation and amortization expense
    
    
    115
    
    
    
    109Accretion of discount on investment securities
    
    
    (1
    )
    
    
    (2
    )Amortization of premium on investment securities
    
    
    11
    
    
    
    18Decrease in mortgages held for sale
    
    
    239
    
    
    
    1,219Increase in interest receivable
    
    
    (64
    )
    
    
    (19
    )Increase in interest payable
    
    
    7
    
    
    
    265(Increase) decrease in other assets
    
    
    128
    
    
    
    (192
    )Increase in other liabilities
    
    
    27
    
    
    
    65Net cash provided by operating activities
    
    $
    1,860
    
    
    $
    2,271
 The accompanying notes are an integral part of these consolidated financial
statements. 7




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




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##### Table of Contents



A.
    
    Accounting and Reporting Policies (continued)Employee compensation expense under stock option plans is reported using
the intrinsic value method. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise price
equal to or greater than the market price of the underlying common stock
at date of grant. The following table illustrates the effect on net
income and earnings per share if expense was measured using the fair
value recognition provisions of FASB Statement No. 123, Accounting for
Stock-based Compensation (in thousands, except share and per share
data). For the Three Months Ended March 31,2004
    
    2003Net incomeAs reported
    
    $
    1,174
    
    
    $
    580Less: stock-based compensation expense
determined under fair value based method
    
    
    9
    
    
    
    345Pro forma
    
    $
    1,165
    
    
    $
    235Basic income per shareAs reported
    
    $
    0.40
    
    
    $
    0.20Pro forma
    
    
    0.39
    
    
    
    0.08Diluted income per shareAs reported
    
    
    0.36
    
    
    
    0.19Pro forma
    
    
    0.36
    
    
    
    0.08
  Stock options vest after a six month period from date of grant. No
options were granted in 2004. The pro forma effects are computed using
option pricing models and the assumptions for the 2003 grants were a
risk-free interest rate of 3.55%, expected life of seven years, and
expected volatility of 25.55%. 9




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##### Table of Contents



B.
    
    Securities Available For SaleThe amortized cost and estimated market value of securities available for
sale are as follows (in thousands): March 31, 2004Gross
    
    Gross
    
    EstimatedAmortized
    
    Unrealized
    
    Unrealized
    
    MarketCost
    
    Gains
    
    Losses
    
    ValueMortgage backed securities
    
    $
    1,084
    
    
    $
    41
    
    
    $
    
    
    
    $
    1,125Corporate debt securities
    
    
    7,700
    
    
    
    
    
    
    
    
    
    
    
    7,700FHLMC preferred stock
    
    
    4,000
    
    
    
    
    
    
    
    (304
    )
    
    
    3,696Totals
    
    $
    12,784
    
    
    $
    41
    
    
    $
    (304
    )
    
    $
    12,521
 December 31, 2003Gross
    
    Gross
    
    EstimatedAmortized
    
    Unrealized
    
    Unrealized
    
    MarketCost
    
    Gains
    
    Losses
    
    ValueUS Treasury securities
    
    $
    2,011
    
    
    $
    2
    
    
    $
    
    
    
    $
    2,013Mortgage backed securities
    
    
    1,194
    
    
    
    31
    
    
    
    
    
    
    
    1,225Corporate debt securities
    
    
    9,710
    
    
    
    
    
    
    
    
    
    
    
    9,710FHLMC preferred stock
    
    
    4,000
    
    
    
    
    
    
    
    
    
    
    
    4,000Totals
    
    $
    16,915
    
    
    $
    33
    
    
    $
    
    
    
    $
    16,948
  The amortized cost and estimated market value of securities available
for sale at March 31, 2004 by contractual maturity are shown below (in
thousands): EstimatedAmortized
    
    MarketCost
    
    ValueDue in over ten years
    
    $
    7,700
    
    
    $
    7,700Mortgage backed securities
    
    
    1,084
    
    
    
    1,125FHLMC preferred stock
    
    
    4,000
    
    
    
    3,696Totals
    
    $
    12,784
    
    
    $
    12,521
  The entire portfolio has a net unrealized loss of $263,000 at March 31,
2004. The Bank holds a floating rate issue of preferred stock of the
Federal Home Loan Mortgage Corporation that has an unrealized loss of
$304,000. This unrealized loss is primarily caused by the floating rate
characteristic of this security and its market value is expected to
improve as interest rates rise. The Corporation does not expect to
realize a loss as a
result of holding this security. The Corporation does not hold any
securities in the Held to Maturity category nor does the Corporation
hold or utilize derivatives. 10




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##### Table of Contents



C.
    
    Stock Option Plan  Options to buy common stock are granted to officers and employees under a
Stock Option Plan which provides for issue of up to 712,186 shares.
Exercise price is the market price at date of grant. The maximum option
term is ten years, and options vest fully after six months from the date
of grant. If an option expires or terminates without having been
exercised, such option becomes available for future grant under the Plan.  A summary of the option activity for the three months ended March 31,
2004 is as follows: WeightedAvailable
    
    
    
    
    
    AverageFor
    
    Options
    
    ExerciseGrant
    
    Outstanding
    
    PriceOutstanding at January 1, 2004
    
    
    
    
    
    
    562,816
    
    
    $
    9.95Exercised
    
    
    
    
    
    
    (17,701
    )
    
    
    9.92Outstanding at March 31, 2004
    
    
    
    
    
    
    545,115
    
    
    $
    9.96
  For the options outstanding at March 31, 2004, the range of exercise
prices was $5.08 to $19.63 per share with a weighted-average remaining
contractual term of 6.8 years. At March 31, 2004, 545,115 options were
exercisable at weighted average exercise price of $9.96 per share. There
were no antidilutive shares for the quarters ended March 31, 2003 and
2002. 11




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PART I    FINANCIAL INFORMATION 
 ITEM 2.    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis are intended to address significant
factors affecting the financial condition and results of operations of the
Corporation. The discussion provides a more comprehensive review of the
financial position and operating results than can be obtained from a reading
of the financial statements and footnotes presented elsewhere in this report. Managements Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements that are based on managements
beliefs, assumptions, current expectations, estimates and projections about the
financial services industry, the economy, and about the Corporation and Bank.
Words such as anticipates, believes, estimates, expects, forecasts,
intends, is likely, plans, projects, variations of such words and
similar expressions are intended to identify such forward- looking statements.
These statements are not guarantees of future performance and involve certain
risks, uncertainties and assumptions (Future Factors) that are difficult to
predict with regard to timing, extent, likelihood and degree of occurrence.
Therefore, actual results and outcomes may materially differ from what may be
expressed or forecasted in such forward-looking statements. The Corporation
undertakes no obligation to update, amend or clarify forward-looking
statements, whether as a result of new information, future events (whether
anticipated or unanticipated), or otherwise. Future Factors include changes in interest rates and interest rate
relationships; demand for products and services; the degree of competition by
traditional and non-traditional competitors; changes in banking regulation;
changes in tax laws; changes in prices, levies and assessments; the impact of
technological advances; governmental and regulatory policy changes; the
outcomes of contingencies; trends in customer behavior as well as their ability
to repay loans; and changes in the national and local economy. These are
representative of the Future Factors that could cause a difference between an
ultimate actual outcome and a preceding forward-looking statement. 12




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General The Corporation was formed in 1992 and the Bank was formed in 1993.
Subsequently, the Bank has opened offices in several communities in
Southeastern Michigan. The date opened, branch location and branch type of
each branch is listed below: Date Opened
    
    Location
    
    Type of officeFebruary 1994
    
    22290 Michigan Avenue
Dearborn, Michigan 48124
    
    Full service retail branch with ATM
Regional lending centerDecember 1995
    
    24935 West Warren Avenue
Dearborn Heights, Michigan 48127
    
    Full service retail branchAugust 1997
    
    44623 Five Mile Road
Plymouth, Michigan 48170
    
    Full service retail branch with ATMMay 2001
    
    1325 North Canton Center Road
Canton, Michigan 48187
    
    Full service retail branch with ATMDecember 2001
    
    45000 River Ridge Drive, Suite 110
Clinton Township, Michigan 48038
    
    Regional lending centerNovember 2002
    
    19100 Hall Road
Clinton Township, Michigan 48038
    
    Full service retail branch with ATMFebruary 2003
    
    12820 Fort Street
Southgate, Michigan 48195
    
    Full service retail branch with ATMMay 2003
    
    3201 University Drive, Suite 180
Auburn Hills, Michigan 48326
    
    Full service retail branch
Regional lending center
 The Bank has also formed three subsidiaries that offer additional or
specialized services to the Banks customers. The Banks subsidiaries, their
formation date and the type of services offered are listed below: Date Formed
    
    Name
    
    Services OfferedAugust 1997
    
    Community Bank Insurance Agency,
Inc.
    
    Limited insurance related activitiesMay 2001
    
    Community Bank Mortgage, Inc.
    
    Origination of commercial and
residential mortgage loansMarch 2002
    
    Community Bank Audit Services, Inc.
    
    Internal auditing and compliance
services for financial institutions
 13




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Results of Operations The Corporation reported net income of $1,174,000 for the three month period
ended March 31, 2004, compared to net income of $580,000 for the three month
period ended March 31, 2003. The increase in net income was primarily due to
the improvement in net interest income. The improvement in net interest income
was primarily due to the increase in the commercial real estate loan and other
commercial loan portfolios and the decreasing cost of deposits during the
period. The increase in loans was partially funded with short term investments
such as interest bearing deposits with banks, federal funds sold and floating
rate securities, which carry a lower yield than loans. Net Interest Income 2004 Compared to 2003.As noted on the two charts on the following pages, net
interest income for the three month period ended March 31, 2004 was $4,484,000,
compared to $3,012,000 for the same period ended March 31, 2003, an increase of
$1,472,000 or 49%. This increase was caused primarily by the decreasing cost
of interest bearing liabilities and the redeployment of interest bearing
deposits with banks, federal funds sold and securities, available for sale into
loans. The Corporations interest rate spread was 3.85% for the three month
period ended March 31, 2004, compared to 3.08% for the same period in 2003.
The Corporations interest rate margin was 4.13% for the three month period
ended March 31, 2004, compared to 3.52% for the same period in 2003. Average Balances, Interest Rates and Yields.Net interest income is affected
by the difference (interest rate spread) between rates of interest earned on
interest-earning assets and rates of interest paid on interest-bearing
liabilities and the relative amounts of interest-bearing liabilities and
interest-earning assets. When the total of interest-earning assets
approximates or exceeds the total of interest-bearing liabilities, any positive
interest rate spread will generate net interest income. Financial institutions
have traditionally used interest rate spreads as a measure of net interest
income. Another indication of an institutions net interest income is its net
yield on interest-earning assets or net interest margin, which is net
interest income divided by average interest-earning assets. 14




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##### Table of Contents



The following table sets forth certain information relating to the
Corporations consolidated average interest-earning assets and interest-bearing
liabilities and reflects the average yield on assets and average cost of
liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average daily balance of assets or
liabilities, respectively, for the periods presented. During the periods
indicated, non-accruing loans, if any, are included in the loan category. Three months ended
    
    Three months endedMarch 31, 2004
    
    March 31, 2003Average
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    Average(In thousands)
    
    Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    RateAssetsInterest bearing deposits with banks
    
    $
    2,775
    
    
    $
    7
    
    
    
    1.01
    %
    
    $
    27,021
    
    
    $
    78
    
    
    
    1.17
    %Federal funds sold
    
    
    7,518
    
    
    
    16
    
    
    
    0.86
    %
    
    
    13,855
    
    
    
    40
    
    
    
    1.17
    %Securities, available for sale
    
    
    14,838
    
    
    
    71
    
    
    
    1.92
    %
    
    
    25,173
    
    
    
    199
    
    
    
    3.21
    %Loans
    
    
    411,413
    
    
    
    6,404
    
    
    
    6.26
    %
    
    
    280,628
    
    
    
    5,000
    
    
    
    7.23
    %Sub-total earning assets
    
    
    436,544
    
    
    
    6,498
    
    
    
    5.99
    %
    
    
    346,677
    
    
    
    5,317
    
    
    
    6.22
    %Other assets
    
    
    15,632
    
    
    
    
    
    
    
    
    
    
    
    19,907Total assets
    
    $
    452,176
    
    
    
    
    
    
    
    
    
    
    $
    366,584Liabilities and stockholders equityInterest bearing deposits
    
    $
    348,571
    
    
    $
    1,660
    
    
    
    1.92
    %
    
    $
    266,687
    
    
    $
    1,953
    
    
    
    2.97
    %Other borrowings
    
    
    20,638
    
    
    
    231
    
    
    
    4.50
    %
    
    
    20,660
    
    
    
    229
    
    
    
    4.50
    %Subordinated debentures
    
    
    10,000
    
    
    
    123
    
    
    
    4.95
    %
    
    
    10,000
    
    
    
    123
    
    
    
    4.99
    %Sub-total interest bearing liabilities
    
    
    379,209
    
    
    
    2,014
    
    
    
    2.14
    %
    
    
    297,347
    
    
    
    2,305
    
    
    
    3.14
    %Non-interest bearing deposits
    
    
    36,402
    
    
    
    
    
    
    
    
    
    
    
    36,639Other liabilities
    
    
    1,081
    
    
    
    
    
    
    
    
    
    
    
    1,476Stockholders equity
    
    
    35,484
    
    
    
    
    
    
    
    
    
    
    
    31,122Total liabilities and stockholders
equity
    
    $
    452,176
    
    
    
    
    
    
    
    
    
    
    $
    366,584Net interest income
    
    
    
    
    
    $
    4,484
    
    
    
    
    
    
    
    
    
    
    $
    3,012Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.85
    %
    
    
    
    
    
    
    
    
    
    
    3.08
    %Net interest margin on earning assets
    
    
    
    
    
    
    
    
    
    
    4.13
    %
    
    
    
    
    
    
    
    
    
    
    3.52
    %
 15




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##### Table of Contents



Rate/Volume Analysis.The following table analyzes net interest income in
terms of changes in the volume of interest-earning assets and interest-bearing
liabilities and changes in yields and rates. The table reflects the extent to
which changes in the interest income and interest expense are attributable to
changes in volume (changes in volume multiplied by prior year rate) and changes
in rate (changes in rate multiplied by prior year volume). Changes
attributable to the combined impact of volume and rate have been allocated
proportionately to changes due to volume and changes due to rate. Three Months Ended March 31, 2004/2003Change in Interest Due to:Average
    
    Average
    
    Net(In thousands)
    
    Balance
    
    Rate
    
    ChangeAssetsInterest bearing deposits with banks
    
    $
    (61
    )
    
    $
    (10
    )
    
    $
    (71
    )Federal funds sold
    
    
    (13
    )
    
    
    (11
    )
    
    
    (24
    )Securities, available for sale
    
    
    (48
    )
    
    
    (80
    )
    
    
    (128
    )Loans
    
    
    2,072
    
    
    
    (668
    )
    
    
    1,404Total earning assets
    
    $
    1,950
    
    
    $
    (769
    )
    
    $
    1,181LiabilitiesInterest bearing deposits
    
    $
    400
    
    
    $
    (693
    )
    
    $
    (293
    )Other borrowings
    
    
    2
    
    
    
    
    
    
    
    2Subordinated debentures
    
    
    1
    
    
    
    (1
    )
    
    
    Total interest bearing liabilities
    
    $
    403
    
    
    $
    (694
    )
    
    $
    (291
    )Net interest income
    
    
    
    
    
    
    
    
    
    $
    1,472Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    0.77
    %Net interest margin on earning assets
    
    
    
    
    
    
    
    
    
    
    0.61
    %
 Provision for Loan Losses 2004 Compared to 2003.The provision for loan losses was $224,000 for the
three month period ended March 31, 2004, compared to $228,000 for the same
period in 2003, a decrease of $4,000 or 2%. The provision for loan losses for
the three month period ended March 31, 2004 is based on the internal analysis
of the adequacy of the allowance for loan losses. The provision for loan
losses was based upon managements assessment of relevant factors, including
types and amounts of non-performing loans, historical and anticipated loss
experience on such types of loans, and current economic conditions. 16




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##### Table of Contents



Non-interest Income 2004 Compared to 2003.Non-interest income was $306,000 for the three month
period ended March 31, 2004, compared to $751,000 for the same period in 2003,
a decrease of $445,000 or 59% for period. The decrease was primarily due to
the decrease in the gain on the sale of loans during the period. The volume of
mortgage loans sold decreased during the period as a result of increased
interest rates and a decrease in the size of the mortgage origination staff.
Management expects the gain on sale of loans to continue at current levels
during 2004. Non-interest Expense 2004 Compared to 2003.Non-interest expense was $2,791,000 for the three month
period ended March 31, 2003, compared to $2,657,000 for the same period in
2003, an increase of $134,000 or 5% for the period. The largest component of
non-interest expense was salaries and employee benefits which amounted to
$1,817,000 for the three month period ended March 31, 2004, compared to
$1,486,000 for the same period in 2003. The primary factors for the increase
in salaries and benefits expense were the addition of one branch office in May
2003 and the expansion of the commercial lending and operations departments.
As of March 31, 2004, the number of full time equivalent employees was 113
compared to 106 as of March 31, 2003. Salaries and employee benefits will
continue to increase as a result of general staff increases. Commissions on the origination of loans amounted to $63,000 for the three
months ended March 31, 2004, compared to $291,000 for the same period in 2003,
a decrease of $228,000 or 78%. The primary reason for the decrease in the
commissions on the origination of loans was the decrease in the volume of loans
originated during the period. Management expects the commissions paid on the
origination of loans to continue at current levels during 2004. The second largest component of non-interest expense was occupancy and
equipment expense. Occupancy and equipment expense amounted to $359,000 for
the three month period ended March 31, 2004, compared to $322,000 for the same
period in 2003, an increase of $37,000 or 11%. The primary factor in the
increase in occupancy and equipment expense was the opening of the regional
lending center in Auburn Hills, Michigan. Income Tax Provision 2004 Compared to 2003.The income tax expense was $601,000 for the three month
period ended March 31, 2004, compared to $298,000 for the same period in 2003,
an increase of $303,000 or 102% for the period. The increase was primarily a
result of increased pre-tax income. 17




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##### Table of Contents



Comparison of Financial Condition at March 31, 2004 and December 31, 2003 Assets.Total assets at March 31, 2004 were $463,543,000 compared to
$446,075,000 at December 31, 2003, an increase of $17,468,000 or 4%. The
increase was primarily due to the increase in loans during the period. Federal Funds Sold.Total federal funds sold at March 31, 2004 were
$11,751,000 compared to $7,651,000 at December 31, 2003, an increase of
$4,100,000 or 54%. The increase was primarily due to the short term deployment
of funds that were received as a result of an increase in deposits. Available
funds are deployed into federal funds sold until they can be utilized to fund
loan volume. Interest bearing deposits with banks.Total interest bearing deposits with
banks at March 31, 2004 were $57,000 compared to $8,325,000 at December 31,
2003, a decrease of $8,268,000 or 99%. This investment was established to
provide the Corporation with an alternate short term investment option. This
short term investment is a variable-rate certificate of deposit with the
Federal Home Loan Bank of Indianapolis that carries a similar rate of return to
federal funds sold. Mortgage Loans Held for Sale.Total mortgage loans held for sale at March 31,
2004 were $1,266,000 compared to $1,505,000 at December 31, 2003, a decrease of
$239,000 or 16%. This decrease was a result of the decrease in the level of
residential real estate mortgage loans waiting to be purchased by mortgage
correspondents. Securities  Available for Sale.Total securities, available for sale, at March
31, 2004 were $12,521,000 compared to $16,948,000 at December 31, 2003, a
decrease of $4,427,000 or 26%. The decrease was due to the sale of securities,
available for sale during the second and third quarters of 2003. The funds
from the sale of these securities were utilized to fund loan volume. Please refer to Note B of the Notes to Consolidated Financial Statements for
the amortized cost and estimated market value of securities, available for
sale. Federal Home Loan Bank Stock.Federal Home Loan Bank stock was valued at
$1,086,000 at March 31, 2004, compared to $1,073,000 at December 31, 2003, an
increase of $13,000 or 1%. 18




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##### Table of Contents



Loans.Total loans at March 31, 2004 were $420,783,000 compared to
$400,958,000 at December 31, 2003, an increase of $19,825,000 or 5%. The
increase was primarily due to the continued expansion of the commercial
lending department during the past twelve months. This expansion included the
addition of two experienced loan officers during the last twelve months.
Major categories of loans included in the loan portfolio are as follows (in
thousands): 03/31/04
    
    12/31/03
    
    03/31/03Consumer loans
    
    $
    25,822
    
    
    $
    25,200
    
    
    $
    21,408Commercial, financial, & other
    
    
    70,190
    
    
    
    68,922
    
    
    
    54,967Commercial real estate construction
    
    
    55,084
    
    
    
    50,087
    
    
    
    33,458Commercial real estate mortgages
    
    
    223,809
    
    
    
    208,305
    
    
    
    146,745Residential real estate mortgages
    
    
    45,878
    
    
    
    48,444
    
    
    
    31,743420,783
    
    
    
    400,958
    
    
    
    288,321Allowance for loan losses
    
    
    (4,632
    )
    
    
    (4,314
    )
    
    
    (3,109
    )$
    416,151
    
    
    $
    396,644
    
    
    $
    285,212
 The following is a summary of non-performing assets and problems loans (in
thousands): 03/31/04
    
    12/31/03
    
    03/31/03Over 90 days past due and still accruing
    
    $
    384
    
    
    $
    19
    
    
    $
    41Non-accrual loans
    
    
    1,691
    
    
    
    2,056
    
    
    
    2,634Renegotiated loans
    
    
    
    
    
    
    
    
    
    
    Other real estate owned
    
    
    
    
    
    
    
    
    
    
    $
    2,075
    
    
    $
    2,075
    
    
    $
    2,675
 Non-accrual loans at March 31, 2004 were $1,691,000, of which, $791,000 was
related to one commercial loan relationship that is well secured. The
remaining non-accrual loans consisted of one slow paying commercial loan with
a balance of $176,000, one slow paying home equity loan with a balance of
$28,000, one slow paying construction loan with a balance of $268,000 and
three well-secured residential mortgage loans with balances of $212,000,
$124,000 and $92,000. Allowance for Loan Losses.The allowance for loan losses was $4,632,000 at
March 31, 2004 compared to $4,314,000 at December 31, 2003, an increase of
$318,000 or 7%. The increase resulted from provisions recorded during the
quarter and a net recovery of $94,000 and responds to the growth of the loan
portfolio during the three months ended March 31, 2004 as well as the mix of
loans and levels of nonperforming loans. The allowance for loan losses was
based upon managements assessment of relevant factors, including loan growth,
types and amounts of non-performing loans, historical and anticipated loss
experience on such types of loans, and current economic conditions. 19




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##### Table of Contents



The following is an analysis of the allowance for loan losses (in thousands): Quarter Ended
    
    Year Ended
    
    Quarter Ended03/31/04
    
    12/31/03
    
    03/31/03Balance, beginning of year
    
    $
    4,314
    
    
    $
    2,875
    
    
    $
    2,875Charge-offs:Consumer loans
    
    
    (5
    )
    
    
    (38
    )
    
    
    (5
    )Commercial, financial & other
    
    
    
    
    
    
    (141
    )
    
    
    Commercial real estate construction
    
    
    
    
    
    
    (50
    )
    
    
    Commercial real estate mortgages
    
    
    
    
    
    
    (124
    )
    
    
    Recoveries:Consumer loans
    
    
    
    
    
    
    13
    
    
    
    2Commercial, financial & other
    
    
    38
    
    
    
    30
    
    
    
    9Commercial real estate construction
    
    
    
    
    
    
    50
    
    
    
    Commercial real estate mortgages
    
    
    61
    
    
    
    
    
    
    
    Net (charge-offs)/recoveries
    
    
    94
    
    
    
    (260
    )
    
    
    6Additions charged to operations
    
    
    224
    
    
    
    1,699
    
    
    
    228Balance, end of period
    
    $
    4,632
    
    
    $
    4,314
    
    
    $
    3,109Allowance to total loans
    
    
    1.10
    %
    
    
    1.08
    %
    
    
    1.08
    %Allowance to nonperforming assets
    
    
    223.23
    %
    
    
    207.90
    %
    
    
    116.22
    %Net (charge-offs)/recoveries to average loans
    
    
    (0.02
    %)
    
    
    0.08
    %
    
    
    0.00
    %
 Premises and Equipment.Bank premises and equipment at March 31, 2004 was
$8,323,000 compared to $5,554,000 at December 31, 2003, an increase of
$2,769,000 or 50 %. The increase in premises and equipment was primarily due
to the purchase and renovation of the Banks operation center in Allen Park,
Michigan. Accrued Interest Receivable.Accrued interest receivable at March 31, 2004 was
$1,525,000 compared to $1,461,000 at December 31, 2003, an increase of $64,000
or 4%. The increase was primarily due to the increase in the Banks loan
portfolio. Other Assets. Other assets at March 31, 2004 were $1,714,000 compared to
$1,742,000 at December 31, 2003, a decrease of $28,000 or 2%. The increase was
primarily due to changes in deferred tax assets. 20




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##### Table of Contents



Deposits.Total deposits at March 31, 2004 were $395,904,000 compared to
$379,619,000 at December 31, 2003, an increase of $16,285,000 or 4%. The
following is a summary of the distribution of deposits (in thousands): 03/31/04
    
    12/31/03
    
    03/31/03Non-interest bearing:Demand
    
    $
    37,097
    
    
    $
    39,081
    
    
    $
    29,023Interest bearing:Checking
    
    $
    20,634
    
    
    $
    24,069
    
    
    $
    24,310Money market
    
    
    12,785
    
    
    
    10,998
    
    
    
    12,417Savings
    
    
    115,232
    
    
    
    126,596
    
    
    
    82,774Time, under $100,000
    
    
    75,499
    
    
    
    65,120
    
    
    
    85,140Time, $100,000 and over
    
    
    134,657
    
    
    
    113,755
    
    
    
    88,398358,807
    
    
    
    340,538
    
    
    
    293,039Total deposits
    
    $
    395,904
    
    
    $
    379,619
    
    
    $
    322,062
 Management continues to implement a strategy to change the mix of the deposit
portfolio by focusing more heavily on savings and institutional deposits. The
increase in deposits was primarily due to normal business development,
marketing, telemarketing, referral programs and growth strategies which
included a promotion that celebrated the Banks 10th Anniversary during March
2004, which targeted time deposit growth. Management expects deposits to
continue to grow at a similar rate during the remainder of 2004. The Bank has enacted a strategy to utilize public funds to a higher degree.
The Bank will also utilize brokered deposits. The Bank has designated a public
funds officer to coordinate and manage these efforts. Public funds consist of
interest checking and time deposits of local governmental units. They are the
result of strong relationships between the Bank and the communities in the
Banks marketing area and are considered by the Bank to be core deposits. The
following is a summary of the distribution of municipal deposits: 03/31/04
    
    12/31/03
    
    03/31/03Interest bearing checking
    
    $
    10,468
    
    
    $
    14,419
    
    
    $
    15,623Time, $100,000 and over
    
    
    61,735
    
    
    
    46,580
    
    
    
    21,506Total municipal deposits
    
    $
    72,203
    
    
    $
    60,999
    
    
    $
    37,129
 Brokered deposits are included in the Time, $100,000 and over category.
Brokered deposits were $2,380,000, $1,330,000 and $0 at March 31, 2004,
December 31, 2003 and March 31, 2003, respectively. 21




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##### Table of Contents



Federal Home Loan Bank Advances. Federal Home Loan Bank advances were
$20,638,000 at March 31, 2004 and December 31, 2003. Other Liabilities. Other liabilities at March 31, 2004 were $490,000 compared
to $463,000 at December 31, 2003, an increase of $27,000 or 6%. The increase
was primarily due to the increase in expenses payable during the period. Accrued Interest Payable. Accrued interest payable at March 31, 2004 was
$761,000 compared to $754,000 at December 31, 2003, an increase of $7,000 or
1%. The increase was primarily due to the increasing amount of interest
bearing deposits during the period. Subordinated Debentures. Subordinated debentures were $10,000,000 at March 31,
2004 and December 31, 2003.On December 19, 2002, the Corporation issued
$10,000,000 of floating rate obligated mandatory redeemable securities through
a special purpose entity as part of a pooled offering. The securities have a
term of thirty years. The Corporation may redeem the securities after five
years at face value. They are considered to be Tier 1 capital for regulatory
capital purposes. The funds from the issue of these securities were invested
into securities available for sale until they can be invested into the Bank
subsidiary to allow for additional growth. Debt issue costs of $300,000 have
been capitalized and are being amortized over the term of the securities.
Unamortized debt issuance costs were $287,000 at March 31, 2004. 22




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##### Table of Contents



Capital Stockholders equity at March 31, 2004 was $35,750,000 compared to $34,601,000
as of December 31, 2003, an increase of $1,149,000 or 3%. 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, 2004Total capital
(to risk weighted assets)Consolidated
    
    $
    50,355
    
    
    
    11.59
    %
    
    $
    34,766
    
    
    
    8.00
    %
    
    $
    43,457
    
    
    
    10.00
    %Bank
    
    
    45,225
    
    
    
    10.52
    %
    
    
    34,393
    
    
    
    8.00
    %
    
    
    42,991
    
    
    
    10.00
    %Tier 1 capital
(to risk weighted assets)Consolidated
    
    
    45,723
    
    
    
    10.52
    %
    
    
    17,383
    
    
    
    4.00
    %
    
    
    26,074
    
    
    
    6.00
    %Bank
    
    
    40,593
    
    
    
    9.44
    %
    
    
    17,197
    
    
    
    4.00
    %
    
    
    25,795
    
    
    
    6.00
    %Tier 1 capital
(to average assets)Consolidated
    
    
    45,723
    
    
    
    10.11
    %
    
    
    18,087
    
    
    
    4.00
    %
    
    
    22,609
    
    
    
    5.00
    %Bank
    
    
    40,593
    
    
    
    9.10
    %
    
    
    17,836
    
    
    
    4.00
    %
    
    
    22,295
    
    
    
    5.00
    %As of December 31, 2003Total capital
(to risk weighted assets)Consolidated
    
    $
    48,893
    
    
    
    11.80
    %
    
    $
    33,237
    
    
    
    8.00
    %
    
    $
    41,547
    
    
    
    10.00
    %Bank
    
    
    42,763
    
    
    
    10.50
    %
    
    
    32,701
    
    
    
    8.00
    %
    
    
    40,877
    
    
    
    10.00
    %Tier 1 capital
(to risk weighted assets)Consolidated
    
    
    44,579
    
    
    
    10.70
    %
    

    
    16,639
    
    
    
    4.00
    %
    
    
    24,928
    
    
    
    6.00
    %Bank
    
    
    38,449
    
    
    
    9.40
    %
    
    
    16,351
    
    
    
    4.00
    %
    
    
    24,526
    
    
    
    6.00
    %Tier 1 capital
(to average assets)Consolidated
    
    
    44,579
    
    
    
    10.20
    %
    
    
    17,460
    
    
    
    4.00
    %
    
    
    21,825
    
    
    
    5.00
    %Bank
    
    
    38,449
    
    
    
    9.00
    %
    
    
    17,113
    
    
    
    4.00
    %
    
    
    21,391
    
    
    
    5.00
    %
 Based on the respective regulatory capital ratios at March 31, 2004 and
December 31, 2003, the Corporation and Bank are considered well capitalized. 23




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PART I    FINANCIAL INFORMATION 
 ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Sensitivity Analysis.The Corporation has sought to manage its
exposure to changes in interest rates by matching the effective maturities or
repricing characteristics of the Corporations interest-earning assets and
interest-bearing liabilities. The matching of the assets and liabilities may
be analyzed by examining the extent to which the assets and liabilities are
interest rate sensitive and by monitoring the expected effects of interest rate
changes on net interest income. An asset or liability is interest rate sensitive within a specific time period
if it will mature or reprice within that time period. If the Corporations
assets mature or reprice more quickly or to a greater extent that its
liabilities, the Corporations net portfolio value and net interest income
would tend to increase during periods of rising interest rates but decrease
during periods of falling interest rates. If the Corporations assets mature
or reprice more slowly or to a lesser extent than its liabilities, its net
portfolio value and net interest income would tend to decrease during periods
of rising interest rates but increase during periods of falling interest rates. The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are interest rate sensitive and by
monitoring an institutions interest rate sensitivity gap. An asset or
liability is said to be interest rate sensitive within a specific period if it
will mature or reprice within that period. The interest rate sensitivity gap
is the difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount
of interest rate sensitive liabilities, and is considered negative when the
amount of interest rate sensitive liabilities exceed the amount of interest
rate sensitive assets. During a period of rising interest rates, a negative
gap would be expected to adversely affect net interest income while a positive
gap would be expected to result in an increase in net interest income, while
conversely during a period of declining interest rates, a negative gap would be
expected to result in an increase in net interest income and a positive gap
would be expected to adversely affect net interest income. 24




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##### Table of Contents



Different types of assets and liabilities with the same or similar maturities
may react differently to changes in overall market rates or conditions, and
thus changes in interest rates may affect net interest income positively or
negatively even if an institution were perfectly matched in each maturity
category. Additionally, the gap analysis does not consider the many factors as
banking interest rates move. While the interest rate sensitivity gap is a
useful measurement and contributes toward effective asset and liability
management, it is difficult to predict the effect of changing interest rates
solely on that measure, without accounting for alterations in the maturity or
repricing characteristics of the balance sheet that occur during changes in
market interest rates.
During periods of rising interest rates, the Corporations assets tend to have
prepayments that are slower than those in an interest rate sensitivity gap and
would increase the negative gap position. Conversely, during a period of
declining interest rates, the Corporations assets would tend to prepay faster
than originally expected thus decreasing the negative gap position. In
addition, some of the Corporations assets, such as adjustable rate mortgages,
have caps on the amount by which their interest rates can change in any single
period, and therefore may not reprice as quickly as liabilities in the same
maturity category. The following table sets forth the amounts of interest earning assets and
interest bearing liabilities outstanding at March 31, 2004,
which are expected to mature or reprice in each of the time periods shown below. Interest Rate Sensitivity Period1-90
    
    91-365
    
    1-5
    
    Over(In thousands)
    
    Days
    
    Days
    
    Years
    
    5 Years
    
    TotalEarning assetsFederal funds sold
    
    $
    11,751
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    11,751Interest bearing deposits with banks
    
    
    57
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57Mortgage loans held for sale
    
    
    1,266
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,266Securities available for sale
    
    
    11,396
    
    
    
    
    
    
    
    84
    
    
    
    1,041
    
    
    
    12,521Federal Home Loan Bank stock
    
    
    1,086
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,086Total loans, net of non-accrual
    
    
    174,332
    
    
    
    21,237
    
    
    
    209,930
    
    
    
    13,593
    
    
    
    419,092Total earning assets
    
    
    199,888
    
    
    
    21,237
    
    
    
    210,014
    
    
    
    14,634
    
    
    
    445,773Interest bearing liabilitiesTotal interest bearing deposits
    
    
    236,101
    
    
    
    92,156
    
    
    
    30,550
    
    
    
    
    
    
    
    358,807Federal Home Loan Bank advances
    
    
    
    
    
    
    
    
    
    
    20,638
    
    
    
    
    
    
    
    20,638Subordinated debentures
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000Total interest bearing liabilities
    
    
    246,101
    
    
    
    92,156
    
    
    
    51,188
    
    
    
    
    
    
    
    389,445Net asset (liability) funding gap
    
    
    (46,213
    )
    
    
    (70,919
    )
    
    
    158,826
    
    
    
    14,634
    
    
    $
    56,328Cumulative net asset (liability) funding gap
    
    
    ($46,213
    )
    
    
    ($117,132
    )
    
    $
    41,694
    
    
    $
    56,328
 25




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Liquidity.Liquidity refers to readily available funds to meet the needs of
borrowers and depositors. Levels of liquidity are closely monitored in
conjunction with loan funding requirements and deposit outflows. Adequate
liquidity protects institutions from raising funds under duress at excessive
expense and provides a necessary cushion for occasional unpredictable
aberrations in demand. While adequate liquidity is imperative, excessive
liquidity in lower yielding cash investments or other easily marketable assets
reduces potential interest income. Thus, an appropriate balance must be
maintained to protect the institution and at the same time, prudently maximize
income opportunities. Sources of liquidity from both assets and liabilities
include federal funds sold, securities available for sale, loan repayments,
core deposits, Federal Home Loan Bank advances and a federal funds purchase
credit facility. The following tables provide information about the Banks contractual
obligations and commitments at March 31, 2004 (in thousands): Contractual Obligations Payments Due By PeriodLess Than 1 Year
    
    1 - 3 Years
    
    4 - 5 Years
    
    Over 5 Years
    
    TotalLong-term borrowings
    
    $
    24
    
    
    $
    10,052
    
    
    $
    10,562
    
    
    $
    
    
    
    $
    20,638Lease commitments
    
    
    356
    
    
    
    745
    
    
    
    679
    
    
    
    602
    
    
    
    2,382Subordinated debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    10,000Totals
    
    $
    380
    
    
    $
    10,797
    
    
    $
    11,241
    
    
    $
    10,602
    
    
    $
    33,020
 Unused Loan Commitments and Letters of Credit Amount of Commitment Expiration Per PeriodLess Than 1 Year
    
    1 - 3 Years
    
    4 - 5 Years
    
    Over 5 Years
    
    TotalUnused loan commitments
    
    $
    40,997
    
    
    $
    21,913
    
    
    $
    1,924
    
    
    $
    14,543
    
    
    $
    79,377Standby letters of credit
    
    
    776
    
    
    
    114
    
    
    
    3,000
    
    
    
    
    
    
    $
    3,890Totals
    
    $
    41,773
    
    
    $
    22,027
    
    
    $
    4,924
    
    
    $
    14,543
    
    
    $
    83,267
 26




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##### Table of Contents



Item 4. Controls and Procedures As of March 31, 2004, an evaluation was performed under the supervision of
and with the participation of the registrants management, including the
President and Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of the registrants disclosure
controls and procedures. Based on that evaluation, the registrants
management, including the President and Chief Executive Officer and the Chief
Financial Officer, concluded that the registrants disclosure controls and
procedures were effective as of March 31, 2004. There have been no significant
changes in the registrants internal controls or in other factors that could
significantly affect internal controls subsequent to March 31, 2004. 27




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##### Table of Contents



PART II    OTHER INFORMATION 
 ITEM 6. EXHIBITS AND REPORTS IN FORM 8-K.  (a)
    
    ExhibitsExhibit 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.(b)
    
    A Form 8-K Report, dated January 22, 2004 was filed during the quarter
ended March 31, 2004. 28




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. Dearborn Bancorp, Inc.
(Registrant)/s/ John E. Demmer
John E. Demmer
Chairman/s/ Michael J. Ross
Michael J. Ross
President and Chief Executive Officer/s/ Jeffrey L. Karafa
Jeffrey L. Karafa
Treasurer and Chief Financial Officer
 Date: May 10, 2004 29




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##### Table of Contents



EXHIBIT INDEX  EXHIBIT NO.
    
    DESCRIPTIONEX - 31.1
    
    Certification of Chief Executive Officer pursuant to Section 302EX - 31.2
    
    Certification of Chief Financial Officer pursuant to Section 302EX - 32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002EX - 32.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002