##### 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 June 30, 2008.
 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.)
 1360 Porter Street, Dearborn, MI
    
    48124(Address of principal executive office)
    
    (Zip Code)
  (Registrants telephone number, including area code)
  þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
  o þ
  Class
    
    Shares OutstandingCommon Stock
    
    8,055,698




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##### 



PagePart I. Financial Information:Item 1. Financial StatementsThe following consolidated condensed financial statements of
Dearborn Bancorp, Inc. and its subsidiary included in this report are:Report of Independent Registered Public Accounting Firm
    
    3Consolidated Condensed Balance Sheets  June 30, 2008,
December 31, 2007 and June 30, 2007
    
    4Consolidated Condensed Statements of Income  For the Three and
Six Months Ended June 30, 2008 and 2007
    
    5Consolidated Condensed Statements of Comprehensive Income  For
the Three and Six Months Ended June 30, 2008 and 2007
    
    6Consolidated Condensed Statements of Cash Flows  For the
Six Months Ended June 30, 2008 and 2007
    
    7Notes to Consolidated Condensed Financial Statements
    
    9-18Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    19-36Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    37-39Item 4. Controls and Procedures
    
    40Part II. Other Information:Pursuant to SEC rules and regulations, the following item(s) are
included with the Form 10-Q Report:Item 4. Submission of Matters to a Vote of Security Holders
    
    41Item 6. Exhibits and Reports on Form 8-KPursuant 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 1A. Risk FactorsItem 2. Changes in Securities and Use of ProceedsItem 3. Defaults upon Senior SecuritiesItem 5. Other InformationSIGNATURES
    
    42EX-31.1EX-31.2EX-32.1EX-32.2
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3




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DEARBORN BANCORP, INC. AND SUBSIDIARY
 
 CONSOLIDATED CONDENSED BALANCE SHEETS
 (Unaudited)
    
    
    
    
    
    
    (Unaudited)(Dollars, in thousands)
    
    06/30/08
    
    
    12/31/07
    
    
    06/30/07ASSETSCash and cash equivalentsCash and due from banks
    
    $
    12,778
    
    
    $
    7,869
    
    
    $
    13,621Federal funds sold
    
    
    1,301
    
    
    
    1,495
    
    
    
    3,392Interest bearing deposits with banks
    
    
    147
    
    
    
    118
    
    
    
    104Total cash and cash equivalents
    
    
    14,226
    
    
    
    9,482
    
    
    
    17,117Mortgage loans held for sale
    
    
    755
    
    
    
    1,316
    
    
    
    1,136Investment securities, available for sale
    
    
    9,381
    
    
    
    8,902
    
    
    
    11,039Federal Home Loan Bank stock
    
    
    3,540
    
    
    
    2,072
    
    
    
    1,927LoansLoans
    
    
    944,081
    
    
    
    952,084
    
    
    
    945,554Allowance for loan loss
    
    
    (16,638
    )
    
    
    (10,617
    )
    
    
    (9,949
    )Net loans
    
    
    927,443
    
    
    
    941,467
    
    
    
    935,605Premises and equipment, net
    
    
    21,630
    
    
    
    22,782
    
    
    
    23,268Real estate owned
    
    
    5,411
    
    
    
    6,319
    
    
    
    3,008Goodwill
    
    
    34,028
    
    
    
    34,028
    
    
    
    32,110Other intangible assets
    
    
    10,487
    
    
    
    11,133
    
    
    
    13,697Accrued interest receivable
    
    
    3,757
    
    
    
    3,816
    
    
    
    3,833Other assets
    
    
    7,880
    
    
    
    5,664
    
    
    
    3,464Total assets
    
    $
    1,038,538
    
    
    $
    1,046,981
    
    
    $
    1,046,204LIABILITIESDepositsNon-interest bearing deposits
    
    $
    82,798
    
    
    $
    83,594
    
    
    $
    103,641Interest bearing deposits
    
    
    741,124
    
    
    
    739,033
    
    
    
    727,090Total deposits
    
    
    823,922
    
    
    
    822,627
    
    
    
    830,731Other liabilitiesFederal funds purchased
    
    
    3,600
    
    
    
    30,100
    
    
    
    21,200Securities sold under agreements to repurchase
    
    
    171
    
    
    
    480
    
    
    
    288Federal Home Loan Bank advances
    
    
    65,401
    
    
    
    41,370
    
    
    
    37,130Accrued interest payable
    
    
    2,047
    
    
    
    3,168
    
    
    
    757Other liabilities
    
    
    1,026
    
    
    
    1,688
    
    
    
    3,336Subordinated debentures
    
    
    10,000
    
    
    
    10,000
    
    
    
    10,000Total liabilities
    
    
    906,167
    
    
    
    909,433
    
    
    
    903,442STOCKHOLDERS EQUITYCommon stock - 20,000,000 shares authorized,
8,055,698 shares at 06/30/08, 8,222,413
shares at
12/31/07; and 8,614,819 shares at 06/30/07
    
    
    133,048
    
    
    
    134,278
    
    
    
    138,230Retained earnings
    
    
    (688
    )
    
    
    3,250
    
    
    
    4,530Accumulated other comprehensive loss
    
    
    11
    
    
    
    20
    
    
    
    2Total stockholders equity
    
    
    132,371
    
    
    
    137,548
    
    
    
    142,762Total liabilities and stockholders equity
    
    $
    1,038,538
    
    
    $
    1,046,981
    
    
    $
    1,046,204
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DEARBORN BANCORP, INC. AND SUBSIDIARY
 
 CONSOLIDATED CONDENSED STATEMENTS OF INCOME (unaudited)
 Three Months Ended
    
    
    Six Months Ended(In thousands, except share and per share data)
    
    06/30/08
    
    
    06/30/07
    
    
    06/30/08
    
    
    06/30/07Interest incomeInterest on loans, including fees
    
    $
    14,994
    
    
    $
    17,259
    
    
    $
    31,168
    
    
    $
    34,384Interest on securities, available for sale
    
    
    109
    
    
    
    163
    
    
    
    218
    
    
    
    341Interest on federal funds
    
    
    21
    
    
    
    109
    
    
    
    36
    
    
    
    277Interest on deposits with banks
    
    
    1
    
    
    
    42
    
    
    
    2
    
    
    
    42Total interest income
    
    
    15,125
    
    
    
    17,573
    
    
    
    31,424
    
    
    
    35,044Interest expenseInterest on deposits
    
    
    5,874
    
    
    
    8,246
    
    
    
    12,902
    
    
    
    16,024Interest on other borrowings
    
    
    812
    
    
    
    507
    
    
    
    1,805
    
    
    
    1,311Interest on subordinated debentures
    
    
    155
    
    
    
    225
    
    
    
    380
    
    
    
    465Total interest expense
    
    
    6,841
    
    
    
    8,978
    
    
    
    15,087
    
    
    
    17,800Net interest income
    
    
    8,284
    
    
    
    8,595
    
    
    
    16,337
    
    
    
    17,244Provision for loan losses
    
    
    8,746
    
    
    
    289
    
    
    
    9,632
    
    
    
    906Net interest income after provision for loan losses
    
    
    (462
    )
    
    
    8,306
    
    
    
    6,705
    
    
    
    16,338Non-interest incomeService charges on deposit accounts
    
    
    363
    
    
    
    331
    
    
    
    743
    
    
    
    649Fees for other services to customers
    
    
    27
    
    
    
    15
    
    
    
    66
    
    
    
    69Gain on the sale of loans
    
    
    51
    
    
    
    47
    
    
    
    104
    
    
    
    101Write-down of real estate owned
    
    
    (100
    )
    
    
    (100
    )
    
    
    (300
    )
    
    
    (100
    )Loss on the sale of real estate owned
    
    
    (469
    )
    
    
    
    
    
    
    (704
    )
    
    
    Other than temporary impairment of securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other income
    
    
    73
    
    
    
    64
    
    
    
    147
    
    
    
    83Total non-interest income
    
    
    (55
    )
    
    
    357
    
    
    
    56
    
    
    
    802Non-interest expensesSalaries and employee benefits
    
    
    3,284
    
    
    
    3,102
    
    
    
    6,493
    
    
    
    6,654Occupancy and equipment expense
    
    
    950
    
    
    
    887
    
    
    
    1,863
    
    
    
    1,845Intangible expense
    
    
    322
    
    
    
    336
    
    
    
    645
    
    
    
    672Advertising and marketing
    
    
    131
    
    
    
    143
    
    
    
    254
    
    
    
    220Stationery and supplies
    
    
    171
    
    
    
    232
    
    
    
    304
    
    
    
    356Professional services
    
    
    259
    
    
    
    222
    
    
    
    485
    
    
    
    486Data processing
    
    
    232
    
    
    
    204
    
    
    
    457
    
    
    
    328Defaulted loan expense
    
    
    511
    
    
    
    29
    
    
    
    946
    
    
    
    159Other operating expenses
    
    
    568
    
    
    
    424
    
    
    
    1,219
    
    
    
    846Total non-interest expenses
    
    
    6,428
    
    
    
    5,579
    
    
    
    12,666
    
    
    
    11,566Income before income tax provision
    
    
    (6,945
    )
    
    
    3,084
    
    
    
    (5,905
    )
    
    
    5,574Income tax provision
    
    
    (2,331
    )
    
    
    1,079
    
    
    
    (1,967
    )
    
    
    1,951Net income
    
    $
    (4,614
    )
    
    $
    2,005
    
    
    $
    (3,938
    )
    
    $
    3,623Per share data:Net income  basic
    
    $
    (0.57
    )
    
    $
    0.23
    
    
    $
    (0.49
    )
    
    $
    0.41Net income  diluted
    
    $
    (0.57
    )
    
    $
    0.22
    
    
    $
    (0.49
    )
    
    $
    0.40Weighted average number of shares outstanding  basic
    
    
    8,051,037
    
    
    
    8,769,939
    
    
    
    8,095,379
    
    
    
    8,833,645Weighted average number of shares outstanding  diluted
    
    
    8,051,037
    
    
    
    9,005,730
    
    
    
    8,095,379
    
    
    
    9,085,837
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DEARBORN BANCORP, INC. AND SUBSIDIARY
 
 CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
 Three Months Ended
    
    
    Six Months Ended(In thousands)
    
    06/30/08
    
    
    06/30/07
    
    
    06/30/08
    
    
    06/30/07Net income
    
    $
    (4,614
    )
    
    $
    2,005
    
    
    $
    (3,938
    )
    
    $
    3,623Other comprehensive income (loss), net of taxUnrealized gains (losses) on securitiesUnrealized holding gains (losses) arising
during
during period
    
    
    (43
    )
    
    
    (5
    )
    
    
    (14
    )
    
    
    11Less: reclassification adjustment for losses
included in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tax effects
    
    
    15
    
    
    
    2
    
    
    
    5
    
    
    
    (3
    )Other comprehensive income/(loss)
    
    
    (28
    )
    
    
    (3
    )
    
    
    (9
    )
    
    
    8Comprehensive
income (loss)
    
    $
    (4,642
    )
    
    $
    2,002
    
    
    $
    (3,947
    )
    
    $
    3,631
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DEARBORN BANCORP, INC. AND SUBSIDIARY
 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 Six Months Ended(In thousands)
    
    6/30/2008
    
    
    6/30/2007Cash flows from operating activitiesInterest and fees received
    
    $
    31,483
    
    
    $
    34,548Interest paid
    
    
    (17,458
    )
    
    
    (18,198
    )Proceeds from sale of mortgages held for sale
    
    
    12,020
    
    
    
    11,303Origination of mortgages held for sale
    
    
    (11,278
    )
    
    
    (10,515
    )Taxes refunded (paid)
    
    
    (181
    )
    
    
    (1,830
    )Cash paid to suppliers and employees
    
    
    (13,913
    )
    
    
    (12,768
    )Net cash provided by operating activities
    
    
    673
    
    
    
    2,540Cash flows from investing activitiesProceeds from the sale of securities available for sale
    
    
    6,850
    
    
    
    18,007Proceeds from calls, maturities and repayments of
of securities available for sale
    
    
    79
    
    
    
    2,358Purchases of securities available for sale
    
    
    (7,332
    )
    
    
    (25,428
    )Purchase of Federal Home Loan Bank stock
    
    
    (1,468
    )
    
    
    (639
    )Proceeds from the sale of real estate owned
    
    
    6,143
    
    
    
    Increase in loans, net of payments received
    
    
    2,768
    
    
    
    (10,017
    )Purchases of property and equipment
    
    
    (215
    )
    
    
    (4,966
    )Net cash paid in Fidelity acquisition
    
    
    
    
    
    
    (32,111
    )Net cash used in investing activities
    
    
    6,825
    
    
    
    (52,796
    )Cash flows from financing activitiesNet increase (decrease) in non-interest bearing deposits
    
    
    (796
    )
    
    
    4,568Net increase (decrease) in interest bearing deposits
    
    
    2,091
    
    
    
    5,400Decrease in other borrowings
    
    
    (309
    )
    
    
    (331
    )Net increase (decrease) in federal funds payable
    
    
    (26,500
    )
    
    
    (16,100
    )Proceeds from Federal Home Loan Bank advances
    
    
    24,031
    
    
    
    9,802Purchase of common stock
    
    
    (1,271
    )
    
    
    (6,263
    )Exercise of stock options
    
    
    
    
    
    
    58Tax benefit of stock options exercised
    
    
    
    
    
    
    209Net cash provided by financing activities
    
    
    (2,754
    )
    
    
    (2,657
    )Increase (decrease) in cash and cash equivalents
    
    
    4,744
    
    
    
    (52,913
    )Cash and cash equivalents at the beginning of the period
    
    
    9,482
    
    
    
    70,030Cash and cash equivalents at the end of the period
    
    $
    14,226
    
    
    $
    17,117
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DEARBORN BANCORP, INC. AND SUBSIDIARY
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Continued)
 Six Months Ended(In thousands)
    
    6/30/2008
    
    
    6/30/2007Reconciliation of net income to net cash provided by operating activitiesNet income
    
    $
    (3,938
    )
    
    $
    3,623Adjustments to reconcile net income to net cash
provided by operating activitiesProvision for loan losses
    
    
    6,021
    
    
    
    906Depreciation and amortization expense
    
    
    683
    
    
    
    703Restricted stock award expense
    
    
    28
    
    
    
    98Stock option expense
    
    
    13
    
    
    
    44Accretion of discount on investment securities
    
    
    (89
    )
    
    
    (88
    )Amortization of intangible assets
    
    
    646
    
    
    
    672Decrease in mortgages held for sale
    
    
    561
    
    
    
    687(Increase) decrease in interest receivable
    
    
    59
    
    
    
    748Increase (decrease) in interest payable
    
    
    (1,121
    )
    
    
    (735
    )(Increase) decrease in other assets
    
    
    (1,528
    )
    
    
    (2,402
    )Decrease in other liabilities
    
    
    (662
    )
    
    
    (1,716
    )Net cash provided by operating activities
    
    $
    673
    
    
    $
    2,540Supplemental noncash disclosures:Transfers from loans to real estate owned
    
    $
    5,235
    
    
    $
    2,525Noncash investing activities:Fidelity Bank acquisition:Loans acquired
    
    
    
    
    
    
    178,052Bank premises and equipment
    
    
    
    
    
    
    9,214Acquisition intangibles recorded
    
    
    
    
    
    
    34,172Other assets acquired
    
    
    
    
    
    
    2,194Deposits assumed
    
    
    
    
    
    
    (187,459
    )Borrowings assumed
    
    
    
    
    
    
    (1,767
    )Other liabilities assumed
    
    
    
    
    
    
    (2,295
    )$
    32,111
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A.
    
    Accounting and Reporting PoliciesThe consolidated condensed financial statements of Dearborn Bancorp, Inc. (the
Corporation) include the consolidation of its only subsidiary, Fidelity Bank (the
Bank). The accounting and reporting policies of the Corporation are in accordance with
accounting principles generally accepted in the United States of America and conform to
practice within the banking industry.The consolidated condensed financial statements of the Corporation as of June 30, 2008 and
2007, and December 31, 2007 and for the three and six month periods ended June 30, 2008 and
2007 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 consolidated condensed balance sheet of the Corporation as of December 31, 2007 has
been derived from the audited consolidated balance sheet as of that date. The operating
results for the three and six month periods ended June 30, 2008 are not necessarily
indicative of results of operations for the entire year.The consolidated condensed financial statements as of June 30, 2008 and 2007, and for the
three and six months ended June 30, 2008 and 2007 included herein have been prepared by the
Corporation, without an audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally included in
interim financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant to such
rules and regulations. These financial statements should be read in conjunction with the
financial statements and notes thereon included in the Corporations 2007 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 and assessing
other than temporary impairments of securities.
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A.
    
    Accounting and Reporting Policies (cont)Income Per ShareBasic income per share is net income divided by the weighted average number of common shares
outstanding during the period. Diluted income per share includes the dilutive effect of
additional potential common shares issuable under stock options. Income per share is
restated for all stock splits and dividends through the date of issue of the financial
statements.Stock options for 485,993 and 35,244 shares of common stock were not considered in computing
diluted earnings per common share for the six months ended June 30, 2008 and 2007,
respectively, because they were antidilutive. All share and per share amounts have been
adjusted for stock dividends.Effect of Newly Issued Accounting StandardsIn September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This
statement defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. This Statement establishes a fair value
hierarchy about the assumptions used to measure fair value and clarifies assumptions about
risk and the effect of a restriction on the sale or use of an asset. The standard is
effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB
issued Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157. This FSP
delays the effective date of FAS 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value on a recurring
basis (at least annually) to fiscal years beginning after November 15, 2008, and interim
periods within those fiscal years. The adoption of this statement did not have a material
impact on the Corporations consolidated financial statements.In February 2006, FASB issued Statement No. 159, The Fair Value Option for Financial Assets
and Liabilities (SFAS 159). Adoption of SFAS 159 is required for January 1, 2008. This
statement allows, but does not require, companies to record certain assets and liabilities
at their fair value. The fair value determination is made at the instrument level, so
similar assets or liabilities could be partially accounted for using the historical cost
method, while other similar assets or liabilities are accounted for using the fair value
method. Changes in fair value are recorded through the income statement in subsequent
periods. The statement provides for a one time opportunity to transfer existing assets and
liabilities to fair value at the point of adoption with a cumulative effect adjustment
recorded against equity. After adoption, the election to report assets or liabilities at
fair value must be made at the point of their inception. The adoption of this statement did
not have a material impact on the Corporations consolidated financial statements.
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A.
    
    Accounting and Reporting Policies (cont)Future Accounting MattersFinancial Accounting Standards Board Statement No. 141 (SFAS 141R), Business Combinations
(Revised 2007), was issued in December 2007 and is effective January 1, 2009. SFAS 141R
replaces SFAS 141 which applies to all transactions and other events in which one entity
obtains control over one or more other businesses. SFAS 141R requires an acquirer, upon
initially obtaining control of another entity, to recognize the assets, liabilities and any
non-controlling interest in the acquiree at fair value as of the acquisition date.
Contingent consideration is required to be recognized and measured at fair value on the date
of acquisition rather than at a later date when the amount of that consideration may be
determinable beyond a reasonable doubt. This fair value approach replaces the cost
allocation process required under SFAS 141 whereby the cost of an acquisition was allocated
to the individual asset acquired and liabilities assumed based on their estimated fair
value. SFAS 141R requires acquirers to expense acquisition-related costs as incurred rather
than allocating such costs to the assets acquired and liabilities assumed.Under SFAS 141R, the requirements of SFAS 146, Accounting for Costs Associated with Exit or
Disposal Activities, would have to be met in order to accrue for a restructuring plan in
purchase accounting. Pre-acquisition contingencies are to be recognized at fair value,
unless it is a non-contractual contingency that is not likely to materialize, in which case,
nothing should be recognized in purchase accounting. Instead, that contingency would be
subject to the probable and estimable recognition criteria under SFAS 5, Accounting for
Contingencies. SFAS 141R is not expected to have a significant impact on the Corporations
financial condition or results of operations.Financial Accounting Standards Board Statement No. 160 (SFAS 160), Noncontrolling Interest
in Consolidated Financial Statements, an amendment of ARB Statement No. 51,was issued in
December 2007 and establishes accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies
that a non-controlling interest in a subsidiary, which is sometimes referred to as a
minority interest, is an ownership interest in the consolidated entity that should be
reported as a component of equity in the consolidated financial statements. Among other
requirements, SFAS 160 requires consolidated net income to be reported at amounts that are
attributable to both the parent and the non-controlling interest. It also requires
disclosure, on the face of the consolidated income statement, of the amounts of consolidated
net income attributable to the parent and to the non-controlling interest. SFAS 160 is
effective for the Corporation on January 1, 2009 and is not expected to have a significant
impact on the Corporations financial statements.
 11




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##### Table of Contents



A.
    
    Accounting and Reporting Policies (cont)Financial Accounting Standards Board Statement No. 161 (SFAS 161), Disclosures About
Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133,was
issued in March 2008 and amends and expands the disclosure requirements of SFAS 133 to
provide greater transparency about (i) how and why an entity uses derivative instruments,
(ii) how derivative instruments and related hedge items are accounted for under SFAS 133 and
its related interpretations, and (iii) how derivative instruments and related hedged items
affect an entitys financial position, results of operations and cash flows. To meet those
objectives, SFAS 161 requires qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about fair value amounts of gains and losses on
derivative instruments and disclosures about credit-risk-related contingent features in
derivative agreements. SFAS 161 is effective for the Corporation on January 1, 2009 and is
not expected to have a significant impact on the Corporations financial statements.B.
    
    Securities Available For SaleThe amortized cost and fair value of securities available for sale are as follows (in
thousands):
 June 30, 2008Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueUS Treasury securities
    
    $
    6,829
    
    
    $
    2
    
    
    
    ($2
    )
    
    $
    6,829US Government sponsored
equity securities
    
    
    1,004
    
    
    
    7
    
    
    
    
    
    
    
    1,011Municipal securities
    
    
    1,306
    
    
    
    19
    
    
    
    (13
    )
    
    
    1,312Mortgage backed securities
    
    
    226
    
    
    
    3
    
    
    
    
    
    
    
    229Totals
    
    $
    9,365
    
    
    $
    31
    
    
    
    ($15
    )
    
    $
    9,381
 December 31, 2007Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueUS Treasury securities
    
    $
    6,800
    
    
    $
    15
    
    
    
    ($10
    )
    
    $
    6,805US Government sponsored
equity securities
    
    
    1,009
    
    
    
    4
    
    
    
    
    
    
    
    1,013Municipal securities
    
    
    758
    
    
    
    16
    
    
    
    
    
    
    
    774Mortgage backed securities
    
    
    305
    
    
    
    5
    
    
    
    
    
    
    
    310Totals
    
    $
    8,872
    
    
    $
    40
    
    
    
    ($10
    )
    
    $
    8,902
 12




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##### Table of Contents



B.
    
    Securities Available for Sale (cont)The amortized cost and fair value of securities available for sale at June 30, 2008 by
contractual maturity are shown below (in thousands):
 Amortized
    
    
    FairCost
    
    
    ValueDue in less than one year
    
    $
    7,833
    
    
    $
    7,841Due in one year through five years
    
    
    1,024
    
    
    
    1,037Due in greater than five years
    
    
    282
    
    
    
    274Mortgage backed securities
    
    
    226
    
    
    
    229Totals
    
    $
    9,365
    
    
    $
    9,381
  Fair
    
    
    UnrealizedValue
    
    
    LossUS Treasury securities
    
    $
    2,985
    
    
    $
    (2
    )Municipal securities
    
    
    535
    
    
    
    (13
    )Total temporarily impaired
    
    $
    3,520
    
    
    $
    (15
    )
 Unrealized losses on securities, available for sale at June 30, 2008 have not been realized
because these securities are of high credit quality, management has the intent and ability
to hold these securities for the foreseeable future, and the decline in fair value is
believed to be largely due to changes in interest rates. The fair value is expected to
recover as the bonds approach their maturity date. These securities have been in a
continuous loss position for less than one year.
 The Corporation does not hold any securities in the Held to Maturity category nor does the
Corporation hold or utilize derivatives.
 13




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##### Table of Contents



C.
    
    Loans
 Non-performing loans and impaired loans are defined differently. Non-performing loans
include both smaller balance homogeneous loans that are collectively evaluated for impairment
and individually classified impaired loans. The aggregate balance in impaired loans are as
follows (in thousands):
 06/30/08
    
    
    12/31/07
    
    
    06/30/07Impaired loans with no allocated allowance for loan
losses
    
    $
    58,386
    
    
    $
    27,817
    
    
    $
    18,482Impaired loans with allocated allowance for loan losses
    
    
    35,607
    
    
    
    10,816
    
    
    
    23,791Total
    
    $
    93,993
    
    
    $
    38,633
    
    
    $
    42,273Amount of the allowance for loan loss allocated
    
    $
    8,102
    
    
    $
    879
    
    
    $
    2,999
 D.
    
    Incentive Stock Plans
 Incentive 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.
 A summary of the option activity in the 1994 Plan follows:
 WeightedAvailable
    
    
    
    
    
    
    Averagefor
    
    
    Options
    
    
    ExerciseGrant
    
    
    Outstanding
    
    
    PriceOutstanding at January 1, 2008
    
    
    
    
    
    
    453,682
    
    
    $
    8.29Forfeited
    
    
    
    
    
    
    (20,149
    )
    
    
    7.45Outstanding at June 30, 2008
    
    
    
    
    
    
    433,533
    
    
    $
    8.33
   14




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##### Table of Contents



D.
    
    Incentive Stock Plans (cont)
 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 and 2006. The
awards have a term of ten years and typically vest fully three years from the grant date.
In order for vesting to occur, 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 that were granted in 2005 vested on June 30, 2008 and the actual cost of these
awards was 100% of the currently recorded compensation cost.
 Stock Options Granted  The incentive stock options were granted with exercise prices equal
to market prices on the day of grant. At June 30, 2008, there were 26,518 stock options
outstanding with a weighted average exercise price of $13.06. At June 30, 2008, 8,733 stock
options vested fully. On June 30, 2009, the 17,785 stock options are scheduled to vest
fully. Stock option activity during the period is listed below:
 WeightedAverage ModifiedNumber
    
    Exerciseof Shares
    
    PriceOutstanding at January 1, 2008
    
    
    35,251
    
    
    $
    13.06Shares Forfeited  Stock Options
    
    
    (8,733
    )
    
    $
    13.06Outstanding at June 30, 2008
    
    
    26,518
    
    
    $
    13.06Options exercisable
    
    
    8,733
 The Corporation recognized stock option compensation expense of $13,000 during the six
months ended June 30, 2008. Compensation cost of $14,000 and $7,000 is expected to be
recognized during 2008 and 2009, respectively.
 15




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##### Table of Contents



D.
    
    Incentive Stock Plans (cont)
 Restricted Stock Grants   Restricted stock was awarded to officers in 2005 and 2006. The
restricted stock is eligible to vest three years from grant date. Upon full vesting,
restricted shares are transferred to common shares. On June 30, 2008, 6,223 restricted
            shares vested fully and were transferred to common shares. At June 30, 2008, there were
11,510 shares of restricted stock outstanding. The restricted stock activity for the period
is listed below:
 Number
    
    Modification Dateof Shares
    
    Value per ShareOutstanding at December 31, 2007
    
    
    23,956
    
    
    $
    13.06Restricted Shares Forfeited
    
    
    (6,223
    )Restricted Shares transferred to Common Shares
    
    
    (6,223
    )Outstanding at June 30, 2008
    
    
    11,510
    
    
    $
    13.06
 The Corporation recognized restricted stock compensation expense of $28,000 during the six
months ended June 30, 2008. Compensation cost of $27,000 and $13,000 is expected to be
recognized during 2008 and 2009, respectively.
 E.
    
    Fair Value of Assets and Liabilities
 Effective January 1, 2008, the Corporation adopted Statement of Financial Accounting
Standards No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about fair value
measurements. SFAS 157 has been applied prospectively as of the beginning of 2008.
 SFAS 157 defines fair value 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. SFAS 157 also establishes a fair value hierarchy 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 liabilitiesLevel 2 
    
    Observable inputs other than Level 1 prices, such as quoted prices for similar
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 liabilitiesLevel 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
 16




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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 sheet, as well as
the general classification of such instruments pursuant to our valuation hierarchy.
 Securities available for sale
 Fair values of securities, available for sale are estimated by a third party using inputs
that are observable or that can be corroborated by observable market data and, therefore,
are classified within Level 2 of the valuation hierarchy.
 The following table presents the fair value measurements of the Corporations assets and
liabilities recognized in the accompanying balance sheet measured at fair value on a
recurring basis and the level within the SFAS 157 fair value hierarchy in which the fair
value measurements fall at June 30, 2008 (in thousands):
 SignificantQuoted Prices in
    
    Other
    
    SignificantActive Markets for
    
    Observable
    
    UnobservableIdentical Assets
    
    Inputs
    
    InputsFair Value
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Securities, available for sale
    
    $
    9,381
    
    
    $
    6,829
    
    
    $
    2,552
    
    
    $
    
 The change in unrealized gains on securities, available for sale during the six months ended
June 30, 2008 was ($14,000).
 Impaired Loans
 Loan impairment is reported when full payment under the loan terms is not expected.
Impaired loans are carried at the present value of estimated future cash flows using the
loans existing rate, or the fair value of collateral if the loan is collateral dependent.
A portion of the allowance for loan losses is allocated to impaired loans if the value of
such loans is deemed to be less than the unpaid balance. If these allocations cause the
allowance for loan losses to increase, such increase is reported as a component of the
provision for loan losses. Loan losses are charged against the allowance when management
believes the uncollectability of the loan is confirmed. During the six month period ended
June 30, 2008, certain impaired loans were partially charged-off or re-evaluated. This
valuation would be considered Level 3, consisting of appraisals of underlying collateral and
discounted cash flow analysis.
 17




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##### Table of Contents



E.
    
    Fair Value of Assets and Liabilities ( cont)
 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 SFAS 157 fair value hierarchy in which the fair
value measurements fall at June 30, 2008 (in thousands):
 Quoted Prices in
    
    SignificantActive Markets
    
    Other
    
    Significantfor
    
    Observable
    
    UnobservableIdentical Assets
    
    Inputs
    
    InputsFair Value
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Loans
    
    $
    27,672
    
    
    $
    
    
    
    $
    
    
    
    $
    27,672
 18




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##### Table of Contents



PART I    FINANCIAL INFORMATION
 
 ITEM 2.  
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    19




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##### Table of Contents



Company Overview
        Date Formed
    
    Name
    
    Services OfferedAugust 1997
    
    Community Bank Insurance Agency, Inc.
    
    Limited insurance related activitiesMarch 2002
    
    Community Bank Audit Services, Inc.
    
    Internal auditing and complianceservices for financial institutions
  20




---



##### Table of Contents



Date Opened
    
    Location
    
    Type of officeFebruary 1994
    
    22290 Michigan Avenue
Dearborn, Michigan 48123
    
    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
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 branchOctober 2004
    
    450 East Michigan Avenue
Saline, MI 48176
    
    Full service retail branch with ATMOctober 2004
    
    250 West Eisenhower Parkway
Ann Arbor, MI 48103
    
    Full service retail branch with ATM
Regional lending certerOctober 2004
    
    2180 West Stadium Blvd.
Ann Arbor, MI 48103
    
    Full service retail branch with ATMDecember 2004
    
    1360 Porter Street
Dearborn, MI 48123
    
    Loan production office
Regional lending centerJanuary 2007
    
    1040 E. Maple
Birmingham, MI 48009
    
    Full service retail branch with ATM
Regional lending certerJanuary 2007
    
    3681 W. Maple
Birmingham, MI 48301
    
    Full service retail branch with ATMJanuary 2007
    
    30700 Telegraph
Bingham Farms, MI 48025
    
    Full service retail branch with ATMJanuary 2007
    
    20000 Twelve Mile Road
Southfield, MI 48076
    
    Full service retail branch with ATMJanuary 2007
    
    26555 Evergreen
Southfield, MI 48076
    
    Full service retail branch with ATMJanuary 2007
    
    200 Galleria Officenter
Southfield, MI 48034
    
    Full service retail branch with ATMApril 2007
    
    7755 23 Mile Road
Shelby Township, MI 48075
    
    Full service retail branch with ATM
 21




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##### Table of Contents



22




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##### Table of Contents



Results of Operations
   Net Interest Income
 2008 Compared to 2007.
 Average Balances, Interest Rates and Yields.
 23




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##### Table of Contents



Three months ended June 30,
    
    
    Three months ended June 30,2008
    
    
    2007Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average(In thousands)
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateAssetsInterest-bearing deposits with banks
    
    $
    206
    
    
    $
    1
    
    
    
    1.95
    %
    
    $
    3,570
    
    
    $
    42
    
    
    
    4.73
    %Federal funds sold
    
    
    4,802
    
    
    
    21
    
    
    
    1.76
    %
    
    
    8,344
    
    
    
    109
    
    
    
    5.25
    %Investment securities, available for sale
    
    
    12,838
    
    
    
    109
    
    
    
    3.41
    %
    
    
    12,883
    
    
    
    163
    
    
    
    5.09
    %Loans
    
    
    948,591
    
    
    
    14,994
    
    
    
    6.36
    %
    
    
    941,259
    
    
    
    17,259
    
    
    
    7.37
    %Sub-total earning assets
    
    
    966,437
    
    
    
    15,125
    
    
    
    6.29
    %
    
    
    966,056
    
    
    
    17,573
    
    
    
    7.32
    %Other assets
    
    
    81,986
    
    
    
    
    
    
    
    
    
    
    
    83,599Total assets
    
    $
    1,048,423
    
    
    
    
    
    
    
    
    
    
    $
    1,049,655Liabilities and stockholders equityInterest bearing deposits
    
    $
    723,733
    
    
    $
    5,874
    
    
    
    3.26
    %
    
    $
    749,303
    
    
    $
    8,246
    
    
    
    4.43
    %Other borrowings
    
    
    99,957
    
    
    
    967
    
    
    
    3.89
    %
    
    
    51,699
    
    
    
    732
    
    
    
    5.69
    %Sub-total interest bearing liabilities
    
    
    823,690
    
    
    
    6,841
    
    
    
    3.34
    %
    
    
    801,002
    
    
    
    8,978
    
    
    
    4.51
    %Non-interest bearing deposits
    
    
    83,614
    
    
    
    
    
    
    
    
    
    
    
    99,918Other liabilities
    
    
    3,117
    
    
    
    
    
    
    
    
    
    
    
    4,910Stockholders equity
    
    
    138,002
    
    
    
    
    
    
    
    
    
    
    
    143,825Total liabilities and stockholders equity
    
    $
    1,048,423
    
    
    
    
    
    
    
    
    
    
    $
    1,049,655Net interest income
    
    
    
    
    
    $
    8,284
    
    
    
    
    
    
    
    
    
    
    $
    8,595Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.95
    %
    
    
    
    
    
    
    
    
    
    
    2.81
    %Net interest margin on earning assets
    
    
    
    
    
    
    
    
    
    
    3.45
    %
    
    
    
    
    
    
    
    
    
    
    3.58
    %
 24




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##### Table of Contents



Six months ended June 30,
    
    
    Six months ended June 30,2008
    
    
    2007Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average(In thousands)
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateAssetsInterest-bearing deposits with banks
    
    $
    193
    
    
    $
    2
    
    
    
    2.08
    %
    
    $
    1,934
    
    
    $
    42
    
    
    
    4.36
    %Federal funds sold
    
    
    3,427
    
    
    
    36
    
    
    
    2.11
    %
    
    
    9,321
    
    
    
    277
    
    
    
    5.96
    %Investment securities, available for sale
    
    
    12,393
    
    
    
    218
    
    
    
    3.53
    %
    
    
    13,657
    
    
    
    341
    
    
    
    5.01
    %Loans
    
    
    948,000
    
    
    
    31,168
    
    
    
    6.59
    %
    
    
    938,786
    
    
    
    34,384
    
    
    
    7.35
    %Sub-total earning assets
    
    
    964,013
    
    
    
    31,424
    
    
    
    6.54
    %
    
    
    963,698
    
    
    
    35,044
    
    
    
    7.29
    %Other assets
    
    
    82,192
    
    
    
    
    
    
    
    
    
    
    
    80,859Total assets
    
    $
    1,046,205
    
    
    
    
    
    
    
    
    
    
    $
    1,044,557Liabilities and stockholders equityInterest bearing deposits
    
    $
    714,982
    
    
    $
    12,902
    
    
    
    3.62
    %
    
    $
    737,350
    
    
    $
    16,024
    
    
    
    4.36
    %Other borrowings
    
    
    106,275
    
    
    
    2,185
    
    
    
    4.12
    %
    
    
    61,353
    
    
    
    1,776
    
    
    
    5.81
    %Sub-total interest bearing liabilities
    
    
    821,257
    
    
    
    15,087
    
    
    
    3.68
    %
    
    
    798,703
    
    
    
    17,800
    
    
    
    4.47
    %Non-interest bearing deposits
    
    
    83,233
    
    
    
    
    
    
    
    
    
    
    
    96,093Other liabilities
    
    
    3,674
    
    
    
    
    
    
    
    
    
    
    
    4,693Stockholders equity
    
    
    138,041
    
    
    
    
    
    
    
    
    
    
    
    145,068Total liabilities and stockholders
equity
    
    $
    1,046,205
    
    
    
    
    
    
    
    
    
    
    $
    1,044,557Net interest income
    
    
    
    
    
    $
    16,337
    
    
    
    
    
    
    
    
    
    
    $
    17,244Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.85
    %
    
    
    
    
    
    
    
    
    
    
    2.82
    %Net interest margin on earning assets
    
    
    
    
    
    
    
    
    
    
    3.40
    %
    
    
    
    
    
    
    
    
    
    
    3.59
    %
 25




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##### Table of Contents



Rate/Volume Analysis.
 Three Months Ended
    
    
    Six Months Ended2008/2007
    
    
    2008/2007Change in Interest Due to:
    
    
    Change in Interest Due to:Average
    
    
    Average
    
    
    Net
    
    
    Average
    
    
    Average
    
    
    Net(In thousands)
    
    Balance
    
    
    Rate
    
    
    Change
    
    
    Balance
    
    
    Rate
    
    
    ChangeAssetsInterest bearing deposits with banks
    
 $
    (16
    )
    
 $
    (25
    )
    
 $
    (41
    )
    
 $
    (18
    )
    
 $
    (22
    )
    
 $
    (40
    )Federal funds sold
    
    
    (15
    )
    
    
    (73
    )
    
    
    (88
    )
    
    
    (61
    )
    
    
    (180
    )
    
    
    (241
    )Investment securities, available for sale
    
    
    
    
    
    
    (54
    )
    
    
    (54
    )
    
    
    (25
    )
    
    
    (98
    )
    
    
    (123
    )Loans
    
    
    129
    
    
    
    (2,394
    )
    
    
    (2,265
    )
    
    
    312
    
    
    
    (3,528
    )
    
    
    (3,216
    )Total earning assets
    
    $
    98
    
    
 $
    (2,546
    )
    
 $
    (2,448
    )
    
    $
    208
    
    
 $
    (3,828
    )
    
 $
    (3,620
    )LiabilitiesInterest bearing deposits
    
 $
    (196
    )
    
 $
    (2,176
    )
    
 $
    (2,372
    )
    
 $
    (396
    )
    
 $
    (2,726
    )
    
 $
    (3,122
    )Other borrowings
    
    
    468
    
    
    
    (233
    )
    
    
    235
    
    
    
    925
    
    
    
    (516
    )
    
    
    409Total interest bearing liabilities
    
    $
    272
    
    
 $
    (2,409
    )
    
 $
    (2,137
    )
    
    $
    529
    
    
 $
    (3,242
    )
    
 $
    (2,713
    )Net interest income
    
    
    
    
    
    
    
    
    
 $
    (311
    )
    
    
    
    
    
    
    
    
    
 $
    (907
    )Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    0.15
    %
    
    
    
    
    
    
    
    
    
    
    0.03
    %Net interest margin on earning assets
    
    
    
    
    
    
    
    
    
    
    (0.13
    %)
    
    
    
    
    
    
    
    
    
    
    (0.19
    %)
 Provision for Loan Losses
 2008 Compared to 2007.
 26




---



##### Table of Contents



Non-interest Income
 2008 Compared to 2007.
  Non-interest Expense
 2008 Compared to 2007.
  Income Tax Provision
 2008 Compared to 2007.
 27




---



##### Table of Contents



Comparison of Financial Condition at June 30, 2008 and December 31, 2007
 Assets.
 Federal Funds Sold.
 Interest bearing deposits with banks.
 Mortgage Loans Held for Sale.
 Securities  Available for Sale.
  Federal Home Loan Bank Stock.
 Loans.
 28




---



##### Table of Contents



06/30/08
    
    
    12/31/07
    
    
    06/30/07Consumer loans
    
    $
    33,206
    
    
    $
    35,833
    
    
    $
    35,666Commercial, financial, & other
    
    
    170,402
    
    
    
    174,958
    
    
    
    181,099Land development loans  residential property
    
    
    60,170
    
    
    
    63,639
    
    
    
    67,025Land development loans  non residential property
    
    
    21,000
    
    
    
    10,156
    
    
    
    12,078Commercial real estate construction  residential property
    
    
    20,605
    
    
    
    33,768
    
    
    
    33,961Commercial real estate construction  non residential
property
    
    
    35,087
    
    
    
    40,187
    
    
    
    34,834Commercial real estate mortgages
    
    
    549,145
    
    
    
    539,306
    
    
    
    527,805Residential real estate mortgages
    
    
    54,466
    
    
    
    54,237
    
    
    
    53,086944,081
    
    
    
    952,084
    
    
    
    945,554Allowance for loan losses
    
    
    (16,638
    )
    
    
    (10,617
    )
    
    
    (9,949
    )$
    927,443
    
    
    $
    941,467
    
    
    $
    935,605
  06/30/08
    
    
    12/31/07
    
    
    06/30/07Impaired loans with no allocated allowance for loan losses
    
    $
    58,386
    
    
    $
    27,817
    
    
    $
    18,482Impaired loans with allocated allowance for loan losses
    
    
    35,607
    
    
    
    10,816
    
    
    
    23,791Total
    
    $
    93,993
    
    
    $
    38,633
    
    
    $
    42,273Amount of the allowance for loan loss allocated
    
    $
    8,102
    
    
    $
    879
    
    
    $
    2,999
  06/30/08
    
    
    12/31/07
    
    
    06/30/07Troubled debt restructuring
    
    
    13,145
    
    
    
    21,077
    
    
    
    Over 90 days past due and still accruing
    
    
    7,319
    
    
    
    884
    
    
    
    2,217Non-accrual loans
    
    
    36,195
    
    
    
    18,117
    
    
    
    14,941Total non-performing loans
    
    
    56,659
    
    
    
    40,078
    
    
    
    17,158Real estate owned
    
    
    5,411
    
    
    
    6,319
    
    
    
    3,008Other repossessed assets
    
    
    
    
    
    
    
    
    
    
    Other non-performing assets
    
    
    5,411
    
    
    
    6,319
    
    
    
    3,008Total non-performing assets
    
    $
    62,070
    
    
    $
    46,397
    
    
    $
    20,166
 29




---



##### Table of Contents



Number ofLoans
    
    
    BalanceConsumer loans
    
    
    
    
    
    $
    Commercial, financial, & other
    
    
    11
    
    
    
    1,542Land development loans  residential property
    
    
    2
    
    
    
    5,748Land development loans  non residential property
    
    
    
    
    
    
    Commercial real estate construction  residential property
    
    
    4
    
    
    
    6,492Commercial real estate construction  non residential property
    
    
    
    
    
    
    Commercial real estate mortgages
    
    
    18
    
    
    
    10,571Residential real estate mortgages
    
    
    6
    
    
    
    1,019Total non-accrual loans
    
    
    41
    
    
    $
    25,372
  Number ofLoans
    
    
    BalanceConsumer loans
    
    
    3
    
    
    $
    161Commercial, financial, & other
    
    
    17
    
    
    
    2,196Land development loans  residential property
    
    
    7
    
    
    
    9,422Land development loans  non residential property
    
    
    1
    
    
    
    3,950Commercial real estate construction  residential property
    
    
    1
    
    
    
    5,098Commercial real estate construction  non residential property
    
    
    5
    
    
    
    3,213Commercial real estate mortgages
    
    
    20
    
    
    
    10,713Residential real estate mortgages
    
    
    10
    
    
    
    1,442Total non-accrual loans
    
    
    64
    
    
    $
    36,195
  30




---



##### Table of Contents



Allowance for Loan Losses.
 31




---



##### Table of Contents



Six Months
    
    
    
    
    
    
    Six MonthsEnded
    
    
    Year Ended
    
    
    Ended06/30/08
    
    
    12/31/07
    
    
    06/30/07Balance, beginning of year
    
    $
    10,617
    
    
    $
    7,775
    
    
    $
    7,775Allowance on loans acquired
    
    
    
    
    
    
    1,704
    
    
    
    1,704Charge-offs:Consumer loans
    
    
    176
    
    
    
    226
    
    
    
    87Commercial, financial & other
    
    
    3,127
    
    
    
    914
    
    
    
    84Land development loans  residential property
    
    
    
    
    
    
    1,665
    
    
    
    143Land development loans  non residential property
    
    
    
    
    
    
    
    
    
    
    Commercial real estate construction  residential property
    
    
    58
    
    
    
    1,291
    
    
    
    Commercial real estate construction  non residential
property
    
    
    
    
    
    
    
    
    
    
    Commercial real estate mortgages
    
    
    190
    
    
    
    662
    
    
    
    Residential real estate mortgages
    
    
    106
    
    
    
    320
    
    
    
    320Recoveries:Consumer loans
    
    
    11
    
    
    
    25
    
    
    
    6Commercial, financial & other
    
    
    31
    
    
    
    224
    
    
    
    174Land development loans  residential property
    
    
    
    
    
    
    
    
    
    
    Land development loans  non residential property
    
    
    
    
    
    
    
    
    
    
    Commercial real estate construction  residential property
    
    
    
    
    
    
    6
    
    
    
    Commercial real estate construction  non residential
property
    
    
    
    
    
    
    
    
    
    
    Commercial real estate mortgages
    
    
    4
    
    
    
    140
    
    
    
    20Residential real estate mortgages
    
    
    
    
    
    
    
    
    
    
    Net charge-offs (recoveries)
    
    
    3,611
    
    
    
    4,683
    
    
    
    436Provision for loan losses
    
    
    9,632
    
    
    
    5,821
    
    
    
    906Balance, end of period
    
    $
    16,638
    
    
    $
    10,617
    
    
    $
    9,949Allowance to total loans
    
    
    1.76
    %
    
    
    1.12
    %
    
    
    1.05
    %
 Premises and Equipment.
 Real estate owned.
 32




---



##### Table of Contents



Goodwill and other intangible assets.
 GrossCarrying
    
    
    AccumulatedAmount
    
    
    AmortizationCore deposit intangible from acquisition of:Bank of Washtenaw
    
    $
    929
    
    
    $
    439Fidelity Financial Corporation of Michigan
    
    
    6,863
    
    
    
    1,180Total core deposit intangible
    
    $
    7,792
    
    
    $
    1,619Borrower relationship intangible from
acquisition of:Bank of Washtenaw
    
    $
    1,620
    
    
    $
    453Fidelity Financial Corporation of Michigan
    
    
    3,558
    
    
    
    411Total borrower relationship intangible
    
    $
    5,178
    
    
    $
    864Total intangible assets
    
    $
    12,970
    
    
    $
    2,483
   Accrued Interest Receivable.
 Other Assets
 33




---



##### Table of Contents



Deposits.
 06/30/08
    
    
    12/31/07
    
    
    06/30/07Non-interest bearing:Demand
    
    $
    82,798
    
    
    $
    83,594
    
    
    $
    103,641Interest bearing:Checking
    
    $
    78,865
    
    
    $
    65,196
    
    
    $
    71,454Money market
    
    
    99,761
    
    
    
    106,145
    
    
    
    121,795Savings
    
    
    68,431
    
    
    
    29,814
    
    
    
    35,097Time, under $100,000
    
    
    187,628
    
    
    
    193,852
    
    
    
    158,689Time, $100,000 and over
    
    
    306,439
    
    
    
    344,026
    
    
    
    340,055741,124
    
    
    
    739,033
    
    
    
    727,090Total deposits
    
    $
    823,922
    
    
    $
    822,627
    
    
    $
    830,731
   06/30/08
    
    
    12/31/07
    
    
    06/30/07Interest bearing checking
    
    $
    1,728
    
    
    $
    1,740
    
    
    $
    1,768Time, $100,000 and over
    
    
    96,339
    
    
    
    109,695
    
    
    
    112,947Total municipal deposits
    
    $
    98,067
    
    
    $
    111,435
    
    
    $
    114,715
  34




---



##### Table of Contents



Federal Funds Purchased
 Securities Sold Under Agreement to Repurchase
 Federal Home Loan Bank Advances
 Accrued Interest Payable
 Other Liabilities
 Subordinated Debentures .
 35




---



##### Table of Contents



Capital
   MinimumTo Be Well CapitalizedMinimum for Capital
    Under Prompt CorrectiveActual
    
    Adequacy Purposes
    
    Action ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAs of June 30, 2008Total capital(to risk weighted assets)Consolidated
    
    
    109,960
    
    
    
    11.46
    %
    
    
    76,770
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    107,192
    
    
    
    11.20
    %
    
    
    76,595
    
    
    
    8.00
    %
    
    
    95,743
    
    
    
    10.00
    %Tier 1 capital(to risk weighted assets)Consolidated
    
    
    97,934
    
    
    
    10.21
    %
    
    
    38,385
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    95,166
    
    
    
    9.94
    %
    
    
    38,297
    
    
    
    4.00
    %
    
    
    57,446
    
    
    
    6.00
    %Tier 1 capital(to average assets)Consolidated
    
    
    97,934
    
    
    
    9.76
    %
    
    
    40,156
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    95,166
    
    
    
    9.52
    %
    
    
    39,985
    
    
    
    4.00
    %
    
    
    49,981
    
    
    
    5.00
    %As of December 31, 2007Total capital(to risk weighted assets)Consolidated
    
    
    112,984
    
    
    
    11.57
    %
    
    
    78,108
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    110,486
    
    
    
    11.34
    %
    
    
    77,972
    
    
    
    8.00
    %
    
    
    97,465
    
    
    
    10.00
    %Tier 1 capital(to risk weighted assets)Consolidated
    
    
    102,367
    
    
    
    10.48
    %
    
    
    39,054
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    99,869
    
    
    
    10.25
    %
    
    
    38,956
    
    
    
    4.00
    %
    
    
    58,479
    
    
    
    6.00
    %Tier 1 capital(to average assets)Consolidated
    
    
    102,367
    
    
    
    10.15
    %
    
    
    40,334
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ABank
    
    
    99,869
    
    
    
    9.99
    %
    
    
    39,989
    
    
    
    4.00
    %
    
    
    49,987
    
    
    
    5.00
    %
  36




---



##### Table of Contents



PART I    FINANCIAL INFORMATION
 
  Interest Rate Sensitivity Analysis.
   37




---



##### Table of Contents



Interest Rate Sensitivity Period1-90
    
    
    91-365
    
    
    1-5
    
    
    Over(In thousands)
    
    Days
    
    
    Days
    
    
    Years
    
    
    5 Years
    
    
    TotalEarning assetsFederal funds sold
    
    $
    1,301
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,301Interest bearing deposits with Banks
    
    
    147
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    147Mortgage loans held for sale
    
    
    755
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    755Securities available for sale
    
    
    5,090
    
    
    
    2,751
    
    
    
    1,266
    
    
    
    274
    
    
    
    9,381Federal Home Loan Bank stock
    
    
    3,540
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,540Total loans, net of non-accrual
    
    
    269,903
    
    
    
    91,355
    
    
    
    500,327
    
    
    
    45,855
    
    
    
    907,440Total earning assets
    
    
    280,736
    
    
    
    94,106
    
    
    
    501,593
    
    
    
    46,129
    
    
    
    922,564Interest bearing liabilitiesTotal interest bearing deposits
    
    
    469,808
    
    
    
    194,203
    
    
    
    76,677
    
    
    
    436
    
    
    
    741,124Federal Home Loan Bank advances
    
    
    0
    
    
    
    25,264
    
    
    
    40,137
    
    
    
    
    
    
    
    65,401Other Borrowings
    
    
    3,771
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,771Subordinated debentures
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000Total interest bearing liabilities
    
    
    483,579
    
    
    
    219,467
    
    
    
    116,814
    
    
    
    436
    
    
    
    820,296Net asset (liability) funding gap
    
    
    (202,843
    )
    
    
    (125,361
    )
    
    
    384,779
    
    
    
    45,693
    
    
    $
    102,268Cumulative net asset (liability) funding gap
    
    $
    (202,843
    )
    
    $
    (328,204
    )
    
    $
    56,575
    
    
    $
    102,268
 38




---



##### Table of Contents



Liquidity.
   Payments Due By PeriodLess Than
    
    
    
    
    
    
    3-5
    
    
    Over 51 Year
    
    
    1-3 Years
    
    
    Years
    
    
    Years
    
    
    TotalSecurities sold under agreements
to repurchase
    
    $
    172
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    172Certificates of deposit
    
    
    416,953
    
    
    
    72,634
    
    
    
    4,043
    
    
    
    436
    
    
    
    494,066Long-term borrowings
    
    
    25,264
    
    
    
    29,802
    
    
    
    10,335
    
    
    
    
    
    
    
    65,401Lease commitments
    
    
    788
    
    
    
    29,802
    
    
    
    10,336
    
    
    
    0
    
    
    
    40,926Subordinated debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    10,000Totals
    
    $
    443,177
    
    
    $
    132,238
    
    
    $
    24,714
    
    
    $
    10,436
    
    
    $
    610,565
  Amount Of Commitment Expiration Per PeriodLess Than
    
    
    
    
    
    
    3-5
    
    
    Over 51 Year
    
    
    1-3 Years
    
    
    Years
    
    
    Years
    
    
    TotalUnused loan commitments
    
    $
    94,514
    
    
    $
    11,057
    
    
    $
    11,769
    
    
    $
    15,444
    
    
    $
    132,784Standby letters of credit
    
    
    6,582
    
    
    
    1,069
    
    
    
    
    
    
    
    
    
    
    
    7,651Totals
    
    $
    101,096
    
    
    $
    12,126
    
    
    $
    11,769
    
    
    $
    15,444
    
    
    $
    140,435
 39




---



##### Table of Contents



Item 4. Controls and Procedures
 Disclosure Controls and Procedures 
 Internal Controls Over Financial Reporting
 40




---



##### Table of Contents



PART II    OTHER INFORMATION
 
   Nominee
    
    Total ForWilliam J. Demmer
    
    
    7,062,261Bradley F. Keller
    
    
    7,874,247Jeffrey G. Longstreth
    
    
    7,980,235
 
  (a)
    
    Exhibits
 Exhibit 31.1 CEO Certification. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.Exhibit 31.2 CFO Certification. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.Exhibit 32.1 CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.Exhibit 32.2 CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(b)
    
    A Form 8-K Report, dated April 15, 2008 was filed during the quarter ended June 30, 2008.
 41




---



##### 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
  42