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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
 For the Quarterly period ended June 30, 2006
 Commission file number 000-24478.
 DEARBORN BANCORP, INC.
  Michigan
    
    38-3073622(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 1360 Porter Street, Dearborn, MI
    
    48124(Address of principal executive office)
    
    (Zip Code)
 (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report)
  þ o
  Class
    
    Shares OutstandingCommon Stock
    
    5,594,223
  o þ o
  o þ




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##### 



PagePart I. Financial Information:Item 1. Financial StatementsThe following consolidated financial statements of Dearborn
Bancorp, Inc. and its subsidiary included in this report are:Report of Independent Registered Public Accounting Firm
    
    
    3Consolidated Balance Sheets  June 30, 2006,
December 31, 2005 and June 30, 2005
    
    
    4Consolidated Statements of Income  For the Three and Six
Months Ended June 30, 2006 and 2005
    
    
    5Consolidated Statements of Comprehensive Income   For
the Three and Six Months Ended June 30, 2006 and 2005
    
    
    6Consolidated Statements of Cash Flows  For the
Six Months Ended June 30, 2006 and 2005
    
    
    7-8Notes to Consolidated Financial Statements
    
    
    9-14Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations, Liquidity and Capital
    
    
    15-29Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    30-32Item 4. Controls and Procedures
    
    
    33Part 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
    
    
    34Item 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 2. Changes in Securities and Use of ProceedsItem 3. Defaults upon Senior SecuritiesItem 5 Other InformationSIGNATURES
    
    
    35CEO Certification pursuant to Section 302CFO Certification pursuant to Section 302CEO Certification pursuant to Section 906CFO Certification pursuant to Section 906
  2




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DEARBORN BANCORP, INC. AND SUBSIDIARY
 
 CONSOLIDATED BALANCE SHEETS (unaudited)
 (Dollars, in thousands)
    
    06/30/06
    
    
    12/31/05
    
    
    06/30/05ASSETSCash and cash equivalentsCash and due from banks
    
    $
    8,091
    
    
    $
    7,118
    
    
    $
    7,655Federal funds sold
    
    
    8,520
    
    
    
    2,268
    
    
    
    6,419Interest bearing deposits with banks
    
    
    107
    
    
    
    69
    
    
    
    6,359Total cash and cash equivalents
    
    
    16,718
    
    
    
    9,455
    
    
    
    20,433Mortgage loans held for sale
    
    
    1,174
    
    
    
    1,041
    
    
    
    2,373Securities, available for sale
    
    
    27,038
    
    
    
    17,153
    
    
    
    19,498Federal Home Loan Bank stock
    
    
    1,293
    
    
    
    1,293
    
    
    
    1,293LoansLoans
    
    
    696,052
    
    
    
    657,037
    
    
    
    635,718Allowance for loan losses
    
    
    (7,154
    )
    
    
    (6,808
    )
    
    
    (6,616
    )Net loans
    
    
    688,898
    
    
    
    650,229
    
    
    
    629,102Premises and equipment, net
    
    
    14,092
    
    
    
    13,792
    
    
    
    14,004Real estate owned
    
    
    
    
    
    
    663
    
    
    
    1,082Goodwill
    
    
    5,473
    
    
    
    5,473
    
    
    
    7,093Other intangible assets
    
    
    2,166
    
    
    
    2,291
    
    
    
    825Accrued interest receivable
    
    
    2,652
    
    
    
    2,586
    
    
    
    2,065Other assets
    
    
    2,986
    
    
    
    2,521
    
    
    
    2,725Total assets
    
    $
    762,490
    
    
    $
    706,497
    
    
    $
    700,493LIABILITIESDepositsNon-interest bearing deposits
    
    $
    59,976
    
    
    $
    59,652
    
    
    $
    64,393Interest bearing deposits
    
    
    552,294
    
    
    
    522,786
    
    
    
    516,222Total deposits
    
    
    612,270
    
    
    
    582,438
    
    
    
    580,615Other liabilitiesFederal funds purchased
    
    
    24,500
    
    
    
    
    
    
    
    Securities sold under agreements to repurchase
    
    
    310
    
    
    
    1,615
    
    
    
    3,201Federal Home Loan Bank advances
    
    
    25,588
    
    
    
    25,588
    
    
    
    25,614Other liabilities
    
    
    260
    
    
    
    960
    
    
    
    889Accrued interest payable
    
    
    1,912
    
    
    
    1,683
    
    
    
    1,319Subordinated debentures
    
    
    10,000
    
    
    
    10,000
    
    
    
    10,000Total liabilities
    
    
    674,840
    
    
    
    622,284
    
    
    
    621,638STOCKHOLDERS EQUITYCommon stock - 10,000,000 shares authorized,
5,677,923 shares at 06/30/06, 5,683,061 shares at
12/31/05; and 5,601,226 shares at 06/30/05
    
    
    87,224
    
    
    
    83,684
    
    
    
    78,685Retained earnings
    
    
    460
    
    
    
    573
    
    
    
    214Accumulated other comprehensive loss
    
    
    (34
    )
    
    
    (44
    )
    
    
    (44
    )Total stockholders equity
    
    
    87,650
    
    
    
    84,213
    
    
    
    78,855Total liabilities and stockholders equity
    
    $
    762,490
    
    
    $
    706,497
    
    
    $
    700,493
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DEARBORN BANCORP, INC. AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF INCOME (unaudited)
 Three Months Ended
    
    
    Six Months Ended(In thousands, except share and per share data)
    
    06/30/06
    
    
    06/30/05
    
    
    06/30/06
    
    
    06/30/05Interest incomeInterest on loans, including fees
    
    $
    12,678
    
    
    $
    10,318
    
    
    $
    24,624
    
    
    $
    20,020Interest on securities, available for sale
    
    
    152
    
    
    
    160
    
    
    
    315
    
    
    
    300Interest on federal funds
    
    
    153
    
    
    
    79
    
    
    
    221
    
    
    
    127Interest on deposits with banks
    
    
    79
    
    
    
    81
    
    
    
    146
    
    
    
    83Total interest income
    
    
    13,062
    
    
    
    10,638
    
    
    
    25,306
    
    
    
    20,530Interest expenseInterest on deposits
    
    
    5,578
    
    
    
    3,491
    
    
    
    10,451
    
    
    
    6,377Interest on other borrowings
    
    
    313
    
    
    
    302
    
    
    
    633
    
    
    
    588Interest on subordinated debentures
    
    
    215
    
    
    
    180
    
    
    
    410
    
    
    
    320Total interest expense
    
    
    6,106
    
    
    
    3,973
    
    
    
    11,494
    
    
    
    7,285Net interest income
    
    
    6,956
    
    
    
    6,665
    
    
    
    13,812
    
    
    
    13,245Provision for loan losses
    
    
    155
    
    
    
    279
    
    
    
    312
    
    
    
    743Net interest income after provision for loan losses
    
    
    6,801
    
    
    
    6,386
    
    
    
    13,500
    
    
    
    12,502Non-interest incomeService charges on deposit accounts
    
    
    166
    
    
    
    166
    
    
    
    323
    
    
    
    316Fees for other services to customers
    
    
    13
    
    
    
    17
    
    
    
    26
    
    
    
    49Gain on the sale of loans
    
    
    94
    
    
    
    204
    
    
    
    175
    
    
    
    334Gain (loss) on the sale of real estate owned
    
    
    (49
    )
    
    
    1
    
    
    
    (103
    )
    
    
    88Other than temporary impairment of securities
    
    
    
    
    
    
    (696
    )
    
    
    
    
    
    
    (696
    )Other income
    
    
    8
    
    
    
    14
    
    
    
    19
    
    
    
    16Total non-interest income
    
    
    232
    
    
    
    (294
    )
    
    
    440
    
    
    
    107Non-interest expensesSalaries and employee benefits
    
    
    2,445
    
    
    
    2,339
    
    
    
    4,877
    
    
    
    4,646Commissions on the origination of loans
    
    
    26
    
    
    
    66
    
    
    
    65
    
    
    
    131Occupancy and equipment expense
    
    
    595
    
    
    
    613
    
    
    
    1,225
    
    
    
    1,247Intangible expense
    
    
    62
    
    
    
    39
    
    
    
    125
    
    
    
    77Advertising and marketing
    
    
    113
    
    
    
    109
    
    
    
    201
    
    
    
    223Stationery and supplies
    
    
    89
    
    
    
    96
    
    
    
    161
    
    
    
    185Professional services
    
    
    175
    
    
    
    180
    
    
    
    358
    
    
    
    379Data processing
    
    
    131
    
    
    
    113
    
    
    
    256
    
    
    
    229Other operating expenses
    
    
    282
    
    
    
    399
    
    
    
    608
    
    
    
    680Total non-interest expenses
    
    
    3,918
    
    
    
    3,954
    
    
    
    7,876
    
    
    
    7,797Income before income tax provision
    
    
    3,115
    
    
    
    2,138
    
    
    
    6,064
    
    
    
    4,812Income tax provision
    
    
    1,059
    
    
    
    726
    
    
    
    2,062
    
    
    
    1,635Net income
    
    $
    2,056
    
    
    $
    1,412
    
    
    $
    4,002
    
    
    $
    3,177Per share data:Net income  basic
    
    $
    0.36
    
    
    $
    0.25
    
    
    $
    0.70
    
    
    $
    0.57Net income  diluted
    
    $
    0.34
    
    
    $
    0.24
    
    
    $
    0.67
    
    
    $
    0.53Weighted average number of shares outstanding  basic
    
    
    5,704,053
    
    
    
    5,595,546
    
    
    
    5,700,807
    
    
    
    5,582,474Weighted average number of shares outstanding -
diluted
    
    
    5,992,923
    
    
    
    5,973,382
    
    
    
    5,996,150
    
    
    
    5,975,647
  5




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DEARBORN BANCORP, INC. AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
 Three Months Ended
    
    
    Six Months Ended(In thousands)
    
    06/30/06
    
    
    06/30/05
    
    
    06/30/06
    
    
    06/30/05Net income
    
    $
    2,056
    
    
    $
    1,412
    
    
    $
    4,002
    
    
    $
    3,177Other comprehensive income, net of taxUnrealized gains (losses) on securitiesUnrealized holding gains (losses) arising
during period
    
    
    4
    
    
    
    (95
    )
    
    
    15
    
    
    
    233Less: reclassification adjustment for losses
included in net income
    
    
    
    
    
    
    696
    
    
    
    
    
    
    
    696Tax effects
    
    
    (1
    )
    
    
    (203
    )
    
    
    (5
    )
    
    
    (315
    )Other comprehensive income
    
    
    3
    
    
    
    398
    
    
    
    10
    
    
    
    614Comprehensive income
    
    $
    2,059
    
    
    $
    1,810
    
    
    $
    4,012
    
    
    $
    3,791
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DEARBORN BANCORP, INC. AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months Ended(In thousands)
    
    6/30/06
    
    
    6/30/05Cash flows from operating activitiesInterest and fees received
    
    $
    25,240
    
    
    $
    20,155Interest paid
    
    
    (11,264
    )
    
    
    (7,073
    )Proceeds from sale of mortgage loans held for sale
    
    
    11,517
    
    
    
    21,295Origination of mortgage loans held for sale
    
    
    (11,475
    )
    
    
    (21,642
    )Taxes paid
    
    
    (2,700
    )
    
    
    (1,580
    )Gain/(loss) on sale of real estate owned
    
    
    (103
    )
    
    
    88Cash paid to suppliers and employees
    
    
    (6,736
    )
    
    
    (7,977
    )Net cash provided by operating activities
    
    
    4,479
    
    
    
    3,266Cash flows from investing activitiesProceeds from calls, maturities and repayments of
securities available for sale
    
    
    8,783
    
    
    
    5,348Purchases of securities available for sale
    
    
    (18,621
    )
    
    
    (3,535
    )Purchase of Federal Home Loan Bank stock
    
    
    
    
    
    
    (171
    )Increase in loans, net of payments received
    
    
    (38,981
    )
    
    
    (48,167
    )Purchases of property and equipment
    
    
    (774
    )
    
    
    (1,342
    )Net cash used in investing activities
    
    
    (49,593
    )
    
    
    (47,867
    )Cash flows from financing activitiesNet increase in non-interest bearing deposits
    
    
    324
    
    
    
    1,328Net increase in interest bearing deposits
    
    
    29,508
    
    
    
    38,407Net increase in Federal Home Loan Bank advances
    
    
    
    
    
    
    5,000Net increase in federal funds payable
    
    
    24,500
    
    
    
    Decrease in other borrowings
    
    
    (1,305
    )
    
    
    (914
    )Purchase of common stock
    
    
    (878
    )
    
    
    Exercise of stock options
    
    
    170
    
    
    
    344Tax benefit of stock options exercised
    
    
    58
    
    
    
    Net cash provided by financing activities
    
    
    52,377
    
    
    
    44,165Increase (decrease) in cash and cash equivalents
    
    
    7,263
    
    
    
    (436
    )Cash and cash equivalents at the beginning of the period
    
    
    9,455
    
    
    
    20,869Cash and cash equivalents at the end of the period
    
    $
    16,718
    
    
    $
    20,433
  7




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DEARBORN BANCORP, INC. AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 Six Months Ended(In thousands)
    
    6/30/06
    
    
    6/30/05Reconciliation of net income to net cash provided by operating activitiesNet income
    
    $
    4,002
    
    
    $
    3,177Adjustments
to reconcile net income to net cash provided by operating activities
Provision for loan losses
    
    
    312
    
    
    
    743Depreciation and amortization expense
    
    
    474
    
    
    
    462Restricted stock award expense
    
    
    52
    
    
    
    Stock option expense
    
    
    23
    
    
    
    Accretion of discount on investment securities
    
    
    (39
    )
    
    
    (21
    )Amortization of premium on investment securities
    
    
    7
    
    
    
    18Amortization of intangible assets
    
    
    125
    
    
    
    77Increase in mortgage loans held for sale
    
    
    (133
    )
    
    
    (681
    )Increase in interest receivable
    
    
    (66
    )
    
    
    (176
    )Increase in interest payable
    
    
    229
    
    
    
    212(Increase) decrease in other assets
    
    
    193
    
    
    
    (209
    )Decrease in other liabilities
    
    
    (700
    )
    
    
    (336
    )Net cash provided by operating activities
    
    $
    4,479
    
    
    $
    3,266Supplemental noncash disclosures:Transfers from loans to real estate owned
    
    $
    39
    
    
    $
    1,850
  8




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A.
    
    Accounting and Reporting Policies
     9




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A.
    
    Accounting and Reporting Policies (continued)
  10




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##### Table of Contents



B.
    
    Securities Available For Sale
  June 30, 2006Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized

    
    FairCost
    
    
    Gains
    
    
    Losses

    
    ValueUS Treasury securities
    
    $
    24,263
    
    
    $
    3
    
    
    ($
    51
    )
    
    $
    24,215Corporate debt securities
    
    
    2,355
    
    
    
    
    
    
    
    
    
    
    
    2,355Mortgage backed securities
    
    
    472
    
    
    
    
    
    
    
    (4
    )
    
    
    468Totals
    
    $
    27,090
    
    
    $
    3
    
    
    ($
    55
    )
    
    $
    27,038
 December 31, 2005Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    FairCost
    
    
    Gains
    
    
    Losses

    
    ValueUS Treasury securities
    
    $
    16,665
    
    
    $
    
    
    
    ($
    68
    )
    
    $
    16,597Mortgage backed securities
    
    
    555
    
    
    
    2
    
    
    
    (1
    )
    
    
    556Totals
    
    $
    17,220
    
    
    $
    2
    
    
    ($
    69
    )
    
    $
    17,153
  Amortized
    
    
    FairCost
    
    
    ValueDue in three months or less
    
    $
    3,000
    
    
    $
    2,995Due in three months through one year
    
    
    1,001
    
    
    
    991Due in over one year through five years
    
    
    20,262
    
    
    
    20,229Due in over five years
    
    
    2,355
    
    
    
    2,355Mortgage backed securities
    
    
    472
    
    
    
    468Totals
    
    $
    27,090
    
    
    $
    27,038
 11




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Investment category
    
    Fair Value
    
    
    Unrealized LossUS treasury securities
    
    $
    16,795
    
    
    ($
    51
    )Mortgage backed securities
    
    
    468
    
    
    
    (4
    )Total temporarily impaired
    
    $
    17,263
    
    
    ($
    55
    )Length of time in a continuous loss position
    
    Fair Value
    
    
    Unrealized LossLess than one year
    
    $
    13,278
    
    
    ($
    40
    )One to three years
    
    
    3,985
    
    
    
    (15
    )Total temporarily impaired
    
    $
    17,263
    
    
    ($
    55
    )
   12




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C.
    
    Stock Incentive Plans
   WeightedAvailable
    
    
    
    
    
    
    AverageFor
    
    
    Options

    
    ExerciseGrant
    
    
    Outstanding
    
    PriceOutstanding at January 1, 2006
    
    
    
    
    
    
    492,510
    
    
    $
    8.40Exercised
    
    
    
    
    
    
    (33,861
    )
    
    
    5.53Outstanding at June 30, 2006
    
    
    
    
    
    
    458,649
    
    
    $
    8.61
    13




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##### Table of Contents



C.
    
    Incentive Stock Plans (cont)
     D.
    
    Effect of Newly Issued But Not Yet Effective Accounting Standards
  14




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PART I    FINANCIAL INFORMATION
 
     15




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##### Table of Contents



General
  Date Opened
    
    Location
    
    Type of officeFebruary 1994
    
    22290 Michigan Avenue
    
    Full service retail branch with ATMDearborn, Michigan 48124December 1995
    
    24935 West Warren Avenue
    
    Full service retail branchDearborn Heights, Michigan 48127August 1997
    
    44623 Five Mile Road
    
    Full service retail branch with ATMPlymouth, Michigan 48170May 2001
    
    1325 North Canton Center Road
    
    Full service retail branch with ATMCanton, Michigan 48187December 2001
    
    45000 River Ridge Drive
    
    Regional lending centerClinton Township, Michigan 48038November 2002
    
    19100 Hall Road
    
    Full service retail branch with ATMClinton Township, Michigan 48038February 2003
    
    12820 Fort Street
    
    Full service retail branch with ATMSouthgate, Michigan 48195May 2003
    
    3201 University Drive, Suite 180
    
    Full service retail branchAuburn Hills, Michigan 48326
    
    Regional lending centerOctober 2004
    
    450 East Michigan Avenue
    
    Full service retail branch with ATMSaline, MI 48176October 2004
    
    250 West Eisenhower Parkway
    
    Full service retail branch with ATMAnn Arbor, MI 48103
    
    Regional lending centerOctober 2004
    
    2180 West Stadium Blvd.
    
    Full service retail branch with ATMAnn Arbor, MI 48103December 2004
    
    1360 Porter Street
    
    Loan production officeDearborn, MI 48124
    
    Regional lending center
  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
 16




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##### Table of Contents



Results of Operations
  Net Interest Income
 2006 Compared to 2005.
 Average Balances, Interest Rates and Yields.
 17




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##### Table of Contents



Three months ended
    
    Three months endedJune 30, 2006
    
    June 30, 2005Average
    
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    
    Average(In thousands)
    
    Balance
    
    
    Interest
    
    
    Rate
    
    Balance
    
    
    Interest
    
    
    RateAssetsInterest-bearing deposits with banks
    
    $
    7,286
    
    
    $
    79
    
    
    
    4.35
    %
    
    $
    11,011
    
    
    $
    81
    
    
    
    2.95
    %Federal funds sold
    
    
    12,159
    
    
    
    153
    
    
    
    5.05
    %
    
    
    10,301
    
    
    
    79
    
    
    
    3.08
    %Investment securities, available for sale
    
    
    13,466
    
    
    
    152
    
    
    
    4.53
    %
    
    
    20,870
    
    
    
    160
    
    
    
    3.08
    %Loans
    
    
    686,235
    
    
    
    12,678
    
    
    
    7.41
    %
    
    
    626,105
    
    
    
    10,318
    
    
    
    6.61
    %Sub-total earning assets
    
    
    719,146
    
    
    
    13,062
    
    
    
    7.29
    %
    
    
    668,287
    
    
    
    10,638
    
    
    
    6.38
    %Other assets
    
    
    30,809
    
    
    
    
    
    
    
    
    
    
    
    30,685Total assets
    
    $
    749,955
    
    
    
    
    
    
    
    
    
    
    $
    698,972Liabilities and stockholders equityInterest bearing deposits
    
    $
    562,717
    
    
    $
    5,578
    
    
    
    3.98
    %
    
    $
    515,757
    
    
    $
    3,491
    
    
    
    2.71
    %Other borrowings
    
    
    38,045
    
    
    
    528
    
    
    
    5.57
    %
    
    
    39,237
    
    
    
    482
    
    
    
    4.93
    %Sub-total interest bearing liabilities
    
    
    600,762
    
    
    
    6,106
    
    
    
    4.08
    %
    
    
    554,994
    
    
    
    3,973
    
    
    
    2.87
    %Non-interest bearing deposits
    
    
    59,013
    
    
    
    
    
    
    
    
    
    
    
    63,734Other liabilities
    
    
    2,357
    
    
    
    
    
    
    
    
    
    
    
    2,057Stockholders equity
    
    
    87,823
    
    
    
    
    
    
    
    
    
    
    
    78,187Total liabilities and stockholders equity
    
    $
    749,955
    
    
    
    
    
    
    
    
    
    
    $
    698,972Net interest income
    
    
    
    
    
    $
    6,956
    
    
    
    
    
    
    
    
    
    
    $
    6,665Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.21
    %
    
    
    
    
    
    
    
    
    
    
    3.51
    %Net interest margin on earning assets
    
    
    
    
    
    
    
    
    
    
    3.88
    %
    
    
    
    
    
    
    
    
    
    
    4.00
    %
 18




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##### Table of Contents



Six Months Ended
    
    
    Six Months EndedJune 30, 2006
    
    

June 30, 2005Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average(In thousands)
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateAssetsInterest-bearing deposits with banks
    
    $
    6,427
    
    
    $
    146
    
    
    
    4.58%
    
    
    $
    5,761
    
    
    $
    83
    
    
    
    2.91%Federal funds sold
    
    
    9,191
    
    
    
    221
    
    
    
    4.85%
    
    
    
    9,280
    
    
    
    127
    
    
    
    2.76%Investment securities, available for sale
    
    
    15,053
    
    
    
    315
    
    
    
    4.22%
    
    
    
    21,284
    
    
    
    300
    
    
    
    2.84%Loans
    
    
    674,979
    
    
    
    24,624
    
    
    
    7.36%
    
    
    
    615,133
    
    
    
    20,020
    
    
    
    6.56%Sub-total earning assets
    
    
    705,650
    
    
    
    25,306
    
    
    
    7.23%
    
    
    
    651,458
    
    
    
    20,530
    
    
    
    6.36%Other assets
    
    
    30,083
    
    
    
    
    
    
    
    
    
    
    
    30,799Total assets
    
    $
    735,733
    
    
    
    
    
    
    
    
    
    
    $
    682,257Liabilities and stockholders equityInterest bearing deposits
    
    $
    550,146
    
    
    $
    10,451
    
    
    
    3.83%
    
    
    $
    499,167
    
    
    $
    6,377
    
    
    
    2.58%Other borrowings
    
    
    38,496
    
    
    
    1,043
    
    
    
    5.46%
    
    
    
    40,572
    
    
    
    908
    
    
    
    4.51%Sub-total interest bearing
liabilities
    
    
    588,642
    
    
    
    11,494
    
    
    
    3.94%
    
    
    
    539,739
    
    
    
    7,285
    
    
    
    2.72%Non-interest bearing deposits
    
    
    58,409
    
    
    
    
    
    
    
    
    
    
    
    63,337Other liabilities
    
    
    1,950
    
    
    
    
    
    
    
    
    
    
    
    2,043Stockholders equity
    
    
    86,732
    
    
    
    
    
    
    
    
    
    
    
    77,138Total liabilities and stockholders
equity
    
    $
    735,733
    
    
    
    
    
    
    
    
    
    
    $
    682,257Net interest income
    
    
    
    
    
    $
    13,812
    
    
    
    
    
    
    
    
    
    
    $
    13,245Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.29%
    
    
    
    
    
    
    
    
    
    
    
    3.64%Net interest margin on earning assets
    
    
    
    
    
    
    
    
    
    
    3.95%
    
    
    
    
    
    
    
    
    
    
    
    4.10%
 19




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##### Table of Contents



Rate/Volume Analysis.
 Three Months Ended

    
    Six Months EndedThree Months
    
    2006/2005

    
    2006/2005Change 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
    
    ($
    41
    )
    
    $
    39
    
    
    ($
    2
    )
    
    $
    15
    
    
    $
    48
    
    
    $
    63Federal funds sold
    
    
    23
    
    
    
    51
    
    
    
    74
    
    
    
    (3
    )
    
    
    97
    
    
    
    94Investment securities, available
for sale
    
    
    (83
    )
    
    
    75
    
    
    
    (8
    )
    
    
    (135
    )
    
    
    150
    
    
    
    15Loans
    
    
    1,104
    
    
    
    1,256
    
    
    
    2,360
    
    
    
    2,162
    
    
    
    2,442
    
    
    
    4,604Total earning assets
    
    $
    1,003
    
    
    $
    1,421
    
    
    $
    2,424
    
    
    $
    2,039
    
    
    $
    2,737
    
    
    $
    4,776LiabilitiesInterest bearing deposits
    
    $
    458
    
    
    $
    1,629
    
    
    $
    2,087
    
    
    $
    943
    
    
    $
    3,131
    
    
    $
    4,074Other borrowings
    
    
    (16
    )
    
    
    62
    
    
    
    46
    
    
    
    (58
    )
    
    
    193
    
    
    
    135Total interest bearing liabilities
    
    $
    442
    
    
    $
    1,691
    
    
    $
    2,133
    
    
    $
    885
    
    
    $
    3,324
    
    
    $
    4,209Net interest income
    
    
    
    
    
    
    
    
    
    $
    291
    
    
    
    
    
    
    
    
    
    
    $
    567Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    (0.30
    %)
    
    
    
    
    
    
    
    
    
    
    (0.35
    %)Net interest margin on earning
assets
    
    
    
    
    
    
    
    
    
    
    (0.12
    %)
    
    
    
    
    
    
    
    
    
    
    (0.15
    %)
 20




---



##### Table of Contents



Provision for Loan Losses
 2006 Compared to 2005.
 Non-interest Income
 2006 Compared to 2005.
  21




---



##### Table of Contents



Non-interest Expense
 2006 Compared to 2005.
  Income Tax Provision
 2006 Compared to 2005.
 22




---



##### Table of Contents



Comparison of Financial Condition at June 30, 2006 and December 31, 2005
 Assets.
 Federal Funds Sold.
 Interest bearing deposits with banks.
 Mortgage Loans Held for Sale.
 Securities  Available for Sale.
  Federal Home Loan Bank Stock.
 23




---



##### Table of Contents



Loans.
 06/30/06
    
    
    12/31/05
    
    
    06/30/05Consumer loans
    
    $
    31,159
    
    
    $
    35,041
    
    
    $
    41,082Commercial, financial, & other
    
    
    116,089
    
    
    
    110,805
    
    
    
    132,058Commercial real estate construction
    
    
    126,538
    
    
    
    118,358
    
    
    
    89,572Commercial real estate mortgages
    
    
    376,970
    
    
    
    345,536
    
    
    
    326,332Residential real estate mortgages
    
    
    45,296
    
    
    
    47,297
    
    
    
    46,674696,052
    
    
    
    657,037
    
    
    
    635,718Allowance for loan losses
    
    
    (7,154
    )
    
    
    (6,808
    )
    
    
    (6,616
    )$
    688,898
    
    
    $
    650,229
    
    
    $
    629,102
  06/30/06
    
    
    12/31/05
    
    
    06/30/05Over 90 days past due and still accruing
    
    $
    982
    
    
    $
    189
    
    
    $
    134Non-accrual loans
    
    
    3,982
    
    
    
    984
    
    
    
    972Total non-performing loans
    
    
    4,964
    
    
    
    1,173
    
    
    
    1,106Real estate owned
    
    
    
    
    
    
    661
    
    
    
    1,082Other repossessed assets
    
    
    
    
    
    
    2
    
    
    
    Other non-performing assets
    
    
    
    
    
    
    663
    
    
    
    1,082Total non-performing assets
    
    $
    4,964
    
    
    $
    1,836
    
    
    $
    2,188
  Number ofLoans
    
    
    BalanceConsumer loans
    
    
    2
    
    
    $
    69Commercial, financial, & other
    
    
    2
    
    
    
    303Commercial real estate construction
    
    
    1
    
    
    
    945Commercial real estate mortgages
    
    
    6
    
    
    
    2,354Residential real estate mortgages
    
    
    3
    
    
    
    311Total non-accrual loans
    
    
    14
    
    
    $
    3,982
 24




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##### Table of Contents



Allowance for Loan Losses.
  Six months ended

    
    Year Ended

    
    Six months ended06/30/06

    
    12/31/05

    
    06/30/05Balance, beginning of year
    
    $
    6,808
    
    
    $
    5,884
    
    
    $
    5,884Allowance on loans acquired
    
    
    
    
    
    
    
    
    
    
    Charge-offs:Consumer loans
    
    
    
    
    
    
    112
    
    
    
    71Commercial, financial & other
    
    
    36
    
    
    
    169
    
    
    
    95Commercial real estate construction
    
    
    
    
    
    
    
    
    
    
    Commercial real estate mortgages
    
    
    36
    
    
    
    86
    
    
    
    6Residential real estate mortgages
    
    
    10
    
    
    
    
    
    
    
    Recoveries:Consumer loans
    
    
    9
    
    
    
    37
    
    
    
    9Commercial, financial & other
    
    
    88
    
    
    
    131
    
    
    
    111Commercial real estate construction
    
    
    
    
    
    
    
    
    
    
    Commercial real estate mortgages
    
    
    19
    
    
    
    10
    
    
    
    9Residential real estate mortgages
    
    
    
    
    
    
    32
    
    
    
    32Net charge-offs (recoveries)
    
    
    (34
    )
    
    
    157
    
    
    
    11Additions charged to operations
    
    
    312
    
    
    
    1,081
    
    
    
    743Balance, end of period
    
    $
    7,154
    
    
    $
    6,808
    
    
    $
    6,616Allowance to total loans
    
    
    1.03
    %
    
    
    1.04
    %
    
    
    1.04
    %Allowance to nonperforming assets
    
    
    144.12
    %
    
    
    370.81
    %
    
    
    302.38
    %Net charge-offs (recoveries) to average loans
    
    
    (0.01
    %)
    
    
    0.02
    %
    
    
    0.00
    %
 25




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##### Table of Contents



Premises and Equipment.
 Real estate owned.
 Goodwill and other intangible assets.
  Accrued Interest Receivable.
 Other Assets
 26




---



##### Table of Contents



Deposits.
 06/30/06
    
    
    12/31/05
    
    
    06/30/05Non-interest bearing:Demand
    
    $
    59,976
    
    
    $
    59,652
    
    
    $
    64,393Interest bearing:Checking
    
    $
    107,107
    
    
    $
    13,413
    
    
    $
    14,443Money market
    
    
    21,071
    
    
    
    26,514
    
    
    
    59,729Savings
    
    
    47,021
    
    
    
    69,503
    
    
    
    74,267Time, under $100,000
    
    
    138,088
    
    
    
    151,038
    
    
    
    143,538Time, $100,000 and over
    
    
    239,007
    
    
    
    262,318
    
    
    
    224,245552,294
    
    
    
    522,786
    
    
    
    516,222Total deposits
    
    $
    612,270
    
    
    $
    582,438
    
    
    $
    580,615
   06/30/06
    
    
    12/31/05
    
    
    06/30/05Interest bearing checking
    
    $
    895
    
    
    $
    1,020
    
    
    $
    2,677Time, $100,000 and over
    
    
    62,571
    
    
    
    85,236
    
    
    
    76,997Total municipal deposits
    
    $
    63,466
    
    
    $
    86,256
    
    
    $
    79,674
  27




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##### Table of Contents



Federal Funds Purchased.
 Securities Sold Under Agreement to Repurchase
 Federal Home Loan Bank Advances
 Accrued Interest Payable
 Other Liabilities
 Subordinated Debentures .
 28




---



##### 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, 2006Total capital
(to risk weighted assets)Consolidated
    
    $
    97,199
    
    
    
    13.31
    %
    
    $
    58,404
    
    
    
    8.00
    %
    
    $
    73,005
    
    
    
    10.00
    %Bank
    
    
    80,725
    
    
    
    11.13
    %
    
    
    58,022
    
    
    
    8.00
    %
    
    
    72,527
    
    
    
    10.00
    %Tier 1 capital
(to risk weighted assets)Consolidated
    
    
    90,045
    
    
    
    12.33
    %
    
    
    29,202
    
    
    
    4.00
    %
    
    
    43,803
    
    
    
    6.00
    %Bank
    
    
    73,571
    
    
    
    10.14
    %
    
    
    29,011
    
    
    
    4.00
    %
    
    
    43,516
    
    
    
    6.00
    %Tier 1 capital
(to average assets)Consolidated
    
    
    90,045
    
    
    
    12.13
    %
    
    
    29,693
    
    
    
    4.00
    %
    
    
    37,116
    
    
    
    5.00
    %Bank
    
    
    73,571
    
    
    
    10.15
    %
    
    
    28,985
    
    
    
    4.00
    %
    
    
    36,231
    
    
    
    5.00
    %As of December 31, 2005Total capital
(to risk weighted assets)Consolidated
    
    $
    93,281
    
    
    
    13.29
    %
    
    $
    56,147
    
    
    
    8.00
    %
    
    $
    70,184
    
    
    
    10.00
    %Bank
    
    
    75,918
    
    
    
    10.89
    %
    
    
    55,756
    
    
    
    8.00
    %
    
    
    69,695
    
    
    
    10.00
    %Tier 1 capital
(to risk weighted assets)Consolidated
    
    
    86,472
    
    
    
    12.32
    %
    
    
    28,073
    
    
    
    4.00
    %
    
    
    42,110
    
    
    
    6.00
    %Bank
    
    
    69,109
    
    
    
    9.92
    %
    
    
    27,878
    
    
    
    4.00
    %
    
    
    41,817
    
    
    
    6.00
    %Tier 1 capital
(to average assets)Consolidated
    
    
    86,472
    
    
    
    12.32
    %
    
    
    28,074
    
    
    
    4.00
    %
    
    
    35,092
    
    
    
    5.00
    %Bank
    
    
    69,109
    
    
    
    10.09
    %
    
    
    27,400
    
    
    
    4.00
    %
    
    
    34,250
    
    
    
    5.00
    %
  29




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##### Table of Contents



PART I    FINANCIAL INFORMATION
 
  Interest Rate Sensitivity Analysis.
   30




---



##### Table of Contents



Interest Rate Sensitivity Period1-90

    
    91-365

    
    1-5
    
    
    Over(In thousands)
    
    Days

    
    Days

    
    Years
    
    
    5 Years
    
    
    TotalEarning assetsFederal funds sold
    
    $
    8,520
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    8,520Interest bearing deposits with Banks
    
    
    107
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    107Mortgage loans held for sale
    
    
    1,174
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,174Securities available for sale
    
    
    4,057
    
    
    
    20,534
    
    
    
    1,979
    
    
    
    468
    
    
    
    27,038Federal Home Loan Bank stock
    
    
    1,293
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,293Total loans, net of non-accrual
    
    
    260,659
    
    
    
    45,029
    
    
    
    351,671
    
    
    
    34,711
    
    
    
    692,070Total earning assets
    
    
    275,810
    
    
    
    65,563
    
    
    
    353,650
    
    
    
    35,179
    
    
    
    730,202Interest bearing liabilitiesTotal interest bearing deposits
    
    
    263,048
    
    
    
    163,688
    
    
    
    125,558
    
    
    
    
    
    
    
    552,294Federal Home Loan Bank advances
    
    
    
    
    
    
    10,000
    
    
    
    15,588
    
    
    
    
    
    
    
    25,588Federal funds purchased
    
    
    24,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,500Other Borrowings
    
    
    310
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    310Subordinated debentures
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000Total interest bearing liabilities
    
    
    297,858
    
    
    
    173,688
    
    
    
    141,146
    
    
    
    
    
    
    
    612,692Net asset (liability) funding gap
    
    
    (22,048
    )
    
    
    (108,125
    )
    
    
    212,504
    
    
    
    35,179
    
    
    $
    117,510Cumulative net asset (liability) funding gap
    (
    $
    22,048
    )
    (
    $
    130,173
    )
    
    $
    82,331
    
    
    $
    117,510
 31




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##### Table of Contents



Liquidity.
   Payments Due By PeriodLess Than
    
    
    1-3
    
    
    3-5
    
    
    Over 51 Year
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    TotalSecurities sold under
agreements to
repurchase
    
    $
    310
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    310Certificates of deposit
    
    
    299,298
    
    
    
    49,463
    
    
    
    28,334
    
    
    
    
    
    
    
    377,095Long-term borrowings
    
    
    34,500
    
    
    
    15,588
    
    
    
    
    
    
    
    
    
    
    
    50,088Lease commitments
    
    
    559
    
    
    
    909
    
    
    
    758
    
    
    
    135
    
    
    
    2,361Subordinated debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    10,000Totals
    
    $
    334,667
    
    
    $
    65,960
    
    
    $
    29,092
    
    
    $
    10,135
    
    
    $
    439,854
  Amount Of Commitment Expiration Per PeriodLess Than
    
    
    1-3
    
    
    3-5
    
    
    Over 51 Year
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    TotalUnused loan commitments
    
    $
    135,543
    
    
    $
    36,483
    
    
    $
    4,307
    
    
    $
    23,761
    
    
    $
    200,094Standby letters of credit
    
    
    2,653
    
    
    
    6,018
    
    
    
    
    
    
    
    
    
    
    
    8,671Totals
    
    $
    138,196
    
    
    $
    42,501
    
    
    $
    4,307
    
    
    $
    23,761
    
    
    $
    208,765
 32




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##### Table of Contents



Item 4. Controls and Procedures
 Disclosure Controls and Procedures 
 Internal Controls Over Financial Reporting
 33




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##### Table of Contents



PART II    OTHER INFORMATION
 
   Nominee
    
    Total ForDavid Himick
    
    
    4,692,192Jeffrey G. Longstreth
    
    
    4,691,246Michael J. Ross
    
    
    4,695,076Robert C. Schwyn
    
    
    4,953,362
  
  (a)
    
    Exhibits
     (b)
    
    Two Form 8-K Reports, dated April 18, 2006 and May 16, 2006 were filed during the quarter
ended June 30, 2006.
 34




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##### Table of Contents



SIGNATURES
  
 /s/ John E. Demmer
 /s/ Michael J. Ross
 /s/ Jeffrey L. Karafa
  35




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##### Table of Contents



Exhibit no.
    
    Description of ExhibitExhibit 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.
 36