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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934  Commission file number 000-24478. DEARBORN BANCORP, INC. 
  Michigan
    
    38-3073622(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 1360 Porter Street, Dearborn, MI
    
    
    48124(Address of principal executive office)
    
    (Zip Code)
 (313) 565-5700 
  N/A 
  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate the number of shares outstanding for each of the issuers classes of common stock, as of
April 30, 2005. Class
    
    Shares OutstandingCommon Stock
    
    4,831,197
 Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of
the 1934 Securities and Exchange Act). Yes o No þ




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DEARBORN BANCORP, INC.
INDEX  
 Part I.
    
    
    
    Financial Information:Item 1.
    
    
    
    Financial StatementsThe following consolidated financial statements of Dearborn Bancorp, Inc. and its subsidiary included in this report are:
    
    PageIndependent Accountants Report
    
    3Consolidated Balance Sheets  March 31, 2005, December 31, 2004 and March 31, 2004
    
    4Consolidated Statements of Income - For the Three Months Ended March 31, 2005 and 2004
    
    5Consolidated Statements of Comprehensive Income - For the Three Months Ended March 31, 2005 and 2004
    
    6Consolidated Statements of Cash Flows - For the Three Months Ended March 31, 2005 and 2004
    
    7Notes to Consolidated Financial Statements
    
    8-13Item 2.
    
    
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital
    
    14-27Item 3.
    
    
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    28-30Item 4.
    
    
    
    Controls and Procedures
    
    31Part II.
    
    
    
    Other Information:Pursuant to SEC rules and regulations, the following item(s) are included with the Form 10-Q Report:Item 6.   Exhibits and Reports on Form 8-K
    
    32Pursuant to SEC rules and regulations, the following items are omitted from this Form 10-Q as inapplicable or to which the answer is negative:Item 1.   Legal ProceedingsItem 2.   Changes in Securities and Use of ProceedsItem 3.   Defaults upon Senior SecuritiesItem 4.   Submission of Matters to a Vote of Security HoldersItem 5    Other InformationSIGNATURES
    
    
    
    33Section 302 Certification of Chief Executive OfficerSection 302 Certification of Chief Financial OfficerSection 906 Certification of Chief Executive OfficerSection 906 Certification of Chief Financial Officer
  2




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders
Dearborn Bancorp, Inc.
Dearborn, Michigan We have reviewed the consolidated balance sheets of Dearborn Bancorp, Inc. as of March 31, 2005 and
the related consolidated statements of income and comprehensive income and the related consolidated
statements of cash flows for the three month periods ended March 31, 2005 and 2004. These
financial statements are the responsibility of the companys management. We conducted our review in accordance with standards established by the Public Company Accounting
Oversight Board (United States). A review of interim financial information consists principally of
applying analytical procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board. Accordingly, we do
not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the
financial statements referred to above for them to be in conformity with accounting principles
generally accepted in the United States of America. /s/ Crowe Chizek and Company LLCGrand Rapids, MichiganMay 2, 2005
 3




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DEARBORN BANCORP, INC. AND SUBSIDIARY 
 CONSOLIDATED BALANCE SHEETS (unaudited) (Dollars, in thousands)
    
    03/31/05
    
    
    12/31/04
    
    
    03/31/04ASSETSCash and cash equivalentsCash and due from banks
    
    $
    10,933
    
    
    $
    5,946
    
    
    $
    9,149Federal funds sold
    
    
    7,214
    
    
    
    12,640
    
    
    
    11,751Interest bearing deposits with banks
    
    
    412
    
    
    
    2,283
    
    
    
    57Total cash and cash equivalents
    
    
    18,559
    
    
    
    20,869
    
    
    
    20,957Mortgage loans held for sale
    
    
    4,458
    
    
    
    1,692
    
    
    
    1,266Securities, available for sale
    
    
    19,652
    
    
    
    21,075
    
    
    
    12,521Federal Home Loan Bank stock
    
    
    1,134
    
    
    
    1,122
    
    
    
    1,086LoansLoans
    
    
    612,472
    
    
    
    587,562
    
    
    
    420,783Allowance for loan loss
    
    
    (6,288
    )
    
    
    (5,884
    )
    
    
    (4,632
    )Net loans
    
    
    606,184
    
    
    
    581,678
    
    
    
    416,151Premises and equipment, net
    
    
    14,017
    
    
    
    13,124
    
    
    
    8,323Real estate owned
    
    
    146
    
    
    
    138
    
    
    
    Goodwill
    
    
    7,042
    
    
    
    7,080
    
    
    
    Other intangible assets
    
    
    863
    
    
    
    902
    
    
    
    Accrued interest receivable
    
    
    2,017
    
    
    
    1,889
    
    
    
    1,525Other assets
    
    
    2,965
    
    
    
    3,093
    
    
    
    1,714Total assets
    
    $
    677,037
    
    
    $
    652,662
    
    
    $
    463,543LIABILITIESDepositsNon-interest bearing deposits
    
    $
    64,978
    
    
    $
    63,065
    
    
    $
    37,097Interest bearing deposits
    
    
    482,829
    
    
    
    477,815
    
    
    
    358,807Total deposits
    
    
    547,807
    
    
    
    540,880
    
    
    
    395,904Other liabilitiesFederal funds purchased
    
    
    16,060
    
    
    
    
    
    
    
    Securities sold under agreements to repurchase
    
    
    3,083
    
    
    
    4,115
    
    
    
    Federal Home Loan Bank advances
    
    
    20,614
    
    
    
    20,614
    
    
    
    20,638Accrued interest payable
    
    
    1,339
    
    
    
    1,107
    
    
    
    761Other liabilities
    
    
    1,187
    
    
    
    1,342
    
    
    
    490Subordinated debentures
    
    
    10,000
    
    
    
    10,000
    
    
    
    10,000Total liabilities
    
    
    600,090
    
    
    
    578,058
    
    
    
    427,793STOCKHOLDERS EQUITYCommon stock
- 10,000,000 shares authorized, 4,831,197 shares at 03/31/05, 4,794,012 shares at
12/31/04; and 3,263,433 shares at 03/31/04
    
    
    75,280
    
    
    
    74,918
    
    
    
    34,622Retained earnings
    
    
    2,109
    
    
    
    344
    
    
    
    1,302Accumulated other comprehensive loss
    
    
    (442
    )
    
    
    (658
    )
    
    
    (174
    )Total stockholders equity
    
    
    76,947
    
    
    
    74,604
    
    
    
    35,750Total liabilities and stockholders equity
    
    $
    677,037
    
    
    $
    652,662
    
    
    $
    463,543
 The accompanying notes are an integral part of these consolidated statements. 4




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DEARBORN BANCORP, INC. AND SUBSIDIARY 
 CONSOLIDATED STATEMENTS OF INCOME (unaudited) Three Months Ended
    
    
    Three Months Ended(In thousands, except share and per share data)
    
    03/31/05
    
    
    03/31/04Interest incomeInterest on loans
    
    $
    9,702
    
    
    $
    6,404Interest on securities, available for sale
    
    
    140
    
    
    
    71Interest on federal funds
    
    
    48
    
    
    
    16Interest on deposits with banks
    
    
    2
    
    
    
    7Total interest income
    
    
    9,892
    
    
    
    6,498Interest expenseInterest on deposits
    
    
    2,886
    
    
    
    1,660Interest on other borrowings
    
    
    286
    
    
    
    231Interest on subordinated debentures
    
    
    140
    
    
    
    123Total interest expense
    
    
    3,312
    
    
    
    2,014Net interest income
    
    
    6,580
    
    
    
    4,484Provision for loan losses
    
    
    464
    
    
    
    224Net interest income after provision for loan losses
    
    
    6,116
    
    
    
    4,260Non-interest incomeService charges on deposit accounts
    
    
    150
    
    
    
    132Fees for other services to customers
    
    
    32
    
    
    
    12Gain on the sale of loans
    
    
    130
    
    
    
    143Gain on the sale of real estate
    
    
    87
    
    
    
    Other income
    
    
    2
    
    
    
    19Total non-interest income
    
    
    401
    
    
    
    306Non-interest expensesSalaries and employee benefits
    
    
    2,307
    
    
    
    1,817Commissions on the origination of loans
    
    
    65
    
    
    
    63Occupancy and equipment expense
    
    
    634
    
    
    
    359Intangible expense
    
    
    38
    
    
    
    Advertising and marketing
    
    
    114
    
    
    
    77Stationery and supplies
    
    
    89
    
    
    
    71Professional services
    
    
    199
    
    
    
    115Data processing
    
    
    116
    
    
    
    71Other operating expenses
    
    
    281
    
    
    
    218Total non-interest expenses
    
    
    3,843
    
    
    
    2,791Income before income tax provision
    
    
    2,674
    
    
    
    1,775Income tax provision
    
    
    909
    
    
    
    601Net income
    
    $
    1,765
    
    
    $
    1,174Per share data:Net income  basic
    
    $
    0.37
    
    
    $
    0.36Net income  diluted
    
    $
    0.34
    
    
    $
    0.33Weighted average number of shares outstanding  basic
    
    
    4,810,735
    
    
    
    3,255,238Weighted average number of shares outstanding  diluted
    
    
    5,152,744
    
    
    
    3,589,246
 The accompanying notes are an integral part of these consolidated statements. 5




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DEARBORN BANCORP, INC. AND SUBSIDIARY 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) Three Months Ended
    
    
    Three Months Ended(In thousands)
    
    03/31/05
    
    
    03/31/04Net income
    
    $
    1,765
    
    
    $
    1,174Other comprehensive income (loss), net of taxUnrealized gains (losses) on securitiesUnrealized holding gains (losses) arising during
period
    
    
    328
    
    
    
    (296
    )Less: reclassification adjustment for gains included
in net income
    
    
    
    
    
    
    Tax effects
    
    
    (112
    )
    
    
    100Other comprehensive income (loss)
    
    
    216
    
    
    
    (196
    )Comprehensive income
    
    $
    1,981
    
    
    $
    978
 The accompanying notes are an integral part of these consolidated statements. 6




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DEARBORN BANCORP, INC. AND SUBSIDIARY 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Three Months Ended(In thousands)
    
    3/31/05
    
    
    3/31/04Cash flows from operating activitiesInterest and fees received
    
    $
    9,764
    
    
    $
    6,434Interest paid
    
    
    (3,080
    )
    
    
    (2,007
    )Taxes paid
    
    
    (250
    )
    
    
    Proceeds from sale of mortgages held for sale
    
    
    8,272
    
    
    
    10,383Origination of mortgages held for sale
    
    
    (10,908
    )
    
    
    (10,001
    )Cash paid to suppliers and employees
    
    
    (3,996
    )
    
    
    (2,949
    )Net cash provided by operating activities
    
    
    (198
    )
    
    
    1,860Cash flows from investing activitiesProceeds from maturities of securities available for sale
    
    
    3,200
    
    
    
    4,000Proceeds from repayments of securities available for sale
    
    
    89
    
    
    
    121Purchases of securities available for sale
    
    
    (1,535
    )
    
    
    Purchases of Federal Home Loan Bank stock
    
    
    (12
    )
    
    
    (13
    )Increase in loans, net of payments received
    
    
    (24,970
    )
    
    
    (19,731
    )Purchases of property and equipment
    
    
    (1,107
    )
    
    
    (2,884
    )Net cash used in investing activities
    
    
    (24,335
    )
    
    
    (18,507
    )Cash flows from financing activitiesNet increase (decrease) in non-interest bearing deposits
    
    
    1,913
    
    
    
    (1,984
    )Net increase in interest bearing deposits
    
    
    5,014
    
    
    
    18,269Net increase in federal funds payable
    
    
    16,060
    
    
    
    Net decrease in other borrowings
    
    
    (1,032
    )
    
    
    Stock option exercise
    
    
    268
    
    
    
    171Net cash provided by financing activities
    
    
    22,223
    
    
    
    16,456Decrease in cash and cash equivalents
    
    
    (2,310
    )
    
    
    (191
    )Cash and cash equivalents at the beginning of the period
    
    
    20,869
    
    
    
    21,148Cash and cash equivalents at the end of the period
    
    $
    18,559
    
    
    $
    20,957Reconciliation of net income to net cash provided by operating
activitiesNet income
    
    $
    1,765
    
    
    $
    1,174Adjustments to reconcile net income to net cash
provided by (used in) operating activitiesProvision for loan losses
    
    
    464
    
    
    
    224Depreciation and amortization expense
    
    
    214
    
    
    
    115Accretion of discount on investment securities
    
    
    (12
    )
    
    
    (1
    )Amortization of premium on investment securities
    
    
    9
    
    
    
    11(Increase) decrease in mortgages held for sale
    
    
    (2,766
    )
    
    
    239Increase in interest receivable
    
    
    (128
    )
    
    
    (64
    )Increase in interest payable
    
    
    232
    
    
    
    7Decrease in other assets
    
    
    85
    
    
    
    128(Increase) decrease in other liabilities
    
    
    (61
    )
    
    
    27Net cash provided by operating activities
    
    ($
    198
    )
    
    $
    1,860
 The accompanying notes are an integral part of these consolidated financial statements. 7




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DEARBORN BANCORP, INC.
FORM 10-Q (continued) 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  A.
    Accounting and Reporting Policies The consolidated financial statements of Dearborn Bancorp, Inc. (the Corporation) include
the consolidation of its only subsidiary, Community Bank of Dearborn (the Bank). The
accounting and reporting policies of the Corporation are in accordance with accounting
principles generally accepted in the United States of America and conform to practice
within the banking industry. The consolidated financial statements of the Corporation as of March 31, 2005 and 2004, and
December 31, 2004 and for the three month periods ended March 31, 2005 and 2004 reflect all
adjustments, consisting of normal recurring items which are in the opinion of management,
necessary for a fair presentation of the results for the interim period. The operating
results for the quarter are not necessarily indicative of results of operations for the
entire year. The consolidated financial statements as of March 31, 2005 and 2004, and for the three
months ended March 31, 2005 and 2004 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 2004 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. 8




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##### Table of Contents



A.
    Accounting and Reporting Policies (continued) Employee compensation expense under stock option plans is reported using the intrinsic
value method. No stock-based compensation cost is reflected in net income, as all options
granted had an exercise price equal to or greater than the market price of the underlying
common stock at date of grant. The following table illustrates the effect on net income
and earnings per share if expense was measured using the fair value recognition provisions
of FASB Statement No. 123, Accounting for Stock-based Compensation (in thousands, except
share and per share data). For the Three Months Ended03/31/05
    
    
    03/31/04Net incomeAs reported
    
    $
    1,765
    
    
    $
    1,174Less: stock-based compensation expense
determined under fair value based method
    
    
    
    
    
    
    9Pro forma
    
    $
    1,765
    
    
    $
    1,165Basic income per shareAs reported
    
    $
    0.37
    
    
    $
    0.36Pro forma
    
    $
    0.37
    
    
    $
    0.36Diluted income per shareAs reported
    
    $
    0.34
    
    
    $
    0.33Pro forma
    
    $
    0.34
    
    
    $
    0.32
 Stock options vest after a six month period from date of grant. No options were
granted in 2004 or 2005. 9




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##### Table of Contents



B.
    Securities Available For Sale The amortized cost and estimated market value of securities available for
sale are as follows (in thousands): March 31, 2005Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueUS Treasury securities
    
    $
    13,699
    
    
    $
    
    
    
    ($
    103
    )
    
    $
    13,596Mortgage backed securities
    
    
    737
    
    
    
    14
    
    
    
    
    
    
    
    751Corporate debt securities
    
    
    1,885
    
    
    
    
    
    
    
    
    
    
    
    1,885FHLMC preferred stock
    
    
    4,000
    
    
    
    
    
    
    
    (580
    )
    
    
    3,420Totals
    
    $
    20,321
    
    
    $
    14
    
    
    ($
    683
    )
    
    $
    19,652
 December 31, 2004Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueUS Treasury securities
    
    $
    15,696
    
    
    $
    
    
    
    ($
    62
    )
    
    $
    15,634Mortgage backed securities
    
    
    826
    
    
    
    25
    
    
    
    
    
    
    
    851Corporate debt securities
    
    
    1,550
    
    
    
    
    
    
    
    
    
    
    
    1,550FHLMC preferred stock
    
    
    4,000
    
    
    
    
    
    
    
    (960
    )
    
    
    3,040Totals
    
    $
    22,072
    
    
    $
    25
    
    
    ($
    1,022
    )
    
    $
    21,075
 The amortized cost and estimated market value of securities available for sale at
March 31, 2005 by contractual maturity are shown below (in thousands): EstimatedAmortized
    
    
    MarketCost
    
    
    ValueDue in three months or less
    
    $
    2,000
    
    
    $
    1,997Due in three months through one year
    
    
    8,695
    
    
    
    8,638Due in over one year through five years
    
    
    3,004
    
    
    
    2,961Due in over five years
    
    
    1,885
    
    
    
    1,885Mortgage backed securities
    
    
    737
    
    
    
    751FHLMC preferred stock
    
    
    4,000
    
    
    
    3,420Totals
    
    $
    20,321
    
    
    $
    19,652
 10




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The entire portfolio has a net unrealized loss of $669,000 at March 31, 2005.
Securities with unrealized losses at March 31, 2005, aggregated by investment category and
the length of time that the securities have been in a continuous loss position, are as
follows: Investment category
    
    Fair Value
    
    
    Unrealized LossUS treasury securities
    
    $
    13,596
    
    
    ($
    103
    )FHLMC preferred stock
    
    
    3,420
    
    
    
    (580
    )Total temporarily impaired
    
    $
    17,016
    
    
    ($
    683
    )
 Length of time in a continuous loss position
    
    Fair Value
    
    
    Unrealized LossLess than one year
    
    $
    13,596
    
    
    ($
    103
    )One to three years
    
    
    3,420
    
    
    
    (580
    )Total temporarily impaired
    
    $
    17,016
    
    
    ($
    683
    )
 The Bank holds a floating rate issue of the preferred stock of the Federal Home Loan
Mortgage Corporation (FHLMC) that has an unrealized loss of $580,000. The unrealized loss
on FHLMC preferred stock has not been recognized into income because the issuer of this
security is of high credit quality, management has the intent and ability to hold this
security for the foreseeable future, and the decline in fair value is believed largely due
to changes in interest rates and reported business issues not related to the underlying
operations of the organization. Management believes that the fair value will recover as the
securitys interest rate increases and the reported business issues are fully resolved. The Corporation does not hold any securities in the Held to Maturity category nor does the
Corporation hold or utilize derivatives. 11




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##### Table of Contents



C.
    Stock Option Plan Options to buy common stock are granted to officers and employees under a Stock Option Plan
which provides for issue of up to 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. If an option expires or terminates without having been
exercised, such option becomes available for future grant under the Plan. A summary of the option activity for the three months ended March 31, 2005 is as follows: WeightedAvailable
    
    
    
    
    
    
    AverageFor
    
    
    Options
    
    
    ExerciseGrant
    
    
    Available
    
    
    PriceOutstanding at January 1, 2005
    
    
    
    
    
    
    540,474
    
    
    $
    9.18Exercised
    
    
    
    
    
    
    (37,185
    )
    
    
    7.22Outstanding at March 31, 2005
    
    
    
    
    
    
    503,289
    
    
    $
    9.33
 For the options outstanding at March 31, 2005, the range of exercise prices was $4.61
to $17.80 per share with a weighted-average remaining contractual term of 6.0 years. At
March 31, 2005, 503,289 options were exercisable at weighted average exercise price of $9.33
per share. There were no antidilutive shares for the quarters ended March 31, 2005 and
2004. 12




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D.
    Acquisition On October 29, 2004, the Corporation acquired the Bank of Washtenaw (Washtenaw), a wholly
owned subsidiary of Pavillion Bancorp, Inc. for $15,100,000 in cash. The assets and
liabilities of the Bank of Washtenaw at acquisition and net income derived from those
assets and liabilities since the acquisition have been consolidated into the Bank.
Washtenaw, which was founded in January 2001, has its main office in Saline, Michigan with
a branch office and a regional lending center in Ann Arbor, Michigan. As of October 29,
2004, Washtenaw had total assets of $85,500,000, gross loans of $67,100,000 and total
deposits of $66,100,000. The acquisition has been accounted for using the purchase method of accounting, and
accordingly, the purchase price has been allocated to the tangible and identified
intangible assets purchased and the liabilities assumed based upon the estimated fair
values at the date of acquisition. There are refinements in the process of allocating the
purchase price that have not been entirely completed. Identified intangible assets and
purchase accounting fair value adjustments are being amortized under various methods over
the expected lives of the corresponding assets and liabilities. Goodwill will not be
amortized, but will be reviewed for impairment on an annual basis. Goodwill and other
intangible assets are tax deductible over 15 years. Currently, identified intangible
assets subject to amortization are $863,000. Goodwill aggregates to $7,042,000. The consolidated statements of income reflect the operating results of Washtenaw since the
effective date of the acquisition. The following table presents pro forma information for
the Corporation including the acquisition of Bank of Washtenaw for the quarter ended March
31, 2004, as if the acquisition had occurred at the beginning of 2004. Three Months Ended(In thousands, except share and per share data)
    
    3/31/2004Interest income
    
    $
    7,516Interest expense
    
    
    2,357Net interest income
    
    
    5,159Provision for loan loss
    
    
    224Net interest income after provision for loan losses
    
    
    4,935Non-interest income
    
    
    383Non-interest expense
    
    
    3,433Income before income tax provision
    
    
    1,885Income tax provision
    
    
    639Net income
    
    $
    1,246Basic earnings per share
    
    $
    0.38Diluted earnings per share
    
    $
    0.35
 13




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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 The following discussion and analysis are intended to address significant factors affecting the
financial condition and results of operations of the Corporation. The discussion provides a more
comprehensive review of the financial position and operating results than can be obtained from a
reading of the financial statements and footnotes presented elsewhere in this report. Managements Discussion and Analysis of Financial Condition and Results of Operations contains
forward-looking statements that are based on managements beliefs, assumptions, current
expectations, estimates and projections about the financial services industry, the economy, and
about the Corporation and Bank. Words such as anticipates, believes, estimates, expects,
forecasts, intends, is likely, plans, projects, variations of such words and similar
expressions are intended to identify such forward- looking statements. These statements are not
guarantees of future performance and involve certain risks, uncertainties and assumptions (Future
Factors) that are difficult to predict with regard to timing, extent, likelihood and degree of
occurrence. Therefore, actual results and outcomes may materially differ from what may be
expressed or forecasted in such forward-looking statements. The Corporation undertakes no
obligation to update, amend or clarify forward-looking statements, whether as a result of new
information, future events (whether anticipated or unanticipated), or otherwise. Future Factors include changes in interest rates and interest rate relationships; demand for
products and services; the degree of competition by traditional and non-traditional competitors;
changes in banking regulation; changes in tax laws; changes in prices, levies and assessments; the
impact of technological advances; governmental and regulatory policy changes; the outcomes of
contingencies; trends in customer behavior as well as their ability to repay loans; and changes in
the national and local economy. These are representative of the Future Factors that could cause a
difference between an ultimate actual outcome and a preceding forward-looking statement. 14




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##### Table of Contents



General The Corporation was formed in 1992 and the Bank was formed in 1993. Subsequently, the Bank has
opened offices in several communities in Southeastern Michigan. The Corporation acquired the Bank
of Washtenaw on October 29, 2004. The three branches, previously operated by the Bank of Washtenaw
have been consolidated into the operations of the Bank. The date opened, branch location and
branch type of each branch is listed below: 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
 The Bank has also formed three subsidiaries that offer additional or specialized services to the
Banks customers. The Banks subsidiaries, their formation date and the type of services offered
are listed below: Date Formed
    
    Name
    
    Services OfferedAugust 1997
    
    Community Bank Insurance Agency, Inc.
    
    Limited insurance related activitiesMay 2001
    
    Community Bank Mortgage, Inc.
    
    Origination of commercial and
residential mortgage loansMarch 2002
    
    Community Bank Audit Services, Inc.
    
    Internal auditing and compliance
services for financial institutions
 15




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##### Table of Contents



Results of Operations The Corporation reported net income of $1,765,000 for the three month period ended March 31, 2005,
compared to net income of $1,174,000 for the three month period ended March 31, 2004 an increase of
$591,000 or 50%. The increase in net income was primarily due to the improvement in net interest
income. The improvement in net interest income was primarily due to the increase in the commercial
real estate loan and other commercial loan portfolios during the period. The increase in loans was
partially funded with short term investments such as interest bearing deposits with banks, federal
funds sold and floating rate securities, which carry a lower yield than loans. Net Interest Income 2005 Compared to 2004.As noted on the two charts on the following pages, net interest income for
the three month period ended March 31, 2005 was $6,580,000, compared to $4,484,000 for the same
period ended March 31, 2004, an increase of $2,096,000 or 47%. This increase was caused primarily
by the volume of interest earning assets and interest bearing liabilities. The Corporations
interest rate spread was 3.76% for the three month period ended March 31, 2005, compared to 3.85%
for the same period in 2004. The Corporations interest rate margin was 4.21% for the three month
period ended March 31, 2005, compared to 4.13% for the same period in 2004. Average Balances, Interest Rates and Yields.Net interest income is affected by the difference
(interest rate spread) between rates of interest earned on interest-earning assets and rates of
interest paid on interest-bearing liabilities and the relative amounts of interest-bearing
liabilities and interest-earning assets. When the total of interest-earning assets approximates or
exceeds the total of interest-bearing liabilities, any positive interest rate spread will generate
net interest income. Financial institutions have traditionally used interest rate spreads as a
measure of net interest income. Another indication of an institutions net interest income is its
net yield on interest-earning assets or net interest margin, which is net interest income
divided by average interest-earning assets. 16




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##### Table of Contents



The following table sets forth certain information relating to the Corporations consolidated
average interest-earning assets and interest-bearing liabilities and reflects the average yield on
assets and average cost of liabilities for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average daily balance of assets or liabilities,
respectively, for the periods presented. During the periods indicated, non-accruing loans, if any,
are included in the loan category. Three months ended
    
    
    Three months endedMarch 31, 2005
    
    
    March 31, 2004Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average(In thousands)
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateAssetsInterest bearing deposits with banks
    
    $
    453
    
    
    $
    2
    
    
    
    1.79%
    
    
    $
    2,775
    
    
    $
    7
    
    
    
    1.01%Federal funds sold
    
    
    8,248
    
    
    
    48
    
    
    
    2.36%
    
    
    
    7,518
    
    
    
    16
    
    
    
    0.86%Securities, available for sale
    
    
    21,702
    
    
    
    140
    
    
    
    2.62%
    
    
    
    14,838
    
    
    
    71
    
    
    
    1.92%Loans
    
    
    604,039
    
    
    
    9,702
    
    
    
    6.51%
    
    
    
    411,413
    
    
    
    6,404
    
    
    
    6.26%Sub-total earning assets
    
    
    634,442
    
    
    
    9,892
    
    
    
    6.32%
    
    
    
    436,544
    
    
    
    6,498
    
    
    
    5.99%Other assets
    
    
    30,915
    
    
    
    
    
    
    
    
    
    
    
    15,632Total assets
    
    $
    665,357
    
    
    
    
    
    
    
    
    
    
    $
    452,176Liabilities and stockholders equityInterest bearing deposits
    
    $
    482,392
    
    
    $
    2,886
    
    
    
    2.43%
    
    
    $
    348,571
    
    
    $
    1,660
    
    
    
    1.92%Other borrowings
    
    
    41,922
    
    
    
    426
    
    
    
    4.12%
    
    
    
    30,638
    
    
    
    354
    
    
    
    4.65%Sub-total interest bearing liabilities
    
    
    524,314
    
    
    
    3,312
    
    
    
    2.56%
    
    
    
    379,209
    
    
    
    2,014
    
    
    
    2.14%Non-interest bearing deposits
    
    
    62,936
    
    
    
    
    
    
    
    
    
    
    
    36,402Other liabilities
    
    
    2,032
    
    
    
    
    
    
    
    
    
    
    
    1,081Stockholders equity
    
    
    76,075
    
    
    
    
    
    
    
    
    
    
    
    35,484Total liabilities and stockholders
equity
    
    $
    665,357
    
    
    
    
    
    
    
    
    
    
    $
    452,176Net interest income
    
    
    
    
    
    $
    6,580
    
    
    
    
    
    
    
    
    
    
    $
    4,484Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.76%
    
    
    
    
    
    
    
    
    
    
    
    3.85%Net interest margin on earning assets
    
    
    
    
    
    
    
    
    
    
    4.21%
    
    
    
    
    
    
    
    
    
    
    
    4.13%
 17




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##### Table of Contents



Rate/Volume Analysis.The following table analyzes net interest income in terms of changes in
the volume of interest-earning assets and interest-bearing liabilities and changes in yields and
rates. The table reflects the extent to which changes in the interest income and interest expense
are attributable to changes in volume (changes in volume multiplied by prior year rate) and changes
in rate (changes in rate multiplied by prior year volume). Changes attributable to the combined
impact of volume and rate have been allocated proportionately to changes due to volume and changes
due to rate. Three Months Ended March 31, 2005/2004Change in Interest Due to:Average
    
    
    Average
    
    
    Net(In thousands)
    
    Balance
    
    
    Rate
    
    
    ChangeAssetsInterest bearing deposits with banks
    
    ($
    10
    )
    
    $
    5
    
    
    ($
    5
    )Federal funds sold
    
    
    4
    
    
    
    28
    
    
    
    32Investment securities, available for sale
    
    
    44
    
    
    
    25
    
    
    
    69Loans
    
    
    3,041
    
    
    
    257
    
    
    
    3,298Total earning assets
    
    $
    3,079
    
    
    $
    315
    
    
    $
    3,394LiabilitiesInterest bearing deposits
    
    $
    787
    
    
    $
    439
    
    
    $
    1,226Other borrowings
    
    
    112
    
    
    
    (40
    )
    
    
    72Total interest bearing liabilities
    
    $
    899
    
    
    $
    399
    
    
    $
    1,298Net interest income
    
    
    
    
    
    
    
    
    
    $
    2,096Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    (0.09%)Net interest margin on earning assets
    
    
    
    
    
    
    
    
    
    
    0.08%
 Provision for Loan Losses 2005 Compared to 2004.The provision for loan losses was $464,000 for the three month period ended
March 31, 2005, compared to $224,000 for the same period in 2004, an increase of $240,000 or 107%.
The provision for loan losses for the three month period ended March 31, 2005 is based on the
internal analysis of the adequacy of the allowance for loan losses. The provision for loan losses
was based upon managements assessment of relevant factors, including types and amounts of
non-performing loans, historical loss experience on such types of loans, and current economic
conditions. The increase in provision during 2005 was driven by changes in loan growth and the
fact that during the first quarter of 2004, the company recorded net recoveries of $94,000 verses
net chargeoffs of $60,000 in the first quarter of 2005. 18




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##### Table of Contents



Non-interest Income 2005 Compared to 2004.Non-interest income was $401,000 for the three month period ended March 31,
2005, compared to $306,000 for the same period in 2004, an increase of $95,000 or 31% for period.
The increase was primarily due to the increase in the gain on the sale of real estate during the
period. This gain was the result of the sale of the commercial building that secured one
commercial mortgage loan. Non-interest Expense 2005 Compared to 2004.Non-interest expense was $3,843,000 for the three month period ended March
31, 2005, compared to $2,791,000 for the same period in 2004, an increase of $1,052,000 or 38% for
the period. The largest component of non-interest expense was salaries and employee benefits which
amounted to $2,307,000 for the three month period ended March 31, 2005, compared to $1,817,000 for
the same period in 2004. The primary factors for the increase in salaries and benefits expense
were the acquisition of the Bank of Washtenaw in October of 2004 and the expansion of the
commercial lending and retail banking departments. As of March 31, 2005, the number of full time
equivalent employees was 148 compared to 113 as of March 31, 2004. Salaries and employee benefits
will continue to increase as a result of general staff increases. The second largest component of non-interest expense was occupancy and equipment expense.
Occupancy and equipment expense amounted to $634,000 for the three month period ended March 31,
2005, compared to $359,000 for the same period in 2004, an increase of $275,000 or 77%. The
primary factor in the increase in occupancy and equipment expense was the opening of the Operations
Center in Allen Park, Michigan and the relocation of the commercial lending department to the
Administrative Building in Dearborn, Michigan during the fourth quarter of 2004. Income Tax Provision 2005 Compared to 2004.The income tax expense was $909,000 for the three month period ended March
31, 2005, compared to $601,000 for the same period in 2004, an increase of $308,000 or 51% for the
period. The increase was primarily a result of increased pre-tax income. 19




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##### Table of Contents



Comparison of Financial Condition at March 31, 2005 and December 31, 2004 Assets.Total assets at March 31, 2005 were $677,037,000 compared to $652,662,000 at December 31,
2004, an increase of $24,375,000 or 4%. The increase was primarily due to the increase in loans
during the period. Federal Funds Sold.Total federal funds sold at March 31, 2005 were $7,214,000 compared to
$12,640,000 at December 31, 2004, a decrease of $5,426,000 or 43%. The decrease was primarily due
to the deployment of available funds into loans. Interest bearing deposits with banks.Total interest bearing deposits with banks at March 31, 2005
were $412,000 compared to $2,283,000 at December 31, 2004, a decrease of $1,871,000 or 82%. The
decrease was primarily due to the deployment of available funds into loans. This investment was
established to provide the Corporation with an alternate short term investment option. This short
term investment is a variable-rate certificate of deposit with the Federal Home Loan Bank of
Indianapolis that carries a similar rate of return to federal funds sold. Mortgage Loans Held for Sale.Total mortgage loans held for sale at March 31, 2005 were $4,458,000
compared to $1,692,000 at December 31, 2004, an increase of $2,766,000 or 163%. This increase was
a result of the increase in the level of residential real estate mortgage loans waiting to be
purchased by mortgage correspondents. Securities  Available for Sale.Total securities, available for sale, at March 31, 2005 were
$19,652,000 compared to $21,075,000 at December 31, 2004, a decrease of $1,423,000 or 7%. The
decrease was due to the sale of securities, available for sale during 2004. The funds from the
sale of these securities were utilized to fund loan volume. Please refer to Note B of the Notes to Consolidated Financial Statements for the amortized cost and
estimated market value of securities, available for sale. The entire portfolio has a net
unrealized loss of $669,000. The unrealized loss is reflected by an adjustment to stockholders
equity. The unrealized loss in the Banks securities portfolio is primarily related to the unrealized loss
of a single security. This security has an unrealized loss of $580,000. This security is an issue
of 80,000 shares of FHLMC preferred stock with a par value of $50 per share. The Bank purchased
this equity security in March of 2001. The security carried an initial interest rate of 4.50%
until March 31, 2002. Thereafter, the interest rate reprices annually on April 1 of each year to a
rate equal to the 12 month LIBOR minus 20 basis points. Additionally, the dividend on this
security is 70% tax deductible. This feature increases the effective yield significantly. As
interest rates declined in 2002 and 2003, the yield on this security also declined. 20




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##### Table of Contents



During 2004, the market value of this security was negatively impacted for two primary factors.
The first factor was the declining interest rate environment. Short term interest rates declined
during 2002 and 2003 and began to increase during 2004. The yield on this security does not react
immediately to shifts in interest rates because of the annual adjustment feature. The coupon on
this security did not benefit from the rise in short term interest rates during 2004 due to the
timing of the coupon reset date. As the next coupon reset date has approached, the market value of
this security has reacted positively. A repricing and market value table for selected dates is
listed below: Market ValueRate
    
    
    (per share)3/23/2001
    
    
    4.50
    %
    
    $
    50.004/1/2002
    
    
    2.82
    %
    
    $
    50.004/1/2003
    
    
    1.14
    %
    
    $
    50.004/1/2004
    
    
    1.14
    %
    
    $
    46.256/30/2004
    
    
    1.14
    %
    
    $
    46.059/30/2004
    
    
    1.14
    %
    
    $
    39.0012/31/2004
    
    
    1.14
    %
    
    $
    38.003/31/2005
    
    
    1.14
    %
    
    $
    42.75
 The
coupon rate reset on April 1, 2005 will be 3.64%. Based on the tax deductibility of the
dividend, the tax equivalent yield of this security on the reset date of April 1, 2005 will be
4.95%. Based on the current level of short term interest rates and the rising interest rate
environment, management expects the market value of this security to continue its upward trend. The second factor in the market value of this security has been the discovery of certain accounting
irregularities at FHLMC and FNMA that have raised questions about the credit quality of these
organizations. The timing of the decline in the market value of the security also coincides with
the public announcements of these accounting irregularities that occurred. According to SFAS 115  Accounting for Certain Investments in Debt and Equity Securities, the
characterization of a security with an other than temporary impairment is subjective but generally
exists when an investor is unlikely to be able to collect all amounts due according to the
contractual terms of the security. Other factors that suggest other than temporary impairment of a
security would be the downgrading of the security by a rating agency or the deterioration of the
financial condition of the issuer. Management expects the market value of this security will continue to improve during 2005 as the
market factors in the impact of the recent significant increase in the coupon of this security and
market interest rates continue to increase. Additionally, management expects the market value of
this security will improve as the investment community considers the impact of changes made by the
Board of FHLMC, such as changes in leadership and auditors, designed to improve the quality of
financial reporting at FHLMC. Furthermore, management possesses the intent and the ability to hold
this security for a period of time sufficient to allow for the recovery of this securitys fair
value. 21




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##### Table of Contents



Federal Home Loan Bank Stock.Federal Home Loan Bank stock was valued at $1,134,000 at March 31,
2005, compared to $1,122,000 at December 31, 2004, an increase of $12,000 or 1%. Loans.Total loans at March 31, 2005 were $612,472,000 compared to $587,562,000 at December 31,
2004, an increase of $24,910,000 or 4%. The increase was primarily due to the continued expansion
of the commercial lending department during the past twelve months. This expansion included the
addition of two experienced loan officers during the last twelve months. Major categories of
loans included in the loan portfolio are as follows (in thousands): 03/31/05
    
    
    12/31/04
    
    
    03/31/04Consumer loans
    
    $
    42,464
    
    
    $
    42,149
    
    
    $
    25,822Commercial, financial, & other
    
    
    131,271
    
    
    
    129,103
    
    
    
    70,190Commercial real estate construction
    
    
    78,522
    
    
    
    72,286
    
    
    
    55,084Commercial real estate mortgages
    
    
    314,603
    
    
    
    296,934
    
    
    
    223,809Residential real estate mortgages
    
    
    45,612
    
    
    
    47,090
    
    
    
    45,878612,472
    
    
    
    587,562
    
    
    
    420,783Allowance for loan losses
    
    
    (6,288
    )
    
    
    (5,884
    )
    
    
    (4,632
    )$
    606,184
    
    
    $
    581,678
    
    
    $
    416,151
 The following is a summary of non-performing assets and problems loans (in thousands): 03/31/05
    
    
    12/31/04
    
    
    3/31/2004Over 90 days past due and still accruing
    
    $
    40
    
    
    $
    143
    
    
    $
    384Non-accrual loans
    
    
    1,868
    
    
    
    2,956
    
    
    
    1,691Real estate owned
    
    
    146
    
    
    
    136
    
    
    
    Other repossessed assets
    
    
    2
    
    
    
    2
    
    
    
    $
    2,056
    
    
    $
    3,237
    
    
    $
    2,075
 Non-accrual loans at March 31, 2005 were $1,868,000. The distribution of non-accrual loans
by loan type is as follows: Number ofLoans
    
    
    BalanceConsumer loans
    
    
    2
    
    
    $
    35Commercial, financial, & other
    
    
    3
    
    
    
    499Commercial real estate construction
    
    
    1
    
    
    
    525Commercial real estate mortgages
    
    
    5
    
    
    
    699Residential real estate mortgages
    
    
    1
    
    
    
    110Total non-accrual loans
    
    
    12
    
    
    $
    1,868
 22




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##### Table of Contents



Allowance for Loan Losses.The allowance for loan losses was $6,288,000 at March 31, 2005
compared to $5,884,000 at December 31, 2004, an increase of $404,000 or 7%. The increase resulted
primarily from provisions less net charge-offs recorded during the quarter. The allowance for loan
losses was based upon managements assessment of relevant factors, including loan growth, types and
amounts of non-performing loans, historical and anticipated loss experience on such types of loans,
and current economic conditions. The following is an analysis of the allowance for loan losses (in thousands): Quarter Ended
    
    
    Year Ended
    
    
    Quarter Ended03/31/05
    
    
    12/31/04
    
    
    03/31/04Balance, beginning of year
    
    $
    5,884
    
    
    $
    4,314
    
    
    $
    4,314Allowance on loans acquired
    
    
    
    
    
    
    184
    
    
    
    Charge-offs:Consumer loans
    
    
    51
    
    
    
    31
    
    
    
    5Commercial, financial & other
    
    
    43
    
    
    
    
    
    
    
    Commercial real estate construction
    
    
    
    
    
    
    
    
    
    
    Commercial real estate mortgages
    
    
    
    
    
    
    100
    
    
    
    Recoveries:Consumer loans
    
    
    7
    
    
    
    13
    
    
    
    Commercial, financial & other
    
    
    18
    
    
    
    104
    
    
    
    38Commercial real estate construction
    
    
    
    
    
    
    
    
    
    
    Commercial real estate mortgages
    
    
    9
    
    
    
    
    
    
    
    61Net charge-offs
    
    
    60
    
    
    
    14
    
    
    
    (94
    )Additions charged to operations
    
    
    464
    
    
    
    1,400
    
    
    
    224Balance, end of period
    
    $
    6,288
    
    
    $
    5,884
    
    
    $
    4,632Allowance to total loans
    
    
    1.03%
    
    
    
    1.00%
    
    
    
    1.10%Allowance to nonperforming assets
    
    
    305.84%
    
    
    
    181.77%
    
    
    
    223.23%Net charge-offs to average loans
    
    
    0.01%
    
    
    
    0.00%
    
    
    
    (0.02%)
 23




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##### Table of Contents



Premises and Equipment.Bank premises and equipment at March 31, 2005 were $14,017,000
compared to $13,124,000 at December 31, 2004, an increase of $893,000 or 7%. The increase in
premises and equipment was primarily due to the renovation at the Banks Operations Center in Allen
Park, Michigan and the updating of equipment at several locations. Real estate owned.Real estate owned at March 31, 2005 was $146,000 compared to $138,000 at
December 31, 2004, an increase of $8,000 or 6%. Real estate owned at March 31, 2005 is comprised
of two residential properties with an appraised value of $182,000. The Bank expects to realize a
gain as a result of the sale of these properties during 2005. Goodwill and other intangible assets.Goodwill and other intangible assets were $7,905,000 at
March 31, 2005 compared to $7,982,000 at December 31, 2004. The Bank has intangible assets for the
estimated value of core deposit accounts acquired in the acquisition of the Bank of Washtenaw. The
intangible values represent the present value of the net revenue streams attributable to these
intangibles. The core deposit intangible amounted to $929,000 and is being amortized over ten
years. The balance of the acquisition price in excess of the fair market value of the assets and
liabilities acquired, including intangible assets, was recorded as goodwill and totaled $7.0
million. Goodwill is defined as an intangible asset with an indefinite useful life, and as such,
is not amortized, but is required to be tested annually for impairment of the value. If impaired,
an impairment loss must be recorded for the value equal to the excess of the assets carrying value
over its fair value. Accrued Interest Receivable.Accrued interest receivable at March 31, 2005 was $2,017,000 compared
to $1,889,000 at December 31, 2004, an increase of $128,000 or 7%. The increase was primarily due
to the increase in the Banks loan portfolio. Other Assets. Other assets at March 31, 2005 were $2,965,000 compared to $3,093,000 at December
31, 2004, a decrease of $128,000 or 4%. The decrease was primarily due to changes in deferred tax
assets. 24




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##### Table of Contents



Deposits.Total deposits at March 31, 2005 were $547,807,000 compared to $540,880,000 at December
31, 2004, an increase of $6,927,000 or 1%. The following is a summary of the distribution of
deposits (in thousands): 03/31/05
    
    
    12/31/04
    
    
    03/31/04Non-interest bearing:Demand
    
    $
    64,978
    
    
    $
    63,065
    
    
    $
    37,097Interest bearing:Checking
    
    $
    14,140
    
    
    $
    15,400
    
    
    $
    20,634Money market
    
    
    60,531
    
    
    
    54,957
    
    
    
    12,785Savings
    
    
    77,297
    
    
    
    83,773
    
    
    
    115,232Time, under $100,000
    
    
    131,767
    
    
    
    124,448
    
    
    
    75,499Time, $100,000 and over
    
    
    199,094
    
    
    
    199,237
    
    
    
    134,657482,829
    
    
    
    477,815
    
    
    
    358,807Total deposits
    
    $
    547,807
    
    
    $
    540,880
    
    
    $
    395,904
 Management continues to implement a strategy to change the mix of the deposit portfolio by
focusing more heavily on savings and institutional deposits. The increase in deposits was
primarily due to normal business development, marketing, telemarketing, referral programs and
growth strategies which included a weeklong celebration in March 2005 that highlighted the Banks
Anniversary. Management expects deposits to grow at an increasing rate during he remainder of
2005. The Bank has enacted a strategy to utilize public funds to a higher degree. The Bank will also
utilize brokered deposits. The Bank has designated a public funds officer to coordinate and manage
these efforts. Public funds consist of interest checking and time deposits of local governmental
units. They are the result of strong relationships between the Bank and the communities in the
Banks marketing area and are considered by the Bank to be core deposits. The following is a
summary of the distribution of municipal deposits (in thousands): 03/31/05
    
    
    12/31/04
    
    
    03/31/04Interest bearing checking
    
    $
    2,986
    
    
    $
    2,633
    
    
    $
    10,468Time, $100,000 and over
    
    
    67,187
    
    
    
    71,058
    
    
    
    61,735Total municipal deposits
    
    $
    70,173
    
    
    $
    73,691
    
    
    $
    72,203
 Brokered deposits are included in the Time, $100,000 and over category. Brokered deposits
were $19,390,000, $19,190,000 and $2,380,000 at March 31, 2005, December 31, 2004 and March 31,
2004, respectively. 25




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##### Table of Contents



Federal Funds Purchased. Federal funds purchased at March 31, 2005 were $16,060,000 compared to $0
at December 31, 2004. The Bank maintains federal funds purchase credit facilities with several
financial institutions as additional sources of funds that the Bank may utilize for short-term
liquidity purposes. Securities Sold Under Agreement to Repurchase. Securities sold under agreements to repurchase at
March 31, 2005 were $3,083,000 compared to $4,115,000 at December 31, 2004, a decrease of
$1,032,000 or 25%. These Repurchase agreements are secured by securities held by the Bank. Federal Home Loan Bank Advances. Federal Home Loan Bank advances were $20,614,000 at March 31,
2005 and December 31, 2004. Accrued Interest Payable. Accrued interest payable at March 31, 2005 was $1,339,000 compared to
$1,107,000 at December 31, 2004, an increase of $232,000 or 21%. The increase was primarily due to
the increasing amount of interest bearing deposits during the period. Other Liabilities. Other liabilities at March 31, 2005 were $1,187,000 compared to $1,342,000 at
December 31, 2004, a decrease of $155,000 or 12%. The decrease was primarily due to the decrease
in expenses payable during the period. Subordinated Debentures. Subordinated debentures were $10,000,000 at March 31, 2005 and December
31, 2004.On December 19, 2002, the Corporation issued $10,000,000 of floating rate obligated
mandatory redeemable securities through a special purpose entity as part of a pooled offering. The
securities have a term of thirty years. The Corporation may redeem the securities after five years
at face value. They are considered to be Tier 1 capital for regulatory capital purposes. The
funds from the issue of these securities were invested into securities available for sale until
they can be invested into the Bank subsidiary to allow for additional growth. Debt issue costs of
$300,000 have been capitalized and are being amortized over the term of the securities.
Unamortized debt issuance costs were $277,000 at March 31, 2005. 26




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##### Table of Contents



Capital Stockholders equity at March 31, 2005 was $76,947,000 compared to $74,604,000 as of December 31,
2004, an increase of $2,343,000 or 3%. The following is a presentation of the Corporations and Banks regulatory capital ratios (in
thousands): MinimumTo Be Well CapitalizedMinimum for Capital
    
    
    Under Prompt CorrectiveActual
    
    
    Adequacy Purposes
    
    
    Action ProvisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioAs of March 31, 2005Total capital
(to risk weighted assets)Consolidated
    
    
    85,359
    
    
    
    13.30
    %
    
    
    51,356
    
    
    
    8.00
    %
    
    
    64,195
    
    
    
    10.00
    %Bank
    
    
    67,595
    
    
    
    10.64
    %
    
    
    50,826
    
    
    
    8.00
    %
    
    
    63,533
    
    
    
    10.00
    %Tier 1 capital
(to risk weighted assets)Consolidated
    
    
    79,071
    
    
    
    12.32
    %
    
    
    25,678
    
    
    
    4.00
    %
    
    
    38,517
    
    
    
    6.00
    %Bank
    
    
    61,307
    
    
    
    9.65
    %
    
    
    25,413
    
    
    
    4.00
    %
    
    
    38,120
    
    
    
    6.00
    %Tier 1 capital
(to average assets)Consolidated
    
    
    79,071
    
    
    
    11.88
    %
    
    
    26,614
    
    
    
    4.00
    %
    
    
    33,268
    
    
    
    5.00
    %Bank
    
    
    61,307
    
    
    
    9.59
    %
    
    
    25,571
    
    
    
    4.00
    %
    
    
    31,964
    
    
    
    5.00
    %As of December 31, 2004Total capital
(to risk weighted assets)Consolidated
    
    
    81,868
    
    
    
    13.27
    %
    
    
    49,360
    
    
    
    8.00
    %
    
    
    61,700
    
    
    
    10.00
    %Bank
    
    
    63,986
    
    
    
    10.47
    %
    
    
    48,913
    
    
    
    8.00
    %
    
    
    61,141
    
    
    
    10.00
    %Tier 1 capital
(to risk weighted assets)Consolidated
    
    
    75,984
    
    
    
    12.32
    %
    
    
    24,680
    
    
    
    4.00
    %
    
    
    37,020
    
    
    
    6.00
    %Bank
    
    
    58,102
    
    
    
    9.50
    %
    
    
    24,457
    
    
    
    4.00
    %
    
    
    36,685
    
    
    
    6.00
    %Tier 1 capital
(to average assets)Consolidated
    
    
    75,984
    
    
    
    12.12
    %
    
    
    25,079
    
    

    
    4.00
    %
    
    
    31,348
    
    
    
    5.00
    %Bank
    
    
    58,102
    
    
    
    9.78
    %
    
    
    23,765
    
    
    
    4.00
    %
    
    
    29,706
    
    
    
    5.00
    %
 Based on the respective regulatory capital ratios at March 31, 2005 and December 31, 2004, the
Corporation and Bank are considered well capitalized. 27




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##### Table of Contents



PART I    FINANCIAL INFORMATION 
 ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Sensitivity Analysis.The Corporation has sought to manage its exposure to changes
in interest rates by matching the effective maturities or repricing characteristics of the
Corporations interest-earning assets and interest-bearing liabilities. The matching of the assets
and liabilities may be analyzed by examining the extent to which the assets and liabilities are
interest rate sensitive and by monitoring the expected effects of interest rate changes on net
interest income. An asset or liability is interest rate sensitive within a specific time period if it will mature or
reprice within that time period. If the Corporations assets mature or reprice more quickly or to
a greater extent that its liabilities, the Corporations net portfolio value and net interest
income would tend to increase during periods of rising interest rates but decrease during periods
of falling interest rates. If the Corporations assets mature or reprice more slowly or to a
lesser extent than its liabilities, its net portfolio value and net interest income would tend to
decrease during periods of rising interest rates but increase during periods of falling interest
rates. The matching of assets and liabilities may be analyzed by examining the extent to which such assets
and liabilities are interest rate sensitive and by monitoring an institutions interest rate
sensitivity gap. An asset or liability is said to be interest rate sensitive within a specific
period if it will mature or reprice within that period. The interest rate sensitivity gap is the
difference between the amount of interest-earning assets maturing or repricing within a specific
time period and the amount of interest-bearing liabilities maturing or repricing within that time
period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the
amount of interest rate sensitive liabilities, and is considered negative when the amount of
interest rate sensitive liabilities exceed the amount of interest rate sensitive assets. During a
period of rising interest rates, a negative gap would be expected to adversely affect net interest
income while a positive gap would be expected to result in an increase in net interest income,
while conversely during a period of declining interest rates, a negative gap would be expected to
result in an increase in net interest income and a positive gap would be expected to adversely
affect net interest income. 28




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##### Table of Contents



Different types of assets and liabilities with the same or similar maturities may react differently
to changes in overall market rates or conditions, and thus changes in interest rates may affect net
interest income positively or negatively even if an institution were perfectly matched in each
maturity category. Additionally, the gap analysis does not consider the many factors as banking
interest rates move. While the interest rate sensitivity gap is a useful measurement and
contributes toward effective asset and liability management, it is difficult to predict the effect
of changing interest rates solely on that measure, without accounting for alterations in the
maturity or repricing characteristics of the balance sheet that occur during changes in market
interest rates. During periods of rising interest rates, the Corporations assets tend to have prepayments that are
slower than those in an interest rate sensitivity gap and would increase the negative gap position.
Conversely, during a period of declining interest rates, the Corporations assets would tend to
prepay faster than originally expected thus decreasing the negative gap position. In addition,
some of the Corporations assets, such as adjustable rate mortgages, have caps on the amount by
which their interest rates can change in any single period, and therefore may not reprice as
quickly as liabilities in the same maturity category. The following table sets forth the amounts of interest earning assets and interest bearing
liabilities outstanding at March 31, 2005, which are expected to mature or reprice in each of the
time periods shown below. Interest Rate Sensitivity Period1-90
    
    
    91-365
    
    
    1-5
    
    
    Over(In thousands)
    
    Days
    
    
    Days
    
    
    Years
    
    
    5 Years
    
    
    TotalEarning assetsFederal funds sold
    
    $
    7,214
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    7,214Interest bearing deposits with banks
    
    
    412
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    412Mortgage loans held for sale
    
    
    4,458
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,458Securities available for sale
    
    
    6,168
    
    
    
    9,811
    
    
    
    2,962
    
    
    
    711
    
    
    
    19,652Federal Home Loan Bank stock
    
    
    1,134
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,134Total loans, net of non-accrual
    
    
    287,870
    
    
    
    20,643
    
    
    
    277,323
    
    
    
    24,769
    
    
    
    610,605Total earning assets
    
    
    307,256
    
    
    
    30,454
    
    
    
    280,285
    
    
    
    25,480
    
    
    
    643,475Interest bearing liabilitiesTotal interest bearing deposits
    
    
    225,958
    
    
    
    157,324
    
    
    
    99,547
    
    
    
    
    
    
    
    482,829Federal funds purchased
    
    
    16,060
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,060Federal Home Loan Bank advances
    
    
    
    
    
    
    10,025
    
    
    
    10,589
    
    
    
    
    
    
    
    20,614Other Borrowings
    
    
    3,083
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,083Trust preferred securities
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000Total interest bearing liabilities
    
    
    255,101
    
    
    
    167,349
    
    
    
    110,136
    
    
    
    
    
    
    
    532,586Net asset (liability) funding gap
    
    
    52,155
    
    
    
    (136,895
    )
    
    
    170,149
    
    
    
    25,480
    
    
    $
    110,889Cumulative net asset (liability) funding gap
    
    $
    52,155
    
    
    ($
    84,740
    )
    
    $
    85,409
    
    
    $
    110,889
 29




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##### Table of Contents



Liquidity.Liquidity refers to readily available funds to meet the needs of borrowers and
depositors. Levels of liquidity are closely monitored in conjunction with loan funding
requirements and deposit outflows. Adequate liquidity protects institutions from raising funds
under duress at excessive expense and provides a necessary cushion for occasional unpredictable
aberrations in demand. While adequate liquidity is imperative, excessive liquidity in lower
yielding cash investments or other easily marketable assets reduces potential interest income.
Thus, an appropriate balance must be maintained to protect the institution and at the same time,
prudently maximize income opportunities. Sources of liquidity from both assets and liabilities
include federal funds sold, securities available for sale, loan repayments, core deposits, Federal
Home Loan Bank advances and a federal funds purchase credit facility. The following tables provide information about the Banks contractual obligations and commitments
at March 31, 2005 (in thousands): Contractual Obligations Payments Due By PeriodLess Than
    
    
    1-3
    
    
    3-5
    
    
    Over 51 Year
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    TotalSecurities sold under
agreements to
repurchase
    
    $
    3,083
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    3,083Federal funds purchased
    
    
    16,060
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,060Long-term borrowings
    
    
    25
    
    
    
    15,589
    
    
    
    5,000
    
    
    
    
    
    
    
    20,614Lease commitments
    
    
    606
    
    
    
    1,060
    
    
    
    872
    
    
    
    504
    
    
    
    3,042Subordinated debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    10,000Totals
    
    $
    19,774
    
    
    $
    16,649
    
    
    $
    5,872
    
    
    $
    10,504
    
    
    $
    52,799
 Unused Loan Commitments and Letters of Credit Amount Of Commitment Expiration Per PeriodLess Than
    
    
    1-3
    
    
    3-5
    
    
    Over 51 Year
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    TotalUnused loan commitments
    
    $
    64,367
    
    
    $
    25,346
    
    
    $
    2,682
    
    
    $
    22,792
    
    
    $
    115,187Standby letters of credit
    
    
    2,631
    
    
    
    3,250
    
    
    
    992
    
    
    
    
    
    
    
    6,873Totals
    
    $
    66,998
    
    
    $
    28,596
    
    
    $
    3,674
    
    
    $
    22,792
    
    
    $
    122,060
 30




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##### Table of Contents



DEARBORN BANCORP, INC. AND SUBSIDIARY
FORM 10-Q (continued) 
 Item 4. Controls and Procedures Disclosure Controls and Procedures As of the end of the period covered by this report,
the registrant carried out an evaluation, under the supervision and with the participation of
management, including the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of the registrants disclosure controls and procedures.
Based on the review of the disclosure controls of the registrant, the Chief Executive Officer and
the Chief Financial Officer have concluded that the registrants disclosure controls and procedures
were effective as of March 31, 2005. Internal Controls Over Financial Reporting  There has been no change in the registrants
internal control over financial reporting that occurred during the period covered by this report
that has materially affected, or is reasonably likely to materially affect the registrants
internal control over financial reporting. 31




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##### Table of Contents



PART II    OTHER INFORMATION 
 ITEM 6. EXHIBITS AND REPORTS IN FORM 8-K. (a)
    
    ExhibitsExhibit 31.1
    
    CEO Certification. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.Exhibit 31.2
    
    CFO Certification. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.Exhibit 32.1
    
    CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.Exhibit 32.2
    
    CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(b)
    
    A Form 8-K Report, dated January 18, 2005 was filed during the quarter ended March 31, 2005.
 32




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##### Table of Contents



DEARBORN BANCORP, INC.
FORM 10-Q (continued) 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dearborn Bancorp, Inc.(Registrant)/s/ John E. DemmerJohn E. DemmerChairman/s/ Michael J. RossMichael J. RossPresident and Chief Executive Officer/s/ Jeffrey L. KarafaJeffrey L. Karafa
Treasurer and Chief Financial Officer
 Date: May 10, 2005 33




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##### Table of Contents



Exhibit No.
    

Exhibit DescriptionExhibit 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.